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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12

Laboratory Specialists of America, Inc.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

XXXXXXXXXXXXXXXX
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)

Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies: .......

(2) Aggregate number of securities to which transaction applies: ..........

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............

(4) Proposed maximum aggregate value of transaction: ......................

(5) Total fee paid: .......................................................

[X] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: ...............................................

(2) Form, Schedule or Registration Statement No.: .........................

(3) Filing Party: .........................................................

(4) Date Filed: ...........................................................

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LABORATORY SPECIALISTS LOGO

MERGER PROPOSED -- YOUR VOTE IS VERY IMPORTANT

The Board of Directors of Laboratory Specialists of America, Inc. has approved a
merger agreement which will result in Laboratory Specialists becoming a
wholly-owned subsidiary of The Kroll-O'Gara Company. Before we can complete this
merger, the merger agreement must be approved by Laboratory Specialists
shareholders.

The Kroll-O'Gara Company is a leading global provider of a broad range of
specialized products and services designed to provide governments, businesses
and individuals with information, analysis, training and products that mitigate
risks. Kroll-O'Gara has a network of 50 offices in 17 countries and had 1997
revenues of $190.4 million.

We expect that, for each share of Laboratory Specialists common stock which you
own just before the merger, you will be entitled to receive a fractional share
of Kroll-O'Gara common stock with a value of $5.00. This may change, however,
depending upon the average trading price of the Kroll-O'Gara common stock before
the Special Meeting. This is explained in the Summary in the accompanying Proxy
Statement/Prospectus. Kroll-O'Gara common stock trades on the Nasdaq National
Market (symbol "KROG"), and Laboratory Specialists common stock trades on the
Nasdaq SmallCap Market (symbol "LABZ"). You can obtain current stock prices for
each company from a newspaper, on the Internet or by calling your broker.

YOUR VOTE IS VERY IMPORTANT. Please take the time to vote, whether or not you
plan to attend the Laboratory Specialists Special Meeting of Shareholders. If
you sign, date and mail your proxy card without indicating how you want to vote,
we will vote your proxy in favor of the merger. If you do not return your card,
or if you do not instruct your broker how to vote any shares held for you in
"street name," the effect will be a vote against the merger.

The Special Meeting of Shareholders will be: December 4, 1998, 2:00 p.m. local
time, at the offices of Dunn Swan & Cunningham, 210 Park Avenue, Suite 2800,
Oklahoma City, Oklahoma.

This Proxy Statement/Prospectus provides you with detailed information about the
proposed merger. We encourage you to read it carefully.

We are very enthusiastic about the merger and the opportunity to become a part
of The Kroll-O'Gara Company. The Board of Directors of Laboratory Specialists
recommends that you vote FOR the merger agreement. In addition, Larry Howell,
Arthur Peterson and I all have signed agreements committing to vote FOR approval
of the merger.

/s/ John Simonelli
John Simonelli
Chairman of the Board
and Chief Executive Officer

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

This Proxy Statement/Prospectus is dated November 10, 1998 and was first mailed
to shareholders on or about November 13, 1998.
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LABORATORY SPECIALISTS OF AMERICA, INC.

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON DECEMBER 4, 1998

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

Laboratory Specialists of America, Inc. will hold a Special Meeting of
Shareholders at the offices of Dunn Swan & Cunningham, 210 Park Avenue, Suite,
2800, Oklahoma City, Oklahoma, at 2:00 p.m. local time on December 4, 1998 to
vote on:

1. The Agreement and Plan of Merger, dated as of October 21, 1998, by and among
The Kroll-O'Gara Company, Kroll-O'Gara Oklahoma, Inc. (a wholly-owned
subsidiary of Kroll-O'Gara) and Laboratory Specialists of America, Inc.,
providing for the merger of Kroll-O'Gara Oklahoma, Inc. into Laboratory
Specialists with the result that Laboratory Specialists will become a
wholly-owned subsidiary of Kroll-O'Gara.

2. Any other matters that properly come before the Special Meeting or any
adjournment or postponement of the Special Meeting.

Laboratory Specialists shareholders at the close of business on November 9, 1998
are receiving notice of and may vote at the Special Meeting. The Agreement and
Plan of Merger requires the affirmative vote of at least a majority of the
outstanding shares of Laboratory Specialists common stock entitled to vote at
the Special Meeting.

PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE PROMPTLY, whether or not you plan to attend the Special Meeting. If you
attend the Special Meeting, you may vote in person if you wish, even if you
previously returned your proxy card.

/s/ John Simonelli
John Simonelli
Chairman of the Board and
Chief Executive Officer

November 10, 1998

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE
AGREEMENT AND PLAN OF MERGER.

PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. IF WE COMPLETE THE
MERGER, WE WILL SEND YOU INSTRUCTIONS ON HOW TO EXCHANGE YOUR STOCK
CERTIFICATES.
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TABLE OF CONTENTS

SUMMARY..................................................... 1
The Companies..................................... 1
The Merger........................................ 1
Differences in Rights of Shareholders............. 5
Appraisal (Dissenters') Rights.................... 5
Regulatory Approvals.............................. 6
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL INFORMATION........................... 7
Kroll-O'Gara Selected Historical Consolidated
Financial Information........................... 7
Laboratory Specialists Selected Historical
Financial Information........................... 9
Summary Unaudited Pro Forma Combined Condensed
Financial Information........................... 11
Selected Unaudited Pro Forma Combined Condensed
Financial Data Including Kizorek, Inc........... 13
Unaudited Comparative Per Share Information....... 15
INDEX TO DEFINED TERMS...................................... 18
RISK FACTORS................................................ 21
THE SPECIAL MEETING......................................... 26
Time and Place; Purpose........................... 26
Proxies........................................... 26
Solicitation of Proxies........................... 26
Record Date and Voting Rights..................... 26
THE MERGER.................................................. 27
Background of the Merger.......................... 27
Reasons for and Advantages of the Merger.......... 29
Disadvantages of the Merger....................... 29
Recommendation of Laboratory Specialists Board of
Directors....................................... 30
Opinion of Laboratory Specialists' Financial
Advisor......................................... 30
Management of Kroll-O'Gara After the Merger....... 32
Interests of Certain Persons in the Merger........ 32
Accounting Treatment.............................. 33
United States Federal Income Tax Consequences..... 33
Federal Securities Law Consequences............... 34
Regulatory Approvals.............................. 34
Appraisal Rights.................................. 35
THE MERGER AGREEMENT........................................ 36
Terms of the Merger............................... 36
Exchange of Certificates.......................... 37
Representations and Warranties.................... 38
Conduct of Business Pending the Merger............ 39
Additional Agreements............................. 41
Conditions to the Merger.......................... 42
Termination....................................... 43
Amendment and Waiver.............................. 44
MARKET PRICES AND DIVIDENDS................................. 45

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THE KROLL-O'GARA COMPANY.................................... 47
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 47
Business.......................................... 61
Management........................................ 78
Executive Compensation and Other Information...... 80
Certain Relationships and Related Party
Transactions.................................... 84
Principal Shareholders and Holdings of
Management...................................... 89
LABORATORY SPECIALISTS OF AMERICA, INC. .................... 90
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 90
Business.......................................... 101
Principal Shareholders and Holdings of
Management...................................... 107
DESCRIPTION OF KROLL-O'GARA CAPITAL STOCK................... 108
COMPARISON OF RIGHTS OF HOLDERS OF KROLL-O'GARA COMMON STOCK
AND LABORATORY SPECIALISTS COMMON STOCK................... 110
LEGAL MATTERS............................................... 114
EXPERTS..................................................... 114
FUTURE SHAREHOLDER PROPOSALS................................ 115
OTHER BUSINESS.............................................. 115
WHERE YOU CAN FIND MORE INFORMATION......................... 115
INDEX TO FINANCIAL STATEMENTS............................... F-1
APPENDIX A: Agreement and Plan of Merger.................... A-1
APPENDIX B: Opinion of Financial Advisor.................... B-1
APPENDIX C: Appraisal Rights Provisions under the
Oklahoma General Corporation Act.......... C-1

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SUMMARY

This summary highlights selected information from this document. It does not
contain all the information that is important to you. You should read this
entire document carefully. For additional information, see "Where You Can Find
More Information" (page 115).

We call this document a Proxy Statement/Prospectus. It is a Proxy Statement sent
by Laboratory Specialists to you and the other shareholders of Laboratory
Specialists. It also is a Prospectus of The Kroll-O'Gara Company covering the
shares of Kroll-O'Gara common stock which you and the other shareholders of
Laboratory Specialists will receive if the merger is completed. These
Kroll-O'Gara shares have been registered with the Securities and Exchange
Commission. Laboratory Specialists has supplied the information in this document
which relates to it, and Kroll-O'Gara has supplied the information which relates
to it.

THE COMPANIES (PAGES 47 AND 90)

THE KROLL-O'GARA COMPANY
9113 LeSaint Drive
Fairfield, Ohio 45014
(513) 874-2112

Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services designed to provide governments, businesses and
individuals with information, analysis, training and products that mitigate
risks. Kroll-O'Gara has a network of 50 offices in 17 countries and had 1997
revenues of $190.4 million.

LABORATORY SPECIALISTS OF AMERICA, INC.
101 Park Avenue, Suite 810
Oklahoma City, Oklahoma 73102
(405) 232-9800

Laboratory Specialists owns and operates an independent drug testing laboratory
providing pre- and post-employment drug testing services to corporate and
institutional customers. Laboratory Specialists' laboratory is certified by the
federal Substance Abuse and Mental Health Services Administration.

THE MERGER (PAGE 27)

GENERAL

We propose a merger as a result of which Laboratory Specialists will be acquired
by, and will become a wholly-owned subsidiary of, Kroll-O'Gara. We hope to
complete the merger in December 1998. The merger agreement is the document that
governs the merger. We have attached this agreement as Appendix A to this Proxy
Statement/Prospectus, and we encourage you to read it.

WHAT YOU WILL RECEIVE IN THE MERGER

The merger agreement provides that you will receive a partial share of
Kroll-O'Gara common stock for each share of Laboratory Specialists common stock
which you own just before the merger. The value of the Kroll-O'Gara common stock
you receive will depend on the selling prices of Kroll-O'Gara common stock
averaged over 20 trading days, ending three trading days before the Special
Meeting.

We expect that, for each share of Laboratory Specialists you own just before the
merger, you will be entitled to receive a partial share of Kroll-O'Gara common
stock with a value of $5.00. This will happen if the average selling price of
Kroll-O'Gara common stock over the 20 trading-day period is between $18.00 and
$23.99. If it is $24.00 or more, you will receive .2102 share of Kroll-O'Gara
common stock, so that you will receive shares valued at more than $5.00. If it
is less than $18.00, you will receive .2778 share of Kroll-O'Gara common stock,
so that you may receive shares valued at less than $5.00. However, the
Laboratory Specialists Board of Directors can cancel the merger unless
Kroll-O'Gara agrees that you will receive at least $5.00 value of Kroll-O'Gara
common stock. The Laboratory Specialists Board of Directors has not decided yet
whether it will cancel the merger in this event.

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The table below shows the formula which determines what you will receive for
each of your shares of Laboratory Specialists common stock.

AVERAGE KROLL-
O'GARA PRICE PORTION OF KROLL-O'GARA SHARE
-------------- -----------------------------

$24.00 or more .2102 share
$23.99 to $18.00 .2084 to .2778 share
$17.99 or less .2778 share (or as
negotiated)

Because the value of the Kroll-O'Gara common stock you will receive is based on
average selling prices over a 20-day period, it probably will be different than
the market price on the date of the merger. We believe using a 20-day period
gives a better measure of the value over time of the stock you will receive.

You will receive only whole shares of Kroll-O'Gara stock and cash in payment for
any fractional share.

COMPARATIVE PER SHARE MARKET PRICE INFORMATION (PAGE 45)

Both Kroll-O'Gara's and Laboratory Specialists' stock trade on The Nasdaq Stock
Market. On October 21, 1998, the last trading day before we announced the
merger, Kroll-O'Gara common stock closed at $23.00 per share and Laboratory
Specialists common stock closed at $4.00 per share. On November 9, 1998,
Kroll-O'Gara common stock closed at $27.88 per share and Laboratory Specialists
common stock closed at $5.13 per share.

You can obtain current stock price quotations for Kroll-O'Gara common stock
(symbol "KROG") and Laboratory Specialists common stock (symbol "LABZ") from a
newspaper, on the Internet or by calling your broker.

You can obtain the average selling price of the Kroll-O'Gara common stock over
the 20 trading-day period that will be used to determine the number of shares of
Kroll-O'Gara common stock that you will receive for your shares of Laboratory
Specialists' common stock by calling Larry E. Howell at (405) 232-9800.

REASONS FOR THE MERGER (PAGE 29)

The Laboratory Specialists Board of Directors believes the merger will benefit
both you and Laboratory Specialists for a number of reasons:

1. Kroll-O'Gara has more capital resources to devote to the growth of Laboratory
Specialists' business than does Laboratory Specialists and, based on
Kroll-O'Gara's history, we expect it to have access to the capital markets on
more favorable terms than Laboratory Specialists. Kroll-O'Gara has indicated
that it wants the current management of Laboratory Specialists to continue to
develop our business. If the business prospers, we hope it will benefit you
as a shareholder of Kroll-O'Gara.

2. We believe the merger will permit cost savings which increase the efficiency
of Laboratory Specialists' operations. This also should increase the
profitability of the business and, hopefully, benefit you as a Kroll-O'Gara
shareholder.

3. As a Kroll-O'Gara shareholder, you will own an interest in a larger and more
diversified company which has grown significantly in recent years. Although
this puts you at risk with regard to the other aspects of Kroll-O'Gara's
business, it also means that fluctuations in Laboratory Specialists' business
are likely to be "smoothed out" in the context of the larger company.

4. You should have greater liquidity for your Kroll-O'Gara common stock than you
have had for your Laboratory Specialists common stock. Kroll-O'Gara's stock
is traded on the Nasdaq National Market. The trading of its stock is more
active than the trading in Laboratory Specialists stock.

5. By exchanging your Laboratory Specialists stock for Kroll-O'Gara stock, you
will receive a premium of 45.3% over the closing price of the Laboratory
Specialists stock on the day before the announcement of the merger.

The current management of Laboratory Specialists has entered into employment
agreements, which were negotiated with

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Kroll-O'Gara, contingent on the merger, and intends to make every effort to
assure that our expectations for the merger are realized. Our expectations are,
of course, forward-looking and there is no assurance that they will be
fulfilled. You should review carefully the "Risk Factors" section of this Proxy
Statement/Prospectus and familiarize yourself with Kroll-O'Gara by reading the
information provided elsewhere in this document before making your decision on
the merger.

THE SPECIAL MEETING OF SHAREHOLDERS (PAGE 26)

We will hold a special meeting of Laboratory Specialists shareholders at the
offices of Dunn Swan & Cunningham, 210 Park Avenue, Suite 2800, Oklahoma City,
Oklahoma, at 2:00 p.m. local time, on December 4, 1998. At this meeting, we will
ask you:

1. To approve the merger agreement, and

2. To act on any other matters that properly may be presented for a vote.
Currently, we know of no other matters to be presented at the meeting.

OUR RECOMMENDATION (PAGE 30)

The Board of Directors of Laboratory Specialists believes that the merger is
fair to you and in your best interests. The Board unanimously recommends that
you vote "FOR" approval of the merger agreement.

RECORD DATE; VOTING POWER (PAGE 26)

You may vote at the special meeting if you owned Laboratory Specialists shares
as of the close of business on November 9, 1998. You will have one vote for each
share of Laboratory Specialists common stock owned on that date.

VOTE REQUIRED AND VOTING AGREEMENT (PAGE 27)

To approve the merger, Laboratory Specialists shareholders holding a majority of
the outstanding shares of Laboratory Specialists common stock entitled to vote
at the special meeting must vote to approve the merger agreement.

Together the directors and executive officers of Laboratory Specialists can vote
17.8% of the shares entitled to vote at the special meeting. Messrs. John
Simonelli, Larry E. Howell and Arthur R. Peterson, Jr., Laboratory Specialists'
three principal executive officers, own 17.4% of the shares entitled to vote at
the meeting. Each of these executives has signed an agreement committing himself
to vote FOR the merger. In addition, based upon the unanimous recommendation of
the Board, we expect that Laboratory Specialists' other executive officers and
directors also will vote all of their shares to approve the merger agreement.

EXCHANGE OF CERTIFICATES (PAGE 37)

If the merger is completed, your shares of Laboratory Specialists common stock
will be converted into shares of Kroll-O'Gara common stock and you will need to
exchange your Laboratory Specialists stock certificates for Kroll-O'Gara stock
certificates.

If we complete the merger, we will send you detailed instructions on how to
exchange your stock certificates. Please do not send us any stock certificates
until you receive these instructions.

WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGE 42)

The completion of the merger depends on a number of conditions being met. These
conditions are set forth in the merger agreement. Some of the conditions are:

1. Laboratory Specialists shareholders must approve the merger agreement;

2. Laboratory Specialists and Kroll-O'Gara must receive all required regulatory
approvals and certain waiting periods required by law must have passed;

3. there must be no governmental order blocking completion of the merger, and no
governmental proceeding trying to block the merger;

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4. Laboratory Specialists and Kroll-O'Gara must receive legal opinions
confirming that the merger will be treated as a reorganization for U.S.
federal income tax purposes;

5. the Nasdaq National Market must approve for listing the shares that
Kroll-O'Gara will issue in the merger; and

6. Laboratory Specialists and Kroll-O'Gara each must receive a letter from its
independent public accountants stating that the merger will qualify for
"pooling of interests" accounting treatment.

Unless prohibited by law, either Kroll-O'Gara or Laboratory Specialists could
waive a condition to the merger that has not been satisfied and complete the
merger anyway.

We cannot be certain whether or when any of these conditions will be satisfied,
or waived if permissible. We cannot be certain that we will complete the merger.

TERMINATION OF THE MERGER AGREEMENT (PAGE 43)

The two companies can agree at any time to terminate the merger agreement
without completing the merger, even if the Laboratory Specialists shareholders
already have approved the merger.

Either company also can terminate the merger agreement for a number of reasons,
including:

1. if any court or governmental body has issued a final order prohibiting the
merger;

2. if the merger is not completed by March 31, 1999;

3. if Laboratory Specialists shareholders do not approve the merger; or

4. if the other company materially violates any of its representations,
warranties or obligations under the merger agreement.

The company seeking to terminate cannot itself have caused the reason for
termination or materially breached the merger agreement.

Laboratory Specialists can terminate the merger agreement if the value of the
fractional share of Kroll-O'Gara common stock to be exchanged for each share of
Laboratory Specialists common stock is less than $5.00.

Additionally, Laboratory Specialists can terminate the merger agreement if it
receives an acquisition proposal which the Board of Directors determines is more
favorable, from a financial point of view, to Laboratory Specialists
shareholders than the proposed merger with Kroll-O'Gara.

If Laboratory Specialists proposes to accept an acquisition proposal which the
Board decides is more favorable and terminates the merger agreement, it must pay
Kroll-O'Gara a fee of $1,500,000.

If the merger agreement is terminated because

1. it is not approved by Laboratory Specialists shareholders, or

2. as a result of actions by Laboratory Specialists, Kroll-O'Gara does not
receive the opinion of its accountants that the merger qualifies for pooling
of interests accounting treatment,

Laboratory Specialists must pay Kroll-O'Gara's reasonable out-of-pocket expenses
related to the merger (up to a maximum of $350,000).

FEDERAL INCOME TAX CONSEQUENCES (PAGE 33)

We expect that neither of the two companies nor the shareholders of Laboratory
Specialists will recognize any gain or loss for U.S. federal income tax purposes
in the merger, except in connection with any cash that Laboratory Specialists
shareholders receive instead of fractional shares. Laboratory Specialists and
Kroll-O'Gara will each receive a legal opinion that this is the case. However,
these opinions do not bind the Internal Revenue Service, which could take a
different view. This tax treatment will not apply to any Laboratory Specialists
shareholder who exercises appraisal rights under Oklahoma law.

Determining the actual tax consequences of the merger to you as a taxpayer can
be complicated. The tax treatment will depend on your specific situation and on
many variables not within our control. You should consult your tax advisor for

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a full understanding of the merger's tax consequences.

ACCOUNTING TREATMENT (PAGE 33)

We expect the merger to qualify as a "pooling of interests," which means that,
for accounting and financial reporting purposes, Kroll-O'Gara will treat
Laboratory Specialists as if it had always been a part of Kroll-O'Gara.

OPINION OF FINANCIAL ADVISOR (PAGE 30)

Among the other factors considered in deciding to approve the merger, the
Laboratory Specialists Board of Directors considered the opinion of its
financial advisor, Jesup & Lamont Securities Corporation, that the value of the
shares of Kroll-O'Gara common stock to be received for each share of Laboratory
Specialists common stock is fair to the holders of Laboratory Specialists common
stock from a financial point of view. We have attached this opinion to this
Proxy Statement/Prospectus as Appendix B.

You should read the opinion carefully to understand the procedures followed,
assumptions made, matters considered and limitations on the review undertaken by
Jesup & Lamont Securities Corporation in rendering its opinion. Laboratory
Specialists has agreed to pay Jesup & Lamont Securities Corporation a financial
advisory fee of $30,000 for its services in connection with the proposed merger.

Jesup & Lamont Securities Corporation holds warrants to purchase 55,522 shares
of Laboratory Specialists common stock at a price of $5.40 per share. At the
time of the merger, these warrants will be converted into warrants to purchase
Kroll-O'Gara common stock at a price adjusted to give effect to the merger.

MANAGEMENT OF KROLL-O'GARA AFTER THE MERGER (PAGE 32)

The current directors and executive officers of Kroll-O'Gara will remain
unchanged after the merger.

INTERESTS OF LABORATORY SPECIALISTS' DIRECTORS AND EXECUTIVE OFFICERS IN THE
MERGER (PAGE 32)

Some directors and executive officers of Laboratory Specialists have interests
in the merger that are different from your interests. Three of the directors
hold options to purchase shares of Laboratory Specialists common stock which
will be converted into options to purchase Kroll-O'Gara common stock. Three of
the executive officers (all of whom are directors) and a fourth director have
entered into employment agreements with Laboratory Specialists or its subsidiary
which will be effective at the time of the merger. They also will receive "stay"
bonuses from Kroll-O'Gara if the merger is completed and they stay in the employ
of Kroll-O'Gara.

Finally, two of them will receive additional bonuses equal to a percentage of
the value of future acquisitions which they bring to Kroll-O'Gara in areas
relating to drug testing and pre-employment screening. The Board of Directors of
Laboratory Specialists was aware of these interests and took them into account
in approving the merger agreement.

DIFFERENCES IN RIGHTS OF SHAREHOLDERS (PAGE 110)

The Oklahoma General Corporation Act and Laboratory Specialists' Certificate of
Incorporation and Bylaws currently govern your rights as a shareholder of
Laboratory Specialists. Kroll-O'Gara is an Ohio corporation and, if the merger
is completed, the Ohio General Corporation Law and Kroll-O'Gara's Articles of
Incorporation and Code of Regulations will govern your shareholder rights.

APPRAISAL (DISSENTERS') RIGHTS (PAGE 35)

Oklahoma law permits holders of Laboratory Specialists common stock to dissent
from the merger and to have the fair value of their stock appraised by a court
and paid to them in cash. To do this, holders of dissenting shares must follow
required procedures, including filing notices with us and either abstaining or
voting against the merger. If you dissent from the merger and follow the
required procedures, your

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shares of Laboratory Specialists common stock will not become shares of
Kroll-O'Gara common stock. Instead, your only right will be to receive the
appraised value of your shares in cash. We have attached the applicable
provisions of Oklahoma law related to appraisal rights to this Proxy
Statement/Prospectus as Appendix C.

REGULATORY APPROVALS (PAGE 34)

We cannot complete the merger until a waiting period, during which the
Department of Justice or Federal Trade Commission could seek to enjoin the
merger, has expired. We have filed the required notifications to begin this
waiting period. Although we do not know of any reason why the Department of
Justice or the Federal Trade Commission would seek to enjoin the merger, we
cannot be certain when or if the merger will be allowed to proceed.

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION

KROLL-O'GARA SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The table below shows selected historical consolidated financial data of
Kroll-O'Gara. This information reflects: (i) a reorganization completed on
October 28, 1996 and a merger on December 1, 1997 with Kroll Holdings, Inc.
("KHI"), each of which was accounted for as a pooling of interests (which
requires the presentation of all prior period financial information as if all
entities had always been a part of Kroll-O'Gara), (ii) the completion of other
acquisitions in 1997 and 1998 that utilized the purchase method of accounting
(which requires including the reported results of the acquired business only
from the effective date of the acquisition), and (iii) the fact that certain
significant entities now a part of Kroll-O'Gara were not required to provide for
income taxes for some of the periods presented. The consolidated financial data
presented below as of December 31, 1996 and 1997 and for each of the three years
in the period ended December 31, 1997, have been derived from the audited
Consolidated Financial Statements of Kroll-O'Gara which are contained in this
Proxy Statement/Prospectus. The consolidated financial data as of June 30, 1998
and for the six-month periods ended June 30, 1997 and 1998 are derived from the
Kroll-O'Gara unaudited interim consolidated financial statements which also are
contained in this Proxy Statement/Prospectus. The consolidated financial data as
of December 31, 1993, 1994 and 1995 and June 30, 1997 and for the years ended
December 31, 1993 and 1994 are derived from Kroll-O'Gara's unaudited
consolidated financial statements, which are not included in this Proxy
Statement/Prospectus. You should read this information together with
Kroll-O'Gara's Consolidated Financial Statements and their Notes and with
Kroll-O'Gara's "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which are presented later in this document.

SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997(1) 1997 1998(1)
------- ------- ------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Net sales............................... $77,215 $86,784 $85,841 $153,661 $190,413 $88,600 $111,816
Cost of sales........................... 45,664 56,189 62,114 111,458 131,644 59,608 75,632
------- ------- ------- -------- -------- ------- --------
Gross profit.......................... 31,551 30,595 23,727 42,202 58,769 28,992 36,184
Selling and marketing expenses.......... 6,017 7,436 9,448 9,763 14,371 6,540 7,734
General and administrative expenses,
including amortization................ 19,470 22,517 18,916 23,940 28,222 13,419 15,643
Merger related costs.................... -- -- -- -- 7,205 -- --
------- ------- ------- -------- -------- ------- --------
Operating income (loss)............... 6,064 642 (4,637) 8,499 8,971 9,033 12,807
Interest expense........................ (2,692) (2,598) (2,813) (3,140) (4,806) (2,115) (2,369)
Other income (expense), net............. 434 466 (384) 336 (393) 120 9
------- ------- ------- -------- -------- ------- --------
Income (loss) before minority
interest, provision (benefit) for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................ 3,806 (1,490) (7,834) 5,695 3,772 7,038 10,447
Minority interest....................... -- -- -- -- (156) (74) --
------- ------- ------- -------- -------- ------- --------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................... 3,806 (1,490) (7,834) 5,695 3,616 6,964 10,447
Provision (benefit) for income
taxes(2).............................. 7,070 (1,751) (1,298) (162) 2,352 2,949 4,140
------- ------- ------- -------- -------- ------- --------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle............. (3,264) 261 (6,536) 5,857 1,264 4,015 6,307
Extraordinary item, net of tax
benefit(3)............................ -- -- -- -- (194) (194) --
------- ------- ------- -------- -------- ------- --------
Income (loss) before cumulative effect
of change in accounting principle... (3,264) 261 (6,536) 5,857 1,070 3,821 6,307

7
13

Cumulative effect of change in
accounting principle, net of tax
benefit(4)............................ (295) -- -- -- (360) -- --
------- ------- ------- -------- -------- ------- --------
Net income (loss)(5).................... $(3,559) $ 261 $(6,536) $ 5,857 $ 710 $ 3,821 $ 6,307
======= ======= ======= ======== ======== ======= ========
Basic earnings (loss) per share......... $ (0.47) $ 0.03 $ (0.65) $ 0.55 $ 0.05 $ 0.29 $ 0.43
======= ======= ======= ======== ======== ======= ========
Diluted earnings (loss) per share....... $ (0.47) $ (0.02) $ (0.65) $ 0.51 $ 0.05 $ 0.26 $ 0.42
======= ======= ======= ======== ======== ======= ========
Basic weighted average shares
outstanding........................... 7,554 8,510 10,021 10,742 13,061 13,060 14,632
Diluted weighted average shares
outstanding........................... 7,554 8,969 10,021 11,160 13,721 13,830 15,015

AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998(1)
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)

BALANCE SHEET DATA:
Working capital......................... $23,920 $14,511 $ 4,087 $10,600 $ 31,526 $ 36,161 $ 87,804
Net property, plant and equipment....... 7,204 7,012 6,876 8,563 14,612 13,310 16,471
Total assets............................ 59,551 63,902 66,767 81,234 133,971 127,151 193,118
Long-term debt, including current
portion............................... 23,374 27,566 30,915 17,479 50,065 56,571 40,292
Shareholders' equity.................... 10,339 11,076 4,657 16,867 27,954 23,806 103,217

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

(1) Kroll-O'Gara completed acquisitions using the purchase method of accounting
with aggregate purchase prices totalling approximately $23.2 million in 1997
and approximately $11.2 million during the first six months of 1998.

(2) Before October 28, 1996, a number of the entities that now are a part of
Kroll-O'Gara were not subject to federal and state income taxes.

(3) In 1997, the Company recorded an extraordinary loss, net of tax benefit, of
approximately $0.2 million due to the early extinguishment of debt.

(4) Effective January 1, 1993, KHI adopted SFAS No.109 and reported the
cumulative effect of a change in the method of accounting for income taxes
in its 1993 consolidated statement of operations. Effective in the fourth
quarter of 1997, the Company changed its method of accounting for costs
incurred in connection with business process reengineering activities.

(5) The net income (loss) and cost of sales for the year ended December 31, 1996
include a write-off by Kroll-O'Gara of approximately $5.0 million ($2.8
million, net of tax benefit) of uncollectible accounts receivable. See "The
Kroll-O'Gara Company -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8
14

LABORATORY SPECIALISTS SELECTED HISTORICAL FINANCIAL INFORMATION

The following selected financial data should be read in conjunction with the
consolidated financial statements and related notes of Laboratory Specialists
and with Laboratory Specialists' "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial data as
of and for the years ended December 31, 1996 and 1997, is derived from
Laboratory Specialists' audited financial statements. The selected financial
data as of and for the six months ended June 30, 1997 and 1998, is derived from
the unaudited financial statements of Laboratory Specialists. All of this
information is presented elsewhere in this Proxy Statement/Prospectus. In the
opinion of management of Laboratory Specialists, the unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such information.

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ------------------------
1996 1997 1997 1998
---------- ----------- ---------- ----------

STATEMENT OF OPERATIONS DATA:
Revenues...................................... $8,726,799 $12,836,953 $6,010,982 $7,659,764
Cost of laboratory services................... 3,816,114 5,828,665 2,659,857 3,462,846
---------- ----------- ---------- ----------
Gross profit................................ 4,910,685 7,008,288 3,351,125 4,196,918
Operating expenses:
Selling................................... 601,945 654,284 292,095 424,932
General and administrative................ 2,442,602 3,230,117 1,599,080 1,786,052
Depreciation and amortization............. 504,123 690,268 317,172 392,908
Asset impairment.......................... 124,531 -- -- --
---------- ----------- ---------- ----------
Total operating expenses............. 3,673,201 4,574,669 2,208,347 2,603,892
---------- ----------- ---------- ----------
Other income (expense):
Interest expense.......................... (67,185) (230,433) (90,484) (98,438)
Interest income........................... 41,208 78,035 19,493 77,823
Other income.............................. 4,169 1,146 72 52,487
---------- ----------- ---------- ----------
Total other (expense) income......... (21,808) (151,252) (70,919) 31,872
---------- ----------- ---------- ----------
Income from operations before income
taxes.................................. 1,215,576 2,282,367 1,071,859 1,624,898
Income tax expense............................ 527,171 953,264 449,243 670,592
---------- ----------- ---------- ----------
Income from continuing operations......... 688,505 1,329,103 622,616 954,306
Discontinued Operations:
Loss from operations of discontinued
clinical business, net of tax
benefit................................ (500,636) -- -- --
Loss on disposal of clinical business, net
of tax benefit......................... (773,580) -- -- --
---------- ----------- ---------- ----------
Net income (loss)............................. $ (585,711) $ 1,329,103 $ 622,616 $ 954,306
========== =========== ========== ==========
Basic earnings per common share:
Weighted average number of common shares
outstanding............................ 3,309,594 3,693,146 3,313,405 5,018,523
========== =========== ========== ==========
Continuing operations..................... $ .21 $ .36 $ .19 $ .19
Discontinued operation.................... (.39) -- -- --
---------- ----------- ---------- ----------
Total................................ $ (.18) $ .36 $ .19 $ .19
========== =========== ========== ==========
Diluted earnings per common share:
Weighted average number of common shares
and common stock equivalents
outstanding............................ 3,954,787 4,325,618 3,834,644 5,381,554
========== =========== ========== ==========
Continuing operations..................... $ .17 $ .31 $ .16 $ .18
Discontinued operation.................... (.32) -- -- --
---------- ----------- ---------- ----------
Total................................ $ (.15) $ .31 $ .16 $ .18
========== =========== ========== ==========

9
15

DECEMBER 31,
------------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------

BALANCE SHEET DATA:
Current assets............................................ $3,194,480 $ 5,702,984 $ 8,028,281
Working capital........................................... 1,002,712 3,305,983 4,872,894
Total assets.............................................. 9,394,808 15,016,580 17,953,038
Current debt obligations.................................. 1,312,650 1,164,854 1,145,605
Long-term debt, net of current portion.................... 1,245,690 2,353,428 1,730,909
Stockholders' equity...................................... 5,650,250 9,906,303 12,706,894

10
16

SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)

The table below shows selected financial data for Kroll-O'Gara which, because
the merger will be accounted for as a pooling of interests, assumes that
Laboratory Specialists has been merged with Kroll-O'Gara throughout the time
periods or at the time presented. We call this "pro forma" information. The pro
forma information does not reflect any reorganization or other expenses relating
to the merger. Kroll-O'Gara expects to incur charges currently estimated to be
approximately $1,200, net of an estimated tax benefit of approximately $400, to
reflect costs associated with transaction fees and costs incident to the merger.
It also does not reflect any reduced operating expenses or other financial
benefits which may be achieved after the merger. In addition, following the
merger, Kroll-O'Gara expects to incur additional expenses, net of any tax
benefits, associated with integrating the operations of the two companies. It is
currently estimated that these nonrecurring charges will not exceed $800, and
such charges are not reflected in the unaudited pro forma combined condensed
balance sheet or statement of operations. Therefore, although the pro forma
information may help illustrate some of the financial characteristics of
Kroll-O'Gara after the merger under one set of assumptions, it does not attempt
to predict or suggest future results. The pro forma information also does not
attempt to show how Kroll-O'Gara actually would have performed had the merger
taken place at the beginning of the time periods presented. The accounting
policies of the separate companies are currently being studied from a conformity
perspective. The impact of conforming accounting policies, if any, is not
presently estimable. You should read the information below together with the
historical consolidated financial statements of Kroll-O'Gara and of Laboratory
Specialists and the full pro forma financial statements, all of which are
presented elsewhere in this Proxy Statement/Prospectus.

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------
1995 1996 1997(1) 1997 1998(1)
------- -------- -------- ------- --------

STATEMENT OF OPERATIONS DATA:
Net sales............................................. $92,767 $162,388 $203,250 $94,611 $119,476
Cost of sales......................................... 65,417 115,443 137,660 62,359 79,196
------- -------- -------- ------- --------
Gross profit........................................ 27,350 46,945 65,590 32,252 40,280
Selling and marketing expenses........................ 10,009 10,365.. 15,025 6,832 8,159
General and administrative expenses, including
amortization........................................ 21,250 26,719 31,955 15,244 17,721
Merger related costs.................................. -- -- 7,205 -- --
Asset impairment...................................... -- 124 -- -- --
------- -------- -------- ------- --------
Operating income (loss)............................. (3,909) 9,737 11,405 10,176 14,400
Interest expense...................................... (2,843) (3,207) (5,037) (2,205) (2,467)
Interest income....................................... 127 41 78 180 442
Other income (expense), net........................... (60) 340 (392) (41) (303)
------- -------- -------- ------- --------
Income (loss) from continuing operations before
minority interest, provision (benefit) for income
taxes, extraordinary item and cumulative effect of
change in accounting principle...................... (6,685) 6,911 6,054 8,110 12,072
Minority interest..................................... -- -- (156) (74) --
------- -------- -------- ------- --------
Income (loss) from continuing operations before
provision (benefit) for income taxes, extraordinary
item and cumulative effect of change in accounting
principle........................................... (6,685) 6,911 5,898 8,036 12,072
Provision (benefit) for income taxes(2)............... (823) 365 3,305 3,398 4,811
------- -------- -------- ------- --------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle............................. (5,862) 6,546 2,593 4,638 7,261
Dividends on preferred stock.......................... (13) -- -- -- --
------- -------- -------- ------- --------

11
17

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------
1995 1996 1997(1) 1997 1998(1)
------- -------- -------- ------- --------

Income (loss) from continuing operations before
extraordinary item and cumulative effect of change
in accounting principle............................. $(5,875) $ 6,546 $ 2,593 $ 4,638 $ 7,261
======= ======== ======== ======= ========
Basic earnings (loss) per share from continuing
operations(6)....................................... $ (0.54) $ 0.57(3) $ 0.19(4) $ 0.33(5) $ 0.46
======= ======== ======== ======= ========
Basic weighted average shares outstanding............. 10,806 11,530 13,940 13,849 15,827
======= ======== ======== ======= ========
Diluted earnings (loss) per share from continuing
operations(6)....................................... $ (0.54) $ 0.53(3) $ 0.18(4) $ 0.30(5) $ 0.45
======= ======== ======== ======= ========
Diluted weighted average shares outstanding........... 10,806 12,102 14,751 14,743 16,296
======= ======== ======== ======= ========

AS OF
JUNE 30,
1998
---------------

BALANCE SHEET DATA:
Working capital............................................. $ 92,677
Net property, plant, and equipment.......................... 18,861
Total assets................................................ 211,071
Total debt.................................................. 43,169
Shareholders' equity........................................ 115,924

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

(1) Kroll-O'Gara completed acquisitions using the purchase method of accounting
with aggregate purchase prices totalling approximately $23,200 in 1997 and
approximately $11,200 during the first six months of 1998.

(2) Prior to October 28, 1996, a number of the entities that are now a part of
Kroll-O'Gara were not subject to federal and state income taxes.

(3) During the fourth quarter of 1996, Laboratory Specialists discontinued its
clinical operations. The related operating loss and shut down expenses of
$1,274, net of a benefit for income taxes of $747, were reported as
discontinued operations by Laboratory Specialists in its income statement
for the year ended December 31, 1996. The basic and diluted earnings per
share impact of the discontinued operations for the year ended December 31,
1996 was $0.11.

(4) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. In addition, during 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 and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The basic and diluted earnings per share impact of the
extraordinary item was $0.01 and the basic and diluted earnings per share
impact of the change in accounting principle was $0.03 and $0.02,
respectively, for the year ended December 31, 1997.

(5) The basic and diluted earnings per share impact of the extraordinary item
discussed in (4) above for the six months ended June 30, 1997 was $0.01.

(6) For purposes of the pro forma basic and diluted earnings per share
computations, we have assumed an exchange ratio of .2381 Kroll-O'Gara share
for every outstanding share of Laboratory Specialists stock on a weighted
average basis. The above exchange ratio is based upon an assumed Kroll-
O'Gara stock price of $21.
12
18

SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA INCLUDING
KIZOREK, INC.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

On September 1, 1998, Kroll-O'Gara completed the acquisition of all of the
capital stock of Kizorek, Inc. The transaction was accounted for under the
purchase method of accounting and, for accounting purposes, was effective July
1, 1998. This means that the results of operations of Kizorek will be included
in Kroll-O'Gara's historical financial statements only from July 1, 1998
forward. However, in order to illustrate what Kroll-O'Gara's financial results
might have looked like if Kizorek had been acquired earlier, the table below
provides pro forma data which assumes that both Laboratory Specialists and
Kizorek had been a part of Kroll-O'Gara throughout the time periods or at the
time presented. The caveats which apply to the pro forma data for the Laboratory
Specialists merger also apply to this pro forma data (see page 11). Historical
financial statements for Kizorek and full pro forma financial statements
including Kizorek are presented in the Financial Statement section of this Proxy
Statement/ Prospectus.

YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997(1) JUNE 30, 1998(1)
-------------------- ----------------

STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $217,726 $125,861
Cost of sales...................................... 145,773 83,107
-------- --------
Gross profit..................................... 71,953 42,754
Selling and marketing expenses..................... 16,357 8,777
General and administrative expenses, including
amortization..................................... 36,074 19,683
Merger related costs............................... 7,205 --
-------- --------
Operating income................................. 12,317 14,294
Interest expense................................... (5,126) (2,502)
Interest income.................................... 78 442
Other income (expense), net........................ (392) (303)
-------- --------
Income from continuing operations before minority
interest, provision for income taxes,
extraordinary item and cumulative effect of
change in accounting principle................ 6,877 11,931
Minority interest.................................. (156) --
-------- --------
Income from continuing operations before
provision for income taxes, extraordinary item
and cumulative effect of change in accounting
principle..................................... 6,721 11,931
Provision for income taxes(2)...................... 3,634 4,754
-------- --------
Income from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle................ $ 3,087 $ 7,177
======== ========
Basic earnings per share from continuing
operations (4)................................... $ 0.22(3) $ 0.44
======== ========
Basic weighted average shares outstanding.......... 14,292 16,179
======== ========
Diluted earnings per share from continuing
operations(4).................................... $ 0.20(3) $ 0.43
======== ========
Diluted weighted average shares outstanding........ 15,103 16,648
======== ========

13
19

AS OF
JUNE 30, 1998
--------------

BALANCE SHEET DATA:
Working capital............................................. $ 92,607
Net property, plant and equipment........................... 19,818
Total assets................................................ 222,569
Total debt.................................................. 43,188
Shareholders' equity........................................ 124,152

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

(2) Prior to October 28, 1996, a number of the entities that are now part of
Kroll-O'Gara were not subject to federal and state income taxes.

(3) During second quarter of 1997, Kroll-O'Gara recorded an extraordinary charge
of $194, net of a benefit for income taxes of $129, related to
Kroll-O'Gara's debt refinancing in 1997. In addition, during 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 and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The basic and diluted earnings per share impact of the
extraordinary item was $0.01 and the basic and diluted earnings per share
impact of the change in accounting principle was $0.03 and $0.02,
respectively.

(4) For purposes of the pro forma basic and diluted earnings per share
computations, we have assumed an exchange ratio of .2381 Kroll-O'Gara share
for every outstanding share of Laboratory Specialists stock on a weighted
average basis. The above exchange ratio is based upon an assumed Kroll-
O'Gara stock price of $21.
14
20

UNAUDITED COMPARATIVE PER SHARE INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)

The table below shows comparative earnings per share and shareholders' equity
(book value) per share for Kroll-O'Gara and Laboratory Specialists on a
historical basis, on a pro forma basis for Kroll-O'Gara giving effect to its
September 1, 1998 acquisition of Kizorek, Inc., on a pro form basis for
Kroll-O'Gara giving effect to the Laboratory Specialists merger and on a pro
forma equivalent basis for Laboratory Specialists. The historical data is
derived from the historical financial statements of Kroll-O'Gara and Laboratory
Specialists. Because the merger will be accounted for as a pooling of interests,
the pro forma data assumes that Laboratory Specialists has been merged with
Kroll-O'Gara throughout the periods shown. We computed the pro forma equivalent
for the merger data by multiplying the pro forma combined for the merger amounts
by an exchange ratio of .2381, which is the portion of a share of Kroll-O'Gara
common stock that Laboratory Specialists shareholders will receive for each
share of Laboratory Specialists common stock owned before the merger assuming an
average trading price of $21 per share of Kroll-O'Gara common stock. The value
of the Kroll-O'Gara common stock you receive will depend on the selling prices
of Kroll-O'Gara common stock averaged over 20 trading days, ending three trading
days before the special meeting. Therefore, all per share data below may change
based on the results of this calculation.

FOR THE YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------------ ENDED
1995 1996 1997 JUNE 30, 1998
------ ----- ----- -------------

Earnings (loss) per common share from continuing
operations (basic)
Kroll-O'Gara:
Historical.................................. $(0.65) $0.55 $0.10 $0.43
Pro forma combined for Kizorek(1)(5)........ N/A N/A $0.13 $0.42
Pro forma combined for the
merger(2)(4)(5)........................... $(0.54) $0.57 $0.19 $0.46
Laboratory Specialists:
Historical.................................. $ 0.20 $0.21 $0.36 $0.19
Pro forma equivalent for the merger(4)(5)... $(0.13) $0.14 $0.04 $0.11

FOR THE YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------------ ENDED
1995 1996 1997 JUNE 30, 1998
------ ----- ----- -------------

Earnings (loss) per common share from continuing
operations (diluted)
Kroll-O'Gara:
Historical.................................. $(0.65) $0.51 $0.09 $0.42
Pro forma combined for Kizorek(1)(5)........ N/A N/A $0.12 $0.40
Pro forma combined for the
merger(2)(4)(5)........................... $(0.54) $0.53 $0.18 $0.45
Laboratory Specialists:
Historical.................................. $ 0.17 $0.17 $0.31 $0.18
Pro forma equivalent for the merger(4)(5)... $(0.13) $0.13 $0.04 $0.11

15
21

AT AT
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------

Shareholders' equity per common share (end of period)
Kroll-O'Gara:
Historical.......................................... $2.14 $7.05
Pro forma combined for Kizorek(1)................... $2.70 $7.44
Pro forma combined for the merger(2)................ $2.72 $7.32
Laboratory Specialists:
Historical.......................................... $2.68 $2.53
Pro forma equivalent for the merger................. $0.65 $1.74

AT AT
DECEMBER 31, 1997 JUNE 30, 1998
----------------- -------------

Shareholders' equity per common share assuming full
dilution(3)
Kroll-O'Gara:
Historical.......................................... $2.17 $7.04
Pro forma combined for Kizorek(1)................... $2.70 $7.41
Pro forma combined for the merger(2)................ $2.69 $7.26
Laboratory Specialists:
Historical.......................................... $2.29 $2.36
Pro forma equivalent for the merger................. $0.64 $1.73

Neither Kroll-O'Gara nor Laboratory Specialists has paid any dividends.
- ---------------

(1) The pro forma combined for Kizorek amounts reflect the pro forma effects on
the historical Kroll-O'Gara consolidated financial information of the
Kizorek acquisition as of the end of the respective period or as if the
purchase transaction had occurred as of the beginning of the respective
period.

(2) The unaudited comparative per share information is presented for
informational purposes only and does not give effect to any synergies that
may occur due to the combining of Kroll-O'Gara's and Laboratory Specialists'
existing operations. Kroll-O'Gara expects to incur charges currently
estimated to be approximately $1,200, net of estimated tax benefit of
approximately $400, to reflect costs associated with transaction fees and
costs incident to the merger. In addition, following the merger,
Kroll-O'Gara expects to incur additional expenses, net of any tax benefits,
associated with integrating the operations of the two companies. It is
currently estimated that these nonrecurring charges will not exceed $800,
and such charges are not reflected in the unaudited pro forma combined
condensed balance sheet or statement of operations.

(3) The calculation of shareholders' equity per common share assuming full
dilution includes the (i) proceeds from the assumed exercise of stock
options and warrants outstanding at the end of each period as a component of
shareholders' equity, and (ii) stock options and warrants outstanding at the
end of each period as a component of common shares outstanding.

(4) During the fourth quarter of 1996, Laboratory Specialists discontinued its
clinical operations. The related operating loss and shut down expenses of
$1,274, net of a benefit for income taxes of $747, were reported as
discontinued operations by Laboratory Specialists in its income statement
for the year ended December 31, 1996. The pro forma combined for the merger
basic and diluted earnings per share impact of the discontinued operations
for the year ended December 31, 1996 was $0.11. The pro forma equivalent for
the merger basic and diluted earnings per share impact of the discontinued
operations for the year ended December 31, 1996 was $0.03.
16
22

(5) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. In addition, during 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 and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The pro forma combined for Kizorek basic and diluted
earnings per share impact of the extraordinary item was $0.01 and the pro
forma combined for Kizorek basic and diluted earnings per share impact of
the change in accounting principle was $0.03 for the year ended December 31,
1997. The pro forma combined for the merger basic and diluted earnings per
share impact of the extraordinary item was $0.01 and the pro forma combined
for the merger basic and diluted earnings per share impact of the change in
accounting principle was $0.03 and $0.02, respectively, for the year ended
December 31, 1997. The pro forma equivalent for the merger basic earnings
per share impact of the change in accounting principle was $0.01 for the
year ended December 31, 1997. The pro forma equivalent for the merger
diluted earnings per share impact of the change in accounting principle and
the pro forma equivalent for the merger basic and diluted earnings per share
impact of the extraordinary item are nominal.
17
23

INDEX TO DEFINED TERMS

PAGE
------

1994 Warrants............................................... 91
1997 Interim Period......................................... 96
1998 Private Offering....................................... 93
1998 Interim Period......................................... 96
360 Contract................................................ 51
738 Contract................................................ 51
AIG......................................................... 68
AM General.................................................. 63
AMSC........................................................ 69
Accu-Path................................................... 92
Accu-Path Asset Purchase.................................... 92
Accu-Path Assets............................................ 92
Acorn....................................................... 48
Alternative Acquisition..................................... 40
Average Stock Price......................................... 36
Bank........................................................ 99
Barber & Bronson Group Warrants............................. 92
Barron Chase Group Warrants................................. 91
Business combination........................................ 111
CAP......................................................... 102
CIT......................................................... 63
Chapter 1704 Transaction.................................... 108
Closing Price............................................... 37
Code........................................................ 33
Control share acquisition................................... 109
Control Share Acquisition Statute........................... 109
Corplex..................................................... 48
Daily Per Share Price....................................... 37
DOJ......................................................... 34
Effective Time.............................................. 36
Excel Metal................................................. 86
Exchange Agent.............................................. 37
FTC......................................................... 34
GPS......................................................... 67
HLI......................................................... 92
HLI Asset Purchase.......................................... 92
HMMWV....................................................... 22
HSR Act..................................................... 34
IMEA........................................................ 48
IPO Offering................................................ 91
IT.......................................................... 97
ITI......................................................... 48
InPhoto..................................................... 49
Interested shares........................................... 109
Interested shareholder...................................... 108

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PAGE
------

Jesup & Lamont Group Warrants............................... 93
Jesup & Lamont.............................................. 28
KHI......................................................... 7
Kroll....................................................... 61
Kroll-O'Gara................................................ 26
Kroll-O'Gara Articles....................................... 108
Kroll-O'Gara Code........................................... 108
LSI......................................................... 90
LSI Acquisition............................................. 90
Labbe....................................................... 48
Laboratory Specialists...................................... 26
Laboratory Specialists Board................................ 26
Laboratory Specialists Bylaws............................... 110
Laboratory Specialists Certificate.......................... 110
Laboratory Specialists Common Stock......................... 26
Laboratory Specialists Dissenting Shares.................... 35
Limited..................................................... 85
Lindquist Avey.............................................. 48
Longline/Excel.............................................. 85
MBf USA..................................................... 90
MBf USA Promissory Note..................................... 90
Material Adverse Effect..................................... 38
Measurement Period.......................................... 37
Merger...................................................... 26
Merger Agreement............................................ 26
Merger Consideration........................................ 36
Merger Sub.................................................. 26
NDAC........................................................ 91
NDAC Asset Purchase......................................... 91
NDAC Purchased Assets....................................... 91
NIDA........................................................ 90
NPLI........................................................ 91
NPLI Goodwill............................................... 91
NPLI Promissory Notes....................................... 91
NPLI Purchase Agreement..................................... 91
NPLI Shareholders........................................... 91
NPLI Stock.................................................. 91
NPLI Stock Purchase Price................................... 91
Next Destination............................................ 47
Offering.................................................... 47
OGCL........................................................ 25
OHE......................................................... 56
OHE de Colombia............................................. 49
OKGCA....................................................... 27
OOS......................................................... 86
OPS......................................................... 86
ORC......................................................... 108

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PAGE
------

OSN......................................................... 85
Oklahoma Court.............................................. 35
Oklahoma Statute............................................ 111
PLL......................................................... 92
PLL Asset Purchase.......................................... 92
PLL Purchase Agreement...................................... 92
Peterson Share Exchange..................................... 90
Record Date................................................. 26
Reorganization.............................................. 85
SAMHSA...................................................... 90
SEC......................................................... 39
STS......................................................... 72
Section 1091................................................ 35
Securities Act.............................................. 34
Special Meeting............................................. 26
Superior Proposal........................................... 40
Surviving Corporation....................................... 36
TLI......................................................... 93
TLI Asset Purchase.......................................... 93
Warrant Redemption Offering................................. 92

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RISK FACTORS

In addition to the other information in this Proxy Statement/Prospectus,
you should carefully consider the Risk Factors discussed below in evaluating the
merger of Laboratory Specialists with Kroll-O'Gara.

Some of the information in this Proxy Statement/Prospectus is
forward-looking. Forward-looking statements can be identified by the use of
language such as "may," "will," "expect," "anticipate," "estimate," "continue"
or other similar words. These statements discuss future expectations which are
subject to risks and uncertainties. When considering such forwarding looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Proxy Statement/Prospectus. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in this section and elsewhere in this document.

RISKS ASSOCIATED WITH THE MERGER

Although Kroll-O'Gara believes that Laboratory Specialists' business will
complement and fit well with Kroll-O'Gara's existing investigations and
intelligence business, the drug testing business is new to Kroll-O'Gara. The
unfamiliarity of Kroll-O'Gara's management with this business may make it more
difficult to integrate Laboratory Specialists operations with those of
Kroll-O'Gara. Kroll-O'Gara will not achieve the anticipated benefits of the
merger unless it successfully integrates the operations of Laboratory
Specialists. There can be no assurance that this will occur.

MANAGEMENT OF GROWTH

Kroll-O'Gara plans to develop further its existing lines of business in
current markets and to expand into new geographic markets. To do this, it will
need to enhance the capabilities of its operational and financial systems and
will require additional employees, management and operational and financial
resources. If Kroll-O'Gara cannot do these things when necessary, it could be
adversely affected.

Kroll-O'Gara also plans to grow through the acquisition of additional
companies that will complement its existing operations or provide it with an
entry into markets it does not currently serve. Kroll-O'Gara may not be able to
identify or acquire suitable companies or lines of business. When companies are
acquired, Kroll-O'Gara may not be able to integrate or manage these businesses
so as to produce returns that justify the investment. Additionally, issues
relating to new acquisitions may divert the attention of Kroll-O'Gara's
management from existing operations.

The expansion of Kroll-O'Gara's business eventually will require additional
capital. Kroll-O'Gara may not be able to generate adequate cash from operations
or obtain adequate financing from external sources for this purpose. The
issuance of additional Kroll-O'Gara common stock to raise capital or to finance
acquisitions may result in dilution to holders of Kroll-O'Gara common stock. Any
debt financing may increase significantly Kroll-O'Gara's leverage and may
involve restrictive covenants which limit Kroll-O'Gara's operations. Future
acquisitions by Kroll-O'Gara also may require approval under Kroll-O'Gara's
credit facility. See "The Kroll-O'Gara Company -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

COMPETITION

The markets in which Kroll-O'Gara does and intends to do business are
highly competitive. There are a large number of companies, both public and
private, that provide products or services similar to those offered by
Kroll-O'Gara. Kroll-O'Gara also may encounter competition from future industry

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entrants. Some of Kroll-O'Gara's current competitors have, and new competitors
may have, substantially greater financial and other resources than Kroll-O'Gara.
A number also have long established relationships with their clients. For
example, some accounting firms and other large security product and service
providers have indicated an interest in expanding their product offerings to
certain of the investigative and consulting services provided by Kroll-O'Gara.
These companies could be formidable competitors if they elect to devote the
necessary resources to businesses which are competitive with Kroll-O'Gara. See
"The Kroll-O'Gara Company -- Business -- Competition."

U.S. MILITARY CONTRACTS

U.S. Military contracts account for a significant portion of Kroll-O'Gara's
business, representing 17%, 36% and 23% of net sales for 1995, 1996 and 1997,
respectively. The U.S. Military funds these contracts in annual increments, and
the contracts require subsequent authorization and appropriation which may not
occur or which may provide less than the total amount of the contract.
Kroll-O'Gara may not receive future contracts and the size of any contracts that
are received may vary. Fluctuations in spending by the U.S. Government for
national defense could adversely affect Kroll-O'Gara's ability to receive future
contracts. Also, the U.S. Government generally may cancel its contracts
unilaterally, at its convenience. The loss of, or a significant reduction in,
this business would have a material adverse effect on Kroll-O'Gara. See "The
Kroll-O'Gara Company -- Business -- U.S. Government Contracts."

SINGLE AND PRIMARY SOURCE SUPPLIERS

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
("HMMWVs"). HMMWVs armored by Kroll-O'Gara are manufactured by AM General
Corporation under separate U.S. Military contracts. Should deliveries of HMMWVs
to Kroll-O'Gara be significantly interrupted, there could be a material adverse
effect on Kroll-O'Gara.

In 1997, Kroll-O'Gara obtained approximately 69% of the glass used in
armoring its vehicles from Pilkington Aerospace Limited. If Kroll-O'Gara ever
needed to select one or more additional or substitute suppliers, delays could be
encountered in obtaining glass which meets Kroll-O'Gara's specifications.

FLUCTUATIONS IN OPERATING RESULTS

Kroll-O'Gara derived approximately 23% of its net sales for 1997 from U.S.
Military contracts and an additional 5% from commercial contracts with U.S.
governmental agencies or foreign governments. Kroll-O'Gara reports these
contracts through its Security Products and Services Group. Because these
contracts generally are awarded on a periodic and/or sporadic basis, the
Security Products and Services Group has significant fluctuations from time to
time in its business. Period-to-period comparisons within a given year or
between years may not be meaningful or indicative of operating results over a
full year. Kroll-O'Gara generally does not have long term contracts with clients
in its Investigations and Intelligence Group, and the business of this Group
depends on obtaining many new projects each year, most of which are of
relatively short duration. As a result, Kroll-O'Gara's net sales and net income
from year-to-year and period-to-period in its Investigations and Intelligence
Group are not predictable, and historically there has not been a consistent
year-to-year pattern of growth. Additionally, the level of corporate
acquisitions and other financial transactions affects the demand for
Kroll-O'Gara's investigative and intelligence services, and clients may reduce
their reliance on certain Kroll-O'Gara's services during periods when there is a
decline in such activities. See "The Kroll-O'Gara Company --
Business -- Seasonality, Backlog and Related Matters" and "The Kroll-O'Gara
Company -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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FIXED PRICE CONTRACTS

Fixed price contracts are used for a substantial portion of Kroll-O'Gara's
projects in its Security Products and Services Group. Kroll-O'Gara attempts to
cover anticipated increases in labor, material and other costs in the original
prices of these contracts. However, due to unexpected events over the life of a
fixed-price contract, the results actually realized often will vary from that
originally expected. Depending on the size of a contract, these variations from
estimated contract performance could have a material adverse effect on
Kroll-O'Gara's results of operations for any quarter or year.

PERCENTAGE-OF-COMPLETION ACCOUNTING

Kroll-O'Gara recognizes net sales from government contracts and most
commercial contracts in its Security Products and Services Group using the
percentage-of-completion method. 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 determined. 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 would
recognize a credit or a charge against current earnings, which could be
material. See "The Kroll-O'Gara Company -- Management's Discussion and Analysis
of Financial Condition and Results of Operations."

POLITICAL AND ECONOMIC RISKS OF DOING BUSINESS OUTSIDE THE UNITED STATES

In addition to its U.S. facilities, Kroll-O'Gara has operations and assets
in Australia, Brazil, Canada, China, Colombia, France, India, Italy, Japan,
Mexico, the Philippines, Russia, Saudi Arabia, Singapore, Switzerland and the
United Kingdom. Kroll-O'Gara also sells its products and services in other
foreign countries and is seeking to increase its level of international business
activity. Kroll-O'Gara's international business exposes it to various risks,
including exchange rate fluctuations, foreign currency restrictions, U.S.
imposed embargoes of sales to specific countries, expropriation of assets, war,
civil uprisings and riots, government instability and the vagaries of foreign
legal systems. Kroll-O'Gara also may be subject to unanticipated taxes, duties,
or other governmental assessments. These risks could result in a loss of
business, significant unexpected write-offs of assets or other unexpected costs
which could have a material adverse effect on Kroll-O'Gara. See "The
Kroll-O'Gara Company -- Business -- Government Regulation."

GOVERNMENT REGULATION

As a contractor with agencies of the U.S. Government, Kroll-O'Gara must
comply with a variety of regulations governing certain aspects of its operations
and the workplace. These agencies also may conduct audits of Kroll-O'Gara's
facilities and operations, and such audits occur routinely. Kroll-O'Gara may be
subject to investigations as a result of an audit or for other causes. Adverse
findings in an audit or other investigation, including violations of
environmental or labor laws, could result in fines or other penalties up to and
including disqualification as a U.S. Government contractor. In addition, U.S.
Government contracts may contain specific delivery requirements. Kroll-O'Gara
could incur penalties or lost profits if it fails to meet these requirements.

Kroll-O'Gara is subject to federal licensing requirements with respect to
the sale in foreign countries of certain products and services. 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

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commercial products in foreign countries, and certain U.S. State Department
regulations require Kroll-O'Gara to file an export license in connection with
sales of military equipment in foreign countries.

The services provided by Kroll-O'Gara's Investigations and Intelligence
Group are subject to various federal, state, local and foreign laws, including
privacy laws. Subsidiaries of Kroll-O'Gara hold private investigative licenses
from, and their investigative activities are regulated by, government agencies
in various jurisdictions. Kroll-O'Gara also utilizes certain data from outside
sources, including data from third party vendors and various government and
public record services, in performing its services. To date, applicable laws and
regulations have not interfered materially with the manner in which Kroll-O'Gara
obtains information and conducts its operations, including Kroll-O'Gara's access
to data used in its business. However, changes in these laws and regulations,
particularly those relating to privacy, could have a material adverse effect on
Kroll-O'Gara. See "The Kroll-O'Gara Company -- Business -- Government
Regulation."

DEPENDENCE ON KEY PERSONNEL

Kroll-O'Gara's operations currently depend on the continued efforts of its
executive officers and senior management, particularly Jules B. Kroll, its
Chairman and Chief Executive Officer, and Wilfred T. O'Gara, its President and
Chief Operating Officer. Kroll-O'Gara also is highly dependent on the quality
and efforts of its professional staff to provide its services and to attract and
retain clients. Competition for qualified management and professional employees
is intense. Kroll-O'Gara's business could be materially and adversely affected
if its executive officers unexpectedly become unable or decide not to continue
in their present positions, or if a number of senior managers fail to continue
with Kroll-O'Gara and Kroll-O'Gara is unable to attract and retain qualified
replacements. See "The Kroll-O'Gara Company -- Management."

CONTROL BY MANAGEMENT AND BOARD

After the merger, Kroll-O'Gara's officers and directors will control
approximately 39% of Kroll-O'Gara's outstanding Common Stock and effectively
will be able to control most matters requiring approval by shareholders,
including the election of directors. See "The Kroll-O'Gara Company -- Principal
Shareholders and Holdings of Management."

LIABILITY TO CLIENTS AND OTHERS

Certain of the matters with respect to which Kroll-O'Gara provides services
are extremely large and complex financial transactions in which very substantial
amounts of money are at risk. Kroll-O'Gara maintains environmental consulting,
product liability and professional liability insurance policies with limits of
$5 million, $25 million and $15 million, respectively; however, a successful
claim could result in liability in excess of coverage limits and have a material
adverse effect on Kroll-O'Gara. Also, in the ordinary course of its business,
Kroll-O'Gara is subject to claims of third parties other than clients alleging
trespass, invasion of privacy and other tortious conduct by its investigators
and other personnel. Although Kroll-O'Gara endeavors to minimize the risk of
such claims, they could have a material adverse effect on Kroll-O'Gara. See "The
Kroll-O'Gara Company -- Business -- Legal Proceedings."

YEAR 2000 ISSUES

Kroll-O'Gara has implemented a Year 2000 program intended to ensure that
its computer systems and applications will function properly beyond 1999.
Kroll-O'Gara believes that it has allocated adequate resources for this purpose
and expects its Year 2000 date conversion program to be completed on a timely
basis. In addition, Kroll-O'Gara is selecting and implementing several new
software

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applications which it believes to be Year 2000 compliant. Kroll-O'Gara's failure
to implement successfully these applications could have a material impact on its
operations. Although the ability of third parties with whom Kroll-O'Gara
transacts business to address adequately their Year 2000 issues is outside
Kroll-O'Gara's control, Kroll-O'Gara is discussing with its vendors and
customers the possibility of any interface difficulties which may affect it.
Kroll-O'Gara currently does not expect that its costs to address the Year 2000
issue will be material to its financial condition or results of operations.
However, the failure of Kroll-O'Gara or of third parties with whom Kroll-O'Gara
transacts business to address adequately their respective Year 2000 issues could
have a material adverse effect on Kroll-O'Gara.

ABSENCE OF DIVIDENDS

Kroll-O'Gara does not anticipate paying any dividends on the Kroll-O'Gara
common stock in the foreseeable future. Additionally, the terms of
Kroll-O'Gara's Senior Notes due 2004 and of its credit agreement with its bank
require maintenance of certain financial ratios which may limit the funds
available for cash dividends. See "Market Prices and Dividends."

POTENTIAL ADVERSE EFFECTS OF CHARTER AND CODE OF REGULATIONS PROVISIONS AND THE
OHIO GENERAL CORPORATION LAW

Certain provisions of Kroll-O'Gara's Amended and Restated Articles of
Incorporation and Code of Regulations and of the Ohio General Corporation Law
(the "OGCL"), together or separately, could discourage potential acquisition
proposals, delay or prevent a change in control of Kroll-O'Gara and limit the
price that certain investors might be willing to pay in the future for
Kroll-O'Gara common stock.

The Board of Directors of Kroll-O'Gara has authority to issue up to
1,000,000 preferred shares without further shareholder approval. Such preferred
shares could have dividend, liquidation, conversion, voting and other rights and
privileges that are superior or senior to Kroll-O'Gara common stock. If
Kroll-O'Gara were to issue preferred shares, it could dilute the voting power of
Kroll-O'Gara common stock, adversely affect holders of Kroll-O'Gara common stock
in the event of liquidation of Kroll-O'Gara or delay, defer or prevent a change
in control of Kroll-O'Gara.

In addition, Sections 1701.01 and 1701.831 of the OGCL require shareholder
approval of any proposed "control share acquisition" of an Ohio corporation at
any of three ownership thresholds (20%, 33 1/2% and 50%), and Chapter 1704 of
the Ohio Revised Code restricts certain business combinations and other
transactions between an Ohio corporation and interested shareholders. See
"Description of Kroll-O'Gara Capital Stock -- Provisions Affecting Business
Combinations and Changes in Control."

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THE SPECIAL MEETING

Laboratory Specialists of America, Inc., an Oklahoma corporation
("Laboratory Specialists"), is mailing this Proxy Statement/Prospectus to
holders of shares of its common stock, par value $0.001 per share ("Laboratory
Specialists Common Stock"), on or about November 13, 1998, together with a
notice of a Special Meeting of Shareholders (the "Special Meeting") and a form
of proxy solicited by the Board of Directors of Laboratory Specialists (the
"Laboratory Specialists Board") for use at the Special Meeting.

TIME AND PLACE; PURPOSE

The Special Meeting will be at the offices of Dunn Swan & Cunningham, 210
Park Avenue, Suite 2800, Oklahoma City, Oklahoma on December 4, 1998, starting
at 2:00 p.m., local time. At the Special Meeting, you will be asked to consider
and vote upon a proposal to approve an Agreement and Plan of Merger (the "Merger
Agreement") dated as of October 21, 1998 by and among The Kroll-O'Gara Company,
an Ohio corporation ("Kroll-O'Gara"), Kroll- O'Gara Oklahoma, Inc., a
wholly-owned subsidiary of Kroll-O'Gara ("Merger Sub"), and Laboratory
Specialists. Pursuant to the Merger Agreement, Merger Sub will be merged into
Laboratory Specialists and Laboratory Specialists will become a wholly-owned
subsidiary of Kroll-O'Gara (the "Merger").

PROXIES

Voting and Revocation of Proxies. You may use the accompanying proxy card
if you are unable to attend the Special Meeting in person or wish to have your
shares voted by proxy even if you do attend the Special Meeting. You may revoke
any proxy that you give at any time before it is exercised, either by submitting
a written notice of revocation or a properly executed proxy of a later date, or
by attending the Special Meeting and voting in person. You should address
written notice of revocation and other communications with respect to the
revocation of Laboratory Specialists proxies to Laboratory Specialists of
America, Inc., 101 Park Avenue, Suite 810, Oklahoma City, Oklahoma 73102,
Attention: Corporate Secretary.

All shares of Laboratory Specialists Common Stock represented by properly
executed proxies received prior to or at the Special Meeting and not revoked
before they are exercised will be voted in accordance with the instructions
indicated in such proxies. If you do not specify how your proxy is to be voted,
it will be voted "FOR" the Merger Agreement.

SOLICITATION OF PROXIES

Laboratory Specialists will pay the expenses of solicitation of proxies for
the Special Meeting. In addition to solicitation by mail, proxies may be
solicited in person by directors, officers and employees of Laboratory
Specialists without additional compensation and by telephone, teletype,
facsimile or similar method. Laboratory Specialists also will make arrangements
with brokerage houses and other custodians, nominees and fiduciaries to send
proxy material to beneficial owners and to secure their voting instructions, if
necessary. Laboratory Specialists will reimburse these record holders for their
reasonable expenses in so doing. Laboratory Specialists currently does not plan
to use a proxy solicitor. Should this become advisable, it is expected that a
recognized solicitor will be engaged at standard fees.

RECORD DATE AND VOTING RIGHTS

Record Date. The Laboratory Specialists Board has fixed the close of
business on November 9, 1998 as the record date for determining the Laboratory
Specialist shareholders entitled to notice of and to vote at the Special Meeting
(the "Record Date"). You will be entitled to vote at the Special Meeting

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if you were a shareholder of record on the close of business on the Record Date.
As of the Record Date, there were 5,745,964 shares of Laboratory Specialists
Common Stock outstanding and entitled to vote.

Voting Rights. Each share of Laboratory Specialists Common Stock entitles
its holder to one vote.

Vote Required and Voting Agreement. Under the Oklahoma General Corporation
Act (the "OKGCA") and the Laboratory Specialists Certificate of Incorporation,
the affirmative vote of the holders of a majority of the shares of Laboratory
Specialists Common Stock outstanding on the Record Date is required to approve
and adopt the Merger Agreement.

As of the Record Date, directors and executive officers of Laboratory
Specialists as a group beneficially own 1,020,906 outstanding shares of
Laboratory Specialists Common Stock, or approximately 17.8% of the outstanding
shares of Laboratory Specialists Common Stock. Messrs. John Simonelli, Larry E.
Howell and Arthur R. Peterson, Jr., Laboratory Specialists' three principal
executive officers, own 995,906 of these shares (approximately 17.4% of the
shares entitled to vote at the Special Meeting). Each of these executives has
signed an agreement committing himself to vote FOR the merger and against any
other proposed transaction, and each has granted officers of Kroll-O'Gara an
irrevocable power of attorney to vote his shares of Laboratory Specialists
Common Stock. In addition, based upon the unanimous recommendation of the
Laboratory Specialists Board, it currently is expected that Laboratory
Specialists' other directors and executive officers also will vote their shares
of Laboratory Specialists Common Stock for approval of the Merger Agreement.

If less than a majority of the outstanding shares of Laboratory Specialists
Common Stock are voted in favor of the Merger Agreement we expect that the
Special Meeting will be postponed or adjourned for the purpose of allowing
additional time for soliciting and obtaining additional proxies or votes. At any
subsequent reconvening of the Special Meeting, we will vote all proxies in the
same manner as they would have been voted at the original convening of the
Special Meeting, except for any proxies that have been revoked or withdrawn.

Abstentions and Broker Non-Votes. A properly executed proxy marked
"abstain" will not be voted on the Merger Agreement proposal. Also, brokers who
hold Laboratory Specialists Common Stock in "street" name for customers cannot
vote these shares on the Merger Agreement proposal without specific instructions
from their customers.

BECAUSE APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE OUTSTANDING SHARES OF LABORATORY SPECIALISTS COMMON STOCK, YOUR
FAILURE TO VOTE, YOUR ABSTENTION OR, IF YOUR SHARES ARE HELD IN "STREET" NAME,
YOUR FAILURE TO INSTRUCT YOUR BROKER ALL WILL HAVE THE SAME EFFECT AS A VOTE
AGAINST THE MERGER. ACCORDINGLY, THE LABORATORY SPECIALISTS BOARD URGES YOU TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE.

THE MERGER

BACKGROUND OF THE MERGER

The growth in Laboratory Specialists' revenues has been in significant part
attributable to the acquisition of National Psychopharmacology Laboratory, Inc.
and five acquisitions of the assets of companies similarly engaged in the
providing of drug testing services. Revenues increased from $5 million in 1994
to $12.8 million in 1997. In mid-1997, management decided that, as an
alternative to continuing to seek acquisitions that would require significant
capital commitments, it should consider a transaction in which Laboratory
Specialists could be acquired by a company whose business would be

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complemented and enhanced by the drug testing services offered by Laboratory
Specialists and which would provide an additional customer-base source for drug
testing. After some initial exploration on their own, representatives of
Laboratory Specialists retained Mallon & Associates in November 1997 to assist
in identifying potential acquisition companies. On August 10, 1998,
representatives of Mallon & Associates contacted representatives of Kroll-O'Gara
to discuss the possible acquisition of Laboratory Specialists. On August 21,
1998, representatives of Mallon & Associates provided Kroll-O'Gara certain
information regarding Laboratory Specialists. During September and October,
1998, representatives of Laboratory Specialists and Kroll-O'Gara met to discuss
and negotiate terms of the merger-acquisition of Laboratory Specialists.

On October 20, 1998, Laboratory Specialists retained Jesup & Lamont
Securities Corporation ("Jesup & Lamont") as a financial advisor. Jesup & Lamont
was engaged to assist the Laboratory Specialists Board in its review and
specifically to render a formal written opinion as to the fairness from a
financial point of view of the consideration to be received in a transaction by
the shareholders of Laboratory Specialists. On October 20, 1998, Jesup & Lamont
informed the Board of Directors that, subject to certain assumptions and
conditions, the shares of Kroll-O'Gara Common Stock to be issued to you and the
other shareholders of Laboratory Specialists as provided in the Merger Agreement
are fair consideration, from a financial point of view.

In addition to the opinion of Jesup & Lamont, the Board of Directors
considered:

(i) the terms of the Merger Agreement, including that the Board of
Directors has the right to consider a transaction which it feels is more
favorable, from a financial point of view, to Laboratory Specialists
shareholders than the Merger;

(ii) the fact that the Merger Consideration consists of equity
securities of Kroll-O'Gara which will allow shareholders of Laboratory
Specialists to maintain an indirect interest in the business of Laboratory
Specialists through their ownership of Kroll-O'Gara Common Stock;

(iii) the closing sale price of the Kroll-O'Gara Common Stock of
$22.875 per share on October 19, 1998, compared to the closing sale price
of the Laboratory Specialists Common Stock of $3.44 per share on such date
and the fact that the equivalent assumed value of the Laboratory
Specialists Common Stock of $5.00 per share after giving effect to its
conversion into Kroll-O'Gara Common Stock represented a premium of 45.3%;

(iv) the anticipated tax-free status of the Merger;

(v) the more active trading market for Kroll-O'Gara Common Stock,
which should provide Laboratory Specialists shareholders greater liquidity;

(vi) the diversification and security nature of the business
enterprises and operations of Kroll-O'Gara compared to the single
drug-testing operations of Laboratory Specialists; and

(vii) the Board's belief that Kroll-O'Gara will afford Laboratory
Specialists the opportunity to develop a broader base of customers
requiring drug testing services and accordingly increase drug-testing
revenues.

On October 20, 1998, the full Board of Directors of Laboratory Specialists
approved the Merger Agreement. The Merger Agreement was executed by Laboratory
Specialists and Kroll-O'Gara on October 21, 1998, and on October 22, 1998,
Laboratory Specialists and Kroll-O'Gara announced the Merger.

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REASONS FOR AND ADVANTAGES OF THE MERGER

As indicated above, the growth in Laboratory Specialists' revenues between
1994 and 1997 has been attributable, in significant part, to acquisitions.
However, continued growth of Laboratory Specialists through acquisitions will
require significant capital resources, either through borrowings or the sale of
additional common stock or other equity securities, each of which presents
distinct risks. In order to avoid the risk of default in repayment of
borrowings, management of Laboratory Specialists believes that the sale of
equity securities is the most appropriate method of obtaining additional long-
term capital resources. Because Kroll-O'Gara Common Stock has a higher market
value based upon a multiple of earnings than Laboratory Specialists Common
Stock, the Laboratory Specialists Board anticipates, although there can be no
assurance, that sales of Kroll-O'Gara Common Stock will result in greater per
share sale proceeds than would sales of Laboratory Specialists Common Stock
without the Merger. The Board believes that this will provide both increased
capital resources and increased value to the current shareholders of Laboratory
Specialists following the Merger. Thus, the Laboratory Specialists Board
believes that consummation of the Merger will facilitate securing additional
equity capital for further acquisitions of drug testing companies or their
assets on more favorable terms than those currently available to Laboratory
Specialists.

The Laboratory Specialists Board also anticipates that consummation of the
Merger will provide the current shareholders of Laboratory Specialists greater
investment liquidity compared to the current liquidity of the Laboratory
Specialists Common Stock due to the higher daily trading volume of the
Kroll-O'Gara Common Stock. The 30-day average trading volumes of Laboratory
Specialists Common Stock and Kroll-O'Gara Common Stock were approximately 13,000
and 44,000 shares, respectively, as of the date of the Laboratory Specialists
Board's approval of the Merger Agreement.

Laboratory Specialists is a relatively small enterprise. The Laboratory
Specialists Board believes that a consolidation of Laboratory Specialists'
operations with those of Kroll-O'Gara will result in increased operational and
administrative efficiencies. However, such efficiencies are indeterminable as of
the date of this Proxy Statement/Prospectus and there is no assurance they will
be obtained.

Consummation of the Merger will result in you and the other shareholders of
Laboratory Specialists owning an interest in a larger and more diversified
business enterprise than the drug testing business of Laboratory Specialists.
The Laboratory Specialists Board believes that, upon consummation of the Merger,
the revenues and cash flows generated from the current customer base, the
customer base that may be contributed by Kroll-O'Gara as well as any other
acquisitions by Laboratory Specialists of companies (or the assets of such
companies) engaged in the providing of drug testing services, will increase
significantly, although there is no assurance. The Board anticipates that you,
as a shareholder in Kroll-O'Gara, will share in those benefits.

DISADVANTAGES OF THE MERGER

Upon consummation of the Merger, you and the other shareholders of
Laboratory Specialists will own a maximum of approximately 8% of the issued and
outstanding shares of Kroll-O'Gara. By comparison, Kroll-O'Gara's officers and
directors will control approximately 39% of Kroll-O'Gara Common Stock and
effectively will be able to control most matters requiring approval by
shareholders, including the election of directors. See "The Kroll-O'Gara
Company -- Principal Shareholders and Holdings of Management." Furthermore, in
considering the Merger, you should consider, in addition to the advantages
described above, the factors, consequences and possible disadvantages to you and
the other shareholders of consummation of the Merger as discussed in "Risk
Factors." Of course, after the Merger, Laboratory Specialists will be owned by
Kroll-O'Gara. Therefore the various risks involved in its business (as described
under "Laboratory Specialists of America, Inc. -- Business") will be assumed

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by Kroll-O'Gara and its shareholders. Furthermore, there is no certainty
regarding the effect of consummation of the Merger upon the market price of the
Kroll-O'Gara Common Stock.

RECOMMENDATION OF THE LABORATORY SPECIALISTS BOARD OF DIRECTORS

The Laboratory Specialists Board unanimously recommends that you vote "FOR"
adoption of the Agreement and Plan of Merger. We will vote your proxy
accordingly unless you specify a contrary choice.

OPINION OF LABORATORY SPECIALISTS' FINANCIAL ADVISOR

Jesup & Lamont has delivered its written opinion to the Laboratory
Specialists Board to the effect that as of October 20, 1998, the consideration
to be received in the Merger by the shareholders of Laboratory Specialists is
fair from a financial point of view to such shareholders. We have attached a
copy of the opinion of Jesup & Lamont as Appendix B. You should read the opinion
in its entirety for assumptions made, matters considered and limits of the
review by Jesup & Lamont. The summary of the opinion of Jesup & Lamont set forth
in this Proxy Statement/Prospectus is qualified in its entirety by reference to
the full text of such opinion. The opinion does not constitute a recommendation
to you as to how you should vote on the Merger.

In arriving at its opinion, Jesup & Lamont reviewed the Merger Agreement.
Jesup & Lamont also reviewed financial and other information that was publicly
available or furnished to it by Laboratory Specialists and Kroll-O'Gara,
including information provided during discussions with their respective
managements. The information provided during discussions with the respective
managements included certain financial projections of Laboratory Specialists and
Kroll-O'Gara prepared by the respective managements of Laboratory Specialists
and Kroll-O'Gara. In addition, Jesup & Lamont compared certain financial and
securities data of Laboratory Specialists and Kroll-O'Gara with various other
companies whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of the Common Stock of Laboratory Specialists
and Kroll-O'Gara, reviewed prices and premiums paid in other business
combinations and conducted such other financial studies, analyses and
investigations as it deemed appropriate for purposes of its opinion. Jesup &
Lamont was not requested to, nor did it, solicit the interest of any other party
in acquiring Laboratory Specialists.

In rendering its opinion, Jesup & Lamont relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all of the
financial and other information that was available to it from public sources,
that was provided to it by Laboratory Specialists and Kroll-O'Gara and that was
otherwise reviewed by it. Jesup & Lamont assumed that the financial projections
supplied to it had been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the managements of Laboratory
Specialists and Kroll-O'Gara as to the future operating and financial
performance of Laboratory Specialists and Kroll-O'Gara and Jesup & Lamont relied
on such projections without any independent verification. Jesup & Lamont did not
make any independent evaluation of Laboratory Specialists' or Kroll-O'Gara's
assets or liabilities nor did it verify any of the information reviewed by it.
Jesup & Lamont made no independent investigation of any legal matters affecting
Laboratory Specialists or Kroll-O'Gara and assumed the correctness of all legal
advice given to the Laboratory Specialists Board by its counsel.

Jesup & Lamont's opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on the information made
available to Jesup & Lamont as of, the date of its opinion. It should be
understood that, although subsequent developments may affect its opinion, Jesup
& Lamont did not and is not expressing an opinion as to the prices at which the
Kroll-O'Gara Common Stock will actually trade at any time.

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The generally accepted financial analysis used by Jesup & Lamont in
reaching its opinion was the "comparable company analysis," which consisted of
reviewing operating statistics and financial and operating information of
selected publicly-traded companies considered to have businesses similar to that
of Laboratory Specialists. In addition, as the shareholders of Laboratory
Specialists will receive Kroll-O'Gara Common Stock as consideration in the
Merger, Jesup Lamont also performed the following analyses: (i) a "comparable
company analysis" on selected publicly-traded companies considered to have
businesses similar to that of Kroll-O'Gara; and (ii) a "dilution analysis" to
see the earnings impact that the Merger would have on Kroll-O'Gara Common Stock
price. Each analysis valued both the enterprise value and the value of the
common stock of each company. Under each analysis, the enterprise value is
defined as the market value of common stock plus the market value of interest-
bearing liabilities (including accrued interest) less cash and marketable
securities.

No company or transaction used in the above analyses is directly comparable
to Laboratory Specialists or Kroll-O'Gara or the Merger. Accordingly, an
analysis of the results of the foregoing is not mathematical; rather it involves
complex considerations and judgments concerning differences in the financial and
operating characteristics of the companies and other factors that could affect
the public trading values of the companies or company to which they are being
compared.

The summary set forth above does not purport to be a complete description
of the analyses performed by Jesup & Lamont. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors summarized above, Jesup & Lamont believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. In
performing its analyses, Jesup & Lamont made numerous assumptions. The analyses
performed by Jesup & Lamont are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses.

The Laboratory Specialists Board selected Jesup & Lamont as its financial
advisor because Jesup & Lamont is a recognized investment banking firm with
substantial experience in transactions similar to the Merger. As part of its
investment banking business, Jesup & Lamont regularly engages in the valuation
of businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.

Pursuant to an engagement letter dated October 20, 1998, Laboratory
Specialists has paid a fee of $30,000 to Jesup & Lamont for its services as
financial advisor to the Laboratory Specialists Board in connection with the
Merger. Laboratory Specialists has also agreed to reimburse Jesup & Lamont for
its out-of-pocket expenses, including the reasonable fees and expenses of its
legal counsel, and to indemnify Jesup & Lamont against certain liabilities
arising out of or in connection with the services rendered by Jesup & Lamont
under the engagement. Jesup & Lamont has performed investment banking and other
services for Laboratory Specialists in the past and has been compensated for
such services. Jesup & Lamont holds warrants to purchase 55,522 shares of
Laboratory Specialists' Common Stock at a price of $5.40 per share. At the time
of the Merger, these warrants will be converted into warrants to purchase
Kroll-O'Gara Common Stock. In addition, in the ordinary course of its business,
Jesup & Lamont and its affiliates may actively trade Laboratory Specialists
Common Stock for its account and the accounts of its customers and, accordingly,
may at any time hold a long or short position in Laboratory Specialists

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Common Stock. Furthermore, Jesup & Lamont has in the past represented Laboratory
Specialists as placement agent for its securities.

MANAGEMENT OF KROLL-O'GARA AFTER THE MERGER

The directors and executive officers of Kroll-O'Gara will not change as a
result of the Merger. See "The Kroll-O'Gara Company -- Management" for
information on Kroll-O'Gara's current directors and executive officers.

INTERESTS OF CERTAIN PERSONS IN THE MERGER

John Simonelli, Larry E. Howell and Arthur R. Peterson, Jr. are
respectively Chairman of the Board and Chief Executive Officer, President, and
Treasurer and Secretary of Laboratory Specialists. These individuals and Robert
A. Gardebled, Jr., Jerome P. Welch and Michael E. Dunn are the directors of
Laboratory Specialists. As of the Record Date, Messrs. Simonelli, Howell,
Peterson and Gardebled held 525,472, 235,217, 235,217 and 25,000 shares of
Laboratory Specialists Common Stock. In addition, Messrs. Gardebled, Welch and
Dunn held stock options exercisable for the purchase of 50,000 shares, 10,000
shares and 10,000 shares of Laboratory Specialists Common Stock, respectively.
These shares will be converted into shares of Kroll-O'Gara Common Stock and
these stock options will become exercisable for the purchase of Kroll-O'Gara
Common Stock. Each of Messrs. Simonelli, Howell and Peterson has signed a Voting
Agreement requiring his vote FOR the Merger, and against any other proposed
transaction, and granted officers of Kroll-O'Gara an irrevocable power of
attorney to vote his shares of Laboratory Specialists Common Stock.

On October 20, 1998, Messrs. Howell and Simonelli entered into Employment
Agreements with Laboratory Specialists and Messrs. Peterson and Gardebled
entered into Employment Agreements with Laboratory Specialists, Inc., each
agreement to become effective at the time of the Merger. These agreements were
negotiated with Kroll-O'Gara. They have three-year terms and provide for annual
base salaries for Mr. Simonelli of $200,000, Mr. Howell, $200,000, Mr. Peterson,
$225,000, and Mr. Gardebled, $90,000. Each individual also is entitled to
participate in Kroll-O'Gara's annual bonus plan and to receive up to 50% of such
bonus in shares of Kroll-O'Gara Common Stock. Employment may be terminated by
Kroll-O'Gara at any time, with or without cause, except that in a case of
termination without cause, the employee is entitled to receive compensation for
the balance of the term of the Agreement. Each Employment Agreement restricts
the employee 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 these individuals also will receive a "stay" bonus from
Kroll-O'Gara in the amounts of $170,000 for each of Mr. Simonelli and Howell,
$120,000 for Mr. Peterson and $27,000 for Mr. Gardebled. These amounts will be
paid if the individual is still employed by Kroll-O'Gara on December 31, 1998
(if the Merger has been completed by that date), or at the time of the Merger if
it is completed after December 31, 1998. In addition, after the Merger Mr.
Simonelli and Mr. Howell will seek out acquisition candidates for Kroll-O'Gara
in areas relating to drug testing and pre-employment screening. In connection
with any such acquisition, each will receive bonuses equal to one-half of the
"Lehman Formula" for any completed acquisition. The Lehman Formula provides for
a fee equal to 5% for the first million dollars of the acquisition price, 4% of
the second, 3% of the third, 2% of the fourth, and 1% of the fifth and each
subsequent million.

The Board was aware of the interests of the directors and executive
officers and took them into account in approving the Merger Agreement.

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ACCOUNTING TREATMENT

Kroll-O'Gara will account for the Merger as a pooling of interests. Under
this method of accounting, the recorded assets and liabilities of Laboratory
Specialists will be carried forward to the Kroll-O'Gara financial statements at
their recorded amounts; the income of Kroll-O'Gara will include income of
Laboratory Specialists for the entire fiscal year in which the Merger occurs;
and the reported income of Laboratory Specialists for prior periods will be
combined with and restated as income of Kroll-O'Gara on a consolidated basis. It
is a condition to the consummation of the Merger that Kroll-O'Gara receive an
opinion from Arthur Andersen LLP, its independent public accountants, confirming
the appropriateness of this accounting treatment under generally accepted
accounting principles. The availability of pooling of interests accounting
treatment requires, among other things, that not more than 10% of the Merger
consideration be paid in cash. Accordingly, if holders of a sufficient number of
shares of Laboratory Specialists exercise appraisal rights, this condition would
not be satisfied. See "The Merger Agreement Conditions to the Merger."

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following discussion is a summary of the material U.S. federal income
tax consequences of the Merger to holders of Laboratory Specialists Common
Stock, stock options and warrants. The discussion which follows is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations
promulgated under the Code, administrative rulings and pronouncements and
judicial decisions as of the date of this Proxy Statement/Prospectus, all of
which are subject to change, possibly with retroactive effect.

The discussion below is for general information only and does not address
the effects of any state, local or foreign tax laws on the Merger. In addition,
the discussion below relates to persons who hold Laboratory Specialists Common
Stock as capital assets. The tax treatment of a Laboratory Specialists
shareholder may vary depending upon the shareholder's particular situation, and
certain shareholders (including, for example, insurance companies, tax-exempt
organizations, financial institutions and broker-dealers, and individuals who
received Laboratory Specialists Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation) may be subject to special
rules not discussed below.

Consummation of the Merger is conditioned upon the receipt by Kroll-O'Gara
of an opinion from Kramer Levin Naftalis & Frankel LLP, its tax counsel, and by
Laboratory Specialists of an opinion from Dunn Swan & Cunningham, its counsel,
to the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code. These opinions of counsel will be based on
facts existing at the time the Merger becomes effective and on certain
representations as to factual matters made by Kroll-O'Gara and Laboratory
Specialists. If the representations are incorrect in certain material respects,
it could jeopardize the conclusions reached in the opinions. Neither
Kroll-O'Gara nor Laboratory Specialists currently is aware of any facts or
circumstances which would cause any of its representations made to counsel to be
untrue or incorrect in any material respect. Any opinion of counsel is not
binding on the Internal Revenue Service or the courts.

Based on the opinions discussed above, the material U.S. federal income tax
consequences that will result from the Merger are as follows:

a. A Laboratory Specialists shareholder will not recognize any income,
gain or loss as a result of the receipt of Kroll-O'Gara Common Stock
pursuant to the Merger, except for cash received in lieu of a fractional
share of Kroll-O'Gara Common Stock.

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b. The tax basis of a Laboratory Specialists shareholder in the
Kroll-O'Gara Common Stock received pursuant to the Merger, including any
fractional share interest in Kroll-O'Gara Common Stock for which cash is
received, will equal the Laboratory Specialists shareholder's tax basis in
the Laboratory Specialists Common Stock exchanged.

c. The holding period of a Laboratory Specialists shareholder for the
Kroll-O'Gara Common Stock received pursuant to the Merger will include the
holding period of the Laboratory Specialists Common Stock surrendered.

d. A Laboratory Specialists shareholder who receives cash in lieu of a
fractional share interest in Kroll-O'Gara Common Stock pursuant to the
Merger will be treated as having received that cash in exchange for the
fractional share interest and generally will recognize capital gain or loss
on the deemed exchange in an amount equal to the difference between the
amount of cash received and the basis of the Laboratory Specialists Common
Stock allocable to the fractional share.

e. No income, gain or loss will be recognized by Kroll-O'Gara,
Laboratory Specialists or Merger Sub as a result of the Merger.

f. Holders of warrants to acquire Laboratory Specialists Common Stock
will not recognize gain or loss upon the conversion of the warrants into
warrants to purchase Kroll-O'Gara Common Stock.

g. Holders of stock options will not recognize income upon the
conversion of the options into options to purchase Kroll-O'Gara Common
Stock. Holders of non-qualified stock options will recognize ordinary
income when the options are exercised in an amount equal to the difference
between the fair market value of the Kroll-O'Gara Common Stock received
upon exercise and the exercise price of the options (plus any amount paid
for the options upon grant).

The foregoing discussion is only a summary and is not a complete analysis
or listing of all potential tax effects relevant to a decision whether to vote
in favor of approval of the Merger Agreement. You are urged to consult your own
tax advisor concerning the United States federal, state and local and any
foreign tax consequences of the Merger to you.

FEDERAL SECURITIES LAW CONSEQUENCES

All shares of Kroll-O'Gara Common Stock received by Laboratory Specialists
shareholders in the Merger will be freely transferable, except that shares of
Kroll-O'Gara Common Stock received by any person who is deemed to be an
"affiliate" (as such term is defined under the Securities Act of 1933, as
amended (the "Securities Act")) of Laboratory Specialists prior to the Merger or
of Kroll-O'Gara after the Merger may be resold by them only in compliance with
the volume, manner-of-sale and notice requirements of Rules 144 and 145 under
the Securities Act. Persons who may be deemed to be affiliates of Kroll-O'Gara
or Laboratory Specialists generally include individuals or entities that
control, are controlled by, or are under common control with, such party and may
include certain officers and directors of such party as well as principal
shareholders of such party.

REGULATORY APPROVALS

Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act"), the Merger may not be completed until certain information has been
submitted to the Antitrust Division of the Department of Justice (the "DOJ") and
to the Federal Trade Commission (the "FTC") and until specified HSR Act waiting
period requirements have been satisfied. Kroll-O'Gara and Laboratory Specialists
made their respective HSR filings on November 4, 1998. Either the DOJ or the FTC
may

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commence litigation under the antitrust laws to enjoin the Merger during a
30-day waiting period which expires on December 3, 1998 but which can be
extended under certain circumstances.

APPRAISAL RIGHTS

The following is a summary of the principal steps which you must take to
perfect appraisal rights under Section 1091 of the OKGCA ("Section 1091").
Because this is a summary, it does not contain all the information that may be
important to you if you want to exercise appraisal rights. You should read the
full text of Section 1091, a copy of which is attached as Appendix C to this
Proxy Statement/Prospectus.

If you dissent from the Merger and demand and perfect appraisal rights
under Section 1091, and if the Merger is approved and becomes effective, your
shares of Laboratory Specialists Common Stock will not be converted into
Kroll-O'Gara Common Stock. Instead, you will have the right to receive the "fair
value" of your Laboratory Specialists shares, as determined by an Oklahoma
district court (the "Oklahoma Court"). You should review this discussion and
Section 1091 of the OKGCA carefully if you wish to exercise appraisal rights, or
wish to preserve the right to do so, since failure to comply with the required
procedures will result in the loss of such rights. If you are considering
dissenting, you should consult your legal advisor. If your shares of Laboratory
Specialists Common Stock are held of record in the name of another person and
you desire to perfect appraisal rights, you must act promptly to cause the
shareholder of record to follow the steps summarized below. Shares of Laboratory
Specialists Common Stock with respect to which Laboratory Specialists
shareholders of record properly exercise appraisal rights are referred to as
"Laboratory Specialists Dissenting Shares."

To exercise appraisal rights, you (i) must file with Laboratory
Specialists, before the vote on the Merger Agreement at the Special Meeting, a
written demand for appraisal of your shares and (ii) must not vote in favor of
the Merger Agreement. A vote in favor of the Merger Agreement will waive your
appraisal rights. Your failure to vote on the Merger Agreement will not in
itself be a waiver of such holder's appraisal rights. However, a vote against
the Merger Agreement or a failure to vote does not, alone, constitute a demand.
If you dissent and demand appraisal rights, you must do so as to all your shares
of Laboratory Specialists Common Stock.

Within 120 days after the Merger becomes effective (the "Effective Time"),
Laboratory Specialists or any shareholder who has complied with Section 1091 and
is otherwise entitled to appraisal rights, may (i) file a petition in the
Oklahoma Court demanding a determination of the value of all Laboratory
Specialists Dissenting Shares and (ii) upon written request, receive from
Laboratory Specialists a statement setting forth the aggregate number of shares
of Laboratory Specialists Common Stock not voted in favor of the Merger
Agreement as to which demands for appraisal have been received and the aggregate
number of holders of such shares. Laboratory Specialists does not intend to file
such a petition. Upon the filing of any such petition by a shareholder, a copy
must be served on Laboratory Specialists.

If a petition for an appraisal is timely filed, the Oklahoma Court must
determine the holders of Laboratory Specialists Dissenting Shares entitled to
appraisal rights and the "fair value" of the Laboratory Specialists Dissenting
Shares. In determining the fair value, the court may consider all relevant
factors, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value.

If you demand an appraisal under Section 1091, you will not, after the
Effective Time, be entitled to vote the shares subject to the demand for any
purpose or to receive dividends or other distributions

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on the shares (except dividends or other distributions, if any, payable to
shareholders of record as of a date before the Effective Time).

If you demand appraisal under Section 1091 and subsequently withdraw your
demand or lose your right to appraisal, your shares of Laboratory Specialists
Common Stock will be converted into shares of Kroll-O'Gara Common Stock in
accordance with the Merger Agreement. You will lose your right to appraisal (i)
if you fail to file a written objection before the vote on the Merger Agreement,
(ii) if you vote in favor of approval of the Merger Agreement, (iii) if no
petition for appraisal is filed within 120 days after the Effective Time, or
(iv) if you withdraw your demand for appraisal within 60 days after the
Effective Time.

THE MERGER AGREEMENT

The description of the Merger Agreement set forth below is not complete.
For full information, you should read the Merger Agreement, a copy of which is
attached to this Proxy Statement/Prospectus as Appendix A.

TERMS OF THE MERGER

The Merger. Merger Sub will merge with and into Laboratory Specialists, the
separate corporate existence of Merger Sub will cease, and Laboratory
Specialists will continue as the surviving corporation ("Surviving
Corporation"). The Surviving Corporation will be a wholly-owned subsidiary of
Kroll-O'Gara.

Effective Time. As promptly as practicable (and in any event within two
business days) after the satisfaction or waiver of the conditions set forth in
the Merger Agreement, Kroll-O'Gara and Laboratory Specialists will complete the
Merger by filing a Certificate of Merger with the Secretary of State of the
State of Oklahoma (the time of such filing being the "Effective Time").

Conversion of Laboratory Specialists Common Stock in the Merger. At the
Effective Time, each share of Laboratory Specialists Common Stock issued and
outstanding immediately prior to the Effective Time (excluding Laboratory
Specialists Dissenting Shares, treasury shares and shares held by Kroll-O'Gara
or any subsidiary of Laboratory Specialists or Kroll-O'Gara) will be converted
into the right to receive validly issued, fully paid and nonassessable shares of
Kroll-O'Gara Common Stock.

The number of shares of Kroll-O'Gara Common Stock that will be received by
a holder of Laboratory Specialists Common Stock (the "Merger Consideration") is
based on the following formula:

X if the "Average Stock Price" of Kroll-O'Gara Common Stock is lower than
$24, each share of Laboratory Specialist Common Stock will be converted
into the right to receive the fraction of one share of Kroll-O'Gara
Common Stock equal to the product of one and a fraction, the numerator of
which is $5.00 and the denominator of which is the Average Stock Price;
except that, if the product so obtained is greater than 0.2778, the
product will be deemed to be 0.2778; or

X if the Average Stock Price of Kroll-O'Gara Common Stock is equal or
greater than $24, then each share of Laboratory Specialist Common Stock
will be converted into the right to receive 0.2102 share of Kroll-O'Gara
Common Stock.

For purposes of this formula:

X "Average Stock Price" means the average of the Daily Per Share Price
during the Measurement Period.

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X "Daily Per Share Price" for any trading day means the weighted average of
the per share selling prices on the Nasdaq National Market of
Kroll-O'Gara Common Stock for such day; if Kroll-O'Gara Common Stock does
not trade on a trading day, the Daily Per Share Price for that day will
be the average of the closing bid and ask prices for the day.

X "Measurement Period" means the twenty trading days ending three trading
days prior to the Special Meeting.

Assumption of Outstanding Stock Options and Warrants. At the Effective
Time, each outstanding stock option and warrant to purchase Laboratory
Specialists Common Stock will be amended to become an option or warrant to
acquire the number of shares of Kroll-O'Gara Common Stock that the holder of
such stock option or warrant would have been entitled to receive in the Merger
had the holder exercised the option or warrant in full immediately prior to the
Effective Time (whether or not the option or warrant was in fact exercisable),
at a price per share equal to (x) the aggregate exercise price for Laboratory
Specialists Common Stock purchasable pursuant to the stock option or warrant
divided by (y) the number of shares of Kroll-O'Gara Common Stock deemed
purchasable pursuant to such stock option or warrant. The number of shares of
Kroll-O'Gara Common Stock that may be purchased upon exercise of a stock option
or warrant will not include any fractional share and, upon exercise of the stock
option or warrant, a cash payment will be made for any fractional share based
upon the Closing Price of a share of Kroll-O'Gara Common Stock on the trading
day immediately preceding the date of exercise. "Closing Price" means, on any
day, the last reported sale price per share of Kroll-O'Gara Common Stock on the
Nasdaq National Market.

The shares of Kroll-O'Gara Common Stock issuable upon exercise of the stock
options and warrants are included in the shares of Kroll-O'Gara Common Stock
registered under the Securities Act through this Proxy Statement/Prospectus.
Kroll-O'Gara will use its best efforts to maintain the effectiveness of such
registration for so long as the stock options and warrants remain outstanding.

Fractional Shares. No fractional shares of Kroll-O'Gara Common Stock will
be issued in the Merger. Instead, Kroll-O'Gara will pay each Laboratory
Specialists shareholder who would otherwise have been entitled to a fractional
share of Kroll-O'Gara Common Stock an amount equal to such fraction multiplied
by the Closing Price on the date of the Effective Time.

EXCHANGE OF CERTIFICATES

Exchange Agent. Kroll-O'Gara and Laboratory Specialists will jointly
designate a bank or trust company (the "Exchange Agent") to act as exchange
agent for the Merger.

Exchange Procedures. As soon as reasonably practicable after the Effective
Time, Kroll-O'Gara will instruct the Exchange Agent to mail to each record
holder of Laboratory Specialists Common Stock at the Effective Time a letter of
transmittal and instructions for exchanging certificates representing Laboratory
Specialists Common Stock for certificates evidencing Kroll-O'Gara Common Stock.
You will have to follow the instructions and surrender your certificate(s) for
Laboratory Specialists Common Stock, together with the properly executed letter
of transmittal, and any other required documents, to the Exchange Agent. You
then will be entitled to receive (i) certificates for that number of whole
shares of Kroll-O'Gara Common Stock which you have the right to receive in the
Merger, (ii) any dividends or other distributions on the Kroll-O'Gara Common
Stock declared or made after the Effective Time to which you may be entitled,
and (iii) cash in respect of any fractional share of Kroll-O'Gara Common Stock.
Until so surrendered, each outstanding certificate that, prior to the Effective
Time, represented shares of Laboratory Specialists Common Stock (other than
Laboratory Specialists Dissenting Shares) will be deemed, for all corporate
purposes other than the payment of dividends, and subject to the payment of cash
in lieu of fractional shares, to evidence the ownership of the number of whole
shares of

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Kroll-O'Gara Common Stock into which such shares of Laboratory Specialists
Common Stock have been converted.

Distributions With Respect to Unexchanged Shares. If any dividends or other
distributions are declared or made after the Effective Time on shares of
Kroll-O'Gara Common Stock, you will not receive them until you surrender your
Laboratory Specialists share certificates. When you do surrender your
certificates, Kroll-O'Gara will pay you, without interest, any dividends or
other distributions with a record date after the Effective Time previously paid
to holders of Kroll-O'Gara Common Stock.

Transfers of Ownership. If you want any certificate for shares of
Kroll-O'Gara Common Stock to be issued in a name other than that in which the
Laboratory Specialists certificate surrendered in exchange is registered, your
Laboratory Specialists certificate must be properly endorsed and otherwise in
proper form for transfer. You also must pay to Kroll-O'Gara or its agent any
resulting transfer (or other) tax, or establish to the satisfaction of
Kroll-O'Gara that such tax has been paid or is not payable.

Escheat and Withholding. Neither Kroll-O'Gara, Merger Sub nor Laboratory
Specialists will be liable to you for any Merger Consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Kroll-O'Gara or the Exchange Agent will deduct from the Merger
Consideration paid to you any amounts that Kroll-O'Gara or the Exchange Agent is
required to withhold under any provision of federal, state, local or foreign tax
law.

Lost, Stolen or Destroyed Certificates. The Exchange Agent will issue
Kroll-O'Gara Common Stock in exchange for a lost, stolen or destroyed Laboratory
Specialists stock certificate upon receipt of an affidavit of that fact by the
owner of the certificate. However, Kroll-O'Gara may, in its discretion, require
you to deliver a reasonable indemnity bond against any claim that may be made
against Kroll-O'Gara or the Exchange Agent with respect to a certificate alleged
to have been lost, stolen or destroyed.

DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
LABORATORY SPECIALISTS SHAREHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME
EXPLAINING HOW TO EXCHANGE LABORATORY SPECIALISTS CERTIFICATES FOR KROLL-O'GARA
CERTIFICATES. YOU SHOULD NOT SEND IN YOUR LABORATORY SPECIALISTS SHARE
CERTIFICATES UNTIL YOU RECEIVE YOUR TRANSMITTAL LETTER.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties of
Laboratory Specialists and of Kroll-O'Gara. Those relate, among other things, to
the following matters (which, in certain cases, are subject to specified
exceptions):

(i) Corporate Status. The organization, good standing, qualification
and capitalization are as described in the Merger Agreement and, except as
stated, there are no commitments by Laboratory Specialists to issue capital
stock;

(ii) Approvals and Filings. There are no governmental or regulatory
approvals or filings required to complete the Merger, or needed to prevent
the termination of governmental or regulatory licenses or permits where the
effect of such termination could reasonably be expected to have a material
adverse effect on the business, assets or financial condition of Laboratory
Specialists or Kroll-O'Gara, as the case may be (a "Material Adverse
Effect");

(iii) Absence of Conflict. The Merger will not conflict with charter
documents, laws or agreements to which such party is subject, and the only
consents required for the completion of the Merger are as set forth except
for those which might not reasonably be expected to have a Material Adverse
Effect;

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(iv) Accuracy of Reports and Financial Statements. Each party has
filed its required reports and documents with the Securities and Exchange
Commission ("SEC") and there are no material misstatements contained in
these filings. Certain financial statements delivered to the other party
have been prepared fairly and in accordance with generally accepted
accounting principles and there are no undisclosed liabilities that could
reasonably be expected to have a Material Adverse Effect;

(v) Conduct of Business. Since the beginning of the current fiscal
year and until completion of the Merger, each has conducted its business in
the ordinary course and there has been an absence of certain changes or
events, including the occurrence of a Material Adverse Effect;

(vi) Pooling of Interests Accounting. There are no actions that
reasonably could be expected to prevent the Merger from being accounted for
as a pooling of interests;

(vii) Absence of Material Untrue Statements. There are no material
untrue statements in this Proxy Statement/Prospectus or the Registration
Statement filed with the SEC of which it is a part; and

(viii) Other Matters. The Merger Agreement also includes
representations and warranties dealing with employee relations, benefit
plans, title to properties owned by Laboratory Specialists, compliance with
laws, the absence of litigation that could reasonably be expected to have a
Material Adverse Effect, intellectual property rights, contracts, the
validity and standing of any required permits and authorizations,
compliance with environmental laws, maintenance of books and records, Year
2000 compliance, customers, and Laboratory Specialists' acquisitions and
relationships and transactions with affiliates.

CONDUCT OF BUSINESS PENDING THE MERGER

Conduct of Business by Laboratory Specialists. Prior to the Effective Time,
Laboratory Specialists will conduct its business only in the ordinary course of
business and in a manner consistent with past practice. Laboratory Specialists
also will use reasonable commercial efforts to preserve substantially intact its
business organization, to keep available the services of its present officers,
employees and consultants and to preserve its present relationships with
customers, suppliers and other persons with which it has significant business
relations. For all of these purposes, and those described below, Laboratory
Specialists' agreements cover actions by its subsidiaries. Except as
contemplated by the Merger Agreement:

(i) Amendments. Laboratory Specialists will not amend its Certificate
of Incorporation or Bylaws;

(ii) Changes in Capital Structure or Assets. Laboratory Specialists
will not change its capital structure, including issuing or repurchasing
stock, or sell, pledge or otherwise dispose of its assets, declare or pay
any dividend or distribution or amend the terms of any of its securities
(except for issuances of shares of Laboratory Specialists Common Stock as a
result of the exercise of stock options and warrants);

(iii) Issue of Indebtedness; Capital Expenditures or
Acquisitions. Without the consent of Kroll-O'Gara, Laboratory Specialists
will not acquire any other business or incur any additional indebtedness
or, except in the ordinary course of business and consistent with past
practice, incur or guarantee or otherwise become responsible for any
material indebtedness or make any capital expenditures or purchase any
fixed assets in excess of set amounts;

(iv) Employment Matters. Laboratory Specialists will not change any
compensation arrangements or make any promises to pay any bonus or extra
compensation to any director, officer,

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employee, salesman or agent, increase any employee benefits, or make any
commitment to adopt an additional employee benefit plan;

(v) Material Change or Election. Laboratory Specialists will not make
any material change to accounting policies or procedures, or make any
material tax election inconsistent with past practice, or settle or
compromise any material tax liability or agree to an extension of a statute
of limitations;

(vi) Satisfaction of Claims or Liabilities. Laboratory Specialists
will not pay, discharge or satisfy any claims, liabilities or obligations
other than in the ordinary course of business and consistent with past
practices; and

(vii) Other Actions. Laboratory Specialists will not take or agree to
take any of the above actions, or any other actions which would make any of
its representations or warranties in the Merger Agreement untrue or
incorrect, or prevent it from performing its covenants under the Merger
Agreement.

No Solicitation. The Merger Agreement provides that Laboratory Specialists
will not, directly or indirectly:

(i) solicit, engage in discussions or negotiate with any person or
take any other action to facilitate the efforts of any person, other than
Kroll-O'Gara, relating to the possible acquisition of Laboratory
Specialists or any of its subsidiaries or any material portion of its or
their capital stock or assets (an "Alternative Acquisition");

(ii) provide information with respect to Laboratory Specialists or any
of its subsidiaries to any person, other than Kroll-O'Gara;

(iii) enter into an agreement with any person, other than
Kroll-O'Gara, providing for a possible Alternative Acquisition; or

(iv) make or authorize any statement, recommendation or solicitation
in support of any possible Alternative Acquisition by any person, other
than by Kroll-O'Gara.

These prohibitions do not apply to certain discussions and negotiations
relating to an Alternative Acquisition if a third party which the Laboratory
Specialists Board has determined (based on the advice of its investment bankers)
is financially capable of completing the Alternative Acquisition and which is
not an affiliate of Laboratory Specialists makes a bona fide written proposal to
the Laboratory Specialists Board to acquire Laboratory Specialists or any of its
subsidiaries through an Alternative Acquisition, and the third party's proposal
identifies a price or range of values to be paid for all outstanding securities
or assets that the Laboratory Specialists Board determines, in good faith, is
more favorable to the shareholders of Laboratory Specialists, from a financial
point of view, than the terms of the Merger (a "Superior Proposal").

Laboratory Specialists must give 48 hours prior notice to Kroll-O'Gara of
the material terms of the proposed Alternative Acquisition before accepting or
entering into an agreement concerning an Alternative Acquisition. Once this is
done, Laboratory Specialists may (i) change its recommendation concerning the
Merger, and (ii) enter into an agreement with the third party relating to the
Alternative Acquisition, provided that Laboratory Specialists immediately makes
payment in full to Kroll-O'Gara of the fee described below.

Conduct of Business by Kroll-O'Gara. Prior to the Effective Time,
Kroll-O'Gara (including its subsidiaries) will conduct its business in the
ordinary course consistent with past practice, except for actions, consistent
with the Merger Agreement, to facilitate the Merger. Except as contemplated by
the

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Merger Agreement Kroll-O'Gara will not: (i) amend its Articles of Incorporation
or Code of Regulations; (ii) declare or pay any cash dividend or other
distribution; (iii) take any action to delist its securities; or (iv) take or
agree to take any action which would make any of its representations or
warranties in the Merger Agreement untrue or incorrect or prevent it from
performing its covenants under the Merger Agreement.

ADDITIONAL AGREEMENTS

Access to Information; Confidentiality. Upon reasonable notice and subject
to any other agreement by which it is bound, each of Laboratory Specialists and
Kroll-O'Gara will afford the other reasonable access to its properties, books,
contracts, commitments and records and will furnish promptly to the other all
information concerning its business, properties and personnel as the other may
reasonably request. Each party has agreed to keep such information confidential.

Consents; Approvals. Laboratory Specialists and Kroll-O'Gara have agreed to
use their reasonable best efforts to obtain all consents, waivers, approvals,
authorizations or orders, and to make all required filings, necessary to
complete the Merger.

Indemnification. The Certificate of Incorporation and Bylaws of the
Surviving Corporation will contain the same indemnification provisions set forth
in the Certificate of Incorporation and Bylaws of Laboratory Specialists. Unless
required by law, these provisions will not be amended, repealed or modified for
a period of three years from the Effective Time in any manner that would
adversely affect the rights of the individuals who, at the Effective Time, were
directors or officers of Laboratory Specialists.

After the Effective Time, the Surviving Corporation will, to the fullest
extent permitted under applicable law or under the Surviving Corporation's
Articles of Incorporation or Bylaws, indemnify and hold harmless each present
and former director of Laboratory Specialists or any of its subsidiaries against
any costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to the transactions contemplated by the Merger Agreement, or otherwise with
respect to any acts or omissions occurring at or prior to the Effective Time, to
the same extent as provided in Laboratory Specialists Certificate of
Incorporation or Bylaws or any applicable contract or agreement as in effect on
the date of the Merger Agreement, in each case for a period of three years after
the date of the Merger Agreement.

Notification of Certain Matters. Each of Laboratory Specialists and
Kroll-O'Gara has agreed to give the other prompt notice of any event which is
likely to cause any of its representations or warranties in the Merger Agreement
to be materially untrue or inaccurate, or of any failure by it materially to
comply with any covenant, condition or agreement in the Merger Agreement.

Further Action/Tax Treatment. Kroll-O'Gara and Laboratory Specialists will
use all commercially reasonable efforts to consummate as promptly as practicable
the transactions contemplated by the Merger Agreement, to obtain in a timely
manner all necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and otherwise to satisfy or cause to be satisfied all
conditions precedent to their obligations under the Merger Agreement, except
that Kroll-O'Gara is under no obligation to agree to divest, abandon, license or
take similar action with respect to any assets. In addition, each of the parties
has agreed to use its commercially reasonable efforts to cause the Merger to
qualify as a reorganization under the provisions of Section 368 of the Code, and
will not (both before and after consummation of the Merger) take any actions
which to its knowledge could reasonably be expected to prevent the Merger from
so qualifying.

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Treatment of Options and Warrants. Laboratory Specialists will use its best
efforts to obtain the agreements of holders of stock options and warrants to
purchase shares of Laboratory Specialists Common Stock that these options and
warrants will instead become rights to purchase shares of Kroll-O'Gara Common
Stock.

Accountant's Letters. Upon reasonable notice from the other, Laboratory
Specialists will use its best efforts to cause Arthur Andersen LLP to deliver to
Kroll-O'Gara, and Kroll-O'Gara will use its best efforts to cause Arthur
Andersen LLP to deliver to Laboratory Specialists, letters covering such matters
as are requested by Kroll-O'Gara or Laboratory Specialists, as the case may be,
and as are customarily addressed in accountants' "comfort" letters.

Pooling Accounting Treatment. Each of Kroll-O'Gara and Laboratory
Specialists has agreed not to take any action that would reasonably be expected
to adversely affect the ability of Kroll-O'Gara to treat the Merger as a pooling
of interests.

CONDITIONS TO THE MERGER

Conditions to Obligation of Each Party to Effect the Merger. The
obligations of each of Kroll-O'Gara and Laboratory Specialists to complete the
Merger are subject to the satisfaction, at or prior to the Effective Time, of
various conditions, including:

(i) Shareholder Approval. The Merger Agreement must have been approved
by the requisite vote of the shareholders of Laboratory Specialists;

(ii) Listing. The Kroll-O'Gara Common Stock issuable in the Merger
must be listed on the Nasdaq National Market, upon official notice of
issuance;

(iii) Hart-Scott-Rodino Approval. All waiting periods applicable to
the consummation of the Merger under the HSR Act must have expired or
terminated;

(iv) Governmental Actions. There must not be any pending or threatened
action, proceeding or inquiry by any governmental authority or
administrative agency, or any other legal restraint, preventing or seeking
to prevent Kroll-O'Gara from exercising all material rights and privileges
pertaining to its ownership of the Surviving Corporation or the ownership
or operation by Kroll-O'Gara of its business or assets, or compelling or
seeking to compel Kroll-O'Gara to dispose of or hold separate all or any
material portion of its business or assets, as a result of the Merger;

(v) Illegality. There must not be any statute, rule, regulation or
order which makes the consummation of the Merger illegal; and

(vi) Tax Opinions. Laboratory Specialists and Kroll-O'Gara must have
received written opinions of Dunn, Swan & Cunningham and Kramer Levin
Naftalis & Frankel LLP, respectively, in form and substance reasonably
satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code.

Additional Conditions to Obligations of Kroll-O'Gara and Merger Sub. The
obligations of Kroll-O'Gara and Merger Sub to effect the Merger are subject to
additional conditions, including:

(i) the representations and warranties of Laboratory Specialists
contained in the Merger Agreement must be true and correct in all respects
on and as of the Effective Time, except where the failure to be true and
correct could not reasonably be expected to have a Material Adverse Effect;

(ii) Laboratory Specialists must have performed or complied in all
material respects with all agreements and covenants required by the Merger
Agreement;

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(iii) Laboratory Specialists must have obtained all material required
consents, waivers, approvals, authorizations or orders, and made all
material required filings, except where the failure to do so would not
reasonably be expected to have a Material Adverse Effect on the Surviving
Corporation or Kroll-O'Gara;

(iv) Kroll-O'Gara must have received an opinion of Arthur Andersen LLP
in form and substance reasonably satisfactory to Kroll-O'Gara, regarding
the qualification of the Merger for pooling of interests accounting
treatment;

(v) Kroll-O'Gara must have received the agreement of each holder of
options or warrants to purchase shares of Laboratory Specialists Common
Stock that the holder will instead have the right to purchase shares of
Kroll-O'Gara Common Stock; and

(vi) Kroll-O'Gara must have received from each "affiliate" of
Laboratory Specialists an agreement to comply with the restrictions on
affiliates under Rule 145 under the Securities Act and under pooling of
interests accounting treatment.

Additional Conditions to Obligation of Laboratory Specialists. The
obligation of Laboratory Specialists to effect the Merger is subject to
additional conditions, including:

(i) the representations and warranties of Kroll-O'Gara and Merger Sub
contained in the Merger Agreement must be true and correct in all respects
on and as of the Effective Time, except where the failure could not
reasonably be expected to have a Material Adverse Effect;

(ii) Kroll-O'Gara and Merger Sub must have performed or complied in
all material respects with all agreements and covenants required by the
Merger Agreement; and

(iii) Kroll-O'Gara and Merger Sub must have obtained all material
required consents, waivers, approvals, authorizations or orders, and made
all material required filings, except where the failure to do so would not
reasonably be expected to have a Material Adverse Effect on Kroll-O'Gara.

TERMINATION

Conditions to Termination. Subject to notice requirements and rights to
cure defaults or breaches, the Merger Agreement may be terminated at any time
prior to the Effective Time, notwithstanding its approval by the shareholders of
Laboratory Specialists:

(i) by mutual written consent authorized by the Boards of Directors of
Kroll-O'Gara and Laboratory Specialists; or

(ii) by either Kroll-O'Gara or Laboratory Specialists if the Merger is
not completed by March 31, 1999 (except that any party whose failure to
fulfill any obligation under the Merger Agreement has prevented
consummation of the Merger by such date cannot terminate the Merger
Agreement for this reason); or

(iii) by either Kroll-O'Gara or Laboratory Specialists if there is a
nonappealable final order, decree or ruling or other action having the
effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; or

(iv) by Kroll-O'Gara or Laboratory Specialists, if the requisite vote
of the shareholders of Laboratory Specialists is not obtained by March 15,
1999; or

(v) by Kroll-O'Gara or Laboratory Specialists, (1) if any
representation or warranty of Laboratory Specialists or Kroll-O'Gara and
Merger Sub, respectively, in the Merger Agreement was untrue when made, or
(2) upon a breach of any covenant or agreement on the part of Laboratory

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Specialists or Kroll-O'Gara, respectively, in the Merger Agreement, such
that the conditions to the other party's obligations would not be
satisfied; or

(vi) by Kroll-O'Gara, if any representation or warranty of Laboratory
Specialists shall have become untrue such that the conditions to
Kroll-O'Gara's obligations would not be satisfied, or by Laboratory
Specialists, if any representation or warranty of Kroll-O'Gara and Merger
Sub shall have become untrue such that the conditions to Laboratory
Specialists' obligations would not be satisfied; or

(vii) by Laboratory Specialists if it proposes to accept a Superior
Proposal; or

(viii) by Laboratory Specialists, if (x) the Average Stock Price is
less than $18 per share, (y) on or before the second trading day prior to
the date of the Special Meeting, Laboratory Specialists delivers to
Kroll-O'Gara written notice of its intention to terminate the Merger
Agreement and (z) Kroll-O'Gara has not agreed, on or before one trading day
prior to the date of the Special Meeting, to exchange each share of
Laboratory Specialists Common Stock (excluding Laboratory Specialists
Dissenting Shares) into the right to receive the fraction of one share of
Kroll-O'Gara Common Stock equal to the product of one and a fraction, the
numerator of which is $5.00 and the denominator of which is the Average
Stock Price. If Kroll-O'Gara delivers its notice specified in clause (z) of
the Merger Agreement, Laboratory Specialists will not have the right to
terminate the Merger Agreement pursuant to this provision of the Merger
Agreement.

Termination Fees. Except as set forth below, all fees and expenses incurred
in connection with the Merger Agreement and the Merger will be paid by the party
incurring the expenses, whether or not the Merger is consummated, except that
Kroll-O'Gara and Laboratory Specialists will share equally all filing fees and
printing expenses incurred in connection with this Proxy Statement/Prospectus.

Laboratory Specialists will pay Kroll-O'Gara a fee of $1,500,000 upon the
termination of the Merger Agreement as a result of Laboratory Specialists
proposing to accept a Superior Proposal.

Laboratory Specialists will reimburse Kroll-O'Gara for its out-of-pocket
expenses relating to the Merger (up to a maximum of $350,000) if:

(i) the Merger Agreement is terminated because it is not approved by
the shareholders of Laboratory Specialists at the Special Meeting or by
March 15, 1999; or

(ii) as a result of any action by Laboratory Specialists, Kroll-O'Gara
does not receive the opinion of its accountants that the Merger qualifies
for pooling of interests accounting treatment.

AMENDMENT AND WAIVER

The Merger Agreement may be amended in writing by the parties at any time
prior to the Effective Time. After approval of the Merger by the shareholders of
Laboratory Specialists, no amendment may be made which by law requires
shareholder approval without such further approval.

At any time prior to the Effective Time, any party to the Merger Agreement
may extend the time for the performance of any of the obligations or other acts
of another party, waive any inaccuracies in the representations and warranties
of another party contained in the Merger Agreement or in any document delivered
pursuant to the Merger Agreement, or waive compliance with any of the agreements
or conditions of another party contained in the Merger Agreement. Any such
extension or waiver will be valid if set forth in an instrument in writing
signed by the party or parties to be bound.

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MARKET PRICES AND DIVIDENDS

MARKET PRICES

Kroll-O'Gara Common Stock trades on the Nasdaq National Market under the
symbol "KROG." Trading in Kroll-O'Gara Common Stock began on November 13, 1996,
at the time of Kroll-O'Gara's initial public offering. On October 29, 1998,
there were approximately 950 beneficial owners of Kroll-O'Gara Common Stock.

Laboratory Specialists Common Stock trades on the Nasdaq SmallCap Market
under the symbol "LABZ." On October 29, 1998, there were approximately 1,600
beneficial owners of Laboratory Specialists Common Stock. The quotations for
Laboratory Specialists Common Stock reflect inter-dealer prices without
adjustment for retail markups, markdowns or commissions and may not reflect
actual transactions.

The table below sets forth the high and low sale prices for Kroll-O'Gara
Common Stock and the high and low closing bid quotations for Laboratory
Specialists Common Stock as reported by The Nasdaq Stock Market for the periods
indicated.

LABORATORY
KROLL-O'GARA SPECIALISTS
---------------- --------------
HIGH LOW HIGH LOW
------ ------ ----- -----

1996
First Quarter...................................... $ -- $ -- $4.00 $2.88
Second Quarter..................................... -- -- 3.69 3.00
Third Quarter...................................... -- -- 3.38 2.38
Fourth Quarter..................................... 9.75 8.25 3.25 2.56
1997
First Quarter...................................... 13.25 9.00 3.13 2.25
Second Quarter..................................... 13.00 9.00 2.88 2.13
Third Quarter...................................... 15.00 10.25 3.69 2.56
Fourth Quarter..................................... 20.00 16.00 6.19 3.16
1998
First Quarter...................................... 19.25 16.50 5.13 4.13
Second Quarter..................................... 22.00 17.00 5.31 4.31
Third Quarter...................................... 26.00 18.50 4.75 3.50
Fourth Quarter..................................... 28.00 20.00 5.13 3.13
(through November 9, 1998)

DIVIDENDS

Kroll-O'Gara anticipates 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 anticipate paying cash dividends on
its shares of Common Stock in the foreseeable future. Additionally, the terms of
Kroll-O'Gara 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.

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Laboratory Specialists has never paid a cash dividend on the Laboratory
Specialists Common Stock. Laboratory Specialists' dividend policy has been to
retain earnings to support the expansion of operations. If the Merger is not
completed, the Laboratory Specialists Board currently does not intend to pay
cash dividends on the Laboratory Specialists Common Stock in the foreseeable
future. Any future cash dividends would depend on earnings, capital
requirements, Laboratory Specialists' financial condition and other factors then
deemed relevant by the Laboratory Specialists Board.

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THE KROLL-O'GARA COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with Kroll-O'Gara's Consolidated
Financial Statements and Notes. As a result of the acquisitions made by
Kroll-O'Gara in 1997 and 1998, financial results from period-to-period may lack
comparability. Additionally, prior to December 1, 1997, Kroll-O'Gara reported
revenue under the categories Security Hardware Products, Security Systems
Integration and Security Services. Effective December 1, 1997, Kroll-O'Gara
recategorized its groups as Security Products and Services, Investigations and
Intelligence and Voice and Data Security. Kroll-O'Gara has reclassified its
historical revenue amounts 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 through three groups. The
Security Products and Services Group markets ballistic and blast protected
vehicles to businesses, individuals, and governments. It also offers security
services such as training, risk and crisis management services, and site
security systems. The Investigations and Intelligence Group offers business
intelligence and investigation services to clients worldwide. The Voice and Data
Security Group offers secure satellite communication equipment, satellite
navigation systems, and computer hardware and software security.

On May 5, 1998, 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 pay off $14.8 million of the indebtedness of Kroll-O'Gara, with the
balance available for potential acquisitions, working capital and other general
corporate purposes. In addition to the shares sold by Kroll-O'Gara, certain
shareholders sold 1,860,000 shares of Kroll-O'Gara Common Stock in conjunction
with the Offering. The Offering followed Kroll-O'Gara's initial public offering,
which was completed on November 15, 1996 and resulted in the issuance of
2,048,000 shares of Common Stock.

Merger with KHI. The merger with KHI was completed on December 1, 1997. In
the KHI merger, 6,098,561 shares of Common Stock were issued and an aggregate of
$14.5 million in outstanding indebtedness of KHI was repaid. Approximately
550,000 additional shares of Kroll-O'Gara Common Stock were reserved for
issuance upon the exercise of options held by KHI employees, which were assumed
by Kroll-O'Gara. Revenues of KHI comprise all of those reported by the
Investigations and Intelligence Group as well as certain revenues in the other
two Groups.

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

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On February 12, 1997, Kroll-O'Gara completed the acquisition of all of the
shares of Labbe, S.A. ("Labbe") a leading armorer of commercial and private
vehicles headquartered in Lamballe, France. The purchase price consisted of
$10.7 million in cash and 376,597 shares of Kroll-O'Gara Common Stock (valued at
approximately $3.5 million or $9.29 per share). The acquisition of Labbe
increased substantially the level of commercial revenue generated by the
Security Products and Services Group and enhanced Kroll-O'Gara's competitive
position due to an expanded product line, which includes cash-in-transit
vehicles, and penetration into new markets, such as Europe and Africa. For
accounting purposes, the acquisition was effective January 1, 1997, and the
results of operations of Labbe are included in the consolidated results of
operations of Kroll-O'Gara from that date forward.

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

Effective December 2, 1997, Kroll-O'Gara acquired all of the shares of ZAO
IMEA ("IMEA"), as well as certain work in process of, and an agreement not to
compete in Russia by, Acorn Communications Group, Inc. ("Acorn"). IMEA and Acorn
had substantially common ownership prior to the acquisition. The purchase price
of $3.0 million consisted of $0.6 million in cash and 138,889 shares of
Kroll-O'Gara Common Stock (valued at approximately $2.4 million or $18.00 per
share). IMEA is engaged in the business of selling cash-in-transit vehicles and
other commercial bank equipment, such as safes, money counters and counterfeit
detectors, throughout Russia; it reports revenue through the Security Products
and Services Group. For accounting purposes, the acquisition was effective
December 1, 1997, and the results of operations of IMEA are included in the
consolidated results of operations of Kroll-O'Gara from that date forward.

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

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

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the consolidated results of operations of Kroll-O'Gara from that date forward.
Lindquist Avey reports revenue through the Investigations and Intelligence
Group.

On September 1, 1998, Kroll-O'Gara acquired all of the capital stock of
Kizorek, Inc. of Naperville, Illinois, now renamed InPhoto Surveillance, Inc.
("InPhoto"). The purchase price consisted of $0.8 million in cash and 352,381
shares of Kroll-O'Gara Common Stock (valued at approximately $8.2 million or
$23.35 per share). InPhoto is a leading claims investigation agency which
primarily provides video surveillance services to insurance companies,
corporations and government agencies in connection with investigating
exaggerated disability claims and other fraud. It reports revenue through the
Investigations and Intelligence Group. For accounting purposes, the acquisition
was effective 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.

On September 22, 1998, a wholly-owned subsidiary of Kroll-O'Gara,
O'Gara-Hess & Eisenhardt de Colombia ("OHE de Colombia"), acquired all of the
assets of Protec S.A. of Bogota, Colombia. Protec S.A. was engaged in the
business of armoring cars in Colombia, South America, and also operated a
facility for the manufacture of bullet- and smash-resistant glass for its own
use and for sale to third parties. The purchase price consisted of $3.2 million
in cash and 38,788 shares of Kroll-O'Gara Common Stock (valued at approximately
$0.9 million or $22.95 per share). OHE de Colombia will report revenue through
the Security Products and Services Group. For accounting purposes, the
acquisition was effective September 30, 1998, and the results of operations of
OHE de Colombia will be included in the consolidated results of operations of
Kroll-O'Gara from that date forward.

Revenue recognition. Kroll-O'Gara recognizes net sales from government and
most commercial armoring contracts using the percentage-of-completion method
calculated utilizing the cost-to-cost approach. Under this method, Kroll-O'Gara
accrues estimated contract revenues based generally on the percentage that costs
to date bear to total estimated costs and recognizes estimated contract losses
in full when it becomes likely that a loss will occur. Accordingly, Kroll-O'Gara
periodically reviews and revises contract revenues and total cost estimates as
the work progresses and as change orders are approved. It reflects adjustments
in contract revenues, based upon the percentage of completion, in the period
when the estimates are revised. To the extent that these adjustments result in
an increase, a reduction or an elimination of previously reported contract
revenues, Kroll-O'Gara would recognize a credit or a charge against current
earnings, which could be material. Contract costs include all direct material
and labor costs, along with certain overhead costs allocated 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 such
losses will occur. Changes in estimated total contract costs will 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 revenue related to telecommunications equipment and
services as equipment is shipped or as services are provided. It records revenue
and related direct costs of brokered satellite time when payments are received
from customers.

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RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1998

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

FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1997 1998 1997 1998
----- ----- ----- -----

Security products and services
Military............................................ 20.9% 25.5% 21.8% 23.7%
Commercial.......................................... 29.8 31.7 30.6 33.7
Intelligence and investigations....................... 38.4 33.2 38.7 33.2
Voice and data communications......................... 10.9 9.6 8.9 9.4
----- ----- ----- -----
Total net sales............................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 67.1 67.3 67.3 67.6
----- ----- ----- -----
Gross profit..................................... 32.9 32.7 32.7 32.4
Operating expenses
Selling and marketing............................ 7.1 6.8 7.4 6.9
General and administrative....................... 14.8 13.2 14.8 13.4
Amortization of costs in excess of assets
acquired....................................... 0.3 0.6 0.3 0.6
----- ----- ----- -----
Operating income...................................... 10.7 12.1 10.2 11.5
Other income (expense)
Interest expense................................. (2.6) (1.9) (2.4) (2.1)
Interest income.................................. 0.1 0.5 0.2 0.3
Other, net....................................... 0.7 (0.3) (0.0) (0.3)
----- ----- ----- -----
Income before minority interest, provision for income
taxes and extraordinary item........................ 8.9 10.4 7.9 9.3
Minority interest..................................... (0.2) -- (0.1) --
----- ----- ----- -----
Income before provision for income taxes and
extraordinary item.................................. 8.7 10.4 7.8 9.3
Provision for income taxes....................... 3.5 4.0 3.3 3.7
----- ----- ----- -----
Income before extraordinary item...................... 5.2 6.4 4.5 5.6
Extraordinary item, net............................... (0.4) -- (0.2) --
----- ----- ----- -----
Net income............................................ 4.8% 6.4% 4.3% 5.6%
===== ===== ===== =====

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

Security Products and Services Group. Net sales for the Security Products
and Services Group for the three months ended June 30, 1998 increased $9.9
million, or 41%, to $33.9 million from $24.0 million for the same period in
1997. For the six months ended June 30, net sales for the Security Products and
Services Group increased $17.7 million, or 38%, from $46.4 million in 1997 to
$64.1 million in 1998. Both increases include net sales of commercial armoring
products, which increased $4.7 million, or 33%, from $14.1 million in 1997 to
$18.8 million for the three months ended June 30, 1998. For the six months ended
June 30, net sales of commercial armoring products increased

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$10.6 million, or 39%, from $27.1 million in 1997 to $37.7 million in 1998. The
increase in commercial net sales was primarily due to continued growth in
Kroll-O'Gara's international armoring divisions. During 1996 and 1997,
Kroll-O'Gara initiated start-up armoring operations in Mexico, Brazil and the
Philippines, and acquired Labbe and IMEA. Kroll-O'Gara will continue in its
efforts to expand the operations of its existing foreign subsidiaries along with
evaluating new acquisition opportunities and additional new markets.

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

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

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

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

COST OF SALES. Cost of sales for the three months ended June 30, 1998
increased $8.2 million, or 26%, to $40.0 million from $31.8 million in the same
period in 1997. For the six months ended June 30, cost of sales increased $16.0
million, or 27%, from $59.6 million in 1997 to $75.6 million in 1998. The
increase in cost of sales was due to the increased level of business activity
experienced in 1998. Gross profit as a percentage of net sales for the three
months ended June 30, 1998 was 32.7%, as

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compared with 32.9% for the same period in 1997. For the six months ended June
30, gross profit as a percent of net sales was 32.4% and 32.7% for 1998 and
1997, respectively.

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

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

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

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

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

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

Additionally, the agreement governing Kroll-O'Gara's Senior Notes (see
"Liquidity and Capital Resources") contained a provision for a step down of the
interest rate if certain criteria were met. Kroll-O'Gara complied with the
specified criteria and the step down of rates commenced in the second quarter of
1998. The step down, which changed the interest rate from 9.56% to 8.56%,
contributed to the decrease in interest expense in the second quarter of 1998.

INTEREST INCOME. Interest income for the three months ended June 30, 1998
increased $0.2 million, or 457%, to $0.3 million, compared to $0.1 million in
the same period in 1997. For the six months ended June 30, interest income
increased from $0.2 million in 1997 to $0.4 million in 1998, an increase of
126%. Funds from the proceeds of the Offering that were not used to pay down
debt or expenses were invested in short-term instruments with maturities of
three months or less. The return on

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these investments is responsible for the increase in interest income in 1998.
Management anticipates that it will continue to have funds available for
investment in the foreseeable future. As a result, Kroll-O'Gara anticipates it
will continue to experience higher levels of interest income in 1998 in
comparison with 1997.

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

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

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

YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----

Security products and services
Military.................................................. 17.4% 35.5% 23.0%
Commercial................................................ 23.2 16.0 32.5
Investigations and intelligence............................. 57.0 43.4 35.4
Voice and data security..................................... 2.4 5.1 9.2
----- ----- -----
Total net sales................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 72.4 72.5 69.1
----- ----- -----
Gross profit.............................................. 27.6 27.5 30.9
Operating expenses
Selling and marketing..................................... 11.0 6.4 7.5
General and administrative................................ 22.0 15.6 14.8
Merger related costs...................................... -- -- 3.8
----- ----- -----
Operating income (loss)..................................... (5.4) 5.5 4.7
Other income (expense):
Interest expense.......................................... (3.3) (2.0) (2.5)
Other, net................................................ (0.4) 0.2 (0.2)
----- ----- -----
Income (loss) before minority interest, provision (benefit)
for income taxes, extraordinary item and cumulative effect
of change in accounting principle......................... (9.1) 3.7 2.0
Minority interest........................................... -- -- 0.1
----- ----- -----
(9.1) 3.7 1.9
Income (loss) before provision (benefit) for income taxes,
extraordinary item and cumulative effect of change in
accounting principle......................................
Provision (benefit) for income taxes........................ (1.5) (0.1) 1.2
----- ----- -----
(7.6) 3.8 0.7
Income (loss) before extraordinary item and cumulative
effect of change in accounting principle..................
Extraordinary loss.......................................... -- -- (0.1)
----- ----- -----
(7.6) 3.8 0.6
Income (loss) before cumulative effect of change in
accounting principle......................................
Cumulative effect of change in accounting principle......... -- -- (0.2)
----- ----- -----
Net income (loss)........................................... (7.6)% 3.8% 0.4%
===== ===== =====

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1996 COMPARED TO 1997

NET SALES. Net sales increased $36.7 million, or 24%, from $153.7 million
in 1996 to $190.4 million in 1997. The primary reasons for this increase were
the acquisitions made in Kroll-O'Gara's Security Products and Services Group and
Voice and Data Security Group in 1997.

Security Products and Services Group. Net sales for the Security Products
and Services Group increased $26.4 million, or 33%, from $79.2 million in 1996
to $105.6 million in 1997.

The Group's net sales for 1997 from commercial products and services were
$61.8 million, an increase of $37.3 million, or 152%, over 1996. This increase
was due to several factors, including primarily the incorporation of net sales
from Labbe and ITI in the Group's results. Excluding acquisitions, net sales
from commercial products and services increased $12.7 million, or 52%. Kroll-
O'Gara experienced significant growth in its Brazilian and Mexican armoring
subsidiaries, a trend management believes will continue for the foreseeable
future. With the purchase of IMEA and the initiation of a start-up armoring
operation in the Philippines, the Security Products and Services Group continued
its expansion in existing and new markets. Kroll-O'Gara will continue to seek
out new acquisition opportunities and additional new markets for its security
products and services.

In 1996, the U.S. Military requested accelerated production of Up-Armored
HMMWVs. This resulted in net sales of $54.6 million in 1996. Military net sales
returned to a non-accelerated level in 1997, resulting in net sales from
military products decreasing by $10.9 million, or 20%, to $43.7 million in 1997.
Management expects net sales from military products to remain at a level
comparable to 1997 for the foreseeable future.

Investigations and Intelligence Group. Net sales of the Investigations and
Intelligence Group in 1997 were derived from the activities of KHI. Throughout
1997, KHI was actively involved in various strategic discussions that
contemplated a sale of the company. Pending the outcome of such discussions, KHI
delayed implementation of its internal growth plans. Furthermore, uncertainties
regarding the outcome of the discussions resulted in the departure of certain
KHI managers prior to the merger with The O'Gara Company. Finally, in connection
with the KHI merger and in an effort to improve its cost structure, Kroll-O'Gara
reduced personnel in certain markets. As a result of these factors, net sales
for the Investigations and Intelligence Group increased only $0.7 million, or
1%, from $66.7 million in 1996 to $67.4 million in 1997. The change in 1997 was
attributable primarily to an increase in net sales from business intelligence
services, which includes due diligence work and services related to corporate
mergers and acquisitions, offset by a decline in net sales from investigations.

During the fourth quarter, the Investigations and Intelligence Group
reactivated its growth plan to open offices in Boston, Mexico City and Dallas
and to pursue related acquisitions. Kroll-O'Gara expects these initiatives will
have a favorable impact on growth of net sales in 1998.

Voice and Data Security Group. During 1997, Kroll-O'Gara replaced its
primary wholesale distributor, acquired Next Destination, a subdistributor, and
reconfigured its distribution product mix to focus on the sale of satellite
communications equipment in addition to satellite navigation equipment. As a
result, Kroll-O'Gara experienced a growth rate in 1997 approximately five to six
times higher than normal. Net sales for the Voice and Data Security Group were
$17.4 million in 1997, an increase of $9.7 million, or 124%, from $7.8 million
in 1996. Kroll-O'Gara expects growth in this segment to return to a more normal
rate in 1998.

COST OF SALES AND GROSS PROFIT. Cost of sales for 1997 increased $20.2
million, or 18%, from $111.5 million in 1996 to $131.6 million in 1997. The
increase in cost of sales was due to increases in Kroll-O'Gara's level of
business activity as result of the acquisitions made in 1997.

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60

Security Products and Services Group. Gross profit as a percent of net
sales for the Security Products and Services Group increased from 25.8% in 1996
to 28.4% in 1997. As revenues and costs are recognized using the
percentage-of-completion method of accounting, actual cost and gross profit may
be revised from previously estimated amounts.

Historically Kroll-O'Gara has experienced a higher gross profit percent
related to net sales of commercial armoring products in comparison with those of
military armoring products. In the future, Kroll-O'Gara expects to increase its
percentage of sales from commercial armoring products. However, because
Kroll-O'Gara's gross profit percentage was affected favorably by adjustments
resulting from performance on certain contracts in 1997, Kroll-O'Gara does not
expect to maintain the 1997 gross profit percentage level in 1998.

Investigations and Intelligence Group. Gross profit as a percent of net
sales for the Investigations and Intelligence Group increased from 29.4% in 1996
to 38.0% in 1997. Gross profit percent in 1996 was unfavorably affected by a
write-off of $5.0 million in uncollectible accounts receivable relating to
services provided in earlier periods. Without the write-off, the gross profit
percentages would have been comparable between periods.

Voice and Data Security Group. Prior to the acquisition of Next
Destination, Kroll-O'Gara's Voice and Data Security Group realized a higher
gross profit percentage due to a higher mix of integrated products versus
distributed products. As a distributor, Next Destination's gross profit
percentages were relatively lower. Gross profit as a percent of net sales for
the Voice and Data Security Group decreased from 27.6% in 1996 to 17.9% in 1997.
Management expects the level of gross profit percentage experienced in 1997 to
be maintained in future periods.

OPERATING EXPENSES. Excluding expenses of $7.2 million related to the KHI
merger, operating expenses increased $8.9 million, or 26%, from $33.7 million in
1996 to $42.6 million in 1997. The $7.2 million in expenses related to the KHI
merger consisted of approximately $4.6 million in professional fees and expenses
and approximately $2.6 million relating to the integration of the operations of
the two companies. Included in the integration expenses were bonuses paid to
certain key employees as incentives to remain with Kroll-O'Gara and severance
payments made to employees who left employment of Kroll-O'Gara in connection
with the merger. Also included was a charge made as result of the acceleration
of the vesting of certain shares of restricted KHI stock immediately prior to
the merger. All of the costs related to the KHI merger were recognized in 1997
and will have no effect on the earnings of Kroll-O'Gara in future periods.

The primary reason for the increase in operating expenses, exclusive of
expenses related to the KHI merger, was the inclusion of operations from the
acquisitions made in 1997. In addition, the increase in operating expenses
reflects Kroll-O'Gara's efforts to expand into new markets, both in the Security
Products and Services Group and the Investigations and Intelligence Group.
Excluding expenses related to the KHI merger, operating expenses as a percent of
net sales stayed constant at 22% in both 1996 and 1997.

Prior to the KHI merger, KHI was involved in merger discussions with
Choicepoint, Inc., a subsidiary of Equifax, Inc. Choicepoint and KHI did not
reach a final agreement and, as a result, did not consummate the transaction.
Certain professional fees, which totaled approximately $0.5 million, associated
with the Choicepoint transaction are included in Kroll-O'Gara's operating
expenses in 1997.

INTEREST EXPENSE. Interest expense for 1997 increased $1.7 million, or 53%,
to $4.8 million, compared to $3.1 million in 1996. The increase in 1997 was the
result of increased borrowing to finance Kroll-O'Gara's 1997 acquisitions.
Kroll-O'Gara retired a portion of its debt with proceeds of the Offering. As a
result, interest expense is expected to be lower in 1998 than in 1997.

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OTHER, NET. Other income (expense), net decreased from $0.3 million of
income in 1996 to $0.4 million in expense in 1997. The change was due primarily
to an increase in foreign currency translation losses recognized in 1997.

PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for income
taxes increased from a benefit of $(0.2) million in 1996 to a provision of $2.4
million in 1997. Kroll-O'Gara's O'Gara-Hess & Eisenhardt Armoring Company
("OHE") subsidiary did not book a tax provision for the first ten months of 1996
due to OHE's S Corporation status, which was terminated on October 28, 1996 in
conjunction with a reorganization in advance of Kroll-O'Gara's initial public
offering.

Kroll-O'Gara incurred taxes at the effective rate of 65% in 1997 due to the
non-deductibility of certain expenses related to the KHI merger in the period
and the impact of foreign losses for which no benefit can be provided.
Management believes that the rate is substantially higher than Kroll-O'Gara will
experience in 1998 and for future periods.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs related to the reengineering of certain information
systems. The capitalized amount, approximately $0.6 million before tax, was
expensed in 1997 in accordance with Emerging Issues Task Force Issue No. 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation." The amount expensed is shown net of applicable tax benefit of
$0.2 million.

1995 COMPARED TO 1996

NET SALES. Net sales increased $67.8 million, or 79%, from $85.8 million in
1995 to $153.7 million in 1996. The primary reasons for this change were the
acceleration of the HMMWV contract and increases in the level of business
activity in the Investigations and Intelligence Group and Voice and Data
Security Group discussed below.

Security Products and Services Group. Net sales for the Security Products
and Services Group increased $44.3 million, or 127%, from $34.9 million in 1995
to $79.2 million in 1996. 1996 net sales reflect the U.S. Government's request
to accelerate the production of Up-Armored HMMWVs and HMMWV armor kits. In
addition, the level of military net sales in 1995 was significantly impacted by
an unanticipated six-month delay in the delivery of HMMWV chassis from a
supplier, leading to production of substantially fewer Up-Armored HMMWVs.

Commercial revenue for 1996 was $24.6 million, an increase of $4.6 million,
or 23% over 1995. This increase was primarily due to the inclusion of net sales
from start-up operations in Russia, Mexico and Brazil.

Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $17.8 million, or 36%, from $48.9 million in 1995
to $66.7 million in 1996. The increase in 1996 was attributable primarily to an
increase in net sales from corporate investigation and business intelligence
services, which increased $12.3 million and $4.0 million, respectively. These
increases were the result of expansion into new geographic areas and an enhanced
marketing program, including a Vendor Integrity Program, which accounted for
approximately $1.0 million of the increase in net sales.

Voice and Data Security Group. Net sales for the Voice and Data Security
Group increased $5.7 million, or 280%, from $2.0 million in 1995 to $7.8 million
in 1996. The increase in net sales was attributable primarily to the addition of
the Compact-M portable satellite terminal, initially marketed by Kroll-O'Gara in
1996.

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COST OF SALES AND GROSS PROFIT. Cost of sales for 1996 increased $49.3
million, or 79%, from $62.1 million in 1995 to $111.5 million in 1996. The
increase in cost of sales was due to increases in Kroll-O'Gara's level of
business activity.

Security Products and Services Group. Gross profit as a percent of net
sales for the Security Products and Services Group increased from 23.3% in 1995
to 25.8% in 1996. This increase was due to revenue recognized on new military
contracts, both U.S. and foreign, with a higher gross profit percent than
previously experienced. Also contributing to the increase in gross profit as a
percent of sales was the effect of the start-up operations in Brazil, Mexico and
Russia, which experienced higher gross margins for their products than
Kroll-O'Gara had experienced previously. These higher margins were the result of
lower direct costs and less developed competition in the markets where these
start-up operations exist.

Investigations and Intelligence Group. Gross profit as a percent of net
sales decreased from 31.1% in 1995 to 29.4% in 1996. Cost of sales in 1996
included a write-off of $5.0 million in uncollectible accounts receivable
relating to services provided in earlier periods. Without the effect of the
write-off, gross margin as a percent of net sales would have increased 5.8% over
1995 to 36.9%.

Voice and Data Security Group. Gross profit as a percent of net sales
increased from 20.0% in 1995 to 27.6% in 1996. This increase was due primarily
to new products marketed by Kroll-O'Gara in 1996, that were sold at a higher
gross margin than Kroll-O'Gara had experienced with other products.

OPERATING EXPENSES. Operating expenses in 1996 increased $5.3 million, or
19%, from $28.4 million in 1995 to $33.7 million in 1996. As a percent of net
sales, operating expenses decreased from 33% in 1995 to 22% in 1996, as result
of increases in net sales which did not require a commitment of additional
marketing and administrative resources.

Selling and marketing expenses increased approximately $0.3 million, or 3%,
from $9.4 million in 1995 to $9.7 million in 1996. Certain costs, primarily
personnel and advertising, increased $1.2 million due to Kroll-O'Gara's growth
into its new Brazilian, Mexican and Russian markets. This increase was offset by
a $0.9 million reduction primarily attributable to the use of lower cost
information services for pre-marketing purposes in the Investigations and
Intelligence Group.

General and administrative expenses increased $5.0 million, or 27%, from
$18.9 million in 1995 to $23.9 million in 1996. This increase was attributable
primarily to the addition of professional employees and associated
infrastructure to support Kroll-O'Gara's increased level of business activity.
These increases included the addition of personnel and facilities to support
expansion into new product lines, such as risk and crisis management services,
and new geographic regions, such as Asia and Latin America.

INTEREST EXPENSE. Interest expense increased $0.3 million, or 12%, from
$2.8 million in 1995 to $3.1 million in 1996. The increase was due primarily to
increased borrowings necessary to finance increased production levels and new
operations in Kroll-O'Gara's Security Products and Services Group. This increase
was offset partially by a reduction in interest expense paid on long-term debt
outstanding to certain shareholders. The amount outstanding to those
shareholders was reduced due to principal payments made in 1996.

OTHER, NET. Other income (expense), net increased $0.7 million, from $(0.4)
million in 1995 to $0.3 million in 1996. This increase was due primarily to a
gain on the sale of marketable securities and a realized foreign currency
transaction gain.

PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) decreased
from a benefit of $1.3 million in 1995 to a benefit of $0.2 million in 1996. The
lower benefit for income taxes in 1996 in

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comparison with 1995 was related to KHI's losses before taxes, which were lower
in 1996. OHE booked no provision for income taxes prior to the termination of
its S Corporation status in October 1996.

LIQUIDITY AND CAPITAL RESOURCES

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

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

Senior Notes. On May 30, 1997, the Company issued and sold $35.0 million
worth of Senior Notes, maturing on May 30, 2004, to certain institutional
investors. The Senior Notes bear interest at 8.56% and impose covenant
restrictions on the Company's operations. These restrictions include limitations
on dividends and priority debt, and constraints on specific investments, as well
as requirements relating to the Company's net worth, fixed charge coverage ratio
and level of outstanding debt.

Credit Facility. Kroll-O'Gara has a revolving credit facility with KeyBank
National Association, which was entered into in May 1997 and amended in October
1998. This agreement provides for a revolving line of credit of $7.0 million and
a letter of credit facility of approximately $7.7 million. The revolving credit
facility bears interest which fluctuates between the prime rate less 1.75% and
prime less 0.25%, or, at Kroll-O'Gara's option, between the LIBOR rate plus
0.75% and LIBOR plus 1.50%. The Credit Agreement imposes requirements on the
Company's reported fixed charge coverage ratio, net worth and debt
capitalization, along with certain restrictions on investments, acquisitions,
intangibles and capital expenditures.

On November 9, 1998, there were no borrowings under the revolving credit
agreement. The remaining proceeds from the Offering along with the unused
capacity on the revolving line of credit will be sufficient to fund the working
capital needs of Kroll-O'Gara for the foreseeable future.

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

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

The change in designation affects progress payments made by the government
to Kroll-O'Gara over the course of a contract, and Kroll-O'Gara's cash flow, in
two ways. First, the progress payments will be determined using a smaller
percentage of total cost committed than they have in the past. Second,
Kroll-O'Gara will only be reimbursed for vendor invoices paid instead of
expenses incurred. Although these changes will not affect the total amount
ultimately collected, they will defer certain amounts previously included as
part of a progress payment until the vehicles are delivered.

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The majority of these adjustments to the way Kroll-O'Gara is reimbursed for
its military business were applied to the HMMWV contracts on a cumulative basis
in the second quarter of 1998. This resulted in a significant increase in the
balance of Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts and its related effect on cash flows from operating activities. The
Company initiated discussions with the government in the third quarter of 1998
in an attempt to alleviate the significant negative cash flow position the
Company had been put in due to the change in designation. The result of these
discussions was an agreement that the new payment guidelines would be applied to
the Company on a prospective basis only. This allows the Company to recover the
amounts committed to the contract in the second quarter. On September 30, 1998,
the Company received a $10.8 million payment from the government resulting from
the agreement.

Cash flows from investing activities. Historically, Kroll-O'Gara has
limited its capital expenditure requirements by leasing certain assets. Capital
expenditures totaled $2.0 million for the six months ended June 30, 1998, and
$2.1 million for the same period in 1997. Additions to databases totaled $1.7
million and $1.1 million for the six months ended June 30, 1998 and 1997,
respectively.

In addition to capital expenditures, 1997 investing activities included
acquisitions which required a total cash outlay of $8.1 million, net of cash
acquired. Through the first nine months of 1998, acquisitions have used
approximately $8.5 million of cash, net of cash acquired. Management anticipates
that, as Kroll-O'Gara continues to pursue strategic acquisitions, additional
cash outlays will be required.

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

Foreign operations. Kroll-O'Gara attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in such
countries, maintaining reserves for credit losses, maintaining insurance on
equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge 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 its exposure to foreign currency rate fluctuations.
At June 30, 1998 five such contracts were outstanding in connection with
intercompany demand notes with Labbe and Lindquist Avey. These contracts are
intended to hedge 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 $20.9 million and $0.3 million, respectively. These
contracts mature between September 1998 and July 2000. Gains or losses on
existing forward instruments are offset against the translation effects
reflected in shareholders' equity. The fair value of forward contracts is not
recognized in the consolidated financial statements since they are accounted for
as hedges. Kroll-O'Gara does not hold or issue derivative financial instruments
for trading purposes.

Year 2000 Issues. Kroll-O'Gara has initiated a comprehensive program to
prepare for the year 2000. During 1997, Kroll-O'Gara began the process of
replacing the enterprise systems at its two largest subsidiaries, both for the
purpose of making the systems Year 2000 compliant and to enhance the information
system capabilities of these subsidiaries. The new systems are scheduled to be
operational by mid-1999.

Additionally, Kroll-O'Gara is implementing a plan to prepare its remaining
systems for Year 2000. Kroll-O'Gara has completed an inventory of all its
computer software and embedded technology and has prepared a master database of
all technology potentially impacted by the Year 2000 issue. In conjunction

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with outside consultants, Kroll-O'Gara now is in the process of evaluating the
findings from its inventory and formulating plans of action. Kroll-O'Gara
anticipates that it will have taken all the necessary steps to ensure no
interruption in services as a result of the Year 2000 issue by the third quarter
of 1999. Total Year 2000 compliance cost is estimated to be approximately $4.0
million, of which approximately $3.6 relates to the new enterprise systems and
will be capitalized. The remaining approximately $0.4 million, some of which
will be capitalized and rest expensed, will be spread over several reporting
periods and is not expected to be material.

If systems are not in place or if all appropriate actions have not been
taken, Kroll-O'Gara's ability to administer and report revenue will be greatly
compromised. Both of Kroll-O'Gara's largest revenue groups are, for the most
part, manual operations. The manufacture of bullet resistant vehicles and the
investigation and intelligence services provided by Kroll-O'Gara are not largely
dependent on imbedded technology. Barring a catastrophic collapse from third
party sources, such as a lack of electrical power, Kroll-O'Gara should be able
to maintain production in its main revenue producing groups, although at a
reduced level.

Many operations Kroll-O'Gara maintains, especially in the Voice and Data
and the Investigations and Intelligence Groups, rely on third party compliance
with the Year 2000 issue to ensure Kroll-O'Gara can continue to operate in these
areas. Background investigations and certain intelligence gathering services
rely solely on third party sources, such as Nexis-Lexis, for their continued
operation. The satellite and global positioning equipment marketed by the Voice
and Data Communications Group is exclusively dependent on the compliance of the
manufacturers of the equipment and the agencies that maintain the satellites for
its revenue. Lack of compliance by third parties would significantly impact
Kroll-O'Gara in these areas.

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

Forward-Looking Statements. Forward-looking statements, within the meaning
of Section 21E of the Securities and Exchange Act of 1934, are made throughout
this Management's Discussion and Analysis of Financial Conditions and Results of
Operations. Kroll-O'Gara's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that could
significantly affect expected results. For example, operating results may be
affected by external factors such as actions of competitors, changes in laws and
regulations, customer demand, effectiveness of programs, strategic relations,
fluctuations in the cost and availability of resources, and foreign economic
conditions, including currency rate fluctuations.

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BUSINESS

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. Worldwide, governments, businesses and individuals increasingly
are recognizing the need for products and services that mitigate the growing
risks associated with white-collar crimes, fraud, physical attacks, threats,
violence and uninformed decisions based upon incomplete or inaccurate
information. Through its network of 50 offices located in 17 countries,
Kroll-O'Gara is meeting these needs by providing information, analysis, training
and products to its customers. Kroll-O'Gara has served a diverse customer base
of over 4,000 clients during the last five years, including large multinational
corporations, medium and small businesses, individuals, law firms, investment
and commercial banks and U.S. and foreign government agencies.

Kroll-O'Gara's Kroll Associates, Inc. ("Kroll") subsidiary was founded in
1972 by Jules B. Kroll to provide internal fraud investigative services. During
the late 1970s, Kroll expanded the scope of its operations to include a variety
of investigative and crisis management services such as business intelligence,
due diligence for financial transactions and intelligence gathering in
connection with hostile takeovers. Over the past five years, Kroll has handled
over 11,000 investigative matters worldwide for its clients, including many
Fortune 500 companies. Kroll-O'Gara's OHE subsidiary has a long and
distinguished history dating back to its early days as a horse-drawn carriage
builder in 1876. In the 1940s, OHE designed and built one of the earliest
armored presidential limousines, which was used by President Harry S Truman.
Since then, OHE's armored commercial vehicles have been used by every U.S.
President, as well as other heads of state, business executives and VIPs
worldwide. OHE has been the sole source provider of armoring systems for the
U.S. Military's HMMWVs since their introduction in 1994. In November 1996,
Kroll-O'Gara completed its initial public offering. Since that time, Kroll-
O'Gara has acquired nine companies in the highly fragmented security industry.

Kroll-O'Gara's operations are divided among the following three business
segments:

Investigations and Intelligence. Kroll-O'Gara's Investigations and
Intelligence Group provides: (i) investigative services designed to mitigate or
determine financial fraud, theft of trade secrets, infringement of trademarks or
other intellectual property rights, and employee misconduct; (ii) litigation or
arbitration assistance in preparation for legal proceedings; (iii) forensic
auditing and asset tracing services and financial profiles in connection with
matters such as bankruptcy cases and loan defaults; (iv) due diligence
investigations and background information for business decisions; and (v)
monitoring and special inquiry assistance in the discovery and assessment of
legal and ethical misconduct and the development and installation of appropriate
systems to assist in ensuring future compliance with relevant standards.

Security Products and Services. Kroll-O'Gara's Security Products and
Services Group provides: (i) armoring products, including ballistic and blast
protected armoring systems for commercial and military vehicles, aircraft and
missile components; and (ii) security services, including advanced driver
training, force protection training, risk and crisis management and turn-key
site security systems.

Voice and Data Security. Kroll-O'Gara's Voice and Data Security Group
provides: (i) planning, design, and hardware and software integration services
which are customized to meet specific portable satellite communications or
navigation needs; and (ii) computer hardware and software security consulting
services.

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PRODUCTS AND SERVICES

The following table presents the net sales of Kroll-O'Gara's products and
services by Group for the periods indicated:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)

Security Products and Services Group.................... $34,883 $ 79,156 $105,557
Investigations and Intelligence Group................... 48,914 66,735 67,419
Voice and Data Security Group........................... 2,044 7,770 17,437
------- -------- --------
$85,841 $153,661 $190,413
======= ======== ========

In addition to the information presented above, see Notes to Kroll-O'Gara's
Consolidated Financial Statements included elsewhere in this Proxy
Statement/Prospectus for business segment data and for information concerning
foreign and domestic operations and export sales.

SECURITY PRODUCTS AND SERVICES GROUP

The Security Products and Services Group has three product categories: (i)
commercial products, (ii) military products, and (iii) security services. Net
sales for the Security Products and Services Group totaled $105.6 million for
fiscal year 1997. The following table presents the aggregate net sales for each
of the three product categories for the periods indicated.

YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
(DOLLARS IN THOUSANDS)

Commercial products...................................... $15,818 $18,304 $ 54,541
Military products........................................ 14,955 54,596 43,719
Security services........................................ 4,110 6,256 7,297
------- ------- --------
$34,883 $79,156 $105,557
======= ======= ========

Commercial Products

Kroll-O'Gara armors a variety of vehicles including limousines, sedans,
sport utility vehicles, commercial trucks and money transport vehicles that
protect against varying degrees of ballistic and blast threats. The armoring
process begins with the disassembly of a base vehicle which is purchased new
from a dealership or directly from the factory. This disassembly normally
involves the removal of the interior trim, seats, doors and windows. The
passenger compartment then is armored with both opaque armor (metallic, fibrous
and ceramic materials) and transparent armor (glass/plastic laminate) and other
features, such as run flat tires and non-exploding gas tanks are 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 1997, Kroll-O'Gara shipped approximately 1,000 armored vehicles.

Armored vehicles. Kroll-O'Gara produces fully armored vehicles and light
armored vehicles. Fully armored vehicles, such as limousines, large sedans (such
as a Cadillac, Mercedes Benz S600 or Volvo S90) or sport utility vehicles (such
as the GMC/Chevrolet Suburban), typically are armored to protect against attacks
from military assault rifles such as AK-47s and M16s and from certain underbody
explosives. Certain vehicles also are blast protected by incorporating 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

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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 $50,000 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 systems and have special features such as supplemental air and oxygen
systems, air purification systems to protect against chemical or biological
contamination, underbody fire suppressant systems, tear gas launchers, anti-
explosive self-sealing fuel tanks, electric deadbolt door locks, gun ports and
bomb scanners. Parade Cars normally sell for $300,000 to in excess of $1.0
million inclusive of the cost of the base vehicle.

Light armored vehicles are similar in all respects to fully armored
vehicles except that substantially less total-weight of armoring is added.
Therefore, it is possible to armor smaller vehicles such as the Volkswagen Jetta
and the General Motors Omega, as well as larger vehicles such as the Mercedes
Benz S600 and the Jeep Cherokee. Light armored vehicles are designed to protect
against attacks from handguns, such as a 9 mm or .357 Magnum. The price of a
light armored vehicle ranges from $5,000 to $60,000 exclusive of the cost of the
base vehicle.

Other vehicles. Kroll-O'Gara also produces specialty vehicles,
cash-in-transit ("CIT") money transport vehicles and commercial truck bodies.
Specialty vehicles are custom built for a specific mission, such as Escort Cars
(usually a convertible) and Chase Cars (usually a closed-top vehicle) in which
security personnel ride while in a head of state motorcade. Kroll-O'Gara's Labbe
and IMEA subsidiaries produce CIT vehicles which 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. Labbe 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 HMMWVs. The HMMWV
chassis are produced by AM General Corporation ("AM General") and shipped
directly to Kroll-O'Gara's facility in Fairfield, Ohio where armor and blast
protection components are added. These Up-Armored HMMWVs provide protection
against 7.62 mm armor-piercing ammunition (such as that fired by the AK-47
military assault rifle), overhead airburst protection against a 155 mm shell,
front underbody blast protection against a 12 lb. anti-tank mine and rear
underbody blast protection against a 4 lb. antipersonnel mine. 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 its customers $70,000 to
$100,000 for these ballistic and blast protective systems, which is in addition
to the cost of the vehicle. During 1997, Kroll-O'Gara shipped 366 Up-Armored
HMMWVs. Kroll-O'Gara also supplies engineering design and prototype services in
support of the Up-Armored HMMWV Program, supplies spare parts and logistic
support and produces field-installable armoring kits.

Other armor systems. Kroll-O'Gara markets armor sub-systems for other
tactical wheeled vehicles, such as .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

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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, risk and crisis management and site security systems.

Training. Kroll-O'Gara offers comprehensive training programs in advanced
driving, ballistics, security and counterintelligence, and surveillance. Driver
training programs are offered primarily through Kroll- O'Gara's ITI subsidiary.
ITI utilizes various facilities around the world including its Force Protection
Institute in San Antonio, Texas, which offer a full range of advanced driver and
force protection training. Kroll-O'Gara offers ballistics training in a
progressive and realistic 360 degree, .223 caliber ballistic 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, such as force
protection, protection of intellectual property rights and information security.
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 a variety of consulting
services to assist businesses in managing diverse risks to their personnel and
assets and in meeting and managing unexpected crises. Kroll-O'Gara's crisis
management services are provided in a variety of contexts, including the crisis
response to a kidnapping of a company's executive, the safety of consumers, the
contamination of a consumer product or the environment or 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 that includes: 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 relevant topics, such as kidnappings or specific regions or
countries that are relevant to business travelers.

Site security systems. Kroll-O'Gara offers comprehensive planning, design
and hardware and software integration services customized to meet the
requirements of customers for physical site protection. Primarily intended for
perimeter security around business facilities and plant operations, Kroll-O'Gara
also offers its services to embassies, VIPs' homes and public facilities.
Generally, such a systems integration project begins with a site survey, which
identifies areas of vulnerability and recommends methods for securing the entire
area surveyed. Specific pieces of hardware are ordered and

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installed, processes and procedures are outlined, engineering documentation is
provided and control centers are established. Although each job is unique, the
methodology used to develop the system is similar in most cases.

INVESTIGATIONS AND INTELLIGENCE GROUP

The Investigations and Intelligence Group has three product categories: (i)
investigations, (ii) business intelligence, and (iii) other services.
Kroll-O'Gara's investigative and intelligence services are provided by
professionals with backgrounds in law, finance, business, consulting, law
enforcement, accounting, journalism, environmental science and technology.
Kroll-O'Gara believes that its blend of talent and expertise is important to the
success of this Group. The following table presents the aggregate net sales for
each of the Group's three product categories for the periods indicated.

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)

Investigations.......................................... $35,244 $ 45,737 $ 40,675
Business intelligence................................... 8,834 11,925 19,148
Other services.......................................... 4,836 9,073 7,596
------- -------- --------
$48,914 $ 66,735 $ 67,419
======= ======== ========

Investigations

Kroll-O'Gara provides a variety of investigative services including
financial fraud investigations, corporate investigations, litigation services,
asset tracing and analysis, vendor investigations and corporate security.

Financial fraud investigations. Kroll-O'Gara's investigators, including
forensic accountants and computer specialists, work with corporations and
governmental entities to detect and curtail fraudulent and illegal activities by
a client's employees, vendors or contractors. When a company's senior management
or a board of directors suspects their company is being victimized by such
conduct, they must act quickly to confirm their suspicions, safeguard the
company's assets, halt the undesired activity and prevent recurrences. This must
be accomplished without disrupting the normal business flow. To this end,
Kroll-O'Gara personnel collect and analyze information about the suspected
conduct, thereby maximizing the client's ability to assess the extent of losses,
attempt to recover assets and contain or prevent damaging financial impact on
the company. Kroll-O'Gara's investigators have extensive experience in detecting
and solving misappropriations of corporate assets, violations of fiduciary
duties, business frauds and insolvency and bankruptcy fraud.

Corporate investigations. Working closely and confidentially with
management and/or legal counsel, Kroll-O'Gara's investigators and forensic
accountants help to devise a strategy to solve such problems as thefts of trade
secrets, threats and hostile acts, gray market and counterfeit products, patent
and trademark infringements, and sexual harassment and other employee issues.
Businesses have encountered growing numbers of disgruntled employees, vengeful
ex-employees and ruthless competitors and distributors. This has resulted in a
growing need for corporate investigations. 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.

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 designing settlement strategies. These services
include developing evidence to support a claim or a defense, identifying and

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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's sophisticated link-analysis software can
track and process voluminous documentation, as well as extensive database
material, in order to identify elusive connections and produce investigative
leads.

Asset tracing and analysis. Kroll-O'Gara's asset tracing services consist
of tracing and locating assets anywhere in the world and developing financial
profiles and life style assessments in connection with bankruptcy cases, loan
defaults, internal investigations and other due diligence requests by clients.
In many cases, Kroll-O'Gara has worked with trustees in bankruptcy and
insolvency, creditors' committees, bankers in workout and restructuring
departments, litigators and bankruptcy attorneys, conducting searches for
concealed or undisclosed assets. In other contexts, clients may be interested in
a financial profile or asset analysis of a person in connection with a potential
business relationship, lawsuit or internal investigation. Kroll-O'Gara's asset
searching and analysis techniques are effective both in uncovering assets and in
bringing debtors to the negotiating table. Kroll-O'Gara's strategies for
identifying assets rely both on a range of investigative techniques and on the
highly sophisticated use of electronic databases. Tactics employed include
searching through sometimes obscure but publicly available local records,
reviewing financial documents and conducting discreet interviews with people
associated with the subject.

Vendor qualification. Kroll-O'Gara has recently developed a vendor
integrity program that 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.

Disability claims investigations. As a result of its acquisition of InPhoto
in September 1998, Kroll-O'Gara provides video surveillance services to
insurance companies, corporations and government agencies in connection with
investigating exaggerated disability claims and other fraud. These services are
provided to clients throughout the United States and in Western Europe and South
Africa.

Corporate security 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.

Business Intelligence

Kroll-O'Gara provides business intelligence services to clients requiring
reliable insight into the strengths, vulnerabilities and strategies of
competitors and potential business partners. Kroll-O'Gara's professionals
provide sophisticated business intelligence on companies and individuals,
reporting on their market position, technical capabilities, strategic direction
and the industries and countries in which they operate. The due diligence and
background information and analysis furnished by Kroll-O'Gara is intended to be
useful for clients considering significant operating or strategic decisions,
such as proposed acquisitions or unsolicited offers to acquire corporate
control, possible business arrangements with particular partners and proposed
entries into new markets.

Business intelligence services are utilized by lenders, underwriters,
potential acquirers and other businesses concerned with assessing and attempting
to minimize the risks related to major financial and

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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.

Other Services

Monitoring services and special inquiries. Kroll-O'Gara provides monitoring
services and special inquiries to clients that require an independent fact
finder to end fraud and install systems that monitor compliance. Kroll-O'Gara's
lawyers, forensic accountants, investigators, analysts and industry experts seek
to identify violations of federal or state regulatory requirements or corporate
policies and consult with clients with respect to establishing systems to audit
and ensure compliance with such regulatory requirements or policies.
Kroll-O'Gara serves as an objective fact finder, one whose work product might
well be turned over to a questioning government regulator or a skeptical and
vocal segment of the public. In addition, Kroll-O'Gara's fact finding efforts
have been enlisted by management or by audit committees concerned about problems
that need to be resolved within an enterprise.

VOICE AND DATA SECURITY GROUP

Satellite communication integration. Kroll-O'Gara offers comprehensive
design and hardware and software integration services customized to meet
specific satellite communication requirements of its customers. This involves
the integration of portable satellite terminals, mobile antennas and software-
based air time. Usually these systems are designed for remote or security
intensive operations. The portable satellite terminals, which are manufactured
by third party suppliers and distributed by Kroll-O'Gara, allow the user to make
voice and data transmissions via satellite link anywhere in the world.

Navigation systems. Kroll-O'Gara distributes Global Positioning Satellite
Systems ("GPS") primarily in the United Kingdom and Europe. The GPS products
enable users to identify their exact location throughout the world.

Computer hardware and software security. Kroll-O'Gara offers computer
hardware and software consulting services. Businesses face a variety of risks
from both employees and outsiders who infiltrate computer systems by various
means including e-mail and internet access points. For example, disgruntled
employees or competitors may cause unauthorized changes to a company's website,
redirect message traffic to an alternative website or create "hate sites"
containing negative and often untrue information about a business.
Kroll-O'Gara's investigators are able to track down the perpetrators of these
activities, analyze how the incident occurred and offer countermeasures to
prevent future security breaches. Kroll-O'Gara also can help a client locate
information vital to a lawsuit, and do so in a manner that assists in proving
the admissability of such evidence. Such 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.

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. Such 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

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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. Local servicing of the vehicle is also a critical concern to private
buyers. Kroll-O'Gara's customers for CITs are generally financial institutions.
Purchasing decisions for CITs depend on many criteria including the ownership of
the institution (private or governmental), insurance requirements and costs. The
geographic distribution of 1997 sales of Kroll-O'Gara's commercial armored
vehicles, as a percentage of total 1997 sales for those products, was as
follows:

1997 COMMERCIAL SALES
BY GEOGRAPHIC AREA

PERCENTAGE OF
COMMERCIAL
SALES
----------------

Central and South America................................... 38
Europe...................................................... 33
North America............................................... 10
Middle East................................................. 8
Far East.................................................... 6
Other....................................................... 5

Military products. Kroll-O'Gara's market for military hardware products is
worldwide in scope, including the U.S. Military and foreign defense forces.
Kroll-O'Gara's major contracts for delivery of Up-Armored HMMWVs are with the
U.S. Military. Additionally, Kroll-O'Gara provides protected container systems,
typically used to protect missile systems from small arms fire, to the U.S.
Military under a subcontract with Lockheed Martin. Kroll-O'Gara has sold
Up-Armored HMMWVs to Qatar and Luxembourg, either directly or through the U.S.
Foreign Military Sales Program and is seeking to expand its sales of these
vehicles to foreign defense forces.

Training. Kroll-O'Gara began offering advanced driver training, firearms
training and surveillance detection training courses after its acquisition of
ITI, which had an established customer base of U.S. and foreign governmental
agencies and corporate customers. 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.
("AIG"), an international multi-risk insurance company, under which Kroll-O'Gara
investigates certain claims by AIG's insureds. Although Kroll-O'Gara is paid by
AIG after claims are made for such occurrences, Kroll-O'Gara's client 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.

Site security systems. Since it began offering site protection systems
integration services in early 1996, Kroll-O'Gara has obtained numerous contracts
with both Russian and multinational companies to provide integrated site
security systems. Currently, Kroll-O'Gara is marketing these products primarily
in Russia. Corporate and governmental buyers of integrated security systems
normally purchase through

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their corporate security officer, a governmental department responsible for the
particular facility's security, a facility manager or a construction project
manager. Purchases generally are made on project-specific proposals and include
the cost of the hardware, transportation costs to the site, engineering
integration and documentation.

INVESTIGATIONS AND INTELLIGENCE GROUP

From 1994 through 1997, Kroll-O'Gara provided investigative and
intelligence services to approximately 2,100 clients located in the United
States and approximately 1,200 clients located in other parts of the world.
Kroll-O'Gara's clients for these 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's governmental clients include
agencies of the U.S. Government, state and local governments in the United
States and a number of foreign governments and ministries.

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, 1995, 1996 and 1997, 71%,
73% and 67%, 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, relatively few clients utilize Kroll-O'Gara's services each year
and the clients that account for a material percentage of net sales in any year
may vary widely.

Generally, in the United States Kroll-O'Gara charges for its investigative
and intelligence services on an hourly basis at varying rates, depending upon
the type of service being provided and the competition that exists in providing
the service. Kroll-O'Gara also provides these services, particularly outside the
United States, on a negotiated project, or fixed fee, basis. Providing services
on a fixed fee basis enhances the potential for higher profit margins. However,
such arrangements can also result in unexpected losses on a particular project.
Kroll-O'Gara believes that this risk is reduced by the large number of its fixed
fee arrangements.

VOICE AND DATA SECURITY GROUP

Satellite communication integration. Principal customers for satellite
communications services include private corporations and individuals,
governmental agencies, peacekeeping forces and disaster relief organizations
which operate in lesser-developed countries that lack a telecommunications
infrastructure, in rural areas of developed countries or in disaster scenarios
in which the traditional forms of telecommunications are rendered inoperable.
Increasingly, customers are demanding that the satellite communication channels
provided be secure. Depending on the level of security desired, satellite
communication systems can be implemented using a variety of encryption methods
up to and including fully secure U.S. Government STU-III telephones. Most of
Kroll-O'Gara's satellite communication customers are located outside of the
United States because the U.S. Federal Communications Commission does not permit
private corporations or individuals to use terminals in the United States which
do not utilize the American Mobile Satellite Corp. ("AMSC") satellite network.
The terminals marketed by Kroll-O'Gara access the INMARSAT network rather than
the AMSC network.

Navigation systems. Kroll-O'Gara resells GPS equipment through
approximately 1,270 independent distributors and retailers in the United Kingdom
and France. Marine GPS units are sold generally through distributors and
retailers which specialize in marine electronics and others that sell general
boat

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equipment. Outdoor (general recreational) GPS units are sold through sporting
goods retailers, camping and outdoor stores and general electronics stores.
Aviation GPS equipment is sold through aviation equipment retailers.

Computer hardware and software security. Kroll-O'Gara markets its computer
hardware and software security to its corporate customers. These customers
either are concerned about potential infiltration of their proprietary databases
or have had their databases infiltrated by employees or third parties.

MARKETING AND SALES

Commercial. Kroll-O'Gara believes that it enjoys excellent name recognition
and a strong reputation in the security industry. The central element of
Kroll-O'Gara's commercial marketing strategy is to leverage the name recognition
and reputation of its products and services by positioning Kroll-O'Gara as a
global provider of one-stop risk mitigation services and products. Kroll-O'Gara
believes that by positioning itself in this manner it can capitalize on its
existing customer base, maximize the benefits of its long history of supplying
security-related products and services around the world and leverage its
leadership niche in the risk mitigation market. Kroll-O'Gara tailors its
marketing strategy to each geographic area of the world and often will tailor
its product and services offering by country. There is strong cross-marketing of
its products and services which Kroll-O'Gara believes strengthens the image of
each product group.

On a worldwide basis, Kroll-O'Gara employs 46 full-time sales professionals
in its Security Products and Services Group who operate out of Los Angeles,
California; Washington, D.C.; Miami, Florida; Fairfield, Ohio; Sao Paulo,
Brazil; Lamballe, France; Paris, France; Mexico City, Mexico; Subic Bay, the
Philippines; Moscow, Russia; and Geneva, Switzerland. All personnel have a
geographic and/or product-specific responsibility. In most cases, these sales
personnel also maintain and recruit 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 the customers security
problems. Sales cycles for commercial physical security products can range from
several months to a matter of days, depending upon the product and the urgency
associated with the security problem being addressed. Physical security products
which are readily available, such as the fully armored Standard Suburban, allow
Kroll-O'Gara to assist customers who have, or believe they have, developed an
immediate threat.

In its Investigations and Intelligence Group, Kroll-O'Gara relies on its
professionals not only to provide services to existing clients, but also for
business development. Kroll-O'Gara's professionals are principally responsible
for the marketing of services and for establishing relationships with clients.
Kroll-O'Gara obtains engagements from a client's board of directors, chief
executive and chief financial 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, Kroll-O'Gara has a professional staff in
New York City and in each of its regional headquarters that includes marketing,
sales and public relations professionals who support and coordinate
Kroll-O'Gara's marketing efforts on a worldwide basis. These marketing efforts
include seminars, briefings, receptions, breakfast and lunch meetings, direct
mail and selected advertising in trade and other journals. Kroll-O'Gara's
services and marketing events are promoted through its Internet website and a
publication mailed periodically to approximately 20,000 clients and prospective
clients.

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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.

Because most of the product sales of Kroll-O'Gara's Voice and Data Security
Group are through independent distributors and retailers, Kroll-O'Gara employs
only eight sales professionals in that Group, most of whom operate out of its
Deer Park, New York and Salisbury, United Kingdom facilities.

Military. Kroll-O'Gara continues to position itself in the marketplace as a
commercial company with a military production capability and to emphasize its
ability to develop new products, or product adaptations, quickly and more
cost-effectively than traditional defense contractors. In marketing its products
to the military, Kroll-O'Gara also places strong emphasis on its superior
antitank and antipersonnel mine protection for the occupants of tactical wheeled
vehicles. Kroll-O'Gara markets its military products through a combination of
trade show exhibitions, print advertising in military-related periodicals and
direct customer visits. Kroll-O'Gara emphasizes the cross-marketing of military
and commercial products, which it believes strengthens the image of each product
group. Kroll-O'Gara also has entered into exclusive teaming and joint marketing
agreements with AM General, the manufacturer of the basic HMMWV, for sales in
the military and commercial arenas. These agreements designate Kroll-O'Gara as
the exclusive armorer to AM General for HMMWVs and allow Kroll-O'Gara to benefit
from the AM General distribution network and save on certain costs, such as
exhibitions where AM General and Kroll-O'Gara otherwise would both show
products.

Kroll-O'Gara's military sales activities are directed toward identifying
contract bid opportunities with various U.S. Government agencies, private
enterprises acting as prime contractors on government contracts, sales through
the Foreign Military Sales Program, and military sales directly to foreign
military organizations. Kroll-O'Gara has two full-time business development
managers who are responsible for this activity and also has contractual
arrangements with several outside consultants who assist the business
development managers in their activities. Proposal preparation and presentation
for government projects is done by a proposal team which normally consists of
program managers who have specific project responsibilities, 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. Kroll-O'Gara
emphasizes engineering excellence and has an extensive engineering staff. Design
engineers use state-of-the-art two-dimensional and three-dimensional computer
aided design and engineering (CAD/CAE) systems in conjunction with coordinate
measuring machines to develop electronic models which generally are converted to
solid models or prototypes. Manufacturing engineers concentrate on the ability
of Kroll-O'Gara to manufacture a product design, on improvements in the
production process and overall cost reductions from better methods, fewer
components and less expensive materials with equal or superior quality and on
materials handling issues. Applying these techniques, in the last several years
Kroll-O'Gara has been able to produce savings in both the time and cost
necessary to produce its armored vehicles.

Quality engineering is responsible for assuring that manufacturing and
design plans are consistent with a reliable, quality product that meets the
specifications of the customer. Quality engineers also are responsible for
identifying in-process quality inspection points in the work orders.
Kroll-O'Gara's

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ballistic engineer, in conjunction with its design and manufacturing engineers,
develops new ballistic and blast protection systems that meet ever-changing
threats. The ballistic engineer also is responsible for the ballistic testing
required by customers, the assignment of ballistic specifications to final
products and the issuance of ballistic specifications for internal quality
control. Advanced engineering is responsible for new product development in
conjunction with design engineering, manufacturing engineering and ballistic
engineering. Kroll-O'Gara estimates that it expended approximately $2.0 million,
$2.8 million and $2.9 million in 1995, 1996 and 1997, respectively, on its
engineering and development efforts. The amount for 1997 includes expensed
amounts reimbursed under a Systems Technical Support Contract described under
"U.S. Government Contracts."

U.S. GOVERNMENT CONTRACTS

Kroll-O'Gara serves as the U.S. Military's sole source contractor for
armoring the HMMWV fleet. Since its initial contract in August 1993 to armor 59
HMMWVs, Kroll-O'Gara has been awarded contracts to armor a total of 1,993
HMMWVs. Of these, 1,323 Up-Armored HMMWVs have been shipped, as follows:

NUMBER OF
HMMWVS
YEAR SHIPPED
---- ---------

1993........................................................ 0
1994........................................................ 139
1995........................................................ 26
1996........................................................ 507
1997........................................................ 366
1998 (through September 30)................................. 285
-----
Total............................................. 1,323
=====

Kroll-O'Gara's most recent contract with the U.S. Military covers 738
Up-Armored HMMWVs for the U.S. Army and the U.S. Air Force, to be delivered from
August 1998 through June 2000. The contract for 378 of those vehicles for the
U.S. Air Force was signed in March 1998, with the remaining amount contracted
for in April 1998. The award includes an option for an additional 216 vehicles.
As the Up-Armored HMMWV fleet grows, Kroll-O'Gara is experiencing continued
growth in sales of spare parts and related fleet management activity, including
a $2.0 million annual contract to support field requirements. This contract was
most recently renewed in March 1998.

In January 1997, Kroll-O'Gara signed a Systems Technical Support ("STS")
Contract with the U.S. Military to support continued research and development on
the Up-Armored HMMWV program. The four year contract, three of which are option
years, was budgeted for $2.5 million in 1997, with $2.5 million options in such
of 1998 and 1999 and a $2.0 million option in 2000. In September 1997, the U.S.
Military exercised its options for 1998 and 1999. The STS Contract, in part,
allows Kroll-O'Gara to make new design improvements, to conduct additional
testing of materials, components and vehicles and to explore alternate and more
advanced armor configurations. The contract requires Kroll-O'Gara to provide
25,000 hours per year of engineering and development time to the U.S. Military.
Kroll-O'Gara believes that the knowledge gained from STS Contract work can be
applied to its commercial manufacturing programs.

As a subcontractor to Lockheed Martin Corporation, Kroll-O'Gara has
provided armoring for certain missile weapons systems. Kroll-O'Gara was first
engaged in September 1993 by Lockheed Martin to armor launch systems of
missiles. Kroll-O'Gara was most recently engaged by Lockheed Martin in March
1997 to provide such armoring and believes that it is well positioned for future
engagements.

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COMPETITION

The markets for Kroll-O'Gara's products and services are highly
competitive. Kroll-O'Gara competes in a variety of fields, with competitors
ranging from small businesses to multinational corporations.

SECURITY PRODUCTS AND SERVICES GROUP

Kroll-O'Gara believes that its design, engineering and production expertise
in providing fully integrated ballistic and blast protected vehicles gives it a
competitive advantage over those competitors who provide protection against only
selected ballistic threats. The largest competitor on a worldwide basis in the
production of armored commercial vehicles is Mercedes-Benz Aktiengesellschaft,
which sells its product through its worldwide dealer distribution system. In
addition, there are a number of other vehicle armorers in Europe, the Middle
East and Latin America which armor primarily locally manufactured automobiles.
U.S. based protected passenger automobile armorers include the Pittston Company
(owner of Brinks armored vehicles), Moloney Coachbuilders, Inc., Armor Holdings,
Inc., and Armet Armored Vehicles, Inc. The principal competitive factors are
price, quality of engineering and design, production capability and capacity,
ability to meet delivery schedules and reputation in the industry. There are a
large number of companies, such as Simula, Inc., that provide specific armoring
packages for tactical wheeled vehicles, helicopters and selected other military
applications. Kroll-O'Gara believes that, as the size of the Up-Armored HMMWV
requirement continues to grow, competition from major defense contractors may
increase.

With regard to the security services provided by this Group, Kroll-O'Gara
competes with numerous local integrators and small consultant-type businesses,
such as Control Risks Group Ltd., and also with large suppliers of
security-related equipment such as Western Resources, Inc., Pinkerton's, Inc.,
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 specific 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 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 certain of the investigation and consulting services provided
by Kroll-O'Gara.

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VOICE AND DATA SECURITY GROUP

In this Group, the products distributed by Kroll-O'Gara compete with those
offered by many companies, including STN Atlas Elektronik, GmbH and Nera AS.
Kroll-O'Gara believes that the competitive factors in this portion of its
business include product reliability, the incorporation of advanced
technological features, price, ease of installation, availability and service.
With respect to secure custom communications systems integration services and
computer hardware and software security services, Kroll-O'Gara competes with
small and large communications and computer security systems integrators.

SEASONALITY, BACKLOG AND RELATED MATTERS

Approximately 23% of Kroll-O'Gara's net sales during 1997 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 1996,
these percentages were 36% and 6%, 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
will not be recognized until one or more subsequent quarters. As a result,
Kroll-O'Gara generally 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, 1996 and 1997 was approximately
$28.8 million and $50.0 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 factors affect the conclusion
of definitive agreements for contracts awarded and the production and delivery
of Kroll-O'Gara's products, no assurance can be given as to when or whether net
sales will be recognized from Kroll-O'Gara's backlog. 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, estimated contract revenues
are accrued based generally 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 "The Kroll-O'Gara Company -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."

PROPERTIES AND FACILITIES

Kroll-O'Gara maintains executive offices in New York, New York, and
Fairfield, Ohio, and regional headquarters in London, England; Hong Kong; Miami,
Florida; and New York, New York. In addition, Kroll-O'Gara maintains 20 domestic
offices or facilities in 14 states and 20 foreign offices or facilities

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in 16 foreign countries around the world. Kroll-O'Gara's principal properties
and facilities as of September 30, 1998 were as follows:

BUILDING
SQUARE
LOCATION FOOTAGE STATUS
-------- -------------- -------------

Fairfield, Ohio............................................. 130,000 owned
Lamballe, France............................................ 125,000 leased
Subic Bay, the Philippines.................................. 85,000 subcontractor
Sao Paulo, Brazil........................................... 50,000 leased
New York, New York.......................................... 36,900 leased
Mexico City, Mexico......................................... 20,000 owned
Washington, D.C. area....................................... n/a leased
San Antonio, Texas.......................................... n/a owned

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 such 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. This facility houses the management, sales and accounting
functions of Labbe. 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.
Labbe has occupied the site since 1948. It currently is leased for a term
expiring in September 2000. For accounting purposes, this is treated as an
operating lease.

Subic Bay, the Philippines. This facility is owned by a subcontractor, but
is supervised by Kroll-O'Gara's personnel and performs installation of armoring
kits engineered in the Fairfield, Ohio facility.

Sao Paulo, Brazil. This facility, which was expanded to include a second
facility on an adjacent location in December 1996, is used for manufacturing and
sales of a full product line of armored commercial vehicles. It currently is
leased for a term expiring in March 2000. For accounting purposes, this lease is
treated as an operating lease.

New York New York. This facility contains executive offices and serves as
the headquarters for Kroll-O'Gara's Investigations and Intelligence Group. The
space is leased for a term expiring in December 2007. For accounting purposes,
this lease is treated as an operating lease.

Mexico City, Mexico. This facility is used for manufacturing and sales of
armored commercial vehicles. The facility currently is installing armoring kits
which have been engineered in the Fairfield, Ohio facility. Kroll-O'Gara expects
the facility to have the capability to build a complete product line once it has
fully trained its production work force.

Washington D.C. area. This facility is used for advanced security training
and includes a portion of an abandoned airport runway that is used specifically
for advanced driver training. The facility is leased for a term expiring in May
1999. 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.

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Kroll-O'Gara's manufacturing capabilities include fully integrated
manufacturing programs which link production control, materials control, quality
control and accounting, thus allowing Kroll-O'Gara to issue work orders, update
and track inventories, implement quality assurance procedures, schedule and
track production and report, on a daily basis, costs accumulated to a job.
Kroll-O'Gara's non-executive offices range from approximately 320 square feet to
approximately 8,800 square feet and are subject to leases expiring through May
2002. Kroll-O'Gara believes that its facilities are adequate for its current
needs and that its properties, including machinery and equipment, are generally
in good condition, well maintained and suitable for intended current and
foreseeable uses.

EMPLOYEES

As of September 30, 1998, Kroll-O'Gara had 1,311 employees (not including
177 temporary employees), comprised of 103 in marketing and sales, 467 in
manufacturing, 376 in professional services, 28 in engineering and 337 in
general and administrative. Kroll-O'Gara's U.S. employees are not represented by
any union and are not covered by any collective bargaining agreements.
Approximately 25 employees of Labbe are employed under agreements with the
Confederation Francaise Democratique du Travail (FTDT). 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 certain data from outside sources, including data
from third party vendors and various government and public record services, in
performing its services. Such utilization is subject to compliance with
applicable law.

As a contractor with agencies of the U.S. Government, Kroll-O'Gara is
obligated to comply with a variety of regulations governing certain aspects of
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 such audits occur routinely. An audit involves a
governmental agency's review of Kroll-O'Gara's compliance with the prescribed
procedures established in connection with the government contract.

Kroll-O'Gara is subject to federal licensing requirements with respect to
the sale in foreign countries of certain of the products of its Security
Products and Services Group. 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 certain 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, including, among others, China, Cuba,
Iran, Iraq, Libya and Syria.

Kroll-O'Gara's foreign operations are subject to the laws and regulations
of the various countries in which they are conducted, including licensing,
labor, environmental and currency control restrictions.

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, that govern activities or operations that may

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have adverse environmental effects, such as discharges to air and water, as well
as handling, storage and disposal practices regarding solid and hazardous
materials, and impose liability for the cost of remediating, and certain 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. Kroll-O'Gara is
implementing recommendations of an environmental consulting company designed to
address certain air pollution, hazardous waste, underground storage tank and
hazard communication matters at its Fairfield, Ohio facility. No notices of
violation have been issued to Kroll-O'Gara by any regulatory agency with respect
to environmental matters which remain uncorrected. Kroll-O'Gara believes that
its potential liability under the environmental laws, if any, would not have a
material adverse effect, individually or in the aggregate, on its results of
operations, financial condition or cash flows.

LEGAL PROCEEDINGS

Kroll-O'Gara is involved in litigation from time to time in the ordinary
course of its business; however, Kroll-O'Gara does not believe that there is any
pending litigation, individually or in the aggregate, that is likely to have a
material adverse effect on its business or financial condition.

PATENTS, TRADEMARKS AND COPYRIGHTS

Kroll-O'Gara currently has four issued U.S. patents relating to its
armoring business. Kroll- O'Gara currently has three federally registered
trademarks and a pending application for a fourth trademark. Kroll-O'Gara has no
federally registered copyrights. Although Kroll-O'Gara does not believe that its
ability to compete in any of its product markets is dependent on its
intellectual property, Kroll-O'Gara does believe that the protection afforded by
its "Armoring Assembly" and "Vehicle Mine Protection Structure" patents, both of
which relate to vehicle underbody blast protection, provides Kroll-O'Gara with
important technological advantages over its competitors. Although Kroll-O'Gara
has protected its technologies to the extent that it believes appropriate, there
can be no assurance that Kroll-O'Gara's measures to protect its proprietary
rights will deter or prevent unauthorized use of Kroll-O'Gara's technologies. In
other countries, Kroll-O'Gara's proprietary rights may not be protected to the
same extent as in the United States.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information as of September 30, 1998
concerning each of Kroll-O'Gara's executive officers and directors:

NAME AGE POSITION
---- --- --------

Jules B. Kroll............................ 57 Chairman of the Board, Chief Executive
Officer and Director
Thomas M. O'Gara.......................... 47 Vice Chairman of the Board and Director
Wilfred T. O'Gara......................... 41 President, Chief Operating Officer and
Director
Nicholas P. Carpinello.................... 48 Controller and Treasurer
Michael G. Cherkasky...................... 48 Chief Operating Officer -- Investigations
and Intelligence Group and Director
Marshall S. Cogan......................... 61 Director
Abram S. Gordon........................... 35 Vice President, General Counsel and
Secretary
Michael J. Lennon......................... 42 Chief Operating Officer -- Security
Products and Services and Director
Raymond E. Mabus.......................... 49 Director
Nazzareno E. Paciotti..................... 52 Chief Financial Officer
Hugh E. Price............................. 61 Director
Jerry E. Ritter........................... 63 Director
William S. Sessions....................... 68 Director
Howard I. Smith........................... 53 Director

Jules B. Kroll has been Chairman of the Board and Chief Executive Officer
of Kroll-O'Gara since the KHI merger on December 1, 1997. He founded Kroll in
1972 and has been the Chairman of the Board and Chief Executive Officer of Kroll
and KHI since their foundings. Mr. Kroll also is a director of United Auto
Group, Inc. He has been a director of Kroll-O'Gara since December 1997.

Thomas M. O'Gara has been Vice Chairman of the Board of Kroll-O'Gara since
the KHI merger. He served as Chairman of the Board of Kroll-O'Gara from August
1996 until December 1997. Mr. O'Gara has also been Chairman of the Board of OHE
since 1990 and was OHE's Chief Executive Officer from 1990 until 1995. He has
been a director of Kroll-O'Gara since August 1996 and a director of OHE since
1988. Mr. O'Gara has held numerous executive officer and director positions with
Kroll-O'Gara, its subsidiaries and its predecessors since 1975. From 1984 until
1986, Mr. O'Gara also was Honorary Consul General for the Sultanate of Oman.
Thomas M. O'Gara and Wilfred T. O'Gara are brothers.

Wilfred T. O'Gara is President and Chief Operating Officer of Kroll-O'Gara.
He served as Kroll-O'Gara's Chief Executive Officer from August 1996 until the
KHI merger. Mr. O'Gara has been associated with Kroll-O'Gara, its subsidiaries
and its predecessors since 1983 and has held numerous executive officer and
director positions, including serving as Chief Executive Officer of OHE since
January 1996, President and Chief Operating Officer of OHE from 1991 through
1995 and Vice President -- Sales and Marketing of OHE from 1988 until 1991. Mr.
O'Gara has been a director of Kroll-O'Gara since August 1996 and a director of
OHE since 1991.

Nicholas P. Carpinello has been Controller and Treasurer of Kroll-O'Gara
since the KHI 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
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been associated with Kroll-O'Gara and its predecessors since 1984. From 1975
until 1984, he was employed by Arthur Andersen LLP where he served as a manager
in the audit and small business consulting divisions.

Michael G. Cherkasky became Chief Operating Officer of Kroll-O'Gara's
Investigations and Intelligence Group in December 1997. Prior to the KHI merger
he had been an Executive Managing Director of KHI since April 1997 and Chief
Operating Officer of KHI since January 1997. From November 1995 to January 1997,
he was the head of KHI's North American Region and from February 1994 to
November 1995 he was the head of KHI's Monitoring Group. From June 1993 to
November 1993, Mr. Cherkasky was a candidate for public office. From 1978 to
June 1993, Mr. Cherkasky was with the District Attorney's office for New York
County, his last position being Chief of the Investigation Division. He became a
director of Kroll-O'Gara in December 1997.

Marshall S. Cogan has been Vice Chairman of Foamex International, Inc., a
manufacturer of polyurethane foam products, since May 1997 and Chairman and
Chief Executive Officer of United Auto Group, a franchisor of car and light
truck dealerships, since April 1997. Mr. Cogan was Chairman of the Board and
Chairman of the Executive Committee of Foamex International from 1993 until 1997
and was Chief Executive Officer of Foamex International from 1994 until 1997.
Since 1974, Mr. Cogan has been the principal shareholder, Chairman or
Co-Chairman of the Board of Directors, and Chief Executive Officer or Co-Chief
Executive Officer, of Trace International Holdings, Inc., a holding company
operating businesses in the auto sales, foam, textile and publishing industries.
Mr. Cogan has been a director of Kroll-O'Gara since December 1997.

Abram S. Gordon is Vice President, General Counsel and Secretary of
Kroll-O'Gara. Prior to joining Kroll-O'Gara in January 1997, he was with the law
firm of Taft, Stettinius & Hollister LLP, Cincinnati, Ohio, from October 1987
until December 1996.

Michael J. Lennon became Chief Operating Officer of Kroll-O'Gara's Security
Products and Services Group in December 1997. He also has been the President and
Chief Operating Officer of OHE since January 1996. Mr. Lennon joined OHE in
February 1994 as Manager of Commercial and Military Programs; he became Vice
President for Sales, Marketing and Program Management in October 1994 and served
OHE in that capacity through 1995. Prior to joining OHE, Mr. Lennon had 15
years' experience in 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 currently of counsel to the law firm of Baker,
Donaldson, Bearman and Caldwell and 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 KHI merger. Prior to the KHI merger he had been the Chief Financial
Officer of KHI since 1992. From 1990 to 1992, he was a Managing Director and the
Controller of the Henley Group (the parent of PneumoAbex Inc. and Fisher
Scientific, a laboratory supply company) and from 1988 to 1990, he was a Vice
President and the Controller of PneumoAbex Inc., an aerospace contractor
specializing in the manufacture of landing gear and flight actuating systems.

Hugh E. Price is engaged in business development activities for
Kroll-O'Gara. During 1995 and 1996, prior to joining Kroll-O'Gara, he was a
consultant to various businesses and organizations. Until his retirement in
1995, Mr. Price had been employed by the Central Intelligence Agency since 1964.
His

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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.

Howard I. Smith has been Executive Vice President, Chief Financial Officer
and Comptroller of AIG since 1996. From 1984 until 1996, Mr. Smith was Senior
Vice President and Comptroller of AIG. From 1975 until 1984 Mr. Smith was a
partner in the independent public accounting firm of Coopers & Lybrand. Mr.
Smith also is a director of AIG, 20th Century Industries, International Lease
Finance Corporation and Transatlantic Holdings, Inc. He became a director of
Kroll-O'Gara in December 1997.

Directors of Kroll-O'Gara are elected annually. Officers of Kroll-O'Gara
are elected annually and serve at the discretion of the Board of Directors.

EXECUTIVE COMPENSATION AND OTHER INFORMATION

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 (i) Jules B. Kroll and Wilfred T. O'Gara,
each of whom served as Chief Executive Officer of Kroll-O'Gara for a portion of
1997, (ii) Michael G. Cherkasky and Nazzareno E. Paciotti, who became executive
officers at the time of the Merger, and (iii) each of Kroll-O'Gara's four other
most highly compensated executive officers who received compensation in excess
of $100,000 during 1997. These persons are sometimes referred to as the "named
executive officers."

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SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------
-------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL RESTRICTED STOCK
COMPEN- STOCK OPTION ALL OTHER
NAME AND SALARY BONUS SATION AWARD GRANTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
------------------ ---- ------- ------ ------- ---------- ---------- ------------

Jules B. Kroll(1) 1997 489,583 -- -- -- -- 32,965(2)
Chairman and Chief 1996 500,000 75,000 -- -- -- 31,715
Executive Officer 1995 500,000 -- -- -- -- 30,395

Thomas M. O'Gara 1997 252,083 -- -- -- 23,150 4,568(3)
Vice Chairman 1996 379,081 7,000 -- -- -- 4,912
1995 410,631 -- -- -- -- 1,218

Wilfred T. O'Gara 1997 240,000 45,000 -- -- 98,150 4,898(3)
President and Chief 1996 200,231 45,000 -- -- 17,000 4,240
Operating Officer 1995 140,550 -- -- -- -- 462

Michael G. Cherkasky(1) 1997 400,000 -- -- 1,904,578 25,000 28,914(2)
Chief Operating Officer -- 1996 300,000 75,000 898 -- 68,647 26,767
Investigations and 1995 260,000 -- 898 -- 21,882 25,971
Intelligence Group

Michael J. Lennon 1997 148,333 70,000 -- -- 20,000 5,401(3)
Chief Operating Officer -- 1996 128,334 60,317 -- -- 17,000 4,258
Security Products and 1995 89,977 20,000 -- -- -- 277
Services Group

Nazzareno E. Paciotti(1) 1997 275,520 66,667 -- 229,714 15,000 26,984(2)
Chief Financial Officer 1996 225,520 50,000 -- -- 68,647 24,984
1995 225,520 -- -- -- 21,882 22,797

Gary W. Allen(1) 1997 116,666 60,000 -- -- 4,000 6,063(3)
Vice President, OHE 1996 100,666 47,784 -- -- 15,000 3,817
1995 88,239 -- -- -- -- 414

Richard L. Curotto(1) 1997 110,000 35,000 -- -- 3,000 9,006(3)
Vice President, OHE 1996 100,833 47,392 -- -- 15,000 8,184
1995 98,433 17,000 -- -- -- 2,223

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

(1) Messrs. Kroll, Cherkasky and Paciotti were unaffiliated with Kroll-O'Gara
prior to the KHI merger on December 1, 1997; however, their compensation
information is given on a pooling of interests basis, as if they had been
executive officers of Kroll-O'Gara throughout the periods presented. Messrs.
Allen and Curotto served as executive officers of Kroll-O'Gara until the KHI
merger; their 1997 information includes compensation for the entire year.

(2) Represents pension contributions and profit-sharing contributions of $20,000
and $500, respectively, for each person and supplemental disability plan
benefits of $12,465 for Mr. Kroll, $8,414 for Mr. Cherkasky and $6,484 for
Mr. Paciotti.

(3) Represents profit-sharing contributions to Kroll-O'Gara's 401(k) Plan of
$1,218 for Mr. Thomas M. O'Gara, $714 for Mr. Wilfred T. O'Gara, $714 for
Mr. Lennon, $602 for Mr. Allen and $2,520 for Mr. Curotto and executive
disability insurance plan benefits of $3,350 for Mr. Thomas M. O'Gara,
$4,184 for Mr. Wilfred T. O'Gara, $4,687 for Mr. Lennon, $5,461 for Mr.
Allen and $6,486 for Mr. Curotto.

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EMPLOYMENT AGREEMENTS

Commencing December 1, 1997, Kroll-O'Gara has employment agreements, or
amendments to existing employment agreements, which expire on November 30, 2000,
with each of Messrs. Kroll, Thomas M. O'Gara, Wilfred T. O'Gara, Lennon,
Paciotti, Nicholas P. Carpinello and Abram S. Gordon, providing for annual base
salaries in the respective amounts set forth in the table below. Each executive
officer, including Mr. Cherkasky (who does not have an employment agreement),
also is entitled to participate in an annual bonus plan established by the
Compensation Committee of the Board and to receive up to 50% of such bonus in
shares of Kroll-O'Gara's Common Stock. Pursuant to these employment agreements,
employment may be terminated by Kroll-O'Gara at any time with or without cause,
except that, in a case of termination without cause, the employee is entitled to
receive compensation for the greater of the balance of the term of the agreement
or one year. The agreements also provide that if Kroll-O'Gara does not renew the
agreement for one year or more at the end of the term, the employee will receive
an amount equal to one year's base salary. Each employment agreement restricts
the executive officer from competing with Kroll-O'Gara during the term of the
agreement, and for two years thereafter if termination of employment is for
cause or at the volition of the employee. Each of Messrs. Thomas M. and Wilfred
T. O'Gara has further agreed that during his employment and for a period of 10
years thereafter he will not directly or indirectly own any interest in or
perform any services for any entity which uses the word "O'Gara" as a business
or trade name and competes with Kroll-O'Gara. Additionally, Mr. Kroll has agreed
that during his employment with Kroll-O'Gara 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. Mr. Cherkasky's base salary, as established by
Kroll-O'Gara's Board of Directors, also is listed below. Additionally, at the
time of the KHI merger, the executive officers were granted options to purchase
shares of Kroll-O'Gara's Common Stock, in the amounts listed below; each option
has an exercise price equal to 100% of the fair market value of the Common Stock
on December 1, 1997 (i.e., $17.25 per share).

OPTIONS TO PURCHASE
SHARES
NAME BASE SALARY OF COMMON STOCK
---- ----------- -------------------

Jules B. Kroll............................................ $375,000 -0-
Thomas M. O'Gara.......................................... 275,000 -0-
Wilfred T. O'Gara......................................... 350,000 75,000
Michael G. Cherkasky...................................... 400,000 25,000
Michael J. Lennon......................................... 185,000 15,000
Nazzareno E. Paciotti..................................... 275,000 15,000
Nicholas P. Carpinello.................................... 140,000 10,000
Abram S. Gordon........................................... 135,000 10,000

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STOCK OPTIONS

The following table presents information on option grants to the named
executive officers during 1997 pursuant to Kroll-O'Gara's 1996 Stock Option
Plan. The Plan does not provide for the grant of stock appreciation rights.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
--------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS EXERCISE FOR
OPTIONS GRANTED TO OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ---------- ---------- -------- ----------

Jules B. Kroll................ -- -- -- -- -- --
Thomas M. O'Gara.............. 23,150 4.8 12.10 3/24/07 176,163 446,431
Wilfred T. O'Gara............. 23,150 4.8 11.00 3/24/07 160,148 405,847
75,000 15.6 17.25 12/01/07 813,632 2,061,404
Michael G. Cherkasky.......... 25,000 5.2 17.25 12/01/07 271,211 687,301
Michael J. Lennon............. 5,000 1.0 11.00 3/24/07 34,589 87,656
15,000 3.1 17.25 12/01/07 162,726 412,381
Nazzareno E. Paciotti......... 15,000 3.1 17.25 12/01/07 162,726 412,381
Gary W. Allen................. 4,000 0.8 11.00 3/24/07 27,671 70,125
Richard L. Curotto............ 3,000 0.6 11.00 3/24/07 20,754 52,594

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

(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.

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With respect to each named executive officer, the following table sets
forth information concerning unexercised stock options held at December 31,
1997. No options were exercised during 1997.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES

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

Jules B. Kroll................ -- -- -- --
Thomas M. O'Gara.............. -- -- 7,716/15,434 42,631/85,273
Wilfred T. O'Gara............. -- -- 24,716/90,434 197,744/130,375
Michael G. Cherkasky.......... -- -- 90,529/25,000 1,290,776/9,375
Michael J. Lennon............. -- -- 18,666/18,334 157,662/27,713
Nazzareno E. Paciotti......... -- -- 90,529/15,000 1,290,776/5,625
Gary W. Allen................. -- -- 16,333/ 2,667 138,206/17,669
Richard L. Curotto............ -- -- 16,000/ 2,000 136,000/13,250

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 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.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In connection with its initial public offering, the Board of Directors of
Kroll-O'Gara 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.

Described below are certain transactions and relationships between
Kroll-O'Gara and certain of its officers, directors and shareholders which have
occurred during the last three fiscal years. Except with respect to interest
rates charged on certain of the intercompany notes and accounts
payable/receivable, Kroll-O'Gara believes that the material terms of the various
transactions were as favorable as could have been obtained from unrelated third
parties.

GENERAL

Prior to October 28, 1996, Kroll-O'Gara's business was conducted by a group
of companies affiliated by substantially common ownership and control. The
armoring business was carried out

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primarily by OHE. Certain foreign armoring operations, and foreign sales for
OHE, were carried out by Overseas Limited (formerly O'Gara-Hess & Eisenhardt
Armoring Company, Limited), an Irish corporation ("Limited"), and its
subsidiaries. Satellite communications operations were carried out by O'Gara
Satellite Networks Limited, an Irish corporation ("OSN"), and OSN, Inc., a
Delaware corporation. On October 28, 1996, certain of these companies and their
businesses were reorganized and combined (the "Reorganization").

Longline Leasing, Inc. and Excel Armor Products, Inc. (together
"Longline/Excel"), each a Delaware corporation, merged as of December 31, 1996;
Messrs. Thomas M. O'Gara, Wilfred T. O'Gara and Carpinello own approximately
92%, 1% and 1%, respectively, of the outstanding capital stock of
Longline/Excel.

LONGLINE LEASING/EXCEL ARMOR

Lease agreements. OHE has a Master Equipment Lease with Longline/Excel,
entered into in July 1995, pursuant to which OHE leases various items of
equipment from Longline/Excel. As of December 31, 1997, OHE had approximately
$1,250,000 of equipment under lease for 12 and 36-month terms, beginning on
various dates between July 1995 and April 1996. Rental expenses were $17,000,
$381,446 and $396,005 for the years ended December 31, 1995, 1996 and 1997,
respectively.

Supplier arrangements. During 1995 and 1996, OHE purchased the dual-hard
steel required for certain aspects of its vehicle armoring from Longline/Excel,
which distributed the steel for an unrelated third party. Purchases by OHE from
Longline/Excel were $520,700 and $960,231 during 1995 and 1996, respectively,
and accounted for 90% and 99% of Longline/Excel's sales revenues for the same
periods. In connection with these purchases, OHE advanced $160,390 to
Longline/Excel during 1995 to fund Longline/Excel's initial purchase commitments
and guaranteed a $150,000 letter of credit furnished by Longline/Excel to the
third party. OHE now purchases its dual-hard steel directly from the third
party. At December 31, 1996 and 1997, OHE had receivables of $210,659 and
$282,345, respectively, from Longline/Excel in connection with the prior
arrangement, which sum is guaranteed by the shareholders of Longline/Excel. All
other aspects of the arrangement have been terminated. Also, in August 1995,
Longline/Excel and OHE entered into an agreement under which OHE manufactured
certain parts needed by Longline/Excel in connection with a contract with a
third party. Total revenue recognized in 1995 and 1996 in association with this
contract was $113,000.

Corporate aircraft. In February 1995, OHE entered into a lease for a
Gulfstream G-II aircraft owned by Longline/Excel. The Gulfstream aircraft was
purchased by Longline/Excel for a price of $4,060,000 (represented by an
exchange of a prior jet leased by Kroll-O'Gara from Longline/Excel and new
financing). In connection with the cancellation of the prior jet's lease,
$400,493, representing the unamortized portion of OHE's $504,000 deposit on that
lease, was transferred as the deposit on the Gulfstream lease. As amended in
August 1996, the Gulfstream lease has provided for minimum lease payments of
$35,200 per month, allowed OHE 23 hours of usage per month and provided for
charges of $1,500 per hour thereafter. Rental expense related to the Gulfstream
lease (including amortization of the deposit) was $414,160, $422,349 and
$233,939 for 1995, 1996 and 1997, respectively. Additionally, Kroll-O'Gara paid
Longline/Excel $327,000 in 1996 and $576,000 in 1997 relating to usage of the
aircraft in connection with the initial public offering and the merger with KHI.
Kroll-O'Gara believes that these rates were equivalent to those charged by
Longline/Excel to other unrelated companies for similar services and compared
favorably to rates charged by another unrelated charter service for similar
aircraft.

Kroll-O'Gara has reached agreement with Longline/Excel to terminate the
aircraft lease as of July 1, 1998. Commencing July 1, 1998, Longline/Excel will
provide OHE a $700 per hour discount, to

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a maximum of 604 hours, on Longline/Excel's normal commercial rates. This
discount will end on July 1, 2003, irrespective of whether the 604 hours have
been utilized. The discount will be used to amortize the remaining portion of
the OHE's deposit under the lease, as well as unused prepaid hours of usage of
the plane, which together aggregate $422,556.

INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE AND CERTAIN LOANS

OHE held promissory notes, for money borrowed, in the principal amounts of
$100,000 and $130,000 from Mr. Thomas M. O'Gara. Each note bore interest at the
rate of 8.75% per annum and was due on December 31, 1996. In December 1996, Mr.
O'Gara repaid in full the $251,834 of principal and accrued interest outstanding
under these notes. Mr. Thomas M. O'Gara also was indebted, for money borrowed,
to OHE in the amount of $242,242, not represented by a promissory note. As of
December 31, 1997, $120,191 of this indebtedness remained outstanding; the full
amount outstanding was repaid in June 1998.

OSN held a promissory note, for money borrowed, from Excel Metal Products,
Inc. ("Excel Metal"), a corporation wholly owned by Mr. Thomas M. O'Gara, in the
principal amount of $310,000, which bore interest at the rate of 8.5% and was
due on February 11, 1997. All principal and accrued interest outstanding
pursuant to this note, totalling $331,224, was repaid in December 1996.

During 1995 and 1996, OHE paid Silver Springs Land and Cattle Company, a
Nevada corporation of which Mr. Thomas M. O'Gara is the President and sole
shareholder, $11,082 and $3,177, respectively, for the use of its facilities for
corporate meetings. The use of these facilities by Kroll-O'Gara has been
discontinued.

Until the Reorganization, OHE held a 49% beneficial interest in O'Gara
Overseas Services, S.A., a Swiss corporation ("OOS"), with the remaining 51%
held by Limited. As part of the Reorganization, OHE's interest in OOS was
exchanged for certain assets and liabilities of Limited, with the result being
that OOS is no longer affiliated with Kroll-O'Gara. In addition, OHE fulfilled a
demand note, bearing interest at 3% per annum, that had been outstanding with
OOS in the amount of $90,930, which represented $88,685 in principal and $2,245
in interest. Also, subsequent to the Reorganization, Mr. Thomas M. O'Gara made
full payment on a 3% promissory note, which totalled $302,803 including
interest, held by OOS. OOS also had provided sales and marketing services for
OHE and OSN. During 1995 and 1996, $377,144 and $363,583, respectively, were
paid to OOS for these services. All arrangements with OOS were terminated in
connection with the Reorganization.

From its incorporation in 1988 until 1996, O'Gara Protective Services, a
Nevada corporation ("OPS") in which the former shareholders of OHE (including
Messrs. Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello and Curotto) previously
owned approximately a 47% interest, but which was and is controlled by Mr.
Edward F. O'Gara, the brother of Messrs. Thomas M. and Wilfred T. O'Gara, was
provided certain medical and general liability insurance coverage under OHE's
insurance policies. These insurance programs were paid for by OPS through
monthly and annual premiums established by OHE's insurance provider. These
arrangements were terminated upon the consummation of Kroll-O'Gara's initial
public offering.

Immediately prior to the KHI merger, KHI owed $6,349,813 to Mr. Kroll,
representing unpaid principal of $4,761,958 and accrued interest of $242,356 on
open account advances and loans which had been made by him to KHI from time to
time since 1989. An additional $286,308 previously had been repaid. Also
immediately prior to the KHI merger, Mr. Kroll owed KHI $1,420,756, representing
aggregate borrowings from KHI of $1,345,499 plus $75,257 in accrued interest. Of
the outstanding principal amounts, $4,380,849 owed by KHI to Mr. Kroll and
$748,000 owed by Mr. Kroll to KHI bore interest at an annual rate equal to the
prime rate plus 1%, $1,129,109 owed by KHI to Mr. Kroll bore

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interest at an annual rate equal to the brokers' loan rate (7.625% at December
1, 1997) and $597,499 owed by each of KHI and Mr. Kroll to the other bore
interest at an annual rate of 7% (equal to the prime rate at the date of the
loan plus 1%). Immediately prior to the KHI merger, the principal and accrued
interest on all outstanding loans from KHI to Mr. Kroll were repaid in full and
loans (plus all accrued interest) from Mr. Kroll to KHI were repaid to the
extent of the amounts owed to KHI by Mr. Kroll. The remaining amount owed Mr.
Kroll is represented by a promissory note, issued by a subsidiary of KHI at the
time of the KHI merger, in the principal amount of $309,500, bearing interest at
an annual rate 1/2% below the prime rate. Also, upon consummation of the KHI
merger, all $6,040,313 of principal and accrued interest owed by KHI to Mr.
Kroll for open account advances was repaid.

In July 1995 AIG loaned $2,000,000 to KHI. These loans were evidenced by
demand promissory notes bearing interest at an annual rate equal to the Citibank
N.A. base rate in effect from time to time plus 2%. As of December 1, 1997,
principal and accrued interest in the aggregate amount of $2,035,583 was
outstanding under these notes. These notes were repaid in full upon the
consummation of the KHI merger.

During 1995, 1996 and 1997, 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 $3,868,967,
$5,325,559 and $6,412,244 in 1995, 1996 and 1997, respectively, for such
services. Included in the 1996 and 1997 amounts are payments pursuant to an
agreement under which Kroll-O'Gara provides certain AIG subsidiaries with crisis
management and marketing services through November 30, 1998. The agreement
provides for an annual retainer ($2,288,640 for 1997), subject to certain
adjustments, and is payable quarterly in advance. The accounts receivable
balance for AIG was $897,361 at December 31, 1997. Since 1995, Kroll-O'Gara has
purchased certain 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 $485,807, $824,348 and
$814,154 for this insurance during 1995, 1996 and 1997, respectively.
Kroll-O'Gara obtains the coverage through an independent insurance broker and
where possible obtains competitive proposals from unrelated third parties.

BUILDING LEASE

OLG, Limited, an Ohio limited liability company of which Messrs. Thomas M.
O'Gara, Wilfred T. O'Gara, Allen, Carpinello, Curotto and Lennon own
approximately 91%, 5%, 1%, 1%, 1% and 1% of the outstanding capital stock, was
formed in March 1996 for the purpose of acquiring and leasing to OHE a facility
located at 4175 Mulhauser Road, Fairfield, Ohio. The building was purchased for
approximately $1.8 million and was leased to OHE for one year, ending March 31,
1997, for $468,000 (plus taxes, insurance and maintenance costs). OHE exercised
an option to renew the lease, at a base rent of $21,000 per month, through July
1997. Since August 1997, OHE has continued to utilize the facility on a month to
month basis. In August 1998, OLG, Limited sold the building to an unrelated
third party. OHE continues to lease the building from the third party.

CONSULTING AGREEMENTS

Excel Metal. OSN, Inc. had a consulting agreement with Excel Metal pursuant
to which Excel Metal provided management consulting services to OSN, Inc. during
calendar year 1996 for a fee of $6,000 per month plus reimbursement of expenses.
The arrangement terminated upon consummation of Kroll-O'Gara's initial public
offering.

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William S. Sessions. From time to time, Mr. Sessions has provided
consulting services to Kroll-O'Gara or OHE. During 1995, 1996 and 1997, he
received $25,000, $5,000 and $7,500, respectively, for sales development
assistance related to OHE's commercial armored products.

Neil P. Saldin. Mr. Saldin was an executive officer of Kroll-O'Gara until
June 30, 1997. Prior to becoming an executive officer of Kroll-O'Gara, Mr.
Saldin was a consultant to OSN from October 1994 through September 1995. The
consulting services, which were managerial and related to the start up of OSN's
operations, were provided through a company controlled by Mr. Saldin, which was
paid $180,000.

Edward F. O'Gara. In 1995 and 1996, OHE guaranteed certain consulting
agreements between Longline/Excel and Cirrus Systems, Inc., a Delaware
corporation owned by Mr. Edward F. O'Gara. Such agreements were for one year
terms for a total of $120,000 per year and expired December 31, 1996. Mr. Thomas
M. O'Gara has agreed to indemnify OHE for any claims made under such guarantees.

EXERCISE OF STOCK OPTIONS AND SALE OF SHARES

On August 23, 1996, Messrs. Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello
and Curotto exercised options previously granted on December 31, 1993 to
purchase 138, 131, 91 and 85 shares of the common stock of OHE, respectively, at
a price of $1.00 per share. Giving effect to the Reorganization, the
corresponding numbers of shares of Common Stock of Kroll-O'Gara were 37,667,
35,756, 24,838 and 23,201, respectively, at a price of $0.0037 per share.

On August 23, 1996, Mr. Thomas M. O'Gara sold 10 shares of the common stock
of OHE to Mr. Carpinello for a price of $468.00 per share (equivalent to 2,730
shares of Common Stock of Kroll-O'Gara for a price of $1.71 per share).
Kroll-O'Gara incurred a non-recurring, non-cash expense of approximately $19,890
in the fourth quarter of 1996 in connection with this sale. This expense
resulted in a corresponding increase in additional paid-in capital, and no
change in total shareholders' equity. This expense was not tax deductible and
represented the difference between the net offering price and the net sales
price of these shares as if issued directly by Kroll-O'Gara.

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PRINCIPAL SHAREHOLDERS AND HOLDINGS OF MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of Kroll-O'Gara's Common Stock on September 30, 1998 by (i) each
beneficial owner of more than five percent of the Common Stock, (ii) each
director and named executive officer individually, and (iii) all directors and
executive officers of Kroll-O'Gara 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.

BENEFICIAL
OWNERSHIP(1)
---------------------
NAME NUMBER PERCENT
---- --------- --------

Jules B. Kroll(2)(3)........................................ 2,879,991 16.7
Thomas M. O'Gara(2)......................................... 2,425,935 14.0
Wilfred T. O'Gara........................................... 253,146 1.5
Gary W. Allen(4)............................................ 18,768 *
Michael G. Cherkasky........................................ 153,939 *
Marshall S. Cogan........................................... -- --
Richard L. Curotto(4)....................................... 41,087 *
Michael J. Lennon........................................... 21,741 *
Raymond E. Mabus............................................ 2,000 *
Nazzareno E. Paciotti....................................... 103,845 *
Hugh E. Price............................................... 17,500 *
Jerry E. Ritter............................................. 2,000 *
William S. Sessions......................................... 2,000 *
Howard I. Smith(2)(5)....................................... 1,444,212 8.4
All directors and current executive officers as a group
(14 persons)(4)(6)........................................ 7,384,608 42.0
American International Group, Inc.(2)....................... 1,444,212 8.4

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

* Less than 1% of the outstanding Common Stock.

(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 September 30,
1998: Mr. Kroll, none; Mr. Thomas M. O'Gara, 7,716 shares; Mr. Wilfred T.
O'Gara, 19,716 shares; Mr. Allen, 16,333 shares; Mr. Cherkasky, 90,529
shares; Mr. Cogan, none; Mr. Curotto, 16,000 shares; Mr. Lennon, 18,666
shares; Mr. Mabus, 2,000 shares; Mr. Paciotti, 90,529 shares; Mr. Price,
17,500 shares; Mr. Ritter, 1,000 shares; Mr. Sessions, 2,000 shares; Mr.
Smith, none; and all directors and current executive officers as a group,
270,989 shares.

(2) Mr. Kroll's address is 900 Third Avenue, New York, New York 10022. Mr.
O'Gara's address is 9113 LeSaint Drive, Fairfield, Ohio 45014. Mr. Smith's
and AIG's address is 70 Pine Street, New York, New York 10270.

(3) Does not include 192,561 shares held by trusts for the benefit of Mr.
Kroll's adult children, in which Mr. Kroll disclaims any beneficial
interest.

(4) Messrs. Allen and Curotto ceased to be executive officers of Kroll-O'Gara on
December 1, 1997. Their shares are not included in those listed as held by
all directors and current executive officers as a group.

(5) Consists of 1,444,212 shares held by AIG. Mr. Smith disclaims any beneficial
interest in these shares.

(6) Includes 1,444,212 shares held by AIG which are deemed to be owned by Mr.
Smith and in which he disclaims any beneficial interest.

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LABORATORY SPECIALISTS OF AMERICA, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and notes thereto of Laboratory Specialists appearing elsewhere in
this Proxy Statement/Prospectus.

GENERAL

Laboratory Specialists, through its wholly-owned subsidiary, Laboratory
Specialists, Inc. ("LSI"), owns and operates an independent laboratory providing
drug testing services to corporate and institutional clients seeking to detect
and deter the use of illegal drugs. The drug testing market is in an expansion
mode in part due to the recent adoptions of additional Department of
Transportation regulations, which became effective in 1995, that substantially
expanded the previous regulations which mandated random drug testing of workers,
especially in such safety-sensitive jobs such as trucking, aviation, railroads
and pipelines. Under these regulations, 50 percent of transportation workers
(mass-transit workers and interstate truckers and bus drivers) will be required
to be tested annually.

LSI is certified by the Substance Abuse and Mental Health Services
Administration ("SAMHSA"), a federal agency and regulatory successor to the
National Institute on Drug Abuse ("NIDA"), to conduct drug testing using legally
defensible (forensic) procedures required for legal defensibility of test
results. The essential elements of these procedures are a secure
chain-of-custody for each specimen from collection to the reporting of test
results and accurate and reliable testing in which a second independent test is
performed to confirm each positive test result. The drug testing services
offered by LSI also include assisting clients with the development of drug
testing programs, training client personnel, managing specimen collection,
arranging for transportation of specimens to LSI's laboratory, identifying
trends in local and national drug use, interpreting test results, and providing
expert testimony concerning challenged test results. All of these services are
customized to the individual needs of the clients to assist in the
implementation and cost-effective maintenance of test programs.

BACKGROUND

Peterson Share Exchange. In April 1994, LSI issued 706,244 shares of LSI
Preferred Stock to MBf USA, Inc. ("MBf USA") with a stated value of $1.00 per
share, and pursuant to a Stock Exchange Agreement, MBf USA transferred to Arthur
R. Peterson, Jr. all of the outstanding common stock of LSI in exchange for
1,300,000 shares of the common stock of MBf USA (having a market value of
$1,178,125), and, effective February 23, 1994, LSI issued a promissory note (the
"MBf USA Promissory Note") in the principal amount of $353,123 to MBf USA, which
resulted in LSI ceasing to be a wholly-owned subsidiary of MBf USA (the
"Peterson Share Exchange"). The MBf Promissory Note bore interest at the rate of
seven percent per annum and was due and payable on February 23, 1999. It was
repaid in full during the first quarter of 1998. The acquisition of the LSI
common stock by Mr. Peterson was accounted for under the purchase method of
accounting. The purchase price exceeded the fair market value of the net
tangible assets of LSI by approximately $1,565,000 and represented a material
payment for goodwill, an intangible asset, which is being amortized over 40
years.

LSI Acquisition. Pursuant to an Exchange Agreement dated June 30, 1994,
Arthur R. Peterson, Jr. exchanged the outstanding common stock of LSI for
1,000,000 shares of Laboratory Specialists Common Stock and 300,000 shares of
Laboratory Specialists Series I Preferred Stock, and MBf USA exchanged the LSI
Preferred Stock for 239,405 shares of Laboratory Specialists Common Stock (the
"LSI Acquisition"). As a result of the LSI Acquisition, LSI became a
wholly-owned subsidiary of Laboratory Specialists on July 8, 1994. The LSI
Acquisition was accounted for as a reverse acquisition

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of Laboratory Specialists by LSI. On July 10, 1995, the Laboratory Specialists
Series I Preferred Stock was redeemed by Laboratory Specialists in full and
ceased to be issued and outstanding.

Private Placement and Prior Operations of Laboratory Specialists. Prior to
the LSI Acquisition, the operations of Laboratory Specialists were limited to
completion of a private placement of 150,000 shares of its Common Stock for net
proceeds of approximately $145,000 and the operations associated with the LSI
Acquisition.

Initial Public Offering. On October 11, 1994, Laboratory Specialists
completed its offering of 1,320,000 shares of Laboratory Specialists Common
Stock and 660,000 warrants (the "1994 Warrants") in units of two shares of
Laboratory Specialists Common Stock and one 1994 Warrant at a price of $5.49 per
unit, which represented a 10 percent discount of the public offering price of
$6.10 per unit (the "IPO Offering"). The proceeds after offering expenses to
Laboratory Specialists were $3,261,660. As a portion of underwriting
compensation, Laboratory Specialists issued to Barron Chase Securities, Inc. and
its designees warrants (the "Barron Chase Group Warrants") exercisable for the
purchase of 66,000 units for $7.32 per unit on or before October 11, 1999. As of
September 1, 1998, the outstanding Barron Chase Group Warrants are exercisable
for the purchase of 34,000 units (68,000 shares of Laboratory Specialists Common
Stock).

NDAC Asset Purchase. On December 1, 1994, Laboratory Specialists acquired
from National Drug Assessment Corporation ("NDAC") certain intangible assets
pursuant to an Asset Purchase Agreement, dated November 30, 1994, ("NDAC Asset
Purchase"). The assets purchased included the customer list of NDAC and certain
other intangible assets (the "NDAC Purchased Assets"). In connection with the
acquisition of the NDAC Purchased Assets, Laboratory Specialists (i) paid
$750,000 and issued and delivered 189,000 shares of Laboratory Specialists
Common Stock and (ii) assumed the obligations of NDAC under an office lease
agreement. The $1,070,940 purchase price of the NDAC Purchased Assets was
allocated entirely to the customer list, which was recorded as an intangible
asset, which is being amortized over 15 years.

NPLI Acquisition. On January 2, 1996, Laboratory Specialists acquired all
of the issued and outstanding capital stock (the "NPLI Stock") of National
Psychopharmacology Laboratory, Inc., a Tennessee corporation ("NPLI"), and
purchased goodwill (the "NPLI Goodwill"), pursuant to a Stock Purchase Agreement
dated January 1, 1996 (the "NPLI Purchase Agreement"), and NPLI became a
wholly-owned subsidiary of Laboratory Specialists. NPLI was engaged in forensic
drug testing and clinical testing and analysis.

Pursuant to the NPLI Purchase Agreement, Laboratory Specialists agreed to
pay (i) $1,585,000 for the NPLI Stock (the "NPLI Stock Purchase Price") of which
$1,075,000 was paid at closing to the shareholders of NPLI (the "NPLI
Shareholders"), two unsecured promissory notes (the "NPLI Promissory Notes"), in
the aggregate adjusted face value of $510,000, were issued and delivered to the
NPLI Shareholders, and NPLI conveyed to the NPLI shareholders an office building
and NPLI's leasehold interest in the real property on which the office building
is located and affixed at an agreed market value of $75,000, and (ii) $140,000
for the NPLI Goodwill payable in 24 monthly installments commencing on February
1, 1996.

Pursuant to the NPLI Purchase Agreement, the aggregate principal amount of
the NPLI Promissory Notes was reduced to $510,000 effective January 2, 1996,
further reduced by principal payments, and pursuant to a Settlement Agreement
and General Release dated August 25, 1997, Laboratory Specialists issued and
delivered to the former NPLI shareholders 103,333 shares of Laboratory
Specialists Common Stock on August 28, 1997, in full payment and elimination of
the NPLI Promissory Notes. Furthermore, pursuant to the NPLI Purchase Agreement,
(i) Laboratory Specialists paid certain NPLI shareholder loans in the aggregate
amount of $275,000 and (ii) entered into a certain First Amendment of Lease
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Agreement with DJ Associates, a general partnership of which the NPLI
Shareholders are the general partners, and pursuant to which Laboratory
Specialists and NPLI leased certain office and laboratory facilities for a term
of six months and agreed to pay monthly rent of $3,000. The total purchase price
of approximately $3,400,000 was recorded as intangible assets.

Laboratory Specialists consolidated and assimilated the forensic drug
testing operations of NPLI with those of LSI during the first quarter of 1996.
Laboratory Specialists discontinued the clinical testing and analysis operations
of NPLI during the fourth quarter of 1996 after several attempts to dispose of
the clinical testing and analysis operations.

PLL Asset Purchase. On January 31, 1997, Laboratory Specialists acquired
from Pathology Laboratories, Ltd., a Mississippi corporation ("PLL"), certain
forensic drug testing assets (the "PLL Asset Purchase") pursuant to an Asset
Purchase Agreement dated January 31, 1997 (the "PLL Purchase Agreement"). The
assets purchased included the customer list of PLL and all related assets, and
all assets owned by PLL used in connection with the PLL office in Greenville,
South Carolina. Pursuant to the Purchase Agreement, Laboratory Specialists (i)
paid $1,600,000 at closing and $765,601 in four quarterly installments during
the 12-month period ended January 31, 1998, and (ii) assumed the obligations of
PLL under a certain Lease between Edith Schlien and PLL, dated September 16,
1996, covering approximately 2,500 square feet of office space located in
Greenville, South Carolina, which requires monthly base rental payments of
$2,083 and which expires on September 16, 1999.

Warrant Redemption. In October 1997, Laboratory Specialists completed the
redemption of its outstanding 1994 Warrants and, in connection therewith and
pursuant to exercise of the 1994 Warrants, issued 1,440,580 shares of Laboratory
Specialists Common Stock for $2.00 per share for net proceeds to Laboratory
Specialists of $2,470,951 (the "Warrant Redemption Offering"). For services
performed, Laboratory Specialists issued to Barber & Bronson Incorporated and
its assigns warrants to purchase 144,058 shares of Laboratory Specialists Common
Stock for $2.20 per share during the three-year period ending October 14, 2000
(the "Barber & Bronson Group Warrants"), and paid Barber & Bronson Incorporated
aggregate fees of $190,829. As of September 1, 1998, a portion of the Barron
Chase Group Warrants have been exercised for the purchase of 32,000 units
(64,000 shares of Laboratory Specialists Common Stock) and Laboratory
Specialists received net proceeds of $230,400 and a portion of the Barber and
Bronson Group Warrants have been exercised for the purchase of 98,572 shares of
Laboratory Specialists Common Stock and Laboratory Specialists received net
proceeds of $216,858.

Accu-Path Asset Purchase. On December 1, 1997, Laboratory Specialists
acquired from Accu-Path Medical Laboratory, Inc. ("Accu-Path") certain
intangible assets pursuant to an Asset Purchase Agreement, dated December 1,
1997, ("Accu-Path Asset Purchase"). The assets purchased included the customer
list of Accu-Path and all related assets and certain assets utilized in the
office of Accu-Path at its offices in Ruston, Louisiana (the "Accu-Path
Assets"). In connection with the acquisition of the Accu-Path Assets, Laboratory
Specialists agreed to pay 180 percent of the forensic testing revenues during
the period of June through November 1998, with an advance payment of $100,000 on
December 1, 1997, and the remaining purchase price balance will be paid through
four quarterly installment payments with the first of such payments due on
December 31, 1998. The purchase price of the Accu-Path Assets was or will be
allocated entirely to the customer list, which was recorded as an intangible
asset, which is being amortized over 15 years. At December 31, 1997, the accrued
installment payments totaled $260,000.

HLI Asset Purchase. On May 1, 1998, Laboratory Specialists acquired from
Harrison Laboratories, Inc. ("HLI") a customer list pursuant to an Asset
Purchase Agreement, dated April 13, 1998 (the "HLI Asset Purchase"). In
connection with the HLI Asset Purchase, Laboratory Specialists (i) paid $500,000

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at closing and agreed to pay on or before May 30, 1999, an amount equal to the
revenues attributable to the customer list during the one-year period ending
April 30, 1999, in excess of $500,000, and (ii) entered into a three-year
employment agreement with the principal shareholder of HLI as a sales
representative, providing for a base salary of $50,000 per year, monthly bonuses
equal to 3.5 percent of revenues attributable to the customer list, and other
benefits. The purchase price of the customer list was recorded as an intangible
asset, which is being amortized over 15 years.

1998 Private Offering. On June 4, 1998, Laboratory Specialists completed
the offering of 555,222 shares of Laboratory Specialists Common Stock for
estimated net proceeds of $2,285,600 (the "1998 Private Offering"). Furthermore,
Laboratory Specialists paid Jesup & Lamont Securities Corporation a placement
fee of $174,650 and issued warrants to Jesup & Lamont and its designees (the
"Jesup & Lamont Group Warrants").

TLI Asset Purchase. On July 1, 1998, Laboratory Specialists acquired the
customer list and other intangible assets of TOXWORK Laboratories, Inc. ("TLI")
for $2.4 million pursuant to an Asset Purchase Agreement dated June 8, 1998 (the
"TLI Asset Purchase"). The purchase price of the customer list and other
intangible assets acquired was recorded as intangible assets which are being
amortized over 15 years.

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RESULTS OF OPERATIONS

The following table sets forth selected results of operations for (i) the
fiscal years ended December 31, 1997 and 1996, which are derived from the
audited consolidated financial statements of Laboratory Specialists appearing
elsewhere in this Proxy Statement/Prospectus, and (ii) the six months ended June
30, 1998 and 1997. The results of operations for the periods presented are not
necessarily indicative of Laboratory Specialists' future operations.

FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997
--------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ----------- -------

Revenues................................... $8,726,799 100.0% $12,836,953 100.0%
Cost of laboratory services................ 3,816,114 43.7% 5,828,665 45.4%
---------- ----- ----------- -----
Gross profit............................... 4,910,685 56.3% 7,008,288 54.6%
---------- ----- ----------- -----
Operating expenses:
Selling.................................. 601,945 6.9% 654,284 5.0%
General and administrative............... 2,442,602 28.0% 3,230,117 25.2%
Depreciation and amortization............ 504,123 5.8% 690,268 5.4%
Asset impairment......................... 124,531 1.4% -- --%
---------- ----- ----------- -----
Total operating expenses................... 3,673,201 42.1% 4,574,669 35.6%
---------- ----- ----------- -----
1,237,484 14.2% 2,433,619 19.0%
Other income (expense)..................... (21,808) .3% (151,252) 1.2%
---------- ----- ----------- -----
Income from continuing operations before
income taxes............................. 1,215,676 13.9% 2,282,367 17.8%
Income tax expense......................... 527,171 6.0% 953,264 7.4%
---------- ----- ----------- -----
Income from continuing operations.......... 688,505 7.9% 1,329,103 10.4%
Discontinued Operations:
Loss from operations of discontinued
clinical business, net of tax
benefit............................... (500,636) 5.7% -- --%
Loss on disposal of clinical business,
net of tax benefit.................... (773,580) 8.9% -- --%
---------- ----- ----------- -----
Net income (loss).......................... $ (585,711) 6.7% $ 1,329,103 10.4%
========== ===== =========== =====

SIX MONTHS ENDED JUNE 30,
----------------------------------------------
1997 1998
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- -------

Revenues.................................... $6,010,982 100.0% $7,659,764 100.0%
Cost of revenues............................ 2,659,857 44.2% 3,462,846 45.2%
---------- ----- ---------- -----
Gross profit................................ 3,351,125 55.8% 4,196,918 54.8%
---------- ----- ---------- -----
Operating expenses:
Selling................................... 292,095 4.9% 424,932 5.6%
General and administrative................ 1,599,080 26.6% 1,786,052 23.3%
Depreciation and amortization............. 317,172 5.3% 392,908 5.1%
---------- ----- ---------- -----
Total operating expenses.................... 2,208,347 36.8% 2,603,892 34.0%
---------- ----- ---------- -----
Income from operations...................... $1,142,778 19.0% $1,593,026 20.8%
========== ===== ========== =====

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During each of the fiscal years ended December 31, 1997 and 1996, and the
six months ended June 30, 1998, LSI experienced a 2.0 percent, 4.7 percent and
3.2 percent decrease in the price per specimen, respectively, compared to the
preceding fiscal year or the same period in the preceding year, principally due
to increased price competition amongst providers of drug testing services, price
per specimen being an important factor in obtaining and maintaining customers.
Management of LSI closely monitors its price per specimen, the prices of its
competitors and the costs of processing specimens to remain competitive, as well
as profitable. There can be no assurance that the price per specimen will not
decline further during 1998 and thereafter. In the event price stabilization has
not occurred, LSI will, as it has in the past, take appropriate measures to
downsize its drug testing personnel and possibly further automate the testing
processes and employ additional technology to continue profitability from
operations, although there can be no assurance that such measures will assure
profitability in the event of substantial price reductions within the short
term. During each of the fiscal years ended December 31, 1997 and 1996 and the
six months ended June 30, 1998, the number of specimens analyzed increased 51.6
percent, 34.5 percent and 31.1 percent, respectively, compared to the preceding
fiscal year ended or the same period in the preceding year.

In connection with the NPLI Acquisition, Laboratory Specialists acquired
the clinical testing and analysis operation conducted by NPLI. After several
attempts to sell the clinical testing analysis operation of NPLI, Laboratory
Specialists discontinued the clinical testing and analysis operation in the
fourth quarter of 1996. This resulted in a loss from the discontinued operation
of $500,636 (after giving effect to the associated tax benefit of $257,904) and
a loss on disposal of the clinical business of $773,580 (after giving effect to
the associated tax benefit of $489,420), which resulted in a loss of $.39 per
basic common share for the fiscal year ended December 31, 1996. Before such
discontinued operation, Laboratory Specialists' income from continuing
operations for the fiscal year ended December 31, 1996 was $688,505 or $.21 per
basic common share.

COMPARISON OF FISCAL 1996 AND 1997

Revenues increased $4,110,154 to $12,836,953 in 1997 from $8,726,799 in
1996, an increase of 47.1 percent. The increase in revenues was due to a 51.6
percent increase in the number of specimens analyzed during 1997 as compared to
1996, although partially offset by a decrease of 2% in the average price per
specimen. The increase in number of specimens analyzed was attributable to the
PLL Asset Purchase and Accu-Path Asset Purchase as well as the obtaining of
additional accounts through LSI's normal sales and marketing efforts. The
decrease in the average price per specimen was principally due to increased
price competition among providers of drug testing services, price per specimen
being the most important factor in obtaining and maintaining clients. There can
be no assurance that the price per specimen will not further decline in 1998
which will directly impact profitability. See "Laboratory
Specialists -- Business -- Competition." Cost of laboratory services increased
$2,012,551 from $3,816,114 in 1996 to $5,828,665 in 1997, an increase of 52.7
percent. This increase was primarily due to the increased volume of specimen
testing and increased as a percentage of revenues by 1.7 percent. Gross profit
on revenues decreased as a percentage of revenues from 56.3 percent in 1996 to
54.6 percent in 1997.

Operating expenses increased $901,468 from $3,673,201 in 1996 to $4,574,669
in 1997, an increase of 24.5 percent, but decreased as a percentage of revenues
from 42.1 percent to 35.6 percent. The increase in operating expenses was
attributable to the increase in general and administrative expenses of $787,515,
selling expense of $52,339, and depreciation and amortization of $186,145.
Laboratory Specialists did not recognize an asset impairment in 1997, while
during 1996 Laboratory Specialists recognized an asset impairment of $124,531,
which was attributable primarily to the write-down, to the estimated fair market
value, of LSI's former laboratory facilities which are held for sale as of the
date

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of this Prospectus. The increase in general and administrative expenses was
principally due to the increase in executive officer compensation of Laboratory
Specialists and bonuses for certain key employees of LSI and increased overhead
as a result of the PLL Asset Purchase and the Accu-Path Asset Purchase. The
increase in selling expenses was due to the addition of two sales
representatives and increased personnel to assist in maintaining forensic drug
testing customers obtained in connection with the PLL Asset Purchase and the
Accu-Path Asset Purchase. Depreciation increased due to the acquisition of new
laboratory equipment in 1997 and the acquisition and renovation of LSI
laboratory and office facilities, and amortization increased due to the
amortization of the customer list and goodwill acquired in connection with the
PLL Asset Purchase and the Accu-Path Asset Purchase.

Interest expense increased $163,248 from $67,185 in 1996 to $230,433 in
1997, a 243 percent increase. The increase in interest expense was the result of
the effect of a full year of a capital lease agreement, entered into in February
1996, for certain laboratory equipment and the increase in long-term debt
associated with the acquisition and renovation of LSI's current laboratory and
office facilities, and the PLL Acquisition. Interest income increased from
$41,208 in 1996 to $78,035 in 1997, a 89.4 percent increase. The increase
resulted from an increase in cash equivalents held for investment attributable
to cash flows from operations and the net proceeds from the issuance of Common
Stock in connection with the Warrant Redemption Offering. Other income decreased
from $4,169 in 1996 to $1,146 during 1997. Income from continuing operations,
after provision for income taxes, increased $640,598 from $688,505 in 1996 to
$1,329,103 in 1997, a 93 percent increase. Income per share of common stock from
continuing operations on a basic basis was $.36 ($.31 per share on a diluted
basis) in 1997, compared to net income per share of common stock on a basic
basis of $.21 ($.17 per share on a diluted basis) in 1996.

COMPARISON OF SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998

Revenues increased to $7,659,764 in the six months ended June 30, 1998 (the
"1998 Interim Period"), from $6,010,982 in the six months ended June 30, 1997
(the "1997 Interim Period"), an increase of 27.4 percent. The increase in
revenues was due to a 31.1 percent increase in the number of specimens analyzed
during the 1998 Interim Period as compared to the 1997 Interim Period, although
partially offset by a decrease of 3.2 percent in the average price per specimen.
The increase in number of specimens analyzed was attributable to the Accu-Path
and HLI Asset Purchases as well as LSI's normal sales and marketing efforts. The
decrease in the average price per specimen was principally due to increased
price competition among providers of drug testing services, price per specimen
being an important factor in obtaining and maintaining clients.

Cost of revenues increased $802,989 from $2,659,857 in the 1997 Interim
Period to $3,462,846 in the 1998 Interim Period, an increase of 30.2 percent.
Gross profit on revenues decreased as a percentage of revenues from 55.8 percent
in the 1997 Interim Period to 54.8 percent in the 1998 Interim Period. The
decrease was primarily due to the decrease in the price per specimen.

Operating expenses increased from $2,208,347 in the 1997 Interim Period to
$2,603,892 in the 1998 Interim Period, an increase of 17.9 percent, and
decreased as a percentage of revenues from 36.8 percent to 34.0 percent. The
increase in operating expenses was attributable to the increase in selling
expenses of $132,837, general and administrative expenses of $186,972 and
depreciation and amortization of $75,736. The increase in general and
administrative expenses was principally the result of (i) an increase in
executive officer compensation, (ii) the addition of several key positions at
LSI and (iii) the addition of certain overhead costs associated with the PLL,
Accu-Path and HLI Asset Purchases. The increase in selling expenses was due to
several additions to the sales force during late 1997 and early 1998, to assist
in maintaining forensic clients acquired as part of the PLL, Accu-Path and HLI

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Asset Purchases, as well as additional business development in other areas of
the United States. Depreciation increased due to the renovation of the new
laboratory and purchase of additional equipment at LSI, while amortization
increased due to the customer list acquisitions from PLL, Accu-Path and HLI and
the amortization of the purchase price of such customer lists.

Income from operations increased from $1,142,788 in the 1997 Interim Period
to $1,593,026 in the 1998 Interim Period, a 39.4 percent increase. Operating
income increased as a percentage of revenues from 19.0 percent to 20.8 percent
in the Interim Period.

Interest expense increased 8.8 percent from $90,484 in the 1997 Interim
Period to $98,438 in 1998 Interim Period. The overall increase in interest
expense was due to the obtaining of bank loans during 1997 associated with the
PLL Asset Purchase and the purchase and renovation of the new laboratory
building, while partially offset by a decrease late in the first quarter of 1998
related to the repayment in full of the note payable to MBf USA. Interest income
increased from $19,493 in the 1997 Interim Period to $77,823 in the 1998 Interim
Period, a 299.2 percent increase. These increases were due to additional funds
on deposit primarily from the exercise of stock warrants late in 1997 and the
1998 Private Offering during the second quarter of 1998. Other income increased
from $72 in the 1997 Interim Period to $52,487 in the 1998 Interim Period. The
increase in other income was primarily due to a one-time gain realized due to
the early payout of the note payable to MBf USA in addition to the recovery of
bad debts previously written off. Net income, after provision for income taxes,
increased from $622,616 in the 1997 Interim Period to $954,306 in the 1998
Interim Period, a 53.3 percent increase.

PRO FORMA EFFECT OF STOCK-BASED COMPENSATION

Laboratory Specialists has historically used options to retain and
compensate its officers, directors, employees and others. During 1997, 1996 and
1995, Laboratory Specialists granted 590,000 stock options for the purchase of
the Common Stock of Laboratory Specialists to certain officers, directors,
employees and others. In accordance with Accounting Principles Board Opinion No.
25, the compensation cost of such stock options is not recognized in the
consolidated financial statements of Laboratory Specialists. The outstanding
stock options granted in 1997 had an estimated fair value at the date of grant
of the options of $473,958, utilizing the methodology prescribed under SFAS No.
123, Accounting for Stock-Based Compensation. After giving effect to the
estimated fair value of such options, Laboratory Specialists had net pro forma
income of $1,053,706 ($.29 per common share on a basic basis and $.24 per common
share on a diluted basis) for the year ended December 31, 1997, and had net pro
forma loss of $673,516 ($.20 per common share on a basic basis and $.17 per
common share on a diluted basis) for the year ended December 31, 1996.

YEAR 2000 COMPUTER SYSTEM COMPLIANCE

Laboratory Specialists has two primary computer systems each of which was
developed employing six digit date structures. Where date logic requires the
year 2000 or beyond, such structures may produce inaccurate results. Management
of Laboratory Specialists has substantially completed the implementation of a
program to comply with year 2000 requirements on a system-by-system basis
including information technology ("IT") and non-IT systems (e.g.,
microcontrollers). Management expects the program to be complete during 1998 at
which time the Company's computer systems are expected to be year 2000
compliant.

Management has evaluated its in-house supported IT systems and found no
instances of date dependent calculations or operations that are affected by this
six digit date structure. Laboratory Specialists' vendor-supported IT system has
been updated and certified year 2000 compliant by the

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vendor. Non-IT systems, including all personal computers, will be evaluated by a
third party contractor, updated if necessary, and certified as compliant during
1998. Laboratory Specialists' risks associated with the year 2000 are mainly its
ability to communicate with its customers and pay its employees, distributors
and vendors. Although management's evaluation is complete and vendor
certifications are being obtained, a failure of Laboratory Specialists' computer
systems or other support systems to function adequately with respect to year
2000 issues could have a material adverse effect on Laboratory Specialists'
operations. Based on progress to date, there is no need for a contingency plan
and such a plan has not been developed. Laboratory Specialists estimates that
the total cost of its program to make Laboratory Specialists' computer systems
year 2000 compliant is less than $25,000.

Laboratory Specialists is in the early process of contacting its major
suppliers to determine if their systems will be year 2000 complaint on a timely
basis. In the event that Laboratory Specialists experiences product
unavailability or supply interruptions due to year 2000 non-compliance by its
suppliers, management believes that it would be able to obtain alternative
sources of its products. A significant delay or reduction in availability of
products, however, could also have a material adverse effect on Laboratory
Specialists' operations.

ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED

In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which modifies segment reporting
requirements and establishes certain criteria for reporting disclosures
concerning a company's products and services, geographic areas and major
customers in annual and interim financial statements. This statement is
effective for financial statements of Laboratory Specialists for the year ending
December 31, 1998. Management of Laboratory Specialists believes that adoption
of SFAS No. 131 will not have a material effect on Laboratory Specialists's
financial statements, other than possibly the disclosure related to Laboratory
Specialists's services, geographic service area and major customers.

QUARTERLY RESULTS OF OPERATIONS

LSI's operations are affected by seasonal trends to which drug testing
laboratories are generally subject. In LSI's experience, testing volume tends to
be higher in the second calendar quarter and lower in the winter holiday season
and the beginning of the first calendar quarter primarily due to hiring patterns
which affect pre-employment drug testing. Because the general and administrative
expenses associated with maintaining and adding to LSI's testing work force are
relatively fixed over the short term, LSI's margins tend to increase in periods
of higher testing volume and decrease in periods of lower testing volume. These
effects are not always apparent because of the impact and timing of the startup
of new businesses and other factors such as the timing and amount of price
increases or decreases and additional acquisitions. Nevertheless, LSI's results
of operations for a particular quarter may not be indicative of the results to
be expected during other quarters.

INCOME TAXES

The provisions for income taxes from continuing operations on pretax income
were based on the effective combined federal and state graduated corporate
income tax rates of approximately 40 percent in the six months ended June 30,
1998, 42 percent in 1997 and 43 percent for 1996. The provisions for income
taxes were $670,592, $953,264 and $527,171 for the six months ended June 30,
1998 and the years ended December 31, 1997 and 1996, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $1,049,111 in the six
months ended June 30, 1998 and $928,758 in the six months ended June 30, 1997.
As of June 30, 1998, Laboratory Specialists had working capital of $4,872,894,
compared to working capital of $3,305,983 at December 31, 1997. In the event
Laboratory Specialists' revenues increase as anticipated by management,
Laboratory Specialists' working capital requirements will also increase and such
requirements may exceed the net cash provided by operating activities and
require that cash be used in operating activities from sources other than
operations, including the available cash and cash equivalents (which were
$4,776,869 at June 30, 1998) and borrowings. The increase in cash used in
operations will principally be due to the timing differential between Laboratory
Specialists' payment for materials and services to its suppliers and employee
work force, and the time at which Laboratory Specialists receives payment from
its customers. On June 4, 1998, Laboratory Specialists completed the offering of
555,222 shares of Laboratory Specialists Common Stock for estimated net proceeds
of $2,285,600 pursuant to the 1998 Private Offering. On July 1, 1998, Laboratory
Specialists completed the TLI Asset Purchase. The $2.4 million purchase price
was paid from the proceeds of the 1998 Private Offering.

FUTURE OPERATIONS AND LIQUIDITY

In February 1996, LSI entered into a capital lease obligation of
approximately $650,000 with a vendor for the purchase of equipment and certain
lab supplies at a fixed price per drug screen performed. The minimum monthly
amount payable under the agreement is approximately $59,750, with approximately
$13,000 per month allocated to the principal and interest of the capital lease
obligation, and the remaining cost being allocated to the cost of laboratory
supplies. The agreement resulted in LSI recording approximately $650,000 in
additional equipment, with an equal amount of capital lease obligation recorded
as a long-term debt obligation payable over five years. As of June 30, 1998, the
outstanding capital lease obligation was $379,898.

On January 9, 1997, LSI entered into a loan agreement with Hibernia
National Bank (the "Bank") which established a credit facility comprised of a
five-year term loan of up to $1,700,000 and a one-year revolving loan of
$250,000 to be used for the PLL Asset Purchase. On August 25, 1998, the one-year
revolving loan was renewed for two years and increased to $1,000,000. As of June
30, 1998, the outstanding principal amount of the five-year term loan was
$1,218,333. Advances on the revolving loan are based upon LSI maintaining
certain ratios and compliance with the covenants of the loan agreement and LSI's
liquid assets including its accounts receivable. The outstanding principal
amount of the revolving loan bears interest at the Citibank, N.A. rate (which
was 9% at June 30, 1998), plus up to 1% and the term loan bears interest at such
rate plus 0.5%. The loans are secured by the accounts receivable, intangible
assets and by a mortgage on the building owned by LSI, and is guaranteed by
Laboratory Specialists. The loan agreement contains various covenants, including
certain financial ratios, all of which Laboratory Specialists was in full
compliance with as of June 30, 1998.

On July 2, 1997, LSI entered into a loan agreement with the Bank for a term
loan in the principal amount of $720,000 to refinance the building in which
LSI's laboratory and offices are located. This loan is payable in 36 monthly
installments of approximately $9,800, followed by 23 monthly installments of
approximately $6,000, with a final payment becoming due on July 2, 2002, of
approximately $484,700. The outstanding principal balance of this loan bears
interest at a rate of 8.65 percent per annum. As of June 30, 1998, the
outstanding principal amount of such loan was approximately $668,208.

On December 1, 1997, Laboratory Specialists completed the Accu-Path Asset
Purchase and pursuant thereto agreed to pay 180 percent of the forensic testing
revenues during the period from June

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through November, 1998 as follows: (i) $100,000 paid at closing, (ii) an amount
equal to 50 percent of the forensic testing revenues for each of the first three
quarters, to be paid 30 days following the end of each quarter, and (iii) the
balance to be paid in four quarterly installments with the first payment due
March 1, 1999. The estimated gross revenues attributable to this customer base
was approximately $360,000. As of June 30, 1998, total payments of $90,151 have
been recorded for the first two quarterly installments related to the Accu-Path
Asset Purchase.

On May 1, 1998, Laboratory Specialists completed the HLI Asset Purchase.
Laboratory Specialists (i) paid $500,000 at closing, and (ii) is required to
make a final payment, on or before, June 1, 1999, in an amount equal to 100
percent of the gross revenues directly attributable to each customer comprising
the customer base of HLI for the year ended April 30, 1999, exceeding $533,855.
The estimated gross revenues attributable to the customer base, for the year
ended December 31, 1997, was approximately $960,000. As of June 30, 1998, no
installment payments have been made related to the HLI Asset Purchase; however,
an account receivable of $33,855 owed by HLI to LSI was offset against the
installment obligation.

On June 26, 1998, 480,000 stock options were exercised by certain officers
of Laboratory Specialists. Pursuant to the stock option plans, the exercise
price of the stock options and the payroll taxes associated with the exercise of
the stock options were paid to Laboratory Specialists in the form of previously
issued fully mature shares of Laboratory Specialists Common Stock. As a result
of the exercise, 105,906 additional shares of Laboratory Specialists Common
Stock were issued on June 26, 1998, and Laboratory Specialists paid
approximately $478,900 in related payroll taxes on July 16, 1998. The payroll
taxes were accrued as part of the payroll tax liability on the balance sheet as
of June 30, 1998.

On July 1, 1998, Laboratory Specialists completed the TLI Asset Purchase.
In connection with the TLI Asset Purchase, Laboratory Specialists paid
$2,400,000 at closing. The purchase price of the acquired customer list was
recorded as an intangible asset, which is being amortized over 15 years.

As of the date of this Proxy Statement/Prospectus, other than as described
above, Laboratory Specialists does not have any significant future capital
commitments. Laboratory Specialists anticipates that existing cash and cash
equivalent balances, short-term investments and funds to be generated from
future operations will be sufficient to fund operations and budgeted capital
expenditures of Laboratory Specialists through 1998.

Future Assessment of Recoverability and Impairment of Goodwill and Customer
List. In connection with its various acquisitions, Laboratory Specialists
recorded goodwill and customer lists, which are being amortized over periods of
15 to 40 years on a straight-line basis over the estimated period that
Laboratory Specialists will be benefited by such assets. At June 30, 1998, the
unamortized portion of the goodwill and the customer lists was $2,271,859 and
$5,217,751, respectively. The carrying value and recoverability of unamortized
goodwill and customer lists will be periodically reviewed by management of
Laboratory Specialists. If the facts and circumstances suggest that the goodwill
or customer list may be impaired, the carrying value of goodwill or customer
list will be adjusted which will result in an immediate charge against income
during the period of the adjustment and/or the length of the remaining
amortization period may be shortened, which will result in an increase in the
amount of goodwill or customer list amortization during the period of adjustment
and each period thereafter until fully amortized. Once adjusted, there can be no
assurance that there will not be further adjustments for impairment and
recoverability in future periods. Of the various factors to be considered by
management of Laboratory Specialists in determining goodwill or customer list
impairment, the most significant will be (i) losses from operations, (ii) loss
of customers, (iii) developments within the drug testing industry, including
Laboratory Specialists' inability to maintain its market share, development of
drug testing

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technologies, imposition of additional regulatory and certification
requirements, and (iv) loss or suspension for an extended period of laboratory
certification, especially by SAMHSA. See "Laboratory
Specialists -- Business - Certification and Government Regulation." In the event
management of Laboratory Specialists determines that goodwill or the customer
lists have become impaired, the adjustment for impairment and recoverability
will most likely occur during a period of operations in which Laboratory
Specialists has sustained losses or has only marginal profitability from
operations, and the impairment and/or increased amortization amount will either
increase such losses from operations or further reduce profitability.

BUSINESS

GENERAL

Laboratory Specialists of America, Inc., through its wholly-owned
subsidiary LSI, owns and operates an independent laboratory providing drug
testing services to corporate and institutional clients seeking to detect and
deter the use of illegal drugs. The drug testing market is in an expansion mode
in part due to the recent adoptions of additional Department of Transportation
regulations, which became effective in 1995, that substantially expanded the
previous regulations which mandated random drug testing of workers, especially
in such safety-sensitive jobs such as trucking, aviation, railroads and
pipelines. Under these new regulations, 50 percent of transportation workers
(mass-transit workers and interstate truckers and bus drivers) will be required
to be tested annually.

LSI is certified by SAMHSA to conduct drug testing using legally defensible
(forensic) procedures required for legal defensibility of test results. The
essential elements of these procedures are a secure chain-of-custody for each
specimen from collection to the reporting of test results and accurate and
reliable testing in which a second independent test is performed to confirm each
positive test result. The drug testing services offered by LSI also include
assisting clients with the development of drug testing programs, training client
personnel, managing specimen collection, arranging for transportation of
specimens to LSI's laboratory, identifying trends in local and national drug
use, interpreting test results, and providing expert testimony concerning
challenged test results. All of these services are customized to the individual
needs of the clients to assist in the implementation and cost-effective
maintenance of test programs.

Laboratory Specialists was incorporated in Oklahoma on March 24, 1994, and
its executive offices are located at 101 Park Avenue, Suite 810, Oklahoma City,
Oklahoma 73102 and its telephone number is (405) 232-9800. LSI was incorporated
in 1978 in Louisiana, and its executive offices and laboratory are located at
1111 Newton Street, Gretna, Louisiana 70053, which is near New Orleans, and its
telephone numbers are (504) 361-8989 and (800) 433-3823.

DRUG TESTING OPERATIONS

The essential elements of legally defensible (forensic) drug testing are a
secure chain-of-custody for each specimen from its collection to the reporting
of test results, and accurate and reliable testing in which a second independent
test is performed to confirm each positive test result. LSI carefully controls
each step of the testing process by following detailed written procedures and by
using the specific forensic testing methods required for legal defensibility of
results. LSI tests for drugs of abuse, including cocaine, methamphetamine,
heroin, PCP, marijuana and alcohol, primarily by urinalysis. LSI performs all
testing at its laboratory in Gretna, Louisiana which operates 24 hours per day,
six days per week. The steps in LSI's forensic drug testing process are as
follows:

Collection and Transportation. Forensic drug testing begins with specimen
collection conducted under carefully controlled conditions. Once a donor has
provided a specimen which consists of two

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specimen bottles, each specimen is assigned a unique specimen identification
number. A bar-coded or numbered label with this specimen identification number
is affixed to each specimen bottle as a tamper-proof seal. The donor is then
required to sign a statement on a chain-of-custody form which is bar-coded or
numbered to match the specimen bottles. The donor certifies that the urine in
the bottles belongs to the donor, that the bottles were sealed and labeled in
the donor's presence and that the identification number on the bottles matches
the number on the form. The collector also signs the form to certify the
integrity of the collection process and then prepares the specimen for shipment
to LSI's laboratory, together with a signed chain-of-custody form. The specimen
and chain-of-custody form are delivered to LSI by overnight or same day courier
or by U.S. mail.

Receiving and Accessioning. LSI receives specimens in its restricted
accessioning rooms, where they are inspected for tampering and checked for
proper chain-of-custody documentation. The unique specimen identification number
is entered into the laboratory computer which automatically orders the proper
screening and confirmation testing and directs the reporting of test results. A
small portion, or aliquot, of the specimen is then poured from one of the
specimen bottles and prepared for screening. The specimen bottle is resealed
with a tamper-proof seal and placed in locked cold storage for approximately 12
months.

Screening. Each specimen submitted to LSI is screened for the presence of
the drugs specified by the client. During 1997, LSI performed more than
5,700,000 screening tests on more than 68,000 specimens per month to determine
the presence of drugs. In conducting these tests, LSI employs several different
screening methods using automated analyzers and procedures which provide rapid,
reliable screening of large numbers of specimens.

Confirmation Testing. Specimens that screen negative are reported to the
client without further testing. Specimens that screen positive are confirmed by
testing a separate portion or aliquot using a different and independent
technology from that used for initial screening. The confirmation technologies
employed by LSI include those required by SAMHSA.

Quality Assurance and Control. LSI carefully monitors the accuracy and
reliability of its test results by internal and external quality assurance and
control programs. LSI's staff evaluates laboratory performance by inserting
"open" and "blind" quality control samples into each batch of client specimens
during both screening and confirmation testing. An "open" sample is a urine
specimen sample containing known quantities of one or more drugs of which the
testing operator may have been informed contains drugs, but is not made aware of
the kind and quantity of drugs contained in the sample. A "blind" sample is a
urine specimen sample containing unknown quantities and kinds of drugs and which
is indistinguishable from other specimen samples contained within a testing
batch of samples. All specimens in a testing batch are retested if the results
obtained for these control samples are not within specified limits. In addition,
LSI is subject to frequent proficiency testing by various certifying bodies
which send their own open and blind samples to the laboratory.

LSI's laboratory is certified by SAMHSA and the College of American
Pathology ("CAP"), as well as nine states and local jurisdictions. Of the
various certifications, SAMHSA certification is considered the most important by
LSI. SAMHSA is a federal regulatory agency charged with the responsibility and
authority to license laboratories performing forensic drug testing services for
the Federal Government and its agencies and industries which are federally
regulated, such as the Department of Transportation, Department of Defense, etc.
SAMHSA certifies, inspects, and monitors laboratories that perform forensic drug
testing services under numerous specific mandated guidelines, including (i)
strict adherence to chain-of-custody procedures, (ii) strict security of urine
specimens from collection through testing, (iii) qualifications of technicians
and the procedures employed in testing and the supervision thereof, (iv)
segregation of SAMHSA-related specimens from non-SAMHSA-related

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specimens, (v) proficiency testing standards, and (vi) strict adherence to
confidential reporting of test results.

SAMHSA certification is essential to LSI's business because a major number
of its clients are required to use certified laboratories, and many of its
clients look to certification as an indication of reliability and accuracy of
tests. In order to remain certified, LSI is subject to frequent inspections and
proficiency tests. Failure to meet any of the numerous certification
requirements to which LSI is subject could result in suspension or loss of
certification. Such suspension or loss of certification could have a material
adverse effect on LSI and Laboratory Specialists. In such event, until the
suspension is lifted or certification reobtained, LSI would be required to
utilize the drug testing services of a SAMHSA certified competitor to process
SAMHSA-related specimens, which would result in a substantial reduction in the
number of specimens tested at LSI's laboratory and the price received per
specimen received net of such competitor's cost to LSI of performing such
testing services. In the event such suspension or loss of certification
continued for a substantial period, LSI may be required to downsize its
laboratory personnel and operations and, upon lifting of the suspension or
reobtaining of SAMHSA certification, restaffing of the laboratory could occur
over an extended period, and client base and market share may be required to be
reestablished, all at substantial cost and expense to LSI.

Data Review. Each test result, whether negative or positive, undergoes four
independent levels of review before being reported. A result is first reviewed
by the laboratory analyst conducting the test. Following the analyst's review,
the screening or confirmation laboratory supervisor reviews the result. Next, a
quality assurance and control technician reviews the result. Finally, the test
result, including all chain-of-custody and testing documentation, is reviewed by
a certifying scientist. It is only after all of these reviews have been
successfully completed and all documentation is in order that the certifying
scientist signs and releases a test result.

Reporting of Results. LSI transmits an increasing number of its test
results electronically through a secured national communications network. This
network immediately encrypts and transmits each test result from the laboratory
computer to the client's personal computer or secure fax machine as soon as it
has been released by the certifying scientist. Using this network, LSI routinely
reports results for specimens that screen negative within 24 hours of receipt in
the laboratory and within 48 hours for specimens that require confirmation.
Other clients receive test results via overnight courier or U.S. mail.

CONTRACTUAL ARRANGEMENTS

Most large drug testing clients, including the majority of public employers
and criminal justice agencies, use a formal competitive bid process in which the
potential client provides a detailed specification of the drug testing services
it requires. While price is an important factor, in most cases these
organizations are not required to accept the lowest bid, but rather may choose
the winning bidder on the basis of technical superiority and client service. LSI
has previously obtained contracts through bidding and procurement procedures and
will continue to attempt to obtain such contracts through competitive bidding.
Such contracts are typically long-term, but are also subject to termination on
short notice with little or no penalty.

Other than drug testing services performed pursuant to contracts obtained
through competitive bidding procedures, LSI performs most of its drug testing
services without a formal contract. In most cases, LSI accepts and tests
specimens for an agreed price which is generally renegotiated periodically.
Because LSI does not currently have any long-term contracts, which is typical of
high volume clients, LSI is not dependent to any significant degree upon any one
client or contractual relationship with a client, the termination of which would
have a material adverse effect upon LSI.

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INSURANCE COVERAGE

Employees of LSI, like those of all companies that provide drug testing
services dealing with urine analysis specimens, may be exposed to risks of
urine-borne infections, possibly including infection from AIDS and hepatitis, if
appropriate laboratory practices are not followed. Although no infections of
this type have been reported in LSI's history, no assurance can be provided that
such infections will not occur in the future. In the ordinary course of its
business, LSI from time to time is sued by individuals who have tested positive
for drugs of abuse. To date, LSI has not experienced any material liability
related to these claims, although there can be no assurance that LSI will not at
some time in the future experience significant liability in connection with
these types of claims, in which event, such legal actions could have a material
adverse effect on Laboratory Specialists's financial condition and results of
operations.

LSI maintains various policies of casualty, commercial and worker
compensation insurance. In addition, LSI maintains professional liability
insurance with limits of $1 million per incident with an aggregate limit of $1
million per incident and $2 million per year. Although Laboratory Specialists
presently is covered by malpractice and general liability insurance, there can
be no assurance that the insurance coverage will provide sufficient funds to
satisfy any judgments which could be entered against LSI in the future or that
liability insurance in such amounts will be available or affordable in the
future. In addition, there can be no assurance that all of the activities
encompassed within Laboratory Specialists's business are covered under LSI's
insurance policies. The lack of such coverage could have a material adverse
effect on Laboratory Specialists' financial condition and results of operations.
Moreover, although Laboratory Specialists maintains casualty insurance and has
taken what it believes to be adequate safeguards, the catastrophic loss of
Laboratory Specialists' laboratory facility could have a material adverse effect
on the continued growth of Laboratory Specialists in a manner which would not be
compensated fully by insurance.

COMPETITION

Drug testing laboratories compete primarily on the basis of technical
superiority, client service and price. The price per specimen is an important
factor in obtaining and maintaining customers. See "Laboratory
Specialists -- Management's Discussion and Analysis of Financial Condition and
Results of Operations." Laboratory Specialists believes that LSI competes
favorably in each of these categories. LSI competes with three types of
companies which offer forensic drug testing services, i.e., national SAMHSA
laboratory chains such as Smith-Kline Beecham Clinical Laboratories and
Laboratory Corporation of America, regional SAMHSA laboratories such as LabOne,
Inc. and Clinical Reference Lab and companies providing on site screening
devices. Some of these competitors have greater financial resources than
Laboratory Specialists. In addition, some clients and potential clients of LSI
operate their own drug testing facilities, or may develop such facilities in the
future.

CERTIFICATION AND GOVERNMENT REGULATION

Companies which compete in the forensic drug testing market generally must
be certified by SAMHSA and may be required to have other types of certification
imposed by certain states or clients. LSI's laboratory is currently certified by
SAMHSA and CAP, as well as nine states and local jurisdictions. LSI is subject
to frequent inspections by certifying bodies, including two SAMHSA inspections
per year, and is also subject to frequent proficiency testing by SAMHSA, CAP and
other certifying bodies. Failure to meet certification requirements could result
in suspension or loss of certification. Certification is essential to LSI's
business because some of its clients are required to use a certified laboratory,
and many of its clients look to certification as an indication of reliability
and accuracy of test results. With respect to its operations, LSI considers
SAMHSA certification to be the

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most important of its various certifications. In order to obtain SAMHSA
certification, a laboratory must apply for certification, meet certain minimum
facility requirements and then successfully complete a series of proficiency
tests, which takes approximately 12 months to complete at substantial cost and
expense.

Employee drug testing by federal agencies and certain private employers is
subject to regulation by certain federal agencies. Legislation currently exists
in a number of states regulating the circumstances under which employers may
test employees and the procedures under which such tests must be conducted. In
addition, the circumstances under which drug testing can legally be required by
employers is subject to court precedent and judicial review.

OTHER REGULATION

The operations of Laboratory Specialists and LSI are also subject to
various federal, state and local requirements which affect businesses generally,
such as taxes, postal regulations, labor laws, and environment and zoning
regulations and ordinances.

ENVIRONMENTAL MATTERS

LSI and consequently Laboratory Specialists is subject to federal, state
and local laws, regulations and policies governing the use, generation, storage,
effluent discharge, handling and disposal of certain materials, chemicals and
wastes. LSI utilizes the services of an independent third party to dispose of
hazardous material and chemical waste. Laboratory Specialists believes that the
procedures and methods utilized to dispose of the hazardous waste by such third
party comply in all material respects with all applicable federal, state and
local laws, regulations and policies. Although since beginning operations in
1978, LSI has not been required to take any extraordinary action to correct any
noncompliance, there can be no assurance that LSI will not be required to incur
significant costs to comply with environmental and health and safety regulations
in the future. During 1997, LSI incurred $2,957 costs in compliance with the
applicable federal, state and local laws, regulations and policies governing the
use, generation, storage, effluent discharge, handling and disposal of certain
materials, chemicals and wastes.

LSI's drug testing activities involve the controlled use of certain
hazardous materials and chemicals, including possibly the testing of infectious
urine specimens. LSI believes that it has adequately warned employees of
potential risks associated with working at LSI and has provided a workplace safe
from hazard, as required by the Occupational Safety and Health Administration
and certain Louisiana laws. Although LSI believes that its safety procedures for
handling and disposing of such materials and chemicals comply with the standards
prescribed by federal, state and local laws and regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of any such accident, LSI and consequently Laboratory Specialists
could be held liable for any damages that result and any such liability could
exceed any applicable insurance coverage and the financial resources of
Laboratory Specialists.

EMPLOYEES

As of October 31, 1998, Laboratory Specialists had three full-time
employees, and LSI had 145 full-time and 59 part-time employees, none of which
are represented by a labor organization. Laboratory Specialists considers its
and LSI's relations with their employees to be good.

PROPERTIES

Laboratory Specialists maintains its executive office in approximately 1800
square feet at Suite 810, 101 Park Avenue, Oklahoma City, Oklahoma 73102. The
office premises are occupied under a long-term

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lease which expires August 31, 2000, and the monthly rental payment is $1,685.
Laboratory Specialists considers such space to be adequate for its current
needs.

LSI's executive offices and laboratory are located in approximately 20,000
square feet at 1111 Newton Street, Gretna, Louisiana 70053, in a building owned
by LSI. The building was acquired in December 1996 and remodeling was completed
in June 1997 at an estimated aggregate cost of $890,000. Laboratory Specialists
believes that, with the acquisition of the building, the new location of the
offices and laboratory will be adequate for the current and anticipated future
needs of LSI. In addition, LSI owns a 7,390 square foot building located at 113
Jarrell Drive, Belle Chasse, Louisiana, in which the laboratory and executive
offices of LSI were formerly located and which is currently used for record and
urine specimen storage.

LITIGATION

In the ordinary course of its business, LSI from time to time is sued by
individuals who have tested positive for drugs of abuse. To date, LSI has not
experienced any material liability related to these claims, although there can
be no assurance that LSI will not at some time in the future experience
significant liability in connection with these types of claims. Based upon the
prior successful defense of similar-type litigation, management believes LSI has
valid defenses to the plaintiffs' claims in all pending litigation, and LSI
intends to vigorously defend itself in such litigation. LSI is not currently a
defendant party in any legal proceedings other than routine litigation that is
incidental to the business of LSI, and management of LSI believes the outcome of
such legal proceedings will not have a material adverse effect upon the results
of operations or financial condition of LSI. Furthermore, management of LSI
believes that the liability insurance coverage is adequate with respect to the
pending litigation and, in general, for the business of LSI.

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PRINCIPAL SHAREHOLDERS AND HOLDINGS OF MANAGEMENT

The following table sets forth certain information as to the beneficial
ownership of Laboratory Specialists Common Stock as of November 9, 1998, by (i)
each director, (ii) each executive officer named in Laboratory Specialists'
Summary Compensation Table, (iii) all current executive officers and directors
of Laboratory Specialists as a group, and (iv) each person known by Laboratory
Specialists to be the beneficial owner of more than five percent of Laboratory
Specialists Common Stock.

SHARES PERCENT OF
BENEFICIALLY SHARE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNERSHIP
------------------------------------ ------------ ----------

Arthur R. Peterson, Jr...................................... 525,472 9.2%
1111 Newton Street
Gretna, Louisiana 70053
John Simonelli.............................................. 235,217 4.1%
Larry E. Howell............................................. 235,217 4.1%
Robert A. Gardebled, Jr.(1)................................. 75,000 1.3%
Jerome P. Welch(2).......................................... 10,000 .2%
Michael E. Dunn(2).......................................... 10,000 .2%
Executive Officers and Directors as a group (six
persons)(3)............................................... 1,090,906 18.8%

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

(1) The number and percent of shares includes stock options exercisable for the
purchase of 50,000 shares of Laboratory Specialists Common Stock.

(2) The named director holds stock options for the purchase of 10,000 shares of
Laboratory Specialists Common Stock.

(3) The number and percent of shares includes stock options exercisable for the
purchase of 70,000 shares of Laboratory Specialists Common Stock.

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DESCRIPTION OF KROLL-O'GARA CAPITAL STOCK

Kroll-O'Gara's authorized capital stock consists of 50,000,000 shares of
common stock $.01 par value per share, of which 17,773,464 shares were
outstanding at November 9, 1998, and 1,000,000 shares of undesignated preferred
stock, $.01 par value per share, none of which is issued or outstanding. The
following description is only a summary of the material terms of the capital
stock of Kroll-O'Gara. Your rights as a shareholder of Kroll-O'Gara will be
governed by the provisions of Kroll-O'Gara's Amended and Restated Articles of
Incorporation (the "Kroll-O'Gara Articles") and Code of Regulations (the
"Kroll-O'Gara Code") and by the provisions of the OGCL.

COMMON STOCK

You will be entitled to one vote for each share held of record by you on
all matters submitted to a vote of shareholders. You will not have the right to
cumulate your votes in the election of directors.

Subject to preferences which have been and may be granted to holders of
preferred stock, you will be entitled to share in such dividends as the Board of
Directors, in its discretion, may validly declare from funds legally available.
In the event of liquidation, each outstanding share of Kroll-O'Gara Common Stock
entitles its holder to participate ratably in the assets remaining after payment
of liabilities and any preferred stock liquidation preferences.

You will have no preemptive or other rights to subscribe for or purchase
additional shares of any class of stock or any other securities of Kroll-O'Gara.
There are no redemption or sinking fund provisions with regard to the
Kroll-O'Gara Common Stock. All outstanding shares of Kroll-O'Gara Common Stock
are fully paid, validly issued and nonassessable.

The vote of holders of a majority of all outstanding shares of Kroll-O'Gara
Common Stock is required to amend the Kroll-O'Gara Articles and to approve
mergers, reorganizations, and similar transactions.

PREFERRED STOCK

Kroll-O'Gara may issue up to 1,000,000 authorized shares of preferred stock
from time to time in series having such designations, preferences and rights,
qualifications and limitations as the Board of Directors may determine, without
any need for your approval. Preferred stock could be given rights which would
adversely affect your equity and could have preference to your Kroll-O'Gara
Common Stock with respect to dividend and liquidation rights. Issuance of
preferred stock could have the effect of acting as an anti-takeover device to
prevent a change of control of Kroll-O'Gara.

PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL

Ohio law governs the rights of shareholders of Kroll-O'Gara. Chapter 1704
of the Ohio Revised Code (the "ORC") may be viewed as having an anti-takeover
effect. This statute, in general, prohibits an "issuing public corporation" (the
definition of which includes Kroll-O'Gara) from entering into a "Chapter 1704
Transaction" with the beneficial owner (or affiliates of such beneficial owner)
of 10% or more of the outstanding shares of the corporation (an "interested
shareholder") for at least three years following the date on which the
interested shareholder attains such 10% ownership, unless the board of directors
of the corporation approves, prior to such person becoming an interested
shareholder, either the transaction or the acquisition of shares resulting in a
10% ownership position. A "Chapter 1704 Transaction" is broadly defined to
include, among other things, a merger or consolidation with, a sale of
substantial assets to, or the receipt of a loan, guaranty or other financial
benefit (which is not proportionately received by all shareholders) from the
interested shareholder. Following the expiration of

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such three-year period, a Chapter 1704 Transaction with the interested
shareholder is permitted only if either (i) the transaction is approved by the
holders of at least two-thirds of the voting power of the corporation (or such
different proportion as is set forth in the corporation's articles of
incorporation), including a majority of the outstanding shares excluding those
owned by the interested shareholder, or (ii) the business combination results in
the shareholders other than the interested shareholder receiving a prescribed
"fair price" for their shares. One significant effect of Chapter 1704 is to
encourage a person to negotiate with the board of directors of a corporation
prior to becoming an interested shareholder.

In addition, Section 1707.043 of the ORC requires a person or entity that
makes a proposal to acquire the control of a corporation to repay to that
corporation any profits made from trades in the corporation's stock within 18
months after making the control proposal.

Section 1701.831 of the OGCL (the "Control Share Acquisition Statute")
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person (including any individual, partnership, corporation,
limited liability company, society, association or two or more persons who have
a joint or common interest) of shares of a corporation that, when added to all
other shares of the corporation that may be voted, directly or indirectly, by
the acquiring person, would entitle such person to exercise or direct the
exercise of 20% or more (but less than 33 1/3%) of the voting power of the
corporation in the election of directors or 33 1/3% or more (but less than a
majority) of such voting power or a majority or more of such voting power. Under
the Control Share Acquisition Statute, the control share acquisition must be
approved in advance by the holders of a majority of the outstanding voting
shares represented at a meeting at which a quorum is present and by the holders
of a majority of the portion of the outstanding voting shares represented at
such a meeting excluding the voting shares owned by the acquiring shareholder
and certain "interested shares," including shares owned by officers elected or
appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.

The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover The provisions of the Control Share Acquisition Statute
grant to the shareholders of Kroll-O'Gara the assurance that they will have
adequate time to evaluate the proposal of the acquiring person, that they will
be permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of Kroll-O'Gara were before
them and, most importantly, that the interests of all shareholders will be taken
into account in connection with such vote and the probability will be increased
that they will be treated equally regarding the price to be offered for their
common shares if the implementation of the proposal is approved.

The Control Share Acquisition Statute applies not only to traditional
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that the transaction must
be authorized at a special meeting of shareholders, at which a quorum is
present, by the affirmative vote of the majority of the voting power represented
and by a majority of the portion of such voting power excluding interested
shares. Any corporate defense against persons seeking to acquire control may
have the effect of discouraging or preventing offers which some shareholders
might find financially attractive. On the other hand, the need on the part of
the acquiring person to convince the shareholders of Kroll-O'Gara of the value
and validity of his offer may cause such offer to be more financially attractive
in order to gain shareholder approval.

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In addition, Section 1701.59 of the OGCL provides that in determining what
such director reasonably believes to be in the best interests of the corporation
the director may consider, in addition to the interests of the corporation's
shareholders, any of the interests of the corporation's employees, suppliers,
creditors and customers, the economy of the State of Ohio and the U.S.,
community and societal considerations and the long-term as well as the short-
term interests of the corporation and its shareholders, including the
possibility that these interests may be best served by the continued
independence of the corporation.

Although Kroll-O'Gara believes that these provisions are in its best
interests, you should be aware that such provisions could be disadvantageous to
you because the overall effect of these statutes may be to render more difficult
or discourage the removal of incumbent management or the assumption of effective
control by other persons.

TRANSFER AGENT AND REGISTRAR

The registrar and transfer agent for Kroll-O'Gara Common Stock is The Fifth
Third Bank, Cincinnati, Ohio.

COMPARISON OF RIGHTS OF HOLDERS OF KROLL-O'GARA COMMON STOCK AND
LABORATORY SPECIALISTS COMMON STOCK

Your rights as a shareholder of Laboratory Specialists currently are
governed by the OKGCA and by Laboratory Specialists' Certificate of
Incorporation (the "Laboratory Specialists Certificate") and Bylaws (the
"Laboratory Specialists Bylaws"). Because Kroll-O'Gara is an Ohio corporation,
your shareholder rights after the Merger will be governed by the OGCL and the
Kroll-O'Gara Articles and Code. The following discussion summarizes some of the
material differences between Ohio and Oklahoma law and between Kroll-O'Gara's
and Laboratory Specialists' governing documents which may affect your rights as
a shareholder.

Authorized Capital. The total number of authorized shares of capital stock
of Laboratory Specialists is 30,000,000, consisting of 20,000,000 shares of
Laboratory Specialists Common Stock and 10,000,000 shares of Laboratory
Specialists Preferred Stock. For the authorized capital of Kroll-O'Gara see
"Description of Kroll-O'Gara Capital Stock."

Directors. There are no material differences in shareholder rights in this
area.

Amendment of Code of Regulations and Bylaws. The Kroll-O'Gara Code may be
amended by the vote of Kroll-O'Gara shareholders entitled to exercise a majority
of the voting power of Kroll-O'Gara. The Laboratory Specialists Bylaws may be
altered or repealed by the affirmative vote of a majority of the outstanding
shares entitled to vote at any regular or special meeting of shareholders or by
the Laboratory Specialists Board.

Amendment of Charter Documents. There are no material differences in
shareholder rights in this area.

Cumulative Voting. Cumulative voting permits a shareholder to cast as many
votes in the election of directors for each share of stock held as there are
directors to be elected. Each shareholder may cast all his votes for a single
candidate or distribute such votes among two or more candidates. Shareholders of
neither Laboratory Specialists nor Kroll-O'Gara may vote cumulatively in the
election of directors.

Filling Vacancies on the Board of Directors. There are no material
differences in shareholder rights in this area.

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Shareholder Meetings and Provisions for Notices. The Kroll-O'Gara Code
provides that special meetings of shareholders may be called by the Chairman of
the Board, the President, a majority of directors, or person or persons holding
50% of all voting power who would be entitled to vote at such meeting. The
Laboratory Specialists Bylaws provide that a special meeting of shareholders may
be called by the President or by the President and Secretary at the written
request of a majority of the board of directors or at the written request of the
holders of 10% or more of the shares entitled to vote at the meeting.

Pursuant to the Kroll-O'Gara Code, written notice of any meeting of
shareholders stating the time and place of the meeting must be given to each
shareholder entitled to vote at such meeting between seven and sixty days before
the date of such meeting. Written notice of a special meeting must also include
the purpose or purposes for which the meeting is called, and only such business
as is stated in such notice shall be acted upon. Under the Laboratory
Specialists Bylaws, notice of the time and place of annual or special meetings
of shareholders, and in the case of a special meeting the purpose for which the
meeting is called, must be given between ten and sixty days before the date of
such annual or special meeting to each shareholder entitled to vote at such
meeting.

Under the OGCL, a proxy is valid for 11 months from its date, unless the
proxy provides otherwise. Under the OKGCA, a proxy is valid for three years,
unless the proxy provides otherwise, and under the Laboratory Specialists Bylaws
a proxy is invalid after the expiration of five years from its date of
execution, unless the proxy provides otherwise.

Notice of Director Nominations and New Business. The Kroll-O'Gara Code
provides that, with respect to an annual meeting of shareholders, nominations of
persons for election to the Kroll-O'Gara Board and the proposal of business to
be considered at the annual meeting must be (i) specified in the notice of
annual meeting given by or at the direction of the Kroll-O'Gara Board, (ii)
brought before the annual meeting by or at the direction of the Kroll-O'Gara
Board, or (iii) brought before the annual meeting by a shareholder who has
complied with advance notice procedures set forth in the Kroll-O'Gara Code.
There is no similar provision in the Laboratory Specialists Certificate or the
Laboratory Specialists Bylaws.

Quorum. Under the Kroll-O'Gara Code, a quorum for the transaction of
business at any regular or special meeting of the Kroll-O'Gara Board consists of
not less than one-half of the whole authorized number of directors. Under the
Laboratory Specialists Bylaws, a quorum for the transaction of business at any
regular or special meeting of the Laboratory Specialists Board consists of a
majority of the directors of the Laboratory Specialists Board.

The quorum required for the transaction of business at shareholder meetings
of Kroll-O'Gara and Laboratory Specialists is essentially the same, i.e., a
majority of the shares entitled to vote.

Preemptive Rights. Shareholders of neither company have preemptive rights.

Voting by Shareholders. There are no material differences in shareholder
rights in this area.

Anti-takeover Statutes. Section 1090.3 of the OKGCA (the "Oklahoma
Statute") applies to a broad range of business combinations between a Oklahoma
corporation and an "interested shareholder." The Oklahoma Statute definition of
"business combination" includes mergers, sales of assets, issuance of voting
stock and almost any related party transaction.

The Oklahoma Statute prohibits a corporation from engaging in a business
combination with an interested shareholder for a period of three years following
the date on which the shareholder became an "interested shareholder" unless (i)
the board of directors approved the business combination before the shareholder
became an "interested shareholder," (ii) upon consummation of the transaction
which

111
117

resulted in the shareholder becoming an "interested shareholder," such
shareholder owned at least 85% of the voting stock outstanding when the
transaction began, or (iii) the board of directors approved the business
combination after the shareholder became an "interested shareholder" and the
business combination was approved by at least two-thirds of the outstanding
voting stock not owned by such shareholder. An "interested shareholder" is
defined as any person who owns, directly or indirectly, 15% or more of the
outstanding voting stock of a corporation. A person "owns" voting stock if such
person individually or with or through any of its affiliates or associates (i)
beneficially owns such stock, directly or indirectly, (ii) has the right to
acquire or vote such stock pursuant to any agreement (except that a person who
has the right to vote such stock pursuant to an agreement which arises solely
from a revocable proxy given in response to a proxy solicitation made to ten or
more persons is not deemed to be an owner for purposes of the Oklahoma Statute),
or (iii) has any agreement for the purposes of acquiring, holding, voting or
disposing of such stock with any other person who beneficially owns such stock,
directly or indirectly. Although the Oklahoma Statute may apply, a corporation
may elect in the certificate of incorporation not to be governed by the Oklahoma
Statute. Laboratory Specialists has not taken action to opt out of the Oklahoma
Statute.

Ohio's anti-takeover statutes are described under "Description of
Kroll-O'Gara Capital Stock -- Provisions Affecting Business Combinations and
Changes in Control."

Mergers, Consolidations and Other Corporate Transactions. Under the OGCL,
an agreement of merger or consolidation must be approved by the directors of
each constitute corporation and adopted by shareholders of each constituent Ohio
corporation (other than the surviving corporation) holding at least two-thirds
of the corporation's voting power, or a different proportion, but not less than
a majority of the voting power, as provided in the articles of incorporation. In
the case of a merger, the agreement must, in certain situations, also be adopted
by the shareholders of the surviving corporation by a similar vote. The
Kroll-O'Gara Articles provide that any such agreement must be adopted by
shareholders holding at least a majority of the voting power.

The approval of a majority of Kroll-O'Gara shares is required for (i) the
consummation of combinations and majority share acquisitions involving the
transfer or issuance of such number of shares as would entitle the holders
thereof to exercise at least one-sixth of the voting power of such corporation
in the election of directors immediately after the consummation of such
transaction, (ii) the disposition of all or substantially all of the
corporation's assets other than in the regular course of business and (iii)
voluntary dissolutions.

Under the OKGCA, an agreement of merger or consolidation must be approved
by the directors of each constituent corporation or each corporation whose
certificate of incorporation is to be amended or adopted by the affirmative vote
of the holders of a majority of the outstanding shares entitled to vote thereon.
The separate vote of any class of shares is required, whether or not entitled to
vote thereon, if the agreement of merger or consolidation provides for the
acquisition of all or part of the shares of the class. Additionally, the OKGCA
provides that, unless the corporation's certificate of incorporation provides
otherwise, no vote of the shareholders of the surviving corporation is required
to approve the merger if (i) the agreement of merger does not amend in any
respect the corporation's certificate of incorporation, (ii) each share
outstanding immediately before the effective date is to be an identical
outstanding or treasury share of the surviving corporation after the effective
date, and (iii) the number of shares of the surviving corporation's common stock
to be issued in the merger plus the number of shares of common stock into which
any other securities to be issued in the merger are initially convertible does
not exceed 20% of its common stock outstanding immediately before the effective
date of the merger. The Laboratory Specialists Certificate does not require any
such vote.

112
118

Class Voting. Under the OGCL, holders of a particular class of shares are
entitled to vote as a separate class if the rights of such class are affected in
certain respects by mergers, consolidations or amendments to the articles of
incorporation.

The OKGCA requires voting by separate classes only with respect to
amendments to the certificate of incorporation which adversely affects the
holders of classes or which increase or decrease the aggregate number of
authorized shares or the par value of the shares of any class.

Appraisal Rights. Under the OGCL, dissenting shareholders are entitled to
appraisal rights in connection with the lease, sale, exchange, transfer or other
disposition of all or substantially all of the assets of a corporation and in
connection with certain amendments to its articles of incorporation. In
addition, shareholders of an Ohio corporation being merged into a new
corporation are also entitled to appraisal rights. Shareholders of an acquiring
corporation are entitled to appraisal rights in a merger, combination or
majority share acquisition in which such shareholders are entitled to voting
rights.

Under the OKGCA, appraisal rights are available only in connection with a
merger or consolidations or share acquisition. Even in such cases, the OKGCA
does not recognize appraisal rights for (a) any class or series of stock which
is either listed on a national securities exchange or designed as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, (b) held of record by more than 2,000
shareholders, or (c) shares held by shareholders of the constituent surviving
corporation if the merger did not require shareholder approval. Except that
appraisal rights are available for holders of stock who, by the terms of the
merger or consolidation, are required to accept anything except (i) stock of the
corporation surviving or resulting from the merger or consolidation, (ii) shares
which at the effective time of the merger or consolidation are either listed on
a national securities exchange, designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, or held of record by more than 2,000 shareholders, (iii) cash in lieu
of fractional shares of stock described in the foregoing clauses (i) and (ii),
or (iv) any combination of stock and cash in lieu of fractional shares described
in the foregoing clauses (i), (ii) or (iii). Appraisal rights are available for
the shares of any class or series of stock in connection with an amendment to a
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation if the certificate of incorporation so provide.
The Laboratory Specialists Certificate does not have such a provision.

Dividends. An Ohio corporation may pay dividends out of surplus, however
created, but must notify its shareholders if a dividend is paid out of surplus
other than earned surplus. An Oklahoma corporation may pay dividends out of any
surplus and, if it has no surplus, out of any net profits for the fiscal year,
in which the dividend was declared or for the preceding fiscal year provided
that such payment will not reduce capital below the amount of capital
represented by all classes of shares having a preference upon the distribution
of assets.

Repurchases. Under the OGCL, a corporation may purchase or redeem its own
shares if authorized by its articles of incorporation or under certain other
circumstances but may not if immediately after its assets would be less than its
liabilities plus its stated capital, if any, or if the corporation is insolvent
or would be rendered insolvent by such a purchase or redemption.

Under the OKGCA, a corporation may repurchase or redeem its shares only out
of surplus and only if such purchase does not impair capital. However, a
corporation may redeem preferred stock out of capital if such shares will be
retired upon redemption and the stated capital of the corporation is thereupon
reduced pursuant to a resolution of its board of directors by the amount of
capital represented by such shares.

113
119

Indemnification and Limitation of Liability. Ohio and Oklahoma have similar
laws regarding indemnification by a corporation of its officers, directors,
employees and other agents.

The Kroll-O'Gara Code provides that Kroll-O'Gara shall indemnify to the
fullest extent permitted by law any person who was or is made or is threatened
to be made a party or is otherwise involved in any action, suit or proceeding
because he is or was a director, officer, employee or agent of Kroll-O'Gara, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another entity, against all expense, liability, and loss
(including, without limitation, attorneys' fees, costs of investigation,
judgments, fines, excise taxes or penalties arising under the Employee
Retirement Income Security Act of 1974 or other federal or state acts) actually
incurred or suffered by such indemnitee.

Pursuant to Section 1701.59 of the OGCL a director is liable for damages
for any action he takes or fails to take as a director only if it is proved by
clear and convincing evidence that his action or failure to act involved an act
or omission undertaken with deliberate intent to cause injury to the corporation
or undertaken with reckless disregard for the best interests of the corporation.

The Laboratory Specialists Certificate provides that Laboratory Specialists
shall indemnify any person made, or threatened to be made, a party to any
threatened, pending, or completed action, suit or proceeding (whether civil,
criminal, administrative, or investigative, other than an action by or in the
right of the corporation) because he is or was a director, officer, employee or
agent of Laboratory Specialists or because such person, at the request of
Laboratory Specialists, is or was serving such other organization in any
capacity against expenses (including attorney fees), judgments, fines, excise
taxes, and amounts paid in settlement actually and reasonably incurred.

The Laboratory Specialists Certificate provides that to the fullest extent
authorized or permitted by law no director shall be personally liable for money
damages for breach of fiduciary duties.

LEGAL MATTERS

The validity of the Kroll-O'Gara Common Stock to be issued in connection
with the Merger will be passed upon by Taft, Stettinius & Hollister LLP,
Cincinnati, Ohio.

Dunn Swan & Cunningham has delivered an opinion to the effect that the
description of the federal income tax consequences of the Merger under the
heading "The Merger -- Certain Federal Income Tax Consequences" correctly sets
forth the material federal income tax consequences of the Merger to Laboratory
Specialists and its shareholders. Kramer Levin Naftalis & Frankel LLP has
delivered a similar opinion to Kroll-O'Gara regarding the federal income tax
consequences to Kroll-O'Gara.

EXPERTS

The consolidated financial statements of Kroll-O'Gara as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997, included in this Proxy Statement/Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their report. In
that report, that firm states that with respect to certain subsidiaries, its
opinion is based on the reports of other independent public accountants, namely
Deloitte & Touche LLP for the year ended December 31, 1996 and KPMG Peat Marwick
LLP for the year ended December 31, 1995. Reference is made to said report,
which includes an explanatory paragraph with respect to the change in the method
of accounting in 1997 for costs incurred in connection with business process
reengineering activities. The audited consolidated financial statements referred
to above are included herein in reliance upon the authority of said firm as
experts in giving said reports.

114
120

The audited consolidated financial statements of Laboratory Specialists as
of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997, included in this Proxy Statement/Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said reports.

The audited financial statements of Kizorek, Inc. as of October 31, 1997
and for the year ended October 31, 1997, included in this Proxy
Statement/Prospectus, have been audited by Crowe, Chizek and Company LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports.

It is expected that representatives of Arthur Andersen LLP will be present
at the Special Meeting, where they will have an opportunity to respond to
appropriate questions of shareholders and to make a statement if they so desire.

FUTURE SHAREHOLDER PROPOSALS

Should the Merger not be completed, shareholder proposals will be
considered for inclusion in the Proxy Statement for Laboratory Specialists' 1999
Annual Meeting if they are received by Laboratory Specialists before the close
of business on January 28, 1999. In addition, Laboratory Specialists will retain
discretionary authority to vote proxies on any matter raised by a shareholder at
the 1999 Annual Meeting (and not included in Laboratory Specialists' Proxy
Statement) unless Laboratory Specialists is notified prior to April 1, 1999,
that the shareholder intends to present the matter at that meeting. If there is
a change in the date after which shareholder notification is untimely,
Laboratory Specialists will so inform shareholders by notice in a filing with
the SEC.

OTHER BUSINESS

We are not aware of any matters which properly may be presented at the
Special Meeting other than those discussed above. However, if other matters do
come before the Special Meeting, proxies will be voted on those matters in
accordance with the recommendation of the Laboratory Specialists Board.

WHERE YOU CAN FIND MORE INFORMATION

Both Kroll-O'Gara and Laboratory Specialists file annual, quarterly and
special reports, proxy statements and other information with the SEC. These SEC
filings are available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You also may read and copy any document filed by
Kroll-O'Gara and Laboratory Specialists at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms.

Kroll-O'Gara has filed a Registration Statement with the SEC covering the
shares of Kroll-O'Gara Common Stock to be issued in the Merger. This Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement. The full Registration Statement is on the SEC's web site
and is available at the SEC's public reference rooms.

You should rely only on the information provided in this Proxy
Statement/Prospectus. No one is authorized to provide you with different
information. Kroll-O'Gara is not making an offer of its Common Stock in any
state where the offer is not permitted. You should not assume that the
information in this Proxy Statement/Prospectus is accurate as of any date other
than the date on the front of this document.

115
121

INDEX TO FINANCIAL STATEMENTS

PAGE
-----

THE KROLL-O'GARA COMPANY
Reports of Independent Public Accountants
Report of Arthur Andersen LLP............................. F-3
Report of Deloitte & Touche LLP........................... F-4
Report of KPMG Peat Marwick LLP........................... F-5
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-6
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-8
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995 1996 and 1997............... F-9
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-10
Notes to Consolidated Financial Statements.................. F-11
Consolidated Balance Sheets as of December 31, 1997 and June
30, 1998 (unaudited)...................................... F-36
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1997 and 1998 (unaudited)........... F-38
Consolidated Statement of Shareholders' Equity for the Six
Months Ended June 30, 1998 (unaudited).................... F-39
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998 (unaudited).................. F-40
Notes to Consolidated Unaudited Financial Statements........ F-41

LABORATORY SPECIALISTS OF AMERICA, INC.
Report of Independent Public Accountants.................... F-47
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-48
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-49
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997.............. F-50
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-51
Notes to Consolidated Financial Statements.................. F-52
Consolidated Balance Sheets as of June 30, 1998
(Unaudited)............................................... F-65
Consolidated Statements of Income for the Six Months Ended
June 30, 1997 and 1998 (Unaudited)........................ F-66
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998 (Unaudited).................. F-67
Notes to Consolidated Financial Statements (Unaudited)...... F-68

F-1
122

PAGE
-----

KIZOREK, INC.
Report of Independent Auditors.............................. F-71
Balance Sheet as of October 31, 1997........................ F-72
Statements of Income and Retained Earnings for the Year
Ended October 31, 1997.................................... F-73
Statement of Cash Flows for the Year Ended October 31,
1997...................................................... F-74
Notes to Financial Statements............................... F-75

THE KROLL-O'GARA COMPANY PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
Kroll-O'Gara Pro Forma Combining Financial Statements....... F-78
Kroll-O'Gara Pro Forma Combining Condensed Balance Sheets
as of June 30, 1998.................................... F-79
Kroll-O'Gara Pro Forma Combining Statements of Operations
for the Year Ended December 31, 1997 and the Six Months
Ended June 30, 1998.................................... F-80
Kroll-O'Gara and Laboratory Specialists Unaudited Pro Forma
Combining Financial Statements............................ F-82
Kroll-O'Gara and Laboratory Specialists Unaudited Pro
Forma Combining Condensed Balance Sheets as of June 30,
1998................................................... F-83
Kroll-O'Gara and Laboratory Specialists Unaudited Pro
Forma Combining Statements of Operations for the Years
Ended December 31, 1995, 1996 and 1997 and the Six
Months Ended June 30, 1997 and 1998.................... F-84
Kroll-O'Gara Pro Forma and Laboratory Specialists Unaudited
Pro Forma Combining Financial Statements.................. F-92
Kroll-O'Gara Pro Forma and Laboratory Specialists
Unaudited Pro Forma Combining Condensed Balance Sheet
as of June 30, 1998.................................... F-93
Kroll-O'Gara Pro Forma and Laboratory Specialists
Unaudited Pro Forma Combining Statements of Operations
for the Year Ended December 31, 1997 and the Six Months
Ended June 30, 1998.................................... F-94

F-2
123

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
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, 1996 and 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 1995 or 1996 financial statements of Kroll
Holdings, Inc., a company acquired during 1997 in a transaction accounted for as
a pooling of interests, as discussed in Note 1. Such statements are included in
the consolidated financial statements of The Kroll-O'Gara Company and reflect
total assets and total revenues of 46 percent and 46 percent, respectively, in
1996 and total revenues of 62 percent in 1995, of the consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to the amounts included for Kroll
Holdings, Inc. for those years, is based solely on the reports of the other
auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.

In our opinion based on our audits and the reports of 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, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

As explained in Note 2(o) 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.

/S/ ARTHUR ANDERSEN LLP

Cincinnati, Ohio
March 13, 1998

F-3
124

INDEPENDENT AUDITORS' REPORT

The Stockholders of
Kroll Holdings, Inc.

We have audited the consolidated balance sheet of Kroll Holdings, Inc. (the
"Company") and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.

/s/ DELOITTE & TOUCHE LLP

New York, New York
March 13, 1997
(August 8, 1997 as to Notes 7 and 17)

F-4
125

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Kroll Holdings, Inc.:

We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows (not presented separately herein) of Kroll
Holdings, Inc. for the year ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Kroll Holdings, Inc. and subsidiaries for the year ended December 31,
1995 in conformity with generally accepted accounting principles.

/s/ KPMG PEAT MARWICK LLP

New York, New York
March 28, 1996

F-5
126

THE KROLL-O'GARA COMPANY

CONSOLIDATED BALANCE SHEETS

AS OF
DECEMBER 31,
---------------------------
1996 1997
----------- ------------

ASSETS
CURRENT ASSETS:
Cash...................................................... $ 4,761,464 $ 6,899,132
Marketable securities..................................... 47,500 22,969
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $1,913,731 and $2,515,579 in
1996 and 1997, respectively (Notes 2 and 4)............ 22,941,065 37,649,259
Unbilled revenues (Note 2)................................ 4,150,307 3,081,481
Other receivables (Note 6)-
Advances to shareholders............................... 288,829 525,996
Affiliates............................................. 291,951 366,307
Employees.............................................. 490,881 47,591
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)......................... 15,326,548 12,078,464
Inventories (Note 4)...................................... 8,733,640 19,452,970
Prepaid expenses and other................................ 2,856,560 6,454,873
Deferred tax asset (Note 5)............................... -- 411,988
----------- ------------
Total current assets.............................. 59,888,745 86,991,030
----------- ------------

PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
Land...................................................... 901,079 1,636,939
Buildings and improvements................................ 3,772,295 6,223,250
Leasehold improvements.................................... 5,186,648 5,242,607
Furniture and fixtures.................................... 3,741,384 4,629,796
Machinery and equipment................................... 8,488,348 11,290,146
Construction-in-progress.................................. -- 1,037,528
----------- ------------
22,089,754 30,060,266
Less -- accumulated depreciation.......................... (13,526,406) (15,448,045)
----------- ------------
8,563,348 14,612,221
----------- ------------
DATABASES, net of accumulated amortization of $16,568,473
and $19,505,625 in 1996 and 1997, respectively (Note 2)... 7,415,449 8,335,211
COSTS IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $88,752 and $772,401 in 1996 and 1997,
respectively (Notes 2 and 3).............................. 2,316,004 17,852,392
OTHER ASSETS (Note 4)....................................... 3,050,425 6,179,862
----------- ------------
12,781,878 32,367,465
----------- ------------
$81,233,971 $133,970,716
=========== ============

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-6
127

THE KROLL-O'GARA COMPANY

CONSOLIDATED BALANCE SHEETS

AS OF
DECEMBER 31,
-----------------------------
1996 1997
------------ -------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 7)........................ $ 9,935,947 $ 559,112
Current portion of long-term debt (Note 8)................ 4,461,420 3,200,925
Shareholder payable (Note 6).............................. 2,000,000 309,500
Accounts payable
Trade.................................................. 15,997,708 31,585,862
Affiliates (Note 6).................................... 532,998 874,939
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 4)......................... 1,330,402 320,662
Accrued liabilities....................................... 9,628,915 13,928,653
Income taxes currently payable............................ 514,871 845,753
Deferred income taxes (Note 5)............................ 1,703,377 --
Customer deposits......................................... 3,183,564 3,839,770
------------ -------------
Total current liabilities......................... 49,289,202 55,465,176
OTHER LONG-TERM LIABILITIES................................. 2,057,197 1,532,730
SHAREHOLDER PAYABLE......................................... 5,048,266 --
DEFERRED INCOME TAXES (Note 5).............................. 2,002,779 2,154,758
LONG-TERM DEBT, net of current portion (Note 8)............. 5,969,092 46,863,591
------------ -------------
Total liabilities................................. 64,366,536 106,016,255
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 12,593,432 and 13,590,525 shares issued and
outstanding in 1996 and 1997, respectively............. 125,934 135,905
Additional paid-in-capital................................ 37,788,430 50,589,966
Retained deficit.......................................... (20,903,110) (22,387,500)
Unrealized appreciation of marketable securities.......... 14,167 10,469
Cumulative foreign currency translation adjustment (Note
2)..................................................... (157,986) (394,379)
------------ -------------
Total shareholders' equity........................ 16,867,435 27,954,461
------------ -------------
$ 81,233,971 $ 133,970,716
============ =============

The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-7
128

THE KROLL-O'GARA COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------
1995 1996 1997
----------- ------------ -------------

NET SALES:
Security products and services.......................... $34,883,065 $ 79,155,974 $ 105,556,685
Investigations and intelligence......................... 48,914,120 66,734,775 67,419,256
Voice and data security................................. 2,044,115 7,770,000 17,437,408
----------- ------------ -------------
Net sales........................................ 85,841,300 153,660,749 190,413,349
COST OF SALES:
Security products and services.......................... 26,769,685 58,718,188 75,539,848
Investigations and intelligence......................... 33,709,055 47,116,851 41,781,284
Voice and data security................................. 1,635,329 5,623,423 14,323,254
----------- ------------ -------------
Cost of sales.................................... 62,114,069 111,458,462 131,644,386
----------- ------------ -------------
Gross profit..................................... 23,727,231 42,202,287 58,768,963
----------- ------------ -------------
OPERATING EXPENSES:
Selling and marketing................................... 9,448,495 9,762,911 14,371,081
General and administrative.............................. 18,888,556 23,897,014 27,538,443
Merger related costs.................................... -- -- 7,204,926
Amortization of costs in excess of assets acquired...... 26,939 43,660 683,649
----------- ------------ -------------
Operating expenses............................... 28,363,990 33,703,585 49,798,099
----------- ------------ -------------
Operating income (loss).......................... (4,636,759) 8,498,702 8,970,864
OTHER INCOME (EXPENSES):
Interest expense........................................ (2,812,455) (3,139,914) (4,806,036)
Other, net.............................................. (384,362) 336,810 (393,135)
----------- ------------ -------------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item
and cumulative effect of change in accounting
principle...................................... (7,833,576) 5,695,598 3,771,693
Minority interest....................................... -- -- (156,223)
----------- ------------ -------------
Income (loss) before provision (benefit) for
income taxes, extraordinary item and cumulative
effect of change in accounting principle....... (7,833,576) 5,695,598 3,615,470
Provision (benefit) for income taxes.................... (1,297,837) (161,624) 2,351,729
----------- ------------ -------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... (6,535,739) 5,857,222 1,263,741
Extraordinary loss, net of applicable tax benefit of
$129,250 (Note 7)..................................... -- -- (193,875)
----------- ------------ -------------
Income (loss) before cumulative effect of change
in accounting principle........................ (6,535,739) 5,857,222 1,069,866
Cumulative effect of change in accounting principle, net
of applicable tax benefit of $240,000 (Note 2(o))..... -- -- (360,000)
----------- ------------ -------------
Net income (loss)................................ $(6,535,739) $ 5,857,222 $ 709,866
=========== ============ =============
Earnings (loss) per share (Note 2):
Basic................................................. $ (0.65) $ 0.55 $ 0.05
=========== ============ =============
Diluted............................................... $ (0.65) $ 0.51 $ 0.05
=========== ============ =============
Weighted average shares outstanding (Note 2):
Basic................................................. 10,020,777 10,742,131 13,060,818
=========== ============ =============
Diluted............................................... 10,020,777 11,160,157 13,720,556
=========== ============ =============

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-8
129

THE KROLL-O'GARA COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

CUMULATIVE
UNREALIZED FOREIGN
APPRECIATION CURRENCY
ADDITIONAL OF TRANSLATION
COMMON PAID-IN RETAINED MARKETABLE ADJUSTMENT
SHARES STOCK CAPITAL DEFICIT SECURITIES (NOTE 2) TOTAL
---------- -------- ----------- ------------ ------------ ----------- -----------

BALANCE, December 31, 1994, as
previously reported............. 3,568,008 $14,072 $ 2,482,140 $ (1,223,982) $ -- $ 493 $ 1,272,723
Adjustment for pooling of
interests....................... 5,529,894 55,299 19,309,745 (9,729,811) -- 167,320 9,802,553
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1994, as
restated........................ 9,097,902 69,371 21,791,885 (10,953,793) -- 167,813 11,075,276
Net loss.......................... -- -- -- (6,535,739) -- -- (6,535,739)
Aggregate translation
adjustment...................... -- -- -- -- -- 29,735 29,735
Incorporation of OSN.............. 922,375 1,163 248,837 -- -- -- 250,000
Distributions to shareholders..... -- -- -- (162,800) -- -- (162,800)
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1995........ 10,020,277 70,534 22,040,722 (17,652,332) -- 197,548 4,656,472
Net income........................ -- -- -- 5,857,222 -- -- 5,857,222
Aggregate translation
adjustment...................... -- -- -- -- -- (355,534) (355,534)
Distributions to shareholders,
prior to the offering........... -- -- -- (230,000) -- -- (230,000)
Sale of common stock between
shareholders prior to the
offering........................ -- -- 39,780 -- -- -- 39,780
Exercise of stock options, prior
to the offering (Note 11)....... 121,463 4 441 -- -- -- 445
Initial public offering of common
stock, net of issuance costs of
approximately $3,550,000 (Note
1).............................. 2,048,000 51,359 14,820,458 -- -- -- 14,871,817
Issuance of Kroll restricted stock
(Note 11(b)).................... 403,692 4,037 887,029 -- -- -- 891,066
Distribution of previously taxed S
Corp earnings to S Corp
shareholders (Note 1)........... -- -- -- (9,000,000) -- -- (9,000,000)
Forgiveness of affiliate
obligation (Note 1)............. -- -- -- 122,000 -- -- 122,000
Unrealized appreciation of
marketable securities (Note
2).............................. -- -- -- -- 14,167 -- 14,167
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1996........ 12,593,432 125,934 37,788,430 (20,903,110) 14,167 (157,986) 16,867,435
Net income........................ -- -- -- 709,866 -- -- 709,866
Aggregate translation
adjustment...................... -- -- -- -- -- (236,393) (236,393)
Issuance of stock bonus to certain
employees....................... 4,547 45 49,972 -- -- -- 50,017
Exercise of stock options (Note
11)............................. 4,200 42 43,152 -- -- -- 43,194
Issuance of stock in conjunction
with the acquisition of
businesses (Note 3)............. 753,806 7,538 8,452,231 -- -- -- 8,459,769
Issuance of stock in conjunction
with the purchase of minority
interest (Note 3(f))............ 69,565 696 1,242,778 -- -- -- 1,243,474
Issuance of Kroll restricted stock
(Note 11(b)).................... 424,011 4,240 1,352,040 -- -- -- 1,356,280
Tax benefit of restricted stock
vesting (Note 11(b))............ -- -- 2,160,341 -- -- -- 2,160,341
Purchase and retirement of common
stock (Note 11(d)).............. (259,036) (2,590) (498,978) (2,194,256) -- -- (2,695,824)
Unrealized depreciation of
marketable securities (Note
2).............................. -- -- -- -- (3,698) -- (3,698)
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1997........ 13,590,525 $135,905 $50,589,966 $(22,387,500) $10,469 $(394,379) $27,954,461
========== ======== =========== ============ ======= ========= ===========

The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-9
130

THE KROLL-O'GARA COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 16)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

1995 1996 1997
----------- ----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(6,535,739) $ 5,857,222 $ 709,866
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization........................... 1,334,829 1,602,415 2,105,440
Amortization of databases............................... 2,470,696 2,949,134 2,937,152
Amortization of costs in excess of assets acquired...... 26,939 26,992 683,649
Bad debt expense........................................ 3,050,310 8,108,976 2,043,080
Shareholder stock compensation.......................... -- 930,846 1,356,280
Loss on write-off of notes receivable................... 55,966 -- 35,434
Share in net (income) loss of joint ventures............ 224,789 (19,224) (121,650)
Loss on sale of property and equipment.................. 6,245 1,872 --
Gain on sale of marketable securities................... -- (108,646) (14,503)
Change in assets and liabilities, net of effects of
acquisitions-
Receivables............................................. (1,511,151) (4,367,583) (10,337,879)
Unbilled revenues....................................... 1,391,221 (2,334,527) 1,068,826
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (3,957,287) (7,626,473) 3,499,084
Inventories............................................. (1,590,370) (3,806,141) (5,498,203)
Deferred tax asset...................................... -- -- (411,988)
Prepaid expenses and other assets....................... (3,001,541) 480,484 (1,967,307)
Accounts payable and income taxes currently payable..... 5,846,271 1,539,162 8,101,579
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (43,150) (375,640) (1,009,740)
Customer deposits....................................... (340,877) 1,767,785 509,540
Amounts due to/from employees........................... 19,820 (294,471) 443,290
Deferred income taxes payable........................... (875,312) (405,380) 151,979
Accrued liabilities..................................... 1,017,909 4,090,422 737,044
Long-term liabilities................................... 149,740 (651,660) (561,467)
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... (2,260,692) 7,365,565 4,459,506
----------- ----------- -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (1,127,676) (3,221,565) (4,417,574)
Proceeds from sale of property and equipment.............. 4,235 600 --
Additions to databases.................................... (2,985,409) (3,250,360) (3,856,914)
Decrease (increase) in notes receivable -- shareholder.... (233,253) 233,253 --
Acquisitions, net of cash acquired (Note 3)............... -- (814,710) (8,103,948)
Sale of marketable securities............................. -- 200,313 35,424
Other..................................................... (27,600) (66,711) 266,004
----------- ----------- -----------
Net cash used in investing activities.............. (4,369,703) (6,919,180) (16,077,008)
----------- ----------- -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Loan financing fees....................................... -- -- (723,727)
Net borrowings (repayments) under revolving lines of
credit.................................................. 4,551,025 (252,818) (9,376,835)
Proceeds from long-term debt.............................. 41,608 50,899 42,406,179
Payments of long-term debt................................ (3,736,745) (5,000,668) (8,922,658)
Proceeds from notes payable -- shareholder................ 2,600,000 2,000,000 500,000
Repayment of notes payable -- shareholder................. (106,500) (803,745) (7,238,766)
Net proceeds from issuance of common stock................ 250,000 14,871,817 --
Purchase and retirement of common stock................... -- -- (2,695,824)
Foreign currency translation.............................. 922 (46,187) (160,462)
Distributions to shareholders............................. (162,800) (9,230,000) --
Proceeds from exercise of stock options................... -- 445 43,194
----------- ----------- -----------
Net cash provided by financing activities.......... 3,437,510 1,589,743 13,831,101
----------- ----------- -----------

NET INCREASE (DECREASE) IN CASH............................. (3,192,885) 2,036,128 2,213,599
Effects of foreign currency exchange rates on cash.......... -- 34,032 (75,931)
----------- ----------- -----------
CASH, beginning of year..................................... 5,884,189 2,691,304 4,761,464
----------- ----------- -----------
CASH, end of year........................................... $ 2,691,304 $ 4,761,464 $ 6,899,132
=========== =========== ===========

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-10
131

THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

(1) BASIS OF PRESENTATION

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

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

Effective upon the consummation of the merger, each then issued and
outstanding share of Kroll common stock, including shares issued under the Kroll
restricted stock plan (see Note 11), was converted into 62.52 shares of common
stock of the Company or 6,098,561 shares of Company common stock in total.
Outstanding employee stock options of Kroll were converted at the same exchange
factor into options to purchase 551,492 shares of Company common stock (see Note
11).

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

There were no transactions between O'Gara and Kroll prior to the
combination, and immaterial adjustments were recorded to conform Kroll's
accounting policies. Certain reclassifications were made to the Kroll financial
statements to conform to the Company's presentations. The results of operations
for the separate companies and the combined amounts presented in the
consolidated financial statements follow:

O'GARA KROLL COMBINED
----------- ----------- ------------

Nine months ended September 30, 1997 (unaudited)
Revenue........................................... $82,567,200 $53,823,958 $136,391,158
Extraordinary item................................ (193,875) -- (193,875)
Net income........................................ 4,181,387 1,796,124 5,977,511
Year ended December 31, 1996
Revenue........................................... 82,777,691 70,883,058 153,660,749
Net income (loss)................................. 6,658,962 (801,740) 5,857,222
Year ended December 31, 1995
Revenue........................................... 32,816,996 53,024,304 85,841,300
Net income (loss)................................. (1,122,052) (5,413,687) (6,535,739)

In connection with the merger, the Company recorded, in the fourth quarter,
a charge to operating expenses of approximately $7.2 million ($5.7 million after
taxes, or $0.41 per diluted share) for direct and other merger-related costs
pertaining to the merger transaction. Merger transaction costs are nonrecurring
and include $0.8 million for stock-based compensation costs triggered by the
change in control of Kroll, $1.8 million for stay bonuses and severance and $4.6
million which consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing, travel and other related charges.

F-11
132
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company was formed originally in 1996 for the purposes of becoming a
holding company, effecting a reorganization and a combination of certain
affiliated entities and carrying out an initial public offering of common stock.
On October 28, 1996, various O'Gara entities (primarily O'Gara-Hess & Eisenhardt
Armoring Company (OHE)) and their related shareholders (primarily one
shareholder who owned or controlled approximately 86% to 88% of each entity)
entered into the reorganization plan. Accordingly, the accompanying consolidated
financial statements present, as a combination of entities under common control
as if using the pooling method of accounting, the financial position and related
results of operations of the O'Gara entities on a consolidated basis for all
periods presented.

On November 15, 1996, the Company completed its initial public offering of
common stock. The proceeds from the sale of 2,048,000 shares of common stock
were used by the Company for retirement of bank debt, payment of the AAA notes
described below, purchase of a manufacturing facility in Mexico, acquisition of
Palmer net assets (Note 3) and transaction costs associated with the offering.

On October 28, 1996 OHE distributed to its shareholders a dividend of
$9,000,000 in the form of long-term notes (the "AAA Notes") which represented
the undistributed previously taxed income of OHE as an S Corporation through the
effective date of the reorganization. During 1996 the Company recognized
approximately $27,000 in interest expense related to the AAA Notes.

In conjunction with the reorganization discussed above, the shareholders of
an affiliated entity forgave $122,000 owed by OHE for no consideration. As this
affiliated entity was controlled by a shareholder of the Company, this
transaction has been reflected as a contribution of capital in the accompanying
consolidated statement of shareholders' equity.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Consolidation -- The consolidated financial statements include the
accounts of O'Gara and Kroll and all their majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
20% to 50% owned entities are accounted for on the 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 of OHE but which were not included in the
O'Gara reorganization and combination.

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

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

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

F-12
133
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

(c) Marketable Securities -- The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," for the year ended December
31, 1996. Under SFAS 115, the Company must classify its debt and marketable
securities as either trading, available-for-sale or held-to-maturity. The
Company has classified all equity securities as available-for-sale.

Unrealized holding gains and losses, net of the related income tax effect
on the available-for-sale securities, are excluded from earnings and are
reported as a separate component of shareholders' equity until realized. The
Company recorded an unrealized gain (loss) of $14,167 and $(3,698) as of
December 31, 1996 and 1997, respectively.

(d) Concentrations of Credit Risk -- Financial instruments that subject the
Company to credit risk consist principally of trade receivables. Concentrations
of credit risk with respect to accounts receivable are limited by the number of
clients that comprise the Company's client base, along with the different
industries and geographic regions in which the Company's clients operate or
reside. The Company does not generally require collateral or other security to
support client receivables, although the Company does require retainers,
up-front deposits or irrevocable letters-of-credit in many situations. The
Company has established an allowance for doubtful accounts based upon facts
surrounding the credit risk of specific clients and past history. Management
does not anticipate incurring losses on its trade receivables in excess of
established allowances.

(e) Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets as follows:

Buildings and improvements............................. 5-40 years
Furniture and fixtures................................. 5-7 years
Machinery and equipment................................ 5-7 years
Leasehold improvements................................. Life of lease

(f) Databases -- Databases are capitalized costs incurred to obtain
information from third party providers. The Company relies on this information
to create and maintain its proprietary and non-proprietary databases. Because of
the continuing accessibility of the information and its usefulness to future
investigative procedures, the cost of acquiring the information is capitalized
and amortized over a five year period.

(g) Costs in Excess of Assets Acquired -- Costs in excess of assets
acquired represent the excess of the purchase cost over the fair value of net
assets acquired in a purchase business combination. Amortization is recorded on
a straight-line basis over periods ranging from 15 to 40 years. The Company
periodically reviews the carrying value of these assets and other long-lived
assets and impairments are recognized when the expected undiscounted future cash
flows are less than the carrying amount of the asset. Based on its most recent
analysis, the Company believes no impairment exists at December 31, 1997.

(h) 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.

F-13
134
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) 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.

(j) Research and Development -- Research and development costs are expensed
as incurred. The Company incurred approximately $91,000, $130,000 and $136,000
for the years ended December 31, 1995, 1996 and 1997, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.

(k) Advertising -- The Company expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1995, 1996 and
1997 were $340,000, $715,000 and $1,497,000, respectively.

(l) Earnings Per Share -- In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share are computed by dividing net income
by the weighted average number of shares of common stock and equivalents
outstanding during the year. Dilutive common stock equivalents represent shares
issuable upon assumed exercise of stock options and upon assumed issuance of
restricted stock. The following is a reconciliation of the numerator and
denominator for basic and diluted earnings per share for the years ended
December 31, 1995, 1996 and 1997:

YEAR ENDED DECEMBER 31, 1995
-----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ---------

Basic EPS.............................................. $(6,535,739) 10,020,277 $(0.65)
======
Effect of dilutive securities:
Options.............................................. -- --
Restricted stock..................................... -- --
----------- -----------
Diluted EPS............................................ $(6,535,739) 10,020,277 $(0.65)
=========== =========== ======

YEAR ENDED DECEMBER 31, 1996
-----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ---------

Basic EPS.............................................. $ 5,857,222 10,742,131 $ 0.55
======
Effect of dilutive securities:
Options.............................................. -- 130,544
Restricted stock..................................... (162,443) 287,482
----------- -----------
Diluted EPS............................................ $ 5,694,779 11,160,157 $ 0.51
=========== =========== ======

YEAR ENDED DECEMBER 31, 1997
-----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ---------

Basic EPS.............................................. $ 709,866 13,060,818 $ 0.05
======
Effect of dilutive securities:
Options.............................................. -- 216,586
Restricted stock..................................... -- 443,152
----------- -----------
Diluted EPS............................................ $ 709,866 13,720,556 $ 0.05
=========== =========== ======

F-14
135
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Basic and diluted earnings per share based on net income before
extraordinary item and cumulative effect of change in accounting principle were
$0.10 and $0.09 for the year ended December 31, 1997. The basic and diluted
earnings per share impact of the extraordinary item was $0.01 and the basic and
diluted earnings per share impact of the change in accounting principle was
$0.03.

(m) SFAS 130 "Reporting Comprehensive Income" -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130), which requires
comprehensive income and the associated income tax expense or benefit be
reported in a financial statement that is displayed with the same prominence as
other financial statements with an aggregate amount of comprehensive income
reported in that same financial statement. "Other Comprehensive Income" refers
to revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but not in net income. This
statement, which the Company intends to adopt in the first quarter of fiscal
1998, expands or modifies disclosures and, accordingly, will have no impact on
the Company's reported consolidated financial position, results of operations or
cash flows.

(n) Stock-Based Compensation -- The Company has elected to account for the
cost of its employee stock options and other forms of employee stock-based
compensation plans utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25) as allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). APB 25 requires compensation cost for stock-based compensation plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stockbased compensation plans. SFAS 123 allows an
entity to continue to measure compensation cost using the principles of APB 25
if certain pro forma disclosures are made. The pro forma disclosures required by
SFAS 123 are presented in Note 11(f).

(o) Change in Accounting Principle -- In the fourth quarter of 1997, the
Company changed its method of accounting for costs incurred in connection with
business process reengineering activities relating to information technology
transformation. Consistent with a consensus reached by the Emerging Issues Task
Force (EITF) under Issue 97-13 in late November 1997, the Company expensed costs
previously capitalized in earlier quarters of 1997 (approximately $360,000, net
of tax benefit of $240,000) as a cumulative change in accounting principle.

(p) Reclassifications -- Certain reclassifications have been reflected in
1995 and 1996 to conform with the current period presentation.

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

(3) ACQUISITIONS

The Company has completed the following acquisitions, all of which were
accounted for as purchases:

(a) Palmer Associates, S.C. -- In October 1996, the Company purchased
substantially all of the assets and certain liabilities of Palmer Associates,
S.C. (Palmer), a security services provider, for approximately $1,000,000, which
resulted in goodwill (amortized over fifteen years) and intangible assets equal
to the purchase price. The purchase price was payable $500,000 at the closing of
the Company's initial public offering and $250,000 each in November 1997 and
1998. The former owner also entered into a four year non-competition agreement,
payable in annual installments of $50,000, and a two year employment agreement.
F-15
136
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(b) Next Destination Limited -- On February 5, 1997, the Company acquired
all of the shares of Next Destination Limited (Next) for $3.5 million,
consisting of approximately $1.9 million in shares of the Company's common stock
(170,234 shares) and approximately $1.6 million in seller-provided financing in
the form of secured three-year 6% notes. Next, headquartered in Salisbury, the
United Kingdom (UK), is a distributor of high technology communication equipment
for the consumer electronic, marine, aviation, professional and leisure markets
in both the UK and Europe. The former managing director and founder of Next
agreed to continue to manage the business and entered into a three year
non-competition agreement. For accounting purposes, the acquisition was
effective on February 1, 1997 and the results of operations of Next are included
in the consolidated results of operations of the Company from that date forward.
The resulting goodwill from this transaction is being amortized over fifteen
years.

(c) Labbe, S.A. -- On February 12, 1997, the Company acquired all the
shares of Labbe, S.A. (Labbe) for approximately $14.2 million, consisting of
$10.7 million in cash and 376,597 shares of the Company's common stock valued at
approximately $3.5 million. Labbe, headquartered in Lamballe, France, provides
vehicle armoring systems for commercial customers located mainly in Western
Europe. The former shareholders are subject to certain non-competition
agreements upon their leaving the employment of the Company. For accounting
purposes, the acquisition was effective on January 1, 1997 and the results of
operations of Labbe are included in the consolidated results of operations of
the Company from that date forward. The resulting goodwill from this transaction
is being amortized over thirty years.

The following unaudited proforma combined results of operations for the
year ended December 31, 1996 assumes the Labbe acquisition occurred as of
January 1, 1996 (in thousands, except per share data):

YEAR ENDED
DECEMBER 31, 1996
-----------------

Sales.............................................. $177,779
Net income......................................... $ 6,052
Earnings per share:
Basic............................................ $0.56
Diluted.......................................... $0.54

(d) International Training, Incorporated -- On March 24, 1997, the Company
acquired all of the shares of International Training, Incorporated (ITI) for
approximately $2.5 million, consisting of approximately $800,000 in shares of
the Company's common stock (68,086 shares), $500,000 in cash and approximately
$1.2 million in seller-provided financing in the form of unsecured two-year 10%
notes. ITI, headquartered near Washington D.C., provides advanced security
training. For accounting purposes, the acquisition was effective on March 1,
1997 and the results of operations of ITI are included in the consolidated
results of operations of the Company from that date forward. The resulting
goodwill from this transaction is being amortized over fifteen years.

(e) ZAO IMEA -- On December 2, 1997, the Company acquired all of the shares
of ZAO IMEA (IMEA), a Russian corporation, and certain assets, liabilities and a
twenty year non-competition agreement in Russia from Acorn Communication Group,
Inc. (Acorn) for an aggregate of approximately $3.0 million, consisting of
$600,000 in cash and 138,889 shares of the Company's common stock valued at
approximately $2.4 million. IMEA provides vehicle armoring systems and other
equipment for commercial customers located in Russia. IMEA and Acorn had
substantially common ownership prior to the acquisition. The former shareholders
of IMEA also entered into employment agreements, which include non-competition
clauses, for periods of six months to three years. The allocation of the
purchase price was based on preliminary estimates and may be revised at a later
date pending the completion of certain appraisals and other analysis. For
accounting purposes, the acquisition was effective on December 1, 1997 and the
results of operations of IMEA are included in the consolidated results of
operations of the Company from that date forward. The resulting goodwill from
this transaction is being amortized over fifteen years.

F-16
137
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the acquisitions of Labbe, Next, ITI and IMEA, assets
were acquired and liabilities were assumed as follows:

NEXT LABBE ITI IMEA
------- -------- ------- -------
(DOLLARS IN THOUSANDS)

FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash................................................. $ -- $ 3,501 $ 123 $ 2
Accounts receivable.................................. 1,830 4,689 231 11
Inventories.......................................... 1,276 3,392 -- 553
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. -- 251 -- --
Prepaid expenses..................................... -- 65 4 7
Property, plant & equipment.......................... 80 3,360 216 82
Intangible assets.................................... -- 140 -- 1,467
Other non-current assets............................. -- 2,357 -- 4
Goodwill............................................. 3,459 7,662 2,061 1,820
------- -------- ------- -------
6,645 25,417 2,635 3,946
Less: Cash paid for net assets...................... -- (10,730) (500) (500)
Fair value of debt issued..................... (1,575) -- (1,231) (100)
Fair value of stock issued.................... (1,851) (3,431) (800) (2,378)
------- -------- ------- -------
$ 3,219 $ 11,256 $ 104 $ 968
======= ======== ======= =======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs............ $ 3,219 $ 9,287 $ 85 $ 968
Debt................................................. -- 1,969 19 --
------- -------- ------- -------
$ 3,219 $ 11,256 $ 104 $ 968
======= ======== ======= =======

(f) Purchase of Minority Interest -- During 1997, the Company exercised its
option to acquire the minority interest in its O'Gara Brazilian subsidiary for
69,565 shares of common stock valued at approximately $1.2 million.

F-17
138
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) BALANCE SHEET ACCOUNTS

(a) Trade Accounts Receivable and Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts -- The following summarizes the components of
trade accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts:

DECEMBER 31,
--------------------------
1996 1997
----------- -----------

United States Military:
Billed receivables........................................ $ 1,461,491 $ 3,756,035
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 10,189,891 9,253,872
----------- -----------
Total United States Military...................... $11,651,382 $13,009,907
=========== ===========
Other contracts:
Billed receivables........................................ $21,479,574 $33,893,224
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 5,136,657 2,824,592
----------- -----------
Total other contracts............................. $26,616,231 $36,717,816
=========== ===========
Total trade accounts receivable............................. $22,941,065 $37,649,259
=========== ===========
Total costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $15,326,548 $12,078,464
=========== ===========

Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $66,180,434 and $89,875,813 of progress billings to the United States
Military at December 31, 1996 and 1997, 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 contracts are substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.

The following summarizes activity in the allowance for doubtful accounts on
trade accounts receivable:

ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ----------- ----------

Year ended December 31, 1995................... $3,189,798 $3,102,310 $(3,731,814) $2,560,294
Year ended December 31, 1996................... $2,560,294 $3,259,976 $(3,906,539) $1,913,731
Year ended December 31, 1997................... $1,913,731 $2,043,080 $(1,441,232) $2,515,579

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

DECEMBER 31,
-------------------------
1996 1997
---------- -----------

Raw materials............................................... $4,782,321 $ 9,441,223
Vehicle costs and work-in-process........................... 3,951,319 10,011,747
---------- -----------
$8,733,640 $19,452,970
========== ===========

F-18
139
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes activity in valuation reserves for inventory
obsolescence:

ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- ---------- ---------- --------

Year ended December 31, 1995...................... $ -- $ -- $ -- $ --
Year ended December 31, 1996...................... $ -- $264,114 $ -- $264,114
Year ended December 31, 1997...................... $264,114 $113,567 $(23,782) $353,899

(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:

USEFUL DECEMBER 31,
LIFE ------------------------
DESCRIPTION (YEARS) 1996 1997
----------- ------- ---------- ----------

Advance to vendor........................................... -- $1,825,207 $1,275,437
Deferred costs.............................................. -- -- 610,376
Security deposits........................................... -- 326,376 471,859
Long-term receivable........................................ -- -- 380,000
Non-refundable deposit on an equipment lease with a related
party..................................................... 10 503,858 297,025
Deferred financing fees..................................... 7-30 152,940 876,667
Non-compete agreements...................................... 5 165,000 1,581,667
Long-term investments....................................... -- 180,998 101,630
Other long-term assets...................................... -- 186,753 865,031
---------- ----------
3,341,132 6,459,692
(290,707) (279,830)
---------- ----------
$3,050,425 $6,179,862
========== ==========

Costs applicable to bids in process are deferred when management believes
it is probable that future contracts will be obtained. These costs are
transferred to contract costs when contracts are awarded or are expensed when
the contract award is no longer considered probable.

(d) Accrued Liabilities -- Accrued liabilities consist of the following at
December 31, 1996 and 1997:

DECEMBER 31,
-------------------------
DESCRIPTION 1996 1997
----------- ---------- -----------

Payroll and related benefits................................ $5,574,621 $ 7,794,598
Property, sales and other taxes payable..................... 590,648 773,846
Accrued interest............................................ 268,605 564,168
Accrued satellite time...................................... 680,835 1,009,162
Other accruals.............................................. 2,514,206 3,786,879
---------- -----------
$9,628,915 $13,928,653
========== ===========

(5) INCOME TAXES

Prior to October 28, 1996, OHE was an S Corporation and generally was not
responsible for payment of income taxes. Rather, the respective OHE shareholders
were taxed on OHE's taxable income at the respective

F-19
140
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

individual federal and state income tax rates. Therefore, the income generated
by OHE was not subject to federal, state or certain foreign income taxes prior
to the date of OHE's reorganization on October 28, 1996. Accordingly, the
accompanying consolidated financial statements only reflect a provision
(benefit) for income taxes for Kroll, a C Corporation, for all periods prior to
October 28, 1996.

The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities using enacted tax rates.

The Company's provision (benefit) for income taxes, excluding extraordinary
item and the cumulative effect of a change in accounting principle, for all
periods is summarized as follows:

1995 1996 1997
----------- --------- -----------

Currently payable:
Federal............................................... $ (159,569) $(110,988) $ 2,109,804
State and local....................................... (262,956) 271,744 372,318
Foreign............................................... -- 83,000 1,364,873
----------- --------- -----------
(422,525) 243,756 3,846,995
----------- --------- -----------

Deferred:
Federal............................................... (576,910) (259,443) (1,270,976)
State and local....................................... (298,402) (145,937) (224,290)
Foreign............................................... -- -- --
----------- --------- -----------
(875,312) (405,380) (1,495,266)
----------- --------- -----------
$(1,297,837) $(161,624) $ 2,351,729
=========== ========= ===========

F-20
141
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

1995 1996 1997
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----- ----------- ----- ---------- -----

Provision (benefit) for income
taxes at the federal
statutory rate............... $(2,663,416) (34.0)% $ 1,936,504 34.0% $1,229,260 34.0%
State and local income taxes,
net of federal benefit....... (370,496) (4.7) 82,756 1.5 155,895 4.3
Impact of S Corp income/loss,
prior to reorganization...... 381,498 4.9 (2,087,529) (36.6) -- --
Impact of foreign income, prior
to reorganization............ -- -- (199,095) (3.5) -- --
Nondeductible expenses......... -- -- -- -- 1,390,163 38.4
Change in valuation
allowance.................... 1,338,113 17.1 109,303 1.9 (755,044) (20.9)
Effect of foreign
income/loss.................. 105,693 1.3 (8,768) (0.2) 577,743 16.0
Other.......................... (89,229) (1.1) 5,205 0.1 (246,288) (6.8)
----------- ----- ----------- ----- ---------- -----
Provision (benefit)
for income taxes... $(1,297,837) (16.5)% $ (161,624) (2.8)% $2,351,729 65.0%
=========== ===== =========== ===== ========== =====

F-21
142
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the Company's consolidated deferred income tax assets and
liabilities as of December 31 are summarized below:

1995 1996 1997
----------- ----------- -----------

Deferred tax assets:
Allowance for doubtful accounts..................... $ 547,247 $ 648,773 $ 710,441
Fixed assets, depreciation and amortization
differences...................................... 591,319 576,996 606,777
Accrual for restricted stock plan................... 464,347 164,794 --
Net operating loss carryforwards.................... 1,365,895 1,423,336 1,839,743
Payroll and other benefits.......................... -- 220,000 594,401
Other accruals...................................... -- 206,000 278,253
Acquisition costs................................... -- -- 440,000
Other............................................... 65,087 394,000 981,610
----------- ----------- -----------
3,033,895 3,633,899 5,451,225
Valuation allowance................................. (1,338,113) (2,303,336) (2,126,035)
----------- ----------- -----------
Net deferred tax assets..................... 1,695,782 1,330,563 3,325,190
----------- ----------- -----------
Deferred tax liabilities:
Nonaccrual service fee receivable................... (219,560) (219,560) (212,079)
Deferred revenue.................................... (1,678,846) (2,072,590) (1,903,975)
Database capitalization............................. (2,644,120) (2,738,824) (2,779,790)
S to C conversion................................... (1,264,792) (5,745) (5,223)
Other............................................... -- -- (166,893)
----------- ----------- -----------
(5,807,318) (5,036,719) (5,067,960)
----------- ----------- -----------
Net deferred tax liability.................. $(4,111,536) $(3,706,156) $(1,742,770)
=========== =========== ===========

The Company has certain foreign net operating loss carryforwards, primarily
in the United Kingdom and France, which approximate $1.4 million and $1.8
million at December 31, 1996 and 1997, respectively. The carryforwards expire
beginning in 2001. A valuation allowance for the full amount 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.

(6) RELATED PARTY TRANSACTIONS

(a) Advances to Shareholders -- The Company historically made advances to
certain employee-shareholders. Such advances are due on demand and are
non-interest bearing. An outstanding advance to a major shareholder of the
Company totalled $120,191 at both December 31, 1996 and 1997, respectively. At
December 31, 1996 and 1997, the Company also had advances to certain minority
shareholders in the amount of $168,638 and $405,805, respectively.

(b) Notes Payable -- Shareholders -- OHE had certain notes payable to
shareholders, which were repaid upon the completion of the Company's initial
public offering in 1996. Interest expense associated with these obligations
approximated $33,000 and $27,000 for the years ended December 31, 1995 and 1996,
respectively.

F-22
143
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Kroll has certain amounts due to/from shareholders of the Company which
include the following amounts at December 31:

1996 1997
----------- ---------

Amounts due from a certain shareholder.............. $ 1,345,499 $ --
----------- ---------
Amounts due to certain shareholders................. (8,393,765) (309,500)
----------- ---------
Net due to shareholders................... $(7,048,266) $(309,500)
=========== =========

Balances included in amounts due to/from shareholders are classified as
open advance accounts or term loans. The net due to shareholders under the term
loans was $2,309,500 at December 31, 1996. Substantially all amounts due to and
due from shareholders were paid off in connection with the merger except for a
loan payable of $309,500 which is due on demand and bears interest at prime less
0.5%.

(c) Sales -- Shareholder -- During 1995, 1996 and 1997, the Company
rendered services to a corporation which is also a shareholder of the Company.
Total revenue recognized for the years ended December 31, 1995, 1996 and 1997
was $3,868,967, $5,325,559 and $6,412,244, respectively. Additionally, this
corporation provided certain services to the Company which have been included in
cost of sales and operating expenses in the accompanying consolidated statements
of operations. These costs were approximately $485,807, $824,348 and $814,154
for the years ended December 31, 1995, 1996 and 1997, respectively. The year end
accounts receivable balance for this customer was approximately $857,820 and
$897,361 at December 31, 1996 and 1997, respectively.

(d) Purchases and Sales -- Affiliated Entities -- The Company had the
following purchase and sale transactions with affiliated entities:

YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- ---------- --------

Purchases from affiliated entities........................ $557,000 $1,176,000 $411,000
Sales to affiliated entities.............................. 208,000 236,000 21,000

(e) Building and Equipment Leases -- Affiliated Entities -- The Company
currently leases a corporate aircraft from an affiliated entity under a ten year
lease agreement which began in February 1995. The lease stipulates minimum
monthly payments of $35,200, with additional charges accruing for usage in
excess of established base limits. The terms of the lease required a
non-refundable deposit. The original deposit of approximately $504,000 is being
amortized as rental expense over the existing lease period. Rental expense,
including amortization recognized, approximated $414,000, $422,000 and $234,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
also paid this affiliated entity $327,000 in fiscal 1996 for usage of the
aircraft during the roadshow for the initial public offering and included such
amount in issuance costs. Additionally, the Company paid $576,000 in fiscal 1997
for usage of the aircraft in connection with the merger with Kroll and included
such amount in merger-related costs. Management is of the opinion that the
hourly rate paid by the Company was equivalent to the rate charged by the
affiliated entity to other unrelated companies for similar services and it was
favorably comparable to rates charged by another unrelated charter service for
similar aircraft. Also, the Company has recorded $152,000 in prepaid expenses
related to payments made for the future use of the aircraft at December 31,
1997.

OHE is also currently leasing equipment and a manufacturing facility from
two affiliated entities under various three year and month-to-month lease
agreements which began in July 1995. Rental expense approximated $17,000,
$757,000 and $579,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.

(f) Consulting and Commission Services -- Various affiliated entities and a
former minority shareholder of the Company provided certain consulting,
commission, sales and marketing services for the Company. Effective

F-23
144
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

with the reorganization (Note 1), these services were terminated. The Company
recognized expense of $526,000 and $466,000 for the years ended December 31,
1995 and 1996, respectively, for these services.

In 1995, prior to joining the Company, a minority shareholder was paid
$135,000, in conjunction with a consulting agreement. These payments were
recognized in selling and marketing expenses in the accompanying consolidated
statements of operations.

(g) Sale of Receivables -- During the year ended December 31, 1995, Kroll
entered into agreements to sell, without recourse, accounts receivable in the
amount of $4,507,800 to a shareholder. A discount of $225,390, or 5%, was
applied to the sales. Under the terms of the agreements, a portion of the sales
proceeds was withheld by the purchaser subject to a final determination of the
specific account receivables to be included in the sale. At December 31, 1995,
all obligations to the purchaser, pursuant to the agreements, were satisfied.

(h) Other -- During 1995 and 1996, OHE recognized approximately $11,000 and
$3,000, respectively, in expense relating to payments made to an affiliated
entity for use of its facilities for corporate meetings. There were no such
payments in 1997.

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

YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- ----------

Sales
to shareholder......................................... $3,868,967 $5,325,559 $6,412,244
to affiliated entities................................. 208,000 236,000 21,000
Purchases
from shareholder....................................... 485,807 824,348 814,157
from affiliated entities............................... 557,000 1,176,000 411,000
Lease expense to affiliated entities..................... 431,000 1,179,000 813,000
Consulting and commission services expense
provided by affiliated entities........................ 377,000 348,000 --
provided by minority shareholders...................... 284,000 118,000 --
Facility service fees paid to affiliated entity.......... 11,000 3,000 --
Receivables sale to shareholder.......................... 4,507,800 -- --
Charter fees included in offering or merger costs........ -- 327,000 576,000

(7) REVOLVING LINES OF CREDIT

The Company had a $12,000,000 revolving line of credit with a bank at
December 31, 1996, which was replaced during 1997. Borrowings under this line of
credit were $9,935,947 at December 31, 1996.

On December 1, 1997 the Company amended and restated its credit agreement
to provide for a revolving line of credit of $7.0 million maturing on May 31,
1999, a letter of credit facility of approximately $7.7 million and a term note
of $7.0 million which matures on January 4, 1999. The revolving credit facility
bears interest at rates ranging from prime less 0.5% to prime or, at the
Company's option, at LIBOR plus 2.0% to LIBOR plus 2.5%, dependent upon amounts
outstanding. Average borrowings under the revolving line of credit and its
predecessors were $6,530,260, $9,915,663 and $4,568,994 during 1995, 1996 and
1997, respectively, at an approximate weighted average interest rate of 8.82%,
8.27% and 8.46%, respectively. The maximum borrowings outstanding during 1995,
1996 and 1997 were $8,216,000, $12,145,000 and $11,600,000, respectively.
Borrowings under this line of credit were $559,112 at December 31, 1997.

F-24
145
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The credit agreement includes certain financial covenants which, among
other restrictions, require the maintenance of certain financial ratios,
including fixed charge coverage and net worth, and impose limitations on foreign
investment, total intangible assets, additional indebtedness and capital
expenditures. The Company was not in compliance with certain of these covenants
as of December 31, 1997. These events of non-compliance have been waived by the
lender.

(8) LONG-TERM DEBT

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

DECEMBER 31,
-------------------------
1996 1997
---------- -----------

Senior unsecured notes payable to various institutions,
interest at 9.56% payable semi-annually, principal payable
at maturity in May 2004, subject to prepayment
penalties................................................. $ -- $35,000,000
Development Bonds, variable interest rate approximating 85%
of the bond equivalent yield of 13 week U.S. Treasury
bills (not to exceed 12%), which approximated 3.9% at
December 31, 1997, payable in scheduled installments
through September 2016, subject to optional tender by the
bondholders and a corresponding re-marketing agreement,
secured by the property, plant and equipment of OHE, and a
bank letter of credit (Note 12)........................... 1,525,000 1,432,224
Note payable to insurance company, interest payable
semi-annually at 10.95%, principal payable semi-annually
totaling at a minimum $2,500,000 subject to additional
principal payments based on cash flows, subject to certain
prepayment penalties, maturing December 15, 1999, repaid
in full in December, 1997................................. 8,125,000 --
Notes payable to former shareholders of Next, stated
interest at 6%, imputed interest at 10%, payable in
scheduled installments through February 2000, principal
due at maturity, secured by assets of Next................ -- 1,614,375
Note payable to bank, interest at prime or LIBOR plus 2.5%,
payable monthly, principal due upon maturity on January 4,
1999, secured by substantially all of the Company's
domestic personal property (Note 7)....................... -- 7,000,000
Note payable to former shareholder of Palmer, interest at
7%, payable in scheduled installments through November
1998...................................................... 505,834 500,000
Mortgage note to bank, interest at 8.68%, payable in monthly
installments of $2,349, including interest, through April
2003, secured by real estate and the guaranty of OHE's
former majority shareholder............................... 195,723 --
Note payable to former shareholder of the Company's Mexican
subsidiary, interest imputed at 9%, due October 1, 1997... 45,000 --
Note payable to former shareholder of Kroll, non-interest
bearing, maturing January 1998............................ -- 1,255,402
Notes payable to former shareholders of ITI, interest at
10%, payable in scheduled installments through July
1999...................................................... -- 1,231,614

F-25
146
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DECEMBER 31,
-------------------------
1996 1997
---------- -----------

Other notes payable, interest at 7.75% to 10.9%, payable in
scheduled installments through September 2007, a portion
of which is secured by various equipment.................. 33,955 2,030,901
---------- -----------
10,430,512 50,064,516
Less-current portion........................................ 4,461,420 3,200,925
---------- -----------
$5,969,092 $46,863,591
========== ===========

The Company's $35 million of senior unsecured notes payable also contains
financial covenants, which among other restrictions, require the maintenance of
net worth and fixed charge coverage ratios.

Scheduled maturities of long-term debt at December 31, 1997 are as follows:

1998........................................................ $ 3,200,925
1999........................................................ 7,787,203
2000........................................................ 1,948,940
2001........................................................ 208,690
2002........................................................ 167,223
Thereafter.................................................. 36,751,535
-----------
$50,064,516
===========

(9) OPERATING LEASES

The Company leases office space and certain equipment under agreements with
terms from one to ten years. The following is a schedule, by year, of
approximate future minimum rental or usage payments required under operating
leases that have initial or non-cancelable lease terms in excess of one year as
of December 31, 1997:

AFFILIATED
ENTITIES OTHER TOTAL
---------- ----------- -----------

1998..................................................... $ 703,265 $ 4,574,331 $ 5,277,596
1999..................................................... 439,600 3,571,406 4,011,006
2000..................................................... 422,400 2,711,017 3,133,417
2001..................................................... 422,400 2,166,347 2,588,747
2002..................................................... 422,400 1,834,362 2,256,762
Thereafter............................................... 1,126,400 8,508,128 9,634,528
---------- ----------- -----------
$3,536,465 $23,365,591 $26,902,056
========== =========== ===========

Rental expense charged against current operations amounted to approximately
$3,317,000, $4,595,000 and $4,115,000, for the years ended December 31, 1995,
1996 and 1997, respectively.

(10) DEFINED CONTRIBUTION AND BONUS PLANS

As of December 31, 1997, the Company had the following employee benefit
plans in place:

(a) Defined Contribution Plans -- The Company and its subsidiaries have
established various non-contributory profit sharing/401(k) plans covering
substantially all of the Company's employees. Contributions to the plans are
discretionary and are determined annually by the Company's Board of Directors.
Certain plans also

F-26
147
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

offer a matching contribution whereby the Company will contribute a percentage
of the amount a participant contributes, limited to certain maximum amounts.
Plan contribution expense charged against current operations for all such plans
amounted to approximately $1,083,000, $1,243,000 and $1,211,140 for the years
ended December 31, 1995, 1996 and 1997, respectively.

(b) Profit and Revenue Sharing Plans -- In 1991, Kroll adopted a Profit and
Revenue Sharing Plan to give Kroll employees an annual cash incentive bonus
based on Kroll's performance. The plan made a portion of most employees'
compensation (except administrative personnel, who have a guaranteed bonus)
contingent upon the achievement of certain performance incentives. There were
two plans under the Profit and Revenue Sharing Plan umbrella -- the Profit and
Revenue Sharing Plan for Managing Directors and the Bonus Plan for Professionals
and Senior Administrative Employees.

Profit and Revenue Sharing Plan for Managing Directors

The managing directors' bonus plan is based on a matrix of Kroll revenue
and a percentage of operating profit. The maximum bonus opportunity for managing
directors was 50%, 15% and 35% of salary in 1995, 1996 and 1997, respectively.
The administrator may amend, modify or terminate the plan at any time.

Bonus Plan for Professional and Senior Administrative Staff

Similar to the managing directors' bonus plan, the plan for the
professional staff is based on a matrix of Kroll revenue and a percentage of
operating profit. The maximum bonus opportunity for this group ranged from 18%
to 26% of salary in 1995, from 15% of salary in 1996, and from 15% of salary in
1997, depending on the employee's level in Kroll. The administrator may amend,
modify or terminate the plan at any time.

The Company expensed approximately $314,000, $2,288,000 and $516,000
associated with the profit and revenue sharing plans in 1995, 1996 and 1997,
respectively.

(11) EQUITY ARRANGEMENTS

(a) Stock Option Plans -- In 1996, the Company adopted a stock option plan
(the 1996 Plan) for employees and nonemployee directors. The Company may grant
options for up to 836,000 shares under the 1996 Plan. Options for 180,000 and
482,050 shares were granted during 1996 and 1997, respectively. Options granted
under the 1996 Plan are generally granted at fair market value at the date of
grant and are exercisable over periods not exceeding ten years.

In January 1995, Kroll established the Kroll Holdings, Inc. Management
Stock Option Plan (the Management Stock Option Plan). Options granted under the
Management Stock Option Plan are nonqualified stock options. Options to purchase
380,747 and 33,448 shares of common stock were granted under the Management
Stock Option Plan in 1995 and 1996, respectively. In addition, during 1996,
options to purchase 137,294 shares of common stock were granted to two key
employees with an exercise price above market price. There were no option grants
under the Management Stock Option Plan during 1997.

(b) Restricted Stock Plan -- Kroll adopted a long-term incentive plan
designed to give managing directors and other key employees of the Kroll
division a stake in the long-term success of Kroll through grants of phantom
stock options. Each option gave the right to receive a payment equal to the
appreciation in the price of the option at the payment determination date.

Effective June 14, 1993, Kroll replaced the 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. Participants who
were awarded stock under the long-term incentive plan prior to or in January
1991 vested in three years, as they received a two-year credit toward vesting.
Participants who were awarded stock under the long-term incentive plan after
January 1, 1991 and prior to, or in January 1992, vested in four years, as they

F-27
148
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

received a one-year credit toward vesting. Under the provisions of the plan, a
participant had the ability to put the stock back to Kroll and receive cash for
the then fair value of the stock. In addition, the plan included a provision
which resulted in accelerated vesting of all shares in the event of a change in
control of Kroll. The Company has accounted for this plan as a fixed plan and,
accordingly, compensation expense was based on the fair market value as
determined by independent appraisal at the date of grant.

During 1996, 259,271 shares of restricted stock fully vested and were
issued. Based on a valuation of Kroll, the total value assigned to these shares
was $572,286. As a result of the merger in December 1997, all remaining shares
associated with the restricted stock plan vested and all restrictions lapsed on
the merger date. In connection with this accelerated vesting, the Company
recognized compensation expense of approximately $800,000 in 1997, which is
included with merger related costs in the accompanying consolidated statement of
operations. In addition to the regular tax benefit based on compensation expense
recognized, the Company will also realize a tax benefit for the fair market
value of all restricted shares which became fully vested in 1997. This benefit
of approximately $2.2 million has been recognized as an increase to additional
paid-in-capital in the accompanying consolidated statement of shareholders'
equity. This balance represents the spread between cumulative compensation
expense recognized by the Company for accounting purposes and the cumulative
compensation expense recognized for tax purposes based on the fair market value
of the shares. No shares are 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.

(c) Kroll Supplemental Executive Award Agreements -- The Company entered
into agreements with certain senior Kroll executives which provided additional
benefits to the participants. During 1996, all 144,421 previously granted shares
fully vested and were issued. Based on a valuation of the Company, the total
value assigned to the shares on the vesting date equaled $318,780.

(d) 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.

(e) OHE Executive Bonus Plan -- During 1993, OHE adopted an executive bonus
plan, which covered four individuals. The plan awarded a bonus based on the
attainment of goals stipulated in the five year business plan, ranging from 50%
to 120% of the executives' base compensation. The bonus amounts were distributed
50% in cash and 50% in non-qualified stock options to purchase stock of OHE.
Subject to the executives' ability to elect a decrease in the percentage of cash
payments and to increase the percentage of stock options, 50% of the bonus
amount was payable in cash, and the remainder in stock options. OHE issued
121,463 options in 1994 based on 1993's operating results. No options were
issued in 1995 or 1996. In August 1996 the 121,463 options were exercised for
121,463 shares of common stock of the Company for $445 and the executive bonus
plan was terminated.

(f) Stock Based Compensation Disclosure -- With respect to the 1996 Plan
and the Management Stock Option Plan, SFAS No. 123 requires, at a minimum, pro
forma disclosures of expense for stock-based awards based on their fair values.
Had compensation cost for these plans been determined consistent with SFAS 123,
the

F-28
149
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company's net income (loss) and diluted earnings (loss) per share for the years
ended December 31, 1996 and 1997 would have been as follows:

1996 1997
---------- --------

Net income (loss):
As reported............................................... $5,857,222 $709,866
Pro forma................................................. $5,834,572 $(81,481)
Diluted earnings (loss) per share:
As reported............................................... $ 0.52 $ 0.05
Pro forma................................................. $ 0.52 $ (0.01)

Had compensation cost for the Company's stock options issued in 1995 and
1996 under the Management Stock Option Plan been determined consistent with SFAS
No. 123, there would have been no effect on the Company's net loss or diluted
loss per share as these options were determined to have a fair value of $0.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997:

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------

Dividend yield.............................................. 0% 0%
Expected volatility......................................... 39.3% 40.5%
Risk-free interest rate..................................... 6.5% 5.96% - 6.76%
Expected lives.............................................. 7.5 years 7.5 years

At December 31, 1996, the 180,000 options granted during 1996 under the
1996 Plan to employees and non-employee directors have an exercise price of $9,
a fair value of $4.98 per option and remaining contractual lives of 9 years. The
482,050 options granted during 1997 to employees and non-employee directors have
exercise prices between $9.88 and $17.25, fair values ranging from $5.56 to
$9.48 per option and remaining contractual lives of 10 years.

A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and the change during the years then ended is presented in
the table below:

1995 1996 1997
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------

Outstanding, beginning of year.... -- $ -- 380,747 $6.40 731,489 $ 6.11
Granted........................... 380,747 6.40 350,742 5.79 482,050 15.52
Exercised......................... -- -- -- -- (4,200) 9.00
Forfeited/Expired................. -- -- -- -- (37,950) 9.46
------- ----- ------- ----- --------- ------
Outstanding, end of year.......... 380,747 $6.40 731,489 $6.11 1,171,389 $ 9.95
======= ===== ======= ===== ========= ======
Exercisable, end of year.......... 95,218 $6.40 235,263 $5.23 698,239 $ 6.16
======= ===== ======= ===== ========= ======

F-29
150
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) COMMITMENTS AND CONTINGENCIES

(a) Letters of Credit -- Under the terms of the Economic Development
Revenue Bonds Agreement, OHE is required to maintain a letter of credit
supporting the debt. The Company's lender is committed to providing this letter
of credit through September 1, 1999. As of December 31, 1997, the Company had an
outstanding letter of credit in the amount of $1,681,750.

At December 31, 1997, the Company had standby and purchase letters of
credit, issued by two financial institutions, in the aggregate amount of
$4,776,502.

(b) Purchase Agreement -- In June 1995, the Company entered into a firm
purchase agreement with Glocom, Inc. ("Glocom"). The agreement provided for an
irrevocable purchase order for the purchase of 4,000 units of the Compact-M
portable satellite telecommunication unit for approximately $12,000,000. In
October 1997, the agreement was amended to provide certain pricing concessions
to the Company and to provide a reduction in the quantity of units that must be
purchased. The amendment also provided certain licensing rights to the Company.
At December 31, 1997, the Company was committed to purchase approximately 250
units at a total cost of approximately $0.7 million. In accordance with the
original agreement, the Company advanced a total of $3,000,000 to Glocom for the
funding of the related production costs. As of December 31, 1996 and 1997, the
Company had advances to the above vendor of $2,320,307 and $1,673,123,
respectively.

(c) Employment Agreements -- On December 1, 1997, the Company entered into
employment agreements with seven key officers and five key employees with annual
compensation ranging in value from $65,000 to $375,000, ending on November 30,
2000. Each of these officers also is eligible for an annual bonus plan. Five of
the officers were granted options to purchase shares of the Company's common
stock at the then existing market value, with the number of shares ranging from
10,000 to 75,000 (see Note 11(f)). In the event of termination without cause,
the terminated individual shall continue to receive his salary for the greater
of the remainder of the agreement or one year. If an agreement is not renewed,
the officer shall receive one year's salary. Each officer also has agreed to
certain non-competition clauses.

As of December 31, 1997, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $6.8 million.

(d) Legal Matters -- The Company is party to various legal proceedings
arising from its operations. Management of the Company believes that the outcome
of these proceedings, individually and in the aggregate, will have no material
adverse effect on the Company's financial position, results of operations or its
cash flows.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

(14) CUSTOMER AND SEGMENT DATA

(a) Segment Data -- The Company operates in three business segments, the
Security Products and Services Group, the Investigations and Intelligence Group
and the Voice and Data Security Group.

F-30
151
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarizes information about the Company's business segments:

INVESTIGATIONS
SECURITY AND
PRODUCTS AND INTELLIGENCE VOICE AND DATA
SERVICES GROUP GROUP SECURITY GROUP CONSOLIDATED
-------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)

1995
Net sales to unaffiliated
customers.......................... $ 34,883 $48,914 $ 2,044 $ 85,841
======== ======= ======= ========
Operating income (loss).............. $ (430) $(3,618) $ (589) $ (4,637)
======== ======= ======= ========
Identifiable assets at year-end...... $ 26,490 $35,678 $ 3,324 $ 65,492
======== ======= =======
Corporate assets..................... 1,275
--------
Total assets at year-end............. $ 66,767
========
1996
Net sales to unaffiliated
customers.......................... $ 79,156 $66,735 $ 7,770 $153,661
======== ======= ======= ========
Operating income..................... $ 6,953 $ 1,008 $ 538 $ 8,499
======== ======= ======= ========
Identifiable assets at year-end...... $ 38,380 $34,681 $ 6,816 $ 79,877
======== ======= =======
Corporate assets..................... 1,357
--------
Total assets at year-end............. $ 81,234
========
1997
Net sales to unaffiliated
customers.......................... $105,557 $67,419 $17,437 $190,413
======== ======= ======= ========
Operating income..................... $ 8,014 $ 665 $ 292 $ 8,971
======== ======= ======= ========
Identifiable assets at year-end...... $ 74,283 $36,955 $13,449 $124,687
======== ======= =======
Corporate assets..................... 9,284
--------
Total assets at year-end............. $133,971
========

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. Depreciation expense
and capital expendi-

F-31
152
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

tures for each of the Company's business segments for the years ended December
31, 1995, 1996 and 1997 are as follows:

INVESTIGATIONS
SECURITY AND
PRODUCTS AND INTELLIGENCE VOICE AND DATA
SERVICES GROUP GROUP SECURITY GROUP CONSOLIDATED
-------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)

1995
Depreciation expense................ $ 462 $ 791 $-- $1,253
====== ====== === ======
Capital expenditures................ $ 755 $ 373 $-- $1,128
====== ====== === ======
1996
Depreciation expense................ $ 841 $ 690 $-- $1,531
====== ====== === ======
Capital expenditures................ $2,627 $ 603 $-- $3,230
====== ====== === ======
1997
Depreciation expense................ $1,427 $ 774 $16 $2,217
====== ====== === ======
Capital expenditures................ $3,149 $1,663 $43 $4,855
====== ====== === ======

Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash,
certain intangible assets and certain prepaid expenses.

The following summarizes information about the Company's different
geographic areas:

UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
------- ------ ------- ------------ ------------
(DOLLARS IN THOUSANDS)

1995
Net sales to unaffiliated customers........ $70,509 $1,708 $13,624 $ -- $85,841
Intercompany............................... 908 276 1,542 (2,726) --
------- ------ ------- ------- -------
Total net sales....................... $71,417 $1,984 $15,166 $(2,726) $85,841
======= ====== ======= ======= =======
Operating income (loss).................... $(3,429) $ (860) $ (348) $ -- $(4,637)
======= ====== ======= ======= =======
Identifiable assets........................ $57,450 $1,338 $ 6,704 $ -- $65,492
======= ====== ======= =======
Corporate assets........................... 1,275
-------
Total assets at year-end................... $66,767
=======

F-32
153
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
(DOLLARS IN THOUSANDS)

1996
Net sales to unaffiliated customers.... $129,290 $ 2,142 $22,229 $ -- $153,661
Intercompany........................... 3,584 316 2,804 (6,704) --
-------- ------- ------- -------- --------
Total net sales................... $132,874 $ 2,458 $25,033 $ (6,704) $153,661
======== ======= ======= ======== ========
Operating income....................... $ 6,451 $ (118) $ 2,166 $ -- $ 8,499
======== ======= ======= ======== ========
Identifiable assets.................... $ 64,739 $ 1,205 $13,933 $ -- $ 79,877
======== ======= ======= ========
Corporate assets....................... 1,357
--------
Total assets at year-end.......... $ 81,234
========
1997
Net sales to unaffiliated customers.... $119,112 $24,004 $47,297 $ -- $190,413
Intercompany........................... 7,413 208 5,624 (13,245) --
-------- ------- ------- -------- --------
Total net sales................... $126,525 $24,212 $52,921 $(13,245) $190,413
======== ======= ======= ======== ========
Operating income....................... $ 3,810 $ 1,382 $ 3,779 $ -- $ 8,971
======== ======= ======= ======== ========
Identifiable assets.................... $ 69,610 $23,706 $31,371 $ -- $124,687
======== ======= ======= ========
Corporate assets....................... 9,284
--------
Total assets at year-end.......... $133,971
========

The Company accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.

The following summarizes the Company's sales in the United States and
foreign locations:

YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)

Sales to unaffiliated customers:
U.S. Government........................................... $11,514 $ 51,505 $ 43,719
Other United States....................................... 45,124 61,080 58,158
Middle East............................................... 8,582 7,598 5,887
Europe.................................................... 8,831 11,798 44,022
Asia...................................................... 6,729 8,946 10,697
Central & South America................................... 1,050 5,807 20,123
Other Foreign............................................. 4,011 6,927 7,807
------- -------- --------
$85,841 $153,661 $190,413
======= ======== ========

Export sales by the Company's domestic operations were approximately 11%,
15% and 16% of net sales for the years ended December 31, 1995, 1996 and 1997,
respectively.

F-33
154
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company is subject to audit and investigation by various agencies which
oversee contract performance in connection with the Company's contracts with the
U.S. Government. 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.

The Company has foreign operations and assets in France, the United
Kingdom, China, Brazil, Mexico, the Philippines, Russia, India, Australia,
Japan, Saudi Arabia, Singapore, Switzerland, and Italy. In addition, the Company
sells its products and services in other foreign countries and continues to
increase its level of international activity. Accordingly, the Company is
subject to various risks including, among others, foreign currency restrictions,
exchange rate fluctuations, government instability and complexities of local
laws and regulations.

(b) Major Customers -- During the years ended December 31, 1995, 1996 and
1997, sales to the U.S. Government approximated 13%, 34%, and 23% of the
Company's net sales, respectively. In addition, the year-end accounts receivable
balance of the U.S. Government approximated 10% and 6% of the Company's accounts
receivable balance as of December 31, 1996 and 1997, respectively.

(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company has entered into four foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
a demand loan to a subsidiary which is denominated in the foreign currency. By
virtue of these contracts, the Company has fixed the total dollar amount which
they will receive under the aforementioned subsidiary loan through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. The
total notional amount of the contracts, which mature between January 1998 and
July 1999, is $15.5 million. The Company's cumulative foreign currency
translation adjustment component of shareholders' equity was increased by
$346,000 in 1997 as a result of these agreements.

The Company has estimated the fair value of their foreign exchange
contracts based on information obtained from the counterparty of the amount the
Company would receive at December 31, 1997 in order to terminate the agreements.
As of December 31, 1997, the Company would have received approximately $534,000
upon cancellation of all contracts.

F-34
155
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(16) SUPPLEMENTAL CASH FLOWS DISCLOSURES

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

1995 1996 1997
---------- ---------- ----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $2,636,061 $4,293,970 $4,579,261
---------- ---------- ----------
Cash paid for taxes.................................... $ 123,686 $ 97,629 $2,645,474
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of restricted stock........................... $ -- $ 891,066 $1,356,280
---------- ---------- ----------
Note payable for purchase of Palmer net assets......... $ -- $ 505,834 $ --
---------- ---------- ----------
Affiliate obligation forgiven in connection with the
reorganization...................................... $ -- $ 122,000 $ --
---------- ---------- ----------
Exchange of note receivable for trade receivables...... $ 60,000 $ -- $ --
---------- ---------- ----------
Exchange of stock in an unaffiliated company for trade
receivables......................................... $ 125,000 $ -- $ --
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of Next................................. $ -- $ -- $1,851,284
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of Labbe................................ $ -- $ -- $3,431,000
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of ITI.................................. $ -- $ -- $ 800,011
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of IMEA................................. $ -- $ -- $2,378,474
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of minority interest.................... $ -- $ -- $1,243,474
---------- ---------- ----------
Notes issued in connection with acquisition of Next.... $ -- $ -- $1,575,000
---------- ---------- ----------
Notes issued in connection with acquisition of ITI..... $ -- $ -- $1,231,513
---------- ---------- ----------
Notes issued in connection with acquisition of IMEA.... $ -- $ -- $ 100,000
---------- ---------- ----------
Tax benefit of restricted stock vesting................ $ -- $ -- $2,160,341
---------- ---------- ----------

(17) QUARTERLY FINANCIAL DATA (UNAUDITED)

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997
Net sales................................................ $41,239 $47,360 $47,791 $54,023
Gross profit............................................. 13,405 15,585 14,481 15,298
Net income (loss)........................................ 1,529 2,292 2,156 (5,267)
Earnings (loss) per share:
Basic.................................................. $ 0.12 $ 0.17 $ 0.17 $ (0.40)
Diluted................................................ $ 0.09 $ 0.15 $ 0.14 $ (0.40)
1996
Net sales................................................ $36,229 $38,666 $36,959 $41,807
Gross profit............................................. 11,183 9,625 14,204 7,190
Net income (loss)........................................ 3,177 818 3,968 (2,106)
Earnings (loss) per share:...............................
Basic.................................................. $ 0.30 $ 0.08 $ 0.38 $ (0.18)
Diluted................................................ $ 0.27 $ 0.05 $ 0.35 $ (0.18)

F-35
156

THE KROLL-O'GARA COMPANY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)

ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 6,899 $ 40,318
Marketable securities..................................... 23 --
Trade accounts receivable, net of allowance for doubtful
accounts of $2,516 and $2,457 at December 31, 1997 and
June 30, 1998, respectively............................ 37,649 41,267
Unbilled revenues......................................... 3,082 5,991
Other receivables
Advances to shareholders............................... 526 173
Affiliates............................................. 366 606
Employees.............................................. 48 108
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 12,078 19,802
Inventories............................................... 19,453 20,153
Prepaid expenses and other................................ 6,455 5,542
Deferred tax asset........................................ 412 412
-------- --------
Total current assets................................. 86,991 134,372
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land...................................................... 1,637 1,637
Buildings and improvements................................ 6,223 6,444
Leasehold improvements.................................... 5,243 5,277
Furniture and fixtures.................................... 4,630 4,961
Machinery and equipment................................... 11,290 12,526
Construction-in-progress.................................. 1,037 1,865
-------- --------
30,060 32,710
Less: accumulated depreciation............................ (15,448) (16,239)
-------- --------
14,612 16,471
-------- --------
DATABASES, net of accumulated amortization of $19,506 and
$21,093 at December 31, 1997 and June 30, 1998,
respectively.............................................. 8,336 8,467
COSTS IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $772 and $1,396 at December 31, 1997 and
June 30, 1998, respectively............................... 17,852 28,515
OTHER ASSETS................................................ 6,180 5,293
-------- --------
32,368 42,275
-------- --------
$133,971 $193,118
======== ========

The accompanying notes are an integral part of these consolidated balance
sheets.
F-36
157

THE KROLL-O'GARA COMPANY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(UNAUDITED)
(DOLLARS IN THOUSANDS)

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit................................. $ 559 $ --
Current portion of long-term debt......................... 3,201 973
Shareholder payable....................................... 309 294
Accounts payable--
Trade.................................................. 31,586 26,973
Affiliates............................................. 875 131
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 320 361
Accrued liabilities....................................... 13,929 13,128
Income taxes currently payable............................ 845 2,081
Customer deposits......................................... 3,840 2,627
-------- --------
Total current liabilities............................ 55,464 46,568
OTHER LONG-TERM LIABILITIES................................. 1,533 1,861
DEFERRED INCOME TAXES....................................... 2,155 2,153
LONG-TERM DEBT, net of current portion...................... 46,864 39,319
-------- --------
Total liabilities.................................... 106,016 89,901
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued................................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,590,525, and 17,276,955 shares issued
and outstanding in 1997 and 1998, respectively......... 136 173
Additional paid-in-capital................................ 50,590 119,616
Retained deficit.......................................... (22,387) (16,080)
Accumulated other comprehensive income (loss)............. (384) (492)
-------- --------
Total shareholders' equity........................... 27,955 103,217
-------- --------
$133,971 $193,118
======== ========

The accompanying notes are an integral part of these consolidated balance
sheets.
F-37
158

THE KROLL-O'GARA COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- --------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

NET SALES
Security Products & Services........................... $23,998 $33,910 $ 46,441 $64,128
Investigations & Intelligence.......................... 18,218 19,734 34,282 37,148
Voice & Data Communications............................ 5,144 5,714 7,877 10,540
------- ------- -------- -------
47,360 59,358 88,600 111,816
COST OF SALES
Security Products & Services........................... 16,754 23,997 32,779 45,854
Investigations & Intelligence.......................... 10,796 11,248 20,432 21,172
Voice & Data Communications............................ 4,224 4,707 6,397 8,606
------- ------- -------- -------
31,774 39,952 59,608 75,632
GROSS PROFIT
Security Products & Services........................... 7,244 9,913 13,662 18,274
Investigations & Intelligence.......................... 7,422 8,486 13,850 15,976
Voice & Data Communications............................ 920 1,007 1,480 1,934
------- ------- -------- -------
15,586 19,406 28,992 36,184
OPERATING EXPENSES
Selling and marketing.................................. 3,378 4,033 6,540 7,734
General and administrative............................. 6,993 7,829 13,113 15,019
Amortization of costs in excess of assets acquired..... 142 383 306 624
------- ------- -------- -------
Operating income....................................... 5,073 7,161 9,033 12,807
OTHER INCOME (EXPENSE):
Interest expense....................................... (1,255) (1,102) (2,115) (2,369)
Interest income........................................ 51 284 161 364
Other, net............................................. 334 (157) (41) (355)
------- ------- -------- -------
Income before minority interest, provision for income
taxes, and extraordinary item....................... 4,203 6,186 7,038 10,447
Minority interest........................................ (71) -- (74) --
------- ------- -------- -------
Income before provision for income taxes and
extraordinary item.................................. 4,132 6,186 6,964 10,447
Provision for income taxes............................... 1,646 2,406 2,949 4,140
------- ------- -------- -------
Income before extraordinary item, net.................. 2,486 3,780 4,015 6,307
Extraordinary item, net.................................. (194) -- (194) --
------- ------- -------- -------
Net income............................................. $ 2,292 $ 3,780 $ 3,821 $ 6,307
======= ======= ======== =======
Basic earnings per share................................. $ 0.17 $ 0.24 $ 0.29 $ 0.43
======= ======= ======== =======
Basic weighted average shares outstanding................ 13,198 15,651 13,060 14,632
======= ======= ======== =======
Diluted earnings per share............................... $ 0.15 $ 0.24 $ 0.26 $ 0.42
======= ======= ======== =======
Diluted weighted average shares outstanding.............. 13,942 16,052 13,830 15,015
======= ======= ======== =======

The accompanying notes are an integral part of these consolidated financial
statements.
F-38
159

THE KROLL-O'GARA COMPANY

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 1998
----------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE
SHARES INCOME STOCK CAPITAL DEFICIT INCOME (LOSS) TOTAL
------ ------------- ------ ---------- -------- ------------- --------
(UNAUDITED)
(IN THOUSANDS)

BALANCE, December 31,
1997.................... 13,590 $136 $ 50,590 $(22,387) $(384) $ 27,955
Issuance of stock in
conjunction with the
acquisition of
businesses.............. 308 3 6,511 -- -- 6,514
Public offering of common
stock, net of issuance
costs of approximately
$1,325.................. 3,200 32 60,403 -- -- 60,435
Issuance of stock bonus to
certain employees....... 2 -- 48 -- -- 48
Exercise of stock options,
and related income tax
benefit................. 177 2 2,064 -- -- 2,066
Comprehensive income:
Net income........... $6,307 -- -- 6,307 -- 6,307
------
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustments, net
of $39 tax
benefit......... -- (98) -- -- -- -- --
Reclassification
adjustment for gain
on securities
included in net
income, net of $4
tax expense........ -- (10) -- -- -- -- --
------
Other comprehensive
income............. -- (108) -- -- -- (108) (108)
------
Comprehensive income...... $6,199 -- -- -- -- --
======
------ ---- -------- -------- ----- --------
BALANCE, June 30, 1998.... 17,277 $173 $119,616 $(16,080) $(492) $103,217
====== ==== ======== ======== ===== ========

The accompanying notes are an integral part of these consolidated financial
statements.
F-39
160

THE KROLL O'GARA COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED
JUNE 30,
----------------------
1997 1998
--------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 3,821 $ 6,307
Adjustments to reconcile net income to net cash provided
by (used in) operating activities--
Depreciation and amortization......................... 1,025 913
Amortization of databases............................. 788 1,587
Amortization of costs in excess of assets acquired.... 306 624
Bad debt expense...................................... 637 1,056
(Gain) loss on sale of marketable securities.......... -- (7)
Share in net (income) loss of joint ventures.......... 43 --
Change in assets and liabilities, net of effects of
acquisitions --
Receivables........................................... (5,318) (4,578)
Advances to shareholders.............................. -- 353
Affiliate receivables................................. 15 168
Employee receivables.................................. 20 (60)
Unbilled revenues..................................... 43 (2,502)
Costs in excess of billings on uncompleted
contracts............................................ 3,443 (7,724)
Inventories........................................... (2,290) (700)
Prepaid expenses and other assets..................... (1,879) 1,793
Accounts payable and income taxes currently payable... (447) (4,522)
Affiliate payable..................................... -- (744)
Notes payable -- shareholders......................... -- (27)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (598) 41
Customer deposits..................................... (509) (1,213)
Deferred income taxes payable......................... -- (108)
Accrued liabilities................................... (195) (759)
Long term liabilities................................. 71 328
-------- -------
Net cash used in operating activities.............. (1,018) (9,774)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net......... (2,062) (2,017)
Additions to databases.................................. (1,081) (1,719)
Acquisitions, net of cash acquired...................... (7,606) (4,454)
Sale (purchase) of marketable securities................ (3,011) 30
Other................................................... (77) --
-------- -------
Net cash used in investing activities.............. (13,689) (8,160)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit................................................. (9,936) (1,096)
Proceeds from long-term debt............................ 34,875 --
Payments of long-term debt.............................. -- (9,944)
Purchase and retirement of common stock................. (2,553) --
Repayment of shareholder notes.......................... (577) --
Net proceeds from public offering of common stock....... -- 60,435
Proceeds from exercise of stock options including
related tax benefits................................... -- 2,066
Foreign currency translation............................ (465) (34)
-------- -------
Net cash provided by financing activities.......... 21,344 51,427
-------- -------
NET INCREASE IN CASH AND EQUIVALENTS........................ 6,637 33,493
Effects of foreign currency exchange rates on cash.......... (46) (74)
-------- -------
CASH AND EQUIVALENTS, beginning of period................... 4,761 6,899
-------- -------
CASH AND EQUIVALENTS, end of period......................... $ 11,398 $40,318
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 1,675 $ 2,328
======== =======
Cash paid for taxes..................................... $ 2,065 $ 1,147
======== =======

The accompanying notes are an integral part of these consolidated financial
statements.
F-40
161

THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

(1) BASIS OF PRESENTATION

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

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

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

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

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

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

(2) REVENUE RECOGNITION

Revenue related to contracts for security products (both government and
commercial) results principally from long-term, fixed price contracts and is
recognized using the percentage-of-completion method calculated

F-41
162
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

utilizing the cost-to-cost approach. The percent deemed to be complete is
determined by comparing the costs incurred to date with estimated total costs
for each contract. This method is used because management considers costs
incurred to be the best available measure of progress on these contracts.
However, adjustments to this measurement are made when management believes that
costs incurred materially exceed effort expended. Contract costs include all
direct material and labor costs, along with certain direct overhead costs
related to contract production.

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

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

(3) ACQUISITIONS

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

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

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

F-42
163
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

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

LINDQUIST
AVEY CORPLEX
--------- -------

Fair value of assets acquired including:
Cash................................................... $ 257 $ 16
Accounts receivable.................................... -- 96
Unbilled revenue....................................... 339 69
Other current assets................................... 577 --
Property, plant and equipment.......................... 628 4
Other non-current assets............................... 116 15
Goodwill............................................... 10,716 384
------- ----
12,633 $584
Less: Cash paid for net assets......................... (4,727) --
Fair value of debt issued.............................. -- --
Fair value of stock issued............................. (5,989) (525)
------- ----
$ 1,917 $ 59
======= ====
Liabilities assumed including:
Liabilities assumed and acquisition costs.............. $ 1,917 $ 46
Debt................................................... -- 13
------- ----
$ 1,917 $ 59
======= ====

(4) EARNINGS PER SHARE

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

THREE MONTHS ENDED JUNE 30, 1997
-------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------

Basic EPS............................................... $2,292 13,198 $0.17
=====
Effect of dilutive securities:
Options............................................ -- 155
Restricted stock................................... (207) 589
------ ------
Diluted EPS............................................. $2,085 13,942 $0.15
====== ====== =====

F-43
164
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

THREE MONTHS ENDED JUNE 30, 1998
-------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------

Basic EPS............................................... $3,780 15,651 $0.24
=====
Effect of dilutive securities:
Options............................................ -- 401
------ ------
Diluted EPS............................................. $3,780 16,052 $0.24
====== ====== =====

SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------

Basic EPS............................................... $3,821 13,060 $0.29
=====
Effect of dilutive securities:
Options............................................ -- 177
Restricted stock................................... (227) 593
------ ------
Diluted EPS............................................. $3,594 13,830 $0.26
====== ====== =====

SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------

Basic EPS............................................... $6,307 14,632 $0.43
=====
Effect of dilutive securities:
Options............................................ -- 383
------ ------
Diluted EPS............................................. $6,307 15,015 $0.42
====== ====== =====

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

(5) NEW PRONOUNCEMENTS

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

F-44
165
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

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

Net income.................................................. $3,821
------
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of $204
tax benefit........................................... (511)
------
Other comprehensive income.................................. (511)
------
Comprehensive income.............................. $3,310
======

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

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

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

(6) SUPPLEMENTAL CASH FLOW DISCLOSURE

Cash and equivalents consist of all operating cash accounts and investments
with an original maturity of three months or less. Marketable securities consist
of available-for-sale commercial paper obligations which

F-45
166
THE KROLL-O'GARA COMPANY

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)

mature in 1998. These securities are valued at current market value, which
approximates cost. Non-cash activity for the six months ended June 30, 1998 and
1997 is as follows (dollars in thousands):

1997 1998
------ ------

Fair value of stock issued in connection with acquisition of
ITI....................................................... $ 800 --
Notes issued in connection with acquisition of ITI.......... $1,232 --
Fair value of stock issued in connection with acquisition of
Next Destination.......................................... $1,851 --
Notes issued in connection with acquisition of Next
Destination............................................... $1,575 --
Fair value of stock issued in connection with acquisition of
Labbe..................................................... $3,431 --
Fair value of stock issued in connection with acquisition of
Corplex................................................... -- $ 525
Fair value of stock issued in connection with acquisition of
Lindquist Avey............................................ -- $5,989

(7) INVENTORIES

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

DECEMBER 31, JUNE 30,
1997 1998
------------ --------
(UNAUDITED)

Raw materials............................................... $ 9,441 $10,823
Vehicle costs and work-in-process........................... 10,012 9,330
------- -------
$19,453 $20,153
======= =======

(8) DERIVATIVE FINANCIAL INSTRUMENTS

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

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

F-46
167

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Laboratory Specialists of America, Inc.:

We have audited the accompanying consolidated balance sheets of Laboratory
Specialists of America, Inc. (an Oklahoma corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Laboratory Specialists of
America, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Oklahoma City, Oklahoma,
March 6, 1998

F-47
168

LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997

1996 1997
---------- -----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 727,381 $ 2,863,639
Accounts receivable, net of allowance of $597,499 in
1996 and $568,237 in 1997............................. 1,696,744 2,262,990
Income tax refund receivable........................... 312,664 190,498
Inventories............................................ 99,754 109,929
Prepaid expenses and other............................. 146,859 115,219
Deferred tax asset..................................... 211,078 160,709
---------- -----------
Total current assets.............................. 3,194,480 5,702,984
---------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of
$900,948 in 1996 and $1,123,909 in 1997.............. 1,592,599 2,376,885
---------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $171,355
in 1996 and $272,148 in 1997.......................... 2,663,850 2,316,302
Customer lists, net of accumulated amortization of
$216,429 in 1996 and $518,105 in 1997................. 1,863,061 4,587,814
Deferred costs......................................... 80,818 32,595
---------- -----------
Total other assets................................ 4,607,729 6,936,711
---------- -----------
Total assets...................................... $9,394,808 $15,016,580
========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 521,705 $ 742,292
Accrued payroll expenses............................... 300,103 411,364
Accrued customer list installment payments............. -- 510,345
Other accrued expenses................................. 57,310 78,491
Short-term debt........................................ 410,293 --
Current portion of long-term debt...................... 118,085 527,696
Obligations related to discontinued operation.......... 784,272 126,813
---------- -----------
Total current liabilities......................... 2,191,768 2,397,001
---------- -----------
LONG-TERM DEBT, net of current portion...................... 1,245,690 2,353,428
---------- -----------
DEFERRED INCOME TAXES....................................... 307,100 359,848
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares
authorized, 3,313,405 shares issued and outstanding in
1996 and 4,924,818 shares issued and outstanding in
1997.................................................. 3,313 4,925
Paid in capital in excess of par....................... 5,366,027 8,291,365
Retained earnings...................................... 280,910 1,610,013
---------- -----------
Total stockholders' equity........................ 5,650,250 9,906,303
---------- -----------
Total liabilities and stockholders' equity........ $9,394,808 $15,016,580
========== ===========

The accompanying notes are an integral part of these consolidated balance
sheets.
F-48
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- -----------

REVENUES................................................. $6,925,716 $8,726,799 $12,836,953
COST OF LABORATORY SERVICES.............................. 3,246,470 3,816,114 5,828,665
---------- ---------- -----------
Gross profit........................................... 3,679,246 4,910,685 7,008,288
---------- ---------- -----------
OPERATING EXPENSES:
Selling................................................ 561,470 601,945 654,284
General and administrative............................. 2,157,410 2,442,602 3,230,117
Depreciation and amortization.......................... 232,535 504,123 690,268
Asset impairment....................................... -- 124,531 --
---------- ---------- -----------
Total operating expenses....................... 2,951,415 3,673,201 4,574,669
---------- ---------- -----------
OTHER (EXPENSE) INCOME:
Interest expense....................................... (29,651) (67,185) (230,433)
Interest income........................................ 126,939 41,208 78,035
Other income........................................... 323,846 4,169 1,146
---------- ---------- -----------
Total other (expense) income................... 421,134 (21,808) (151,252)
---------- ---------- -----------
Income from continuing operations before income
taxes........................................ 1,148,965 1,215,676 2,282,367
INCOME TAX EXPENSE....................................... 474,405 527,171 953,264
---------- ---------- -----------
Income from continuing operations...................... 674,560 688,505 1,329,103
DISCONTINUED OPERATION:
Loss from operations of discontinued clinical business,
net of tax benefit of $257,904...................... -- (500,636) --
Loss on disposal of clinical business, net of tax
benefit of $489,420................................. -- (773,580) --
---------- ---------- -----------
Net income (loss)................................... 674,560 (585,711) 1,329,103
DIVIDENDS ON PREFERRED STOCK............................. 13,344 -- --
---------- ---------- -----------
Net income (loss) available to common
stockholders........................................ $ 661,216 $ (585,711) $ 1,329,103
========== ========== ===========
BASIC EARNINGS PER COMMON SHARE:
Weighted average number of common stock shares
outstanding......................................... 3,298,405 3,309,594 3,693,146
========== ========== ===========
Continuing operations.................................. $ 0.20 $ 0.21 $ 0.36
Discontinued operation................................. -- (0.39) --
---------- ---------- -----------
Total............................................... $ 0.20 $ (0.18) $ 0.36
========== ========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Weighted average number of common stock shares and
common stock equivalents outstanding................ 3,843,391 3,954,787 4,325,618
========== ========== ===========
Continuing operations.................................. $ 0.17 $ 0.17 $ 0.31
Discontinued operation................................. -- (0.32) --
---------- ---------- -----------
Total............................................... $ 0.17 $ (0.15) $ 0.31
========== ========== ===========

The accompanying notes are an integral part of these consolidated financial
statements.
F-49
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------

Preferred stock, $0.001 par value, $1 stated value:
Balance, beginning of period......................... $ 300,000 $ -- $ --
Redemption of stock (Note 5)......................... (300,000) -- --
---------- ---------- ----------
Balance, end of period............................ -- -- --
---------- ---------- ----------
Common stock, $0.001 par value:
Balance, beginning of period......................... 3,298 3,298 3,313
Exercise of common stock warrants
(Note 11)......................................... -- -- 1,501
Issuance of stock in connection with the settlement
of a note payable (Note 7)........................ -- -- 103
Other issuance of stock.............................. -- 15 8
---------- ---------- ----------
Balance, end of period............................ 3,298 3,313 4,925
---------- ---------- ----------
Paid in capital in excess of par:
Balance, beginning of period......................... 5,341,667 5,341,667 5,366,027
Exercise of common stock warrants
(Note 11)......................................... -- -- 2,677,950
Issuance of stock in connection with the settlement
of a note payable (Note 7)........................ -- -- 232,396
Other issuance of stock.............................. -- 24,360 14,992
---------- ---------- ----------
Balance, end of period............................ 5,341,667 5,366,027 8,291,365
---------- ---------- ----------
Retained earnings:
Balance, beginning of period......................... 205,405 866,621 280,910
Net income (loss).................................... 674,560 (585,711) 1,329,103
Preferred stock dividends............................ (13,344) -- --
---------- ---------- ----------
Balance, end of period............................ 866,621 280,910 1,610,013
---------- ---------- ----------
Total stockholders' equity................... $6,211,586 $5,650,250 $9,906,303
========== ========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.
F-50
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
---------- ---------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 674,560 $ (585,711) $ 1,329,103
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization.................... 232,535 550,933 690,268
Provision for bad debts and other................ 84,246 446,087 40,000
Gain on sales of assets.......................... -- (50,000) --
Deferred income taxes............................ (18,694) (744,936) 103,117
Asset impairment................................. -- 174,531 --
Disposal of clinical business.................... -- 1,263,000 --
Impact of changes in assets and liabilities --
Accounts receivable............................ (222,300) (411,079) (606,246)
Income tax refund receivable................... 8,600 (54,939) 275,139
Inventories.................................... (3,745) 43,582 (10,175)
Prepaid expenses and other..................... (13,045) 64,182 17,342
Accounts payable and accrued expenses.......... (7,682) (222,849) (183,742)
---------- ---------- -----------
Net cash provided by operating activities... 734,475 472,801 1,654,806
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................. (211,886) (127,915) (1,038,561)
Proceeds from sales of assets......................... -- 50,000 --
Purchase of PLL customer list......................... -- -- (2,406,593)
Purchase of Accu-Path customer list................... -- -- (101,018)
Purchase of NPLI stock, net of cash acquired.......... -- (1,022,597) --
Acquisition costs..................................... (101,826) (301,816) (98,569)
---------- ---------- -----------
Net cash used in investing activities....... (313,712) (1,402,328) (3,644,741)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................................ (24,748) -- --
Redemption of preferred stock......................... (300,000) -- --
Warrant offering costs................................ (38,821) -- --
Net proceeds from exercise of warrants and stock
options............................................. -- -- 2,733,272
Payments on short-term debt........................... -- (598,515) (91,833)
Payments on long-term debt............................ (90,585) (155,628) (902,651)
Proceeds from long-term borrowings, net of loan
origination fees.................................... -- -- 2,387,405
---------- ---------- -----------
Net cash provided by (used in) financing
activities................................ (454,154) (754,143) 4,126,193
---------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................................. (33,391) (1,683,670) 2,136,258
CASH AND CASH EQUIVALENTS, beginning of period............. 2,444,442 2,411,051 727,381
---------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of period................... $2,411,051 $ 727,381 $ 2,863,639
========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.............. $ 29,651 $ 112,698 $ 218,298
========== ========== ===========
Cash paid during the period for income taxes.......... $ 480,405 $ 631,564 $ 823,000
========== ========== ===========

The accompanying notes are an integral part of these consolidated financial
statements.
F-51
172

LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997

1. GENERAL:

Laboratory Specialists of America, Inc. (the "Company" or "LSAI"), an
Oklahoma corporation, was organized in March 1994. Effective July 8, 1994, and
January 2, 1996, respectively, LSAI acquired all of the capital stock of
Laboratory Specialists, Inc. ("LSI"), a Louisiana corporation, and National
Psychopharmacology Laboratory, Inc. ("NPLI"), a Tennessee corporation, and LSI
and NPLI became wholly owned subsidiaries of the Company.

Through LSI, the Company operates an independent forensic drug testing
laboratory providing integrated drug testing services to corporations and
governmental bodies, by negotiated contract, for detection of illegal drug use
by employees and prospective employees. The Company's customers are primarily in
the construction, transportation, service, mining and manufacturing industries,
principally located in the southeast and southwest United States. See Note 3 for
a discussion of NPLI.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of all
subsidiary companies. All material intercompany transactions have been
eliminated.

Earnings Per Common Share

The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," during 1997 and
restated all previously presented amounts in conformity with SFAS No. 128. Basic
earnings per common share includes no dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
stock shares outstanding for the period. Diluted earnings per common share is
computed by dividing income available to common stockholders by the
weighted-average number of common stock shares and common stock equivalents
outstanding which includes the dilutive impact of a convertible note payable and
outstanding warrants and options using the treasury stock method.

F-52
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes the calculation of basic earnings per common
share and diluted earnings per common share:

FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- ----------------------
INCOME SHARES INCOME SHARES INCOME SHARES
(NUMER- (DENOMI- (NUMER- (DENOMI- (NUMER- (DENOMI-
ATOR) NATOR) ATOR) NATOR) ATOR) NATOR)
-------- --------- -------- --------- ---------- ---------

Income from continuing
operations.................. $674,560 $688,505 $1,329,103
Less -- Preferred stock
dividends................... 13,344 -- --
-------- --------- -------- --------- ---------- ---------
Basic Earnings Per Common
Share
Income from continuing
operations available to
common stockholders......... 661,216 3,298,405 688,505 3,309,594 1,329,103 3,693,146
Per Common Share Amount....... $0.20 $0.21 $0.36
----- ----- -----
----- ----- -----
Diluted Earnings Per Common
Share Effect of dilutive
securities:
Convertible note payable...... -- -- -- 154,303 -- 67,662
Warrants...................... -- 541,809 -- 484,286 -- 460,226
Options....................... -- 3,177 -- 6,604 -- 104,584
-------- --------- -------- --------- ---------- ---------
Income from continuing
operations available to
common stockholders plus
assumed
conversions................. $661,216 3,843,391 $688,505 3,954,787 $1,329,103 4,325,618
======== ========= ======== ========= ========== =========
Per Common Share Amount....... $0.17 $0.17 $0.31
----- ----- -----
----- ----- -----

During 1997, 66,000 warrants to purchase two shares of common stock at
$7.20 per warrant were outstanding but were not included in the computation of
diluted earnings per common share because the warrants' exercise price was
greater than the average market price of the common shares. Of these warrants,
30,000 were exercised to purchase 60,000 shares of common stock in November
1997, and the common shares issued are included as outstanding for the period
from exercise through December 31, 1997, in both the basic earnings per common
share and diluted earnings per common share calculations. The remaining 36,000
warrants, which expire on October 10, 1999, were outstanding at the end of 1997
(see Note 11).

Cash and Cash Equivalents

Cash equivalents consist of all highly liquid debt instruments with an
initial maturity of three months or less at the date of purchase. The Company
invests excess cash overnight in 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.

Inventories

Inventories consist of supplies of laboratory chemicals and specimen
collection materials. Inventories are valued at the lower of cost or market,
using the first-in, first-out method.

F-53
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost, and are depreciated
over the estimated useful lives of the assets using the straight-line method as
follows:

ESTIMATED
USEFUL LIVES 1996 1997
------------ ---------- -----------

Land................................................... N/A $ 29,353 $ 169,353
Building and improvements.............................. 7 - 40 Years 867,110 1,457,097
Equipment.............................................. 5 - 12 Years 1,492,633 1,765,377
Vehicles............................................... 5 Years 32,419 32,419
Furniture and fixtures................................. 5 - 10 Years 72,032 76,548
---------- -----------
2,493,547 3,500,794
Less- Accumulated depreciation and amortization........ (900,948) (1,123,909)
---------- -----------
$1,592,599 $ 2,376,885
========== ===========

Impairment of Long-Lived Assets

Effective January 1, 1996, the Company adopted the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This standard requires that long-lived assets,
certain identifiable intangibles and goodwill related to those assets be
reviewed for impairment by asset group for which the lowest level of independent
cash flows can be identified. The adoption of SFAS No. 121 in 1996 resulted in
no adjustment to the consolidated financial statements of the Company. However,
during the fourth quarter of 1996, the Company made a decision to hold for sale
a former laboratory building, which resulted in an impairment of approximately
$111,000 being recorded, which reduced the net book value of the building to
$225,000. The impairment is included in "Asset Impairment" in the accompanying
consolidated income statement.

Goodwill and Customer Lists

Goodwill is amortized on a straight-line basis over 20 or 40 years and the
customer lists are amortized on a straight-line basis over fifteen years. The
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of goodwill or the customer
lists may warrant revision or that the remaining unamortized balance of goodwill
or the customer lists may not be recoverable. When factors, such as operating
losses, loss of customers, loss or suspension of laboratory certification for an
extended period, or changes in the drug testing industry, if present, indicate
that goodwill or the customer lists should be evaluated for possible impairment,
the Company uses an estimate of the related undiscounted net cash flows over the
remaining life of the goodwill or the customer lists in measuring whether they
are recoverable. Although management believes that goodwill and the customer
lists are currently recoverable over the respective remaining amortization
periods, it is possible, due to a change in circumstances, that the carrying
value could become impaired in the future. Such impairment could have a material
effect on the results of operations in a particular reporting period.

Deferred Costs

At December 31, 1997, deferred costs of $32,595 related to loan origination
fees for two notes payable to a bank which were issued during 1997. These costs
are being amortized over the related lives of the associated notes payable.
Deferred costs at December 31, 1996, included $38,821 of legal and accounting
expenses incurred in connection with the registration of the Company's
outstanding warrants (see Note 11), $33,523 related to

F-54
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

construction in progress, and $8,474 other. In 1997, the deferred registration
costs were recorded as a reduction of the proceeds from the exercise of the
warrants. Also in 1997, the Company transferred the construction in progress to
property, plant and equipment and began depreciating the costs when the related
building was placed in use.

Employee Stock Option Plan

The Company accounts for its employee stock option plan using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (see Note 10).

Income Taxes

Deferred income taxes are provided to reflect the future tax consequences
of differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements.

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, the
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 as additional
information becomes known.

3. BUSINESS ACQUISITIONS:

National Psychopharmacology Laboratory, Inc.

On January 2, 1996, the Company acquired all of the issued and outstanding
capital stock (the "NPLI Stock") of NPLI, and purchased goodwill (the "NPLI
Goodwill"), pursuant to a Stock Purchase Agreement dated January 1, 1996 (the
"NPLI Purchase Agreement"), and NPLI became a wholly owned subsidiary of the
Company (the "NPLI Acquisition"). NPLI was engaged in forensic drug testing
(urine drug screening with chain of custody) and clinical testing and analysis.

Pursuant to the Purchase Agreement and in connection with the NPLI
Acquisition, the Company (i) agreed to pay $1,585,000 for the NPLI Stock of
which $1,075,000 was paid at closing to the shareholders of NPLI (the "NPLI
Shareholders"), and two unsecured promissory notes, with an aggregate adjusted
face value of $510,000, were issued and delivered to the NPLI Shareholders, (ii)
agreed to pay $140,000 for the NPLI Goodwill payable in 24 monthly installments
commencing on February 1, 1996, (iii) assumed net liabilities of NPLI of
approximately $875,000, and (iv) incurred deferred income taxes of approximately
$800,000 as a result of NPLI's tax basis being significantly less than the
purchase price of the NPLI Stock. All of the above resulted in a total purchase
price of approximately $3,400,000, substantially all of which was recorded as
intangible assets.

The forensic portion of NPLI's business was merged into LSI's operation
effective February 1996. The Company intended to sell the clinical business
during 1996, but after negotiations with three potential buyers failed, the
Company shut down the clinical operations effective in the fourth quarter of
1996. The revenues related to the discontinued clinical operation for the year
ended December 31, 1996, were approximately $3,413,000. The related operating
loss and shut down expenses of the clinical business are included in the
accompanying consolidated income statement as "Discontinued Operation" and
"Disposition of Discontinued Operation," respectively. Assuming the acquisition
had occurred at the beginning of 1995, the unaudited

F-55
176
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidated pro forma results of operations (excluding the clinical business)
for the year ended December 31, 1995, are as follows (in thousands of dollars,
except per-share amounts):

(UNAUDITED)
-----------

Revenues.................................................... $8,626
Net income from continuing operations....................... $ 851
Basic earnings per common share from continuing
operations................................................ $ 0.26
Diluted Earnings per common share from continuing
operations................................................ $ 0.22

Pathology Laboratories, Ltd.

On January 31, 1997, the Company acquired from Pathology Laboratories, Ltd.
("PLL") certain intangible assets pursuant to an Asset Purchase Agreement dated
January 31, 1997. PLL is a privately held corporation. The assets purchased
included the forensic drug testing customer list of PLL and all contracts,
contract rights and agreements, correspondence with the customers for which PLL
has provided forensic drug testing services, and all assets owned by PLL used in
connection with the PLL office in Greenville, South Carolina. Pursuant to the
Purchase Agreement, the Company (i) paid $1,600,000 at closing and (ii) assumed
the obligations of PLL under a certain lease, dated September 16, 1996, which
requires monthly base rental payments of $2,083 and which expires on September
16, 1999. Furthermore, the Company agreed to make four additional quarterly
installment payments to PLL within 60 days following the end of each three-month
period during the twelve months ending January 31, 1998. These quarterly
payments are based on ninety percent of gross revenues directly attributable to
each customer comprising the customer base of PLL for the year ending January
31, 1998, exceeding $1,600,000. Excluding the obligations assumed under the
lease, the Company has estimated the total purchase price will be $2,560,000,
which was allocated entirely to the customer list to be amortized over 15 years.
In the accompanying consolidated balance sheet at December 31, 1997, the Company
has $250,345 accrued for the remainder of the estimated purchase price as
"accrued customer list installment payments." The initial purchase price of
$1,600,000 was financed with additional long-term bank indebtedness. The Company
consolidated the drug testing services with LSI's laboratory in March 1997.

Assuming the acquisition had occurred at the beginning of 1996, the
unaudited consolidated pro forma results of operations for the year ended
December 31, 1996, are as follows (in thousands of dollars, except per-share
amounts):

(UNAUDITED)
-----------

Revenues.................................................... $11,287
Net income from continuing operations....................... $ 1,093
Basic earnings per common share from continuing
operations................................................ $ 0.33
Diluted earnings per common share from continuing
operations................................................ $ 0.28

Accu-Path Medical Laboratories, Inc.

On December 1, 1997, the Company acquired from Accu-Path Medical
Laboratories, Inc. ("Accu-Path") certain intangible assets pursuant to an Asset
Purchase Agreement dated December 1, 1997. Accu-Path is a privately held
corporation. The assets purchased included the forensic drug testing customer
list of Accu-Path, all contracts and contract rights for the providing of drug
testing services, and certain of the assets owned by Accu-Path used in
connection with the Accu-Path office in Ruston, Louisiana. The purchase price
for these assets was established as 180% of the collected and collectible
forensic drug testing customer list revenues during the period from June 1998
through November 1998. The Company paid $100,000 at closing and will pay within
30 days following the end of each three-month period after closing, 50% of the
forensic testing revenue for each of the first three quarters. The remaining
purchase price balance will be paid through four quarterly installment

F-56
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

payments with the first of such payments due 30 days following the end of the
first twelve-month anniversary date of the acquisition. The Company has
estimated the total purchase price will be $360,000, which was allocated
entirely to the customer list to be amortized over 15 years. In the accompanying
consolidated balance sheet at December 31, 1997, the Company has $260,000
accrued for the remainder of the estimated purchase price as "accrued customer
list installment payments." The Company consolidated the drug testing services
with LSI's laboratory in December 1997. Had the acquisition occurred at the
beginning of 1997, the Company's results of operations for the year ended
December 31, 1997, would not have been materially different from those presented
in the accompanying consolidated statement of income.

4. OTHER INCOME:

Other income, as reflected in the consolidated statement of income for the
year ended December 31, 1995, includes proceeds of $320,000 received from the
settlement of litigation brought by LSI.

5. TRANSACTIONS WITH RELATED PARTIES:

During the years 1995, 1996 and 1997, the Company incurred approximately
$130,000, $30,000 and $170,000, respectively, for legal services rendered by a
director of the Company who also serves as legal counsel for the Company.
Management believes that the amounts incurred approximate those which would have
been paid to unrelated parties for the same services.

In 1994, LSI issued a note payable in the amount of $353,123 to MBf USA,
Inc. ("MBf") in connection with LSI's President and former owner, Arthur R.
Peterson, Jr.'s acquisition of LSI's common stock. Peterson later exchanged all
of the outstanding common stock of LSI for 1,000,000 shares of common stock and
300,000 shares of Series I Cumulative Redeemable Convertible Preferred Stock
(the "Series I Preferred Stock") of LSAI. The Series I Preferred Stock was
entitled to annual cumulative dividends based upon the national prime rate which
initially was 6.75% subject to a maximum 2% rate increase or decrease
adjustment. LSAI redeemed the Series I Preferred Stock in July 1995 at $1.00 per
share totaling $300,000.

6. LINE OF CREDIT:

In December 1995, LSI entered into a $1 million line of credit arrangement,
which matured in December 1996. The line of credit was renewed for $250,000 in
January 1997, maturing in January 1998, with an interest rate equal to the
Citibank N.A. rate, which was 8.25% at the date of renewal. LSAI is a guarantor
of any balances outstanding under the line of credit, which is collateralized by
LSI's accounts receivable, intangibles, inventories, equipment, and furniture
and fixtures. No borrowings were made against the line of credit during 1997,
and no balance was outstanding as of December 31, 1997.

7. DEBT:

Short-term debt at December 31, 1996, consisted of notes payable to the
former shareholders of NPLI with a recorded amount of $334,460, representing the
discounted value of approximately 153,282 shares reserved for issuance pursuant
to the NPLI Purchase Agreement. The Company did not issue and deliver these
shares to the former shareholders during 1996, based upon certain
representations made by the NPLI Shareholders which the Company believed to have
been misleading and false at the closing of the NPLI Acquisition. In August
1997, 103,333 shares of stock were issued to the NPLI shareholders to settle the
note payable. The issuance of these shares of common stock has been excluded
from the accompanying consolidated statement of cash flows as it is a non-cash
transaction. The remaining short-term debt at December 31, 1996, of $75,833
related to the note payable for NPLI Goodwill (see Note 3), was paid in 1997.

F-57
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Long-term debt consists of the following at December 31, 1996 and 1997:

1996 1997
---------- ----------

Note payable to MBf, due February 1999, interest rate 7%,
collateralized by substantially all of the assets of LSI
(see Note 5).............................................. $ 353,123 $ 353,123
Note payable for purchase of laboratory building............ 450,000 --
Capital lease agreement with Boehringer-Mannheim
Corporation............................................... 560,652 442,567
Note payable to a bank bearing interest at 8.65%, with
principal and interest payable monthly through June 2002
and the balance of principal and interest due in a balloon
payment in July 2002, collateralized by substantially all
of the assets of LSI...................................... -- 697,101
Term loan with a bank bearing interest at the prime rate
plus 0.5% (9.0% at December 31, 1997), with principal and
interest payable monthly through January 2002,
collateralized by substantially all of the assets of
LSI....................................................... -- 1,388,333
---------- ----------
Total long-term debt.............................. 1,363,775 2,881,124
Less-Current portion.............................. (118,085) (527,696)
---------- ----------
$1,245,690 $2,353,428
========== ==========

In late 1996, the Company purchased a building to be renovated for its new
laboratory. The purchase was financed by a note payable to the seller due in
June 1997, with no stated interest rate. This was a noncash transaction and was
excluded from the accompanying 1996 consolidated statement of cash flows. In
1996, this note payable to the seller was classified as long-term based on a
written commitment from a bank to refinance the purchase and construction costs
up to the lesser of 80% of appraised value or cost, not to exceed $720,000. Upon
maturity in 1997, the note was refinanced through a note payable to a bank.

During February 1996, LSI entered into an agreement with
Boehringer-Mannheim Corporation through February 2001, to purchase equipment and
certain lab supplies at a fixed price, per drug screen performed. The agreement
resulted in the Company recording approximately $650,000 in additional
equipment, with an equal amount recorded as a capital lease obligation payable
over five years. The amortization of the capital lease assets is included in
depreciation expense in the accompanying consolidated statements of income. The
total monthly payment through November 1996 was $46,740. The agreement was
amended during December 1996, due to increased drug testing volumes and the new
monthly payment became $59,750, with $13,223 allocated to the principal and
interest of the capital lease obligation, and the remaining cost allocated to
the cost of laboratory supplies. In July 1997, due to further increases in drug
testing volumes, the original lease term was extended from five years to six
years and additional equipment was added. The total monthly payment and capital
lease obligation did not change as a result of this amendment, and the portion
of the monthly payment which is allocated to the principal and interest of the
capital lease obligation during the first five years of the agreement

F-58
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

will be treated as equipment rental expense during the sixth year. The future
minimum lease payments related to this obligation are as follows:

CAPITAL OPERATING
-------- ----------

1998........................................................ $158,670 $ 558,330
1999........................................................ 158,670 558,330
2000........................................................ 158,670 558,330
2001........................................................ 26,446 690,555
2002........................................................ -- 119,500
-------- ----------
502,456 2,485,045
Less -- Interest on capital lease obligation................ 59,889 --
-------- ----------
Total future minimum lease payments............... $442,567 $2,485,045
======== ==========

8. INCOME TAXES:

Prior to 1995, the Company had no material differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements, except for certain goodwill which is not deductible for tax
purposes, and treated as a permanent difference.

The 1995, 1996 and 1997 provision (benefit) for income taxes on income from
continuing operations is summarized below:

1995 1996 1997
-------- -------- --------

U.S. Federal--
Current................................................... $390,008 $581,467 $690,916
Deferred.................................................. (8,735) (166,115) 57,829
-------- -------- --------
381,273 415,352 748,745
State....................................................... 93,132 111,819 204,519
-------- -------- --------
Total............................................. $474,405 $527,171 $953,264
======== ======== ========

The results of the discontinued operation for the year ended December 31,
1996, include a tax benefit of $747,324.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Deferred tax liabilities (assets) at December 31, 1996 and 1997, are
composed of the following:

1996 1997
--------- ---------

Net current deferred tax asset:
Allowance for doubtful accounts........................ $(134,273) $(133,660)
Accrued liabilities.................................... (105,180) (58,564)
Deferred taxable revenue, short-term................... 28,375 4,848
Customer list, net of amortization, short-term......... -- 26,667
--------- ---------
(211,078) (160,709)
--------- ---------
Net non-current deferred tax liability:
Accelerated depreciation............................... (69,748) 42,515
Customer list, net of amortization, long-term.......... 372,000 317,333
Deferred taxable revenue, long-term.................... 4,848 --
--------- ---------
307,100 359,848
--------- ---------
Total deferred taxes.............................. $ 96,022 $ 199,139
========= =========

In the following table, the U.S. Federal income tax rate is reconciled to
the Company's 1995, 1996 and 1997 effective tax rates from continuing operations
for income as reflected in the consolidated statements of income.

1995 1996 1997
---- ---- ----

U.S. statutory rate......................................... 34.0% 34.0% 34.0%
Increases resulting from --
State income taxes..................................... 5.4 6.1 6.1
Goodwill amortization.................................. 1.2 2.9 1.5
Other.................................................. 0.7 0.4 0.2
---- ---- ----
41.3% 43.4% 41.8%
==== ==== ====

9. COMMITMENTS AND CONTINGENCIES:

Contingent Liabilities

Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse, generally arising from
LSI's alleged failure to properly administer drug urinalysis tests. LSI is
currently a defendant in several such lawsuits. Based upon prior successful
defense of similar-type lawsuits, the Company believes it has valid defenses to
each of such lawsuits, and intends to vigorously defend itself in such actions.
Although LSI maintains insurance to protect itself against such liability, and
LSI's insurance carriers have assumed the defense of LSI in connection with
certain actions, the extent of such insurance coverage is limited, both in terms
of types of risks covered by the policies and the amount of coverage. In the
opinion of the Company's management and its legal counsel, these suits and
claims should not result in judgments or settlements which would have a material
adverse effect on the Company's results of operations or financial position.
Although LSI has not experienced any material liability related to such claims,
there can be no assurance that LSI, and possibly the Company, will not at some
time in the future experience significant liability in connection with such
claims and such liability may exceed the extent of such insurance coverage, both
in terms of risks covered by the policies and the amount of coverage, which
could have a material effect on the results of operations and financial
condition of the Company.

F-60
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Certification

The Company's laboratory is certified by the Substance Abuse and Mental
Health Services Administration ("SAMHSA"), the successor to the National
Institute on Drug Abuse, as well as certain state and local jurisdictions.
Certification by SAMHSA is essential to the Company's business, as certain
clients are required to use certified laboratories, and many of its clients look
to certification as an indication of reliability and accuracy of tests. In order
to remain certified, the Company is subject to frequent inspections and
proficiency tests. Failure to meet any of the numerous certification
requirements could result in suspension or loss of certification. Such
suspension or loss of certification could have a material adverse effect on the
Company.

Employment Agreements

LSAI has written employment agreements with its President and its Chief
Executive Officer which provide, among other things, the following: (i) a term
of four years from April 16, 1996, which automatically extends one additional
year after each year of service; (ii) a base salary of $112,500 each; (iii)
bonuses at the discretion of the Board of Directors not to exceed 10 percent of
the net income of the Company; (iv) eligibility for stock options under LSAI's
stock option plans (see Note 10); and (v) health and disability insurance
benefits and life insurance of $500,000. Subsequent to December 31, 1997, these
agreements were verbally amended to increase the base salary to $114,750 each.
The agreements also restrict the right to participate in other activities
outside of LSAI to the extent such activities conflict with the ability to
perform duties and that would violate duty and loyalty to LSAI.

LSI has a written employment agreement with its President which provides,
among other things, the following: (i) a term of four years from April 16, 1996,
which automatically extends one additional year after each year of service; (ii)
a base salary of $125,000, (iii) a bonus equal to 10 percent of the pre-tax
income of LSAI, not to exceed $50,000; (iv) eligibility for stock options under
LSAI's stock option plans (see Note 10); and (v) health and disability insurance
benefits and life insurance of $1,000,000. Subsequent to December 31, 1997, this
agreement was verbally amended to increase the base salary to $127,500. The
agreement requires the President to devote his full time and attention to the
business of LSI.

LSI has verbal employment agreements with five key employees which provide,
among other things, the following: (i) bonuses equal to one percent of the
pre-tax income of LSI or equal to one percent of the net income of LSAI; (ii)
other bonuses at the discretion of the Board of Directors; (iii) eligibility for
stock options under LSAI's stock option plans (see Note 10); and (iv)
eligibility for health, disability and life insurance benefits on the same terms
as other employees. Additionally, LSI has a written employment severance
agreement with one of these employees providing for salary continuation for a
period of twelve months upon termination for any reason other than cause. The
agreements require the five key employees to devote their full time and
attention to the business of LSI.

Judicial Decisions and Government Policy

Hazardous Materials

Certain testing procedures employed by the Company require the use of
hazardous materials. Failure to comply with current or future federal, state or
local environmental laws or regulations could have a material adverse effect on
the Company.

F-61
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. STOCK OPTION PLANS:

LSAI established the 1994 Stock Option Plan (the "1994 Plan") on May 10,
1994. On October 30, 1996, the 1994 Plan was amended, and the total number of
shares of common stock authorized and reserved for issuance was increased from
225,000 to 425,000. The 1994 Plan provides for the issuance of both incentive
stock options ("ISO Options") and nonqualified stock options with or without
stock appreciation rights ("SARs") to directors, executive officers, key
employees and independent contractors and consultants of the Company and its
subsidiaries. ISO Options may be granted only to employees of the Company and
its subsidiaries.

On October 1, 1997, LSAI established the 1997 Non-Qualified Stock Option
Plan (the "1997 Plan"), with 400,000 shares of common stock authorized to be
granted. The 1997 Plan provides for the issuance of non-qualified stock options,
with stock appreciation rights attached, to directors, executive officers, key
employees and independent contractors and consultants of the Company and its
subsidiaries.

The Board of Directors interprets both Plans and establishes certain
committees to administer the Plans. These committees or the Board of Directors
have authority to grant options to all eligible employees and determine the
types of options granted, with or without SARs, the terms, restrictions and
conditions of the options at the time of grant, and whether SARs, if granted,
are exercisable at the time of the exercise of the option to which the SAR is
attached. Under both Plans, the option price of the common stock is determined
by the Board of Directors or the various committees. The price may not be less
than 85% of the fair market value of the shares on the date of the grant of the
option, with the exception of ISO options, which may not be less than the fair
market value of the shares on the date of grant. The Company's stock options are
fixed-price options generally granted at the fair market value of the underlying
common stock on the date of grant. Generally, the options vest and become
exercisable six months from the grant date and expire five to ten years after
the grant date.

The following table shows the activity for options issued under the Plans
as well as other options issued:

1994 PLAN AND
OTHER OPTIONS ISSUED 1997 PLAN
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE EXERCISE PRICE
OPTIONS PER OPTION OPTIONS PER OPTION
-------- -------------- ------- --------------

Balance outstanding December 31, 1994..... -- -- -- --
Options granted...................... 125,000 3.00 -- --
-------- -------
Balance outstanding December 31, 1995..... 125,000 3.00 -- --
Options granted...................... 185,000 2.75 -- --
-------- -------
Balance outstanding December 31, 1996..... 310,000 2.85 -- --
Options cancelled.................... (250,000) 2.82 -- --
Options granted...................... 250,000 2.00 340,000 3.18
Options exercised.................... (7,500) 2.00 -- --
-------- -------
Balance outstanding December 31, 1997..... 302,500 2.20 340,000 3.18
======== =======
Options exercisable--
December 31, 1995.................. 10,000 3.00 -- --
December 31, 1996.................. 125,000 3.00 -- --
December 31, 1997.................. 302,500 2.20 -- --

Following is the range of exercise prices, the weighted-average remaining
life of all stock options outstanding at December 31, 1997, and the
weighted-average price within each price range of those options outstanding and
those options exercisable at December 31, 1997.

F-62
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 DECEMBER 31, 1997
- ------------------------------------------------------ ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
EXERCISE REMAINING AVERAGE AVERAGE
PRICE CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
OPTIONS PER OPTION LIFE (YEARS) PER OPTION OPTIONS PER OPTION
- --------- ---------- ------------ -------------- ------- --------------

242,500 $ 2.00 9.3 $2.00 242,500 $2.00
60,000 3.00 2.9 3.00 60,000 3.00
340,000 3.18 9.8 3.18 -- --
------- -------
642,500 2.00-3.18 8.9 2.72 302,500 2.20
======= =======

SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes a
fair-value method of accounting for employee stock options under which
compensation expense is measured based on the estimated fair value of stock
options at the grant date and recognized over the period that the options vest.
The Company will continue to account for its stock option plans under the
optional intrinsic value method of APB No. 25, whereby no compensation expense
is recognized for fixed-price stock options with a grant price equal to or in
excess of the fair market value of the underlying stock at the grant date. Had
compensation expense been determined in accordance with SFAS No. 123, the
estimated weighted-average, grant-date fair value would have been $1.23, $1.14
and $0.94 per option for those options granted in 1995, 1996 and 1997,
respectively, and the resulting compensation expense would have reduced net
income and earnings per share as shown in the following pro forma amounts. These
amounts may not be representative of compensation expense that might be expected
to result in future years using the fair-value method of accounting for employee
stock options, as the number of options granted in a particular year may not be
indicative of the number of options granted in future years.

1995 1996 1997
-------- --------- ----------

Net income (loss) available for common stockholders:
As reported............................................ $661,216 $(585,711) $1,329,103
Pro forma.............................................. 614,771 (673,516) 1,053,706
Earnings (loss) per share:
Basic, as reported..................................... $ 0.20 $ (0.18) $ 0.36
Diluted, as reported................................... 0.17 (0.15) 0.31
Basic, pro forma....................................... 0.19 (0.20) 0.29
Diluted, pro forma..................................... 0.16 (0.17) 0.24

The fair value of each option granted in 1995, 1996 and 1997 was estimated
as of the grant date using the Black-Scholes option pricing model with the
following weighted-average assumptions:

1995 1996 1997
---- ---- ----

Expected life (years)....................................... 5 5 5
Risk-free interest rate..................................... 6% 6% 6%
Expected dividend yield..................................... -- -- --
Expected volatility......................................... 35% 35% 38%

11. COMMON STOCK WARRANTS:

In connection with the Company's public offering on October 11, 1994, the
Company issued 660,000 warrants. No warrants had been exercised at December 31,
1996. Until April 15, 1997, each warrant could be exercised to purchase two
shares of common stock for $3.50 per share. After April 15, 1997, each warrant
could be exercised to purchase two shares of common stock for $2.00 per share.
On September 3, 1997, LSAI gave notice to the holders of these warrants of the
Company's election to redeem the outstanding warrants at $0.01

F-63
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

each on October 14, 1997, unless extended, at the sole discretion of the
Company, 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, the Company
also issued warrants to purchase 66,000 units at $7.32 per unit, consisting of
two shares of common stock and one warrant for two additional shares of common
stock, 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 $2.00 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 two
shares of common stock comprising the unit for $7.20. In November 1997, 30,000
of the Underwriter Warrants were exercised with respect to the two shares of
common stock comprising the unit for $7.20. The remaining 36,000 of the
Underwriter Warrants with respect to the two 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 warrants and stock options" in the accompanying consolidated statement of
cash flows and was approximately $2.7 million, net of commissions and other
offering expenses.

In connection with the Warrant Redemption, LSAI issued warrants to purchase
144,058 shares of common stock to various investment bankers as a portion of
their compensation for serving as managers of the Warrant Redemption and certain
other services. These warrants have an exercise price per share of $2.20 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 the
Company 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 stockholders'
equity.

F-64
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

JUNE 30,
1998
------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 4,776,869
Accounts receivable, net of allowance of $494,989......... 2,860,074
Income tax refund receivable.............................. --
Inventories............................................... 72,172
Prepaid expenses and other................................ 158,457
Deferred tax asset........................................ 160,709
-----------
Total current assets................................. 8,028,281
-----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,281,817................................ 2,390,096
-----------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $316,592..... 2,271,859
Customer list, net of accumulated amortization of
$695,913............................................... 5,217,751
Deferred costs............................................ 45,051
-----------
Total other assets................................... 7,534,661
-----------
Total assets......................................... $17,953,038
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 871,128
Accrued income tax........................................ 95,559
Accrued payroll........................................... 974,202
Accrued expenses.......................................... 68,893
Accrued customer list installment payments................ 595,994
Obligations from discontinued operations.................. 14,080
Current portion of long-term debt......................... 535,531
-----------
Total current liabilities............................ 3,155,387
-----------
LONG-TERM DEBT, net of current portion...................... 1,730,909
-----------
DEFERRED INCOME TAXES....................................... 359,848
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 20,000,000 shares
authorized, 5,602,446 shares issues and outstanding.... 5,602
Paid in capital in excess of par, common stock............ 10,136,973
Retained earnings......................................... 2,564,319
-----------
Total stockholders' equity........................... 12,706,894
-----------
Total liabilities and stockholders' equity........... $17,953,038
===========

The accompanying notes are an integral part of this consolidated balance sheet.
F-65
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(UNAUDITED)

REVENUES.................................................... $6,010,982 $7,659,764
COST OF LABORATORY SERVICES................................. 2,659,857 3,462,846
---------- ----------
Gross profit.............................................. 3,351,125 4,196,918
---------- ----------
OPERATING EXPENSES:
Selling................................................... 292,095 424,932
General and administrative................................ 1,599,080 1,786,052
Depreciation and amortization............................. 317,172 392,908
---------- ----------
Total operating expenses............................. 2,208,347 2,603,892
---------- ----------
Income from operations................................. 1,142,778 1,593,026
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (90,484) (98,438)
Interest income........................................... 19,493 77,823
Other income.............................................. 72 52,487
---------- ----------
Total other income (expense)......................... (70,919) 31,872
---------- ----------
Income before income taxes............................. 1,071,859 1,624,898
INCOME TAX EXPENSE.......................................... 449,243 670,592
---------- ----------
Net income............................................. $ 622,616 $ 954,306
========== ==========
BASIC EARNINGS PER SHARE:
Weighted average number of common stock shares
outstanding............................................... 3,313,405 5,018,523
========== ==========
Net income per common stock share........................... $ .19 $ .19
========== ==========
DILUTED EARNINGS PER SHARE:
Weighted average number of common stock and common stock
equivalent shares outstanding............................. 3,834,644 5,381,554
========== ==========
Net income per common stock and common stock equivalents.... $ .16 $ .18
========== ==========

The accompanying notes are an integral part of these statements.
F-66
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
------------- -------------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 622,616 $ 954,306
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................ 317,172 392,908
Provision for bad debts and other.................... 40,000 --
Gain from extinguishment of long-term debt........... -- (38,122)
Impact of changes in assets and liabilities:
Accounts receivable............................... (627,671) (630,939)
Income tax refund receivable...................... 241,243 190,498
Inventories....................................... 24,384 37,757
Prepaid expenses and other........................ 53,759 (43,238)
Income tax payable................................ -- 95,559
Accounts payable and accrued expenses............. 257,255 90,382
----------- -----------
Net cash provided by operating activities............ 928,758 1,049,111
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (481,957) (183,870)
Purchase of PLL Customer List............................. (1,894,184) (42,033)
Purchase of Accu-Path Customer List....................... -- (92,692)
Purchase of Harrison Customer List........................ -- (553,515)
Acquisition costs......................................... (37,514) (12,456)
----------- -----------
Net cash used in investing activities................ (2,413,655) (884,566)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term borrowings......................... (11,667) --
Payments on long-term borrowings.......................... (199,533) (576,562)
Proceeds from long-term borrowings........................ 1,682,293 --
Proceeds from exercise of warrants and stock options...... -- 49,400
Proceeds from private offering............................ -- 2,275,847
Warrant offering costs.................................... (10,420) --
----------- -----------
Net cash provided by financing activities............ 1,460,673 1,748,685
----------- -----------
(DECREASE) IN CASH AND CASH EQUIVALENTS..................... (24,224) 1,913,230
----------- -----------
CASH AND CASH EQUIVALENTS, beginning of period.............. 727,381 2,863,639
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 703,157 $ 4,776,869
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 90,484 $ 110,573
=========== ===========
Cash paid during the period for taxes..................... $ 190,000 $ 384,535
=========== ===========

The accompanying notes are an integral part of these statements.
F-67
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND JUNE 30, 1998, IS UNAUDITED.)

1. GENERAL

The consolidated financial statements included in this report have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission for interim reporting and include all adjustments which
are, in the opinion of management, necessary for a fair presentation. These
financial statements have not been audited by an independent accountant. The
consolidated balance sheet at December 31, 1997, has been derived from the
audited balance sheet of the Company.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures are adequate to
make the information presented not misleading. However, these financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Annual Report on Form 10-KSB filed by the
Company with the Securities and Exchange Commission on March 27, 1998. The
financial data for the interim periods presented may not necessarily reflect the
results to be expected for the full year.

2. EARNINGS PER COMMON SHARE

Both Basic and Diluted Earnings per common share were computed using the
weighted average number of common shares outstanding. Diluted earnings per share
also reflect the dilutive effect, if any, of the conversion of stock options,
outstanding warrants and contingent shares. In the diluted earnings per share
calculation the outstanding warrants were calculated using the weighted average
market price during the term of the warrants.

Income from continuing operations for purposes of computing both basic
earnings per share and diluted earnings per share was $954,306 and $622,616 for
the six months ended June 30, 1998 and 1997, respectively. A reconciliation of
the average shares outstanding used to compute basic earnings per share to the
shares used to compute diluted earnings per share for both periods is presented
below:

SIX MONTHS
ENDED JUNE 30,
----------------------
1997 1998
--------- ---------

Average shares outstanding-basic............................ 3,313,405 5,018,523
Dilutive effect of stock options............................ 58,429 268,107
Dilutive effect of warrants................................. 308,506 94,924
Dilutive effect of contingent shares related to NPL
purchase.................................................. 154,304 --
--------- ---------
Average shares outstanding assuming dilution................ 3,834,644 5,381,554
========= =========

3. GOODWILL AND CUSTOMER LIST

Goodwill and customer lists are being amortized on a straight-line basis
over twenty to forty years and fifteen years, respectively. The Company
continually evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of goodwill and customer lists may
warrant revision or that the remaining unamortized balance of goodwill or
customer lists may not be recoverable. When factors, such as operating losses,
loss of customers, loss or suspension for an extended period of laboratory
certification, or changes in the drug testing industry, if present, indicate
that goodwill or customer lists should be evaluated for possible impairment, the
Company uses an estimate of the related undiscounted cash flows over the
remaining life of the goodwill or customer lists in measuring whether the
goodwill and the customer lists are recoverable. Although management believes
that goodwill and the customer lists are currently recoverable over the
respective

F-68
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LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

remaining amortization periods, it is possible, due to a change in
circumstances, that the carrying value could become impaired in the future. Such
impairment could have a material effect on the results of operations in a
particular reporting period.

4. CONTINGENT LIABILITIES

Incidental to its business, the Company from time to time is sued by
individuals who have tested positive for drugs of abuse or who allege that
improper analysis has been performed, generally arising from Laboratory
Specialists, Inc.'s, the company's wholly owned subsidiary ("LSI"), alleged
failure to properly administer drug urinalysis tests. LSI is currently a
defendant in several such lawsuits. Based upon prior successful defense of
similar-type lawsuits, the Company believes it has valid defenses to each of
such lawsuits, and intends to vigorously defend in such actions. Although LSI
maintains insurance to protect itself against such liability, and LSI's
insurance carriers have assumed the defense of LSI in connection with certain
actions, the extent of such insurance coverage is limited, both in terms of
types of risks covered by the policies and the amount of coverage. In the
opinion of the Company's management and it's legal counsel, these suits and
claims should not result in judgments or settlements which would have a material
adverse effect on the Company's results of operations or financial position.
Although LSI has not experienced any material liability related to such claims,
there can be no assurance that LSI, and possibly the Company, will not at some
time in the future experience significant liability in connection with such
claims and such liability may exceed the extent of such insurance coverage, both
in terms of risks covered by the policies and the amount of coverage, which
could have a material adverse effect upon the results of operations and
financial condition of the Company.

5. SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

In connection with the purchase of assets from Pathology Laboratories, Ltd.
("PLL"), a liability of $960,000 was recorded based upon estimated future
quarterly installment payments to be made to PLL. As of June 30, 1998, all
installment payments, totaling $751,688 had been made and the remaining balance
of the liability, approximately $208,312, was treated as a reduction in the
carrying value of the PLL customer list since it will not be paid pursuant to
the purchase agreement.

In connection with the purchase of assets from Accu-Path Medical
Laboratory, Inc. ("Accu-Path"), a liability of $260,000 was recorded based upon
estimated future quarterly installment payments to be made to Accu-Path. As of
June 30, 1998, the first and second installment payments, totaling $90,151, had
been made, with two quarterly installment payments to be made.

In connection with the purchase of assets from Harrison Laboratories, Inc.
("HLI"), a liability of $460,000 was recorded based upon the estimated future
payment obligation. As of June 30, 1998, no payments have been made on this
liability; however, a $33,855 reduction was recorded as a result of the offset
of an account receivable owed to Laboratory Specialists, Inc. by HLI.

The above transactions, except the monthly payments to the vendor and the
reductions in the liability owed to PLL, Accu-Path and HLI, are non-cash
transactions and have been excluded from the accompanying statements of cash
flows.

6. SUBSEQUENT EVENTS

On July 1, 1998, the Company acquired from Toxworx Laboratories, Inc.
("TLI"), a California corporation, a customer list pursuant to an Asset Purchase
Agreement dated June 8, 1998, ("TLI Asset Purchase"). In connection with the TLI
Asset Purchase, the Company paid $2,400,000 at closing. The purchase price of
the customer list was recorded as an intangible asset, which is being amortized
over 15 years.

On July 20, 1998, the Company granted 20,000 stock options for the purchase
of Common Stock of Laboratory Specialists of America, Inc. to certain employees.
The stock options have an exercise price of $4.25
F-69
190
LABORATORY SPECIALISTS OF AMERICA, INC. AND SUBSIDIARY

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

per share, which represented the fair market value on the date of the grant, and
are exercisable at any time after January 20, 1999, and on or before July 20,
2008.

On August 25, 1998, the Company renewed the revolving loan portion of its
credit facility with Hibernia National Bank for a two-year period and increased
the lending limit to $1,000,000. Advances on the revolving loan are based upon
Laboratory Specialists, Inc. maintaining certain ratios, compliance with the
loan covenants and levels of liquid assets including accounts receivable. The
outstanding principal amount of the revolving loan bears interest at the
Citibank, N.A. rate, plus up to 1%.

F-70
191

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Kizorek, Inc.
Naperville, Illinois

We have audited the accompanying balance sheet of Kizorek, Inc. as of
October 31, 1997 and the related statements of income and retained earnings and
cash flows for the year then ended. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kizorek, Inc. as of October
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

Crowe, Chizek and Company LLP
Oak Brook, Illinois
December 10, 1997, except for Note 8,
as to which the date is August 31, 1998

F-71
192

KIZOREK, INC.
BALANCE SHEET
OCTOBER 31, 1997

ASSETS
Current assets
Cash...................................................... $ 558,315
Accounts receivable (less allowance for doubtful accounts
of $65,000)............................................ 2,405,538
Employee loans............................................ 97,069
Prepaid vehicle lease costs............................... 175,473
Other prepaid expenses.................................... 111,458
----------
Total current assets................................... 3,347,853
Property and equipment
Photo equipment........................................... 1,033,364
Office and computer equipment............................. 2,121,218
Vehicles.................................................. 229,329
Leasehold improvements.................................... 76,962
----------
3,460,873
Accumulated depreciation.................................. 2,291,904
----------
1,168,969
Other assets
S corporation tax deposit................................. 30,153
Security deposits......................................... 36,734
----------
66,887
----------
$4,583,709
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt (Note 3)............. $ 19,204
Accounts payable.......................................... 677,779
Accrued payroll........................................... 161,107
Accrued other expenses.................................... 120,388
----------
Total current liabilities.............................. 978,478
Long-term debt (Note 3)..................................... 25,669
Stockholder's equity
Common stock, no par value; authorized 100 shares, issued
and outstanding 10 shares.............................. 1,000
Retained earnings......................................... 3,578,562
----------
3,579,562
----------
$4,583,709
==========

See accompanying notes to financial statements.
F-72
193

KIZOREK, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED OCTOBER 31, 1997

REVENUE..................................................... $14,476,272
Operating expenses
Payroll, payroll taxes, and fringe benefits............... 7,205,295
Vehicle operating and leasing............................. 1,718,389
Travel.................................................... 1,004,521
Occupancy................................................. 340,129
Depreciation.............................................. 478,540
Outside services.......................................... 221,149
Insurance................................................. 488,275
Advertising and promotion................................. 245,531
Telephone................................................. 443,902
Office and computer related expenses...................... 521,926
Other..................................................... 556,566
-----------
13,224,223
-----------
Income from operations...................................... 1,252,049
Interest expense............................................ 19,816
Net income.................................................. 1,232,233
Retained earnings at beginning of year...................... 2,730,052
Dividends to stockholder.................................... (383,723)
-----------
RETAINED EARNINGS AT END OF YEAR............................ $ 3,578,562
===========

See accompanying notes to financial statements.
F-73
194

KIZOREK, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997

CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $1,232,233
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation........................................... 478,540
Gain on disposal of equipment.......................... (1,103)
Change in assets and liabilities
Accounts receivable.................................. (360,027)
Other current assets................................. (79,983)
Other assets......................................... 18,851
Accounts payable..................................... 145,260
Other current liabilities............................ 4,959
----------
Net cash provided by operating activities......... 1,438,730
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment........................... 36,103
Additions to property and equipment....................... (296,230)
----------
Net cash used in investing activities.................. (260,127)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit............................ (450,000)
Repayment of long-term debt............................... (18,938)
Dividends to stockholder.................................. (383,723)
----------
Net cash used in financing activities.................. (852,661)
----------
NET CHANGE IN CASH.......................................... 325,942
CASH AT BEGINNING OF YEAR................................... 232,373
----------
CASH AT END OF YEAR......................................... $ 558,315
==========
Supplemental disclosures of cash flow information
Cash paid during the year for Interest.................... $ 20,132
Supplemental schedule of noncash investing activity
Equipment acquired through a capital lease................ $ 59,108

See accompanying notes to financial statements.
F-74
195

KIZOREK, INC.

NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business: Kizorek, Inc. (the Company) is an insurance claims
investigation agency based in Naperville, Illinois. The Company's primary
service is providing video surveillance to insurance companies investigating
disability claims primarily throughout the United States.

Use of Estimates in Preparation of Financial Statements: 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.

Revenue Recognition: Kizorek, Inc. provides surveillance services for its
clients. Fees are generated and recognized for hours incurred based upon
established hourly rates. Accounts receivable include unbilled balances of
$192,000 for services provided prior to the end of the period but billed
subsequently.

Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed based on the estimated useful lives of the related
assets using the straight-line method for financial reporting and accelerated
methods for income tax purposes. For each classification of property and
equipment, the depreciable lives are as follows:

Photo equipment......................................... 6 years
Office and computer equipment........................... 3 to 6 years
Vehicles................................................ 3 years
Leasehold improvements.................................. 5 years

Income Taxes: The Company, with the consent of its stockholder, elected to
have its income taxed as an S corporation which provides that, in lieu of
corporate income taxes, the stockholder is taxed on the Company's taxable
income.

NOTE 2 -- LINE OF CREDIT

The Company has a line of credit of $1,000,000 with Northern Trust
Bank/DuPage. The line of credit bears interest at the prime rate and is secured
by all business assets of the Company. The bank's commitment under the line of
credit expires on March 1, 1998. Restrictive covenants contained in the loan
agreement require the maintenance of certain financial ratios. At October 31,
1997, no borrowings had been made against the line of credit.

NOTE 3 -- LONG-TERM DEBT

Long-term debt consists of the following at October 31, 1997:

Lease payable, Naper Leasing Service, maturing January 2000
with interest at 12.8%, payable in monthly installments
of $1,988, secured by equipment.......................... $44,873
Less current maturities.................................... 19,204
-------
$25,669
=======

F-75
196
KIZOREK, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future maturities are as follows:

YEAR ENDING
OCTOBER 31,
-----------

1998..................................................... 19,204
1999..................................................... 21,795
2000..................................................... 3,874

NOTE 4 -- PROFIT SHARING PLAN

The Company maintains a defined contribution profit sharing plan for
substantially all employees which provides for contributions at the discretion
of the Board of Directors, voluntary employee 401(k) contributions, and matching
contributions by the Company up to specified limits. The matching contribution
for the year ended October 31, 1997 was $46,335. There was no discretionary
contribution for the year ended October 31, 1997.

NOTE 5 -- LEASE COMMITMENTS

The Company conducts its operations from leased office facilities in
Illinois, South Carolina, Hawaii, California, and South Africa. The leases
expire at various dates through 1999.

The total office rental expense was $309,909 for the year ended October 31,
1997.

The Company leases vehicles under operating leases with two- or three-year
lease terms. Total expense amounted to $750,559 for the year ended October 31,
1997.

Future minimum lease commitments are as follows:

YEAR ENDING
OCTOBER 31, AMOUNT
----------- ------

1998................................................... $ 788,614
1999................................................... 213,392
-----------
$ 1,002,006
===========

NOTE 6 -- CONTINGENCY

The Company entered into an agreement with North American Benefits, Inc.,
whereby North American Benefits, Inc. provides certain administrative services
and North American Specialty Insurance Company provides stop loss coverage.
However, the Company is responsible for the funding of all claims up to $17,500
per individual per policy year and up to approximately $250,000 per year on the
group as a whole. A liability has been recorded for the estimate of claims
pending at the balance sheet date.

NOTE 7 -- PENDING LITIGATION

The Company is a defendant in several lawsuits arising from the performance
of their regular business activities. These lawsuits are being defended by
counsel for the Company's insurance carrier. Damages being sought are covered by
the Company's existing insurance policies and are not expected to exceed
existing coverage limitations. These matters, when finally concluded and
determined, will not, in the opinion of management, have a material adverse
effect on the results of operations or financial position of the Company.

NOTE 8 -- SUBSEQUENT EVENTS

Effective November 1, 1997, the Company established a deferred compensation
plan for key executives and employees. The total amount of benefits awarded
under this plan is $1,350,000, payable November 1, 2004 plus

F-76
197
KIZOREK, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

interest accrued from the date of the award. If there is a change in control of
the Company through merger, consolidation, liquidation, dissolution, or sale of
all or substantially all of the Company's assets, payments become due in three
installments plus interest commencing on the December 1 following the date of
the change in control of the Company with the balance being due in two
installments on December 1 of each of the next two years.

On August 31, 1998, all of the outstanding shares of common stock of the
Company were exchanged for cash and shares of common stock of The Kroll-O'Gara
Company under the terms of a merger agreement.

F-77
198

THE KROLL-O'GARA COMPANY PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)

KROLL-O'GARA
PRO FORMA COMBINING FINANCIAL STATEMENTS

The Pro Forma Combining Condensed Balance Sheet of The Kroll-O'Gara Company
(the "Company") as of June 30, 1998, reflects the financial position of the
Company after giving effect to the acquisition of Kizorek. The Pro Forma
Consolidated Statement of Operations for the year ended December 31, 1997, and
the six months ended June 30, 1998, assumes that the acquisition occurred on
January 1, 1997, and January, 1, 1998, respectively, and is based on the
operations of the Company for the periods then ended.

The Unaudited Pro Forma Combining Condensed Financial Statements have been
prepared by the Company based upon assumptions it deems proper. The Unaudited
Pro Forma Combining Condensed Financial Statements presented herein are not
necessarily indicative of the future consolidated financial position or future
consolidated results of operations of the Company. The statements are also not
indicative of the consolidated financial position or consolidated results of
operations of the Company that would have actually occurred had the transaction
been in effect as of the date or for the periods presented. It should be noted
that for periods subsequent to June 30, 1998 the Company's consolidated
financial statements will reflect the acquisition.

The Unaudited Pro Forma Combining Condensed Financial Statements should be
read in conjunction with the historical consolidated Financial Statements and
related notes of the Company contained in its annual report on Form 10-K for the
year ended December 31, 1997.

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.

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

KIZOREK
-------

Fair value of assets acquired including:
Cash..................................................... $ 192
Accounts receivable...................................... 1,743
Unbilled revenue......................................... 269
Other current assets..................................... 448
Property, plant and equipment............................ 955
Intangibles.............................................. 700
Goodwill................................................. 8,076
-------
$12,383
Less: Cash paid for net assets............................. (800)
Fair value of debt issued................................ --
Fair value of stock issued............................... (8,228)
-------
$ 3,355
=======
Liabilities assumed including:
Liabilities assumed and acquisition costs................ $ 3,155
Debt..................................................... 200
-------
$ 3,355
=======

F-78
199

KROLL-O'GARA

PRO FORMA COMBINING CONDENSED BALANCE SHEETS
AS OF JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)

HISTORICAL KIZOREK (1) ADJUSTMENTS PRO FORMA
---------- ------------- ------------ ---------

ASSETS
CURRENT ASSETS:
Cash.............................. $ 40,318 $ 294 $ (800)(5) $ 39,812
Accounts receivable............... 41,267 1,843 -- 43,110
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 19,802 -- -- 19,802
Inventories....................... 20,153 -- -- 20,153
Other current assets.............. 12,832 903 -- 13,735
-------- ------ ------ --------
Total current assets......... 134,372 3,040 (800) 136,612
Property, plant, and equipment,
net............................... 16,471 957 -- 17,428
Databases, net....................... 8,467 -- -- 8,467
Cost in excess of assets acquired,
net............................... 28,515 -- 7,567(2)(3)(7) 36,082
Other assets......................... 5,293 34 700(6) 6,027
-------- ------ ------ --------
42,275 34 8,267 50,576
-------- ------ ------ --------
Total assets...................... $193,118 $4,031 $7,467 $204,616
======== ====== ====== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................. $ 27,104 $ 782 $ 545(3) $ 28,431
Accrued liabilities............... 13,128 334 450(8) 13,912
Other current liabilities......... 6,336 9 190(7) 6,535
-------- ------ ------ --------
Total current liabilities.... 46,568 1,125 1,185 48,878
Other long-term liabilities.......... 1,861 -- 900(8) 2,761
Deferred income taxes................ 2,153 -- 60(7) 2,213
Long-term debt, net of current
portion........................... 39,319 -- -- 39,319
-------- ------ ------ --------
Total liabilities................. 89,901 1,125 2,145 93,171
Shareholders' equity................. 103,217 2,906 5,322(4)(8) 111,445
-------- ------ ------ --------
Total liabilities and
shareholders' equity............ $193,118 $4,031 $7,467 $204,616
======== ====== ====== ========

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

(1) Kizorek historical balance sheet as of April 30, 1998

(2) To record $6,772 in goodwill resulting from the acquisition of Kizorek.

(3) To record $545 in costs associated with the acquisition of Kizorek.

(4) To reflect 352,381 shares of stock issued in connection with the
acquisition, less Kizorek historical equity.

(5) To reflect $800 cash paid to the former shareholder of Kizorek in connection
with the acquisition.

(6) To reflect a value of $600 for customer lists and $100 for private
investigation licenses identified in conjunction with the acquisition.

(7) To record current and long-term Deferred Tax Liability resulting from the
differences in preliminary book and tax basis of assets acquired.

(8) To record accrued compensation under the Kizorek deferred compensation plan
associated with the accelerated vesting of benefits resulting from a change
in control of the company ($1,350 at 5 1/8%)

F-79
200

KROLL-O'GARA

PRO FORMA COMBINING STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
HISTORICAL KIZOREK (1) ADJUSTMENTS (8) PRO FORMA
---------- ------------- ----------------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Net sales....................................... $190,413 $14,476 $ -- $204,889
Cost of sales................................... 131,644 8,113 -- 139,757
-------- ------- ----- --------
Gross profit............................. 58,769 6,363 -- 65,132
OPERATING EXPENSES
Selling and marketing......................... 14,371 1,332 -- 15,703
General and administrative.................... 27,538 3,779 47(6) 31,364
Merger related costs.......................... 7,205 -- -- 7,205
Amortization of costs in excess of assets
acquired.................................... 684 -- 293(2)(3) 977
-------- ------- ----- --------
Operating income......................... 8,971 1,252 (340) 9,883
OTHER INCOME (EXPENSE):
Interest expense.............................. (4,806) (20) (69)(7) (4,895)
Other, net.................................... (393) -- -- (393)
-------- ------- ----- --------
Income before minority interest,
provision for income taxes,
extraordinary item, and cumulative
effect of change in accounting
principle.............................. 3,772 1,232 (409) 4,595
Minority interest............................. (156) -- -- (156)
-------- ------- ----- --------
Income before provision for income taxes,
extraordinary item, and cumulative
effect of change in accounting
principle.............................. 3,616 1,232 (409) 4,439
Provision for income taxes.................... 2,352 -- 329(4)(5) 2,681
-------- ------- ----- --------
Income from continuing operations........ $ 1,264 $ 1,232 $(738) $ 1,758
======== ======= ===== ========
Basic earnings per share from continuing
operations.................................. $ 0.10 $ 0.13
======== ========
Basic weighted average shares outstanding..... 13,061 13,413
======== ========
Diluted earnings per share from continuing
operations.................................. $ 0.09 $ 0.12
======== ========
Diluted weighted average shares outstanding... 13,721 14,073
======== ========

- ---------------
(1) To include historical results of operations for Kizorek for the year ended
October 31, 1997. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies

(2) To record amortization on goodwill resulting from the acquisition of Kizorek
(gross cost $6,772 over 25 years).

(3) To amortize capitalized acquisition costs associated with Kizorek ($545 over
25 years).

(4) To recognize the benefit for income taxes on pro forma adjustments at an
effective rate of 40%.

(5) To recognize provision for income taxes at an effective rate of 40% in
association with the historical results of Kizorek, which had previously
been treated as an S Corporation for tax purposes.

(6) To record amortization of customer lists and detective licenses identified
in conjunction with the acquisition (gross cost $700 over 15 years)

(7) To record interest expense under the Kizorek deferred compensation plan
($1,350 at 5 1/8%)

(8) Pro forma adjustments exclude the impact of compensation expense for a
non-recurring charge under the Kizorek deferred compensation plan associated
with the accelerated vesting of benefits resulting from a change in control
of the company.

F-80
201

KROLL-O'GARA

PRO FORMA COMBINING STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------
HISTORICAL KIZOREK (1) ADJUSTMENTS (8) PRO FORMA
---------- ------------- ----------------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

Net sales............................. $111,816 $6,385 $ -- $118,201
Cost of sales......................... 75,632 3,911 -- 79,543
-------- ------ ----- --------
Gross profit................... 36,184 2,474 -- 38,658
OPERATING EXPENSES
Selling and marketing............... 7,734 618 -- 8,352
General and administrative.......... 15,019 1,793 23(6) 16,835
Amortization of costs in excess of
assets acquired.................. 624 -- 146(2)(3) 770
-------- ------ ----- --------
Operating income............... 12,807 63 (169) 12,701
OTHER INCOME (EXPENSE):
Interest expense.................... (2,369) -- (35)(7) (2,404)
Other, net.......................... 9 -- -- 9
-------- ------ ----- --------
Income before provision for
income taxes................ 10,447 63 (204) 10,306
Provision for income taxes.......... 4,140 -- (57)(4)(5) 4,083
-------- ------ ----- --------
Net income..................... $ 6,307 $ 63 $(147) $ 6,223
======== ====== ===== ========
Basic earnings per share............ $ 0.43 $ 0.42
======== ========
Basic weighted average shares
outstanding...................... 14,632 14,984
======== ========
Diluted earnings per share.......... $ 0.42 $ 0.40
======== ========
Diluted weighted average shares
outstanding...................... 15,015 15,367
======== ========

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

(1) To include historical results of operations for Kizorek for the year ended
October 31, 1997. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies

(2) To record amortization on goodwill resulting from the acquisition of Kizorek
(gross cost $6,772 over 25 years).

(3) To amortize capitalized acquisition costs associated with Kizorek ($545 over
25 years).

(4) To recognize the benefit for income taxes on pro forma adjustments at an
effective rate of 40%.

(5) To recognize provision for income taxes at an effective rate of 40% in
association with the historical results of Kizorek, which had previously
been treated as an S Corporation for tax purposes.

(6) To record amortization of customer lists and detective licenses identified
in conjunction with the acquisition (gross cost $700 over 15 years)

(7) To record interest expense under the Kizorek deferred compensation plan
($1,350 at 5 1/8%).

F-81
202

KROLL-O'GARA AND LABORATORY SPECIALISTS UNAUDITED PRO FORMA

COMBINING FINANCIAL STATEMENTS

The unaudited pro forma combining financial data gives effect to the merger
as a pooling of interests, and should be read in conjunction with, and is
qualified by reference to the audited consolidated financial statements of
Kroll-O'Gara and Laboratory Specialists and the notes thereto included elsewhere
in this Proxy Statement/ Prospectus. For purposes of the unaudited pro forma
operating data, Kroll-O'Gara's consolidated financial statements for the three
fiscal years ended December 31, 1997 and for the six months ended June 30, 1997
and 1998 have been combined with the consolidated financial statements of
Laboratory Specialists for the three fiscal years ended December 31, 1997 and
for the six months ended June 30, 1997 and 1998, respectively. For purposes of
the unaudited pro forma combined balance sheet data, Kroll-O'Gara's consolidated
financial data at June 30, 1998 has been combined with Laboratory Specialist's
consolidated financial data at June 30, 1998.

The pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have been achieved if the merger had been consummated as of the beginning of the
periods indicated, nor is it indicative of future financial position or results
of operations.

F-82
203

KROLL-O'GARA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEETS

AS OF JUNE 30, 1998
----------------------------------------
LABORATORY
KROLL-O'GARA SPECIALISTS PRO FORMA
------------ ----------- ---------
(IN THOUSANDS)

Current Assets:
Cash and equivalents................................... $ 40,318 $ 4,777 $ 45,095
Accounts receivable, net............................... 42,154 2,860 45,014
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 19,802 -- 19,802
Inventories............................................ 20,153 72 20,225
Other current assets................................... 11,945 319 12,264
-------- ------- --------
Total current assets.............................. 134,372 8,028 142,400
Property, plant and equipment, net....................... 16,471 2,390 18,861
Databases................................................ 8,467 -- 8,467
Costs in excess of assets acquired and other intangible
assets, net............................................ 30,013 7,490 37,503
Other assets............................................. 3,795 45 3,840
-------- ------- --------
Total assets...................................... $193,118 $17,953 $211,071
======== ======= ========
Current Liabilities:
Accounts payable....................................... $ 27,104 $ 871 $ 27,975
Accrued liabilities.................................... 13,128 1,043 14,171
Other current liabilities.............................. 5,363 95 5,458
Current debt obligations............................... 973 1,146 2,119
-------- ------- --------
Total current liabilities......................... 46,568 3,155 49,723
Long-term debt, net of current portion................... 39,319 1,731 41,050
Other long-term liabilities.............................. 4,014 360 4,374
Shareholders' equity..................................... 103,217 12,707 115,924
-------- ------- --------
Total liabilities and shareholders' equity........ $193,118 $17,953 $211,071
======== ======= ========

F-83
204

KROLL-O'GARA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------
LABORATORY PRO FORMA
KROLL-O'GARA SPECIALISTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales............................ $85,841 $6,926 $92,767
Cost of sales........................ 62,114 3,247 56(1) 65,417
------- ------ -------
Gross profit.................... 23,727 3,679 27,350
Selling and marketing expenses....... 9,448 561 10,009
General and administrative expenses,
including amortization............. 18,916 2,390 (56)(1) 21,250
------- ------ -------
Operating income (loss)......... (4,637) 728 (3,909)
Interest expense..................... (2,813) (30) (2,843)
Interest income...................... -- 127 127
Other income (expense), net.......... (384) 324 (60)
------- ------ -------
Income (loss) before provision
for income taxes.............. (7,834) 1,149 (6,685)
Provision (benefit) for income
taxes.............................. (1,298) 475 (823)
------- ------ -------
Net income...................... (6,536) 674 (5,862)
Dividends on preferred stock......... -- (13) (13)
------- ------ -------
Net income available to common
shareholders.................. $(6,536) $ 661 $ 5,875
======= ====== =======
Basic earnings per share............. $ (0.65) $ 0.20 $ (0.54)
======= ====== =======
Basic weighted average shares
outstanding........................ 10,021 3,298 (2,513)(2) 10,806(3)
======= ====== =======
Diluted earnings per share........... $ (0.65) $ 0.17 $ (0.54)
======= ====== =======
Diluted weighted average shares
outstanding........................ 10,021 3,843 (3,058)(2) 10,806(3)
======= ====== =======

- ---------------
(1) Reflects reclassifications necessary to conform the accounting practices of
the combined companies.

(2) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Laboratory Specialists common stock and
equivalents into Kroll-O'Gara common stock and equivalents based on the
estimated exchange ratio. For purposes of the pro forma basic and diluted
earnings per share computations, we have assumed an exchange ratio of .2381
Kroll-O'Gara share for every outstanding share of Laboratory Specialists
common stock on a weighted average basis. The above exchange ratio is based
upon a Kroll-O'Gara stock price of $21.

(3) On a pro forma basis for the year ended December 31, 1995, Kroll-O'Gara and
Laboratory Specialists had a combined net loss. As such, there is no further
dilution of earnings per share by the common stock equivalents of
Kroll-O'Gara and Laboratory Specialists and basic and diluted weighted
average shares outstanding are the same.

F-84
205

KROLL-O'GARA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------
LABORATORY PRO FORMA
KROLL-O'GARA SPECIALISTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales............................ $153,661 $8,727 $162,388
Cost of sales........................ 111,459 3,816 168(1) 115,443
-------- ------ --------
Gross profit.................... 42,202 4,911 46,945
Selling and marketing expenses....... 9,763 602 10,365
General and administrative expenses,
including amortization............. 23,940 2,947 (168)(1) 26,719
Asset impairment..................... -- 124 124
-------- ------ --------
Operating income................ 8,499 1,238 9,737
Interest expense..................... (3,140) (67) (3,207)
Interest income...................... -- 41 41
Other income, net.................... 336 4 340
-------- ------ --------
Income from continuing
operations before provision
(benefit) for income taxes.... 5,695 1,216 6,911
Provision (benefit) for income
taxes.............................. (162) 527 365
-------- ------ --------
Income from continuing
operations (4)
$ 5,857 $ 689 $ 6,546
======== ====== ========
Basic earnings per share from
continuing operations (4).......... $ 0.55 $ 0.21 $ 0.57
======== ====== ========
Basic weighted average shares
outstanding........................ 10,742 3,310 (2,522)(2) 11,530(3)
======== ====== ========
Diluted earnings per share from
continuing operations (4).......... $ 0.51 $ 0.17 $ 0.53
======== ====== ========
Diluted weighted average shares
outstanding........................ 11,160 3,955 (3,013)(2) 12,102(3)
======== ====== ========

- ---------------
(1) Reflects reclassifications necessary to conform the accounting practices of
the combined companies.

F-85
206

(3) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31, 1996:

INCOME SHARES
------ ------

Basic earnings per share........................... $6,546 11,530
Effect of dilutive securities:
Options.......................................... -- 133
Restricted stock................................. (162) 287
Warrants......................................... -- 115
Convertible note payable......................... -- 37
------ ------
Diluted earnings per share......................... $6,384 12,102
====== ======

F-86
207

KROLL-O'GARA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
LABORATORY PRO FORMA
KROLL-O'GARA SPECIALISTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales............................... $190,413 $12,837 $203,250
Cost of sales........................... 131,644 5,829 187(1) 137,660
-------- ------- --------
Gross profit....................... 58,769 7,008 65,590
Selling and marketing expenses.......... 14,371 654 15,025
General and administrative expenses,
including amortization................ 28,222 3,920 (187)(1) 31,955
Merger related costs.................... 7,205 -- 7,205
-------- ------- --------
Operating income................... 8,971 2,434 11,405
Interest expense........................ (4,806) (231) (5,037)
Interest income......................... -- 78 78
Other income (expense), net............. (393) 1 (392)
-------- ------- --------
Income from continuing operations
before minority interest,
provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................ 3,772 2,282 6,054
Minority interest....................... (156) -- (156)
-------- ------- --------
Income from continuing operations
before provision for income
taxes, extraordinary item and
cumulative effect of change in
accounting principle............. 3,616 2,282 5,898
Provision for income taxes.............. 2,352 953 3,305
-------- ------- --------
Income from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle (4)......... $ 1,264 $ 1,329 $ 2,593
======== ======= ========
Basic earnings per share from continuing
operations (4)........................ $ 0.10 $ 0.36 $ 0.19
======== ======= ========
Basic weighted average shares
outstanding........................... 13,061 3,693 (2,814)(2) 13,940(3)
======== ======= ========
Diluted earnings per share from
continuing operations (4)............. $ 0.09 $ 0.31 $ 0.18
======== ======= ========
Diluted weighted average shares
outstanding........................... 13,721 4,326 (3,295)(2) 14,751(3)
======== ======= ========

- ---------------
(1) Reflects reclassifications necessary to conform the accounting practices of
the combined companies.

F-87
208

(3) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31, 1997:

INCOME SHARES
------ ------

Basic earnings per share........................... $2,593 13,940
Effect of dilutive securities:
Options.......................................... -- 242
Restricted stock................................. -- 443
Warrants......................................... -- 110
Convertible note payable......................... -- 16
------ ------
Diluted earnings per share......................... $2,593 14,751
====== ======

F-88
209

KROLL-O'GARA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------
LABORATORY PRO FORMA
KROLL-O'GARA SPECIALISTS ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales............................... $88,600 $6,011 $94,611
Cost of sales........................... 59,608 2,660 91(1) 62,359
------- ------ -------
Gross profit....................... 28,992 3,351 32,252
Selling and marketing expenses.......... 6,540 292 6,832
General and administrative expenses,
including amortization................ 13,419 1,916 (91)(1) 15,244
------- ------ -------
Operating income................... 9,033 1,143 10,176
Interest expense........................ (2,115) (90) (2,205)
Interest income......................... 161 19 180
Other expense, net...................... (41) -- (41)
------- ------ -------
Income from continuing operations
before minority interest,
provision for income taxes and
extraordinary item............... 7,038 1,072 8,110
------- ------ -------
Minority interest....................... (74) -- (74)
Income from continuing operations
before provision for income taxes
and extraordinary item........... 6,964 1,072 8,036
Provision for income taxes.............. 2,949 449 3,398
------- ------ -------
Income from continuing operations
before extraordinary item (4).... $ 4,015 $ 623 $ 4,638
======= ====== =======
Basic earnings per share from continuing
operations (4)........................ $ 0.31 $ 0.19 $ 0.33
======= ====== =======
Basic weighted average shares
outstanding........................... 13,060 3,313 (2,524)(2) 13,849(3)
======= ====== =======
Diluted earnings per share from
continuing operations (4)............. $ 0.27 $ 0.16 $ 0.30
======= ====== =======
Diluted weighted average shares
outstanding........................... 13,830 3,835 (2,922)(2) 14,743(3)
======= ====== =======

- ---------------
(1) Reflects reclassifications necessary to conform the accounting policies of
the combined companies.

F-89
210

(3) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the six months ended June 30, 1997:

INCOME SHARES
------ ------

Basic earnings per share........................... $4,638 13,849
Effect of dilutive securities:
Options.......................................... -- 191
Restricted stock................................. (227) 593
Warrants......................................... -- 73
Convertible note payable......................... -- 37
------ ------
Diluted earnings per share......................... $4,411 14,743
====== ======

F-90
211

KROLL-O'GARA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------
LABORATORY PRO FORMA
KROLL-O'GARA SPECIALISTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales............................ $111,816 $7,660 $119,476
Cost of sales........................ 75,632 3,463 101(1) 79,196
-------- ------ --------
Gross profit.................... 36,184 4,197 40,280
Selling and marketing expenses....... 7,734 425 8,159
General and administrative expenses,
including amortization............. 15,643 2,179 (101)(1) 17,721
-------- ------ --------
Operating income................ 12,807 1,593 14,400
Interest expense..................... (2,369) (98) (2,467)
Interest income...................... 364 78 442
Other income (expense), net.......... (355) 52 (303)
-------- ------ --------
Income before provision for
income taxes.................. 10,447 1,625 12,072
Provision for income taxes........... 4,140 671 4,811
-------- ------ --------
Net income...................... $ 6,307 $ 954 $ 7,261
======== ====== ========
Basic earnings per share............. $ 0.43 $ 0.19 $ 0.46
======== ====== ========
Basic weighted average shares
outstanding........................ 14,632 5,019 (3,824)(2) 15,827(3)
======== ====== ========
Diluted earnings per share........... $ 0.42 $ 0.18 $ 0.45
======== ====== ========
Diluted weighted average shares
outstanding........................ 15,015 5,382 (4,101)(2) 16,296(3)
======== ====== ========

- ---------------
(1) Reflects reclassifications necessary to conform the accounting practices of
the combined companies.

(3) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the six months ended June 30, 1998:

INCOME SHARES
------ ------

Basic earnings per share........................... $7,261 15,827
Effect of dilutive securities:
Options.......................................... -- 447
Warrants......................................... -- 22
------ ------
Diluted earnings per share......................... $7,261 16,296
====== ======

F-91
212

KROLL-O'GARA PRO FORMA AND LABORATORY SPECIALISTS UNAUDITED PRO FORMA

COMBINING FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial data as of
June 30, 1998 and for the year ended December 31, 1997 and the six months ended
June 30, 1998 is derived from the unaudited pro forma combined condensed
financial statements which give effect to the merger as a pooling of interests,
after giving effect to Kroll-O'Gara's acquisition of Kizorek. The unaudited pro
forma combined condensed financial data should be read in conjunction with, and
are qualified by reference to, such pro forma statements and the notes thereto
included elsewhere in the Proxy Statement/Prospectus. For purposes of the
unaudited financial position and operating data, Kroll-O'Gara's pro forma
consolidated financial statements as of June 30, 1998 and for the year ended
December 31, 1997 and the six months ended June 30, 1998 have been combined with
the consolidated financial statements of Laboratory Specialists as of June 30,
1998 and for the year ended December 31, 1997 and the six months ended June 30,
1998.

The pro forma data is presented for illustrative purposes only, and is not
indicative of the financial position or operating results that would have been
achieved if the acquisition of Kizorek or the merger had been consummated as of
the beginning of the periods indicated, nor is it indicative of future financial
position or results of operations.

F-92
213

KROLL-O'GARA PRO FORMA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEET

AS OF JUNE 30, 1998
-----------------------------------------
KROLL-O'GARA LABORATORY
PRO FORMA SPECIALISTS PRO FORMA
------------- ----------- ---------
(IN THOUSANDS)

Current Assets:
Cash and equivalents............................... $ 39,812 $ 4,777 $ 44,589
Accounts Receivable, net........................... 43,110 2,860 45,970
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ 19,802 -- 19,802
Inventories........................................ 20,153 72 20,225
Other current assets............................... 13,735 319 14,054
-------- ------- --------
Total current assets.......................... 136,612 8,028 144,640
Property, plant and equipment, net................... 17,428 2,390 19,818
Databases, net....................................... 8,467 -- 8,467
Costs in excess of assets acquired and other
intangible assets, net............................. 37,580 7,490 45,070
Other assets......................................... 4,529 45 4,574
-------- ------- --------
Total assets.................................. $204,616 $17,953 $222,569
======== ======= ========
Current Liabilities:
Accounts payable................................... $ 28,431 $ 871 $ 29,302
Accrued liabilities................................ 13,912 1,043 14,955
Other current liabilities.......................... 5,543 95 5,638
Current debt obligations........................... 992 1,146 2,138
-------- ------- --------
Total current liabilities..................... 48,878 3,155 52,033
Long-term debt, net of current portion............... 39,319 1,731 41,050
Other long-term liabilities.......................... 4,974 360 5,334
Shareholders' equity................................. 111,445 12,707 124,152
-------- ------- --------
Total liabilities and shareholders' equity.... $204,616 $17,953 $222,569
======== ======= ========

F-93
214

KROLL-O'GARA PRO FORMA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
KROLL-O'GARA LABORATORY PRO FORMA
PRO FORMA SPECIALISTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales.................................... $204,889 $12,837 $217,726
Cost of sales................................ 139,757 5,829 187(1) 145,773
-------- ------- --------
Gross profit............................ 65,132 7,008 71,953
Selling and marketing expenses............... 15,703 654 16,357
General and administrative expenses,
including amortization..................... 32,341 3,920 (187)(1) 36,074
Merger related costs......................... 7,205 -- 7,205
-------- ------- --------
Operating income........................ 9,883 2,434 12,317
Interest expense............................. (4,895) (231) (5,126)
Interest income.............................. -- 78 78
Other income (expense), net.................. (393) 1 (392)
-------- ------- --------
Income from continuing operations before
minority interest, provision for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle.................. 4,595 2,282 6,877
Minority interest............................ (156) -- (156)
-------- ------- --------
Income from continuing operations before
provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................. 4,439 2,282 6,721
Provision for income taxes................... 2,681 953 3,634
-------- ------- --------
Income from continuing operations before
extraordinary item and cumulative
effect of change in accounting
principle (4)......................... $ 1,758 $ 1,329 $ 3,087
======== ======= ========
Basic earnings per share from continuing
operations (4)............................. $ 0.13 $ 0.36 $ 0.22
======== ======= ========
Basic weighted average shares outstanding.... 13,413 3,693 (2,814)(2) 14,292(3)
======== ======= ========
Diluted earnings per share from continuing
operations (4)............................. $ 0.12 $ 0.31 $ 0.20
======== ======= ========
Diluted weighted average shares
outstanding................................ 14,073 4,325 (3,295)(2) 15,103(3)
======== ======= ========

- ---------------
(1) Reflects reclassifications necessary to conform the accounting practices of
the combined companies.

(2) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Laboratory Specialists common stock and
equivalents into Kroll-O'Gara common stock and equivalents based on the
estimated exchange ratio. For purposes of the pro forma basic and diluted
earnings per share computations, we have assumed an exchange ratio of .2381
Kroll-O'Gara share for every outstanding share of Laboratory Specialists
stock on a weighted average basis. The above exchange ratio is based upon a
Kroll-O'Gara stock price of $21.

F-94
215

(3) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31, 1997:

INCOME SHARES
------ ------

Basic earnings per share........................... $3,087 14,292
Effect of dilutive securities:
Options.......................................... -- 242
Restricted stock................................. -- 443
Warrants......................................... -- 110
Convertible note payable......................... -- 16
------ ------
Diluted earnings per share......................... $3,087 15,103
====== ======

F-95
216

KROLL-O'GARA PRO FORMA AND LABORATORY SPECIALISTS

UNAUDITED PRO FORMA COMBINING
STATEMENTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------------
KROLL-O'GARA LABORATORY PRO FORMA
PRO FORMA SPECIALISTS ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales................................ $118,201 $7,660 $125,861
Cost of sales............................ 79,543 3,463 101(1) 83,107
-------- ------ --------
Gross profit........................ 38,658 4,197 42,754
Selling and marketing expenses........... 8,352 425 8,777
General and administrative expenses,
including amortization................. 17,605 2,179 (101)(1) 19,683
-------- ------ --------
Operating income.................... 12,701 1,593 14,294
Interest expense......................... (2,404) (98) (2,502)
Interest income.......................... 364 78 442
Other income (expense), net.............. (355) 52 (303)
-------- ------ --------
Income before provision for income
taxes............................. 10,306 1,625 11,931
Provision for income taxes............... 4,083 671 4,754
-------- ------ --------
Net income............................. $ 6,223 $ 954 $ 7,177
======== ====== ========
Basic earnings per share................. $ 0.42 $ 0.19 $ 0.44
======== ====== ========
Basic weighted average shares
outstanding............................ 14,984 5,019 (3,824)(2) 16,179(3)
======== ====== ========
Diluted earnings per share............... $ 0.40 $ 0.18 $ 0.43
======== ====== ========
Diluted weighted average shares
outstanding............................ 15,367 5,382 (4,101)(2) 16,648(3)
======== ====== ========

- ---------------
(1) Reflects reclassifications necessary to conform the accounting practices of
the combined companies.

(2) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Laboratory Specialists common stock and
equivalents into Kroll-O'Gara common stock and equivalents based on the
estimated exchange ratio. For purposes of the pro forma basic and diluted
earnings per share computations, we have assumed an exchange ratio of .2381
Kroll-O'Gara share for every outstanding share of Laboratory Specialists
stock on a weighted average basis. The above exchange ratio is based upon a
Kroll-O'Gara stock price of $21.

(3) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the six months ended June 30, 1998:

INCOME SHARES
------ ------

Basic earnings per share........................... $7,177 16,179
Effect of dilutive securities:
Options....................................... -- 447
Warrants...................................... -- 22
------ ------
Diluted earnings per share......................... $7,177 16,648
====== ======

F-96
217

APPENDIX A

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
218

TABLE OF CONTENTS

ARTICLE I

THE MERGER.................................................. A-1
SECTION 1.1 The Merger.................................................. A-1
SECTION 1.2 Effective Time.............................................. A-1
SECTION 1.3 Effect of the Merger........................................ A-2
SECTION 1.4 Certificate of Incorporation; By-Laws....................... A-2
SECTION 1.5 Directors and Officers...................................... A-2
SECTION 1.6 Effect on Capital Stock..................................... A-2
SECTION 1.7 Exchange of Certificates.................................... A-3
SECTION 1.8 Dissenting Shares........................................... A-5
SECTION 1.9 Stock Transfer Books........................................ A-5
SECTION 1.10 No Further Ownership Rights in Company Common Stock......... A-5
SECTION 1.11 Lost, Stolen or Destroyed Certificates...................... A-5
SECTION 1.12 Tax and Accounting Consequences............................. A-5
SECTION 1.13 Taking of Necessary Action; Further Action.................. A-5
SECTION 1.14 Material Adverse Effect..................................... A-6

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY............... A-6
SECTION 2.1 Corporate Organization...................................... A-6
SECTION 2.2 Capitalization.............................................. A-6
SECTION 2.3 Subsidiaries................................................ A-6
SECTION 2.4 No Commitments to Issue Capital Stock....................... A-7
SECTION 2.5 Authorization; Execution and Delivery....................... A-7
SECTION 2.6 Governmental Approvals and Filings.......................... A-7
SECTION 2.7 No Conflict................................................. A-8
SECTION 2.8 SEC Filings................................................. A-8
Financial Statements; Absence of Undisclosed Liabilities;
SECTION 2.9 Receivables................................................. A-8
SECTION 2.10 Certain Other Financial Representations..................... A-9
SECTION 2.11 Absence of Changes.......................................... A-9
SECTION 2.12 Tax Matters................................................. A-10
SECTION 2.13 Relations with Employees.................................... A-12
SECTION 2.14 Benefit Plans............................................... A-12
SECTION 2.15 Title to Properties......................................... A-14
SECTION 2.16 Compliance with Laws; Legal Proceedings..................... A-14
SECTION 2.17 Brokers..................................................... A-15
SECTION 2.18 Intellectual Property....................................... A-15
SECTION 2.19 Insurance................................................... A-16
SECTION 2.20 Contracts; etc.............................................. A-16
SECTION 2.21 Permits, Authorizations, etc................................ A-17
SECTION 2.22 Environmental Matters....................................... A-17
SECTION 2.23 Company Acquisitions........................................ A-18
SECTION 2.24 Books and Records........................................... A-18
SECTION 2.25 Interested Party Transactions............................... A-18
SECTION 2.26 Opinion of Financial Advisor................................ A-18
SECTION 2.27 Pooling Matters............................................. A-18
SECTION 2.28 Registration Statement; Proxy Statement/Prospectus.......... A-18
SECTION 2.29 Bank Accounts and Powers of Attorney........................ A-19

A-i
219

SECTION 2.30 Certain Payments............................................ A-19
SECTION 2.31 Customers; Customer Relationships........................... A-19
SECTION 2.32 Year 2000 Compliance........................................ A-19

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..... A-20
SECTION 3.1 Corporate Organization...................................... A-20
SECTION 3.2 Capitalization.............................................. A-20
SECTION 3.3 Subsidiaries................................................ A-20
SECTION 3.4 Authorization; Execution and Delivery....................... A-20
SECTION 3.5 Governmental Approvals and Filings.......................... A-21
SECTION 3.6 No Conflict................................................. A-21
SECTION 3.7 SEC Filings................................................. A-21
SECTION 3.8 Financial Statements; Absence of Undisclosed Liabilities.... A-21
SECTION 3.9 Absence of Changes.......................................... A-22
SECTION 3.10 Tax Matters................................................. A-22
SECTION 3.11 Relations with Employees.................................... A-23
SECTION 3.12 Benefit Plans............................................... A-23
SECTION 3.13 Compliance with Laws; Legal Proceedings..................... A-23
SECTION 3.14 Brokers..................................................... A-24
SECTION 3.15 Intellectual Property....................................... A-24
SECTION 3.16 Insurance................................................... A-24
SECTION 3.17 Contracts; etc.............................................. A-24
SECTION 3.18 Permits, Authorizations, etc................................ A-24
SECTION 3.19 Environmental Matters....................................... A-24
SECTION 3.20 Books and Records........................................... A-25
SECTION 3.21 Pooling Matters............................................. A-25
SECTION 3.22 Registration Statement; Proxy Statement/Prospectus.......... A-25
SECTION 3.23 Ownership of Merger Sub; No Prior Activities................ A-25

ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER...................... A-26
SECTION 4.1 Conduct of Business by the Company Pending the Merger....... A-26
SECTION 4.2 Conduct of Business by Parent Pending the Merger............ A-27

ARTICLE V
ADDITIONAL AGREEMENTS....................................... A-27
SECTION 5.1 Proxy Statement/Prospectus; Registration Statement.......... A-27
SECTION 5.2 Company Stockholders Meeting................................ A-28
SECTION 5.3 Access to Information; Confidentiality...................... A-28
SECTION 5.4 Consents; Approvals......................................... A-28
SECTION 5.5 Agreements with Respect to Affiliates....................... A-28
SECTION 5.6 Indemnification and Insurance............................... A-28
SECTION 5.7 Notification of Certain Matters............................. A-29
SECTION 5.8 Further Action/Tax Treatment................................ A-29
SECTION 5.9 Public Announcements........................................ A-30
SECTION 5.10 Designation of Parent Common Stock.......................... A-30
SECTION 5.11 Conveyance Taxes............................................ A-30
SECTION 5.12 Accountant's Letters........................................ A-30
SECTION 5.13 Pooling Accounting Treatment................................ A-30

A-ii
220

SECTION 5.14 No Solicitation............................................. A-30
SECTION 5.15 Option and Warrant Amendments............................... A-31

ARTICLE VI
CONDITIONS TO THE MERGER.................................... A-31
Conditions to Obligation of Each Party to Effect the
SECTION 6.1 Merger...................................................... A-31
Additional Conditions to Obligations of Parent and Merger
SECTION 6.2 Sub......................................................... A-32
SECTION 6.3 Additional Conditions to Obligation of the Company.......... A-33

ARTICLE VII
TERMINATION................................................. A-34
SECTION 7.1 Termination................................................. A-34
SECTION 7.2 Effect of Termination....................................... A-35
SECTION 7.3 Fees and Expenses........................................... A-35

ARTICLE VIII
GENERAL PROVISIONS.......................................... A-35
Effectiveness of Representations, Warranties and
SECTION 8.1 Agreements.................................................. A-35
SECTION 8.2 Notices..................................................... A-35
SECTION 8.3 Certain Definitions......................................... A-36
SECTION 8.4 Amendment................................................... A-37
SECTION 8.5 Waiver...................................................... A-37
SECTION 8.6 Headings; Construction...................................... A-37
SECTION 8.7 Severability................................................ A-37
SECTION 8.8 Entire Agreement............................................ A-37
SECTION 8.9 Assignment; Merger Sub...................................... A-37
SECTION 8.10 Parties in Interest......................................... A-38
SECTION 8.11 Failure or Indulgence Not Waiver; Remedies Cumulative....... A-38
SECTION 8.12 Governing Law............................................... A-38
SECTION 8.13 Counterparts................................................ A-38
SECTION 8.14 Waiver of Jury Trial........................................ A-38

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AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated as of October 21, 1998 (this
"Agreement"), among THE KROLL-O'GARA COMPANY., an Ohio corporation ("Parent"),
KROLL-O'GARA OKLAHOMA, INC., an Oklahoma corporation and a direct, wholly-owned
subsidiary of Parent ("Merger Sub"), and LABORATORY SPECIALISTS OF AMERICA,
INC., an Oklahoma corporation (the "Company").

W I T N E S S E T H:

WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have
each determined that it is advisable and in the best interests of their
respective stockholders for Parent to cause Merger Sub to merge with and into
the Company upon the terms and subject to the conditions set forth herein;

WHEREAS, in furtherance of such combination, the Boards of Directors of
Parent, Merger Sub and the Company have each approved the merger (the "Merger")
of Merger Sub with and into the Company in accordance with the applicable
provisions of the Oklahoma General Corporation Act (the "OGCA"), and upon the
terms and subject to the conditions set forth herein;

WHEREAS, Parent, Merger Sub and the Company intend, by approving
resolutions authorizing this Agreement, to adopt this Agreement as a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code"), and the regulations promulgated thereunder;

WHEREAS, Parent, Merger Sub and the Company intend that the Merger be
accounted for as a pooling-of-interests for financial reporting purposes; and

WHEREAS, pursuant to the Merger, each outstanding share (each, a "Share")
of the Company's Common Stock, par value $0.001 per share (the "Company Common
Stock"), shall be converted into the right to receive the Merger Consideration
(as defined in Section 1.7(b)), upon the terms and subject to the conditions set
forth herein;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Merger Sub and the Company hereby agree as follows:

ARTICLE I
THE MERGER

SECTION 1.1 The Merger.

(a) Effective Time. At the Effective Time (as defined in Section 1.2), and
subject to and upon the terms and conditions of this Agreement and the OGCA,
Merger Sub shall be merged with and into the Company, the separate corporate
existence of Merger Sub shall cease, and the Company shall continue as the
surviving corporation. The Company as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."

(b) Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
7.1 and subject to the satisfaction or waiver of the conditions set forth in
Article VI, the consummation of the Merger will take place as promptly as
practicable (and in any event within two business days) after satisfaction or
waiver of the conditions set forth in Article VI at the offices of Kramer,
Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York (the "Closing"),
unless another date, time or place is agreed to in writing by the parties
hereto.

SECTION 1.2 Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VI, the parties
hereto shall cause the Merger to be consummated by filing a certificate of
merger as contemplated by the OGCA (the "Certificate of Merger"), together with
any required related

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certificates, with the Secretary of State of the State of Oklahoma, in such form
as required by, and executed in accordance with the relevant provisions of, the
OGCA (the time of such filing being the "Effective Time").

SECTION 1.3 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the OGCA. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchises of the Company and Merger Sub shall vest in
the Surviving Corporation, and all debts, liabilities and duties of the Company
and Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.

SECTION 1.4 Certificate of Incorporation; By-Laws.

(a) Certificate of Incorporation. The Certificate of Incorporation of the
Company, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by the OGCA and such Certificate of Incorporation.

(b) By-Laws. The By-Laws of the Company, as in effect immediately prior to
the Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by the OGCA, the Certificate of Incorporation of
the Surviving Corporation and such By-Laws.

SECTION 1.5 Directors and Officers. The directors of Merger Sub
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Certificate of
Incorporation and By-Laws of the Surviving Corporation, and the officers of
Merger Sub immediately prior to the Effective Time shall be the initial officers
of the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.

SECTION 1.6 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the Parent, Merger Sub, the
Company or the holders of any of the following securities:

(a) Conversion of Securities. Subject to Section 1.6(f):

(i) if the Average Stock Price of a share of the common stock, par
value $0.01 per share, of Parent ("Parent Common Stock") is lower than $24
per share, each Share (excluding any Shares cancelled pursuant to Section
1.6(b) and excluding Dissenting Shares (as defined in Section 1.8)) shall
be converted into the right to receive the fraction of one fully paid and
non-assessable share of Parent Common Stock equal to the product of one and
a fraction, the numerator of which is $5.00 and the denominator of which is
the Average Stock Price; provided, however, that, in the event the product
so obtained is more than 0.2778, such product shall, for purposes of this
Agreement, be deemed to equal 0.2778; or

(ii) if the Average Stock Price is equal to or greater than $24, each
Share (excluding any Shares cancelled pursuant to Section 1.6(b) and
excluding Dissenting Shares (as defined in Section 1.8)) shall be converted
into the right to receive 0.2102 of one fully paid and non-assessable share
of Parent Common Stock.

The fraction of one share of Parent Common Stock into which each Share
is converted pursuant to this Section 1.6(a) (or Section 7.1(i)) is
referred to herein as the "Exchange Ratio." For purposes of this Section
1.6(a) and Section 7.1(i), all numbers shall be rounded to the nearest
ten-thousandth with the number five and below being rounded down.

(b) Cancellation. Each Share held in the treasury of the Company and each
Share owned by Parent, Merger Sub or any direct or indirect wholly-owned
subsidiary of the Company or Parent immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, cease to be outstanding, be canceled and retired without payment of any
consideration therefor and cease to exist.

(i) Each option outstanding at the Effective Time to purchase shares of
Company Common Stock (a "Stock Option") granted under (A) the Company's 1994
Stock Option Plan and 1997 Non-Qualified Stock Option Plan

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(the "Company Stock Option Plans"), or (B) any other stock plan or agreement of
the Company, which by its terms is not extinguished in the Merger, and each
warrant (a "Warrant"), all as listed in Schedule 2.2 of the Company Disclosure
Schedule, shall be deemed assumed by Parent and deemed to constitute an option
to acquire, on the same terms and conditions mutatis mutandis as were applicable
under such Stock Option or Warrant prior to the Effective Time, the number of
shares of Parent Common Stock as the holder of such Stock Option or Warrant
would have been entitled to receive pursuant to the Merger had such holder
exercised such option in full immediately prior to the Effective Time (not
taking into account whether or not such Stock Option or Warrant was in fact
exercisable) at a price per share equal to (x) the aggregate exercise price for
Company Common Stock otherwise purchasable pursuant to such Stock Option or
Warrant divided by (y) the number of shares of Parent Common Stock deemed
purchasable pursuant to such Stock Option or Warrant; provided, however, that
the number of shares of Parent Common Stock that may be purchased upon exercise
of any such Stock Option or Warrant shall not include any fractional share and,
upon exercise of the Stock Option or Warrant, a cash payment shall be made for
any fractional share based upon the Closing Price (as hereinafter defined) of a
share of Parent Common Stock on the trading day immediately preceding the date
of exercise. "Closing Price" shall mean, on any day, the last reported sale
price of one share of Parent Common Stock on the Nasdaq National Market or such
other stock exchange on which the Parent Common Stock may be traded ("Nasdaq").
As soon as practicable after the Effective Time, Parent shall cause to be
delivered to each holder of an outstanding Stock Option or Warrant an
appropriate notice setting forth such holder's rights pursuant thereto, and such
Stock Option or Warrant shall continue in effect on the same terms and
conditions.

(ii) Parent shall cause to be taken all corporate action necessary to
reserve for issuance a sufficient number of shares of Parent Common Stock
for delivery upon exercise of Stock Options and Warrants in accordance with
this Section 1.6(c). As soon as practicable after the Effective Time,
Parent shall cause the Parent Common Stock subject to the Stock Options to
be registered under the Securities Act of 1933, as amended and the rules of
the Securities and Exchange Commission (the "SEC") thereunder (the
"Securities Act"), pursuant to a registration statement on Form S-8 (or any
successor or other appropriate form), and shall use its best efforts to
cause the effectiveness of such registration statement (and the current
status of the prospectus or prospectuses contained therein) to be
maintained for so long as the Stock Options remain outstanding.

(d) Capital Stock of Merger Sub. Each share of common stock, $0.001 par
value, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully paid
and nonassessable share of common stock, $0.001 par value, of the Surviving
Corporation.

(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
appropriately adjusted to reflect fully the effect of any stock split, reverse
split or stock dividend (including any dividend or distribution of securities
convertible into Parent Common Stock), with respect to Parent Common Stock
having a record date after the date hereof and prior to the Effective Time.

(f) Fractional Shares. No certificates or scrip representing less than one
share of Parent Common Stock shall be issued upon the surrender for exchange of
a certificate or certificates which immediately prior to the Effective Time
represented outstanding Shares, Stock Options or Warrants, as applicable
("Certificates"). In lieu of any such fractional share, each holder of Shares,
Stock Options or Warrants who would otherwise have been entitled to a fraction
of a share of Parent Common Stock upon surrender of Certificates for exchange
shall be paid upon such surrender cash (without interest) in an amount equal to
such fraction multiplied by the Closing Price of Parent Common Stock on the date
of the Effective Time. If more than one Certificate shall be surrendered at one
time for the account of the same holder of such Certificates, the number of full
shares of Parent Common Stock for which Certificates shall be exchanged pursuant
to Section 1.7 shall be computed on the basis of the aggregate number of Shares,
Stock Options or Warrants, as applicable, represented by the Certificates so
surrendered.

SECTION 1.7 Exchange of Certificates.

(a) Exchange Agent. Parent shall cause to be supplied, to or for such bank
or trust company as shall be mutually designated by the Company and Parent (the
"Exchange Agent"), in trust for the benefit of the holders of Company Common
Stock, for exchange in accordance with this Section 1.7, through the Exchange
Agent,

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certificates evidencing the shares of Parent Common Stock into which the
outstanding Shares have been converted pursuant to Section 1.6(a) in exchange
for outstanding Shares and the cash to be paid in lieu of fractional shares.

(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Parent will instruct the Exchange Agent to mail to each holder
of record of Certificates (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Parent may reasonably
specify), and (ii) instructions to effect the surrender of the Certificates in
exchange for the certificates evidencing shares of Parent Common Stock. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such letter of transmittal, duly executed, and such other customary documents as
may be required pursuant to such instructions, the holder of such Certificate
shall be entitled to receive in exchange therefor (A) certificates evidencing
that number of whole shares of Parent Common Stock which such holder has the
right to receive in accordance with the Exchange Ratio in respect of the Shares
formerly evidenced by such Certificate, (B) any dividends or other distributions
to which such holder is entitled pursuant to Section 1.7(c), and (C) cash in
respect of fractional shares as provided in Section 1.6(f), in each case without
any interest thereon (the shares of Parent Common Stock and cash being,
collectively, the "Merger Consideration"), and the Certificate so surrendered
shall forthwith be cancelled. In the event of a transfer of ownership of Shares
which is not registered in the transfer records of the Company as of the
Effective Time, shares of Parent Common Stock, dividends, distributions and cash
in respect of fractional shares may be issued and paid in accordance with this
Article I to a transferee if the Certificate evidencing such Shares is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer pursuant to this Section 1.7(b) and by evidence that any
applicable stock transfer taxes have been paid. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time, represented Shares
(other than Dissenting Shares) will be deemed from and after the Effective Time,
for all corporate purposes, other than the payment of dividends and subject to
Section 1.6(f), to evidence the ownership of the number of whole shares of
Parent Common Stock, and cash in respect of fractional shares, into which such
Shares shall have been converted pursuant to the provisions hereof.

(c) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
shares of Parent Common Stock payable to stockholders of record as of a date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Common Stock they are entitled
to receive pursuant to the provisions hereof until the holder of such
Certificate shall surrender such Certificate pursuant to Section 1.7(b). Subject
to applicable law, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Parent Common Stock issued in exchange therefor, without interest, at the time
of such surrender, the amount of dividends or other distributions payable to
stockholders of record as of a date after the Effective Time and theretofore
paid with respect to such whole shares of Parent Common Stock.

(d) Transfers of Ownership. If any certificate for shares of Parent Common
Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the Person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
certificate surrendered, or established to the satisfaction of Parent or any
agent designated by it that such tax has been paid or is not payable.

(e) No Liability. Neither Parent, Merger Sub nor the Company shall be
liable to any holder of Company Common Stock for any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.

(f) Withholding Rights. Parent or the Exchange Agent shall be entitled to
deduct and withhold from the Merger Consideration otherwise payable pursuant to
this Agreement to any holder of Company Common Stock such amounts as Parent or
the Exchange Agent is required to deduct and withhold with respect to the making
of such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Parent or the Exchange Agent,
such withheld amounts shall be treated for all purposes of this

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Agreement as having been paid to the holder of the Shares in respect of which
such deduction and withholding was made by Parent or the Exchange Agent.

SECTION 1.8. Dissenting Shares.

(a) Notwithstanding any provision of this Agreement to the contrary, any
Shares issued and outstanding immediately prior to the Effective Time and held
by a holder who has demanded and perfected his demand for appraisal of his
Shares in accordance with the OGCA (including but not limited to Section 1091
thereof), and as of the Effective Time has neither effectively withdrawn nor
lost his right to such appraisal ("Dissenting Shares"), shall not be converted
into or represent a right to receive the Merger Consideration pursuant to
Section 1.7 hereof, but the holder thereof shall be entitled to only such rights
as are granted by the OGCA.

(b) Notwithstanding the provisions of Section 1.8(a), if any holder of
Shares who demands appraisal of his Shares under the OGCA shall effectively
withdraw or lose (through failure to perfect or otherwise) his right to
appraisal, then as of the Effective Time or the occurrence of such event,
whichever occurs later, such holder's Shares shall no longer be Dissenting
Shares and shall automatically be converted into and represent only the right to
receive the Merger Consideration as provided in Section 1.7, without interest
thereon, upon surrender of the certificate or certificates representing such
Shares.

(c) The Company shall give the Parent (i) prompt notice of any written
demands for appraisal or payment of the fair value of any Shares, withdrawals of
such demands and any other instruments served pursuant to the OGCA received by
the Company after the date hereof and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under the
OGCA. The Company shall not voluntarily make any payment with respect to any
demands for appraisal and shall not, except with the prior written consent of
Parent, settle or offer to settle any such demands.

SECTION 1.9 Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
registration of transfers of the Company Common Stock thereafter on the records
of the Company.

SECTION 1.10 No Further Ownership Rights in Company Common Stock. The
Merger Consideration delivered upon the surrender for exchange of Shares in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such Shares, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
Shares which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to the Surviving Corporation for
any reason, they shall be cancelled and exchanged as provided in this Article I.

SECTION 1.11 Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificate, upon the
making of an affidavit of that fact by the holder thereof, such shares of Parent
Common Stock as may be required pursuant to Section 1.7; provided, however, that
Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent or the Exchange Agent with respect to the
Certificate alleged to have been lost, stolen or destroyed.

SECTION 1.12 Tax and Accounting Consequences. It is intended by the
parties hereto that the Merger shall (i) constitute a reorganization within the
meaning of Section 368 of the Code, and (ii) subject to applicable accounting
standards, qualify for accounting treatment as a pooling of interests. The
parties hereto hereby adopt this Agreement as a "plan of reorganization" within
the meaning of sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.

SECTION 1.13 Taking of Necessary Action; Further Action. Each of Parent,
Merger Sub and the Company will take all such reasonable and lawful action as
may be necessary or appropriate in order to effectuate the Merger in accordance
with this Agreement as promptly as possible. If, at any time after the Effective
Time, any such further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and
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franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub immediately prior to the Effective Time are fully
authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action.

SECTION 1.14 Material Adverse Effect. When used in connection with the
Company or any of its subsidiaries or Parent or any of its subsidiaries, as the
case may be, the term "Material Adverse Effect" means any change, effect or
circumstance that, individually or when taken together with all other such
changes, effects or circumstances that have occurred prior to the date of
determination of the occurrence of the Material Adverse Effect, is or is
reasonably likely to be materially adverse to the business, operations, assets
(including intangible assets), condition (financial or otherwise), liabilities
or results of operations of the Company and its subsidiaries or Parent and its
subsidiaries, as the case may be, in each case taken as a whole.

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to Parent and Merger Sub that,
except as set forth in the written disclosure schedule delivered by the Company
to Parent (the "Company Disclosure Schedule"):

SECTION 2.1 Corporate Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Oklahoma and has all requisite corporate power and authority to own, operate and
lease its properties and assets as and where the same are owned, operated or
leased and to conduct its business as it is now being conducted. The Company is
in good standing and duly qualified or licensed as a foreign corporation to do
business in those jurisdictions listed in Section 2.1 of the Company Disclosure
Schedule, such jurisdictions being the only jurisdictions in which the location
of the property and assets owned, operated or leased by the Company or the
nature of the business conducted by the Company makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
could not reasonably be expected to have a Material Adverse Effect. The Company
has heretofore delivered to the Parent complete and correct copies of the
Company's Certificate of Incorporation and By-laws, as amended to and as in
effect on the date hereof.

SECTION 2.2 Capitalization.

(a) The authorized capital stock of the Company consists of 20,000,000
shares of Company Common Stock and 10,000,000 shares of Preferred Stock, par
value $0.001 per share. As of the date hereof, 5,729,091 shares of Company
Common Stock and no shares of Preferred Stock are issued and outstanding.

(b) All outstanding shares of Company Common Stock are validly issued and
outstanding, fully paid and nonassessable, and there are no preemptive or
similar rights in respect of the Company Common Stock. All shares of Company
Common Stock issuable upon the exercise of Stock Options and the Warrants will,
when issued in accordance therewith, be validly issued, fully paid and
nonassessable. All outstanding shares of Company Common Stock issued since
January 1, 1996 were issued in compliance with all requirements of all
applicable federal and state securities laws.

(c) Section 2.2 of the Company Disclosure Schedule sets forth a complete
and correct list of (i) all Stock Options, including Stock Options granted under
the Company Stock Option Plans, and (ii) all warrants to purchase Company Common
Stock, including the Warrants, indicating as to each holder thereof, the number
of shares of Company Common Stock subject thereto and the exercisability,
exercise price and termination date therefor.

SECTION 2.3 Subsidiaries.(a) Except for the Subsidiaries listed in Section
2.3(a) of the Company Disclosure Schedule, there are no entities 10% or more of
whose out-standing voting securities or other equity interests are owned,
directly or indirectly through one or more intermediaries, by the Company. Each
Subsidiary of the Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation (which
jurisdiction is indicated in Section 2.3(a) of the Company Disclosure

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Schedule) and has all requisite corporate power and authority to own, operate
and lease its properties and assets as and where the same are owned, operated or
leased by such Subsidiary and to conduct its business as it is now being
conducted. Each Subsidiary is in good standing and duly qualified or licensed as
a foreign corporation to do business in each of the jurisdictions in which the
location of the property and assets owned, operated or leased by such Subsidiary
or the nature of the business conducted by such Subsidiary makes such
qualification or licensing necessary, except where the failure to be so
qualified or licensed could not reasonably be expected to have a Material
Adverse Effect. The Company has heretofore delivered to Parent complete and
correct copies of each of its Subsidiaries' certificate of incorporation and
by-laws (or similar organizational document), in each case as amended to and as
in effect on the date hereof.

(b) Section 2.3(b) of the Company Disclosure Schedule sets forth the
authorized capital stock of each Subsidiary of the Company, the number of
outstanding shares of each class of such capital stock and the Company's (or, in
the case of Subsidiaries indirectly owned by the Company, a specified
Subsidiary's) ownership of each such class. The Company or such Subsidiary has
good and valid title to all such shares free and clear of all mortgages,
pledges, claims, liens, security interests or other restrictions or encumbrances
of any kind or nature whatsoever ("Encumbrances"). All of the outstanding shares
of capital stock of each Subsidiary of the Company are validly issued, fully
paid and nonassessable, and there are no preemptive or similar rights in respect
of any shares of capital stock of any Subsidiary. All of the outstanding shares
of each Subsidiary of the Company were issued in compliance with all
requirements of all applicable federal and state securities laws. Except as set
forth in Section 2.3(b) of the Company Disclosure Schedule, neither the Company
nor any Subsidiary of the Company owns any capital stock of or other equity
interest of any kind or nature in any Person.

SECTION 2.4 No Commitments to Issue Capital Stock. Except for the Stock
Options and the Warrants and as set forth in Section 2.4 of the Company
Disclosure Schedule, there are no outstanding options, warrants, calls,
convertible securities or other rights, agreements, commitments or other
instruments pursuant to which the Company or any of its Subsidiaries is or may
become obligated to authorize, issue or transfer any shares of its capital stock
or any other equity interest. Except as set forth in Section 2.4 of the Company
Disclosure Schedule, there are no agreements or understandings in effect among
any of the stockholders of the Company or any such Subsidiary or with any other
Person and by which the Company or any such Subsidiary is bound with respect to
the voting, transfer, disposition or registration under the Securities Act of
any shares of capital stock of the Company or any of its Subsidiaries.

SECTION 2.5 Authorization; Execution and Delivery. The Company has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly authorized by all requisite
corporate action on the part of the Company, except that the Company's
stockholders are required to adopt this Agreement and the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Company and, subject to such stockholder approval, constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms. The Board of Directors of the Company has unanimously
recommended that the stockholders of the Company adopt and approve this
Agreement and the transactions contemplated hereby.

SECTION 2.6 Governmental Approvals and Filings. No approval,
authorization, consent, license, clearance or order of, declaration or
notification to, or filing or registration with, any governmental or regulatory
authority is required in order (a) to permit the Company to consummate the
Merger or perform its obligations under this Agreement or (b) to prevent the
termination of, or materially and adversely affect, any governmental right,
privilege, authority, franchise, license, permit or certificate of the Company
or any of its Subsidiaries (collectively "Governmental Licenses") to enable the
Company and its Subsidiaries to own, operate and lease their properties and
assets as and where such properties and assets are owned, leased or operated and
to provide service and carry on their business as presently provided and
conducted, or to prevent any material loss or disadvantage to the Company's
business, by reason of the Merger, except for (i) filing and recording of the
Certificate of Merger as required by the OGCA and an Agreement of Merger as
required by the OGCA, (ii) filings and other required submissions under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and (iii) as set forth in Section 2.6 of the Company Disclosure Schedule.

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SECTION 2.7 No Conflict. Subject to compliance with the Governmental
Licenses described in Section 2.6 of the Company Disclosure Schedule and
obtaining the other consents and waivers that are set forth and described in
Section 2.7 of the Company Disclosure Schedule (the "Private Consents"), neither
the execution, delivery and performance of this Agreement by the Company, nor
the consummation by the Company of the transactions contemplated hereby, will
(i) conflict with, or result in a breach or violation of, any provision of the
certificate of incorporation (or similar organizational document) or by-laws of
the Company or any of its Subsidiaries; (ii) conflict with, result in a breach
or violation of, give rise to a default, or result in the acceleration of
performance, or permit the acceleration of performance, under (whether or not
after the giving of notice or lapse of time or both) any Encumbrance, note,
bond, indenture, guaranty, lease, license, agreement or other instrument, writ,
injunction, order, judgment or decree to which the Company or any of its
Subsidiaries or any of their respective properties or assets is a party or is
subject; (iii) give rise to a declaration or imposition of any Encumbrance upon
any of the properties or assets of the Company or any of its Subsidiaries; or
(iv) impair the Company's business or adversely affect any Governmental License
necessary to enable the Company and its Subsidiaries to carry on their business
as presently conducted, except, in the case of clauses (ii), (iii) or (iv), for
any conflict, breach, violation, default, declaration, imposition or impairment
that could not reasonably be expected to have a Material Adverse Effect.

SECTION 2.8 SEC Filings.

(a) The Company has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1995 and has made available to Parent (i)
its Annual Reports on Form 10-KSB for the fiscal years ended December 31, 1995,
1996 and 1997; (ii) its Quarterly Reports on Form 10-QSB for the quarterly
periods ended March 31, and June 30, 1998; (iii) all proxy statements relating
to the Company's meetings of stockholders (whether annual or special) held since
January 1, 1995; (iv) all other reports or registration statements (other than
Reports on Form 10-QSB not referred to in clause (ii) above or on Form 8-K filed
before January 1, 1995) filed by the Company with the SEC since January 1, 1995;
and (v) all amendments and supplements to all such reports and registration
statements filed by the Company with the SEC (collectively, the "Company SEC
Reports"). Except as disclosed in Section 2.8 of the Company Disclosure
Schedule, the Company SEC Reports (i) were prepared in accordance, and complied
as of their respective dates in all material respects, with the requirements of
the Securities Act or the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the SEC's rules thereunder, as the case may be, and (ii) did
not at the time they were filed (or if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. To the
best knowledge of the Company, the Company has filed with the SEC as exhibits
for the Company SEC Reports all agreements, contracts and other documents or
instruments required to be so filed, and such exhibits are correct and complete
copies of such agreements, contracts and other documents or instruments. None of
the Company's Subsidiaries is required to file any forms, reports or other
documents with the SEC.

SECTION 2.9 Financial Statements; Absence of Undisclosed Liabilities;
Receivables.

(a) The Company has heretofore delivered to Parent complete and correct
copies of the following financial statements (the "Company Financial
Statements"), all of which have been prepared from the books and records of the
Company and its Subsidiaries in accordance with generally accepted accounting
principles ("GAAP") consistently applied and maintained throughout the periods
indicated (except as may be indicated in the notes thereto) and fairly present
in all material respects the financial condition of the Company and its
Subsidiaries as at their respective dates and the results of their operations
and cash flows for the periods covered thereby, except that unaudited interim
results were or are subject to normal and recurring year-end adjustments which
were not or are not expected to be material in amount:

(i) audited consolidated balance sheets at December 31, 1995, 1996 and
1997 and audited consolidated statements of income, cash flows and
stockholders' equity of the Company and its Subsidiaries for the fiscal
years then ended, audited by Arthur Andersen LLP, independent public
accountants; and

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(ii) unaudited consolidated balance sheet (the "Company Interim
Balance Sheet") of the Company and its Subsidiaries as of June 30, 1998
(the "Company Interim Balance Sheet Date") and consolidated statements of
income and cash flows for the six months then ended.

Such statements of income do not contain any items of special or
nonrecurring revenue or income or any revenue or income not earned in the
ordinary course of business, except as expressly specified therein.

(b) Except as and to the extent reflected or reserved against on the
Company Interim Balance Sheet, neither the Company nor any of its Subsidiaries
had, as of the Company Interim Balance Sheet Date, any liabilities, debts or
obligations (whether absolute, accrued, contingent or otherwise) of any nature
that would be required as of such date to have been included on a balance sheet
prepared in accordance with GAAP. Since the Company Interim Balance Sheet Date,
neither the Company nor any of its Subsidiaries has incurred or suffered to
exist any liability, debt or obligation (whether absolute, accrued, contingent
or otherwise), except liabilities, debt and obligations incurred in the ordinary
course of business, consistent with past practice, none of which will have a
Material Adverse Effect. Since the Company Interim Balance Sheet Date, there has
been no material adverse change in the business, operations, assets (including
intangible assets), condition (financial or otherwise), liabilities or results
of operations of the Company and its Subsidiaries, taken as a whole, and no
event has occurred which is reasonably likely to cause any such material adverse
change.

(c) All receivables of the Company and its Subsidiaries (including accounts
receivable, loans receivable and advances) which are reflected in the Company
Interim Balance Sheet, and all such receivables which have arisen thereafter and
prior to the Effective Time, have arisen or will have arisen only from bona fide
transactions in the ordinary course of business and shall be fully collectible
at the aggregate recorded amounts thereof (except to the extent of appropriate
reserves therefor established in accordance with prior practice and GAAP) and
are not and will not be subject to defense, counterclaim or offset.

(d) To the best of the Company's knowledge, the Company's realization of
goodwill and the value of customer lists purchased by the Company in each of its
acquisitions is not, and at the Closing shall not be, impaired. In addition, the
Company's realization of the carrying value of the real property owned by it
which is located at 113 Jarrell Drive, Belle Chasse, Louisiana is not, and at
the Closing shall not be, impaired based on the Company's current use of such
property.

SECTION 2.10 Certain Other Financial Representations. Since the Company
Interim Balance Sheet Date, the Company's accounts payable have been accrued and
paid in a manner consistent with the Company's prior practice and at no point in
time since June 30, 1998, have the Company's aggregate past due accounts payable
been more than $80,000.

SECTION 2.11 Absence of Changes. Except as disclosed in the Company
Financial Statements or as set forth in Section 2.11 of the Company Disclosure
Schedule, since December 31, 1997, the Company and its Subsidiaries have
conducted their respective businesses only in the ordinary course and neither
the Company nor any of its Subsidiaries has:

(a) amended or otherwise modified its Certificate of Incorporation or
By-Laws (or similar organizational document);

(b) issued or sold or authorized for issuance or sale, or granted any
options or warrants or amended or modified in any respect of any previously
granted option or warrant or made other agreements (other than this
Agreement) of the type referred to in Section 2.4 with respect to, any
shares of its capital stock or any other of its securities, or altered any
term of any of its outstanding securities or made any change in its
outstanding shares of capital stock or other ownership interests or its
capitalization, whether by reason of a reclassification, recapitalization,
stock split or combination, exchange or readjustment of shares, stock
dividend or otherwise or redeemed, purchased or otherwise acquired any of
its or its parent's capital stock or agreed to do any of the foregoing
(whether or not legally enforceable), except as a result of the exercise of
Stock Options or Warrants;

(c) recorded or accrued any item of revenue, except as a result of the
provision of services in the ordinary course of business and consistent
with prior practice;
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(d) incurred any indebtedness for borrowed money, entered into any
lease that should be capitalized in accordance with GAAP or subjected to
any Encumbrance or other restriction any of its properties, business or
assets except Encumbrances or other restrictions that could not reasonably
be expected to have a Material Adverse Effect;

(e) discharged or satisfied any Encumbrance, or paid any obligation or
liability, absolute, accrued, contingent or otherwise, whether due or to
become due, other than current liabilities shown on the Company's
consolidated balance sheet as of December 31, 1997 and current liabilities
incurred since that date in the ordinary course of business and consistent
with prior practice;

(f) sold, transferred, leased to others or otherwise disposed of any
material properties or assets or purchased, leased from others or otherwise
acquired any material properties or assets except in the ordinary course of
business;

(g) cancelled or compromised any debt or claim or waived or released
any right of substantial value;

(h) terminated or received any notice of termination of any contract,
lease, license or other agreement or any Governmental License, or suffered
any damage, destruction or loss (whether or not covered by insurance) that
could reasonably be expected to have a Material Adverse Effect;

(i) made any change in the rate of compensation, commission, bonus or
other remuneration payable, or paid, agreed, or promised (in writing or
otherwise) to pay, provide or modify, conditionally or otherwise, any
bonus, extra compensation, pension, severance or vacation pay or any other
benefit or perquisite of any other kind, to any director, officer,
employee, salesman or agent of the Company or any of its Subsidiaries
except in the ordinary course of business consistent with prior practice
and pursuant to or in accordance with plans disclosed in Section 2.14(a) of
the Company Disclosure Schedule that were in effect as of December 31,
1997;

(j) made any increase in or commitment (whether or not legally
enforceable) to increase or communicated any intention to increase any
employee benefits, adopted or made any commitment to adopt any additional
employee benefit plan or made any contribution, other than regularly
scheduled contributions, to any Employee Benefit Plan (as defined in
Section 2.14(a));

(k) lost the employment services of a senior manager or other employee
of equal or higher ranking;

(l) made any loan or advance to any Person other than travel and other
similar routine advances in the ordinary course of business consistent with
past practice, or acquired any capital stock or other securities of any
other corporation or any ownership interest in any other business
enterprise;

(m) instituted, settled or agreed to settle any material litigation,
action or proceeding before any court or governmental body relating to the
Company or any Subsidiary or their respective properties or assets;

(n) entered into any transaction, contract or commitment other than in
the ordinary course of business;

(o) changed any accounting practices, policies or procedures utilized
in the preparation of the Company Financial Statements (including
procedures with respect to revenue recognition, payment of accounts payable
or collection of accounts receivable);

(p) entered into any agreement or made any commitment to take any of
the types of action described in subparagraphs (a) through (o) of this
Section 2.11.

SECTION 2.12 Tax Matters.

(a) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes,
fees, levies, duties, tariffs, imposts and governmental impositions or charges
of any kind in the nature of (or similar to) taxes, payable to any federal,
state, local or foreign taxing authority, including (without limitation) (i)
income, franchise, profits, gross receipts, ad valorem, net worth, value added,
sales, use, service, real or personal property, special assessments, capital
stock, license, payroll, withholding, employment, social security, workers'
compensation, unemployment compensation, utility, severance, production, excise,
stamp, occupation, premiums, windfall profits, transfer and gains taxes, and
(ii) interest, penalties, additional taxes and additions to tax imposed with
respect thereto; and

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"Tax Returns" shall mean returns, reports, and information statements with
respect to Taxes required to be filed with the Internal Revenue Service (the
"IRS") or any other taxing authority, domestic or foreign, including, without
limitation, consolidated, combined and unitary tax returns, including returns
required in connection with any Employee Benefit Plan (as defined in Section
2.14(a)).

(b) The Company on behalf of itself and all of its Subsidiaries hereby
represents that, other than as disclosed in Section 2.12(b) of the Company
Disclosure Schedule or the Company SEC Reports: the Company and its Subsidiaries
have timely filed all United States federal income Tax Returns and all other
material Tax Returns required to be filed by them. All such Tax Returns are
complete and correct in all material respects (except to the extent a reserve
has been established as reflected in the Company Interim Balance Sheet). The
Company and its Subsidiaries have timely paid and discharged all Taxes due in
connection with or with respect to the periods or transactions covered by such
Tax Returns and have paid all other Taxes as are due, except such as are being
contested in good faith by appropriate proceedings (to the extent that any such
proceedings are required), and there are no other Taxes that would be due if
asserted by a taxing authority, except with respect to which the Company is
maintaining reserves unless the failure to do so could not have a Material
Adverse Effect. Except as does not involve or would not result in liability to
the Company or any of its Subsidiaries that could have a Material Adverse
Effect, (i) there are no tax liens on any assets of the Company or any of its
Subsidiaries; (ii) neither the Company nor any of its Subsidiaries has granted
any waiver of any statute of limitations with respect to, or any extension of a
period for the assessment of, any Tax; (iii) no unpaid (or unreserved)
deficiencies for Taxes have been claimed, proposed or assessed by any taxing or
other governmental authority with respect to the Company or any of its
Subsidiaries; (iv) there are no pending or threatened audits, investigations or
claims for or relating to any liability in respect of Taxes of the Company or
any of its Subsidiaries; and (v) neither the Company nor any of its Subsidiaries
has requested any extension of time within which to file any currently unfiled
Tax Returns. The accruals and reserves for Taxes (including deferred taxes)
reflected in the Company Interim Balance Sheet are in all material respects
adequate to cover all Taxes accruable through the date thereof (including Taxes
being contested) in accordance with GAAP.

(c) The Company on behalf of itself and all its Subsidiaries hereby
represents that, other than as disclosed in Section 2.12(c) of the Company
Disclosure Schedule or the Company SEC Reports, and other than with respect to
items the inaccuracy of which could not have a Material Adverse Effect: (i)
neither the Company nor any of its Subsidiaries is obligated under any agreement
with respect to industrial development bonds or other obligations with respect
to which the excludability from gross income of the holder for federal or state
income tax purposes could be affected by the transactions contemplated
hereunder; (ii) neither the Company nor any of its Subsidiaries is, or has been,
a United States real property holding corporation (as defined in Section
897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code; (iii) neither the Company nor any of its
Subsidiaries has filed or been included in a combined, consolidated or unitary
return (or substantial equivalent thereof) of any Person other than the Company
and its Subsidiaries; (iv) neither the Company nor any of its Subsidiaries is
liable for Taxes of any Person other than the Company and its Subsidiaries, or
currently under any contractual obligation to indemnify any Person with respect
to Taxes, or a party to any tax sharing agreement or any other agreement
providing for payments by the Company or any of its Subsidiaries with respect to
Taxes; (v) except entities the beneficial ownership of which is wholly-owned by
the Company and/or its Subsidiaries, neither the Company nor any of its
Subsidiaries is a party to any joint venture, partnership or other arrangement
or contract which could be treated as a partnership for United States federal
income tax purposes; (vi) neither the Company nor any of its Subsidiaries is a
party to any agreement, contract, arrangement or plan that would result (taking
into account the transactions contemplated by this Agreement), separately or in
the aggregate, in the payment of any "excess parachute payments" within the
meaning of Section 280G of the Code; (vii) the prices for any property or
services (or for the use of property) provided by the Company or any of its
Subsidiaries to any other Subsidiary or to the Company have been arm's length
prices determined using a method permitted by the Treasury Regulations under
Section 482 of the Code; (viii) neither the Company nor any of its Subsidiaries
is a "consenting corporation" under Section 341(f) of the Code or any
corresponding provision of state, local or foreign law; (ix) neither the Company
nor any of its Subsidiaries has made an election or is required to treat any of
its assets as owned by another Person for federal income tax purposes or as
tax-exempt bond financed property or tax-exempt use property within the meaning
of Section 168 of the Code (or any

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corresponding provision of state, local or foreign law); and (x) the Company is
not an investment company within the meaning of Section 368(a)(2)(F)(iii) of the
Code.

SECTION 2.13 Relations with Employees.

(a) Except as set forth in Section 2.13(a) of the Company Disclosure
Schedule:

(i) The Company and its Subsidiaries have satisfactory relationships
with their employees.

(ii) The Company and its Subsidiaries are and have been in compliance
with all applicable laws respecting employment and employment practices,
terms and conditions of employment, and wages and hours, including any law,
rule or regulation relating to discrimination, fair labor standards and
occupational health and safety, wrongful discharge or violation of the
personal rights of employees, former employees or prospective employees,
and neither the Company nor any of its Subsidiaries is or has been engaged
in any unfair labor practices, except to the extent a failure to so comply
could not, alone or together with any other failure, have a Material
Adverse Effect.

(iii) No collective bargaining agreement with respect to the business
of the Company or any of its Subsidiaries is currently in effect or being
negotiated. Neither the Company nor any of its Subsidiaries has any
obligation to negotiate any such collective bargaining agreement. There are
no labor unions representing, purporting to represent or attempting to
represent any employee of the Company or any of its Subsidiaries.

(iv) There are no strikes, slowdowns or work stoppages pending or, to
the best of the Company's knowledge, threatened with respect to the
employees of the Company or any of its Subsidiaries, nor has any such
strike, slowdown or work stoppage occurred or, to the best of the Company's
knowledge, been threatened since January 1, 1996. There is no
representation claim or petition or complaint pending before the National
Labor Relations Board or any state or local labor agency and, to the best
of the Company's knowledge, no question concerning representation has been
raised or threatened since January 1, 1996 respecting the employees of the
Company or any of its Subsidiaries.

(v) To the best of the Company's knowledge, no charges with respect to
or relating to the business of the Company or any its Subsidiaries are
pending before the Equal Employment Opportunity Commission, or any state or
local agency responsible for the prevention of unlawful employment
practices, which could reasonably be expected to have a Material Adverse
Effect.

(b) Except as set forth in Section 2.13(b) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a contractor or
subcontractor with obligations under any federal, state or local government
contract.

(c) Except as set forth in Section 2.13(c) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has or could have any
material liability, whether absolute or contingent, including any obligations
under any of the Employee Benefit Plans described in Section 2.14, with respect
to any misclassification of a person as an independent contractor rather than as
an employee.

(d) Section 2.13(d) of the Company Disclosure Schedule contains a complete
and correct list of all employment, management or other consulting agreements
with any Persons employed or retained by the Company or any of its Subsidiaries
(including independent consultants), complete and correct copies of which have
been delivered to Parent.

SECTION 2.14 Benefit Plans.

(a) Section 2.14(a) of the Company Disclosure Schedule sets forth each
employee benefit plan, policy, program, practice, agreement, understanding,
arrangement or commitment (whether written or underwritten) providing
compensation, benefits or perquisites of any kind, including executive
compensation, deferred compensation, stock ownership, stock purchase, stock
option, restricted stock, performance share, bonus and other incentive plans,
pension, profit sharing, savings, thrift or retirement plans, employee stock
ownership plans, life, health, dental and disability plans, vacation, severance
pay, sick leave or dependent care plans, any cafeteria

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or tuition reimbursement plans and any "employee benefit plans" within the
meaning of Section g(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") (whether or not subject to ERISA), all employment,
severance, golden parachute or similar agreements (individually, an "Employee
Benefit Plan" and collectively, the "Employee Benefit Plans"), currently or
within the past six years maintained by, contributed by or with respect to which
an obligation to contribute exists on the part of the Company, any of its
Subsidiaries or any other trade or business, whether or not incorporated, which,
together with the Company or any Subsidiary, is treated as a single employer
under Section 414 of the Code (collectively, "ERISA Affiliates"), or with
respect to which the Company, any of its Subsidiaries or any ERISA Affiliate may
have any liability or obligation (direct, indirect, contingent or otherwise) to
any employee, former employee, director or former director (or any of their
dependents or beneficiaries) of the Company or any of its Subsidiaries or to any
governmental entity. There have been delivered to Parent or its counsel complete
and correct copies of all written Employee Benefit Plans and any related trust
agreements, insurance and other contracts and other funding arrangements,
written descriptions of all unwritten Employee Benefit Plans, the current
summary plan descriptions and current summaries of material modifications
relating to each Employee Benefit Plan, the three most recent Forms 5500
required to have been filed with any appropriate government agency with respect
to each Employee Benefit Plan, the most recent favorable determination letter
issued for each Employee Benefit Plan and related trust that is intended to
satisfy the qualification requirements of sections 401(a) and 501(a) of the Code
(and the latest IRS form 5300 or 5307, whichever is applicable, filed with the
IRS for each such Employee Benefit Plan), and all collective bargaining
agreements pursuant to which an Employee Benefit Plan is maintained or
contributions to an Employee Benefit Plan are or have been made.

(b) No Employee Benefit Plan is, a "defined benefit plan" within the
meaning of section 3(35) of ERISA to which ERISA applies applicable to or a plan
to which the funding requirements of Section 412 of the Code or 302 of ERISA and
neither the Company, any of its Subsidiaries nor any ERISA Affiliate has or
could have any liability with respect to any such plan. Neither the Company, any
of its Subsidiaries nor any ERISA Affiliate has ever contributed to, or
withdrawn in a complete or partial withdrawal from, any multiemployer plan
(within the meaning of Subtitle E of Title IV of ERISA) or incurred contingent
liability under section 4204 of ERISA. No Employee Benefit Plan provides for
medical or health benefits (through insurance or otherwise) to individuals other
than current employees of the Company or any of its Subsidiaries (or spouses and
dependents of such employees), except to the extent necessary to comply with
"Applicable Benefits Law" (including, without limitation, section 4980B of the
Code), and there has been no communication to any person that could reasonably
be expected to promise or guarantee any employee, former employee (or any
spouse, dependent or domestic partner of any employee or former employee) any
retiree medical, life or other retiree benefits. "Applicable Benefits Law"
refers to the legal requirements (whether imposed by common law, statue or
regulation or otherwise) applicable to employee benefit plans sponsors thereof
or their affiliates, services providers thereto or fiduciaries thereof or their
affiliates or parties related thereto or their affiliates by the United States
or any political subdivision thereof (including any requirements enforced by the
IRS with respect to employee benefit plans intended to confer tax benefits on
the Company, any of its Subsidiaries or any of their respective employees).

(c) Each Employee Benefit Plan (and each related trust, insurance contract
and fund) is in compliance in all material respects in form and in operation
with all applicable requirements of Applicable Benefits Law (including ERISA and
the Code), and is being administered in all material respects in accordance with
all relevant plan documents to the extent consistent with Applicable Benefits
Law. There has been no prohibited transaction with respect to any Employee
Benefit Plan which would result in the imposition of any material unpaid excise
tax. No Employee Benefit Plan is under investigation or audit by the Department
of Labor or Internal Revenue Service other than as part of a routine tax audit
of the Company. There are no legal actions or suits pending or, to the best of
the Company's knowledge, threatened against or with respect to any Employee
Benefit Plan or the assets of any such Employee Benefit Plan or against any
fiduciary of any such Employee Benefit Plan and the Company has no knowledge of
any facts that could give rise to any such actions. There has been full
compliance in all material respects with the notice and continuation
requirements of section 4980B of the Code and Part 6 of Subtitle B of Title I of
ERISA, and the requirement of Part 7 of Subtitle B of Title I of ERISA and
Section 9801, et. seq. of the Code applicable to any Employee Benefit Plan. No
event has occurred or reasonably is expected to occur as a result of which the
Company, any Subsidiary or any ERISA Affiliate, directly or indirectly, could be
subject to any material Liability (including under any indemnity or hold
harmless agreement) under ERISA or the
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Code or any other Applicable Benefits Law, including, without limitation,
section 4971, 4975 or 4976 of the Code or section 406, 409, 502(i) and 502(l) of
the Code.

(d) Except as provided in Section 2.14 (d) of the Company Disclosure
Statement, no provision of any Employee Benefit Plan becomes effective in the
event of a change in control of the employer maintaining such Employee Benefit
Plan. Neither the Company nor any of its Subsidiaries has agreed to or has
announced any plan or commitment (whether or not legally binding) to create any
new employee benefit plan or, with respect to any existing Employee Benefit
Plan, to increase the benefits or change in employee coverage in an amount that
could increase the expense of maintaining such Employee Benefit Plan or to
terminate any Employee Benefit Plan. No provision of any Employee Benefit Plan
prohibits the employer maintaining it from amending or terminating such Employee
Benefit Plan at any time and to the fullest extent that law permits. Except as
provided in Section 2.14 (d) of the Company Disclosure Schedule, the
consummation of the Merger or any other transaction contemplated by this
Agreement, either alone or in combination of any other event, will not (i)
result in an increase in the amount of compensation or benefits or accelerate
the vesting or timing of payment of any benefits or compensation payable under
any Employee Benefit Plan in respect of any employee or former employee of the
Company or any of its Subsidiaries, (ii) entitle any such current or former
employee to any benefits or payment, or (iii) result in any "Parachute Payment"
under Section 280 G of the Code, whether or not such payment is considered
reasonable compensation for services rendered. No employee or former employee of
the Company or any of its Subsidiaries will be entitled to any severance
benefits under the terms of any Employee Benefit Plan solely by reason of the
consummation of the Merger or any other transaction contemplated by this
Agreement.

(e) No leased employee (within the meaning of section 414(n) or (o) of the
Code) performs any services for the Company or any of its Subsidiaries.

(f) All actions required to be taken on behalf of any Employee Benefit Plan
that is a stockholder of the Company, in order to effectuate the Merger or the
other transactions contemplated by this Agreement, shall have been duly
authorized by the appropriate fiduciaries of such Employee Benefit Plan, and
shall comply in all material respects with the terms of such Employee Benefit
Plan, ERISA and other applicable laws.

(g) Except as set forth in Section 2.14(g) of the Company Disclosure
Schedule, there are no material liabilities, whether absolute or contingent, of
the Company or its Subsidiaries relating to workers compensation benefits that
are not fully insured against by a bona fide third-party insurance carrier.
Except as set forth in Section 2.14(g) of the Company Disclosure Schedule, with
respect to each workers' compensation arrangement that is funded wholly or
partially through an insurance policy or public or private fund, all premiums
required to have been paid to date under the insurance policy or fund have been
paid, all premiums required to be paid under the insurance policy or fund
through the Closing Date will have been paid on or before the Closing Date and,
as of the Closing Date, there will be no material liability of the Company or
any of its Subsidiaries under any such insurance policy, fund or ancillary
agreement with respect to such insurance policy or fund in the nature of a
retroactive rate adjustment, loss sharing arrangement or other actual or
contingent liability arising wholly or partially out of events occurring prior
to the Closing Date.

SECTION 2.15 Title to Properties. Except as set forth in Section 2.15 of
the Company Disclosure Schedule, the Company and each of its Subsidiaries have
good and indefeasible title to all of their properties and assets, free and
clear of all Encumbrances, except liens for taxes not yet due and payable and
such Encumbrances or other imperfections of title, if any, as do not materially
detract from the value of or interfere with the present use of the property
affected thereby or which could not reasonably be expected to have a Material
Adverse Effect, and except for Encumbrances which secure indebtedness reflected
in the Company Interim Balance Sheet.

SECTION 2.16 Compliance with Laws; Legal Proceedings. (a) Neither the
Company nor any of its Subsidiaries is in violation of, or in default with
respect to, any applicable law, statute, regulation, ordinance, writ,
injunction, order, judgment, decree or any Governmental License, including any
federal state or local law regarding or relating to trespass or violations of
privacy rights, which violation or default could reasonably be expected to have
a Material Adverse Effect.

(b) Except as set forth in Section 2.16(b) of the Company Disclosure
Schedule, there is no order, writ, injunction, judgment or decree outstanding
and no legal, administrative, arbitration or other governmental

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proceeding or investigation pending or, to the best of the Company's knowledge,
threatened, and there are no claims (including unasserted claims of which the
Company is aware) against or relating to the Company or any of its Subsidiaries
or any of their respective properties, assets or businesses. There is no legal,
administrative or other governmental proceeding or investigation pending or, to
the best of the Company's knowledge, threatened against the Company or any of
its Subsidiaries, or any of their respective directors or officers, as such,
that relates to this Agreement, the Merger or any of the transactions
contemplated hereby. None of the items listed in Section 2.16(b) of the Company
Disclosure Schedule could reasonably be expected to have a Material Adverse
Effect. The Company and its Subsidiaries have been defendants (either
originally, by counter-claim or impleading) in only 15 legal proceedings which
have either been filed in the past five (5) fiscal years or are currently
pending (all as set forth in Section 2.16(b) of the Company Disclosure
Schedule). Except as set forth in Section 2.16(b) of the Company Disclosure
Schedule, none of the legal proceedings set forth in Section 2.16(b) of the
Company Disclosure Schedule has had or, to the best of the Company's knowledge,
will have a Material Adverse Effect.

SECTION 2.17 Brokers. Except for Mallon & Associates (whose fees shall be
paid by the Company and shall in the aggregate not exceed $500,000), no broker,
finder or investment advisor acted, directly or indirectly, as such for the
Company, any Subsidiary of the Company or any stockholder of the Company in
connection with this Agreement or the Merger, and no broker, finder, investment
advisor or other Person is entitled to any fee or other commission, or other
remuneration, in respect thereof based in any way on any action, agreement,
arrangement or understanding taken or made by or on behalf of the Company, any
Subsidiary of the Company or any stockholder of the Company.

SECTION 2.18 Intellectual Property. (a) The Company and/or each of its
Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use, all patents, trademarks, trade names, service marks, copyrights,
and any applications therefor, technology, know-how, computer software programs
or applications, and tangible or intangible proprietary information or material
that are used in the business of the Company and its Subsidiaries as currently
conducted, except as would not reasonably be expected to have a Material Adverse
Effect.

(b) Except as disclosed in Section 2.18(b) of the Company Disclosure
Schedule or the Company SEC Reports or as could not reasonably be expected to
have a Material Adverse Effect: (i) The Company is not, nor will it be as a
result of the execution and delivery of this Agreement or the performance of its
obligations hereunder, in violation of any licenses, sublicenses and other
agreements as to which the Company is a party and pursuant to which the Company
is authorized to use any patents, trademarks, service marks or copyrights owned
by others ("Company Third-Party Intellectual Property Rights"); (ii) No claims
with respect to the patents, registered and material unregistered trademarks and
service marks, registered copyrights, trade names and any applications therefor
owned by the Company or any of its Subsidiaries (the "Company Intellectual
Property Rights"), any trade secret material to the Company, or Company Third
Party Intellectual Property Rights to the extent arising out of any use,
reproduction or distribution of Company Third Party Intellectual Property Rights
by or through the Company or any of its Subsidiaries, are currently pending or,
to the best of the Company's knowledge, have been threatened by any Person; or
(iii) The Company does not know of any valid grounds for any bona fide claims
(1) to the effect that the sale, licensing or use of any product or service as
now sold, licensed or used, or proposed for sale, license or use by the Company
or any of its Subsidiaries infringes on any copyright, patent, trademark,
service mark or trade secret; (2) against the use by the Company or any of its
Subsidiaries, of any trademarks, trade names, trade secrets, copyrights,
patents, technology, know-how or computer software programs and applications
used in the business of the Company or any of its Subsidiaries as currently
conducted or as proposed to be conducted; (3) challenging the ownership,
validity or effectiveness of any of the Company Intellectual Property Rights or
other trade secret material to the Company; or (4) challenging the license or
legally enforceable right to use of Company Third Party Intellectual Rights by
the Company or any of its Subsidiaries.

(c) To the best of the Company's knowledge, there is no material
unauthorized use, infringement or misappropriation of any of the Company
Intellectual Property Rights by any third party, including any employee or
former employee of the Company or any of its Subsidiaries.

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SECTION 2.19 Insurance. Except as set forth in Section 2.19 of the Company
Disclosure Schedule, all material fire and casualty, general liability, business
interruption, product liability and other insurance policies maintained by the
Company and its Subsidiaries are with reputable insurers, provide adequate
coverage for all normal risks incident to the Company's and its Subsidiaries'
assets, properties and business operations and are in character and amount at
least equivalent to that carried by Persons engaged in a business subject to the
same or similar perils or hazards. Neither the Company nor any of its
Subsidiaries has, since January 1, 1996, been denied or had revoked or rescinded
any policy of insurance.

SECTION 2.20 Contracts; etc. (a) Set forth on Section 2.20 of the Company
Disclosure Schedule is a complete and correct list of each of the following
agreements, leases and other instruments, both oral and written, to which the
Company or any of its Subsidiaries is a party or by which Company or any of its
Subsidiaries or their respective properties or assets are bound:

(i) each service or other similar type of agreement under which
services are provided by any other Person to the Company or any Subsidiary
which is material to the business of the Company and its Subsidiaries taken
as a whole;

(ii) each agreement that restricts the operation of the business of
the Company or any of its Subsidiaries or the ability of the Company or any
of its Subsidiaries to solicit customers or employees;

(iii) each operating lease (as lessor, lessee, sublessor or sublessee)
that is material to the Company and its Subsidiaries taken as a whole of
any real or tangible personal property or assets;

(iv) each agreement under which services are provided by the Company
or any Subsidiary to any material customer;

(v) each agreement (including capital leases) under which any money
has been or may be borrowed or loaned or any note, bond, indenture or other
evidence of indebtedness has been issued or assumed (other than those under
which there remain no ongoing obligations of the Company or any of its
Subsidiaries), and each guaranty of any evidence of indebtedness or other
obligation, or of the net worth, of any Person (other than endorsements for
the purpose of collection in the ordinary course of business);

(vi) each partnership, joint venture or similar agreement;

(vii) each agreement containing restrictions with respect to the
payment of dividends or other distributions in respect of the Company's or
any Subsidiary's capital stock;

(viii) each agreement to make unpaid capital expenditures in excess of
$50,000;

(ix) each agreement providing for accelerated or special payments as a
result of the Merger, including any shareholder rights plan or other
instrument commonly referred as a "poison pill."

A complete and correct copy of each written agreement, lease or other type
of document, and a true, complete and correct summary of each oral agreement,
lease or other type of document, required to be disclosed pursuant to this
Section 2.20(a) has been previously delivered to Parent.

(b) Each agreement, lease or other type of document required to be
disclosed pursuant to Sections 2.13, 2.14 or 2.20(a) or filed as an exhibit to
the Company SEC Reports to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries or their respective
properties or assets is bound (collectively, the "Company Contracts"), except
for Company Contracts, the loss of which could not reasonably be expected to
have a Material Adverse Effect, is valid, binding and in full force and effect
and is enforceable by the Company or such Subsidiary in accordance with its
terms. Neither the Company nor any such Subsidiary is (with or without the lapse
of time or the giving of notice, or both) in breach of or in default under any
of the Company Contracts, and, to the best of the Company's knowledge, no other
party to any of the Company Contracts is (with or without the lapse of time or
the giving of notice, or both) in breach of or in default under any of the
Company Contracts, where such breach or default could reasonably be expected to
have a Material Adverse Effect. No existing or completed agreement to which the
Company or any of its Subsidiaries is a party is subject to renegotiation with
any governmental body.

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SECTION 2.21 Permits, Authorizations, etc. Section 2.21 of the Company
Disclosure Schedule sets forth all Governmental Licenses and each other material
approval, authorization, consent, license, certificate, order or other permit of
any governmental agencies, whether federal, state, local or foreign, necessary
to enable the Company and its Subsidiaries to own, operate and lease their
properties and assets as and where such properties and assets are owned, leased
or operated and to provide service and carry on their business as presently
provided and conducted (collectively, the "Company Permits") or required to
permit the continued conduct of such business following the Merger in the manner
conducted on the date of this Agreement (indicating in each case whether or not
the consent of any Person is required for the consummation of the transactions
contemplated hereby). The Company has all necessary Company Permits of all
governmental agencies, whether federal, state, local or foreign, all of which
are valid and in good standing with the issuing agencies and not subject to any
proceedings for suspension, modification or revocation, except for such Company
Permits which could not reasonably be expected to have a Material Adverse
Effect.

SECTION 2.22 Environmental Matters. (a) For purposes of this Agreement,
the capitalized terms defined below shall have the meanings ascribed to them
below.

(i) "Environmental Claim" means any accusation, allegation, notice of
violation, action, claim, lien, demand, abatement or other order or
direction (conditional or otherwise) by any governmental agency or entity
or any other Person for personal injury (including sickness, disease or
death), tangible or intangible property damage, damage to the environment,
nuisance, pollution, contamination or other adverse effects an the
environment, or for fines, penalties or restrictions resulting from or
based upon (a) the existence, or the continuation of the existence, of a
Release (including, without limitation, sudden or non-sudden accidental or
non-accidental Releases) of, or exposure to, any Hazardous Substance, odor
or audible noise in, into or onto the environment (including, without
limitation, the air, soil, surface water or groundwater) at, in, by, from
or related to any property owned, operated or leased by the Company or any
of its Subsidiaries or any activities or operations thereof; (b) the
transportation, storage, treatment or disposal of Hazardous Substances in
connection with any property owned, operated or leased by the Company or
any of its Subsidiaries or its operations or facilities; or (c) the
violation, or alleged violation, of any Environmental Law or Environmental
Permit of or from any governmental agency or entity relating to
environmental matters connected with any property owned, leased or operated
by the Company and any of its Subsidiaries.

(ii) "Environmental Law(s)" means all federal, state or local law
(including common law), statute, ordinance, rule, regulation, code, or
other requirement relating to the environment, natural resources, or public
or employee health and safety and includes, but is not limited to the
Comprehensive Environmental Response Compensation and Liability Act
("CERCLA"), 42 U.S.C. sec. 9601 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. sec. 1801 et seq., the Resource Conservation
and Recovery Act ("RCRA"), 42 U.S.C. sec. 6901 et seq., the Clean Water
Act, 33 U.S.C. Section sec. 1251 et seq., the Clean Air Act, 33 U.S.C. sec.
2601 et seq., the Toxic Substances Control Act, 15 U.S.C. sec. 2601 et
seq., the Oil Pollution Act of 1990, 33 U.S.C. sec. 2701 et seq., and the
Occupational Safety and Health Act, 29 U.S.C. sec. 651 et seq., as such
laws have been amended or supplemented, and the regulations promulgated
pursuant thereto, and all analogous state or local statutes and any
applicable transfer statutes.

(iii) "Environmental Permits" means all approvals, authorizations,
consents, permits, licenses, registrations and certificates required by any
applicable Environmental Law.

(iv) "Hazardous Substance(s)" means, without limitation, any flammable
explosives, radioactive materials, urea formaldehyde foam insulation,
polychlorinated biphenyls, petroleum and petroleum products (including but
not limited to waste petroleum and petroleum products), methane, hazardous
materials, hazardous wastes, pollutants, contaminants and hazardous or
toxic substances, as defined in or regulated under any applicable
Environmental Laws.

(v) "Release" means any past or present spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping or disposing of a Hazardous Substance into the Environment.

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(b) The Company and each Subsidiary of the Company has obtained all
Environmental Permits required for each of their businesses and facilities
except for such Environmental Permits the failure of which to obtain could not
reasonably be expected to have a Material Adverse Effect. The Company and its
Subsidiaries (i) are in compliance with all terms and conditions of their
Environmental Permits and of any applicable Environmental Law, except for such
failure to be in compliance that could not reasonably be expected to have
Material Adverse Effect; (ii) have not received notice of any violation by or
claim against the Company or any such Subsidiary under any Environmental Law;
and (iii) are not aware of any facts or circumstances related to their
businesses and facilities likely to give rise to an Environmental Claim that
could reasonably be expected to have a Material Adverse Effect.

(c) There have been no Releases, or threatened Releases of any Hazardous
Substances into, on or under any of the properties owned or operated (or
formerly owned or operated) by the Company or any such Subsidiary, in any case
in such a way as to create any liability (including the costs of investigation
and remediation) under any applicable Environmental Law that could reasonably be
expected to have a Material Adverse Effect.

(d) Neither the Company nor any of its Subsidiaries has been identified as
a potentially responsible party at any federal or state National Priority List
("Superfund") site, and neither the Company nor any of its Subsidiaries has
transported, disposed of, or arranged for the disposal of any Hazardous
Substances.

SECTION 2.23 Company Acquisitions. Section 2.23 of the Company Disclosure
Schedule hereto contains a complete and correct list of all agreements
("Acquisition Agreements") executed by the Company or any of its Subsidiaries
pursuant to which the Company or any of its Subsidiaries has acquired or agreed
to acquire all or any part of the stock or assets (including any customer list)
of any Person. A complete and correct copy of each of the Acquisition Agreements
has been delivered to Parent. Neither the Company nor any such Subsidiary has
any further obligation or liability under any of the Acquisition Agreements or
as a result of the transactions provided for therein, except as described in
reasonable detail in Section 2.23 of the Company Disclosure Schedule.

SECTION 2.24 Books and Records. All accounts, books, ledgers and official
and other records prepared and kept by the Company and its Subsidiaries have
been kept and completed in all material respects, and there are no material
inaccuracies or discrepancies contained or reflected therein. Such records of
the Company are located at the Company's offices in Oklahoma City, Oklahoma and
Gretna, Louisiana.

SECTION 2.25 Interested Party Transactions. Except as set forth in Section
2.25 of the Company Disclosure Schedule or the Company SEC Reports, since
January 1, 1997 no event has occurred that would be required to be reported as a
Certain Relationship or Related Transaction, pursuant to Item 404 of Regulation
S-B promulgated by the SEC.

SECTION 2.26 Opinion of Financial Advisor. The Company has been advised by
its financial advisor, Jesup & Lamont Securities Corporation, to the effect that
in its opinion, as of the date hereof, the Exchange Ratio is fair from a
financial point of view to the holders of Shares.

SECTION 2.27 Pooling Matters. To the best knowledge of the Company, the
Company has provided to Parent and its independent accountants all information
concerning actions taken or agreed to be taken by the Company or any of its
Affiliates on or before the date of this Agreement that could reasonably be
expected to adversely affect the ability of Parent to account for the business
combination to be effected by the Merger as a pooling of interests. The Company
has fully, completely and accurately responded to all requests for information
made by its independent accountants. The Company has provided to Parent a letter
from its independent public accountants to the effect that, after review, such
accountants know of no reason relating to the Company that would prevent the
Parent from accounting for the Merger as a pooling of interests.

SECTION 2.28 Registration Statement; Proxy Statement/Prospectus. The
information supplied by the Company with respect to the Company and its
Subsidiaries and their respective officers, directors, stockholders and other
Affiliates (collectively, the "Company Information") for inclusion in the
Registration Statement (as defined in Section 3.23) shall not at the time the
Registration Statement is declared effective by the SEC contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The Company Information supplied by the Company for
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inclusion in the proxy statement/prospectus (such proxy statement/prospectus as
amended or supplemented is referred to herein as the "Proxy
Statement/Prospectus") to be sent to the stockholders of the Company in
connection with the meeting of the stockholders of the Company to consider the
Merger (the "Company Stockholders Meeting") will not, on the date the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) is first
mailed to stockholders or at the time of the Company Stockholders Meeting,
contain any statement which, at such time and in light of the circumstances
under which it shall be made, is false or misleading with respect to any
material fact, or shall omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which it
shall be omitted, not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Company Stockholders Meeting which has
become false or misleading. If at any time prior to the Effective Time any event
relating to the Company or its Subsidiaries or any of their respective officers,
directors, stockholders or other Affiliates should be discovered by the Company
which should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement/Prospectus, the Company shall promptly inform
Parent. The Proxy Statement/Prospectus shall comply in all material respects
with the requirements of the Securities Act and the Exchange Act.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by Parent or Merger Sub which is
contained or incorporated by reference in, or furnished in connection with the
preparation of, the Registration Statement or the Proxy Statement/Prospectus.

SECTION 2.29 Bank Accounts and Powers of Attorney. Section 2.29 of the
Company Disclosure Schedule sets forth the name of each bank in which the
Company and its Subsidiaries have an account, lock box or safe deposit box, the
number of each such account, lock box or safe deposit box and the names of the
Persons authorized to draw thereon or have access thereto. Except as set forth
on Section 2.29 of the Company Disclosure Schedule, no Person holds any power of
attorney from the Company or any of its Subsidiaries.

SECTION 2.30 Certain Payments. Neither the Company nor any of its
Subsidiaries nor any director, officer, agent, or employee thereof, or to the
knowledge of the Company, any other Person associated with or acting for or on
behalf of the Company, has directly or indirectly (a) made any contribution,
gift, bribe, rebate, payoff, influence payment, kickback or other payment to any
Person, private or public, regardless of form, whether in money, property, or
services (i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured, (iii) to obtain special concessions or
for special concessions already obtained, for or in respect of the Company or
any affiliate of the Company, or (iv) in violation of any legal requirement, or
(b) established or maintained any fund or asset that has not been recorded in
the books and records of the Company.

SECTION 2.31 Customers; Customer Relationships. Section 2.31 of the
Company Disclosure Schedule sets forth a complete list of the 15 largest clients
and customers of the Company in each of the last two years and in the nine
months ended September 30, 1998, including the amounts they paid to the Company
in each such year and nine month period. To the knowledge of the Company, there
are no facts or circumstances that are likely to result in the loss of any such
client or customer of the Company or a material change in the relationship of
the Company with any such client or customer.

SECTION 2.32 Year 2000 Compliance. Except as otherwise disclosed in
Section 2.32 of the Company Disclosure Schedule, the internal computer systems
of the Company are Year 2000 compliant or will be so compliant by December 31,
1998. The Company believes that all of its vendors and suppliers are using
computer systems which are Year 2000 compliant, except where the failure to be
so compliant could not be reasonable expected to have a Material Adverse Effect
on the Company.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF
PARENT AND MERGER SUB

Parent and Merger Sub, jointly and severally, hereby represent and warrant
to the Company that, except as set forth in the written disclosure schedule
delivered by Parent to the Company (the "Parent Disclosure Schedule"):

SECTION 3.1 Corporate Organization. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Ohio and has all requisite corporate power and authority to own, operate and
lease its properties and assets as and where the same are owned, operated or
leased and to conduct its business as it is now being conducted. Parent is in
good standing and duly qualified or licensed as a foreign corporation to do
business in those jurisdictions in which the location of the property and assets
owned, operated or leased by Parent or the nature of the business conducted by
Parent makes such qualification or licensing necessary, except where the failure
to be so qualified or licensed could not reasonably be expected to have a
Material Adverse Effect. Parent has heretofore delivered to the Company complete
and correct copies of Parent's Certificate of Incorporation and By-laws, as
amended to and as in effect on the date hereof.

SECTION 3.2 Capitalization. (a) The authorized capital stock of Parent
consists of 50,000,000 shares of Parent Common Stock and 1,000,000 shares of
Parent Preferred Stock, par value $0.01 per share. As of September 30, 1998,
17,751,569 shares of Parent Common Stock and no shares of Parent Preferred Stock
are issued and outstanding.

(b) All outstanding shares of Parent Common Stock are validly issued and
outstanding, fully paid and nonassessable and there are no preemptive or similar
rights in respect of Parent Common Stock. All outstanding shares of Parent
Common Stock issued since January 1, 1996 were issued in compliance with all
requirements of all applicable federal and state securities laws.

SECTION 3.3 Subsidiaries. (a) The Subsidiaries of Parent listed in the
exhibits to Parent's SEC Reports (as defined in Section 3.7) constitute the only
material Subsidiaries of Parent. Each Subsidiary of Parent is a corporation duly
organized, validly existing and, in each jurisdiction in which the concept of
"good standing" is applicable, is in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own, operate and lease its properties and assets as and where the
same are owned, operated or leased by such Subsidiary and to conduct its
business as it is now being conducted. Each of the Subsidiaries of Parent which
are incorporated in jurisdictions in which the concept of "good standing" is
applicable is in good standing and duly qualified or licensed as a foreign
corporation to do business in each of such jurisdictions in which the location
of the property and assets owned, operated or leased by such Subsidiary or the
nature of the business conducted by such Subsidiary makes such qualification or
licensing necessary, except where the failure to be so qualified or licensed
could not reasonably be expected to have a Material Adverse Effect.

(b) Except as set forth in Section 3.3(b) of the Parent Disclosure
Schedule, Parent or a Subsidiary of Parent has good and valid title to all
shares of each such Subsidiary owned by Parent or another Subsidiary of Parent,
free and clear of all Encumbrances. All of the outstanding shares of capital
stock of each Subsidiary of Parent are validly issued, fully paid and
nonassessable, and there are no preemptive or similar rights in respect of any
shares of capital stock of any such Subsidiary.

SECTION 3.4 Authorization; Execution and Delivery. Parent and Merger Sub
each has all requisite corporate power and authority to execute, deliver and
perform its obligations under this Agreement. The execution, delivery and
performance of this Agreement by Parent and Merger Sub and the consummation by
Parent or Merger Sub of the transactions contemplated hereby have been duly
authorized by all requisite corporate action on the part of Parent and Merger
Sub. This Agreement has been duly executed and delivered by Parent and Merger
Sub and constitutes the legal, valid and binding obligation of Parent and Merger
Sub, enforceable against Parent and Merger Sub in accordance with its terms. The
shares of Parent Common Stock to be issued as part of the Merger Consideration
have been duly reserved and authorized for issuance upon

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consummation of the Merger and when issued pursuant to and in accordance with
this Agreement will be duly authorized, validly issued, fully paid and
nonassessable shares of Parent Common Stock.

SECTION 3.5 Governmental Approvals and Filings. No approval,
authorization, consent, license, clearance or order of, declaration or
notification to, or filing or registration with, any governmental or regulatory
authority is required in order (a) to permit Parent or Merger Sub to consummate
the Merger or perform its obligations under this Agreement or (b) to prevent the
termination of, or materially and adversely affect, any Governmental License of
Parent or any of its Subsidiaries to enable Parent and its Subsidiaries to own,
operate and lease their properties and assets as and where such properties and
assets are owned, leased or operated and to provide its services or carry on its
business, or to prevent any material loss or disadvantage to Parent's business,
by reason of the Merger, except for (i) filing and recording of the Certificate
of Merger as required by the OGCA, (ii) filings and other required submissions
under the HSR Act and (iii) as set forth in Section 3.5 of the Parent Disclosure
Schedule.

SECTION 3.6 No Conflict. Subject to compliance with any Governmental
Licenses described in Section 3.6 of the Parent Disclosure Schedule and
obtaining the consents and waivers that are set forth and described in Section
3.6 of the Parent Disclosure Schedule (the "Private Consents"), neither the
execution, delivery and performance of this Agreement by Parent or Merger Sub,
nor the consummation by Parent or Merger Sub of the transactions contemplated
hereby, will (i) conflict with, or result in a breach or violation of, any
provision of the certificate of incorporation (or similar organizational
document) or by-laws of Parent or any of its Subsidiaries; (ii) conflict with,
result in a breach or violation of, give rise to a default, or result in the
acceleration of performance, or permit the acceleration or performance, under
(whether or not after the giving of notice or lapse of time or both) any
Encumbrance, note, bond, indenture, guaranty, lease, license, agreement or other
instrument, writ, injunction, order, judgment or decree to which Parent or any
of its Subsidiaries or any of their respective properties or assets is subject;
(iii) give rise to a declaration or imposition of any Encumbrance upon any of
the properties or assets of Parent or any of its Subsidiaries; or (iv) impair
Parent's business or adversely affect any Governmental License necessary to
enable Parent and its Subsidiaries to carry on their business as presently
conducted, except, in the cases of clauses (ii), (iii) or (iv), for any
conflict, breach, violation, default, declaration, imposition or impairment that
could not reasonably be expected to have a Material Adverse Effect.

SECTION 3.7 SEC Filings. (a) The Parent has filed all forms, reports and
documents required to be filed with the SEC since the initial public offering of
the Parent Common Stock on November 13, 1996 (the "IPO"), and has made available
to the Company (i) its Annual Reports on Form 10-K for the fiscal years ended
December 31, 1996 and 1997; (ii) its Quarterly Reports on Form 10-Q for the
quarterly periods ended March 31, and June 30, 1998; (iii) all proxy statements
relating to Parent's meetings of stockholders (whether annual or special) held
since the IPO; (iv) all other reports or registration statements (other than
Reports on Form 10-Q not referred to in clause (ii) above or on Form 8-K filed
before January 1, 1997) filed by Parent with the SEC since January 1, 1996; and
(v) all amendments and supplements to all such reports and registration
statements filed by Parent with the SEC (collectively, the "Parent SEC
Reports"). Except as disclosed in Section 3.7 of the Parent Disclosure Schedule,
the Parent SEC Reports (i) were prepared in accordance, and complied as of their
respective dates in all material respects, with the requirements of the
Securities Act or the Exchange Act, as the case may be, and (ii) did not at the
time they were filed (or if amended or superseded by a filing prior to the date
of this Agreement, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. Parent has filed
with the SEC as exhibits to the Parent SEC Reports all agreements, contracts and
other documents or instruments required to be so filed, and such exhibits are
correct and complete copies of such agreements, contracts and other documents or
instruments. None of Parent's Subsidiaries is required to file any forms,
reports or other documents with the SEC.

SECTION 3.8 Financial Statements; Absence of Undisclosed Liabilities. (a)
Parent has heretofore delivered to the Company complete and correct copies of
the following financial statements (collectively, the "Parent Financial
Statements"), all of which have been prepared from the books and records of
Parent and its Subsidiaries in accordance with GAAP consistently applied and
maintained throughout the periods indicated (except as may be indicated in the
notes thereto) and fairly present in all material respects the financial
condition of Parent and its Subsidiaries as at their respective dates and the
results of their operations and cash flows for the
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periods covered thereby, except that unaudited interim results were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount:

(i) audited consolidated balance sheets at December 31, 1996 and 1997
and audited consolidated statements of income, cash flows and stockholders'
equity of Parent and its Subsidiaries for the fiscal years then ended,
audited by Arthur Andersen LLP, independent public accountants; and

(ii) unaudited consolidated balance sheet (the "Parent Interim Balance
Sheet") of Parent and its Subsidiaries as at June 30, 1998 (the "Parent
Interim Balance Sheet Date") and consolidated statements of income and cash
flows for the six months then ended.

(b) Except as and to the extent reflected or reserved against on the Parent
Interim Balance Sheet, and except for liabilities which will not have a Material
Adverse Effect, neither Parent nor any of its Subsidiaries had, as of the Parent
Interim Balance Sheet Date, any liabilities, debts or obligations (whether
absolute, accrued, contingent or otherwise) of any nature that would be required
as of such date to have been included on a balance sheet prepared in accordance
with GAAP. Since the Parent Interim Balance Sheet Date, neither Parent nor any
of its Subsidiaries has incurred or suffered to exist any liability, debt or
obligation (whether absolute, accrued, contingent or otherwise), except
liabilities, debt and obligations incurred in the ordinary course of business,
consistent with past practice, none of which will have a Material Adverse
Effect. Since the Parent Interim Balance Sheet Date, there has been no material
adverse change in the business, operations, assets (including intangible
assets), condition (financial or otherwise), liabilities or results of
operations of Parent and its Subsidiaries, taken as a whole, and no event has
occurred which is reasonably likely to cause any such material adverse change.

SECTION 3.9 Absence of Changes. Except as set forth in Section 3.9 of the
Parent Disclosure Schedule, since the Parent Interim Balance Sheet Date, Parent
and its Subsidiaries have conducted their respective businesses only in the
ordinary course, and neither Parent nor any of its Subsidiaries has:

(a) amended or otherwise modified its Certificate of Incorporation or
By-Laws (or similar organizational document);

(b) sold, transferred, leased to others or otherwise disposed of any
material properties or assets or except in the ordinary course of business;

(c) terminated or received any notice of termination of any contract,
lease, license or other agreement or any Governmental License, or suffered
any damage, destruction or loss (whether or not covered by insurance), that
could reasonably be expected to have a Material Adverse Effect;

(d) entered into any transaction, contract or commitment other than in
the ordinary course of business;

(e) changed any accounting practices, policies or procedures utilized
in the preparation of the Parent Financial Statements (including procedures
with respect to revenue recognition, payment of accounts payable and
collection of accounts receivable);

(f) entered into any agreement or made any commitment to take any of
the types of action described in subparagraphs (a) through (e) of this
Section 3.9.

SECTION 3.10 Tax Matters. Parent on behalf of itself and all of its
Subsidiaries hereby represents that, other than as disclosed in Section 3.10(a)
of the Parent Disclosure Schedule or the Parent SEC Reports, Parent and its
Subsidiaries have timely filed all United States federal income Tax Returns and
all other material Tax Returns required to be filed by them. All such Tax
Returns are complete and correct in all material respects (except to the extent
a reserve has been established as reflected in the Parent Interim Balance
Sheet). Parent and its Subsidiaries have timely paid and discharged all Taxes
due in connection with or with respect to the periods or transactions covered by
such Tax Returns and have paid all other Taxes as are due, except such as are
being contested in good faith by appropriate proceedings (to the extent that any
such proceedings are required), and there are no other Taxes that would be due
if asserted by a taxing authority, except with respect to which Parent is
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maintaining reserves unless the failure to do so could not have a Material
Adverse Effect. Except as does not involve or would not result in liability to
Parent or any of its Subsidiaries that could have a Material Adverse Effect, (i)
there are no tax liens on any assets of Parent or any of its Subsidiaries; (ii)
neither Parent nor any of its Subsidiaries has granted any waiver of any statute
of limitations with respect to, or any extension of a period for the assessment
of, any Tax; (iii) no unpaid (or unreserved) deficiencies for Taxes have been
claimed, proposed or assessed by any taxing or other governmental authority with
respect to Parent or any of its Subsidiaries; (iv) there are no pending or
threatened audits, investigations or claims for or relating to any liability in
respect of Taxes of Parent or any of its Subsidiaries; and (v) neither Parent
nor any of its Subsidiaries has requested any extension of time within which to
file any currently unfiled Tax Returns. The accruals and reserves for Taxes
(including deferred taxes) reflected in the Parent Interim Balance Sheet are in
all material respects adequate to cover all Taxes accruable through the date
thereof (including Taxes being contested) in accordance with GAAP.

SECTION 3.11 Relations with Employees. (a) Except as set forth in Section
3.11 of the Parent Disclosure Schedule:

(a) Parent and its Subsidiaries have satisfactory relationships with
their employees in all material respects.

(b) Parent and its Subsidiaries are in compliance with all applicable
laws respecting employment and employment practices, terms and conditions
of employment, and wages and hours, and neither Parent nor any of its
Subsidiaries is engaged in any unfair labor practices, except to the extent
a failure to so comply could not have a Material Adverse Effect.

(c) To the best of Parent's knowledge, no charges with respect to or
relating to the business of Parent or any its Subsidiaries are pending
before the Equal Employment Opportunity Commission, or any state or local
agency responsible for the prevention of unlawful employment practices,
which could reasonably be expected to have a Material Adverse Effect.

SECTION 3.12 Benefit Plans. (a) Complete and correct copies of all
material written Employee Benefit Plans of Parent and its Subsidiaries have been
filed as exhibits to the Parent's SEC Reports.

(b) No Employee Benefit Plan of Parent or any of its Subsidiaries is, and
no employee benefit plan formerly maintained by Parent and/or any of its
Subsidiaries was, a "defined benefit plan" within the meaning of section 3(35)
of ERISA to which ERISA applies. Neither the Parent nor any of its Subsidiaries
has ever contributed to, or withdrawn in a complete or partial withdrawal from,
any multiemployer plan (within the meaning of Subtitle E of Title IV of ERISA)
or incurred contingent liability under section 4204 of ERISA.

(c) Each Employee Benefit Plan of Parent and its Subsidiaries (and each
related trust, insurance contract and fund) is in compliance in all material
respects in form and in operation with all applicable requirements of Applicable
Benefits Law (including ERISA and the Code), and is being administered in all
material respects in accordance with all relevant plan documents to the extent
consistent with Applicable Benefits Law. There has been no prohibited
transaction with respect to any Employee Benefit Plan of Parent or any of its
Subsidiaries which would result in the imposition of any material unpaid excise
tax. No Employee Benefit Plan of Parent or any of its Subsidiaries is under
investigation or audit by the Department of Labor or Internal Revenue Service
other than as part of a routine tax audit of Parent. There are no legal actions
or suits pending or, to the best of Parent's knowledge, threatened against any
Employee Benefit Plan of Parent or any of its Subsidiaries or the assets of any
such Employee Benefit Plan or against any fiduciary of any such Employee Benefit
Plan and Parent has no knowledge of any facts that could give rise to any such
actions. There has been full compliance in all material respects with the notice
and continuation requirements of section 4980B of the Code applicable to any
Employee Benefit Plan of Parent and its Subsidiaries.

(d) At no time since the organization of Parent or any of its Subsidiaries
has any entity (other than Parent or any such Subsidiary) been an "ERISA
affiliate" of Parent, any such Subsidiary, or both.

SECTION 3.13 Compliance with Laws; Legal Proceedings. (a) Neither Parent
nor any of its Subsidiaries is in violation of, or in default with respect to,
any applicable statute, regulation, ordinance, writ, injunction, order,
judgment, decree or any Governmental License which violation or default could
reasonably be expected to have a Material Adverse Effect.

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(b) Except as set forth in Section 3.13(b) of the Parent Disclosure
Schedule or in the Parent SEC Reports, there is no order, writ, injunction,
judgment or decree outstanding and no legal, administrative, arbitration or
other governmental proceeding or investigation pending or, to the best of
Parent's knowledge, threatened, and there are no claims (including unasserted
claims of which Parent is aware) against Parent or any of its Subsidiaries or
any of their respective properties, assets or businesses that could reasonably
be expected to have a Material Adverse Effect or against Parent or any of its
directors or officers, as such, that relate to this Agreement, the Merger or the
other transactions contemplated hereby.

SECTION 3.14 Brokers. Except for J. Jeffrey Brausch & Co., no broker,
finder or investment advisor acted directly or indirectly as such for Parent,
any Subsidiary of Parent or any stockholder of Parent in connection with this
Agreement or the Merger, and no broker, finder, investment advisor or other
Person is entitled to any fee or other commission, or other remuneration, in
respect thereof based in any way on any action, agreement, arrangement or
understanding taken or made by or on behalf of Parent, any Subsidiary of Parent
or any stockholder of the Parent.

SECTION 3.15 Intellectual Property. (a) Parent and/or each of its
Subsidiaries owns, or is licensed or otherwise possesses legally enforceable
rights to use, all patents, trade names, service marks, copyrights, and any
applications therefor, technology, know-how, computer software programs or
applications, and tangible or intangible proprietary information or material
that are used in the business of Parent and its Subsidiaries as currently
conducted, except as could not reasonably be expected to have a Material Adverse
Effect.

(b) To the best of the Parent's knowledge, there is no material
unauthorized use, infringement or misappropriation of any of the foregoing by
any third party, including any employee or former employee of the Parent or any
of its Subsidiaries.

SECTION 3.16 Insurance. Except as set forth in Section 3.16 of the Parent
Disclosure Schedule, all material fire and casualty, general liability, business
interruption, product liability and other insurance policies maintained by
Parent and its Subsidiaries are with reputable insurers, provide adequate
coverage for all normal risks incident to Parent's and its Subsidiaries' assets,
properties and business operations and are in character and amount at least
equivalent to that carried by Persons engaged in a business subject to the same
or similar perils or hazards.

SECTION 3.17 Contracts; etc. Each agreement, lease or other type of
document required to be disclosed pursuant to Section 3.12 or filed as an
exhibit to the Parent's SEC Reports to which Parent or any of its Subsidiaries
is a party or by which Parent or any of its Subsidiaries or their respective
properties or assets are bound (collectively, the "Parent Contracts"), except
for Parent Contracts, the loss of which could not reasonably be expected to have
a Material Adverse Effect, is valid, binding and in full force and effect and is
enforceable by Parent or such Subsidiary in accordance with its terms. Neither
Parent nor any such Subsidiary is (with or without the lapse of time or the
giving of notice, or both) in breach of or in default under any of the Parent
Contracts, and, to the best of Parent's knowledge, no other party to any of the
Parent Contracts is (with or without the lapse of time or the giving of notice,
or both) in breach of or in default under any of the Parent Contracts, where
such breach or default could reasonably be expected to have a Material Adverse
Effect.

SECTION 3.18 Permits, Authorizations, etc. All Governmental Licenses and
each other material approval, authorization, consent, license, certificate,
order or other permit of all governmental agencies, whether federal, state,
local or foreign, necessary to enable Parent and its Subsidiaries to own,
operate and lease their properties and assets as and where such properties and
assets are owned, leased or operated and to provide service and carry on their
business as presently provided and conducted or required to permit the continued
conduct of such business following the Merger in the manner conducted on the
date of this Agreement (collectively, the "Parent Permits") are valid and in
good standing with the issuing agencies and not subject to any proceedings for
suspension, modification or revocation, except for such Parent Permits which
could not reasonably be expected to have a Material Adverse Effect.

SECTION 3.19 Environmental Matters. (a) Parent and each Subsidiary of
Parent has obtained all Environmental Permits that are required for the lawful
operation of its business except for such Environmental
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Permits the failure of which to obtain could not reasonably be expected to have
a Material Adverse Effect. Parent and its Subsidiaries (i) are in compliance
with all terms and conditions of their Environmental Permits and are in
compliance with and not in default under any applicable Environmental Law,
except for such failure to be in compliance that could not reasonably be
expected to have Material Adverse Effect, and (ii) have not received written
notice of any material violation by or material claim against Parent or any such
Subsidiary under any Environmental Law.

(b) There have been no Releases or threatened Releases of any Hazardous
Substances (i) into, on or under any of the properties owned or operated (or
formerly owned or operated) by Parent or any such Subsidiary in such a way as to
create any liability (including the costs of investigation or remediation) under
any applicable Environmental Law that could reasonably be expected to have a
Material Adverse Effect.

(c) Neither the Parent or its Subsidiaries have been identified as a
potentially responsible party at any federal or stated National Priority List
("superfund") site.

SECTION 3.20 Books and Records. All accounts, books, ledgers and official
and other records prepared and kept by Parent and its Subsidiaries have been
kept and completed in all material respects, and there are no material
inaccuracies or discrepancies contained or reflected therein.

SECTION 3.21 Pooling Matters. Parent has provided to the Company and its
independent accountants all information concerning actions taken or agreed to be
taken by Parent or any of its Affiliates on or before the date of this Agreement
that could reasonably be expected to adversely affect the ability of Parent to
account for the business combination to be effected by the Merger as a pooling
of interests.

SECTION 3.22 Registration Statement; Proxy Statement/Prospectus. Subject
to the accuracy of the representations of the Company in Section 2.28, the
registration statement (the "Registration Statement") pursuant to which the
Parent Common Stock to be issued in the Merger will be registered with the SEC
shall not at the time the Registration Statement is declared effective by the
SEC contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The information supplied by Parent in writing specifically
for inclusion in the Proxy Statement/Prospectus will not, on the date the Proxy
Statement/Prospectus (or any amendment thereof or supplement thereto) is first
mailed to stockholders or at the time of the Company Stockholders Meeting,
contain any statement which, at such time and in light of the circumstances
under which it shall be made, is false or misleading with respect to any
material fact, or shall omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which it
shall be omitted, not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Company Stockholders Meeting which has
become false or misleading. If at any time prior to the Effective Time any event
relating to Parent or any of its respective Affiliates, officers or directors
should be discovered by Parent which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement/Prospectus, Parent
shall promptly inform the Company. The Proxy Statement/Prospectus shall comply
in all material respects with the requirements of the Securities Act and the
Exchange Act. Notwithstanding the foregoing, Parent makes no representation or
warranty with respect to any Company Information which is contained or
incorporated by reference in, or furnished in connection with the preparation
of, the Registration Statement or the Proxy Statement/Prospectus.

SECTION 3.23 Ownership of Merger Sub; No Prior Activities. (a) Merger Sub
is a direct, wholly-owned subsidiary of Parent and was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement.

(b) As of the date hereof and the Effective Time, expect for obligations or
liabilities incurred in connection with its incorporation or organization and
the transactions contemplated by this Agreement and expect for this Agreement
and any other agreements or arrangements contemplated by this Agreement, Merger
Sub has not and will not have incurred, directly or indirectly, through any
subsidiary or affiliate, any obligations or liabilities or

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engaged in any business activities of any type or kind whatsoever or entered
into any agreements or arrangements with any Person.

ARTICLE IV
CONDUCT OF BUSINESS PENDING THE MERGER

SECTION 4.1 Conduct of Business by the Company Pending the Merger. During
the period from the date of this Agreement and continuing until the earlier of
the termination of this Agreement or the Effective Time, the Company covenants
and agrees that, unless Parent shall otherwise agree in writing, the Company
shall conduct its business and shall cause the businesses of its Subsidiaries to
be conducted only in, and the Company and its Subsidiaries shall not take any
action except in, the ordinary course of business and in a manner consistent
with past practice; and the Company shall use reasonable commercial efforts to
preserve substantially intact the business organization of the Company and its
Subsidiaries, to keep available the services of the present officers, employees,
agents and consultants of the Company and its Subsidiaries and to preserve the
present relationships of the Company and its Subsidiaries with customers,
suppliers and other Persons with which the Company or any of its Subsidiaries
has significant business relations. By way of amplification and not limitation,
except as contemplated by this Agreement, neither the Company nor any of its
Subsidiaries shall, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of Parent:

(a) amend or otherwise change the Company's Certificate of
Incorporation or By-Laws;

(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of
capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of capital
stock, or any other ownership interest (including, without limitation, any
phantom interest) in the Company, any of its Subsidiaries or Affiliates
(except for the issuance of shares of Company Common Stock issuable upon
the exercise of the Stock Options and Warrants and other commitments listed
in Section 2.4 of the Company Disclosure Schedule);

(c) sell, transfer, lease to others or otherwise dispose of or subject
to any Encumbrance any material assets or properties of the Company or any
of its Subsidiaries or purchase, lease from others or otherwise acquire any
material assets or properties (except for (i) purchases or sales of assets
in the ordinary course of business and in a manner consistent with past
practice, (ii) dispositions of obsolete or worthless assets, and (iii)
purchases or sales of immaterial assets not in excess of $20,000);

(d) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of any of its capital stock, except that a wholly-owned
Subsidiary of the Company may declare and pay a dividend to its parent,
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (iii) amend
the terms or change the period of exercisability of, purchase, repurchase,
redeem or otherwise acquire, or permit any Subsidiary to purchase,
repurchase, redeem or otherwise acquire, any of its securities or any
securities of its Subsidiaries, including shares of Company Common Stock or
any option, warrant or right, directly or indirectly, to acquire shares of
Company Common Stock;

(e) (i) acquire (by merger, consolidation, or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money, except
for borrowings and reborrowing under the Company's existing credit
facilities or issue any debt securities or assume, guarantee (other than
guarantees of bank debt of the Company's subsidiaries under existing credit
facilities entered into in the ordinary course of business) or endorse or
otherwise as an accommodation become responsible for, the obligations of
any Person, or make any loans or advances, except in the ordinary course of
business consistent with past practice; (iii) authorize any capital
expenditures or purchases of fixed assets which are, in the aggregate, in
excess of the amount set forth in Section 4.1 of the Company Disclosure
Schedule for the Company and its subsidiaries taken as a whole; or (iv)
enter into or amend any contract, agreement, commitment or arrangement to
effect any of the matters prohibited by this Section 4.1(e);

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(f) make any change in the rate of compensation, commission, bonus or
other remuneration payable, or pay or agree or promise to pay,
conditionally or otherwise, any bonus, extra compensation, pension or
severance or vacation pay, to any director, officer, employee, salesman or
agent of the Company or any of its Subsidiaries except in the ordinary
course of business consistent with prior practice and pursuant to or in
accordance with plans disclosed in Section 2.14(a) of the Company
Disclosure Schedule that were in effect as of June 30, 1998 or make any
increase in or commitment to increase any employee benefits, adopt or make
any commitment to adopt any additional employee benefit plan or make any
contribution, other than regularly scheduled contributions, to any Employee
Benefit Plan;

(g) take any action to change accounting practices, policies or
procedures (including procedures with respect to revenue recognition,
payments of accounts payable or collection of accounts receivable);

(h) make any material tax election inconsistent with past practice or
settle or compromise any material federal, state, local or foreign Tax
liability or agree to an extension of a statute of limitations, except to
the extent the amount of any such settlement has been reserved for in the
financial statements contained in the Company SEC Reports filed with the
SEC prior to the date of this Agreement;

(i) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction when due, in the ordinary course of business and
consistent with past practice of liabilities reflected or reserved against
in the Company Financial Statements or incurred after June 30, 1998 in the
ordinary course of business and consistent with past practice;

(j) enter into any transaction, contract or commitment other than in
the ordinary course of business; or

(k) take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (j) above, or any action which would
make any of the representations or warranties of the Company contained in
this Agreement untrue or incorrect or prevent the Company from performing
or cause the Company not to perform its covenants herein.

SECTION 4.2 Conduct of Business by Parent Pending the Merger. During the
period from the date of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, Parent covenants and agrees
that, except as set forth in Section 4.2 of the Parent Disclosure Schedule or
unless the Company shall otherwise agree in writing, Parent shall conduct its
business, and cause the businesses of its Subsidiaries to be conducted, in the
ordinary course of business and consistent with past practice, other than
actions taken by Parent or its Subsidiaries in contemplation of the Merger, and
shall not directly or indirectly do, or propose to do, any of the following
without the prior written consent of the Company:

(a) amend or otherwise change Parent's Certificate of Incorporation or
By-Laws;

(b) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect
of any of its capital stock, except that a wholly-owned Subsidiary of
Parent may declare and pay a dividend to its parent; or

(c) take or agree in writing or otherwise to take any action which
would make any of the representations or warranties of Parent or Merger Sub
contained in this Agreement untrue or incorrect or prevent Parent or Merger
Sub from performing or cause Parent or Merger Sub not to perform its
covenants herein.

ARTICLE V
ADDITIONAL AGREEMENTS

SECTION 5.1 Proxy Statement/Prospectus; Registration Statement. As
promptly as practicable after the execution of this Agreement, and after the
furnishing by the Company and Parent of all information required to be contained
therein (which each agrees to do as promptly as practicable after the date
hereof), the Company and Parent shall file with the SEC a Registration Statement
on Form S-4 (or on such other form as shall be appropriate), which shall include
the Proxy Statement/Prospectus relating to the adoption of this Agreement and
approval of the transactions contemplated hereby by the stockholders of the
Company pursuant to this

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Agreement, and shall use all reasonable efforts to cause the Registration
Statement to become effective as soon thereafter as practicable. The Proxy
Statement/Prospectus shall include the unanimous recommendation of the Board of
Directors of the Company in favor of the Merger and such recommendation shall
not be withdrawn modified or changed in a manner adverse to Parent or Merger
Sub.

SECTION 5.2 Company Stockholders Meeting. The Company shall call the
Company Stockholders Meeting as promptly as practicable for the purpose of
voting upon the approval of the Merger, and the Company shall use its reasonable
best efforts to hold the Company Stockholders Meeting as soon as practicable
after the date on which the Registration Statement becomes effective. The
Company shall solicit from its stockholders proxies in favor of approval of the
Merger and this Agreement, shall take all other reasonable action necessary or
advisable to secure the vote or consent of stockholders in favor of such
approval and shall not take any action that could reasonably be expected to
prevent the vote or consent of stockholders in favor of such approval.

SECTION 5.3 Access to Information; Confidentiality. Upon reasonable notice
and subject to restrictions contained in confidentiality agreements to which
such party is subject (from which such party shall use reasonable efforts to be
released), the Company and Parent shall each (and shall cause each of their
Subsidiaries to) afford to the officers, employees, accountants, counsel and
other representatives of the other reasonable access, during the period prior to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, the Company and Parent each shall (and shall
cause each of their Subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request, and each shall make available to the other the
appropriate individuals (including attorneys, accountants and other
professionals) for discussion of the other's business, properties and personnel
as either Parent or the Company may reasonably request. Each party shall keep
such information confidential in accordance with the terms of the
confidentiality letter between Parent and the Company (the "Confidentiality
Letter").

SECTION 5.4 Consents; Approvals. The Company and Parent shall each use
their reasonable best efforts to obtain all consents, waivers, approvals,
authorizations or orders (including, without limitation, all United States and
foreign governmental and regulatory rulings and approvals), and the Company and
Parent shall make all filings (including, without limitation, all filings with
United States and foreign governmental or regulatory agencies) required in
connection with the authorization, execution and delivery of this Agreement by
the Company and Parent and the consummation by them of the transactions
contemplated hereby. The Company and Parent shall furnish all information
required to be included in the Proxy Statement/Prospectus and the Registration
Statement or for any application or other filing to be made pursuant to the
rules and regulations of any United States or foreign governmental body in
connection with the transactions contemplated by this Agreement.

SECTION 5.5 Agreements with Respect to Affiliates. The Company shall
deliver to Parent, prior to the date the Registration Statement becomes
effective under the Securities Act, a letter (the "Affiliate Letter")
identifying all Persons who are, at the time of the Company Stockholders
Meeting, anticipated to be "Affiliates" of the Company for purposes of Rule 145
under the Securities Act ("Rule 145"), or the rules and regulations of the SEC
relating to pooling of interests accounting treatment for merger transactions
(the "Pooling Rules"). The Company shall use its reasonable best efforts to
cause each Person who is identified as an "affiliate" in the Affiliate Letter to
deliver to Parent, no less than 30 days prior to the date of the Company
Stockholders Meeting a written agreement (an "Affiliate Agreement") in
connection with restrictions on Affiliates under Rule 145 and pooling of
interests accounting treatment, in form mutually agreeable to the Company and
Parent.

SECTION 5.6 Indemnification and Insurance. (a) The By-Laws and Certificate
of Incorporation of the Surviving Corporation shall contain the provisions with
respect to indemnification set forth in the By-Laws and Certificate of
Incorporation of the Company, which provisions shall not be amended, repealed or
otherwise modified for a period of three years from the Effective Time in any
manner that would adversely affect the rights thereunder as of the Effective
Time of individuals who at the Effective Time were directors or officers of the
Company or its Subsidiaries, unless such modification is required after the
Effective Time by law.

(b) The Surviving Corporation shall, to the fullest extent permitted under
applicable law or under the Surviving Corporation's Certificate of Incorporation
or By-Laws, indemnify and hold harmless each present and
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former director or officer of the Company or any of its Subsidiaries
(collectively, the "Indemnified Parties") against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative (collectively, "Actions"), (x) arising out of or
pertaining to the transactions contemplated by this Agreement, or (y) otherwise
with respect to any acts or omissions occurring at or prior to the Effective
Time, to the same extent as provided in the Company's Certificate of
Incorporation or By-Laws or any applicable contract or agreement as in effect on
the date hereof, in each case for a period of three years after the Effective
Time; provided, however, that, in the event that any claim or claims for
indemnification are asserted or made within such three-year period, all rights
to indemnification in respect of any such claim or claims shall continue until
the disposition of any and all such claims. In the event of any such Action
(whether arising before or after the Effective Time), the Indemnified Parties
shall promptly notify the Surviving Corporation in writing, and the Surviving
Corporation shall have the right to assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Parties. The
Indemnified Parties shall have the right to employ separate counsel in any such
Action and to participate in (but not control) the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Parties
unless (a) the Surviving Corporation has agreed to pay such fees and expenses,
(b) the Surviving Corporation shall have failed to assume the defense of such
Action or (c) the named parties to any such Action (including any impleaded
parties) include both the Surviving Corporation and the Indemnified Parties and
such Indemnified Parties shall have been reasonably advised in writing by
counsel that there may be one or more legal defenses available to the
Indemnified Parties which are in conflict with those available to the Surviving
Corporation. In the event such Indemnified Parties employ separate counsel at
the expense of the Surviving Corporation pursuant to clauses (b) or (c) of the
previous sentence, (i) any counsel retained by the Indemnified Parties for any
period after the Effective Time shall be reasonably satisfactory to the
Surviving Corporation; (ii) the Indemnified Parties as a group may retain only
one law firm to represent them in each applicable jurisdiction with respect to
any single Action unless there is, under applicable standards of professional
conduct, a conflict on any significant issue between the positions of any two or
more Indemnified Parties, in which case each Indemnified Person with respect to
whom such a conflict exists (or group of such Indemnified Persons who among them
have no such conflict) may retain one separate law firm in each applicable
jurisdiction; (iii) after the Effective Time, the Surviving Corporation shall
pay the reasonable fees and expenses of such counsel, promptly after statements
therefor are received; and (iv) the Surviving Corporation will cooperate in the
defense of any such Action. The Surviving Corporation shall not be liable for
any settlement of any such Action effected without its written consent.

(c) The provisions of this Section 5.6 shall survive the consummation of
the Merger at the Effective Time, is intended to benefit the Company, the
Surviving Corporation and the Indemnified Parties, shall be binding on all
successors and assigns of the Surviving Corporation and shall be enforceable by
the Indemnified Parties.

SECTION 5.7 Notification of Certain Matters. The Company shall give prompt
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or nonoccurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty contained in this
Agreement to be materially untrue or inaccurate, or (ii) any failure of the
Company, Parent or Merger Sub, as the case may be, materially to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice; and provided further that failure
to give such notice shall not be treated as a breach of covenant for the
purposes of Sections 6.2(b) or 6.3(b) unless the failure to give such notice
results in material prejudice to the other party.

SECTION 5.8 Further Action/Tax Treatment. Upon the terms and subject to
the conditions hereof, each of the parties hereto shall use all commercially
reasonable efforts to take, or cause to be taken, all actions and to do, or
cause to be done, all other things reasonably necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, to obtain in a timely manner all necessary
waivers, consents and approvals and to effect all necessary registrations and
filings, and otherwise to satisfy or cause to be satisfied all conditions
precedent to its obligations under this Agreement. The foregoing covenant shall
not include any obligation by Parent to agree to divest, abandon, license or
take similar action with

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respect to any assets (tangible or intangible) of Parent or the Company. Each of
Parent, Merger Sub and the Company shall use its commercially reasonable efforts
to cause the Merger to qualify, and will not (both before and after consummation
of the Merger) take any actions which to its knowledge could reasonably be
expected to prevent the Merger from qualifying, as a reorganization under the
provisions of Section 368 of the Code.

SECTION 5.9 Public Announcements. Parent and the Company shall consult
with each other before issuing any press release with respect to the Merger or
this Agreement and shall not issue any such press release or make any such
public statement without the prior consent of the other party, which shall not
be unreasonably withheld; provided, however, that a party may, without the prior
consent of the other party, issue such press release or make such public
statement as may upon the advice of counsel be required by law if it has used
all reasonable efforts to consult with the other party.

SECTION 5.10 Designation of Parent Common Stock. Parent shall use its best
efforts to cause the shares of Parent Common Stock to be issued in the Merger
and upon the exercise of the Stock Options and Warrants to be designated, upon
official notice of issuance, on Nasdaq prior to the Effective Time.

SECTION 5.11 Conveyance Taxes. Parent and the Company shall cooperate in
the preparation, execution and filing of all returns, questionnaires,
applications or other documents regarding any real property transfer or gains,
sales, use, transfer, value added, stock transfer and stamp taxes, any transfer,
recording, registration and other fees, and any similar taxes which become
payable in connection with the transactions contemplated hereby that are
required or permitted to be filed on or before the Effective Time and the
Surviving Corporation shall be responsible for the payment of all such taxes and
fees.

SECTION 5.12 Accountant's Letters. Upon reasonable notice from the other,
the Company shall use its best efforts to cause Arthur Andersen LLP to deliver
to Parent, and Parent shall use its best efforts to cause Arthur Andersen LLP
deliver to the Company, a letter covering such matters as are requested by
Parent or the Company, as the case may be, and as are customarily addressed in
accountant's "comfort" letters.

SECTION 5.13 Pooling Accounting Treatment. Parent and the Company each
agrees not to take any action that would reasonably be expected to adversely
affect the ability of Parent to account for the business combination to be
effected by the Merger as a pooling of interests, and Parent and the Company
each agrees to use its commercially reasonable efforts to take such action as
may be reasonably required to negate the impact of any past actions by Parent,
the Company or their respective Affiliates which would reasonably be expected to
adversely impact the ability of Parent to treat the Merger as a pooling of
interests. The taking by Parent or the Company of any action prohibited by the
previous sentence, or the failure of Parent or the Company to use its
commercially reasonable efforts to take any action required by the previous
sentence, if the Merger is not able to be accounted for as a pooling of
interests because of such action or failure to take action, shall constitute a
breach of this Agreement by such party for the purposes of Section 7.1(g).

SECTION 5.14 No Solicitation. (a) Upon execution of this Agreement, the
Company does not have, or shall immediately terminate, any discussions with any
third party concerning an Alternative Acquisition (as defined below). From and
after the date of this Agreement until the earlier of the Effective Time or the
termination of this Agreement in accordance with its terms, the Company shall
not, and shall not permit any officer, director, employee, affiliate, investment
banker or other agent or other representative of the Company or any Subsidiary
of the Company or any stockholder of the Company to, directly or indirectly, (1)
solicit, engage in discussions or negotiate with any Person (whether such
discussions or negotiations are initiated by the Company, such other Person or
otherwise) or take any other action intended or designed to facilitate the
efforts of any Person, other than Parent, relating to the possible acquisition
of the Company or any of its Subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of its
or their capital stock or assets (with any such efforts by any such Person,
including a firm proposal to make such an acquisition, being referred to as an
"Alternative Acquisition"), (2) provide information with respect to the Company
or any of its Subsidiaries to any Person, other than Parent, relating to a
possible Alternative Acquisition by any Person, other than Parent, (3) enter
into an agreement with any Person, other than Parent, providing for a possible
Alternative Acquisition, or (4) make or authorize any statement, recommendation
or solicitation in support of any possible Alternative Acquisition by any
Person, other than by Parent.

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(b) Notwithstanding the foregoing, the restrictions set forth in Section
5.14(a) shall not prevent the Board of Directors of the Company (or its agents
pursuant to its instructions) from taking any of the following actions: (1)
furnishing information concerning the Company or any of its Subsidiaries to any
third party or (2) engaging in discussions or negotiating with such third party
concerning an Alternative Acquisition, in either such case provided that all of
the following events shall have occurred: (A) such third party is not an
Affiliate of the Company and has made a written, bona fide proposal to the Board
of Directors of the Company to acquire the Company or any of its Subsidiaries
through an Alternative Acquisition which proposal identifies a price or range of
values to be paid for all of the outstanding securities (including stock rights)
or substantially all of the assets of the Company or any of its Subsidiaries,
and which proposal the Board of Directors of the Company has determined, in good
faith, based on the advice of the Company's investment bankers, is more
favorable to the stockholders of the Company, from a financial point of view,
than the terms of the Merger (a "Superior Proposal"); (B) the Company's Board of
Directors has determined, based on the advice of the Company's investment
bankers, that such third party is financially capable of consummating such
Superior Proposal; and (C) Parent shall have been notified in writing of such
Alternative Acquisition, including all of its terms and conditions, shall have
been given copies of such proposal and shall have been apprised of all material
discussions, and the content thereof, with respect to such Alternative
Acquisition.

(c) Notwithstanding the foregoing, the Company and its Subsidiaries shall
not provide any non-public information to such third party unless (1) it has
prior to or contemporaneously therewith provided such information to Parent or
Parent's representatives; and (2) the Company provides such non-public
information pursuant to a nondisclosure agreement with terms which are at least
as restrictive as the nondisclosure agreement heretofore entered into between
Parent and the Company.

(d) In addition to the foregoing, the Company shall not accept or enter
into any agreement concerning an Alternative Acquisition for a period of not
less than 48 hours after Parent's receipt of a notice of the material terms of
such proposed Alternative Acquisition. Upon compliance with all of the foregoing
provisions of this Section 5.14, the Company shall be entitled to (i) change its
recommendation concerning the Merger, and (ii) enter into an agreement with such
third party concerning an Alternative Acquisition provided that the Company
shall immediately make payment in full to Parent of the fee as set forth in
Section 7.3(b).

(e) The Company shall ensure that the officers, directors and Affiliates of
the Company and its subsidiaries and any investment banker or other financial
advisor or representative retained by the Company or any subsidiary of the
Company are aware of the restrictions described in this Section 5.14.

SECTION 5.15 Option and Warrant Amendments. The Company shall use its best
efforts to obtain amendments or statements of clarification of each of the
agreements governing the Stock Options and Warrants, as described in Section
6.2(f).

ARTICLE VI
CONDITIONS TO THE MERGER

SECTION 6.1 Conditions to Obligation of Each Party to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:

(a) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective by the SEC under the
Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the SEC;

(b) Stockholder Approval. The Merger and this Agreement shall have
been approved by the requisite vote of the stockholders of the Company;

(c) Designation. The shares of Parent Common Stock issuable in the
Merger shall have been designated on the Nasdaq upon official notice of
issuance;

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(d) HSR Act. All waiting periods applicable to the consummation of
the Merger under the HSR Act shall have expired or been terminated;

(e) Governmental Actions. There shall not have been instituted,
pending or threatened any action or proceeding (or any investigation or
other inquiry that might result in such an action or proceeding) by any
governmental authority or administrative agency before any governmental
authority, administrative agency or court of competent jurisdiction,
domestic or foreign, nor shall there be in effect any judgment, decree or
order of any governmental authority, administrative agency or court of
competent jurisdiction, or any other legal restraint (i) preventing or
seeking to prevent consummation of the Merger, (ii) prohibiting or seeking
to prohibit or limiting or seeking to limit Parent from exercising all
material rights and privileges pertaining to its ownership of the Surviving
Corporation or the ownership or operation by Parent or any of its
Subsidiaries of all or a material portion of the business or assets of
Parent or any of its Subsidiaries, or (iii) compelling or seeking to compel
Parent or any of its Subsidiaries to dispose of or hold separate all or any
material portion of the business or assets of Parent or any of its
Subsidiaries (including the Surviving Corporation and its Subsidiaries), as
a result of the Merger or the transactions contemplated by this Agreement;

(f) Illegality. No statute, rule, regulation or order shall be
enacted, entered, enforced or deemed applicable to the Merger which makes
the consummation of the Merger illegal;

(g) Opinions of Counsel. The Company shall have received the written
opinion of Kramer, Levin, Naftalis & Frankel, in form reasonably
satisfactory to the Company, as to certain customary corporate and legal
matters relating to Parent, Merger Sub, the Merger, this Agreement and the
transactions contemplated hereby. Parent and Merger Sub shall have received
the written opinion of Dunn, Swan & Cunningham, in form reasonably
satisfactory to Parent, as to certain customary corporate and legal matters
relating to the Company, the Merger, this Agreement and the transactions
contemplated hereby; and

(h) Tax Opinions. The Company shall have received a written opinion
of Dunn, Swan & Cunningham, and Parent shall have received a written
opinion of Kramer, Levin, Naftalis & Frankel, in form and substance
reasonably satisfactory to each of them to the effect that the Merger will
constitute a reorganization within the meaning of Section 368 of the Code.
Each party agrees to make all representations and covenants reasonably
requested by such counsel in connection with the rendering of such
opinions.

SECTION 6.2 Additional Conditions to Obligations of Parent and Merger
Sub. The obligations of Parent and Merger Sub to effect the Merger are also
subject to the following conditions:

(a) Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and in the Company
Disclosure Schedule shall be true and correct in all respects on and as of
the Effective Time with the same force and effect as if made on and as of
the Effective Time, except for (i) changes contemplated by this Agreement,
(ii) those representations and warranties which address matters only as of
a particular date (which shall have been true and correct as of such date,
subject to clause (iii)), or (iii) where the failure to be true and correct
would not reasonably be expected to have a Material Adverse Effect, and
Parent and Merger Sub shall have received a certificate dated as of the
Closing to such effect signed by the Chief Executive Officer and Chief
Financial Officer of the Company;

(b) Agreements and Covenants. The Company shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing, and Parent and Merger Sub shall have received a
certificate dated as of the Closing to such effect signed by the Chief
Executive Officer and Chief Financial Officer of the Company;

(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be made, by the Company for the authorization, execution and delivery of
this Agreement, the consummation by it of the transactions contemplated
hereby and the continuation in full force and effect of any and all
material rights, documents, agreements or instruments of the Company shall
have been obtained and made by the Company, except where the failure to
receive such consents, waivers, approvals, authorizations or orders would
not reasonably be expected to have a Material Adverse Effect on the Parent;

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(d) Opinion of Accountant. Parent shall have received an opinion of
Arthur Andersen LLP, independent certified public accountants, regarding
the qualification of the Merger as a pooling of interests for accounting
purposes, and Company shall have received an opinion of Arthur Andersen
LLP, independent certified public accountants, regarding the qualification
of the Merger as a pooling of interests for accounting purposes. Such
opinions shall be in form and substance reasonably satisfactory to Parent;

(e) Affiliate Agreements. Parent shall have received from each Person
who is identified in the Affiliate Letter as an "affiliate" of the Company,
an Affiliate Agreement, and such Affiliate Agreement shall be in full force
and effect;

(f) Option and Warrant Amendments. The Company shall obtain and
deliver to Parent amendments or statements of clarification to each
agreement governing the Stock Options and Warrants which state that the
holder of such Stock Option or Warrant agrees that the only consideration
such holder is entitled to receive after the Merger with respect to any
Stock Option or Warrant held by such holder is the consideration set forth
in Section 1.6(c);

(g) Pooling of Interests. The Merger shall constitute a pooling of
interests for financial accounting purposes; and

(h) Comfort Letter. If requested, Arthur Andersen LLP shall have
delivered to Parent the "comfort letter" set forth in Section 5.12.

SECTION 6.3 Additional Conditions to Obligation of the Company. The
obligation of the Company to effect the Merger is also subject to the following
conditions:

(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub contained in this Agreement and the
Parent Disclosure Schedule shall be true and correct in all respects on and
as of the Effective Time with the same force and effect as if made on and
as of the Effective Time, except for (i) changes contemplated by this
Agreement, (ii) those representations and warranties which address matters
only as of a particular date (which shall have been true and correct as of
such date, subject to clause (iii)), or (iii) where the failure to be true
and correct could not reasonably be expected to have a Material Adverse
Effect, and the Company shall have received a certificate dated as of the
Closing to such effect signed by an officer of Parent;

(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and the Company shall have received
a certificate dated as of the Closing to such effect signed by an officer
of Parent; and

(c) Consents Obtained. All material consents, waivers, approvals,
authorizations or orders required to be obtained, and all filings required
to be made, by Parent or Merger Sub for the authorization, execution and
delivery of this Agreement, the consummation by them of the transactions
contemplated hereby and the continuation in full force and effect of any
and all material rights, documents, agreements or instruments of Parent
shall have been obtained and made by Parent and Merger Sub, except where
the failure to receive such consents, waivers, approvals, authorizations or
orders could not be reasonably be expected to have a Material Adverse
Effect on Parent.

(d) Comfort Letter. If requested, Arthur Andersen LLP shall have
delivered to the Company the "comfort letter" set forth in Section 5.12.

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ARTICLE VII
TERMINATION

SECTION 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, notwithstanding approval thereof by the
stockholders of the Company or Parent:

(a) by mutual written consent duly authorized by the Boards of
Directors of Parent and the Company; or

(b) by either Parent or the Company if the Merger shall not have been
consummated by March 31, 1999 (provided that the right to terminate this
Agreement under this Section 7.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of the Merger to occur on or before
such date); or

(c) by either Parent or the Company if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued a nonappealable final order, decree or ruling
or taken any other action having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger (provided that the right to
terminate this Agreement under this Section 7.1(c) shall not be available
to any party who has not complied with its obligations under Section 5.7
and such noncompliance materially contributed to the issuance of any such
order, decree or ruling or the taking of such action); or

(d) by either Parent or the Company if the requisite vote of the
stockholders of the Company shall not have been obtained by March 15, 1999
or stockholders of the Company shall not have approved the Merger and this
Agreement at the Company Stockholders Meeting; or

(e) by Parent or the Company if any representation or warranty of the
Company, or Parent and Merger Sub, respectively, set forth in this
Agreement shall be untrue when made, such that the conditions set forth in
Sections 6.2(a) or 6.3(a), as the case may be, would not be satisfied (a
"Terminating Misrepresentation"); provided, however, that, if such
Terminating Misrepresentation is curable prior to the date first
established for the Company Stockholders Meeting by the Company or Parent,
as the case may be, through the exercise of its commercially reasonable
efforts and for so long as the Company or Parent, as the case may be,
continues to exercise such reasonable efforts, neither Parent nor the
Company, respectively, may terminate this Agreement under this Section
7.1(e); or

(f) by Parent if any representation or warranty of the Company shall
have become untrue such that the condition set forth in Section 6.2(a)
would not be satisfied (a "Company Terminating Change"), or by the Company
if any representation or warranty of Parent and Merger Sub shall have
become untrue such that the condition set forth in Section 6.3(a) would not
be satisfied (a "Parent Terminating Change" and together with a Company
Terminating Change, a "Terminating Change"), in either case other than by
reason of a Terminating Breach (as hereinafter defined); provided, however,
that if any such Terminating Change is curable prior to the date first
established for the Company Stockholders Meeting by the Company or Parent,
as the case may be, through the exercise of its commercially reasonable
efforts, and for so long as the Company or Parent, as the case may be,
continues to exercise such commercially reasonable efforts, neither Parent
nor the Company, respectively, may terminate this Agreement under this
Section 7.1(f); or

(g) by Parent or the Company upon a breach of any covenant or
agreement on the part of the Company or Parent, respectively, set forth in
this Agreement, such that the conditions set forth in Sections 6.2(b) or
6.3(b), as the case may be, would not be satisfied (a "Terminating
Breach"); provided, however, that, if such Terminating Breach is curable
prior to the date first established for the Company Stockholders Meeting by
the Company or Parent, as the case may be, through the exercise of its
commercially reasonable efforts and for so long as the Company or Parent,
as the case may be, continues to exercise such commercially reasonable
efforts, neither Parent nor the Company, respectively, may terminate this
Agreement under this Section 7.1(g); or

(h) by the Company, if it proposes to accept a Superior Proposal; or

(i) by the Company, if (x) the Average Stock Price is less than $18
per share (as adjusted for any stock split, recapitalization,
reorganization or other similar corporate transactions), (y) on or before
the second trading day prior to the date of the Company Stockholders
Meeting, the Company delivers to Parent written notice of its intention,
subject to the following clause (z), to terminate this Agreement and (z)
Parent has not

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agreed, by notice to the Company, on or before one trading day prior to the
date of the Company Stockholders Meeting to exchange each Share (excluding
any Shares cancelled pursuant to Section 1.6(b) and excluding Dissenting
Shares (as defined in Section 1.8)) into the right to receive the fraction
of one fully paid and non-assessable share of Parent Common Stock equal to
the product of one and a fraction, the numerator of which is $5.00 and the
denominator of which is the Average Stock Price. In the event Parent
delivers its notice specified in clause (z) of this Section 7.1(i), the
Company shall not have the right to terminate this Agreement pursuant to
this Section 7.1(i).

SECTION 7.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 7.1, this Agreement shall forthwith become void
and there shall be no liability on the part of any party hereto or of any of its
Affiliates, directors, officers or stockholders except (i) as set forth in
Section 7.3 and Section 8.1, and (ii) except as provided in Section 7.3, nothing
herein shall relieve any party from liability for any breach hereof.

SECTION 7.3 Fees and Expenses. (a) Except as set forth in this Section
7.3, all fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, whether or not the Merger is consummated; provided, however, that
Parent and the Company shall share equally all SEC filing fees and printing
expenses incurred in connection with the printing and filing of the Proxy
Statement/Prospectus (including any preliminary materials related thereto) and
the Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.

(b) The Company shall pay to Parent a fee equal to $1,500,000 upon
termination of this Agreement by the Company pursuant to Section 7.1(h). The
Company shall reimburse Parent for its out-of-pocket expenses up to a maximum of
$350,000 upon the termination of this Agreement: (i) pursuant to 7.1(d); or (ii)
the failure of the Company to satisfy the condition set forth in Section 6.2(d).

(c) Upon termination of this Agreement by either Parent or the Company, the
respective parties hereto may seek any and all remedies available to it under
applicable law.

(d) Any amount due to Parent pursuant to Section 7.3(b) shall be paid
immediately following the occurrence of any of the events described in Section
7.3(b).

ARTICLE VIII
GENERAL PROVISIONS

SECTION 8.1 Effectiveness of Representations, Warranties and
Agreements. (a) Except as otherwise provided in this Section 8.1, the
representations, warranties, covenants and agreements of each party hereto shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any other party hereto, any Person controlling any such
party or any of their officers, directors or representatives, whether prior to
or after the execution of this Agreement. The representations, warranties and
agreements in this Agreement and in the Disclosure Schedules shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to Section
7.1, as the case may be, except that the covenants and agreements set forth in
Article I and Section 5.6 shall survive the Effective Time and those set forth
in Section 7.3 shall survive such termination. The Confidentiality Letter shall
survive termination of this Agreement as provided therein.

(b) Any disclosure made with reference to one or more Sections of the
Company Disclosure Schedule or the Parent Disclosure Schedule shall be deemed
disclosed with respect to each other section therein as to which such disclosure
is relevant provided that such relevance is reasonably apparent. Disclosure of
any matter in the Company Disclosure Schedule or the Parent Disclosure Schedule
shall not be deemed an admission that such matter is material.

SECTION 8.2 Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made if and when delivered personally or by overnight courier to the parties
at the following addresses or sent by electronic transmission, with confirmation
received, to

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the telecopy numbers specified below (or at such other address, telecopy or
telephone number or other Person's attention for a party as shall be specified
by like notice):

(a) If to Parent or Merger Sub:

The Kroll-O'Gara Company
9113 LeSaint Drive
Fairfield, OH 45014
Telecopier No.: (513) 874-1262
Telephone No.: (513) 874-2112
Attention: Abram S. Gordon, Esq.

With a copy to:

Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, NY 10022
Telecopier No.: (212) 715-8000
Telephone No.: (212) 715-9100
Attention: Peter S. Kolevzon, Esq.

(b) If to the Company:

Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 810
Oklahoma City, OK 73102
Telecopier No.: (405) 232-9801
Telephone No.: (405) 232-9800
Attention: President

With a copy to:

Dunn, Swan & Cunningham, P.C.
2800 Oklahoma Tower
210 Park Avenue
Oklahoma City, OK 73102-5604
Attention: Michael E. Dunn, Esq.

SECTION 8.3 Certain Definitions. For purposes of this Agreement, the term:

(a) "Affiliates" means a Person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, the first mentioned Person;

(b) "Average Stock Price" means the average of the Daily Per Share Prices
during the Measurement Period;

(c) "Business Day" means any day other than a day on which banks in New
York or Oklahoma City are required or authorized to be closed;

(d) "Control" (including the terms "controlled by" and "under common
control with") means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock, as trustee or
executor, by contract or credit arrangement or otherwise;

(e) "Daily Per Share Price" for any trading day means the weighted average
of the per share selling prices on the Nasdaq of the Parent Common Stock for
such day; provided, however, if there is no trading on the Nasdaq of the Parent
Common Stock for any trading day, the Daily Per Share Price shall be the average
of the closing bid and ask prices for such trading day;

(f) "Measurement Period" means the twenty trading days ending three trading
days prior to the Company Stockholders Meeting;

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(g) "Person" means an individual, corporation, partnership, limited
liability company, association, trust, unincorporated organization other entity
or group (as defined in Section 13(d)(3) of the Exchange Act); and

(h) "Subsidiary" or "Subsidiaries" of the Company, the Surviving
Corporation, Parent or any other Person means any corporation, partnership,
limited liability company, or other legal entity of which the Company, the
Surviving Corporation, Parent or such other Person, as the case may be (either
alone or through or together with any other subsidiary), owns, directly or
indirectly, more than 10% of the stock or other equity interests the holders of
which are generally entitled to vote for the election of the board of directors
or other governing body of such corporation or other legal entity.

SECTION 8.4 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective Boards of Directors at any
time prior to the Effective Time; provided, however, that, after approval of the
Merger and this Agreement by the stockholders of the Company, no amendment may
be made which by law requires further approval by such stockholders without such
further approval. This Agreement may not be amended except by an instrument in
writing signed by the parties hereto.

SECTION 8.5 Waiver. At any time prior to the Effective Time, any party
hereto may with respect to any other party hereto (a) extend the time for the
performance of any of the obligations or other acts, (b) waive any inaccuracies
in the representations and warranties contained herein or in any document
delivered pursuant hereto, or (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if set
forth in an instrument in writing signed by the party or parties to be bound
thereby.

SECTION 8.6 Headings; Construction. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. In this Agreement (a) words
denoting the singular include the plural and vice versa, (b) "it" or "its" or
words denoting any gender include all genders, (c) the word "including" shall
mean "including without limitation," whether or not expressed, (d) any reference
to a statute shall mean the statute and any regulations thereunder in force as
of the date of this Agreement or the Closing, as applicable, unless otherwise
expressly provided, (e) any reference herein to a Section, Article or Schedule
refers to a Section or Article of or a Schedule to this Agreement, unless
otherwise stated, (f) when calculating the period of time within or following
which any act is to be done or steps taken, the date which is the reference day
in calculating such period shall be excluded and if the last day of such period
is not a Business Day, then the period shall end on the next day which is a
Business Day and (g) any reference to a party's "best efforts" or "reasonable
efforts" shall not include any obligation of such party to pay, or guarantee the
payment of, money or other consideration to any third party or to agree to the
imposition on such party or its Affiliates of any condition reasonably
considered by such party to be materially burdensome to such party or its
Affiliates.

SECTION 8.7 Severability. (a) If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent reasonably
possible.

(b) The Company and Parent agree that the fee provided in Section 7.3(b) is
fair and reasonable in the circumstances. If a court of competent jurisdiction
shall nonetheless, by a final, non-appealable judgment, determine that the
amount of such fee exceeds the maximum amount permitted by law, then the amount
of such fee shall be reduced to the maximum amount permitted by law in the
circumstances, as determined by such court of competent jurisdiction.

SECTION 8.8 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and undertakings (other than the
Confidentiality Letter), both written and oral, among the parties, or any of
them, with respect to the subject matter hereof, except as otherwise expressly
provided herein.

SECTION 8.9 Assignment; Merger Sub. This Agreement shall not be assigned
by operation of law or otherwise, except that all or any of the rights of Merger
Sub hereunder may be assigned to any direct, wholly-
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owned Subsidiary of Parent provided that no such assignment shall relieve the
assigning party of its obligations hereunder. Parent guarantees the full and
punctual performance by Merger Sub of all the obligations hereunder of Merger
Sub or any such assignees.

SECTION 8.10 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other Person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, including, without limitation, by way of subrogation, other than
Section 5.6 (which is intended to be for the benefit of the Indemnified Parties
and may be enforced by such Indemnified Parties).

SECTION 8.11 Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty, covenant or
agreement herein, nor shall any single or partial exercise of any such right
preclude other or further exercise thereof or of any other right. All rights and
remedies existing under this Agreement are cumulative to, and not exclusive of,
any rights or remedies otherwise available.

SECTION 8.12 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of New York
applicable to contracts executed and fully performed within the State of New
York.

SECTION 8.13 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.

SECTION 8.14 WAIVER OF JURY TRIAL. EACH OF PARENT, MERGER SUB AND THE
COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED
UPON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.

THE KROLL-O'GARA COMPANY

By /s/ WILFRED T. O'GARA
--------------------------------------------
Name: Wilfred T. O'Gara
Title: President and Chief Operating Officer

KROLL-O'GARA OKLAHOMA. INC.

By /s/ ABRAM S. GORDON
--------------------------------------------
Name: Abram S. Gordon
Title: President

LABORATORY SPECIALISTS OF AMERICA, INC.

By /s/ JOHN SIMONELLI
--------------------------------------------
Name: John Simonelli
Title: Chief Executive Officer

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APPENDIX B

JESUP & LAMONT
SECURITIES CORPORATION
650 FIFTH AVENUE
NEW YORK, NY 10019

OCTOBER 20, 1998

Board of Directors
Laboratory Specialists of America, Inc.
101 Park Avenue, Suite 820
Oklahoma City, OK 73102-7202

Members of the Board:

You have asked us to advise you with respect to the fairness to the current
holders of Common Stock of Laboratory Specialists of America, Inc., from a
financial point of view of the consideration to be received pursuant to the
terms of the Agreement and Plan of Merger dated as of October 21, 1998 by and
among The Kroll-O'Gara Company. Oklahoma Acquisition Inc. (a wholly-owned
subsidiary of Kroll-O'Gara Corp. (the "Acquiror")) and Laboratory Specialists of
America, Inc. (the "Target") and together with the Acquiror, the "Companies") as
described in the Agreement and Plan of Merger dated October 21, 1998 (the
"Transaction"), that provides for, among other things:

If the Average Stock Price (weighted average per share selling price during
the twenty trading days ending three days prior to the Company's Stockholders
Meeting) of the Acquiror ("Acquiror Common Stock") is lower than $24 per share,
each share of the common stock of the Target ("Target Common Stock") shall be
converted into the right to receive the fraction of one share of Acquiror Common
Stock equal to a fraction, the numerator of which is $5.00 and the denominator
of which is the average stock price; provided, however, that in the event the
product so obtained is more than 0.2778, such product shall be deemed to equal
0.2778. If the average stock price is equal to or greater than $24, each Target
Common Stock shall be converted into the right to receive 0.2102 of one Acquiror
Common Stock.

In arriving at our opinion, we have reviewed the terms of the Transaction
and certain publicly available business and financial information relating to
the Companies. We also have reviewed certain other information, including
financial forecasts, relating to the Companies and have met with the managements
of the Companies to discuss the businesses and prospectus of the Companies.

We have also considered certain current financial and stock market data of
the Companies and have compared those data with similar data of publicly held
companies in businesses similar those of the Companies and we have considered,
to the extent publicly available, the financial terms of certain other
transactions which have recently been effected. We also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which we deemed relevant.

In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respect. With respect to the
financial projections, we have assumed that such projections have been
reasonably prepared reflecting the best currently available estimates and
judgments of the management of the Companies as to the future financial
performance of the Companies. In addition, we have not been requested to make
and have not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Companies, nor have we been
furnished with any such evaluations or appraisals. Our opinion is necessarily
based upon information available to us, and financial, economic, market and
other conditions as they exist and can be evaluated, on the date hereof. In
connection with our engagement, we were not requested to, and did not, solicit
on, except for the Transaction, evaluate third party indications of interest in
acquiring all or a part of the Companies.

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Board of Directors
Laboratory Specialists of America, Inc.
October 20, 1998
Page 2

We have acted as financial advisor to the Board of Directors of the Target
in connection with the Transaction and will receive a fee for our services upon
the delivery of this opinion. In the ordinary course of business, we and our
affiliates may actively trade the debt and equity securities of the Companies
and their affiliates for our own account and for the accounts of customers and,
accordingly, may at any timehold a long or short position in such securities. In
addition, we have in the past represented the Target as placement agent for the
Target's securities.

It is understood that this letter is for the information of the Board of
Directors of the Target in connection with its evaluation of the Transaction,
does not constitute a recommendation to any stockholder as to how such
stockholder should vote on any matter in connection with the proposed
Transaction, and is not to be quoted or referred to, in whole or in part in any
registration statement, prospectus or proxy statement or in any other document
used in connection with the offering or sale of securities, other than the S-4
and proxy statement relating to the Transaction, nor shall this letter be used
for any other purposes, without our prior written consent.

Our opinion speaks only as of the date hereof, is based on the conditions
as they exist and information which we have been supplied as of the date hereof,
and is without regard to any market, economic, financial, legal or other
circumstances or event of any kind or nature which may exist or occur after such
date. We are not expressing any opinion herein as to the prices at which the
Acquiror Common Stock will trade following the announcement or consummation of
the Merger.

Based upon the subject of the foregoing and current market conditions, it
is our opinion that as of the date hereof, the consideration to be received by
holders of the Targets Common Stock in the Transaction is fair to the holders of
the Target's Common Stock from a financial point of view.

Very truly yours,

JESUP & LAMONT SECURITIES CORPORATION

HOWARD F. CURD
President & Chief Executive Officer

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APPENDIX C

OKLAHOMA GENERAL CORPORATION ACT
SECTION 1091 APPRAISAL RIGHTS

A. Any shareholder of a corporation of this state who holds shares of stock
on the date of the making of a demand pursuant to the provisions of subsection D
of this section with respect to the shares, who continuously holds the shares
through the effective date of the merger or consolidation, who has otherwise
complied with the provisions of subsection D of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to the provisions of Section 1073 of this title shall be entitled to an
appraisal by the district court of the fair value of the shares of stock under
the circumstances described in subsections B and C of this section. As used in
this section, the word "shareholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and "depository receipt" means an instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository. The
provisions of this subsection shall be effective only with respect to mergers or
consolidations consummated pursuant to an agreement of merger or consolidation
entered into after November 1, 1988.

B. 1. Except as otherwise provided for in this subsection, appraisal rights
shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation, or of the acquired
corporation in a share acquisition, to be effected pursuant to the provisions of
Section 1081, other than a merger effected pursuant to subsection G of Section
1081, and Sections 1082, 1086, 1087, 1090.1 or 1090.2 of this title.

2. a. No appraisal rights under this section shall be available for
the shares of any class or series of stock which stock, or depository
receipts in respect thereof, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the meeting of
shareholders to act upon the agreement of merger or consolidation, were
either:

(1) listed on a national securities exchange or designated as a
national market system security or an interdealer quotation system by
the National Association of Securities Dealers, Inc.; or

(2) held of record by more than two thousand holders. No appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the shareholders of the surviving corporation as
provided in subsection G of Section 1081 of this title.

b. In addition, no appraisal rights shall be available for any shares
of stock, or depository receipts in respect thereof, of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the shareholders of the surviving corporation as
provided for in Subsection F of Section 1081 of this title.

3. Notwithstanding the provisions of paragraph 2 of this subsection,
appraisal rights provided for in this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to the provisions of Sections 1081, 1082, 1086,
1087, 1090.1 or 1090.2 of this title to accept for the stock anything
except:

a. shares of stock of the corporation surviving or resulting from
the merger or consolidation or depository receipts thereof, or

b. shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security or an interdealer

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quotation system by the National Association of Securities Dealers, Inc.
or held of record by more than two thousand holders, or

c. cash in lieu of fractional shares or fractional depository
receipts described in subparagraphs a and b of this paragraph, or

d. any combination of the shares of stock, depository receipts, and
cash in lieu of the fractional shares or depository receipts described
in subparagraphs a, b, and c of this paragraph.

4. In the event all of the stock of a subsidiary Oklahoma corporation
party to a merger effected pursuant to the provisions of Section 1083 of
this title is not owned by the parent corporation immediately prior to the
merger, appraisal rights shall be available for the shares of the
subsidiary Oklahoma corporation.

C. Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections D and E
of this section, shall apply as nearly as is practicable.

D. Appraisal rights shall be perfected as follows:

1. If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of shareholders, the corporation, not less than twenty (20) days
prior to the meeting, shall notify each of its shareholders entitled to the
appraisal rights that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in the notice a
copy of this section. Each shareholder electing to demand the appraisal of
the shares of the shareholder shall deliver to the corporation, before the
taking of the vote on the merger or consolidation, a written demand for
appraisal of the shares of the shareholder. The demand will be sufficient
if it reasonably informs the corporation of the identity of the shareholder
and that the shareholder intends thereby to demand the appraisal of the
shares of the shareholder. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A shareholder electing to
take such action must do so by a separate written demand as herein
provided. Within ten (10) days after the effective date of the merger or
consolidation, the surviving or resulting corporation shall notify each
shareholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation as of the date that the merger or consolidation
has become effective; or

2. If the merger or consolidation is approved pursuant to the
provisions of Section 1073 or 1083 of this title, each constituent
corporation, either before the effective date of the merger or
consolidation or within ten (10) days thereafter, shall notify each of the
holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all of the
shares of the class or series of stock of the constituent corporation, and
shall include in such notice a copy of this section. Provided, if the
notice is given on or after the effective date of the merger or
consolidation, the notice shall be given by the surviving or resulting
corporation to all the holders of any class or series of stock of a
constituent corporation that are entitled to appraisal rights. The notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify the shareholders of the effective date of
the merger or acquisition. Any shareholder entitled to appraisal rights
may, within twenty (20) days after the date of mailing of the notice,
demand in writing from the surviving or resulting corporation the appraisal
of the holder's shares. The demand will be sufficient if it reasonably
informs the corporation of the identity of the shareholder and that the
shareholder intends to demand the appraisal of the holder's shares. If the
notice does not notify shareholders of the effective date of the merger or
consolidation either:

a. each constituent corporation shall send a second notice before
the effective date of the merger or consolidation notifying each of the
holders of any class or series of stock of the constituent corporation
that are entitled to appraisal rights of the effective date of the
merger or consolidation, or

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b. the surviving or resulting corporation shall send a second
notice to all holders on or within ten (10) days after the effective
date of the merger or consolidation; provided, however, that if the
second notice is sent more than twenty (20) days following the mailing
of the first notice, the second notice need only be sent to each
shareholder who is entitled to appraisal rights and who has demanded
appraisal of the holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that the
notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
shareholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more
than ten (10) days prior to the date the notice is given; provided, if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be the effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.

E. Within one hundred twenty (120) days after the effective date of the
merger or consolidation, the surviving or resulting corporation or any
shareholder who has complied with the provisions of subsections A and D of this
section and who is otherwise entitled to appraisal rights, may file a petition
in district court demanding a determination of the value of the stock of all
such shareholders; provided, however, at any time within sixty (60) days after
the effective date of the merger or consolidation, any shareholder shall have
the right to withdraw the demand of the shareholder for appraisal and to accept
the terms offered upon the merger or consolidation. Within one hundred twenty
(120) days after the effective date of the merger or consolidation, any
shareholder who has complied with the requirements of subsections A and D of
this section, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of the shares. The written statement shall
be mailed to the shareholder within ten (10) days after the shareholder's
written request for a statement is received by the surviving or resulting
corporation or within ten (10) days after expiration of the period for delivery
of demands for appraisal pursuant to the provisions of subsection D of this
section, whichever is later.

F. Upon the filing of any such petition by a shareholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which, within
twenty (20) days after service, shall file, in the office of the court clerk of
the district court in which the petition was filed, a duly verified list
containing the names and addresses of all shareholders who have demanded payment
for their shares and with whom agreements regarding the value of their shares
have not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall be
accompanied by such duly verified list. The court clerk, if so ordered by the
court, shall give notice of the time and place fixed for the hearing on the
petition by registered or certified mail to the surviving or resulting
corporation and to the shareholders shown on the list at the addresses therein
stated. Notice shall also be given by one or more publications at least one (1)
week before the day of the hearing, in a newspaper of general circulation
published in the City of Oklahoma City, Oklahoma, or other publication as the
court deems advisable. The forms of the notices by mail and publication shall be
approved by the court, and the costs thereof shall be borne by the surviving or
resulting corporation.

G. At the hearing on the petition, the court shall determine the
shareholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The court may require the shareholders who
have demanded an appraisal of their shares and who hold stock represented by
certificates to submit their certificates of stock to the court clerk for
notation thereon of the pendency of the appraisal proceedings; and if any
shareholder fails to comply with this direction, the court may dismiss the
proceedings as to that shareholder.

H. After determining the shareholders entitled to an appraisal, the court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining the fair value, the
court shall take into account all relevant factors. In determining the fair rate
of interest, the court may consider all relevant factors, including the rate of
interest
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which the surviving or resulting corporation would have to pay to borrow money
during the pendency of the proceeding. Upon application by the surviving or
resulting corporation or by any shareholder entitled to participate in the
appraisal proceeding, the court may, in its discretion, permit discovery or
other pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the shareholder entitled to an appraisal. Any
shareholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to the provisions of subsection F of this section and who
has submitted the certificates of stock of the shareholder to the court clerk,
if required, may participate fully in all proceedings until it is finally
determined that the shareholder is not entitled to appraisal rights pursuant to
the provisions of this section.

I. The court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
shareholders entitled thereto. Interest may be simple or compound, as the court
may direct. Payment shall be made to each shareholder, in the case of holders of
uncertificated stock immediately, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing the stock. The court's decree may be enforced as other
decrees in the district court may be enforced, whether the surviving or
resulting corporation be a corporation of this state or of any other state.

J. The costs of the proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may order all or a portion of the
expenses incurred by any shareholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

K. From and after the effective date of the merger or consolidation, no
shareholder who has demanded appraisal rights as provided for in subsection D of
this section shall be entitled to vote the stock for any purpose or to receive
payment of dividends or other distributions on the stock, except dividends or
other distributions payable to shareholders of record at a date which is prior
to the effective date of the merger or consolidation; provided, however, that if
no petition for an appraisal shall be filed within the time provided for in
subsection E of this section, or if the shareholder shall deliver to the
surviving or resulting corporation a written withdrawal of the shareholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within sixty (60) days after the effective date of the merger or consolidation
as provided for in subsection E of this section or thereafter with the written
approval of the corporation, then the right of the shareholder to an appraisal
shall cease; provided further, no appraisal proceeding in the district court
shall be dismissed as to any shareholder without the approval of the court, and
approval may be conditioned upon terms as the court deems just.

L. The shares of the surviving or resulting corporation into which the
shares of any objecting shareholders would have been converted had they assented
to the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.

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LABORATORY SPECIALISTS OF AMERICA, INC.
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

PROXY FOR SPECIAL MEETING

The undersigned hereby appoints John Simonelli and Larry E. Howell, and each of
them, attorneys with the powers which the undersigned would possess if
personally present, including the power of substitution, to vote all shares of
the undersigned at the Special Meeting of Shareholders of Laboratory Specialists
of America, Inc. to be held at the offices of Dunn, Swan & Cunningham, 210 Park
Avenue, Suite 2800, Oklahoma City, Oklahoma 73102-5604 on Friday, December 4,
1998 at 2:00 p.m., and at any adjournments thereof.

[ ] FOR [ ] AGAINST [ ] ABSTAIN on the proposal for the merger of
Kroll-O'Gara Oklahoma, Inc. into Laboratory Specialists with the result that
Laboratory Specialists will become a wholly-owned subsidiary of The Kroll-O'Gara
Company.

2. Upon such other business as may properly come before the meeting.

The proxy will be voted on the above as specified. IF NO SPECIFICATION IS MADE,
THE PROXY WILL BE VOTED "FOR" THE PROPOSAL.

As to any other matter, said attorneys shall vote in accordance with the
recommendation of the Board of Directors.

Please mark: I do [ ] do not [ ] plan to attend the meeting.

Dated , 1998
----------------

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

- ----------------------------
(Signature of Shareholder)

IMPORTANT: Please date and sign exactly as name appears hereon. If shares are
held jointly, each shareholder named should sign. Executors, administrators,
trustees, etc. should so indicate when signing. If the signer is a corporation,
please sign full corporate name by duly authorized officer.