##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission File Number: 000-21629

Kroll Inc.

(Exact name of registrant as specified in its
charter)


|                                                                              |  |                                            
|----------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                      |  | 13-4131019                                 
|(State or other jurisdiction of
    incorporation or organization)            |  | (I.R.S. Employer
    Identification Number)
|                                                                             
|900 Third Avenue
    New York, NY(Address of principal executive
    offices) |  | 10022(Zip code)                            

(212) 593-1000

(Registrants telephone number, including
area code)


Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:

Common Stock, $.01 par value


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment of the
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of
1934).     Yes þ          No o

The aggregate market value of the Common Stock of
the registrant held by non-affiliates of the registrant was
approximately $999,717,967 as of June 30, 2003. As of
March 1, 2004, 39,239,174 shares of Common Stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Some of the information required by Part III
(Items 10, 11, 12, 13 and 14) is incorporated by
reference from the registrants definitive proxy statement,
in connection with the registrants 2004 Annual Meeting of
Stockholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A no later than
April 30, 2004.



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TABLE OF CONTENTS






|                                                                                                                 |  |  |    | 
|---------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                                                                                           |  |  | 2  | 
|Item 1.  Business                                                                                                |  |  | 2  | 
|Item 2.  Properties                                                                                              |  |  | 20 | 
|Item 3.  Legal
    Proceedings                                                                                   |  |  | 21 | 
|Item 4.  Submission
    of Matters to a Vote of Security Holders                                                 |  |  | 22 | 
|                                                                                                                
|PART II                                                                                                          |  |  | 22 | 
|Item 5.  Market
    for Registrants Common Equity and Related Stockholder
    Matters                           |  |  | 22 | 
|Item 6.  Selected
    Financial Data                                                                             |  |  | 24 | 
|Item 7.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations           |  |  | 27 | 
|Item 7A.  Quantitative
    and Qualitative Disclosures About Market Risk                                         |  |  | 44 | 
|Item 8.  Financial
    Statements and Supplementary Data                                                         |  |  | 44 | 
|Item 9.  Changes
    in and Disagreements With Accountants on Accounting and
    Financial Disclosure            |  |  | 44 | 
|Item 9A.  Controls
    and Procedures                                                                            |  |  | 44 | 
|                                                                                                                
|PART III                                                                                                         |  |  | 44 | 
|Item 10.  Directors
    and Executive Officers of the Registrant                                                 |  |  | 44 | 
|Item 11.  Executive
    Compensation                                                                             |  |  | 44 | 
|Item 12.  Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters |  |  | 45 | 
|Item 13.  Certain
    Relationships and Related Transactions                                                     |  |  | 45 | 
|Item 14.  Principal
    Accountant Fees and Services                                                             |  |  | 45 | 
|                                                                                                                
|PART IV                                                                                                          |  |  | 45 | 
|Item 15.  Exhibits,
    Financial Statement Schedules and Reports of Form 8-K                                    |  |  | 45 | 
|Item 15(a)(1)  Financial
    Statements                                                                          |  |  | 45 | 
|Item 15(a)(2)  Financial
    Statement Schedules                                                                 |  |  | 45 | 
|Item 15(a)(3)  Exhibits                                                                                          |  |  | 45 | 
|Item 15(b)  Reports
    on Form 8-K                                                                              |  |  | 45 | 
|SIGNATURES                                                                                                       |  |  | 46 | 
|OFFICE LEASE                                                                                                    
|OFFICE LEASE                                                                                                    
|SPECIFIC CODE FOR FINANCIAL AND CERTAIN OFFICERS                                                                
|CODE OF BUSINESS CONDUCT AND ETHICS                                                                             
|SUBSIDIARIES                                                                                                    
|CONSENT OF DELOITTE & TOUCHE LLP                                                                                
|CERTIFICATION OF CEO                                                                                            
|CERTIFICATION OF CFO                                                                                            
|CERTIFICATION OF CEO                                                                                            
|CERTIFICATION OF CFO                                                                                            



FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements can sometimes be identified by our use of
forward-looking words such as anticipate,
believe, estimate, expect,
intend, may, will and
similar expressions. These statements are based on our current
expectations and are subject to risks, including the risks set
forth below under Risk Factors, uncertainties and
assumptions. Should one or more of these risks or uncertainties
materialize or should our underlying assumptions prove
incorrect, actual results may vary materially from those
anticipated, expected, estimated or projected. We assume no
obligation to update or revise these forward-looking statements
to reflect future events, new information or otherwise.

1



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PART I





|        |         
|------- | --------
|Item 1. | Business

General

Kroll Inc., together with its subsidiaries
(collectively, Kroll), is a leading global provider
of complementary risk consulting services. Kroll assists
businesses, governments and individuals throughout the world in
preventing, mitigating and responding to risk through an
integrated suite of services. In 2003, Krolls five
business groups enabled Kroll to provide its clients with
comprehensive, single source, risk consulting services. These
five business groups are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Corporate Advisory and Restructuring
    Services.Kroll acts both in an
    advisory capacity to, and as interim management of, financially
    troubled companies throughout North America and Europe, and
    advises all the various stakeholders involved in the
    reorganization process. In this context, Kroll provides
    corporate restructuring, operational turnaround, strategic
    advisory services, financial crisis management and corporate
    finance services.        
|
| |  | Consulting Services.Kroll provides independent consulting services free from the
    audit conflicts incurred by major accounting firms. These
    consulting services include business and financial
    investigations, forensic accounting, business valuation,
    litigation consulting, due diligence, litigation intelligence,
    asset tracing and analysis, monitoring and special inquiries,
    market intelligence and intellectual property and infringement
    investigations.
|
| |  | Technology Services.Kroll provides electronic discovery, data recovery and computer
    forensics services, along with related software solutions.                                                                                                                                                                                                                                                                                                                                            
|
| |  | Background Screening
    Services.Kroll provides employee and
    vendor background investigations, credit screening and substance
    abuse testing.                                                                                                                                                                                                                                                                                                                                         
|
| |  | Security Services.Kroll provides security architecture and design, corporate
    security consulting, emergency management and environmental
    services as well as protective services, operations and training.                                                                                                                                                                                                                                                                            

Effective January 1, 2004, Kroll integrated
its Security Services business group into its Consulting
Services business group. Accordingly, Kroll will report its
business results in four business groups: Corporate Advisory and
Restructuring Services, Consulting Services, Technology Services
and Background Screening Services.

Kroll maintains an Internet address at
www.krollworldwide.com. Kroll makes available free of charge on
its website its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and
any amendments to these reports that are filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably
practicable after such materials are electronically filed with,
or furnished to, the Securities and Exchange Commission.

Recent Developments

On January 2, 2004, Kroll issued
$175 million aggregate principal amount of its
1.75% Convertible Subordinated Notes due 2014. The notes
are convertible, under certain circumstances, into shares of
Krolls common stock at an initial conversion rate of
28.5205 shares of common stock per $1,000 principal amount
of notes (equal to a conversion price of $35.06 per share).
The notes are redeemable at Krolls option beginning in
January 2009 at a redemption price of 100% of the principal
amount plus accrued interest, if any. Holders of the notes have
the right to require Kroll to repurchase their notes in January
2009 and January 2011 and under certain other circumstances. See
Note 26 of the Notes to Consolidated Financial Statements
for further information regarding the notes.

On January 2, 2004, concurrent with the
completion of the offering of the notes, Kroll repurchased
approximately 2.0 million shares of its common stock. As of
March 1, 2004, Kroll had purchased an aggregate

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of approximately 2.78 million shares of its
common stock for an aggregate purchase price of approximately
$70.8 million.


On March 2, 2004, Kroll acquired The Credit
Network Trust, a mortgage credit reporting company, for a
purchase price of $20.5 million in cash. Of this purchase
price, $1.5 million is to be paid in annual installments of
$500,000 over the next three years subject to the retention of
certain customer accounts. The results of operations of The
Credit Network will be included within the Background Screening
Services Group subsequent to the date of acquisition.

Services

Krolls services are divided into five major
service categories or segments. The following table presents the
aggregate net sales for each segment for the periods indicated.

|           |                                               |                          |         |         |  |      |         |         |  |   |         |         | 
|---------- | --------------------------------------------- | ------------------------ | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|           |                                               |                         
|           |                                               | Years Ended December 31,
|           |                                               |                         
|           |                                               | 2003                     |         | 2002    |  | 2001
|           |                                               |                          |         |         |  |     
|Net Sales: |                                               |                          |         |         |  |      |         |         |  |   |         |        
|           | Corporate Advisory and Restructuring Services |                          | $       | 160,110 |  |      | $       | 71,386  |  |   | $       | 30,751  | 
|           | Consulting Services                           |                          |         | 130,906 |  |      |         | 106,564 |  |   |         | 106,126 | 
|           | Technology Services                           |                          |         | 83,273  |  |      |         | 36,438  |  |   |         | 4,380   | 
|           | Background Screening Services                 |                          |         | 78,022  |  |      |         | 44,364  |  |   |         | 35,672  | 
|           | Security Services                             |                          |         | 33,165  |  |      |         | 25,496  |  |   |         | 24,129  | 
|           |                                               |                          |         |         |  |      |         |         |  |   |         |        
|           |                                               | $                        | 485,476 |         |  | $    | 284,248 |         |  | $ | 201,058 |        
|           |                                               |                          |         |         |  |      |         |         |  |   |         |        

For a summary of Krolls net sales, gross
profit, operating income (loss) and identifiable assets for each
of its business segments, please see Note 22 of the Notes
to Consolidated Financial Statements, included elsewhere in this
Annual Report on Form 10-K. For a summary of Krolls
domestic and international net sales, operating income (loss)
and identifiable assets, please see Note 22 of the Notes to
Consolidated Financial Statements.



| |                                                        
| | -------------------------------------------------------
| | Corporate Advisory and Restructuring
    Services Group

Kroll acts both in an advisory capacity to, and
as interim management of, financially troubled companies
throughout North America and Europe and advises the various
stakeholders involved in the reorganization process. In this
context, Kroll provides corporate restructuring, operational
turnaround services, strategic advisory services, financial
crisis management and corporate finance services. Krolls
international presence allows it to act as a single source
provider for large-scale cross-border U.S. based
bankruptcies and restructurings.



| |         
| | --------
| | Services



| |                        
| | -----------------------
| | Corporate Restructuring

Kroll represents both debtors and creditors in
bankruptcies, restructurings and other situations involving
financially troubled companies. Kroll offers these services
throughout North America and Europe. Kroll also acts as court
appointed officers in bankruptcy and insolvency proceedings.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Debtor
    Representation When
    advising a corporate debtor, Kroll works with the clients
    management to assess the clients financial condition and
    viability, and then structure and implement a business
    rehabilitation plan designed to increase the probability that
    the rehabilitation will be successful. The key factors
    influencing whether the process is implemented in or out of
    court are the need for and availability of financing, the
    relative concentration and size of claims, the extent of legal
    and contractual impediments and the types of products or
    services offered by the debtor. Kroll works toward
    reestablishing credibility to garner support for the
    reorganization process and a consensual

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| |  |                                                                                                                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | reorganization and/or restructuring plan. Kroll
    has advised and assisted troubled companies to resolve virtually
    all critical reorganization process issues in both judicial and
    non-judicial reorganizations.



| |                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In pursuing business rehabilitation efforts,
    Kroll works with management to structure and implement a
    realistic business plan for the client. Such plans typically
    involve asset sales and business divestitures, operations
    improvement and cost reduction, improved operational and
    financial controls and the normalization of external and
    internal relationships.





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If an out-of-court reorganization plan (a
    workout) appears unlikely, Kroll assesses the impact
    of a bankruptcy filing on the clients financial condition
    and operating performance and seeks debtor-in-possession
    financing on the clients behalf. If the client voluntarily
    files bankruptcy or is involuntarily forced into bankruptcy,
    Kroll will assist in managing the entire bankruptcy process,
    including structuring, negotiating with creditors and devising
    and implementing the plan of reorganization. Kroll also renders
    expert testimony in connection with the bankruptcy proceeding on
    such issues as business unit valuation and economic loss.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Creditor
    Representation When
    assisting either secured or unsecured creditors, Kroll seeks to
    maximize amounts recovered by them from the debtor in either
    out-of-court or in-court proceedings. In a workout engagement,
    Kroll evaluates and monitors the quality and value of the
    collateral and any other assets available to the creditor,
    analyzes the debtors business plan and underlying cash
    flow projections and assesses the adequacy of the debtors
    financial reporting systems. Based on Krolls analysis, it
    then assesses the debtors viability and develops and
    evaluates a restructuring plan. In the event that an
    out-of-court workout is not feasible, Kroll assists creditors in
    deciding whether to provide debtor-in-possession financing, when
    working through the bankruptcy process, and in structuring and
    evaluating various reorganization plan alternatives.



| |                                
| | -------------------------------
| | Operational Turnaround Services

Kroll conducts a detailed review of the
operations of its clients and assists in devising and
implementing an operational plan that optimizes profits and cash
flow. Kroll provides clients with assistance that enables them
to identify and optimize their competitive advantages and
thereby improve profits and cash flows to augment returns for
creditors and increase shareholder values for debtors.



| |                            
| | ---------------------------
| | Strategic Advisory Services

Kroll assists companies in devising,
reformulating and executing strategic plans that will assist in
maximizing competitive strength, financial health and
shareholder value.



| |                            
| | ---------------------------
| | Financial Crisis Management

Kroll provides crisis management services in
which its teams perform senior management functions such as
chief executive officer, chief operating officer, chief
financial officer or chief restructuring officer within
companies facing turnaround, financial restructuring and
bankruptcy reorganization challenges.



| |                           
| | --------------------------
| | Corporate Finance Services

Kroll assists clients in developing and
implementing financial programs that are suitably aligned with
the clients needs. Krolls corporate finance services
include assistance with and advice on debt and equity
restructurings, financings, mergers and acquisitions,
divestitures and capital raising.

Kroll currently believes that its Corporate
Advisory and Restructuring Services business in the United
States will grow more slowly over the next few years as
potential large restructuring assignments in the United States
become fewer and the competition for those assignments
increases. Kroll does not expect this business to be able to
sustain its historical level of performance. A significant
portion of the revenues of its corporate advisory and
restructuring services business in the United States has been
attributable to success fees from debtor representation in
corporate restructurings. As a result of the expected slower
growth in this business, Kroll expects the amount of success
fees to decline.

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| |        
| | -------
| | Clients

The principal clients of Krolls Corporate
Advisory and Restructuring Group include multinational
corporations, institutional and other creditors, government
agencies, lawyers, accountants, financial institutions,
investors and stakeholders in troubled companies. Some of
Krolls more notable engagements have included Enron Corp.,
Federal Mogul Corporation, Federated Department Stores, Sunbeam
(now known as American Household Inc.), Laidlaw, Inc.,
Washington Group International, Inc., Polaroid Corporation,
Morrison Knudsen Corporation, Pegasus Gold Inc., NationsRent
West, Inc., and ICG Communications, Inc.

Krolls corporate advisory and restructuring
services are typically charged on an hourly basis as well as on
a negotiated project, or fixed fee, basis. In addition, a
significant portion of the Corporate Advisory and Restructuring
Groups sales each year has been attributable to success
fees and a relatively small number of clients, which vary
significantly from year to year.



| |            
| | -----------
| | Competition

Krolls Corporate Advisory and Restructuring
Group faces competition from national and international
accounting firms and specialist corporate recovery firms, such
as FTI Consulting, Inc., Crossroads LLC, Alvarez &
Marsal, LLC and AlixPartners LLC.



| |                          
| | -------------------------
| | Consulting Services Group

Kroll provides independent consulting services
free from the audit conflicts experienced by major accounting
firms. These consulting services include business and financial
investigations, forensic accounting, business valuation,
litigation consulting, due diligence, litigation intelligence,
asset tracing and analysis, monitoring and special inquiries,
market intelligence and intellectual property and infringement
investigations.



| |         
| | --------
| | Services



| |                                          
| | -----------------------------------------
| | Business and Financial
    Investigations

Krolls multi-disciplinary global team of
professionals has backgrounds in law, law enforcement,
intelligence and forensic accounting. These teams provide
clients with the information and analysis necessary to make
informed decisions about potential risks and suspected
wrongdoing. Krolls investigative and fact-finding services
are used by businesses, governments, non-profit institutions,
law firms and individuals, and address issues as diverse as
reputational threats, money laundering, organized crime and
management malfeasance. Krolls fraud investigations
services encompass civil and criminal fraud, employee fraud and
theft, management fraud and theft, procurement fraud and the
identification of secret commissions and kickbacks. Kroll has
broad experience in detecting, investigating and assisting
clients in asset tracing and recovery, security and internal
control reviews and training on fraud awareness, prevention and
related topics.



| |                    
| | -------------------
| | Forensic Accounting

Forensic accounting is the application of
financial knowledge and skills, in conjunction with
investigative strategies and techniques, to resolve, in a
legally defensible manner, matters that are financial in nature.
Krolls forensic and investigative accountants work with
corporations, law firms, financial institutions, governments and
individuals to assist them in successfully handling complex,
high risk, financial and investigative situations. Krolls
services include statutory and regulatory compliance, insurance
claims and quantification of economic damages.



| |                   
| | ------------------
| | Business Valuation

Kroll provides business valuation services to
corporations, individuals, financial institutions, government
agencies, debtors, creditors and counsel on behalf of themselves
or their clients in matters including mergers, acquisitions,
asset divestitures, management buy-outs, expropriations, tax and
corporate reorganizations, executive stock option valuations,
intangible asset valuations, estate and gift tax, corporate
reporting

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requirements, marital dissolution and commercial
litigation such as breach of contract, partnership and
shareholder disputes.




| |                      
| | ---------------------
| | Litigation Consulting

Kroll provides litigation consulting services to
outside counsel and in-house lawyers to assist them in the
preparation and resolution of litigation or arbitration
proceedings and in designing settlement strategies. These
services include:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expert Testimony.Kroll renders expert opinions at trial or in regulatory
    proceedings concerning proof of business facts, damage
    calculations and other matters. A number of Krolls senior
    staff members are experienced expert witnesses.
|
| |  | Expert Consultation.Kroll assists counsel to evaluate whether actionable conduct
    occurred and/or to develop an effective strategy for obtaining a
    favorable settlement or judgment in pending litigation.                                     
|
| |  | Facilitation.Kroll
    assists disputants using alternative dispute resolution
    mechanisms, such as mediation or arbitration, in which the
    disputants, or the trier of fact, retain decision-making
    authority.                             



| |              
| | -------------
| | Due Diligence

Kroll helps its clients conduct in-depth
investigations into prospective transactions to minimize risk
and help ensure success. Without proper due diligence,
businesses are exposed to an increased likelihood of financial
losses and liabilities as well as injured reputations. Kroll
provides comprehensive background information and intelligence
in areas such as personal and business reputation, financial and
operating history, verification of key representations, records
of litigation, liens or judgments, environmental liabilities and
other actual or potential problems.

The due diligence and background information and
analysis that Kroll furnishes are intended to be useful for
lenders, underwriters, potential acquirers and other businesses
concerned with assessing and attempting to minimize the risks
related to critical financial and other business decisions.
These services include pre-transaction intelligence, due
diligence investigations, competitor intelligence and analysis,
intelligence in contests for corporate control and market entry
intelligence related to business partners, clients and critical
vendors.



| |                        
| | -----------------------
| | Litigation Intelligence

Kroll assists counsel in developing evidence to
support a claim or defense, identifying and locating material
witnesses, investigating adverse witnesses, process management,
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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.



| |                           
| | --------------------------
| | Asset Tracing and Analysis

Krolls asset tracing services consist of
tracing and locating assets anywhere in the world. This includes
developing financial profiles and lifestyle assessments in
connection with bankruptcy cases, loan defaults, internal
investigations and other due diligence requests by clients. In
many cases, Kroll has worked with trustees in bankruptcy and
insolvency, creditors committees, bankers in out-of-court
reorganization plans and restructuring departments and
litigation and bankruptcy attorneys in conducting searches for
concealed or undisclosed assets. In other contexts, clients may
be interested in a financial profile or asset analysis of a
person in connection with a potential business relationship,
lawsuit or internal investigation. Krolls asset searching
and analysis techniques can help clients to uncover assets and
bring debtors to the negotiating table.

6



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##### Table of Contents





| |                                              
| | ---------------------------------------------
| | Monitoring Services and Special
    Inquiries

Kroll provides monitoring services to, and
conducts special inquiries for, clients that require an
independent fact finder to uncover and end fraud and implement
systems that monitor compliance. Kroll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 to
establish systems to audit and ensure compliance with these
regulatory requirements or policies. Kroll serves as an
objective fact finder whose work product could be turned over to
a questioning government regulator or a skeptical and vocal
segment of the public.



| |                    
| | -------------------
| | Market Intelligence

Kroll applies its broad range of investigative
and financial expertise to assist businesses in analyzing and
evaluating market conditions, market opportunities and the
competitive environment within their industries.



| |                                                          
| | ---------------------------------------------------------
| | Intellectual Property and Infringement
    Investigations

Krolls investigators help to investigate
and devise strategies to solve problems such as thefts of trade
secrets, threats and hostile acts, gray market and counterfeit
products and patent and trademark infringements. Kroll 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.



| |        
| | -------
| | Clients

Clients of Krolls Consulting Services Group
include law firms, multinational corporations, financial
institutions, government agencies, shareholders, investors and
individuals in a wide range of business sectors. Whether as
direct clients or as sources of referral engagements, law firms
form a significant element of Krolls client base for its
Consulting Services Group. Krolls financial institution
clients include many of the largest international investment
banks, numerous commercial banks, insurance companies and other
significant credit institutions. Many of these clients,
particularly law firms, multinational corporations, government
agencies and financial institutions, are also significant
sources of business for Krolls Corporate Advisory and
Restructuring and Technology Services Groups and, to a lesser
extent, its Security Services and Background Screening Groups.

Krolls consulting services are charged in
one of two ways: (1) on an hourly basis or (2) on a
negotiated project, or fixed fee, basis. With respect to hourly
assignments, Kroll generally charges for its services at varying
rates, depending upon the type of service being provided, the
knowledge, skill and experience of the individual professionals
providing the service and the competition that exists in
providing the service. Providing services on a fixed fee basis
enhances the potential for higher profit margins. However, these
arrangements can also result in unexpected losses on a
particular project. Kroll believes that this risk is reduced by
being spread over a number of fixed fee arrangements and through
its contracting process that specifies the actual steps that are
required to be performed for the fixed fee.



| |            
| | -----------
| | Competition

Krolls Consulting Services Group faces
competition from local, regional, national and international
accounting firms, forensic accounting, litigation support,
investigative and other specialist consulting firms, including
the Big Four accounting firms, Navigant
Consulting, Inc., Huron Consulting Group LLC,
Standard & Poors, a division of The McGraw-Hill
Companies Inc., and Control Risks Group Limited.



| |                          
| | -------------------------
| | Technology Services Group

Kroll provides data recovery, electronic
discovery and computer forensics services, along with related
software solutions.

7



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| |         
| | --------
| | Services



| |              
| | -------------
| | Data Recovery

Kroll recovers lost or corrupted data from
virtually all operating systems and types of storage devices
through a broad range of service solutions, including engineer
assisted in-lab, on-site and remote data recovery services and
do-it yourself software solutions.

Recoveries are performed using one or more of
Krolls proprietary data recovery tools and techniques. The
final deliverable, recovered data, is provided in a number of
ways depending on the type of service solution chosen by the
client.



| |                     
| | --------------------
| | Electronic Discovery

Kroll conducts, manages and advises with respect
to the collection, analysis and production of electronic
documents and data within the legal discovery process.
Krolls data collection process enables it to capture data
from multiple business software applications, multiple
geographic locations, email systems and IT platforms. Collection
options range from consulting services and the use of
Krolls data collection software, to the use of our data
gathering experts, who work on-site to capture the data.
Krolls collection experts have gathered data from
thousands of global sites and have experience with virtually
every hardware and software platform.

Once data is collected, Krolls data
analysis process helps clients to eliminate those electronic
documents that are not responsive or relevant to discovery
requests. The information generated from the collection and
analysis phases is then delivered in the format best suited for
each clients case, including printed documents, litigation
support software and electronic repository.



| |                   
| | ------------------
| | Computer Forensics

Kroll provides investigative resources to assist
clients in matters such as collecting data from computers, logs,
networks and other sources to facilitate investigations and
tracing employees, competitors and others using internet
bulletin boards to start rumors about stocks, to post trade
secrets, or to conduct cyberterrorism. Kroll also helps clients
track down web-based intellectual property thefts, counterfeit
goods and criminals that use the internet to steal information
or property and commit fraud.

Using sophisticated forensic software, Kroll also
helps clients access information recovered from hard drives and
reconstruct computer data that may be introduced as evidence in
legal proceedings. Because the data Kroll produces is often
entered into evidence in court proceedings, Kroll follows
carefully developed procedures that address security,
authenticity and chain-of-custody of the original media.

Krolls computer forensic experts retrieve
data from virtually all storage and operating systems, including
many antiquated systems. Krolls engineers can also often
determine whether computer evidence was tampered with, altered,
damaged or removed. Once data analysis is complete, Krolls
computer forensic engineers work to support the clients
case with customized reports about the data collected and
produced, providing data for affidavits or other pleadings and
providing expert testimony and reports.



| |         
| | --------
| | Software

In addition, Kroll continues to offer certain
software utilities and other software solutions, such as our
Disk Manager product, related to Krolls data recovery,
electronic discovery and computer forensics offerings.



| |        
| | -------
| | Clients

Krolls Technology Services Group provides
data recovery services to clients ranging from Fortune 500
companies, governmental agencies and educational and financial
institutions to small businesses and individuals. Kroll obtains
clients through referral relationships with other services
companies and corporate partners, including major computer
manufacturers, who offer and promote Krolls services
solutions to their clients. The principal client base for
Krolls electronic discovery and computer forensics
services are major

8



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U.S. law firms, which historically have been
the clients of Krolls Consulting Services Group. Kroll
utilizes its existing relationships with these major
U.S. law firms and other clients of Krolls Consulting
Services Group to market its technology services to those same
clients. In addition, Kroll enjoys long-standing relationships
with hard disk drive manufacturers that license its Disk Manager
product.


Krolls technology services are typically
charged on a negotiated project, or fixed fee, basis depending
on the type of service Kroll is retained to provide. In
addition, Kroll typically charges its clients a per-page fee for
each page of data that Kroll recovers in connection with its
data recovery service. Kroll charges for its software solutions
on a per unit basis.



| |            
| | -----------
| | Competition

Krolls Technology Services Group faces
competition from small, independent service providers and
technology companies, litigation support companies and printers
that specialize in services similar to those that Kroll
provides, including Applied Discovery Inc., Electronic Evidence
Discovery, Inc., Daticon, Inc.,
Fios, Inc., IKON Office Solutions and Merrill.
Krolls desktop utility software products compete with
products offered by much larger companies such as Network
Associates.



| |                                        
| | ---------------------------------------
| | Background Screening Services
    Group

Kroll provides employee and vendor background
investigations, credit screening, substance abuse testing and
identity fraud solutions.



| |         
| | --------
| | Services



| |                                                  
| | -------------------------------------------------
| | Employee and Vendor Background
    Investigations

Kroll verifies job applicant background
information for employers. The background investigations are
made through the use of databases, independent contractors and
other sources. Screening procedures include reviews of credit
histories, reference checks, criminal and civil records,
workers compensation histories and driving records,
education and credential verification among others. Services
also include identity theft prevention and investigation and
compliance programs in regulated industries.



| |                 
| | ----------------
| | Credit Screening

Kroll provides a wide range of customized
information services to assist businesses to make decisions for
a wide range of credit and business purposes, such as whether to
approve a mortgage or other loan, accept new tenants or enter
into a business relationship. Kroll specializes in providing
customized mortgage credit reports and other mortgage related
services, such as credit scores and property valuations. Kroll
gathers data from a wide range of sources, including the three
major credit repositories, updates and analyzes that information
and electronically presents and delivers its results in a manner
customized to each customers decision-making process.
Kroll also provides consumer and commercial credit reports and
resident screening.



| |                        
| | -----------------------
| | Substance Abuse Testing

Kroll owns and operates a state-of-the-art
laboratory providing substance abuse testing services to
corporate and institutional clients seeking to detect and deter
the use of illegal drugs. The laboratory is certified by the
federal Substance Abuse and Mental Health Services
Administration to conduct substance abuse testing using forensic
procedures required for legally defensible test results.
Krolls substance abuse testing services also include
assisting clients with the development of substance abuse
testing programs, training client personnel, managing specimen
collections, arranging for transportation of specimens to our
laboratory, identifying trends in local and national drug use,
interpreting test results and providing expert testimony
concerning test results.

9



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##### Table of Contents





| |        
| | -------
| | Clients

Clients of the Background Screening Group include
a broad array of domestic and multinational corporations and
financial institutions. Krolls background screening
services are typically charged on a per service basis, a
standard packaged price or a custom package of services,
depending on the particular clients preference.



| |            
| | -----------
| | Competition

Krolls Background Screening Group faces
competition from other background checking companies that
specialize in the services Kroll provides, including ChoicePoint
Inc., Total Information Services, Inc., ADREM Profiles
Inc., Trans Union LLC, Verifications Inc., Yale
Associates, Inc., First Advantage Corporation, Equifax Inc.
and First American Corporation.



| |                        
| | -----------------------
| | Security Services Group

Kroll provides security architecture and design,
corporate security consulting, emergency management and
environmental services as well as protective services,
operations and training. Beginning January 1, 2004, Kroll
integrated this business group into its Consulting Services
business group.



| |         
| | --------
| | Services



| |                                 
| | --------------------------------
| | Security Architecture and Design

Kroll provides comprehensive planning,
engineering and design services that are customized to meet the
requirements of clients for physical site protection. Kroll
offers a wide range of technical services from master planning
through construction, including facility review and threat
assessment, security systems planning and design, architectural
security recommendations, system specification and bid award
assistance and installation and project management.



| |                              
| | -----------------------------
| | Corporate Security Consulting

Kroll offers a variety of consulting services to
assist businesses in safeguarding their employees, clients,
operations and premises and in meeting and managing unexpected
crisis. These services include review of security policies and
procedures, assessment and training of security staff, business
continuity planning and exercises and response to product
contamination.



| |                     
| | --------------------
| | Emergency Management

Krolls services include emergency
management and homeland security counter-terrorism initiatives
for government agencies, health care institutions and air, sea
and rail transportation agencies. Kroll assists these clients
with program planning, incident response and personnel training.



| |                       
| | ----------------------
| | Environmental Services

Kroll offers comprehensive environmental due
diligence and compliance assessments, environmental property
assessments, Environment, Health and Safety management systems
design and implementation, independent auditing and monitoring,
environmental investigations and litigation support,
environmental crisis management and remedial services, product
safety and security, laboratory safety and security, biological,
chemical and radiological threat assessment and monitoring.



| |                                                 
| | ------------------------------------------------
| | Protective Services, Operations and
    Training

Kroll provides personal protection programs and
training for law enforcement officials, military personnel and
business executives. On a worldwide basis, Krolls security
specialists can provide trained drivers, security escorts or
full protective details for high-risk personnel. At Crucible,
our training school in Fredericksburg, Virginia, Kroll provides
training for defensive driving, surveillance detection,
executive protection, close

10



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##### Table of Contents



quarters combat and kidnap avoidance.
Krolls personal security seminars are offered both at
Crucible and at client sites.




| |        
| | -------
| | Clients

Clients of the Security Services Group include
multinational corporations, government agencies, major
architecture firms and commercial property owners,
transportation authorities, individuals and financial
institutions.

Krolls security background screening
services are typically charged on a per service basis, a
standard packaged price or a custom package of services,
depending on the particular clients preference. Security
training is generally charged on a per course basis or on a
custom priced arrangement.



| |            
| | -----------
| | Competition

Krolls Security Services Group faces
competition from investigative and security firms, guard
companies, consultants and individual subcontractors, including
Vance International, Inc. and Securitas AB and its
subsidiary, Pinkerton Consulting &
Investigations, Inc.

Acquisition Strategy

Krolls strategy to increase the size of its
existing business is to grow internally and through select
acquisitions. Kroll has made several acquisitions in the past
and intends to continue to seek such acquisitions in the future.
In executing its acquisition strategy, Kroll seeks to acquire
profitable companies that increase the geographic scope of
Krolls services and that augment Krolls services
with similar or complementary products and services. For a
discussion of risks related to Krolls acquisition
strategy, see Risk Factors below.

Marketing and Sales

Krolls services in its five business groups
are marketed and sold by three different types of sales
personnel, including senior professionals, full time sales and
marketing staff and global sales managers. As of
December 31, 2003, Kroll had 103 senior professional
service providers, who are expected to provide marketing
services; 277 full time sales and marketing employees, who work
in regional markets; and 5 global sales managers, who market and
sell all of Krolls varied services, both in the United
States and abroad.

Kroll relies principally on its senior
professional service providers not only to service existing
clients, but also to develop and market new business. Kroll
obtains engagements from a clients board of directors,
executive officers and management and a variety of other
corporate officials. Our senior professionals act as
relationship managers for our major clients. A significant part
of Krolls marketing efforts consists of maintaining and
developing these personal relationships. Krolls full time
regional sales and marketing staff coordinates local and
regional sales and marketing efforts around the world. These
sales and marketing efforts include direct client sales efforts
as well as seminars, briefings, receptions, breakfast and lunch
meetings, direct mail and selected advertising in trade and
other journals. In addition to targeting new clients,
Krolls marketing efforts also attempt to increase business
with existing clients by increasing clients awareness of
the range of services Kroll offers and by increasing the number
of decision makers within a clients organization who are
aware of the range of Krolls services.

A significant portion of the marketing for
services offered by Krolls Technology Services Group
involves general name recognition, repeat business, referrals
from existing clients and third-party referral arrangements.
Kroll has dedicated sales and marketing resources to develop
referral relationships with other services companies and
corporate partners, including major computer manufacturers,
which offer and promote Krolls services solutions to their
clients. Kroll also educates the law firm market about
electronic discovery through its senior professionals and legal
consultants that provide training on electronic discovery and
computer forensics to leading law firms.

11



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Services offered by Krolls Background
Screening Group are primarily marketed and sold through a
full-time sales staff and independent contractors that work on a
commission basis. These salespeople target corporations and
other enterprises that have multiple locations but centralized
decision-making.

Although many of Krolls clients utilize
these services on a periodic basis, comparatively few clients
utilize Krolls services on a long-term continuing basis
and the clients that account for a material percentage of net
sales in any year may vary widely. Many of Krolls clients
who use Krolls services on a periodic basis are obtained
through referrals from existing clients.

Seasonality

Although Kroll does have some long term contracts
with its clients, its ability to generate sales is generally
dependent upon obtaining many new projects each year, most of
which are relatively short term. In addition, during the latter
part of the fourth quarter of every year, Krolls business
is generally impacted by fewer background screening and mortgage
requests and fewer consulting assignments compared with other
quarters within the year. Accordingly, period-to-period
comparisons within a given year or between years should take
this normal fluctuation into consideration.

Employees

As of December 31, 2003, Kroll had
2,416 full-time employees, of whom 282 were in sales and
marketing, 712 were in operations, 848 were professional
services providers and 574 performed general and administrative
services. In addition, Kroll had 219 part-time employees.
Of a total of 2,635 employees, 1,571 were located in the United
States and 1,064 were located abroad.

Krolls employees are not represented by a
union and are not covered by any collective bargaining
agreements. Kroll has not experienced any work stoppages or
employee related slowdowns and believes that its relationship
with its employees is satisfactory.

Government Regulation

Krolls business groups are subject to
various federal, state, local and foreign laws and regulations.
Two of Krolls subsidiaries hold private investigative
licenses from, and their investigative activities are regulated
by, state and local government agencies in various
jurisdictions. Kroll also uses some data from outside sources,
including data from third party vendors and various government
and public records services, in performing its services, the use
of which is regulated by certain laws and regulations. To date,
applicable laws and regulations have not interfered materially
with the manner in which Kroll obtains information and conducts
its operations, including its access to data used in
Krolls business. However, changes in these laws and
regulations or the adoption of new laws or regulations,
particularly those relating to privacy, could interfere with
Krolls method of operations and access to data.

Additionally, the laboratory of our substance
abuse testing subsidiary, Kroll Laboratory
Specialists, Inc., is certified on the federal level and
licensed in a number of states. If the subsidiarys
certification were suspended or lost, Kroll would not be
eligible to perform testing for various clients requiring this
certification.

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

Environmental Matters

Krolls substance abuse testing laboratory
located in Gretna, Louisiana and its Crucible training center in
Fredericksburg, Virginia are subject to a number of
environmental laws, regulations and ordinances governing
activities that may have adverse environmental effects, such as
discharges to air and water, as well as handling, storage and
disposal practices for solid and hazardous materials. These laws
also impose liability for the cost of remediation of, and
damages resulting from, sites of past releases of hazardous
materials. Kroll is not aware of any such matters as of
December 31, 2003 and believes that it currently conducts
its activities and operations in substantial compliance with
applicable environmental laws.

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Research and Development

Expenditures for research and software
development costs are expensed as incurred. Such costs related
to the development of software products are required to be
expensed until the point that technological feasibility and
proven marketability of the product under development are
established.

Intellectual Property and Proprietary
Information

Kroll relies on a combination of trade secret and
trademark laws, confidentiality procedures, contractual
provisions and patent and copyright laws to protect its
proprietary rights in its products and technology. These
measures may not be adequate to protect Krolls trade
secrets and proprietary technology. As a result, unauthorized
parties may copy or otherwise obtain and use Krolls
products or technology. Kroll may not be able to detect all
instances of infringement. Furthermore, Kroll may be subject to
additional risks as it enters into transactions in countries
where intellectual property laws are not well developed or are
poorly enforced. Legal protection of its rights may be
ineffective in these countries. If Kroll must engage in
litigation to defend and enforce its intellectual property
rights, either in the United States or in other countries, Kroll
could face substantial costs and diversion of resources,
regardless of the outcome of that litigation. Any future attempt
to enforce Krolls intellectual property rights might not
be successful, might result in royalties that are less than the
cost of such enforcement efforts, or might result in the loss of
the intellectual property altogether. Even if Kroll succeeds in
protecting its intellectual property, others may independently
develop similar technologies or products that do not infringe on
Krolls intellectual property.

Risk Factors

You should carefully consider each of the
following risks. If any of the following risks and uncertainties
develop into actual events, this could have a material adverse
effect on Krolls business, financial condition or results
of operations. In that case, the trading price of Krolls
common stock could decline. The risks and uncertainties
described below are not the only ones facing Kroll. Additional
risks and uncertainties not presently known to Kroll or that it
currently believes to be immaterial may also adversely affect
Krolls business.



| |                                                                    
| | -------------------------------------------------------------------
| | Kroll may not be able to develop or manage
    its internal growth.

Growing Krolls existing businesses may
strain its management, human resources and information systems.
To manage its growth successfully, Kroll must add managers and
employees and periodically update its operating, financial and
other systems, procedures and controls. In addition, issues
relating to new acquisitions may divert managements
attention from existing operations. Kroll also must effectively
motivate, train and manage a larger professional staff. If Kroll
fails to manage its growth effectively, its business could be
materially adversely affected.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Kroll may not be able to effectively
    integrate the operations of Factual Data Corp. into its
    business.

Krolls future success will depend on its
ability to continue to consolidate and effectively integrate the
operations of Factual Data Corp., which Kroll acquired on
August 21, 2003, into its background screening business.
Kroll cannot be sure that Factual Data will be successfully
combined with its existing background screening business into a
single business. If Kroll cannot successfully combine those
operations, it may experience a material adverse effect on its
business, financial condition or results of operations.

The integration involves combining two companies
that have previously operated separately. The integration
process is complex and time consuming and involves a number of
risks, including:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | the diversion of managements attention to
    the combining of operations;                                 
|
| |  | difficulties in the combining of operations and
    systems, particularly sales and marketing organizations;
|
| |  | difficulties in the assimilation and retention of
    employees;                                            
|
| |  | the need to coordinate geographically diverse
    operations;                                               

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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | challenges in keeping existing clients and
    obtaining new clients;            
|
| |  | retooling and reprogramming equipment and
    information technology systems; and
|
| |  | potential adverse short-term effects on operating
    results.                   

Because of difficulties in combining Factual
Datas operations, Kroll may not be able to realize the
cost savings, revenue growth and other benefits it hopes to
achieve from the acquisition. In addition, Kroll may be required
to spend additional time or money on integration that would
otherwise be spent on the development of our other businesses
and services.



| |                                                                 
| | ----------------------------------------------------------------
| | Kroll may not be able to implement its
    acquisition strategy.

While Kroll has experience in identifying and
integrating acquisitions, it may not be able to identify
suitable acquisition candidates, obtain the capital necessary to
pursue its acquisition strategy or complete acquisitions on
satisfactory terms or at all. When companies are acquired, Kroll
may not be able to integrate or manage these businesses to
produce returns that justify its investment.

A number of Krolls competitors have also
adopted the strategy of expanding and diversifying through
acquisitions. Kroll experiences competition in its effort to
execute its acquisition strategy and expects the level of
competition to increase. As a result, Kroll may be unable to
continue to make acquisitions or may be forced to pay more for
the companies it is able to acquire.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Kroll faces a number of risks in connection
    with its Zolfo Cooper subsidiary.

The business of Kroll Zolfo Cooper, which Kroll
acquired on September 5, 2002, constitutes a significant
portion of its Corporate Advisory and Restructuring Services
group. This business has grown rapidly in the last several
years. This growth was, in part, attributable to worsening
economic conditions in the U.S., major financial failures due to
poor management and industry failures resulting in an increased
number of large bankruptcies and restructurings that occurred
during this period. Kroll currently believes that the Kroll
Zolfo Cooper business will grow more slowly over the next few
years as there will be fewer large restructuring assignments and
the competition for those assignments will increase. Kroll does
not expect Kroll Zolfo Cooper to be able to sustain its
historical level of performance. If the demand for financial
restructuring and turnaround services declines as a result of an
improved economy or otherwise and there is no corresponding
growth in demand for Krolls other services, Krolls
business, operating results and financial condition may be
materially adversely affected.

Furthermore, the business of Kroll Zolfo Cooper
is highly dependent upon Stephen Cooper, Michael France and
Leonard LoBiondo, the three former principal owners of Kroll
Zolfo Cooper, for the generation of new business as well as the
retention of existing clients. The loss of their services could
materially adversely affect Krolls business.

A significant portion of Kroll Zolfo
Coopers revenue each year has been attributable to success
fees and a relatively small number of clients, which vary from
year to year. In 2001, 2002 and 2003, Kroll Zolfo Cooper earned
success fees of $8.6 million, $4.5 million and
$20.9 million, respectively. The 2001 and 2002 periods
reflect activity of Zolfo Cooper prior to its acquisition by
Kroll. Success fees are negotiated on a case-by-case basis, are
payable upon the successful completion of stipulated events,
such as a successful restructuring, and are usually agreed upon
in advance in a fixed amount that is related to the size and
complexity of a project and not the amount of time spent on the
project. Payment of success fees earned by Kroll Zolfo Cooper in
connection with pending bankruptcy cases is also subject to
bankruptcy court approval. As a result of the expected slower
growth in Kroll Zolfo Coopers business, Kroll expects the
amount of success fees to decline. To the extent Kroll is unable
to continue to earn success fees consistent with past levels due
to competitive or other factors and cannot increase revenues
from its other services, our business, operating results and
financial condition may be materially adversely affected.

Kroll Zolfo Cooper performed services for more
than 80 clients in 2001, more than 73 clients in 2002 and more
than 85 clients in 2003; however, in 2001, 2002 and 2003, 22%,
47% and 73%, respectively, of Kroll Zolfo

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Coopers consolidated revenue was derived
from five clients. In one instance during 2001 and in two
instances during 2002 and 2003, a single client accounted for
more than 10% of Kroll Zolfo Coopers consolidated revenues
for the applicable year. If Kroll is unable to retain existing
Corporate Advisory and Restructuring Services group clients and
replace them in future years with new clients, its business may
be materially adversely affected.




| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | A decrease in demand for mortgage credit
    reports will likely decrease the earnings of Kroll Factual
    Data.

The business of Kroll Factual Data, which Kroll
acquired on August 21, 2003, constitutes a significant
portion of Krolls Background Screening Services group. The
primary service of Kroll Factual Data is the preparation of
mortgage credit reports. The demand for this service depends
primarily upon the level of home mortgage originations and
refinancings and, to a lesser extent, the efforts of lenders to
develop new, and monitor existing, credit relationships.
Consumer demand for mortgage credit tends to vary because of
interest rate fluctuations and general economic conditions, with
demand tending to decrease during periods of economic
contraction or rising interest rates. Because Kroll Factual Data
is dependent on mortgage market activity, a downturn in the
demand for mortgage credit reports would adversely affect our
business, operating results and financial condition,
particularly if Kroll were unable to control Kroll Factual
Datas costs, including labor and communication charges,
during a period of reduced demand.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Kroll is highly dependent on executive
    management and other key employees.

Kroll relies heavily on its executive management
and key employees to provide services and for continued business
development, including, in particular, Jules B. Kroll, its
executive chairman of the board of directors, and Michael G.
Cherkasky, its chief executive officer. Competition for these
personnel is intense. Kroll has employment agreements which
contain non-competition and non-solicitation provisions with
most of its executive managers and senior managers in the
Consulting Services and Corporate Advisory and Restructuring
Services Groups and its key employees in its other service
groups. Kroll also has non-solicitation agreements with many of
its professional non-executive employees in its service groups.
These agreements would be subject to enforcement by Kroll in the
event any of these employees were to resign to join one of our
competitors or to compete on his or her own. Krolls
business could be materially adversely affected if a number of
its executive managers, senior managers or key employees were to
leave and if Kroll were unable to enforce the non-competition
and non-solicitation agreements or to attract and retain
qualified replacements.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Krolls success is largely dependent
    upon its ability to hire and retain skilled
    professionals.

Competition for competent professionals,
particularly for personnel with the specific skills necessary to
perform the services that Kroll offers, is intense and has
caused wages to increase at a rate greater than the general rate
of inflation. Krolls professionals have varied specialties
and backgrounds in such fields as law, accounting, law
enforcement and engineering. A number of Krolls
professionals have highly specialized skills or advanced degrees
and many have legal training and experience. Kroll may not be
successful in attracting, hiring and retaining qualified people
at favorable rates or at all. If Kroll is unable to hire and
retain skilled professionals, its business could be materially
adversely affected.



| |                                                                 
| | ----------------------------------------------------------------
| | Krolls professional reputation is
    critical to its business.

As a company in a client service business, Kroll
depends upon its reputation and the individual reputations of
its senior professionals to obtain new client engagements. Kroll
obtains a substantial number of new engagements from existing
clients or through referrals from existing clients. Any factor
that diminishes its reputation or the reputations of its senior
professionals may make it more difficult for Kroll to compete
successfully for new engagements or to retain existing clients
and therefore could materially adversely affect Krolls
business.

15



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| |                                                                               
| | ------------------------------------------------------------------------------
| | Competitive conditions could materially
    adversely affect Krolls business.

The markets in which Kroll does, and intends to
do, business are highly competitive with few barriers to entry.
In most service areas in which Kroll operates, there is at least
one competitor that is significantly larger or more established
than Kroll is in the delivery of that particular service. Many
of the national and international accounting and consulting
firms, along with other companies such as FTI
Consulting, Inc., Securitas AB and its subsidiary Pinkerton
Consulting & Investigations, Inc.,
Alvarez & Marsal, AlixPartners, Control Risks Group
Limited, Crossroads LLC, ChoicePoint, Inc. and Applied
Discovery, Inc., provide consulting and other services
similar to some of Krolls services. Some of these firms
have indicated an interest in providing services similar to
Krolls on a broader scale and may prove to be formidable
competitors if they elect to devote the necessary resources to
these competitive businesses. The national and international
accounting and consulting firms have significantly larger
financial and other resources than Kroll has and have
long-established relationships with their clients, which also
are likely to be clients or prospective clients of Krolls.
In addition, large multinational security services providers
have indicated an interest in expanding their services to
include value-added services such as some of the risk mitigation
services Kroll provides.



| |                                                   
| | --------------------------------------------------
| | Krolls business varies from period to
    period.

Krolls net sales and net income from
year-to-year and period-to-period are not necessarily
predictable and historically there has not been a consistent
year-to-year pattern of growth. 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. The
demand for many of Krolls services is affected by general
economic conditions and the level of corporate acquisitions and
other financial transactions; clients tend to reduce their
reliance on these services during periods when there is a
decline in those activities. Krolls Corporate Advisory and
Restructuring Services group specializes in assisting companies
that are financially distressed. This business is cyclical but
counter to some of the other areas of Krolls business.
Because of the nature of its Corporate Advisory and
Restructuring Services groups practice, once Kroll
finishes an engagement with a debtor client, Kroll generally
does not generate additional revenue from that client. A
significant decline in revenue of the Corporate Advisory and
Restructuring Services group could have a material adverse
effect on Krolls business, results of operations and
financial condition. In addition, Krolls operating results
are affected by specific market conditions, including, among
other risk factors discussed in this section, increased
competition, the mix of services sold among our service
offerings, our ability to control costs and the demand for our
services. The timing of future acquisitions and the cost of
integrating them may cause fluctuations in our operating results
as well.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Krolls business depends on the
    protection of its intellectual property and proprietary
    information.

Kroll relies on a combination of trade secret and
trademark laws, confidentiality procedures, contractual
provisions and patent and copyright laws to protect its
proprietary rights in its products and technology. These
measures may not be adequate to protect our trade secrets and
proprietary technology. As a result, unauthorized third parties
may copy or otherwise obtain and use Krolls products or
technology. Furthermore, Kroll may be subject to additional
risks as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly
enforced. Legal protection of its rights may be ineffective in
these countries. If Kroll must engage in litigation to defend
and enforce its intellectual property rights, either
domestically or in other countries, Kroll could face substantial
costs and diversion of resources, regardless of the outcome of
that litigation. Any future attempt by Kroll to enforce its
intellectual property rights might not be successful, might
result in royalties that are less than the cost of such
enforcement efforts or might result in the loss of the
intellectual property altogether. Even if Kroll succeeds in
protecting its intellectual property, others may independently
develop similar technologies or products that do not infringe on
its intellectual property.

16



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##### Table of Contents





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Krolls business outside the United
    States exposes it to numerous risks that, individually or
    together, could materially adversely affect its
    business.

In addition to its U.S. facilities, Kroll
has operations and assets in Argentina, Australia, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan,
Mexico, the Philippines, Russia, South Africa, Spain,
Switzerland and the United Kingdom. Kroll also offers its
services in other countries and seeks to increase its level of
international business activity. Krolls international
business exposes it to various risks. Currently, the most
significant risks relate to regional economic downturns in
Central and South America and in certain regions in Asia. Other
risks of doing business outside the United States include
exchange rate fluctuations, foreign currency restrictions,
U.S. government-imposed prohibitions against offering
services to specific countries, expropriation of assets, war,
civil uprisings and riots, government instability, difficulties
enforcing contracts under foreign legal systems and
unanticipated taxes, duties or other governmental assessments.
Any of these risks could result in a loss of business,
significant unexpected write-offs of assets or other unexpected
costs that could have a material adverse effect on Krolls
business, results of operations and financial condition.

In the past, Kroll has occasionally had
difficulty in collecting significant accounts receivable for its
services, particularly when the obligor was located in a foreign
country.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Krolls credit facility contains
    restrictive covenants that may limit its liquidity and corporate
    activities.

Krolls credit facility imposes operating
and financial restrictions, including restrictions that limit
its ability to:



| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | pay dividends;                                                 
|
| |  | incur additional indebtedness;                                 
|
| |  | create liens on its assets;                                    
|
| |  | sell the capital stock or other assets of its
    subsidiaries;
|
| |  | make investments;                                              
|
| |  | engage in mergers and acquisitions;                            
|
| |  | make capital expenditures; and                                 
|
| |  | change the control of Kroll.                                   

These covenants could limit Krolls
operational flexibility and restrict its ability to raise
additional funds, if necessary, to finance operations, to pursue
its acquisition strategy and to make principal and interest
payments on its other debt. In addition, failure to comply with
these operational and financial covenants could result in an
event of default under the terms of the credit facility that, if
not cured or waived, could result in amounts borrowed under the
credit facility and other debt of Kroll becoming due and
payable. The effect of these covenants, or Krolls failure
to comply with them, could materially adversely affect its
business, results of operations and financial condition.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | If Kroll defaults under its credit
    facility, Kroll could forfeit its rights in its
    assets.

Kroll has pledged substantially all of its assets
and Krolls domestic subsidiaries have pledged
substantially all of their assets as security to the lenders
under its credit facility. A default under the credit facility,
if not waived or cured, would permit the lenders to foreclose on
the collateral and Kroll could lose its rights in the
collateral, which would have a material adverse effect on its
business.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Kroll may not be able to obtain additional
    financing when it needs it or on acceptable terms.

There can be no assurance that Krolls
available financing and anticipated cash flow from operations
will be sufficient to meet all of its cash requirements. Kroll
may also need additional capital in order to finance internal
growth or pursue its acquisition strategy. Kroll may not be able
to replace its credit facility at the time

17



---



##### Table of Contents



it becomes due. In addition, the terms of any
alternate credit arrangement may restrict Krolls financial
and operating flexibility. Kroll may also experience unexpected
circumstances, including the occurrence of any of the risk
factors discussed in this section, which may have a material
adverse effect on its business, results of operations and
financial condition.


If Kroll requires additional capital, it may have
to borrow funds under new credit facilities or issue equity,
equity-related or debt securities. Raising additional funds in
the future by issuing securities could adversely affect Kroll
stockholders and negatively affect Krolls operating
results. If Kroll raises additional capital through the issuance
of debt securities, the holders of the debt securities will have
a claim to Krolls assets that will have priority over any
claim of its stockholders. The interest on these debt securities
would increase Krolls costs and negatively impact
Krolls operating results. Kroll may decide to sell
additional shares of common stock or other equity securities to
obtain additional capital. If Kroll sells more shares or issue
securities convertible into or exchangeable for shares of its
common stock, the price of its stock may decline significantly
and the ownership of existing stockholders may be substantially
diluted.

Kroll cannot assure you that any required
additional financing will be available or, if it is, whether it
will be on acceptable terms. Krolls inability to obtain
any needed financing, or the terms on which it may be available,
could have a material adverse effect on its business.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | Changes in government regulations and
    licensing requirements could have a material adverse effect on
    Krolls business.

Kroll is subject to various federal, state, local
and foreign laws and regulations. Two of its subsidiaries hold
private investigative licenses from, and their investigative
activities are regulated by, state and local government agencies
in various jurisdictions. Kroll also uses some data from outside
sources, including data from third party vendors and various
government and public records services, in performing its
services. The use of this data is regulated by certain laws and
regulations. To date, applicable laws and regulations have not
interfered materially with the manner in which Kroll obtains
information and conducts its operations, including its access to
data used in its business. However, changes in these laws and
regulations or the adoption of new laws or regulations,
particularly those relating to privacy, could interfere with
Krolls method of operations and access to data and, as a
result, materially adversely affect its business.

Additionally, the laboratory of Krolls drug
testing subsidiary, Laboratory Specialists of
America, Inc., is certified on the federal level and
licensed in a number of states. If this subsidiarys
certification were suspended or lost, it would not be eligible
to perform testing for certain clients requiring this
certification, which could materially adversely affect the drug
testing services aspect of Krolls business.



| |                                                                 
| | ----------------------------------------------------------------
| | Krolls drug testing services are
    performed at one location.

Krolls drug testing services are performed
at its laboratory facility located in Gretna, Louisiana. Should
it be unable to use this facility for any reason, Kroll may be
unable to provide drug-testing services, which could materially
adversely affect its business, results of operations and
financial condition.



| |                                                                      
| | ---------------------------------------------------------------------
| | Kroll may be subject to potentially
    significant liability claims.

The nature of Krolls business exposes it to
liability claims in instances in which Krolls clients
suffer losses in spite of its efforts to mitigate their risks.
Kroll maintains professional liability insurance with a policy
aggregate limit of $50 million, including loss and claim
expense. If one or more successful claims substantially exceeded
Krolls coverage limits, it could have a material adverse
effect on Krolls business.

One of Krolls subsidiaries has been served
with a $40 million (Cdn.) lawsuit in connection with a
negligence claim. This subsidiary is being defended by its
former insurance carrier, the Reliance Insurance Company.
Reliance is in liquidation and has advised Kroll that any claim
for damages or settlement greater than $25,000 (Cdn.) will be a
claim in the liquidation on which distributions will be made as
the liquidation progresses. Should this claim succeed and, if
large enough (either alone or in combination with other claims),

18



---



##### Table of Contents



it could have a material adverse effect on
Krolls financial condition. For more information, see
Legal Proceedings in this Annual Report on
Form 10-K.


In addition, in the ordinary course of its
business, Kroll is subject to claims of third parties, other
than clients, alleging trespass, invasion of privacy, negligence
and other tortious conduct by its investigators, consultants,
professionals and other personnel, which are not covered by
insurance. Although Kroll endeavors to minimize the risk of
these claims, a substantial successful claim could have a
material adverse effect on its financial condition.



| |                                                         
| | --------------------------------------------------------
| | Krolls business is subject to
    technological change.

Kroll regularly develops solutions for its
clients by using information technology, electronic document
management techniques, the Internet and other state-of-the-art
technologies. Many of these technologies have only recently
emerged, will rapidly change and may become obsolete as new
technologies appear. Krolls future success will depend
upon the ability of its professionals to remain current with the
rapid changes in the technologies Kroll uses in its business, to
learn quickly to use new technologies as they emerge and to
adapt its existing technologies and solutions and develop new
technology-based solutions as appropriate. If Krolls
professionals fail to do this, Kroll could be at a competitive
disadvantage. Krolls competitors may gain exclusive access
to improved technology, which also could put Kroll at a
competitive disadvantage. Industry standards are constantly
evolving and there may be changes in its clients or
prospective clients preferences for technology solutions.
If Kroll cannot adapt to these changes, its business may be
materially adversely affected.

In addition, the computer industry in which
Krolls technology services group operates is characterized
by rapid technological changes and frequent introductions of new
enhanced products and Krolls technology services group
must constantly adapt its data recovery techniques, its data
recovery hardware and software tools and its commercial software
products to keep pace with these technological changes. If Kroll
cannot adapt to these changes, its business may be materially
adversely affected.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Krolls certificate of incorporation
    and bylaws provide for the indemnification and exculpation of
    its directors and officers.

Krolls certificate of incorporation and
bylaws provide for indemnification of its directors and officers
and, in addition, provide that a director of Kroll will not be
personally liable to Kroll or its stockholders for monetary
damages for breach of fiduciary duty as a director. However, a
director will remain liable for any breach of the
directors duty of loyalty to Kroll or its stockholders,
for unlawful payment of dividends or unlawful stock purchase or
redemption, or for any transaction from which the director
derived any improper personal benefit. In addition, pursuant to
Krolls certificate of incorporation and the Delaware
General Corporation Law, a director will remain liable for acts
or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law.



| |                                            
| | -------------------------------------------
| | Kroll does not intend to pay
    dividends.

Kroll intends to retain future earnings that may
be generated from our operations, if any, to help finance the
growth and development of its business, and Kroll does not plan
to pay dividends to its stockholders for the foreseeable future.
Furthermore, Kroll is prohibited from paying cash dividends by
the terms of its credit facility.



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delaware law and Krolls certificate
    of incorporation, bylaws and debt instruments contain provisions
    that could deter an acquisition by a third party.

Provisions contained in Delaware law and
Krolls certificate of incorporation, bylaws and debt
instruments could make it difficult for a third party to acquire
Kroll. Krolls certificate of incorporation provides its
board of directors with the authority to issue preferred stock
without the approval of stockholders. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a
change in control, may adversely affect the voting and other
rights of the holders of Krolls capital stock and may
discourage, delay or prevent a takeover attempt that a
stockholder might consider in its best interest. Krolls
certificate of

19



---



##### Table of Contents



incorporation and bylaws contain the following
provisions that may have an anti-takeover effect and may
discourage, delay or prevent a takeover attempt that a
stockholder might consider in its best interest. These
provisions include:




| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the requirement that there be three classes of
    directors and that their terms be staggered;                                                                                                                   
|
| |  | the requirement that a stockholder comply with
    specified procedures, including advance written notice, before
    bringing matters, including the nomination of directors, before
    a stockholders meeting;
|
| |  | the specific denial of stockholders ability
    to take action by written consent; and                                                                                                                           
|
| |  | the restriction of the right to call special
    meetings of stockholders to only the chief executive officer or
    a majority of the board of directors pursuant to a board
    resolution.                     

In addition, a change in control would be an
event of default under Krolls credit facility and its
6% Convertible Senior Subordinated Notes. These events
would add to the cost of an acquisition of Kroll, which could
deter a third party from acquiring Kroll.






|        |           
|------- | ----------
|Item 2. | Properties

Kroll maintains its principal executive offices
and a regional headquarters in New York, New York, and
other regional headquarters in London, Toronto, Hong Kong and
Miami. In addition to these offices, Kroll maintains 27 domestic
offices or facilities in 13 states and 31 foreign offices
or facilities in 15 foreign countries around the world.
Krolls principal properties and facilities as of
December 31, 2003 were as follows:

|                           |  |           |         |        |  |                      |        |  |  |                                        
|-------------------------- |  | --------- | ------- | ------ |  | -------------------- | ------ |  |  | ---------------------------------------
|                           |  | Total Sq. |         |        |  |                     
|Location                   |  | Footage   |         | Status |  | Expiration of Leases
|                           |  |           |         |        |  |                     
|Eden Prairie, Minnesota    |  |           | 156,017 |        |  |                      | Leased |  |  | November 30, 2009 and December 31, 2013
|New York, New York         |  |           | 48,500  |        |  |                      | Leased |  |  | December 31, 2007                      
|London, England            |  |           | 38,935  |        |  |                      | Leased |  |  | December 25, 2008                      
|Loveland, Colorado         |  |           | 32,086  |        |  |                      | Leased |  |  | March 31, 2018                         
|Philadelphia, Pennsylvania |  |           | 21,000  |        |  |                      | Leased |  |  | November 30, 2009                      
|Toronto, Canada            |  |           | 20,274  |        |  |                      | Leased |  |  | March 31, 2012                         
|Gretna, Louisiana          |  |           | 20,000  |        |  |                      | Owned  |  |  | N/A                                    
|Nashville, Tennessee       |  |           | 18,154  |        |  |                      | Leased |  |  | August 31, 2008                        



| |                        
| | -----------------------
| | Eden Prairie, Minnesota

This facility serves as the headquarters of our
subsidiary providing technology services within the Technology
Services segment. It consists of two office locations near each
other.



| |                   
| | ------------------
| | New York, New York

This facility contains our principal executive
offices and serves as a regional headquarters for the Consulting
Services segment. In addition, we lease a smaller office near
the headquarters for administrative purposes.



| |                
| | ---------------
| | London, England

This facility houses the headquarters of our
United Kingdom subsidiaries providing corporate advisory and
restructuring services within the Corporate Advisory and
Restructuring Services segment and consulting services.



| |                   
| | ------------------
| | Loveland, Colorado

This facility serves as the headquarters of our
credit screening services subsidiary within the Background
Screening Services segment. It consists of two office locations
near each other.

20



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##### Table of Contents





| |                           
| | --------------------------
| | Philadelphia, Pennsylvania

This facility primarily houses a significant
U.S. office of our subsidiary providing financial services
within the Consulting Services segment.



| |                
| | ---------------
| | Toronto, Canada

This facility houses the headquarters of our
Canadian subsidiary providing financial services within the
Consulting Services segment.



| |                  
| | -----------------
| | Gretna, Louisiana

This facility houses our substance abuse testing
laboratory and substance abuse testing services within the
Background Screening Services segment.



| |                     
| | --------------------
| | Nashville, Tennessee

This facility serves as the headquarters of our
employee and vendor background investigations subsidiary within
the Background Screening Services segment.

We believe that our current space is adequate for
our reasonably foreseeable needs.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Kroll Lindquist Avey Co. (formerly Lindquist Avey
Macdonald & Baskerville (LAMB)), a
subsidiary of Kroll, and several of its principals have been
named as third-party defendants in a lawsuit filed in the
Ontario Superior Court of Justice by HSBC Securities (Canada)
Inc., formerly Gordon Capital, an investment dealer
(HSBC). HSBC filed the underlying suit against
Gordon Capitals former law firm, Davies, Ward &
Beck, (DW&B) seeking damages in the amount of
approximately $40,000,000 (Cdn.). HSBC alleges DW&B
negligently advised Gordon Capital during 1991 through 1993 with
respect to its rights concerning trading losses and
irregularities by a client account manager and various insurance
bonds relating to such losses and irregularities. HSBC further
alleges various suits and declaratory judgment actions involving
the insurers were filed in 1993 and that summary judgment
granted in favor of the insurers in 1996 was affirmed on appeal
to the Supreme Court of Canada on the basis that the limitation
period under the bonds had expired without an action being
commenced for recovery of Gordon Capitals losses. Gordon
Capital, DW&B and LAMB entered into various tolling
agreements until the matters pending with the insurers were
exhausted. In April 2000, HSBC filed suit against DW&B. In
July 2001, DW&B filed a third-party claim against LAMB and
certain principals for contribution and indemnity. An amended
third-party claim was filed in September 2001. The third-party
claim alleges DW&B retained LAMB in June 1991 to examine the
trading irregularities and to advise Gordon Capital in respect
of its dealings with its insurers and that LAMB acted
negligently in carrying out these services. Third party claims
have also been filed against some entities formerly known as
Peat Marwick Thorne, Gordon Capitals alleged former
auditors, and AON Reed Stenhouse, Inc., Gordon
Capitals alleged former insurance broker. The parties
attended mediation in December 2002 and October 2003.
Representatives of LAMB attended but did not participate. LAMB
is being defended by its former carrier, the Reliance Insurance
Company. Reliance is in liquidation, and while paying all
defense costs, has advised that any claim for damages or
settlement greater than $25,000 (Cdn.) will be a claim in the
liquidation, on which distributions will be made as the
liquidation progresses. A hearing on the parties motions
for summary judgment originally scheduled for January 2004 has
been postponed and a new date has not yet been scheduled while
DW&B seeks to examine a former employee of Gordon Capital
with respect to the motions for summary judgment. A trial date
has been scheduled for September 2004. Management of Kroll
believes LAMB has meritorious defenses to the claims and intends
to defend the claims vigorously.

On June 27, 2003, a shareholder of Factual
Data filed a lawsuit against Factual Data and its directors in
the District Court for the County of Larimer, Colorado, styled
Troxler v. Factual Data Corporation [sic], Jerald H.
Donnan, Todd A. Neiberger, Robert J. Terry, J. Barton
Goodwin, Daniel G. Helle, Abdul H. Rajput

21



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##### Table of Contents



and James N. Donnan. On August 1, 2003,
the plaintiff filed an amended complaint. In the amended
complaint, the plaintiff alleges, among other things, that the
individual defendants engaged in self dealing in connection with
the negotiation and approval of the merger agreement and the
merger. The plaintiff also claims the individual defendants
obtained benefits not shared by the plaintiff, and that they
breached their fiduciary duties of care, loyalty, candor and
independence owed under Colorado law to Factual Datas
public shareholders. The plaintiff seeks certification of the
case as a class action. The plaintiff requests damages, certain
equitable relief, attorneys fees and costs and an order
rescinding the merger. On August 12, 2003, Factual Data
moved to dismiss the plaintiffs amended complaint. On
September 15, 2003, the plaintiff filed a response to
Factual Datas motion to dismiss. On September 26,
2003, Factual Data filed an amended reply in support of its
motion to dismiss the first amended complaint. On
December 9, 2003, the court denied Factual Datas
motion to dismiss the amended complaint. The parties have not
engaged in any discovery to date. Kroll and Factual Data believe
that the allegations in the amended complaint are without merit
and will defend the suit vigorously.


The ultimate outcome of these matters cannot
presently be determined. Accordingly, the ultimate resolution of
these matters could have a material adverse effect on its
consolidated financial position, results of operations or its
cash flows.

In addition to the matters discussed above, Kroll
is involved in litigation from time to time in the ordinary
course of its business; however, Kroll does not believe that
there is any currently pending litigation, individually or in
the aggregate, that is likely to have a material adverse effect
on its consolidated financial position, results of operations or
its cash flows.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Krolls common stock trades on the NASDAQ
National Market under the symbol KROL. On
March 1, 2004, there were approximately 219 record owners
of Kroll common stock.

The table below sets forth the high and low sale
prices for Kroll common stock as reported by the NASDAQ National
Market for the periods indicated.

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                             |  | High |       | Low
|                             |  |      |       |    
|Year ended December 31, 2002 |  |      |       |     |  |   |       | 
|Quarter Ended:               |  |      |       |     |  |   |       | 
|March 31, 2002               |  | $    | 19.24 |     |  | $ | 15.11 | 
|June 30, 2002                |  |      | 24.34 |     |  |   | 14.19 | 
|September 30, 2002           |  |      | 25.00 |     |  |   | 17.00 | 
|December 31, 2002            |  |      | 22.85 |     |  |   | 16.70 | 
|Year ended December 31, 2003 |  |      |       |     |  |   |       | 
|Quarter Ended:               |  |      |       |     |  |   |       | 
|March 31, 2003               |  | $    | 21.95 |     |  | $ | 16.35 | 
|June 30, 2003                |  |      | 27.89 |     |  |   | 19.50 | 
|September 30, 2003           |  |      | 28.99 |     |  |   | 18.30 | 
|December 31, 2003            |  |      | 26.53 |     |  |   | 18.70 | 

22



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##### Table of Contents



Dividends

Kroll has not paid dividends in the last
two years and anticipates that any future earnings will be
retained to finance its operations and for the growth and
development of its business. Accordingly, Kroll does not
anticipate paying cash dividends on its shares of common stock
for the foreseeable future. Krolls credit facility
provides that it cannot pay dividends and requires that it
maintain financial ratios and other covenants, which further
limit the funds available for cash dividends. The payment of any
future dividends will be subject to the discretion of
Krolls board of directors and will depend on its 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 Krolls board of directors
deems relevant.

Sale of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer
and Affiliated Purchasers

On October 28, 2003, the Kroll board of
directors approved a repurchase program to purchase up to
$35.0 million of Kroll common stock in one or more
open-market transactions. No shares of Kroll common stock have
been purchased pursuant to this buyback program.

On December 16, 2003, the Board of Directors
approved the repurchase of up to 2.78 million shares of
Kroll common stock in connection with its anticipated offering
of $175 million aggregate principal amount of
1.75% convertible subordinated notes due 2014.

The following table describes purchases of Kroll
common stock made by or on behalf of Kroll or any affiliated
purchaser pursuant to the December 16, 2003 repurchase plan
during the fourth quarter of 2003.

|                          |  |              |         |               |  |                  |       |                        |  |  |         |  |  |  |           |    
|------------------------- |  | ------------ | ------- | ------------- |  | ---------------- | ----- | ---------------------- |  |  | ------- |  |  |  | --------- | ---
|                          |  |              |         |               |  | Total Number of  |       | Maximum Number        
|                          |  |              |         |               |  | Shares Purchased |       | (or Approximate Dollar
|                          |  |              |         |               |  | as               |       | Value) of Shares That 
|                          |  | Total Number |         | Average Price |  | Part of Publicly |       | May Yet Be Purchased  
|                          |  | of Shares    |         | Paid Per      |  | Announced Plans  |       | Under the Plans       
|Period                    |  | Purchased    |         | Share         |  | or Programs      |       | or Programs           
|                          |  |              |         |               |  |                  |       |                       
|October 1 to October 31   |  |              |        |               |  |                  |      |                        |  |  |        |  |  |  |          |    
|November 1 to November 30 |  |              |        |               |  |                  |      |                        |  |  |        |  |  |  |          |    
|December 1 to December 31 |  |              | 250,300 | (1)           |  | $                | 25.73 |                        |  |  | 250,300 |  |  |  | 2,529,700 |    
|Total                     |  |              | 250,300 |               |  | $                | 25.73 |                        |  |  | 250,300 |  |  |  | 2,529,700 | (2)



---



|    |                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All of these shares were purchased in open-market
    transactions pursuant to the publicly announced
    December 16, 2003 repurchase plan. No shares were purchased
    other than through a publicly announced plan or program.                              
|   
|(2) | After December 31, 2003, Kroll purchased
    2,527,477 shares of its common stock. Kroll does not intend
    to purchase any additional shares of its common stock under this
    repurchase plan and considers this repurchase plan to have been
    completed.

For information regarding equity compensation
plans, see Item 12 of this Annual Report on Form 10-K.

23



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The selected financial data presented as of
December 31, 2003 and 2002 and for each of the
three years in the period ended December 31, 2003 have
been derived from the audited consolidated financial statements
of Kroll presented elsewhere in this document. The selected
financial data presented as of December 31, 2001, 2000 and
1999 and for the years ended December 31, 2000 and 1999
have been derived from the consolidated financial statements of
Kroll not included in this document. Certain selected balance
sheet data have been adjusted to reflect the effects of the
restatement as discussed below and in Note 25 of the Notes
to Consolidated Financial Statements. The selected financial
data should be read in conjunction with the consolidated
financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Annual Report on Form 10-K.

|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |        |        |        |  
|----------------------------------- | --------------------------------- | ------------------------------------------------------------- | ---------------------------------------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------ | ------ | -
|                                    |                                   |                                                              
|                                    |                                   | As of or for the Years Ended December 31,                    
|                                    |                                   |                                                              
|                                    |                                   | 2003                                                          |                                          | 2002    |         | 2001   |         | 2000    |         | 1999  
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |       
|                                    |                                   |                                                              
|                                    |                                   | (In thousands, except per share amounts)                     
|Statement of Operations Data(1)(2): |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|Net sales                           |                                   | $                                                             | 485,476                                  |         |         | $      | 284,248 |         |         | $      | 201,058 |        |        | $       | 205,610 |        |         | $       | 187,845 |       
|Cost of sales                       |                                   |                                                               | 224,921                                  |         |         |        | 145,058 |         |         |        | 120,727 |        |        |         | 123,791 |        |         |         | 104,366 |       
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    | Gross profit                      |                                                               |                                          | 260,555 |         |        |         | 139,190 |         |        |         | 80,331 |        |         |         | 81,819 |         |         |         | 83,479 |       
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|Operating expenses:                 |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    | Selling and marketing             |                                                               |                                          | 44,514  |         |        |         | 26,720  |         |        |         | 18,017 |        |         |         | 21,490 |         |         |         | 16,705 |       
|                                    | General and administrative(3)     |                                                               |                                          | 109,342 |         |        |         | 72,198  |         |        |         | 60,007 |        |         |         | 63,362 |         |         |         | 56,151 |       
|                                    | Research and development          |                                                               |                                          | 12,124  |         |        |         | 5,845   |         |        |         |       |        |         |         |       |         |         |         |       |       
|                                    | Amortization of other intangibles |                                                               |                                          | 8,803   |         |        |         | 2,495   |         |        |         | 489    |        |         |         | 830    |         |         |         | 756    |       
|                                    | Restructuring expenses(4)         |                                                               |                                          | 5,794   |         |        |         |        |         |        |         | 2,726  |        |         |         |       |         |         |         | 4,072  |       
|                                    | Loss on sale of business unit(4)  |                                                               |                                          |        |         |        |         | 102     |         |        |         | 528    |        |         |         |       |         |         |         |       |       
|                                    | Failed financing costs(4)         |                                                               |                                          |        |         |        |         |        |         |        |         | 1,043  |        |         |         |       |         |         |         |       |       
|                                    | Impairment of assets(4)           |                                                               |                                          |        |         |        |         |        |         |        |         | 807    |        |         |         |       |         |         |         |       |       
|                                    | Failed separation costs(4)        |                                                               |                                          |        |         |        |         |        |         |        |         | 607    |        |         |         | 4,195  |         |         |         |       |       
|                                    | Failed merger related costs(5)    |                                                               |                                          |        |         |        |         |        |         |        |         |       |        |         |         | 2,491  |         |         |         | 1,562  |       
|                                    | Merger related costs(6)           |                                                               |                                          |        |         |        |         |        |         |        |         |       |        |         |         | 357    |         |         |         | 4,069  |       
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    |                                   | Operating expenses                                            |                                          |         | 180,577 |        |         |         | 107,360 |        |         |        | 84,224 |         |         |        | 92,725  |         |         |        | 83,315 |       
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    |                                   |                                                               | Operating income (loss)                  |         |         | 79,978 |         |         |         | 31,830 |         |        |        | (3,893  | )       |        |         | (10,906 | )       |        |        | 164    |  
|Other income (expense):             |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    | Interest expense                  |                                                               |                                          | (4,682  | )       |        |         | (4,436  | )       |        |         | (4,375 | )      |         |         | (4,321 | )       |         |         | (2,753 | )     
|                                    | Interest income                   |                                                               |                                          | 669     |         |        |         | 515     |         |        |         | 127    |        |         |         | 250    |         |         |         | 338    |       
|                                    | Other, net(7)                     |                                                               |                                          | 180     |         |        |         | (4,351  | )       |        |         | (782   | )      |         |         | 1,658  |         |         |         | (58    | )     
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    |                                   | Income (loss) before provision (benefit) for
    income taxes |                                          |         | 76,145  |        |         |         | 23,558  |        |         |        | (8,923 | )       |         |        | (13,319 | )       |         |        | (2,309 | )     
|                                    |                                   | Provision (benefit) for income taxes                          |                                          |         | 29,943  |        |         |         | 7,067   |        |         |        | 2,209  |         |         |        | 2,377   |         |         |        | (1,105 | )     
|                                    |                                   |                                                               |                                          |         |         |        |         |         |         |        |         |        |        |         |         |        |         |         |         |       
|                                    |                                   |                                                               | Income (loss) from continuing operations |         |         | 46,202 |         |         |         | 16,491 |         |        |        | (11,132 | )       |        |         | (15,696 | )       |        |        | (1,204 | )

24



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##### Table of Contents



|                            |                                                                         |                                           |   |         |        |                 |   |         |        |      |   |         |         |   |   |         |         |   |   |         |        |  
|--------------------------- | ----------------------------------------------------------------------- | ----------------------------------------- | - | ------- | ------ | --------------- | - | ------- | ------ | ---- | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------ | -
|                            |                                                                         |                                          
|                            |                                                                         | As of or for the Years Ended December 31,
|                            |                                                                         |                                          
|                            |                                                                         | 2003                                      |   | 2002    |        | 2001            |   | 2000    |        | 1999
|                            |                                                                         |                                           |   |         |        |                 |   |         |        |     
|                            |                                                                         |                                          
|                            |                                                                         | (In thousands, except per share amounts) 
|Discontinued operations(8): |                                                                         |                                           |   |         |        |                 |   |         |        |      |   |         |         |   |   |         |         |   |   |        
|                            | Loss from video surveillance subsidiary, net of
    tax                 |                                           |   | (8,310  | )      |                 |   | (191    | )      |      |   | (603    | )       |   |   |        |         |   |   |        |       
|                            | Income (loss) from Security Products and Services
    Group, net of tax |                                           |   |        |        |                 |   | 81      |        |      |   | (7,541  | )       |   |   | (10,011 | )       |   |   | 1,043   |       
|                            | Loss from Voice and Data Communications Group,
    net of tax           |                                           |   |        |        |                 |   |        |        |      |   | (2,111  | )       |   |   | (8,237  | )       |   |   | (1,761  | )     
|                            |                                                                         |                                           |   |         |        |                 |   |         |        |      |   |         |         |   |   |         |         |   |   |        
|                            |                                                                         | Net income (loss)                         |   | $       | 37,892 |                 |   | $       | 16,381 |      |   | $       | (21,387 | ) |   | $       | (33,944 | ) |   | $       | (1,922 | )
|                            |                                                                         |                                           |   |         |        |                 |   |         |        |      |   |         |         |   |   |         |         |   |   |        
|Basic Per Share Data:       |                                                                         |                                           |   |         |        |                 |   |         |        |      |   |         |         |   |   |         |         |   |   |        
|                            | Income (loss) from continuing operations                                |                                           | $ | 1.13    |        |                 | $ | 0.56    |        |      | $ | (0.50   | )       |   | $ | (0.70   | )       |   | $ | (0.05   | )     
|                            | Net income (loss)                                                       |                                           | $ | 0.93    |        |                 | $ | 0.56    |        |      | $ | (0.95   | )       |   | $ | (1.52   | )       |   | $ | (0.09   | )     
|                            | Weighted average shares outstanding                                     |                                           |   | 40,820  |        |                 |   | 29,448  |        |      |   | 22,479  |         |   |   | 22,295  |         |   |   | 22,006  |       
|Diluted Per Share Data:     |                                                                         |                                           |   |         |        |                 |   |         |        |      |   |         |         |   |   |         |         |   |   |        
|                            | Income (loss) from continuing operations                                |                                           | $ | 1.09    |        |                 | $ | 0.54    |        |      | $ | (0.50   | )       |   | $ | (0.70   | )       |   | $ | (0.05   | )     
|                            | Net income (loss)                                                       |                                           | $ | 0.90    |        |                 | $ | 0.54    |        |      | $ | (0.95   | )       |   | $ | (1.52   | )       |   | $ | (0.09   | )     
|                            | Weighted average shares outstanding                                     |                                           |   | 42,223  |        |                 |   | 30,542  |        |      |   | 22,479  |         |   |   | 22,295  |         |   |   | 22,006  |       
|                           
|Balance Sheet Data:         |                                                                         |                                           |   |         |        | As Restated (9)
|                            |                                                                         |                                           |   |         |        |                
|                           
|                            | Working capital                                                         |                                           | $ | 48,916  |        |                 | $ | 124,078 |        |      | $ | 52,354  |         |   | $ | 25,714  |         |   | $ | 62,042  |       
|                            | Net property, plant and equipment                                       |                                           | $ | 37,842  |        |                 | $ | 27,193  |        |      | $ | 15,534  |         |   | $ | 20,272  |         |   | $ | 21,778  |       
|                            | Total assets                                                            |                                           | $ | 679,609 |        |                 | $ | 529,418 |        |      | $ | 162,699 |         |   | $ | 217,202 |         |   | $ | 248,057 |       
|                            | Total debt, including current portion                                   |                                           | $ | 33,170  |        |                 | $ | 24,701  |        |      | $ | 21,958  |         |   | $ | 75,350  |         |   | $ | 63,485  |       
|                            | Stockholders equity                                                    |                                           | $ | 546,843 |        |                 | $ | 450,010 |        |      | $ | 104,236 |         |   | $ | 109,524 |         |   | $ | 149,279 |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Kroll consummated a number of acquisitions and
    dispositions during the years ended December 31, 2003, 2002
    and 2001. Financial information regarding acquisitions is
    discussed in Note 5 of the Notes to Consolidated Financial
    Statements. Financial information regarding Krolls
    dispositions can be found in Notes 6 and 7 of the Notes to
    Consolidated Financial Statements.                                                                                                                                                        
|   
|(2) | During October 2000, Krolls then wholly
    owned subsidiary, Securify Inc. (Securify),
    completed a private equity offering to certain unrelated
    parties. This offering resulted in Krolls investment in
    Securify, previously consolidated, being accounted for using the
    equity method. See Note 7 of the Notes to Consolidated
    Financial Statements. Securifys net sales consolidated by
    Kroll for the years ended December 31, 2000 and 1999 were
    $4.0 million and $4.3 million, respectively.                               
|   
|(3) | On January 1, 2002, Kroll adopted the
    non-amortization provisions of Statement of Financial Accounting
    Standards (SFAS) No. 142, Goodwill and
    Other Intangible Assets. Accordingly, the results of
    operations for the years ended December 31, 2001, 2000 and
    1999 reflect amortization of goodwill and indefinite-lived
    intangible assets of $2.1 million, $2.6 million and
    $2.5 million, respectively, while the results of operations
    for the years ended December 31, 2003 and 2002 do not
    reflect such amortization.
|   
|(4) | For information regarding restructuring expenses,
    loss on sale of business unit, failed financing costs,
    impairment of assets and failed separation costs, see
    Note 8 of the Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                             
|   
|(5) | On November 15, 1999, Kroll announced that
    it had entered into a definitive agreement with Blackstone
    Capital Partners III Merchant Banking Fund L. P.
    (Blackstone) pursuant to which Blackstone would
    acquire shares held by all Kroll stockholders, other than
    certain members of management, for $18.00 per share in
    cash. On April 12, 2000, Kroll announced that Blackstone
    had withdrawn its offer to acquire                                                                                                                

25



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##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Kroll shares. Costs associated with the failed
    merger for the years ended December 31, 2000 and 1999 were
    $2.5 million and $1.6 million, respectively.                                                                                                                                                              
|   
|(6) | Merger related costs for the years ended
    December 31, 2000 and 1999 primarily represent merger and
    integration related costs incurred in connection with the
    acquisition of Background America, Inc. in June 1999.                                                                                              
|   
|(7) | Kroll recognized losses on the extinguishment of
    debt during the years ended December 31, 2002 and 2001 of
    $4.5 million and $0.5 million, respectively. See
    Notes 12 and 16 of the Notes to Consolidated Financial
    Statements.                                                                              
|   
|(8) | Income (loss) from discontinued operations, net
    of tax, includes the after tax results of Krolls
    discontinued operations and the gain (loss) on disposal of
    discontinued operations. See Note 6 of the Notes to
    Consolidated Financial Statements.                                                         
|   
|(9) | Kroll has restated its Consolidated Balance
    Sheets as of December 31, 2002, 2001, 2000 and 1999 to
    reflect adjustments to its database, deferred income tax and
    stockholders equity accounts for database costs. See
    Note 25 of the Notes to Consolidated Financial Statements
    for further information.

26



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion of results of
operations and financial condition is based upon and should be
read in conjunction with our consolidated financial statements
and accompanying notes thereto included elsewhere in this Annual
Report on Form 10-K.

General

Kroll is a leading global provider of
complementary risk consulting services. Kroll assists
businesses, governments and individuals throughout the world in
preventing, mitigating and responding to risk through an
integrated suite of services. In 2003, Krolls five
business groups enabled Kroll to provide its clients with
comprehensive, single source, risk consulting services. These
groups are: (1) Corporate Advisory and Restructuring
Services, which provides corporate restructuring, operational
turnaround, strategic advisory, financial crisis management and
corporate finance services; (2) Consulting Services, which
provides business and financial investigations, forensic
accounting, business valuation, litigation consulting, due
diligence, litigation intelligence, asset tracing and analysis,
monitoring and special inquiries, market intelligence and
intellectual property and infringement investigations;
(3) Technology Services, which provides electronic
discovery, data recovery and computer forensics services, along
with related software solutions; (4) Background Screening
Services, which provides employee and vendor background
investigations, credit screening and substance abuse testing and
(5) Security Services, which provides security architecture
and design, corporate security consulting, emergency management
and environmental services as well as protective services,
operations and training. Effective January 1, 2004, Kroll
integrated its Security Services group into its Consulting
Services group as a result of a change in the management
structure of these businesses.

Overview

2003

Kroll experienced strong operating growth in
2003, with substantial improvements over the results of 2002 and
2001. Over this three-year period, Kroll has developed, through
internal growth and selective acquisitions, into a more
diversified, better capitalized company.

Net sales in 2003 were $485.5 million, an
increase of 70.8% over 2002. In 2003, as the U.S. economy
began to improve, merger and acquisition activity became more
active, which resulted in increases in demand for Krolls
U.S. consulting services. Correspondingly, as the economy
began to improve, the demand for restructuring services began to
decline. Although 2003 was a very profitable year for
Krolls U.S. corporate advisory and restructuring
business, Kroll expects this business to grow more slowly in the
future. However, the European market for restructuring services
is proceeding at a different pace. Krolls European
turnaround business posted strong increases in 2003 and Kroll
expects continued growth in this business in the next year. In
addition, Kroll strengthened its technology services business by
cross marketing its services and products to the clients of its
other business segments and Kroll significantly broadened its
background screening services as a result of its acquisition of
Factual Data Corp. in August 2003.

Gross margin in 2003, as a percentage of net
sales, was 53.7%, an increase of 4.7 percentage points over
2002, primarily because of increases in gross margins in
Krolls Corporate Advisory and Restructuring Services and
Technology Services businesses, which are higher margin
businesses. This increase was partially offset by a decrease in
gross margin in security services. Kroll does not expect to
achieve similar gross margins next year as the
U.S. restructuring business grows more slowly and, as a
result, this business may suffer a decrease in operating
margins. Krolls cost of sales increased by 55.1%,
primarily as a result of the inclusion of the expenses of
Factual Data and the companies acquired by Kroll in 2002 and
increases in professional staff in almost all of Krolls
business groups.

Income from continuing operations in 2003 was
$46.2 million, an increase of 180.2% over 2002.
Krolls 2003 results were impacted by the closing of some
of Krolls offices worldwide and related elimination of
employees, which resulted in a restructuring charge. Kroll also
reported a loss of $8.3 million during 2003 associated with
the sale of its InPhoto Surveillance subsidiary.

27



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##### Table of Contents



2002 and
2001

The most significant events for Kroll in the two
year period ended December 31, 2002 were the sales of the
OGara armored car business and the voice and data group in
2001. These sales allowed Kroll to redefine itself as a risk
response, prevention and solutions company and concentrate on
developing the lines of business that are complementary to its
core risk consulting services.

The events of September 11, 2001 also
significantly impacted Kroll by changing the economic
environment in which it operates. Since that time, security has
been a primary concern of businesses, governments and
individuals, and the demand for Krolls services has
rapidly increased.

In 2002, Kroll acquired Ontrack Data
International, Inc. and Zolfo Cooper LLC. These
acquisitions resulted in the creation of Krolls Technology
Services Group and Corporate Advisory and Restructuring Services
Group, which have significantly diversified its businesses. In
addition, in 2002, Kroll raised approximately $111 million
of net proceeds in a public offering of 6.3 million shares
of its common stock. The proceeds were used to repay debt
incurred to acquire Zolfo Cooper and for working capital and
other general corporate purposes.

Future Business Trends

Corporate Advisory and Restructuring
Services Kroll expects its
European recovery and turnaround division to grow because it
believes that the number of bankruptcies and restructurings in
Europe will increase. This, however, is expected to be offset by
slower growth in Krolls U.S. restructuring operations
as the opportunities for large restructuring assignments
decrease and competition for those assignments increases. This
competition may cause operating margins of its
U.S. restructuring business to decrease over the next few
years.

Consulting
Services Kroll believes
that, as the U.S. economy improves, merger and acquisition
activity in the U.S. will grow, which should result in an
increase in demand for its U.S. forensic accounting,
financial and valuation services. This may be partially offset
by increased costs of additional professional staff. In
addition, as of January 1, 2004, this segment includes the
Security Services group. Since the situation in Iraq does not
seem to be improving, Kroll expects the demand for its security
services in the Middle East, Africa and Europe to increase.

Background Screening
Services Kroll has
recently obtained several new U.S. government screening
contracts, including background screening contracts with the
Transportation Services Authority and the Customs and Border
Patrol, and a drug screening contract with the Administrative
Office of the United States Courts, which should result in
increases in sales of its U.S. background checking
services. If interest rates increase, the demand for mortgages
is likely to decrease, which should result in a decrease in
sales of Krolls credit screening services.

Technology
Services Kroll believes
that the legal discovery process is becoming more dependent on
the collection and storage of documents electronically rather
than the use of paper filing systems, which should result in
greater demand for its electronic discovery services.

Acquisition Strategy

Krolls strategy to increase the size of its
existing business is to grow internally and through select
acquisitions. Kroll has made several acquisitions in the past
and intends to continue to seek such acquisitions in the future.
In executing its acquisition strategy, Kroll seeks to acquire
profitable companies that increase the geographic scope of
Krolls services and that augment Krolls services
with similar or complementary products and services.

28



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##### Table of Contents



Acquisitions

Kroll completed the following acquisitions during
2003 and 2002:

|                         |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|------------------------ |  | ---------------------------------------------------------------------- |  | --------------------------------------------- |  | ----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Company                  |  | Business                                                               |  | Segment                                       |  | Date Acquired     |  | Price                                                                                                                                                                                                                                      
|                         |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|Ontrack Data             |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|International, Inc.      |  | Data recovery, electronic discovery and computer
    forensic services |  | Technology Services                           |  | June 13, 2002     |  | Approximately 6.9 million shares of common
    stock                                                                                                                                                                                       
|                        
|Crucible Inc.            |  | Elite training and protective services                                 |  | Security Services                             |  | July 3, 2002      |  | $1.0 million in cash plus note payable of
    $1.0 million                                                                                                                                                                                 
|                        
|Zolfo Cooper, LLC        |  | Corporate restructuring and operational
    turnaround services        |  | Corporate Advisory and Restructuring Services |  | September 5, 2002 |  | $100 million in cash, 2.9 million
    shares of common stock issued on January 15, 2003, 625,000
    shares of common stock to be issued in March 2004 and additional
    shares of common stock if agreed upon profit levels are achieved.
|                        
|Certico Verification     |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|Services, LLC            |  | Background checking services                                           |  | Background Screening Services                 |  | March 14, 2003    |  | $3.5 million in cash                                                                                                                                                                                                                       
|                        
|Personnel Risk           |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|Management               |  | Pre-employment screening services                                      |  | Background Screening Services                 |  | March 21, 2003    |  | $1.4 million in cash plus an additional
    payment of up to $2.1 million if agreed upon profit levels
    are achieved                                                                                                                    
|                        
|Invex Partners Limited   |  | Corporate financial services                                           |  | Corporate Advisory and Restructuring Services |  | March 25, 2003    |  | $1.2 million in cash                                                                                                                                                                                                                       
|                        
|Intellifacts Corporation |  | Background checking services                                           |  | Background Screening Services                 |  | July 18, 2003     |  | $2.2 million in cash                                                                                                                                                                                                                       
|                        
|MIE Resource Services    |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|(Pty) Limited            |  | Credentials verification                                               |  | Background Screening Services                 |  | August 15, 2003   |  | $0.5 million in cash plus an additional
    payment of up to $0.3 million if agreed upon profit levels
    are achieved                                                                                                                    
|                        
|Factual Data Corp.       |  | Customized information services                                        |  | Background Screening Services                 |  | August 21, 2003   |  | $87.4 million in cash and
    934,712 shares of common stock                                                                                                                                                                               
|                        
|Oyez Legal               |  |                                                                        |  |                                               |  |                   |  |                                                                                                                                                                                                                                            
|Technologies Limited     |  | Legal information management systems                                   |  | Technology Services                           |  | December 1, 2003  |  | $18.9 million in cash                                                                                                                                                                                                                      

See Note 5 of the Notes to Consolidated
Financial Statements for further information regarding these
acquisitions.

29



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##### Table of Contents



Discontinued Operations

On June 18, 2003, Kroll sold its video
surveillance subsidiary, InPhoto, for $850,000 in cash. In
connection with this disposition, Kroll wrote off
$7.5 million of related goodwill. InPhoto, which was part
of Krolls Background Screening Services segment, provided
surveillance services primarily to the insurance industry.

On August 22, 2001, Kroll completed the sale
of its Security Products and Services Group, other than the
Russian armored car businesses, for $53.7 million. In May
2002, Kroll executed agreements to sell to local management its
interest in the Russian businesses. Kroll received $150,000 upon
closing, $10,000 in both the third and fourth quarters of 2002
and an additional $107,000 during 2003.

On June 27, 2001, Kroll sold its Voice and
Data Communications Group for approximately $4.0 million.

See Note 6 of the Notes to Consolidated
Financial Statements for further information regarding these
dispositions.

Critical Accounting Policies

Krolls significant accounting policies,
including the assumptions and judgments underlying them, are
more fully described in Note 3 of the Notes to Consolidated
Financial Statements. Some of Krolls accounting policies
require the application of significant judgment by management in
the preparation of the financial statements, and as a result,
they are subject to a greater degree of uncertainty. In applying
these policies, management uses its judgment to determine the
appropriate assumptions to be used in calculating estimates that
affect the reported amounts of assets, liabilities, revenues and
expenses. Management bases its estimates and assumptions on
historical experience and on various other factors that are
believed to be reasonable under the circumstances. Kroll has
identified certain of its accounting policies as the ones that
are most important to the portrayal of Krolls financial
condition and results of operations, and which require
management to make its most difficult and subjective judgments,
often as a result of the need to make estimates of matters that
are inherently uncertain. Krolls critical accounting
policies include the following:

Revenue
Recognition

Revenue is recognized as the services are
performed pursuant to the applicable contractual arrangements.
Revenue related to time and materials arrangements is recognized
in the period in which the services are performed. Revenue from
standard hourly rate engagements is recognized as hours are
incurred and revenue from standard daily rate arrangements is
recognized at amounts represented by the agreed-upon billing
amounts as incurred. Revenue related to fixed price arrangements
are recognized based upon the achievement of certain milestones
or progress points within the project plan. Revenue provided
from credit services is recognized when the information is
delivered to the customer, either electronically or by other
means. The impact of any revisions in estimated total revenue
and direct contract costs is recognized in the period in which
they become known. Expenses incurred by professional staff in
the generation of revenue are billed to the client and included
in revenue. Kroll records either billed or unbilled accounts
receivable based on case-by-case invoicing determinations.
Software revenue is recognized when shipped, with the exception
of royalty-based products, for which revenue is recognized as
applicable royalty reports are received. Software revenue is
stated net of estimated customer returns and allowances. Kroll
recognizes contingent fees as earned, i.e., upon satisfaction of
all conditions to their payment.

Accounting
for Intangible and Long-Lived Assets

In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, Kroll conducts
annual impairment tests of goodwill and indefinite-lived
intangible assets recorded on its books in order to determine if
any impairment of value may have taken place. Impairment tests
will be conducted sooner if circumstances indicate that
impairment may have occurred. At January 1, 2002, Kroll
determined that there was no impairment of its goodwill and
indefinite-lived intangible assets. At its annual evaluation of
its goodwill and

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indefinite-lived intangible assets during the
third quarter of 2003, Kroll determined that such assets were
not impaired.


Intangible assets with finite useful lives, which
primarily consist of customer lists and customer relationships,
internally-developed software, franchise and license agreements,
trademarks and non-compete agreements, continue to be amortized
on a straight-line basis. Customer lists and customer
relationships are amortized over periods ranging from four to
fifteen years. Internally developed software is amortized over
periods ranging from seven to ten years. Franchise and license
agreements are amortized over periods ranging from five to eight
years and trademarks are amortized over periods ranging from
three to twenty-five years. Non-compete agreements are amortized
over the lives of the respective agreements, which range from
three to seven and one-half years.

In accordance with SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets, Kroll tests its long-lived assets, other than
goodwill and indefinite-lived intangible assets, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. The value
of a long-lived asset is impaired if the carrying value of the
asset exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. An
impairment loss will be measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value. In
addition, in accordance with SFAS No. 144, Kroll
measures long-lived assets to be disposed of by sale, including
discontinued operations, at the lower of carrying amount or fair
value less cost to sell.

Foreign
Currency Translation and Transactions

Assets and liabilities of Krolls foreign
operations are translated using year-end exchange rates.
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
stockholders 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 and are
recorded within the statement of operations. 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.

Results of Operations

Our Consolidated Statements of Operations
comprised the following (in thousands):

|               |                                               |                          |         |         |  |      |         |         |  |  |         |         | 
|-------------- | --------------------------------------------- | ------------------------ | ------- | ------- |  | ---- | ------- | ------- |  |  | ------- | ------- | 
|               |                                               |                         
|               |                                               | Years Ended December 31,
|               |                                               |                         
|               |                                               | 2003                     |         | 2002    |  | 2001
|               |                                               |                          |         |         |  |     
|Net Sales:     |                                               |                          |         |         |  |      |         |         |  |  |         |        
|               | Corporate Advisory and Restructuring Services |                          | $       | 160,110 |  |      | $       | 71,386  |  |  | $       | 30,751  | 
|               | Consulting Services                           |                          |         | 130,906 |  |      |         | 106,564 |  |  |         | 106,126 | 
|               | Technology Services                           |                          |         | 83,273  |  |      |         | 36,438  |  |  |         | 4,380   | 
|               | Background Screening Services                 |                          |         | 78,022  |  |      |         | 44,364  |  |  |         | 35,672  | 
|               | Security Services                             |                          |         | 33,165  |  |      |         | 25,496  |  |  |         | 24,129  | 
|               |                                               |                          |         |         |  |      |         |         |  |  |         |        
|               |                                               |                          | 485,476 |         |  |      | 284,248 |         |  |  | 201,058 |        
|               |                                               |                          |         |         |  |      |         |         |  |  |         |        
|Cost of Sales: |                                               |                          |         |         |  |      |         |         |  |  |         |        
|               | Corporate Advisory and Restructuring Services |                          |         | 67,500  |  |      |         | 30,757  |  |  |         | 14,706  | 
|               | Consulting Services                           |                          |         | 72,179  |  |      |         | 62,981  |  |  |         | 70,887  | 
|               | Technology Services                           |                          |         | 21,993  |  |      |         | 11,237  |  |  |         | 1,752   | 
|               | Background Screening Services                 |                          |         | 40,308  |  |      |         | 23,437  |  |  |         | 18,863  | 
|               | Security Services                             |                          |         | 22,941  |  |      |         | 16,646  |  |  |         | 14,519  | 
|               |                                               |                          |         |         |  |      |         |         |  |  |         |        
|               |                                               |                          | 224,921 |         |  |      | 145,058 |         |  |  | 120,727 |        
|               |                                               |                          |         |         |  |      |         |         |  |  |         |        

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|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |        |         |  
|-------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------- | ------- | ------- | ------ | ---- | ------- | ------ | ------ |  | ------ | ------ | ------- | -
|                           |                                                                         |                                                
|                           |                                                                         | Years Ended December 31,                       
|                           |                                                                         |                                                
|                           |                                                                         | 2003                                            |         | 2002    |        | 2001
|                           |                                                                         |                                                 |         |         |        |     
|Gross Profit:              |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           | Corporate Advisory and Restructuring Services                           |                                                 |         | 92,610  |        |      |         | 40,629 |        |  |        | 16,045 |        
|                           | Consulting Services                                                     |                                                 |         | 58,727  |        |      |         | 43,583 |        |  |        | 35,239 |        
|                           | Technology Services                                                     |                                                 |         | 61,280  |        |      |         | 25,201 |        |  |        | 2,628  |        
|                           | Background Screening Services                                           |                                                 |         | 37,714  |        |      |         | 20,927 |        |  |        | 16,809 |        
|                           | Security Services                                                       |                                                 |         | 10,224  |        |      |         | 8,850  |        |  |        | 9,610  |        
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           |                                                                         |                                                 | 260,555 |         |        |      | 139,190 |        |        |  | 80,331 |       
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|Operating Expenses:        |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           | Selling and marketing                                                   |                                                 |         | 44,514  |        |      |         | 26,720 |        |  |        | 18,017 |        
|                           | General and administrative                                              |                                                 |         | 109,342 |        |      |         | 72,198 |        |  |        | 60,007 |        
|                           | Research and development                                                |                                                 |         | 12,124  |        |      |         | 5,845  |        |  |        |       |        
|                           | Amortization of other intangibles                                       |                                                 |         | 8,803   |        |      |         | 2,495  |        |  |        | 489    |        
|                           | Restructuring expenses                                                  |                                                 |         | 5,794   |        |      |         |       |        |  |        | 2,726  |        
|                           | Loss on sale of business unit                                           |                                                 |         |        |        |      |         | 102    |        |  |        | 528    |        
|                           | Failed financing costs                                                  |                                                 |         |        |        |      |         |       |        |  |        | 1,043  |        
|                           | Impairment of assets                                                    |                                                 |         |        |        |      |         |       |        |  |        | 807    |        
|                           | Failed separation costs                                                 |                                                 |         |        |        |      |         |       |        |  |        | 607    |        
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           |                                                                         |                                                 | 180,577 |         |        |      | 107,360 |        |        |  | 84,224 |       
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           |                                                                         | Operating income (loss)                         |         |         | 79,978 |      |         |        | 31,830 |  |        |        | (3,893  | )
|Other Income (Expense):    |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           | Interest expense, net                                                   |                                                 |         | (4,013  | )      |      |         | (3,921 | )      |  |        | (4,248 | )      
|                           | Other, net                                                              |                                                 |         | 180     |        |      |         | (4,351 | )      |  |        | (782   | )      
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           |                                                                         | Income (loss) before provision for income taxes |         |         | 76,145 |      |         |        | 23,558 |  |        |        | (8,923  | )
|Provision for income taxes |                                                                         |                                                 | 29,943  |         |        |      | 7,067   |        |        |  | 2,209  |       
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           |                                                                         | Income (loss) from continuing operations        |         |         | 46,202 |      |         |        | 16,491 |  |        |        | (11,132 | )
|Discontinued Operations:   |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           | Loss from video surveillance subsidiary, net of
    tax                 |                                                 |         | (8,310  | )      |      |         | (191   | )      |  |        | (603   | )      
|                           | Income (loss) from Security Products and Services
    Group, net of tax |                                                 |         |        |        |      |         | 81     |        |  |        | (7,541 | )      
|                           | Loss from Voice and Data Communications Group,
    net of tax           |                                                 |         |        |        |      |         |       |        |  |        | (2,111 | )      
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       
|                           |                                                                         | Net income (loss)                               |         | $       | 37,892 |      |         | $      | 16,381 |  |        | $      | (21,387 | )
|                           |                                                                         |                                                 |         |         |        |      |         |        |        |  |        |       

Year Ended
December 31, 2003 Compared to Year Ended December 31,
2002



| |          
| | ---------
| | Net Sales

Net sales increased $201.2 million, or 70.8%.

Corporate Advisory and Restructuring
Services Net sales for the
Corporate Advisory and Restructuring Services segment increased
$88.7 million, or 124.3%, due to a 43.0% increase in net
sales of Krolls European recovery and turnaround division
and the inclusion of Kroll Zolfo Cooper for the entire period in
2003. Zolfo Cooper was acquired on September 5, 2002.
Krolls European recovery and turnaround division has
experienced an increase in net sales in 2003 as the number of
bankruptcies and restructurings in Europe has increased. Kroll
Zolfo Cooper recognized $20.9 million of success fees
during 2003 and $3.2 million of success fees in 2002.
Although Kroll Zolfo Cooper recorded increased revenues in 2003,
the U.S. corporate restructuring business has begun to grow
more slowly.

Consulting
Services Net sales for the
Consulting Services segment increased $24.3 million, or
22.8%, primarily as a result of increases in demand for
Krolls forensic accounting, financial and valuation
services in the United States of 169.5%, and increases in
Krolls intelligence and investigative services in Europe
of 23.6%. The increase in demand for Krolls
U.S. services reflects an increase in merger and
acquisition activity in the United States markets. In addition,
net sales for the Consulting Services segment reflected
increases in

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Krolls domestic intelligence and
investigative services of 6.9%, increases in the Asian region of
5.5% and increases in the Canadian region of 3.2%.


Technology
Services Net sales for the
Technology Services segment increased $46.8 million, or
128.5%, due to the inclusion of Kroll Ontrack for the entire
period in 2003, as well as strong demand for Kroll
Ontracks electronic evidence discovery and data recovery
services. Kroll has increased demand for its technology services
and products by cross marketing these services to the clients of
its Consulting Services group. Ontrack was acquired on
June 13, 2002.

Background Screening
Services Net sales for the
Background Screening Services segment increased
$33.7 million, or 75.9%, due to an increase of 23.5% in the
demand for Krolls domestic pre-employment background
checking services, as well as the inclusion of revenues from
Kroll Factual Data, which was acquired on August 21, 2003.
Kroll Factual Datas credit screening business was strong
during 2003 because of high demand for mortgages due to low
interest rates.

Security
Services Net sales for the
Security Services segment increased $7.7 million, or 30.1%,
primarily due to the results of our new Europe, Middle East and
Africa security operations. Kroll is providing protection
services for individuals, governments and other organizations in
high-risk locations in the Middle East, including some large
government contracts relating to Iraq. This was partially offset
by decreases in our domestic operations, especially the
architecture and technical design service areas, as a result of
a decrease in corporate activity due to the current domestic
economic environment and a delay in the issuance of additional
government contracts.

Cost
of Sales and Gross Profit

Cost of sales increased $79.9 million, or
55.1%, primarily due to the inclusion of a full year of
operating expenses of Kroll Ontrack and Kroll Zolfo Cooper,
which were acquired on June 13, 2002 and September 5,
2002, respectively, as well as the inclusion of the operating
expenses of Kroll Factual Data, which was acquired on
August 21, 2003. Also affecting cost of sales were
headcount increases in our European restructuring and technology
businesses. Gross margin as a percentage of sales increased
4.7 percentage points from 49.0% in 2002 to 53.7% in 2003.

Corporate Advisory and Restructuring
Services Gross margin for
the Corporate Advisory and Restructuring Services segment
increased 0.9 percentage points from 56.9% in 2002 to 57.8%
in 2003. This is primarily attributable to the inclusion of
Kroll Zolfo Cooper for the entire period in 2003 (Zolfo Cooper
was acquired on September 5, 2002), and the recognition of
$20.9 million in success fees in 2003. Success fees of
$3.2 million were recognized in 2002. Excluding success
fees, gross margin decreased 3.4 percentage points from
54.9% in 2002 to 51.5% in 2003, primarily due to a decline in
domestic corporate restructurings. As part of Krolls plan
to increase its European business and reduce the effect of
slower growth in its domestic restructuring business, Kroll
hired additional professional staff in Europe. This has affected
margins, but has positioned Kroll to service additional cases in
Europe as well as international cases.

Consulting
Services Gross margin for
the Consulting Services segment increased 4.0 percentage
points from 40.9% in 2002 to 44.9% in 2003. This increase is
primarily attributable to increased utilization in our domestic
consulting business, particularly driven by the growth of our
forensic accounting and litigation consulting practice areas.

Technology
Services Gross margin for
the Technology Services Segment increased 4.4 percentage
points from 69.2% in 2002 to 73.6% in 2003. This increase is
primarily due to the inclusion of Kroll Ontrack for the entire
period and to the strong results of Kroll Ontracks data
recovery and electronics evidence products. Ontrack was acquired
on June 13, 2002.

Background Screening
Services Gross margin for
the Background Screening Services segment increased
1.1 percentage points from 47.2% in 2002 to 48.3% in 2003.
This increase is primarily attributable to the impact of
relatively higher margins from Kroll Factual Data, which was
acquired on August 21, 2003. The increase in margin was
partially offset by decreased margins in Krolls drug
testing unit due to increased competition.

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Security
Services Gross margin for
the Security Services segment decreased 3.9 percentage
points from 34.7% in 2002 to 30.8% in 2003. This decrease is
primarily due to the margin impact of a decrease in domestic
sales, especially in the architecture and technical design
service areas. Margins were also affected by new government
contracts relating to security in the Middle East. Initial
margins on these contracts are lower due to significant start up
costs for our new Europe, Middle East and Africa operations.
Margins on these contracts are expected to increase as the
contracts mature.

Operating
Expenses

Operating expenses increased $73.2 million,
or 68.3%, primarily due to the inclusion of operating expenses
of Kroll Factual Data, which was acquired on August 21,
2003, and the inclusion of operating expenses for Kroll Ontrack
and Kroll Zolfo Cooper for the entire year. Ontrack and Zolfo
Cooper were acquired on June 13, 2002 and September 5,
2002, respectively. In addition, Kroll recorded a
$6.2 million restructuring charge in 2003 and a credit of
$0.4 million relating to its 2001 restructuring plan. Kroll
also recognized increased expenses to support the growth in the
Technology and Consulting Services Segments.

During the third quarter of 2003, Kroll recorded
a restructuring charge of $5.8 million in connection with
the closure of 10 non-hub offices worldwide and the elimination
of 102 employees. This charge was increased by
$0.4 million during the fourth quarter of 2003 to reflect
additional restructuring charges incurred. The restructuring
charges recognized during 2003 were based on
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The restructuring plan
was undertaken to reduce costs and improve operating
efficiencies. The breakdown of this restructuring charge by
segment was $4.3 million, $0.8 million,
$0.6 million, $0.3 million and $0.2 million for
Consulting Services, Corporate Advisory and Restructuring
Services, Security Services, Background Screening Services and
Corporate, respectively. The $6.2 million total
restructuring charge for 2003 was offset by a credit of
$0.4 million relating to Krolls 2001 restructuring
plan.

The initial recognition of the 2003 restructuring
expense and the corresponding utilization from inception by
category is as follows (in thousands):

|                                    |  |               |       |          |  |            |        |              |  |   |      |   |  |   |       | 
|----------------------------------- |  | ------------- | ----- | -------- |  | ---------- | ------ | ------------ |  | - | ---- | - |  | - | ----- | 
|                                    |  |               |       |          |  |            |        | Balance at  
|                                    |  | Restructuring |       | Cash     |  | Other      |        | December 31,
|                                    |  | Expense       |       | Payments |  | Reductions |        | 2003        
|                                    |  |               |       |          |  |            |        |             
|Employee related                    |  | $             | 4,167 |          |  | $          | (2,415 | )            |  | $ |     |   |  | $ | 1,752 | 
|Lease rentals                       |  |               | 1,218 |          |  |            | (546   | )            |  |   |     |   |  |   | 672   | 
|Write-off of leasehold improvements |  |               | 205   |          |  |            |       |              |  |   | (205 | ) |  |   |      | 
|Impairment of equipment             |  |               | 120   |          |  |            |       |              |  |   | (120 | ) |  |   |      | 
|Other exit costs                    |  |               | 443   |          |  |            | (443   | )            |  |   |     |   |  |   |      | 
|                                    |  |               |       |          |  |            |        |              |  |   |      |   |  |   |       | 
|                                    |  | $             | 6,153 |          |  | $          | (3,404 | )            |  | $ | (325 | ) |  | $ | 2,424 | 
|                                    |  |               |       |          |  |            |        |              |  |   |      |   |  |   |       | 

The 2003 restructuring plan is expected to be
substantially completed in early 2004. In addition, the
restructuring charge is expected to yield an equivalent amount
of savings annually.

As a percent of net sales, selling, general and
administrative expenses decreased 3.1 percentage points
from 34.8% in 2002 to 31.7% in 2003.

Interest
Expense, Net

Interest expense, net was essentially flat at
$3.9 million and $4.0 million in 2002 and 2003,
respectively.

Other
Income (Expense)

Other income increased $4.5 million from a
loss of $4.3 million in 2002 to income of $0.2 million
in 2003. During 2002, Kroll recorded a loss of $4.5 million
relating to the write-off of financing fees associated with the
early repayment of its $75 million term loan in October
2002, a payment to a holder of its 6% Convertible Notes of
$1.6 million in connection with certain amendments to those
notes and the write-off of financing fees

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##### Table of Contents



relating to its $15 million revolving credit
facility which was terminated in September 2002. These losses
were previously recorded as an extraordinary item in the
Consolidated Statement of Operations prior to the adoption of
SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections.


Provision
for Income Taxes

The provision for income taxes increased by
$22.9 million, or 323.7%, due to higher pre-tax income and
an increase in our effective income tax rate. The increase in
the effective income tax rate is due to a larger proportion of
total pre-tax income attributable to domestic operations in
2003, which are taxed at a higher tax rate than our foreign
operations. In addition, the 2002 rate was reduced by the use of
net operating loss carryforwards which were not available in
2003.

Income
from Continuing Operations

Income from continuing operations increased
$29.7 million, or 180.0%, as a result of the
above-discussed factors.

Loss
from Discontinued Operations

Loss from discontinued operations increased
$8.2 million from a loss of $0.1 million in 2002 to a
loss of $8.3 million in 2003. This is due to the loss on
the sale of InPhoto, which was recorded during the second
quarter 2003.

Net
Income

Net income improved by $21.5 million, or
131.3%, due primarily to a $121.4 million increase in gross
profit as a result of increased sales and improved margins in
2003 as well as an increase in other income of $4.5 million
due to the losses recorded in 2002 in connection with the
extinguishment of debt. These items were partially offset by a
$73.2 million increase in operating expenses, a
$22.9 million tax provision increase and an increase in
loss from discontinued operations of $8.2 million.

Year Ended
December 31, 2002 Compared to Year Ended December 31,
2001



| |          
| | ---------
| | Net Sales

Net sales increased $83.2 million, or 41.4%.

Corporate Advisory and Restructuring
Services Net sales for the
Corporate Advisory and Restructuring Services segment increased
$40.6 million, or 132.1%, due to a 38.0% increase in
Krolls European recovery and turnaround division, and the
inclusion of net sales of Kroll Zolfo Cooper for four months in
2002. Zolfo Cooper was acquired on September 5, 2002.

Consulting
Services Net sales for the
Consulting Services segment increased $0.4 million, or
0.4%, due to strong demand for our financial and investigative
services in Europe (12.0% revenue increase) and Latin
America (8.0% revenue increase). These were mostly offset by
decreased revenue in our Asian operations. A weak economic
climate and reduced merger and acquisition activity have
negatively impacted sales in Asia.

Technology
Services Net sales for the
Technology Services segment increased $32.1 million, or
731.9%, primarily due to Krolls acquisition of Ontrack on
June 13, 2002.

Background Screening
Services Net sales for the
Background Screening Services segment increased
$8.7 million, or 24.4%, primarily as a result of an
increase of $6.7 million, or 38.0%, in demand for our
domestic pre-employment background checking services. Since the
events of September 11, 2001, as part of their growing
concerns with security issues, U.S. companies became
increasingly concerned with questions regarding their employees
and potential hires, which resulted in increased demand for
Krolls background screening services.

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##### Table of Contents



Security
Services Net sales for the
Security Services segment increased $1.4 million, or 5.7%.
Our domestic security services business recorded sales increases
of approximately $6.1 million, or 3.0%, due to increased
demand for security consulting and design services in light of
recent national and international events. This was partially
offset by reduced demand in Latin America, where poor economic
conditions exist, and a reduction in revenues from the crisis
management business, which Kroll exited in June 2002.



| |                               
| | ------------------------------
| | Cost of Sales and Gross Profit

Cost of sales increased $24.3 million, or
20.2%. This increase was primarily due to the inclusion of the
expenses of Kroll Ontrack and Kroll Zolfo Cooper in 2002
results. Ontrack and Zolfo Cooper were acquired on June 13,
2002 and September 5, 2002, respectively. Gross margin as a
percentage of sales increased 9.0 percentage points from
40.0% in 2001 to 49.0% in 2002 primarily as a result of the
acquisitions.

Corporate Advisory and Restructuring
Services Gross margin for
the Corporate Advisory and Restructuring Services segment
increased 4.7 percentage points from 52.2% in 2001 to 56.9%
in 2002. This was attributable to increased revenues and margins
from our European recovery and turnaround division, as well as
the results of Kroll Zolfo Coopers revenues and margins
for four months in 2002, which included $3.2 million of
success fees. Zolfo Cooper was acquired on September 5,
2002.

Consulting
Services Gross margin for
the Consulting Services segment increased 7.7 percentage
points from 33.2% in 2001 to 40.9% in 2002. In a relatively flat
sales environment, this was accomplished through close
management of payroll and other direct expenses which resulted
in each region of Krolls consulting segment, even those
which experienced sales declines, posting margin improvements.

Technology
Services Gross margin for
the Technology Services segment increased 9.2 percentage
points from 60.0% in 2001 to 69.2% in 2002. The increase is
primarily attributable to the acquisition of Ontrack on
June 13, 2002, which had higher profit margins.

Background Screening
Services Gross margin for
the Background Screening Services segment increased
0.1 percentage points from 47.1% in 2001 to 47.2% in 2002.
This increase is primarily attributable to improved margins in
our domestic background checking business, which more than
offset reduced margins in our substance abuse testing business
and increased costs incurred in connection with the
establishment of our European background screening practice in
the fourth quarter of 2002.

Security
Services Gross margin for
the Security Services segment decreased 5.1 percentage
points from 39.8% in 2001 to 34.7% primarily due to a decrease
in margins in our security architecture and design business
combined with the reduction in gross margin of the crisis
management business, which Kroll exited in June 2002.

Operating
Expenses

Operating expenses increased $23.1 million,
or 27.5%, primarily due to the inclusion of the operating
expenses of Kroll Ontrack and Kroll Zolfo Cooper, which were
acquired in June and September of 2002, respectively. Kroll also
incurred marketing and integration expenses relating to these
acquisitions in 2002. In addition, operating expenses in 2001
included $2.7 million of restructuring expenses,
$1.0 million of failed financing costs, a $0.8 million
charge for impairment of assets, $0.6 million of failed
separation costs and a $0.5 million loss on the sale of a
business unit. See Note 8 of the Notes to Consolidated
Financial Statements for further information concerning these
2001 items.

In accordance with SFAS No. 142, Kroll
ceased amortizing goodwill beginning January 1, 2002. If
SFAS No. 142 were applied to Krolls results for
the year ended December 31, 2001, net income for that
period would have been increased by $1.6 million, or
$2.4 million before taxes.

As a percentage of net sales, general and
administrative expenses, after adjustment for goodwill
amortization, decreased from 29.7% in 2001 to 25.6% in 2002.

36



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Interest
Expense

Interest expense, net of interest income,
decreased $0.3 million, or 7.7%. This decrease reflects the
higher cash balances maintained by Kroll due to its increase in
cash flow from operations and its equity offering in October
2002.

Other
Income (Expense)

Kroll recorded a loss of $4.5 million in
2002 relating to the extinguishment of debt, an increase of
$4.0 million from a similar loss of $0.5 million
recorded in 2001. In 2002, Kroll wrote off financing fees
associated with the early repayment of its $75 million term
loan in October 2002, paid a consent fee of $1.6 million to
a holder of its 6% Convertible Notes in connection with
certain amendments to those notes and wrote off financing fees
relating to its $15 million revolving credit facility which
was terminated in September 2002. In 2001, Kroll wrote off
financing fees when it retired an amended bank loan and senior
notes. These losses were previously recorded as an extraordinary
item in the Consolidated Statement of Operations prior to the
adoption of SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections.

Provision
for Income Taxes

The provision for income taxes increased
$4.9 million, or 219.9%. In 2001, Kroll reported tax
expense despite a pretax loss from operations, largely because
of income in certain foreign and domestic jurisdictions.
Additionally, certain domestic and foreign entities realized
losses in 2001 from which Kroll was unable to derive tax
benefits. The 2002 provision increased as a result of the
increased profitability of Krolls operations.

Income from
Continuing Operations

Income from continuing operations increased
$27.6 million, as a result of the above-discussed factors.

Income
(Loss) from Discontinued Operations

Results from discontinued operations improved
from a loss of $10.3 million in 2001 to a loss of
$0.1 million in 2002. InPhoto reported a loss from
operations of $0.2 million during 2002 compared with
$0.6 million during 2001. In addition, the Voice and Data
Communications Group was sold in June 2001 and the Security
Products and Services Group was sold to Armor
Holdings, Inc. (Armor) on August 22, 2001.

Net
Income

Net income improved by $37.8 million from a
loss of $21.4 million in 2001 to income of
$16.4 million in 2002. The increase in net income was due
primarily to a $58.9 million increase in gross profit as a
result of increased sales and improved margins in 2002 and a
$10.2 million decrease in the loss from discontinued
operations. These items were partially offset by a
$23.1 million increase in operating expenses and a
$4.9 million tax provision increase.

Liquidity and Capital Resources



| |        
| | -------
| | General

Kroll historically has met its operating cash
needs by utilizing borrowings under its credit arrangements to
supplement cash provided by operations. Kroll currently believes
that cash on hand, cash flows from operations and available
borrowings under its credit facility will be sufficient to meet
its current funding requirements and obligations over the next
twelve months.

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Cash
Flows



| |                                     
| | ------------------------------------
| | Cash Flows from Operating Activities

Continuing operations provided $83.1 million
and $28.0 million of net cash in 2003 and 2002,
respectively, and used $1.0 million of net cash in 2001.
The year-to-year increase is due to the improvement in
Krolls income from continuing operations. In 2003, funds
were also provided by a $9.9 million decrease in working
capital and a $3.1 million decrease in long-term net
assets. In 2002, the funds provided by income from continuing
operations were partially offset by an $8.0 million
increase in working capital and a decrease of $0.8 million
in long term net assets, most of which related to deferred
taxes. In 2001, the funds provided by income from continuing
operations were partially offset by a $7.6 million increase
in working capital and an increase of $0.9 million in
long-term net assets.



| |                                     
| | ------------------------------------
| | Cash Flows from Investing Activities

During 2003, 2002, and 2001, Kroll used
$140.4 million, $80.8 million and $4.4 million of
net cash, respectively. In 2003, Kroll made one significant
acquisition, Factual Data, which accounted for approximately
$81.7 million of its reported $109.1 million of
acquisitions, net of cash received. Kroll acquired Factual Data
for $119.0 million, including transaction costs and
expenses of $2.7 million, through a combination of
$87.4 million paid in cash, excluding transaction costs and
expenses, and an exchange of shares, including options, for the
balance. In this acquisition, Kroll obtained $8.4 million
in cash resulting in the $81.7 million of net cash used. In
2002, Kroll made two significant acquisitions that accounted for
substantially all of its $77.8 million of acquisitions, net
of cash received. In 2002, Kroll purchased Zolfo Cooper for
approximately $103.6 million in cash, including transaction
costs and expenses, and an exchange of shares. This transaction
resulted in $100.3 million of net cash used after deducting
$3.3 million obtained in this transaction. In 2002, Kroll
also acquired Ontrack through an exchange of common shares and
transaction costs and expenses of approximately
$3.7 million. Kroll obtained $32.0 million in cash,
resulting in $28.3 million in net cash provided from this
acquisition. In addition, after the acquisition of Ontrack,
Kroll realized approximately $5.6 million from the sale of
Kroll Ontracks marketable securities.

In 2003, expenditures for property, plant and
equipment totaled $14.1 million. In 2003, Kroll also made
additional investments totaling $17.3 million as further
discussed in Note 11 of the Notes to Consolidated Financial
Statements. In 2002, expenditures for property, plant and
equipment totaled $6.1 million. Cash used in investing
activities in 2001 was primarily for additions to fixed assets
of $3.4 million and additions to other intangible assets of
$0.8 million.



| |                                     
| | ------------------------------------
| | Cash Flows from Financing Activities

Financing activities provided net cash of
$1.5 million and $118.8 million in 2003 and 2002,
respectively, and used net cash of $41.7 million in 2001.
During 2003, Kroll made net payments of $5.3 million on its
debt and repurchased $6.4 million of its common stock in
open market transactions. Kroll also received $8.3 million
from the exercise of stock options and $2.6 million from
the issuance of stock under its employee stock purchase plan.
During 2002, Kroll borrowed $75.0 million to acquire Zolfo
Cooper in September 2002. In October 2002, Kroll realized net
cash of approximately $110.6 million from the sale of
common stock to the public, $75.0 million of which was used
to repay the aforementioned September loan incurred to acquire
Zolfo Cooper. Also in 2002, Kroll received $8.5 million of
proceeds from the exercise of stock options. During 2001,
$35.3 million of senior debt and $36.6 million of
borrowings under the credit facility in place at the beginning
of the year were retired, using the proceeds from the sale of
the Security Products and Services Group and the proceeds from
the $30.0 million of 6% Convertible Notes issued in
November 2001.



| |                                            
| | -------------------------------------------
| | Cash Flows from Discontinued
    Operations

Net cash provided by discontinued operations was
$0.5 million in 2003. In 2003, Kroll sold InPhoto for
$0.9 million and incurred approximately $0.4 million
in expenses as a result of the sale. Net cash used by
discontinued operations was $0.1 million in 2002. Legal and
other professional fees of $0.6 million offset the
$0.2 million proceeds from the sale of the discontinued
Russian operations and the $0.3 million of cash

38



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generated by the discontinued InPhoto business.
Cash of $52.6 million provided in 2001 primarily reflects
the sale of the Security Products and Services Group to Armor
for $53.7 million.




| |                         
| | ------------------------
| | Revolving Line of Credit

On March 6, 2003, Kroll executed agreements
with Fleet National Bank (Fleet) providing for a
revolving credit facility of up to $25 million for a term
of three years. Krolls obligations under the Fleet
revolving credit facility are guaranteed by its domestic
subsidiaries. In addition, the Fleet revolving credit facility
is secured by a security interest in substantially all of the
assets of Kroll and its material domestic subsidiaries and a
pledge of the stock of Krolls material domestic
subsidiaries and 65% of the stock of certain of the foreign
subsidiaries of Kroll and its domestic subsidiaries. A
$25 million revolving credit facility with Goldman
Sachs & Co. was simultaneously retired on March 6,
2003.

Borrowings under the Fleet revolving credit
facility will bear interest, at Krolls election, at a rate
per annum equal to (1) the prime rate of Fleet or
(2) LIBOR plus 2.00%. During the term of the Fleet
revolving credit facility, Kroll will pay Fleet a quarterly fee
equal to 0.375% per annum of the unused portion of the line
of credit. The Fleet revolving credit facility requires Kroll to
maintain a minimum level of EBITDA and net income, contains
maximum leverage and liabilities requirements and contains
restrictions on the incurrence of additional debt, the creation
of any liens, the payment of cash dividends, certain
acquisitions and distributions to certain subsidiaries. The
Fleet revolving credit facility also contains other affirmative
and negative covenants and events of default customarily
contained in commercial loan agreements of this type. There have
been no borrowings made under this facility. At
December 31, 2003, Kroll was in compliance with all
covenants and provisions of this facility.

In connection with the acquisition of Buchler
Phillips during 1999, Kroll acquired a demand note with maximum
borrowings of 2.5 million pounds sterling. This amount was
increased to 4.4 million pounds sterling during 2002. The
demand note bears interest at the Bank of Englands base
rate plus 1.5%. During 2003, maximum borrowings permitted under
the demand note decreased from 4.4 million pounds sterling
to 4.0 million pounds sterling, or $7.1 million, as
translated at December 31, 2003. The amount outstanding
under this demand note at December 31, 2003 was
$2.2 million, a decrease of $1.6 million from the
amount outstanding at December 31, 2002 due primarily to
repayments made during 2003. The interest rate at
December 31, 2003 was 5.25%.



| |                         
| | ------------------------
| | Senior Convertible Notes

Krolls 6% Senior Convertible Notes
mature November 14, 2006 and bear interest at the rate of
6% per annum payable semi-annually. However, 12% per
annum will accrue on any principal payment that is past due.
Kroll may redeem these convertible notes at par plus accrued
interest, in whole or in part, beginning November 14, 2004,
provided the note holders have been notified in writing
20 days in advance. The note holders may, at any time prior
to one day before the earlier of the maturity date or the
redemption date, convert all or a portion of the principal
amount of the notes into Kroll common stock at the conversion
price of $10.80 per share. The $30.0 million of notes
are presently convertible into 2,777,777 shares of Kroll
common stock, subject to customary and other anti-dilution
adjustments.

In connection with the issuance of the
6% Convertible Notes, Kroll recorded a notes discount of
approximately $11.4 million based on the difference between
the closing price of its stock on the issuance date and the
conversion price. In addition to the stated 6% interest, the
discount is being amortized as non-cash interest expense over
the expected 5-year life of the notes. Barring early conversion
by the note holders or early redemption by Kroll, the average
additional non-cash interest expense resulting from this
discount amortization is approximately $2.3 million, or
7.6% per year, on the $30.0 million aggregate
principal amount. The amount of non-cash interest expense
resulting from this discount amortization for the years ended
December 31, 2003, 2002 and 2001 was $1.9 million,
$1.6 million and $0.2 million, respectively. Kroll
intends to redeem the 6% Convertible Notes in November 2004.

39



---



##### Table of Contents





| |                     
| | --------------------
| | Other Long-Term Debt

In connection with the acquisition of Factual
Data on August 21, 2003, Kroll assumed Factual Datas
capitalized service license agreements with Experian Information
Solutions, Inc. (Experian) for consumer credit
reporting services. Under these agreements, Kroll Factual Data
has access, on a non-exclusive basis, to all credit and other
information contained in Experians database associated
with consumers living in certain geographic areas. Each
agreement has an initial term of ten years and continues for
successive one-year periods unless either party delivers a
written notice of intent not to renew the agreement at least six
months before the end of the initial ten-year or any one-year
renewal period. At December 31, 2003, the balance
outstanding under these agreements was $5.0 million at an
interest rate of 9.985%. These agreements currently expire in
April and November of 2010 and January 2011 and are payable over
a five-year term.

Prior to its acquisition by Kroll, Factual Data
issued notes as part of the purchase price for its prior
acquisitions. At December 31, 2003, the balance outstanding
under these notes was $2.6 million. These notes bear
interest at rates ranging from 5.0% to 12.0% and are due at
different times through November 2008.

Kroll Factual Data also has various capitalized
lease obligations for office furniture and fixtures and computer
equipment and software. At December 31, 2003, the balance
outstanding under these obligations was $263,000. Such
obligations bear interest at rates ranging from 8.47% to 10.43%
and mature at different times through June 2005.



| |                     
| | --------------------
| | Stockholders Equity

In October 2002, Kroll sold 6.3 million
shares of its common stock to the public in an underwritten
public offering and raised approximately $110.6 million of
net proceeds, after $0.2 million of accrued expenses. Kroll
used a portion of these proceeds to repay its three-year
$75 million term loan incurred on September 5, 2002 to
acquire Zolfo Cooper. The remaining proceeds were used for
working capital to fund operations and for other general
corporate purposes.

On December 16, 2003, the Board of Directors
approved the repurchase of up to 2,780,000 shares of Kroll
common stock. As of December 31, 2003, Kroll had purchased
250,300 shares of its common stock for approximately
$6.4 million. Kroll purchased 2,527,477 additional shares
of its common stock subsequent to December 31, 2003 for
approximately $64.3 million. The purchase of shares of
common stock will be held in treasury in connection with the
likely conversion of Krolls 6% Convertible Notes into
2,777,777 shares of Kroll common stock. Kroll expects to
call these notes for redemption in November 2004.

During the fourth quarter of 2003, the Board of
Directors also approved the repurchase of up to
$35.0 million of Kroll common stock, none of which has been
purchased.

40



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##### Table of Contents





| |                        
| | -----------------------
| | Contractual Obligations

Krolls contractual obligations were
comprised of the following as of December 31, 2003 (dollars
in thousands):

|                                                                                                      |       |                        |        |               |  |           |        |           |  |               |        |        |  |   |        |        |  |   |        |        | 
|----------------------------------------------------------------------------------------------------- | ----- | ---------------------- | ------ | ------------- |  | --------- | ------ | --------- |  | ------------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                                      |       |                       
|                                                                                                      |       | Payments Due by Period
|                                                                                                      |       |                       
|Contractual Obligations                                                                               |       | Total                  |        | Within 1 Year |  | 2-3 Years |        | 4-5 Years |  | After 5 Years
|                                                                                                      |       |                        |        |               |  |           |        |           |  |              
|Revolving lines of credit                                                                             |       | $                      | 2,929  |               |  | $         | 2,929  |           |  | $             |       |        |  | $ |       |        |  | $ |       |       
|Current portion of long-term debt, excluding
    capitalized service agreements and lease obligations |       |                        | 1,115  |               |  |           | 1,115  |           |  |               |       |        |  |   |       |        |  |   |       |       
|Capitalized service agreements                                                                        |       |                        | 5,480  |               |  |           | 3,260  |           |  |               | 2,220  |        |  |   |       |        |  |   |       |       
|Capitalized lease obligations                                                                         |       |                        | 277    |               |  |           | 233    |           |  |               | 44     |        |  |   |       |        |  |   |       |       
|6% Convertible Notes                                                                                  |       |                        | 30,000 |               |  |           |       |           |  |               | 30,000 |        |  |   |       |        |  |   |       |       
|Long-term debt                                                                                        |       |                        | 1,529  |               |  |           |       |           |  |               | 867    |        |  |   | 662    |        |  |   |       |       
|Operating leases                                                                                      |       |                        | 74,375 |               |  |           | 14,732 |           |  |               | 24,540 |        |  |   | 18,731 |        |  |   | 16,372 |       
|Other long-term obligations                                                                           |       |                        | 750    |               |  |           | 250    |           |  |               | 500    |        |  |   |       |        |  |   |       |       
|                                                                                                      |       |                        |        |               |  |           |        |           |  |               |        |        |  |   |        |        |  |   |        |       
|                                                                                                      | Total |                        | $      | 116,455       |  |           | $      | 22,519    |  |               | $      | 58,171 |  |   | $      | 19,393 |  |   | $      | 16,372 | 
|                                                                                                      |       |                        |        |               |  |           |        |           |  |               |        |        |  |   |        |        |  |   |        |       



| |                   
| | ------------------
| | Foreign Operations

In addition to its U.S. facilities, Kroll
has operations and assets in Argentina, Australia, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan,
Mexico, the Philippines, Russia, South Africa, Spain,
Switzerland and the United Kingdom. Kroll also offers its
services in other countries and seeks to increase its level of
international business activity. Krolls international
business exposes it to various risks. For a discussion of these
risks, see Business  Risk Factors 
Krolls business outside the United States exposes it to
numerous risks that, individually or together, could materially
adversely affect its business.

Kroll attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its
operations in those countries, maintaining reserves for credit
losses and insuring equipment to protect against losses related
to political risks and terrorism.



| |                       
| | ----------------------
| | Quarterly Fluctuations

Although Kroll does have some long term contracts
with its clients, its ability to generate sales is generally
dependent upon obtaining many new projects each year, most of
which are relatively short term. In addition, during the latter
part of the fourth quarter of every year, Krolls business
is generally impacted by fewer background screening and mortgage
requests and fewer consulting assignments compared with other
quarters within the year. Accordingly, period-to-period
comparisons within a given year or between years will need to
take this normal fluctuation into consideration.

Accounting Pronouncements



| |                      
| | ---------------------
| | Business Combinations

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141,
Business Combinations, which addresses financial
accounting and reporting for business combinations, including
goodwill and other intangible assets acquired at acquisition.
SFAS No. 141 requires all business combinations in the
scope of the statement to be accounted for using one method, the
purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

On January 1, 2002, Kroll adopted
SFAS No. 142. SFAS No. 142 established
accounting and reporting standards for goodwill and other
intangible assets that are acquired individually or with a group
of other assets. SFAS No. 142 also established
accounting and reporting standards for goodwill and other
intangible assets subsequent to their date of acquisition. In
connection with the adoption of this standard, Kroll ceased

41



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##### Table of Contents



amortizing goodwill and any indefinite-lived
intangible assets beginning January 1, 2002. Prior to the
adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over periods ranging from 12 to
40 years. See Note 10 of the Notes to Consolidated
Financial Statements for the pro forma effect on 2001 had the
non-amortization provisions of SFAS No. 142 been
applied to that year.




| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

On January 1, 2002, Kroll adopted
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which replaced
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
Of. SFAS No. 144 retained the impairment
recognition and measurement provisions of SFAS No. 121
for all long-lived assets to be held and used other than
goodwill and indefinite-lived intangible assets, which are now
covered by SFAS No. 142. SFAS No. 144 also
requires that long-lived assets held for sale, including
discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell.



| |                                     
| | ------------------------------------
| | Derivative Financial
    Instruments

Effective January 1, 2001, Kroll adopted
SFAS No. 133, Accounting for Derivative
Financial Instruments and Hedging Activities, as amended.
SFAS No. 133 established accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. Under SFAS No. 133, certain contracts that
were not formerly considered derivatives may now meet the
definition of a derivative.

Through December 31, 2003, Kroll had not
used hedging or derivative instruments and did not hold or issue
derivative financial instruments for trading purposes. In
connection with the issuance of its 1.75% convertible
subordinated notes due 2014 on January 2, 2004, discussed
in Note 26, Kroll will be required to mark to market an
embedded interest rate derivative instrument contained within
these notes. Any increase or decrease in the derivative
instrument will be recorded as an adjustment to interest expense
in Krolls Consolidated Statement of Operations.



| |                                    
| | -----------------------------------
| | Other Accounting
    Pronouncements

Kroll adopted several other accounting
pronouncements that contained provisions that became effective
during 2003 and 2002. Except as noted, none of the
pronouncements had a material impact on Krolls
consolidated results of operations or financial position. They
are as follows:



| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 143, Accounting for
    Asset Retirement Obligations;                                                                                                                                                                                                                         
|
| |  | SFAS No. 145, Rescission of FASB
    Statements No. 4, 44, and 64, Amendment of FASB Statement
    No. 13, and Technical Corrections;                                                                                                                                                  
|
| |  | SFAS No. 146, Accounting for
    Costs Associated with Exit or Disposal Activities;                                                                                                                                                                                                    
|
| |  | SFAS No. 148, Accounting for
    Stock-Based Compensation  Transition and
    Disclosure  an amendment of FASB Statement
    No. 123;                                                                                                                                                
|
| |  | SFAS No. 149, Amendment of
    SFAS No. 133 on Derivative Instruments and Hedging
    Activities;                                                                                                                                                                                      
|
| |  | SFAS No. 150, Accounting for
    Certain Financial Instruments with Characteristics of Both
    Liabilities and Equity;                                                                                                                                                                
|
| |  | SFAS No. 132 (revised 2003),
    Employers Disclosures about Pensions and Other
    Postretirement Benefits  an amendment of FASB
    Statements No. 87, 88, and 106;                                                                                                                
|
| |  | FASB Interpretation No. 45,
    Guarantors Accounting and Disclosure Requirements
    for Guarantees, Including Indirect Guarantees of
    Indebtedness of Others, an Interpretation of FASB Statements
    Nos. 5, 57, and 107, and Rescission of FASB Interpretation
    No. 34; and
|
| |  | FASB Interpretation No. 46 (revised December
    2003), Consolidation of Variable Interest
    Entities  an interpretation of ARB No. 51.                                                                                                                                             

42



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##### Table of Contents



Subsequent Events



| |                                         
| | ----------------------------------------
| | 1.75% Convertible Subordinated
    Notes

On January 2, 2004, Kroll issued
$175.0 million aggregate principal amount of Convertible
Subordinated Notes due January 2014. The notes bear interest at
a rate of 1.75% per annum. Kroll will pay interest on the
notes on January 15 and July 15 of each year,
beginning on July 15, 2004. The interest rate is subject to
upward adjustment during certain periods and under certain
circumstances.

The notes may be converted into shares of Kroll
common stock initially at a conversion rate of
28.5205 shares of common stock per $1,000 principal amount
of notes, which is equivalent to an initial conversion price of
approximately $35.06 per share (subject to adjustment in
certain events), under the following circumstances:
(1) during specified periods, if the closing sale price of
Krolls common stock reaches, or the trading price of the
notes falls below, specified levels, (2) Kroll calls the
notes for redemption, (3) during any period in which the
credit ratings assigned to the notes by Moodys and S&P
are below specified levels or are suspended or withdrawn by both
rating agencies, or (4) specified corporate transactions
occur.

The notes are subordinated, unsecured obligations
and rank equal in right of payment with all of Krolls
other unsecured and subordinated indebtedness. The notes are
subordinated in right of payment to all of Krolls existing
and future senior indebtedness. The notes are not guaranteed by
any of Krolls subsidiaries and, accordingly, the notes are
structurally subordinated to any existing and future
indebtedness and other liabilities of Krolls subsidiaries.
The indenture governing the notes does not limit Krolls
right or the right of Krolls subsidiaries to incur
indebtedness in the future.

The notes will mature on January 15, 2014.
On or after January 15, 2009, Kroll may redeem all or a
portion of these convertible notes at a price equal to 100% of
the principal amount, plus accrued and unpaid interest to, but
not including, the date of redemption. On January 15, 2009
and 2011, or upon a change in control (as defined in the
indenture governing the notes), the note holders may require
Kroll to repurchase all or a portion of the notes at 100% of the
principal amount, plus accrued and unpaid interest to, but not
including, the date of repurchase. Kroll will pay cash for any
notes so repurchased on January 15, 2009 but, at
Krolls option, may pay cash, shares of Kroll common stock
(valued at 95% of its market price) or a combination of cash and
shares of Kroll common stock for repurchases made on
January 15, 2011 or upon a change of control.

Kroll has agreed to file a shelf registration
statement covering resales of the notes and the shares of common
stock into which the notes are convertible. If this registration
statement is not filed by April 1, 2004 or if the
registration statement is not declared effective by
June 29, 2004, liquidated damages will accrue as additional
interest on the notes until the registration statement is filed
or declared effective, as the case may be. The liquidated
damages will accrue at a rate of 0.25% of the principal amount
per annum up to and including the 90th day after the failure to
file or have the registration statement declared effective and
0.5% of the principal amount per annum from and after the
91st day after the failure to file or have the registration
statement declared effective. Liquidated damages on the notes
may also accrue if the registration statement ceases to be
effective or if Kroll prevents or restricts sales under an
effective registration statement for certain periods of time.



| |               
| | --------------
| | Treasury Stock

On January 2, 2004, concurrently with the
completion of the offering of the notes, Kroll repurchased
approximately 2.0 million shares of its common stock. As of
March 1, 2004, Kroll had purchased an aggregate of
approximately 2.78 million shares of its common stock for
an aggregate purchase price of approximately $70.8 million.



| |                                          
| | -----------------------------------------
| | Change in Segment Reporting
    Structure

Effective January 1, 2004, the Security
Services segment was integrated into the Consulting Services
segment as a result of a change in the management structure of
these businesses.

43



---



##### Table of Contents





| |             
| | ------------
| | Acquisitions

On March 2, 2004, Kroll acquired The Credit
Network Trust, a mortgage credit reporting company, for a
purchase price of $19.0 million in cash. In addition,
$1.5 million is to be paid in annual installments of
$500,000 over the next three years subject to the retention of
certain customer accounts. The results of operations of The
Credit Network will be included within the Background Screening
Services Group subsequent to the date of acquisition.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Kroll does not expect to enter into financial
instruments for trading or hedging purposes. Kroll does not
currently anticipate entering into interest rate swaps and/or
similar instruments.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

See Financial Statements and Index to Financial
Statements on page F-1 hereof.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a)Disclosure Controls and
Procedures. Krolls management, with the participation
of Krolls Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of
the end of the period covered by this report. Based on such
evaluation, Krolls Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such
period, Krolls disclosure controls and procedures are
operating effectively.

(b)Internal Control over Financial
Reporting. There have been no changes in Krolls
internal controls over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fourth quarter of 2003 that have materially
affected, or are reasonably likely to materially affect,
Krolls internal control over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information required by this Item is incorporated
herein by reference from Krolls definitive proxy statement
for its 2004 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission pursuant to
Regulation 14A no later than April 29, 2004 (the
Proxy Statement).

Kroll has adopted a code of ethics for
management, including Krolls principal executive officer,
principal financial officer and controller, and directors, known
as the Specific Code for Financial and Certain Other Officers.
The Specific Code for Financial and Certain Other Officers is
filed as an exhibit to this Annual Report on Form 10-K. In
addition, Kroll has adopted a code of business conduct and
ethics for all employees generally. The Kroll Code of Business
Conduct and Ethics is also filed as an exhibit to this Annual
Report on Form 10-K.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information required by this Item is incorporated
herein by reference from the Proxy Statement, which will be
filed no later than 120 days after December 31, 2003.

44



---



##### Table of Contents








|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Information required by this Item is incorporated
herein by reference from the Proxy Statement, which will be
filed no later than 120 days after December 31, 2003.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information required by this Item is incorporated
herein by reference from the Proxy Statement, which will be
filed no later than 120 days after December 31, 2003.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information required by this Item is incorporated
herein by reference from the Proxy Statement, which will be
filed no later than 120 days after December 31, 2003.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports of Form 8-K






|              |                     
|------------- | --------------------
|Item 15(A)(1) | Financial Statements

See Financial Statements and Index to Financial
Statements on page F-1 hereof.






|              |                              
|------------- | -----------------------------
|Item 15(A)(2) | Financial Statement Schedules

Schedules have been omitted because they are
either not applicable or not required or the information has
been furnished in the consolidated financial statements






|              |         
|------------- | --------
|Item 15(A)(3) | Exhibits

See List of Exhibits on page G-1 hereof.






|           |                    
|---------- | -------------------
|Item 15(B) | Reports on Form 8-K

On October 28, 2003, Kroll filed a
Form 8-K/A, which amended a Form 8-K filed by Kroll on
September 5, 2003 in connection with its acquisition of
Factual Data Corp., to make available financial information of
Factual Data Corp.

On October 30, 2003, Kroll filed a
Form 8-K that provided financial information regarding
Krolls earnings in the third quarter of 2003 and that
furnished (but did not file) an earnings press release.

On December 17, 2003, Kroll filed a
Form 8-K regarding certain information that was disclosed
at Krolls Investor Day Conference on December 10,
2003.

On December 18, 2003, Kroll filed a
Form 8-K relating to press releases issued in connection
with its offering of 1.75% convertible subordinated notes
due 2014.

On December 22, 2003, Kroll filed a
Form 8-K relating to another press release issued in
connection with its offering of 1.75% convertible
subordinated notes due 2014.

45



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, as of the 15th day
of March 2004.



| |           
| | ----------
| | KROLL INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ MICHAEL G. CHERKASKY

| |                                          
| | -----------------------------------------
| |                                          
| | Michael G. Cherkasky                     
| | President and Chief Executive
    Officer

POWER OF ATTORNEY AND SIGNATURES

We, the undersigned directors of Kroll Inc.
hereby severally constitute and appoint Jules B. Kroll and
Michael G. Cherkasky, and each of them singly, our true and
lawful attorneys and agents, to do any and all acts and things
in our names and on our behalf as directors of Kroll Inc., which
said attorneys and agents, or either of them may deem necessary
or advisable to enable Kroll Inc. to comply with the Securities
Exchange Act of 1934, as amended, and the rules, regulations and
requirements of the Securities and Exchange Commission, in
connection with the filing of Kroll Inc.s Annual Report on
Form 10-K for the fiscal year ended December 31, 2003,
including, without limitation, signing for us, or any of us, in
our names as directors of Kroll Inc., such Form 10-K and
any and all amendments thereto, and we hereby ratify and confirm
all that said attorneys and agents, or either of them, shall do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated as of the 15th day of March 2004.

|                                             |  |                                                                                                           |  | 
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- |  | 
|                                             |  |                                                                                                          
|Signature                                    |  | Title                                                                                                    
|                                             |  |                                                                                                          
|                                            
|Jules B. Kroll                               |  | Executive Chairman of the Board                                                                          
|                                            
|/s/ MICHAEL G. CHERKASKYMichael G. Cherkasky |  | President, Chief Executive Officer and
    Director
    (Principal Executive Officer)                    
|                                            
|/s/ STEVEN L. FORDSteven L. Ford             |  | Executive Vice President and Chief Financial
    Officer
    (Principal Financial and Accounting Officer)
|                                            
|/s/ JUDITH AREENJudith Areen                 |  | Director                                                                                                 
|                                            
|/s/ PETER A. COHENPeter A. Cohen             |  | Director                                                                                                 
|                                            
|Thomas E. Constance                          |  | Director                                                                                                 
|                                            
|/s/ SIMON V. FREAKLEYSimon V. Freakley       |  | President of Corporate Advisory and
    Restructuring Group and Director                                 

46



---



##### Table of Contents



|                                             |  |                                                                   |  | 
|-------------------------------------------- |  | ----------------------------------------------------------------- |  | 
|                                             |  |                                                                  
|Signature                                    |  | Title                                                            
|                                             |  |                                                                  
|                                            
|Raymond E. Mabus                             |  | Director                                                         
|                                            
|/s/ MICHAEL D. SHMERLINGMichael D. Shmerling |  | President of Background Screening
    Services Group and Director
|                                            
|/s/ J. ARTHUR URCIUOLIJ. Arthur Urciuoli     |  | Director                                                         

47



---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

|                                                                                                         |  |  |     | 
|-------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Independent Auditors Report                                                                             |  |  | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                         |  |  | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001           |  |  | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001           |  |  | F-6 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001 |  |  | F-7 | 
|Notes to Consolidated Financial Statements                                                               |  |  | F-9 | 

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of

Kroll Inc.:


We have audited the accompanying Consolidated
Balance Sheets of Kroll Inc. and subsidiaries (the
Company) as of December 31, 2003 and 2002, and
the related Consolidated Statements of Operations, Cash Flows
and Stockholders Equity for each of the three years in the
period ended December 31, 2003. 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
audits.

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

In our opinion, such consolidated financial
statements present fairly, in all material respects, the
consolidated financial position of the Company as of
December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of
America.

As discussed in Note 3, the Company changed
its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
effective on January 1, 2002.

As discussed in Note 25, the accompanying
December 31, 2002 consolidated balance sheet, and the
consolidated statements of cash flows and stockholders
equity for each of the two years in the period ended
December 31, 2002, have been restated to adjust
Krolls accounting for database costs.



| |                          
| | -------------------------
| | /s/ DELOITTE & TOUCHE LLP

New York, New York

March 12, 2004


F-2



---



##### Table of Contents



KROLL INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |         |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------- | -------------- | ------- |  | ------- | ------- | ------- | 
|                                                                                                                                             |                                                                                                                                                     |                      
|                                                                                                                                             |                                                                                                                                                     | December 31,         
|                                                                                                                                             |                                                                                                                                                     |                      
|                                                                                                                                             |                                                                                                                                                     | 2003                  |         | 2002          
|                                                                                                                                             |                                                                                                                                                     |                       |         |               
|                                                                                                                                             |                                                                                                                                                     |                       |         | (As Restated  
|                                                                                                                                             |                                                                                                                                                     |                       |         | (see Note 25))
|                                                                                                                                             |                                                                                                                                                     |                      
|                                                                                                                                             |                                                                                                                                                     | (In thousands,       
|                                                                                                                                             |                                                                                                                                                     | except share amounts)
|ASSETS                                                                                                                                      
|CURRENT ASSETS:                                                                                                                              |                                                                                                                                                     |                       |         |                |         |  |         |        
|                                                                                                                                             | Cash and cash equivalents                                                                                                                           |                       | $       | 22,835         |         |  | $       | 77,317  |        
|                                                                                                                                             | Trade accounts receivable, net of allowance for
    doubtful accounts of $6,435 and $6,875 at December 31, 2003
    and 2002, respectively (Note 9) |                       |         | 71,640         |         |  |         | 48,661  |        
|                                                                                                                                             | Unbilled revenues                                                                                                                                   |                       |         | 38,322         |         |  |         | 29,921  |        
|                                                                                                                                             | Related party receivables (Note 13)                                                                                                                 |                       |         | 155            |         |  |         | 720     |        
|                                                                                                                                             | Deferred tax assets (Note 15)                                                                                                                       |                       |         | 2,087          |         |  |         | 5,304   |        
|                                                                                                                                             | Assets of discontinued operations (Note 6)                                                                                                          |                       |         | 169            |         |  |         | 9,399   |        
|                                                                                                                                             | Prepaid expenses and other current assets                                                                                                           |                       |         | 10,862         |         |  |         | 7,908   |        
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        
|                                                                                                                                             |                                                                                                                                                     | Total current assets  |         |                | 146,070 |  |         |         | 179,230 | 
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        
|PROPERTY, PLANT AND EQUIPMENT, at cost
    (Note 3):                                                                                         |                                                                                                                                                     |                       |         |                |         |  |         |        
|                                                                                                                                             | Land                                                                                                                                                |                       |         | 394            |         |  |         | 194     |        
|                                                                                                                                             | Buildings                                                                                                                                           |                       |         | 2,096          |         |  |         | 2,092   |        
|                                                                                                                                             | Leasehold improvements                                                                                                                              |                       |         | 16,092         |         |  |         | 12,420  |        
|                                                                                                                                             | Furniture and fixtures                                                                                                                              |                       |         | 9,723          |         |  |         | 7,409   |        
|                                                                                                                                             | Equipment                                                                                                                                           |                       |         | 52,776         |         |  |         | 38,268  |        
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        
|                                                                                                                                             |                                                                                                                                                     |                       | 81,081  |                |         |  | 60,383  |        
|                                                                                                                                             | Less: accumulated depreciation and amortization                                                                                                     |                       |         | (43,239        | )       |  |         | (33,190 | )      
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        
|                                                                                                                                             |                                                                                                                                                     |                       | 37,842  |                |         |  | 27,193  |        
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        
|GOODWILL (Notes 3 and 10)                                                                                                                    |                                                                                                                                                     |                       | 376,988 |                |         |  | 292,095 |        
|OTHER INTANGIBLE ASSETS, net of accumulated
    amortization of $13,466 and $5,599 at December 31, 2003 and
    2002, respectively (Note 10) |                                                                                                                                                     |                       | 95,488  |                |         |  | 25,195  |        
|OTHER ASSETS (Note 11)                                                                                                                       |                                                                                                                                                     |                       | 23,221  |                |         |  | 5,705   |        
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        
|                                                                                                                                             |                                                                                                                                                     | Total Assets          |         | $              | 679,609 |  |         | $       | 529,418 | 
|                                                                                                                                             |                                                                                                                                                     |                       |         |                |         |  |         |        

F-3



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##### Table of Contents



KROLL INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |         |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | -------------- | ------- | ------- | ------ | ------- | ------- | ------- | 
|                                                                                                                                  |                                                                                                                                                               |                           
|                                                                                                                                  |                                                                                                                                                               | December 31,              
|                                                                                                                                  |                                                                                                                                                               |                           
|                                                                                                                                  |                                                                                                                                                               | 2003                       |                                            | 2002          
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |               
|                                                                                                                                  |                                                                                                                                                               |                            |                                            | (As Restated  
|                                                                                                                                  |                                                                                                                                                               |                            |                                            | (see Note 25))
|                                                                                                                                  |                                                                                                                                                               |                           
|                                                                                                                                  |                                                                                                                                                               | (In thousands,            
|                                                                                                                                  |                                                                                                                                                               | except share amounts)     
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                         
|CURRENT LIABILITIES:                                                                                                              |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|                                                                                                                                  | Revolving lines of credit (Note 12)                                                                                                                           |                            | $                                          | 2,929          |         |         | $      | 4,209   |        
|                                                                                                                                  | Current portion of long-term debt (Note 16)                                                                                                                   |                            |                                            | 4,328          |         |         |        | 73      |        
|                                                                                                                                  | Trade accounts payable                                                                                                                                        |                            |                                            | 18,354         |         |         |        | 10,529  |        
|                                                                                                                                  | Related party payables (Note 13)                                                                                                                              |                            |                                            | 606            |         |         |        | 2,253   |        
|                                                                                                                                  | Accrued payroll and related benefits                                                                                                                          |                            |                                            | 29,683         |         |         |        | 9,422   |        
|                                                                                                                                  | Other accrued liabilities (Note 14)                                                                                                                           |                            |                                            | 13,868         |         |         |        | 10,873  |        
|                                                                                                                                  | Income taxes payable                                                                                                                                          |                            |                                            | 13,245         |         |         |        | 2,448   |        
|                                                                                                                                  | Liabilities of discontinued operations
    (Note 6)                                                                                                           |                            |                                            | 250            |         |         |        | 857     |        
|                                                                                                                                  | Deferred revenue                                                                                                                                              |                            |                                            | 13,891         |         |         |        | 14,488  |        
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|                                                                                                                                  |                                                                                                                                                               | Total current liabilities  |                                            |                | 97,154  |         |        |         | 55,152  |        
|DEFERRED INCOME TAXES (Note 15)                                                                                                   |                                                                                                                                                               |                            | 7,718                                      |                |         |         | 2,051  |        
|CONVERTIBLE NOTES, net of unamortized discount of
    $7,695 and $9,599 at December 31, 2003 and 2002,
    respectively (Note 16) |                                                                                                                                                               |                            | 22,305                                     |                |         |         | 20,401 |        
|LONG-TERM DEBT, net of current portion
    (Note 16)                                                                              |                                                                                                                                                               |                            | 3,608                                      |                |         |         | 18     |        
|OTHER LONG-TERM LIABILITIES                                                                                                       |                                                                                                                                                               |                            | 1,981                                      |                |         |         | 1,786  |        
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|                                                                                                                                  |                                                                                                                                                               | Total liabilities          |                                            |                | 132,766 |         |        |         | 79,408  |        
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|COMMITMENTS AND CONTINGENCIES (Note 17)
    STOCKHOLDERS EQUITY (Notes 18 and 19):                                               |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|                                                                                                                                  | Preferred stock, $0.01 par value,
    5,000,000 shares authorized, none issued                                                                                |                            |                                            |               |         |         |        |        |        
|                                                                                                                                  | Common stock, $0.01 par value,
    100,000,000 shares authorized, 41,916,288 and
    36,994,758 shares issued at December 31, 2003 and
    2002, respectively |                            |                                            | 419            |         |         |        | 370     |        
|                                                                                                                                  | Common shares to be issued for acquisition
    (Note 5)                                                                                                       |                            |                                            | 16,250         |         |         |        | 55,280  |        
|                                                                                                                                  | Additional paid-in-capital                                                                                                                                    |                            |                                            | 557,668        |         |         |        | 456,843 |        
|                                                                                                                                  | Accumulated deficit                                                                                                                                           |                            |                                            | (20,595        | )       |         |        | (58,487 | )      
|                                                                                                                                  | Accumulated other comprehensive income (loss)                                                                                                                 |                            |                                            | 565            |         |         |        | (3,952  | )      
|                                                                                                                                  | Treasury stock, at cost, 250,300 shares at
    December 31, 2003, none at December 31, 2002                                                                   |                            |                                            | (6,441         | )       |         |        |        |        
|                                                                                                                                  | Deferred compensation                                                                                                                                         |                            |                                            | (1,023         | )       |         |        | (44     | )      
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|                                                                                                                                  |                                                                                                                                                               | Total stockholders equity |                                            |                | 546,843 |         |        |         | 450,010 |        
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |        
|                                                                                                                                  |                                                                                                                                                               |                            | Total liabilities and stockholders equity |                | $       | 679,609 |        |         | $       | 529,418 | 
|                                                                                                                                  |                                                                                                                                                               |                            |                                            |                |         |         |        |        

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

F-4



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##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

For the Years Ended December 31, 2003,
2002 and 2001


|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |        |        |         |  
|-------------------------------- | ---------------------------------------- | ------------------------------------------------------------------------- | ----------------------------------------------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------ | ------ | ------- | -
|                                 |                                          | 2003                                                                      |                                                 | 2002    |         | 2001  
|                                 |                                          |                                                                           |                                                 |         |         |       
|                                 |                                          |                                                                          
|                                 |                                          | (In thousands, except per share amounts)                                 
|NET SALES                        |                                          | $                                                                         | 485,476                                         |         |         | $      | 284,248 |         |         | $      | 201,058 |       
|COST OF SALES                    |                                          |                                                                           | 224,921                                         |         |         |        | 145,058 |         |         |        | 120,727 |       
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Gross profit                             |                                                                           |                                                 | 260,555 |         |        |         | 139,190 |         |        |         | 80,331 |       
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|OPERATING EXPENSES:              |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Selling and marketing                    |                                                                           |                                                 | 44,514  |         |        |         | 26,720  |         |        |         | 18,017 |       
|                                 | General and administrative               |                                                                           |                                                 | 109,342 |         |        |         | 72,198  |         |        |         | 60,007 |       
|                                 | Research and development                 |                                                                           |                                                 | 12,124  |         |        |         | 5,845   |         |        |         |       |       
|                                 | Amortization of other intangible assets  |                                                                           |                                                 | 8,803   |         |        |         | 2,495   |         |        |         | 489    |       
|                                 | Restructuring expenses (Note 8)          |                                                                           |                                                 | 5,794   |         |        |         |        |         |        |         | 2,726  |       
|                                 | Loss on sale of business unit (Note 8)   |                                                                           |                                                 |        |         |        |         | 102     |         |        |         | 528    |       
|                                 | Failed financing costs (Note 8)          |                                                                           |                                                 |        |         |        |         |        |         |        |         | 1,043  |       
|                                 | Impairment of assets (Note 8)            |                                                                           |                                                 |        |         |        |         |        |         |        |         | 807    |       
|                                 | Failed separation costs (Note 8)         |                                                                           |                                                 |        |         |        |         |        |         |        |         | 607    |       
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 |                                          | Operating expenses                                                        |                                                 |         | 180,577 |        |         |         | 107,360 |        |         |        | 84,224 |        
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 |                                          |                                                                           | Operating income (loss)                         |         |         | 79,978 |         |         |         | 31,830 |         |        |        | (3,893  | )
|OTHER INCOME (EXPENSE):          |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Interest expense                         |                                                                           |                                                 | (4,682  | )       |        |         | (4,436  | )       |        |         | (4,375 | )     
|                                 | Interest income                          |                                                                           |                                                 | 669     |         |        |         | 515     |         |        |         | 127    |       
|                                 | Other (Notes 7, 12 and 16)               |                                                                           |                                                 | 180     |         |        |         | (4,351  | )       |        |         | (782   | )     
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 |                                          |                                                                           | Income (loss) before provision for income taxes |         |         | 76,145 |         |         |         | 23,558 |         |        |        | (8,923  | )
|                                 | Provision for income taxes (Note 15)     |                                                                           |                                                 | 29,943  |         |        |         | 7,067   |         |        |         | 2,209  |       
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 |                                          |                                                                           | Income (loss) from continuing operations        |         |         | 46,202 |         |         |         | 16,491 |         |        |        | (11,132 | )
|                                 | Discontinued Operations (Note 6):        |                                                                           |                                                 |         |         |        |         |         |         |        |         |        |       
|                                 |                                          | Loss from video surveillance subsidiary, net of
    taxes                 |                                                 |         | (8,310  | )      |         |         | (191    | )      |         |        | (603   | )      
|                                 |                                          | Income (loss) from security products and services
    group, net of taxes |                                                 |         |        |        |         |         | 81      |        |         |        | (7,541 | )      
|                                 |                                          | Loss from voice and data communications group,
    net of taxes           |                                                 |         |        |        |         |         |        |        |         |        | (2,111 | )      
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 |                                          |                                                                           | Net income (loss)                               |         | $       | 37,892 |         |         | $       | 16,381 |         |        | $      | (21,387 | )
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|BASIC PER SHARE DATA (Note 4):   |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Income (loss) from continuing operations |                                                                           | $                                               | 1.13    |         |        | $       | 0.56    |         |        | $       | (0.50  | )     
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Net income (loss) per share              |                                                                           | $                                               | 0.93    |         |        | $       | 0.56    |         |        | $       | (0.95  | )     
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Weighted average shares outstanding      |                                                                           |                                                 | 40,820  |         |        |         | 29,448  |         |        |         | 22,479 |       
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|DILUTED PER SHARE DATA (Note 4): |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Income (loss) from continuing operations |                                                                           | $                                               | 1.09    |         |        | $       | 0.54    |         |        | $       | (0.50  | )     
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Net income (loss) per share              |                                                                           | $                                               | 0.90    |         |        | $       | 0.54    |         |        | $       | (0.95  | )     
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       
|                                 | Weighted average shares outstanding      |                                                                           |                                                 | 42,223  |         |        |         | 30,542  |         |        |         | 22,479 |       
|                                 |                                          |                                                                           |                                                 |         |         |        |         |         |         |        |         |       

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

F-5



---



##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended December 31, 2003,
2002 and 2001


|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |         |        |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | ------------------------------------------------------- | -------------- | ------- | -------- | ------ | ------- | ------ | ------- | ------- | ------- | ------ | ------- | -
|                                                                            |                                                                                                        | 2003                                                         |                                                         | 2002           |         | 2001    
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |         
|                                                                            |                                                                                                        |                                                              |                                                         |               
|                                                                            |                                                                                                        |                                                              |                                                         | (As Restated  
|                                                                            |                                                                                                        |                                                              |                                                         | (see Note 25))
|                                                                            |                                                                                                        |                                                             
|                                                                            |                                                                                                        | (In thousands)                                              
|OPERATING ACTIVITIES:                                                       |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|                                                                            | Net income (loss)                                                                                      |                                                              | $                                                       | 37,892         |         |          | $      | 16,381  |        |         | $       | (21,387 | )     
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                              |                                                         |                |         |          |        |         |        |         |         |         |       
|                                                                            |                                                                                                        | Loss from discontinued operations, net of taxes
    (Note 6) |                                                         |                | 8,310   |          |        |         | 110    |         |         |         | 10,255 |        
|                                                                            |                                                                                                        | Bad debt expense (Note 9)                                    |                                                         |                | 7,118   |          |        |         | 3,934  |         |         |         | 5,879  |        
|                                                                            |                                                                                                        | Depreciation and amortization (Notes 3 and 10)               |                                                         |                | 19,601  |          |        |         | 9,813  |         |         |         | 8,709  |        
|                                                                            |                                                                                                        | Non-cash compensation expense                                |                                                         |                | 863     |          |        |         |       |         |         |         | 337    |        
|                                                                            |                                                                                                        | Non-cash interest expense                                    |                                                         |                | 2,383   |          |        |         | 1,934  |         |         |         | 401    |        
|                                                                            |                                                                                                        | Loss on extinguishments of debt (Notes 12 and 16)            |                                                         |                | 85      |          |        |         | 4,453  |         |         |         | 344    |        
|                                                                            |                                                                                                        | Loss on sale of business unit (Note 8)                       |                                                         |                |        |          |        |         | 102    |         |         |         | 528    |        
|                                                                            |                                                                                                        | Loss on impairment of assets (Note 8)                        |                                                         |                |        |          |        |         |       |         |         |         | 807    |        
|                                                                            |                                                                                                        | Non-cash gain from investments                               |                                                         |                |        |          |        |         |       |         |         |         | (143   | )      
|                                                                            | Change in assets and liabilities, net of effects
    of acquisitions and dispositions:                 |                                                              |                                                         |                |         |          |        |         |        |         |         |         |       
|                                                                            |                                                                                                        | Trade accounts receivables and unbilled revenues             |                                                         |                | (19,516 | )        |        |         | (3,551 | )       |         |         | (8,227 | )      
|                                                                            |                                                                                                        | Prepaid expenses and other current assets                    |                                                         |                | 1,742   |          |        |         | (2,139 | )       |         |         | 1,498  |        
|                                                                            |                                                                                                        | Trade accounts payable                                       |                                                         |                | (5,507  | )        |        |         | 50     |         |         |         | (2,027 | )      
|                                                                            |                                                                                                        | Amounts due to/from related parties                          |                                                         |                | 1,235   |          |        |         | (6,236 | )       |         |         | (2,038 | )      
|                                                                            |                                                                                                        | Accrued liabilities                                          |                                                         |                | 15,597  |          |        |         | (3,174 | )       |         |         | 3,380  |        
|                                                                            |                                                                                                        | Income taxes payable                                         |                                                         |                | 9,814   |          |        |         | 5,493  |         |         |         | 14     |        
|                                                                            |                                                                                                        | Deferred revenue                                             |                                                         |                | (945    | )        |        |         | 5,027  |         |         |         | 352    |        
|                                                                            |                                                                                                        | Deferred income taxes                                        |                                                         |                | 7,528   |          |        |         | (3,453 | )       |         |         | (567   | )      
|                                                                            |                                                                                                        | Other long-term assets and liabilities                       |                                                         |                | (3,102  | )        |        |         | (777   | )       |         |         | 880    |        
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|                                                                            |                                                                                                        |                                                              | Net cash provided by (used in) operating
    activities |                |         | 83,098   |        |         |        | 27,967  |         |         |        | (1,005  | )
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|INVESTING ACTIVITIES:                                                       |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|                                                                            | Purchases of property, plant and equipment                                                             |                                                              |                                                         | (14,134        | )       |          |        | (6,055  | )      |         |         | (3,400  | )     
|                                                                            | Additions to other intangible assets                                                                   |                                                              |                                                         |               |         |          |        |        |        |         |         | (834    | )     
|                                                                            | Gain (loss) on the retirement of assets                                                                |                                                              |                                                         | 152            |         |          |        | (2,193  | )      |         |         | (32     | )     
|                                                                            | Acquisitions, net of cash acquired (Note 5)                                                            |                                                              |                                                         | (109,094       | )       |          |        | (77,752 | )      |         |         |        |       
|                                                                            | Sales of marketable securities, net                                                                    |                                                              |                                                         |               |         |          |        | 5,594   |        |         |         |        |       
|                                                                            | Other investments                                                                                      |                                                              |                                                         | (17,333        | )       |          |        | (355    | )      |         |         | (84     | )     
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|                                                                            |                                                                                                        |                                                              | Net cash used in investing activities                   |                |         | (140,409 | )      |         |        | (80,761 | )       |         |        | (4,350  | )
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|FINANCING ACTIVITIES:                                                       |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|                                                                            | Net borrowings (repayments) under revolving
    lines of credit                                        |                                                              |                                                         | (3,375         | )       |          |        | 749     |        |         |         | (36,649 | )     
|                                                                            | Proceeds from issuance of long-term debt                                                               |                                                              |                                                         |               |         |          |        | 75,000  |        |         |         | 30,000  |       
|                                                                            | Payments of long-term debt                                                                             |                                                              |                                                         | (1,897         | )       |          |        | (75,797 | )      |         |         | (35,326 | )     
|                                                                            | Proceeds from exercise of stock options and
    warrants                                               |                                                              |                                                         | 8,344          |         |          |        | 8,545   |        |         |         | 2,569   |       
|                                                                            | Proceeds from issuance of common stock in
    connection with public offering                          |                                                              |                                                         |               |         |          |        | 110,568 |        |         |         |        |       
|                                                                            | Purchase of treasury stock                                                                             |                                                              |                                                         | (6,441         | )       |          |        |        |        |         |         |        |       
|                                                                            | Proceeds from issuance of common stock under
    Employee Stock Purchase Plan                          |                                                              |                                                         | 2,581          |         |          |        |        |        |         |         |        |       
|                                                                            | Other                                                                                                  |                                                              |                                                         | 2,284          |         |          |        | (265    | )      |         |         | (2,292  | )     
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|                                                                            |                                                                                                        |                                                              | Net cash provided by (used in) financing
    activities |                |         | 1,496    |        |         |        | 118,800 |         |         |        | (41,698 | )
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                    |                                                                                                        |                                                              | (55,815                                                 | )              |         |          | 66,006 |         |        |         | (47,053 | )      
|Effects of foreign currency exchange rates on
    cash and cash equivalents |                                                                                                        |                                                              | 859                                                     |                |         |          | (87    | )       |        |         | (325    | )      
|Net cash provided by (used in) discontinued
    operations                  |                                                                                                        |                                                              | 474                                                     |                |         |          | (87    | )       |        |         | 52,586  |        
|CASH AND CASH EQUIVALENTS, beginning of year                                |                                                                                                        |                                                              | 77,317                                                  |                |         |          | 11,485 |         |        |         | 6,277   |        
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        
|CASH AND CASH EQUIVALENTS, end of year                                      |                                                                                                        | $                                                            | 22,835                                                  |                |         | $        | 77,317 |         |        | $       | 11,485  |        
|                                                                            |                                                                                                        |                                                              |                                                         |                |         |          |        |         |        |         |         |        

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

F-6



---



##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Years Ended December 31, 2001,
2002 and 2003


|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  |                |        |                |  |          |         |        |  |              |         |                |   |   |        |        |   |  |   |   |  |   |   |   |  |   |      |   |  |   |         |         |  
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---------------------- | ---------- | ----------- |  | ----------- | --- | ----------- |  | -------------- | ------ | -------------- |  | -------- | ------- | ------ |  | ------------ | ------- | -------------- | - | - | ------ | ------ | - |  | - | - |  | - | - | - |  | - | ---- | - |  | - | ------- | ------- | -
|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  |                |        | Accumulated    |  |          |         |        |  |              |         |               
|                                                                                                      |                                                                                            |                        |            | Common      |  |             |     |             |  | Other          |        |                |  |          |         |       
|                                                                                                      |                                                                                            | Common Stock           |            | Stock to Be |  | Additional  |     |             |  | Comprehensive  |        | Treasury Stock |  |          |         |       
|                                                                                                      |                                                                                            |                        |            | Issued for  |  | Paid-In-    |     | Accumulated |  | Income         |        |                |  | Deferred |         |       
|                                                                                                      |                                                                                            | Shares                 |            | Amount      |  | Acquisition |     | Capital     |  | Deficit        |        | (Loss)         |  | Shares   |         | Amount |  | Compensation |         | Total         
|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  |                |        |                |  |          |         |        |  |              |         |               
|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  | (As Restated   |        |                |  |          |         |        |  |              |         | (As Restated  
|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  | (see Note 25)) |        |                |  |          |         |        |  |              |         | (see Note 25))
|                                                                                                      |                                                                                            |                       
|                                                                                                      |                                                                                            | (Dollars in thousands)
|BALANCE, January 1, 2001                                                                              |                                                                                            |                        | 22,414,697 |             |  | $           | 224 |             |  | $              |       |                |  | $        | 169,467 |        |  | $            | (53,481 | )              |   | $ | (6,349 | )      |   |  |  |   |  | $ |  |   |  | $ | (337 | ) |  | $ | 109,524 |        
|Comprehensive Loss:                                                                                   |                                                                                            |                        |            |             |  |             |     |             |  |                |        |                |  |          |         |        |  |              |         |                |   |   |        |        |   |  |   |   |  |   |   |   |  |   |      |   |  |   |         |        
|                                                                                                      | Net loss                                                                                   |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         | (21,387        | ) |   |        |       |   |  |   |  |  |   |   |  |  |   |      |  |  |   |         |         |  
|                                                                                                      | Reversal of foreign currency translation from the
    sale of SPSG, net of taxes of $2,538 |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         |               |   |   |        | 4,140  |   |  |   |  |  |   |   |  |  |   |      |  |  |   |         |         |  
|                                                                                                      | Foreign currency translation adjustment                                                    |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         |               |   |   |        | (2,336 | ) |  |   |  |  |   |   |  |  |   |      |  |  |   |         |         |  
|                                                                                                      | Total comprehensive loss                                                                   |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         |               |   |   |        |       |   |  |   |  |  |   |   |  |  |   |      |  |  |   |         | (19,583 | )
|Exercise of employee stock options and warrants                                                       |                                                                                            |                        | 379,174    |             |  |             | 4   |             |  |                |       |                |  |          | 2,565   |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 2,569   |        
|Amortization of restricted stock                                                                      |                                                                                            |                        |           |             |  |             |    |             |  |                |       |                |  |          |        |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   | 337  |   |  |   | 337     |        
|Discount to market of senior subordinated
    convertible notes (Note 16)                             |                                                                                            |                        |           |             |  |             |    |             |  |                |       |                |  |          | 11,389  |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 11,389  |        
|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  |                |        |                |  |          |         |        |  |              |         |                |   |   |        |        |   |  |   |   |  |   |   |   |  |   |      |   |  |   |         |        
|BALANCE, December 31, 2001                                                                            |                                                                                            |                        | 22,793,871 |             |  |             | 228 |             |  |                |       |                |  |          | 183,421 |        |  |              | (74,868 | )              |   |   | (4,545 | )      |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 104,236 |        
|Comprehensive Income:                                                                                 |                                                                                            |                        |            |             |  |             |     |             |  |                |        |                |  |          |         |        |  |              |         |                |   |   |        |        |   |  |   |   |  |   |   |   |  |   |      |   |  |   |         |        
|                                                                                                      | Net income                                                                                 |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         | 16,381         |   |   |        |       |   |  |   |  |  |   |   |  |  |   |      |  |  |   |         |         |  
|                                                                                                      | Foreign currency translation adjustment                                                    |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         |               |   |   |        | 593    |   |  |   |  |  |   |   |  |  |   |      |  |  |   |         |         |  
|                                                                                                      | Total comprehensive income                                                                 |                        |            |            |  |             |     |            |  |                |        |               |  |          |         |       |  |              |         |               |   |   |        |       |   |  |   |  |  |   |   |  |  |   |      |  |  |   |         | 16,974  |  
|Exercise of employee stock options                                                                    |                                                                                            |                        | 1,022,977  |             |  |             | 10  |             |  |                |       |                |  |          | 8,535   |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 8,545   |        
|Tax benefit from exercise of employee stock
    options                                               |                                                                                            |                        |           |             |  |             |    |             |  |                |       |                |  |          | 4,432   |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 4,432   |        
|Issuance of restricted stock                                                                          |                                                                                            |                        | 2,500      |             |  |             |    |             |  |                |       |                |  |          |        |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   | (44  | ) |  |   | (44     | )      
|Issuance of common stock and stock options in
    connection with the acquisition of Ontrack (Note 5) |                                                                                            |                        | 6,850,410  |             |  |             | 69  |             |  |                |       |                |  |          | 149,950 |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 150,019 |        
|Issuance of common stock in connection with
    public offering (Note 18)                             |                                                                                            |                        | 6,325,000  |             |  |             | 63  |             |  |                |       |                |  |          | 110,505 |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 110,568 |        
|Common stock to be issued in connection with the
    acquisition of Zolfo Cooper (Note 5)             |                                                                                            |                        |           |             |  |             |    |             |  |                | 55,280 |                |  |          |        |        |  |              |        |                |   |   |       |        |   |  |  |   |  |   |  |   |  |   |     |   |  |   | 55,280  |        
|                                                                                                      |                                                                                            |                        |            |             |  |             |     |             |  |                |        |                |  |          |         |        |  |              |         |                |   |   |        |        |   |  |   |   |  |   |   |   |  |   |      |   |  |   |         |        
|BALANCE, December 31, 2002                                                                            |                                                                                            |                        | 36,994,758 |             |  |             | 370 |             |  |                | 55,280 |                |  |          | 456,843 |        |  |              | (58,487 | )              |   |   | (3,952 | )      |   |  |  |   |  |   |  |   |  |   | (44  | ) |  |   | 450,010 |        

F-7



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##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (Continued)

For the Years Ended December 31, 2001,
2002 and 2003


|                                                                                                               |                                         |                        |            |           |  |             |     |             |  |                |         |                |  |          |         |        |  |              |         |                |  |   |        |       |  |  |          |   |  |   |        |   |  |   |        |   |  |   |         |        | 
|-------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ---------------------- | ---------- | --------- |  | ----------- | --- | ----------- |  | -------------- | ------- | -------------- |  | -------- | ------- | ------ |  | ------------ | ------- | -------------- |  | - | ------ | ----- |  |  | -------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------- | ------ | 
|                                                                                                               |                                         |                        |            |           |  | Common      |     |             |  |                |         | Accumulated    |  |          |         |        |  |              |         |               
|                                                                                                               |                                         |                        |            | Stock to  |  |             |     |             |  | Other          |         |                |  |          |         |       
|                                                                                                               |                                         | Common Stock           |            | Be Issued |  | Additional  |     |             |  | Comprehensive  |         | Treasury Stock |  |          |         |       
|                                                                                                               |                                         |                        |            | for       |  | Paid-In-    |     | Accumulated |  | Income         |         |                |  | Deferred |         |       
|                                                                                                               |                                         | Shares                 |            | Amount    |  | Acquisition |     | Capital     |  | Deficit        |         | (Loss)         |  | Shares   |         | Amount |  | Compensation |         | Total         
|                                                                                                               |                                         |                        |            |           |  |             |     |             |  |                |         |                |  |          |         |        |  |              |         |               
|                                                                                                               |                                         |                        |            |           |  |             |     |             |  | (As Restated   |         |                |  |          |         |        |  |              |         | (As Restated  
|                                                                                                               |                                         |                        |            |           |  |             |     |             |  | (see Note 25)) |         |                |  |          |         |        |  |              |         | (see Note 25))
|                                                                                                               |                                         |                       
|                                                                                                               |                                         | (Dollars in thousands)
|BALANCE, January 1, 2003                                                                                       |                                         |                        | 36,994,758 |           |  | $           | 370 |             |  | $              | 55,280  |                |  | $        | 456,843 |        |  | $            | (58,487 | )              |  | $ | (3,952 | )     |  |  |         |   |  | $ |       |   |  | $ | (44    | ) |  | $ | 450,010 |       
|Comprehensive Income:                                                                                          |                                         |                        |            |           |  |             |     |             |  |                |         |                |  |          |         |        |  |              |         |                |  |   |        |       |  |  |          |   |  |   |        |   |  |   |        |   |  |   |         |       
|                                                                                                               | Net income                              |                        |            |          |  |             |     |            |  |                |         |               |  |          |         |       |  |              |         | 37,892         |  |   |        |      |  |  |          |  |  |   |        |  |  |   |        |  |  |   |         |        | 
|                                                                                                               | Foreign currency translation adjustment |                        |            |          |  |             |     |            |  |                |         |               |  |          |         |       |  |              |         |               |  |   |        | 4,517 |  |  |          |  |  |   |        |  |  |   |        |  |  |   |         |        | 
|                                                                                                               | Total comprehensive income              |                        |            |          |  |             |     |            |  |                |         |               |  |          |         |       |  |              |         |               |  |   |        |      |  |  |          |  |  |   |        |  |  |   |        |  |  |   |         | 42,409 | 
|Exercise of employee stock options                                                                             |                                         |                        | 848,411    |           |  |             | 8   |             |  |                |        |                |  |          | 8,336   |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   | 8,344   |       
|Tax benefit from exercise of employee stock
    options                                                        |                                         |                        |           |           |  |             |    |             |  |                |        |                |  |          | 4,072   |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   | 4,072   |       
|Issuance of restricted stock                                                                                   |                                         |                        | 82,854     |           |  |             | 1   |             |  |                |        |                |  |          | 1,841   |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   | (1,842 | ) |  |   |        |       
|Amortization of restricted stock                                                                               |                                         |                        |           |           |  |             |    |             |  |                |        |                |  |          |        |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   | 863    |   |  |   | 863     |       
|Issuance of common stock  Employee
    Stock Purchase Plan (ESPP)                                           |                                         |                        | 155,554    |           |  |             | 2   |             |  |                |        |                |  |          | 2,579   |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   | 2,581   |       
|Issuance of common stock and stock options in
    connection with the acquisition of Factual Data (Note 5)     |                                         |                        | 934,712    |           |  |             | 9   |             |  |                |        |                |  |          | 28,838  |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   | 28,847  |       
|Issuance of common stock in connection with the
    acquisition of Zolfo Cooper (Note 5)                       |                                         |                        | 2,899,999  |           |  |             | 29  |             |  |                | (55,280 | )              |  |          | 55,251  |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   |        |       
|Additional shares of common stock to be issued in
    connection with the acquisition of Zolfo Cooper (Note 5) |                                         |                        |           |           |  |             |    |             |  |                | 16,250  |                |  |          |        |        |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   | 16,250  |       
|Purchase of treasury stock                                                                                     |                                         |                        |           |           |  |             |    |             |  |                |        |                |  |          |        |        |  |              |        |                |  |   |       |       |  |  | (250,300 | ) |  |   | (6,441 | ) |  |   |       |   |  |   | (6,441  | )     
|Stock issuance costs                                                                                           |                                         |                        |           |           |  |             |    |             |  |                |        |                |  |          | (92     | )      |  |              |        |                |  |   |       |       |  |  |         |   |  |   |       |   |  |   |       |   |  |   | (92     | )     
|                                                                                                               |                                         |                        |            |           |  |             |     |             |  |                |         |                |  |          |         |        |  |              |         |                |  |   |        |       |  |  |          |   |  |   |        |   |  |   |        |   |  |   |         |       
|BALANCE, December 31, 2003                                                                                     |                                         |                        | 41,916,288 |           |  | $           | 419 |             |  | $              | 16,250  |                |  | $        | 557,668 |        |  | $            | (20,595 | )              |  | $ | 565    |       |  |  | (250,300 | ) |  | $ | (6,441 | ) |  | $ | (1,023 | ) |  | $ | 546,843 |       
|                                                                                                               |                                         |                        |            |           |  |             |     |             |  |                |         |                |  |          |         |        |  |              |         |                |  |   |        |       |  |  |          |   |  |   |        |   |  |   |        |   |  |   |         |       

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

F-8



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##### Table of Contents



KROLL INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For the Years Ended December 31, 2003,
2002 and 2001


1.     Nature of
Operations

Kroll Inc. (Kroll) is a leading
global provider of complementary risk consulting services. Kroll
assists businesses, governments and individuals throughout the
world in preventing, mitigating and responding to risk through
an integrated suite of services. In 2003, Krolls five
business groups enabled Kroll to provide its clients with
comprehensive, single source, risk consulting services. These
five business groups are: (1) Corporate Advisory and
Restructuring Services, which provides corporate restructuring,
operational turnaround, strategic advisory services, financial
crisis management and corporate finance services;
(2) Consulting Services, which provides business and
financial investigations, forensic accounting, business
valuation, litigation consulting, due diligence, litigation
intelligence, asset tracing and analysis, monitoring and special
inquiries, market intelligence and intellectual property and
infringement investigations; (3) Technology Services, which
provides electronic discovery, data recovery and computer
forensics services, along with related software solutions;
(4) Background Screening Services, which provides employee
and vendor background investigations, credit screening and
substance abuse testing and (5) Security Services, which
provides security architecture and design, corporate security
consulting, emergency management and environmental services as
well as protective services, operations and training. Effective
January 1, 2004, Security Services was integrated into
Consulting Services (see Note 26).

Kroll consummated a number of acquisitions and
dispositions within the periods presented in the accompanying
consolidated financial statements. Financial information
regarding Krolls acquisitions is discussed in Note 5.
Financial information regarding Krolls dispositions is
discussed in Notes 6 and 7.

2.     Basis of
Presentation

The consolidated financial statements include the
historical consolidated financial statements of Kroll and the
businesses it has acquired, since their respective dates of
acquisition. All material intercompany accounts and transactions
are eliminated in consolidation. Investments in 20% to 50% owned
entities are accounted for using the equity method. Investments
in less than 20% owned entities are accounted for under the cost
method.

In presenting the consolidated financial
statements, management makes estimates and assumptions that
affect the amounts reported and related disclosures. Estimates,
by their nature, are based on judgment and available
information. Accordingly, actual results could differ from those
estimates.

Certain reclassifications have been made to prior
period amounts to conform to the current year presentation.

3.     Summary of
Significant Accounting Policies



| |                      
| | ---------------------
| | Business Combinations

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141,
Business Combinations, which addresses financial
accounting and reporting for business combinations, including
goodwill and other intangible assets acquired at acquisition.
SFAS No. 141 requires all business combinations in the
scope of the statement to be accounted for using one method, the
purchase method. The provisions of this statement apply to all
business combinations initiated after June 30, 2001.

F-9



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash equivalents consist of all highly liquid
investments with an initial maturity of three months or less at
the date of purchase. Kroll invests excess cash primarily in
money market funds. The carrying amount of cash and cash
equivalents approximates fair value of those instruments due to
their short maturity.



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that subject Kroll to
credit risk consist principally of trade receivables. The number
of clients that comprise Krolls client base, along with
the different industries and geographic regions in which
Krolls clients operate, limits concentrations of credit
risk with respect to accounts receivable. Kroll does not
generally require collateral or other security to support client
receivables, although Kroll does require retainers, up-front
deposits or irrevocable letters-of-credit in some situations.
Kroll has established an allowance for doubtful accounts based
upon facts surrounding the credit risk of specific clients and
past history. Management believes that such allowance is
adequate and does not anticipate incurring any significant
losses on its trade receivables in excess of established
allowances.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment is stated at cost
with the exception of capitalized leases which are recorded at
present value. Improvements are capitalized, while repairs and
maintenance costs are charged to operations as incurred.
Depreciation is computed utilizing the straight-line method over
the estimated useful lives of the related assets. The estimated
useful lives used are as follows: buildings, ten to thirty-one
and one-half years; leasehold improvements, lesser of useful
life or life of lease; furniture and fixtures, three to ten
years; and equipment, one and one-half to ten years.

Furniture and fixtures, net and equipment, net
include capitalized lease costs of $370,234 and $209,720,
respectively, at December 31, 2003.

Depreciation of property, plant and equipment for
the years ended December 31, 2003, 2002 and 2001 was
$10,798,045, $7,318,494 and $5,674,939, respectively.



| |                                         
| | ----------------------------------------
| | Goodwill and Other Intangible
    Assets

On January 1, 2002, Kroll adopted SFAS
No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 established accounting and reporting standards
for goodwill and other intangible assets that are acquired
individually or with a group of other assets. SFAS No. 142
also established accounting and reporting standards for goodwill
and other intangible assets subsequent to their date of
acquisition. In connection with the adoption of this standard,
Kroll ceased amortizing goodwill and any indefinite-lived
intangible assets beginning January 1, 2002. Prior to the
adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over periods ranging from 12 to
40 years. Amortization of goodwill was $2.1 million
during 2001. See Note 10 for the pro forma effect on 2001
had the non-amortization provisions of SFAS No. 142 been
applied to that year.

In connection with the implementation of SFAS
No. 142, Kroll was required to assess goodwill and any
indefinite-lived intangible assets for impairment. It was
determined that there was no impairment of goodwill and
indefinite-lived intangible assets at January 1, 2002.
Additionally, pursuant to SFAS No. 142, Kroll is required
to assess its goodwill and indefinite-lived intangible assets
for impairment annually or more frequently if circumstances
indicate impairment may have occurred. In connection with
Krolls annual impairment tests during the third quarter of
2003, it was determined that such assets were not impaired.

Intangible assets with finite useful lives, which
primarily consist of customer lists, customer relationships,
internally-developed software, franchise and license agreements,
trademarks and non-compete agreements,

F-10



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

continue to be amortized on a straight-line
basis. Customer lists and customer relationships are amortized
over periods ranging from four to fifteen years. Internally
developed software, primarily recorded as part of Krolls
acquisitions of Ontrack Data International, Inc. and Factual
Data Corp., are amortized over periods ranging from seven to ten
years. Franchise and license agreements are amortized over
periods ranging from five to eight years and trademarks are
amortized over periods ranging from three to twenty-five years.
Non-compete agreements are amortized over the lives of the
respective agreements, which range from three to seven and
one-half years.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

On January 1, 2002, Kroll adopted SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which replaced SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. SFAS No. 144
retained the impairment recognition and measurement provisions
of SFAS No. 121 for all long-lived assets to be held and
used other than goodwill and indefinite-lived intangible assets,
which are now covered by SFAS No. 142. SFAS No. 144
also requires that long-lived assets held for sale, including
discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell. As of December 31,
2003 and 2002, there has been no impairment in the carrying
amount of Krolls long-lived assets.

Kroll evaluates the recoverability of its
long-lived assets, including goodwill and indefinite-lived
intangible assets for periods before January 1, 2002,
whenever events or changes in circumstances indicate the
carrying amount of a long-lived asset may not be recoverable. An
impairment loss is recognized whenever the carrying amount of a
long-lived asset exceeds the expected future cash flows, on an
undiscounted basis, to be generated from the asset, including
eventual disposition. An impairment loss would be measured as
the amount by which the carrying amount of the long-lived asset
exceeds its fair value.



| |                                                  
| | -------------------------------------------------
| | Foreign Currency Translation and
    Transactions

Assets and liabilities of foreign operations are
translated using year-end exchange rates. Revenues and expenses
are translated using exchange rates prevailing during the year,
with gains or losses resulting from translation included in
accumulated other comprehensive income (loss).

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 and are
recorded within the statement of operations. 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.



| |                    
| | -------------------
| | Revenue Recognition

Revenue is recognized as the services are
performed pursuant to the applicable contractual arrangements.
Revenue related to time and materials arrangements is recognized
in the period in which the services are performed. Revenue from
standard hourly rate engagements is recognized as hours are
incurred and revenue from standard daily rate arrangements is
recognized at amounts represented by the agreed-upon billing
amounts as incurred. Revenue related to fixed price arrangements
are recognized based upon the achievement of certain milestones
or progress points within the project plan. Revenue provided
from credit services is recognized when the information is
delivered to the customer, either electronically or by other
means. The impact of any revisions in estimated total revenue
and direct contract costs is recognized in the period in which
they become known. Expenses incurred by professional staff in
the generation of revenue are billed to the client and included
in revenue. Kroll records either billed or unbilled accounts
receivable based on case-by-case invoicing determinations.
Software revenue is recognized when shipped, with the exception
of royalty-based products, for which revenue is recognized as
applicable royalty reports are received. Software revenue is

F-11



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

stated net of estimated customer returns and
allowances. Kroll recognizes contingent fees as earned, i.e.,
upon satisfaction of all conditions to their payment.



| |            
| | -----------
| | Advertising

Kroll expenses the cost of advertising as
incurred. Advertising expense for the years ended
December 31, 2003, 2002 and 2001 was approximately
$2,986,000, $2,146,000 and $426,000, respectively.



| |                         
| | ------------------------
| | Research and Development

Expenditures for research and software
development costs are expensed as incurred. Such costs related
to the development of software products are required to be
expensed until the point that technological feasibility and
proven marketability of the product under development are
established.



| |                                       
| | --------------------------------------
| | Issuances of Stock by
    Subsidiaries

Kroll has adopted income statement recognition as
its accounting policy for recognizing any gains and losses on
issuances of stock by its subsidiaries.



| |                                     
| | ------------------------------------
| | Derivative Financial
    Instruments

Effective January 1, 2001, Kroll adopted
SFAS No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities, as amended. SFAS No.
133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under
SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a
derivative.

Kroll used foreign currency exchange contracts
during 2001 to hedge its exposure to movements in foreign
currency exchange rates. Kroll accounted for those contracts as
hedges and therefore the transition adjustment on
January 1, 2001 was not material as the carrying value of
those contracts prior to the adoption of SFAS No. 133
approximated their fair value at the adoption date. In November
2001, Kroll sold its four remaining foreign currency hedge
contracts with notional amounts aggregating $3.2 million,
resulting in a net gain of approximately $65,000. Through
December 31, 2003, Kroll had not since used hedging or
derivative instruments and did not hold or issue derivative
financial instruments for trading purposes. In connection with
the issuance of its 1.75% convertible subordinated notes due
2014 on January 2, 2004, discussed in Note 26, Kroll
will be required to mark to market an embedded interest rate
derivative instrument contained within these notes. Any increase
or decrease in the derivative instrument will be recorded as an
adjustment to interest expense in Krolls Consolidated
Statement of Operations.



| |                         
| | ------------------------
| | Stock-Based Compensation

As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123, Kroll
accounts 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
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and its related
interpretations. Accordingly, compensation expense is recognized
based on the difference, if any, between the fair market value
of the stock option award on the date of grant and the option
exercise price. SFAS No. 123 established a fair value-based
method of accounting for compensation cost related to stock
options and other forms of stock-based compensation plans.
However, SFAS No. 123, as amended by SFAS No. 148
during 2002, allows an entity to continue to measure
compensation cost using the principles of APB Opinion
No. 25 only if certain pro forma disclosures are made. With
respect to restricted stock awards, the market value at

F-12



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

date of grant of the shares of restricted stock
issued is recorded as compensation expense over the period of
restriction.

Under APB Opinion No. 25, no stock-based
employee compensation expense relating to Krolls stock
option plans was reflected in net income (loss), as all options
granted under its plans had an exercise price equal to the
market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net
income (loss) and net income (loss) per share if Kroll
had applied the fair value recognition provisions of SFAS
No. 123 to employee stock option awards (in thousands,
except per share amounts).

|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------- | ------- | -
|                                                                                                                                                    |                             |                         
|                                                                                                                                                    |                             | Years Ended December 31,
|                                                                                                                                                    |                             |                         
|                                                                                                                                                    |                             | 2003                     |        | 2002   |  | 2001
|                                                                                                                                                    |                             |                          |        |        |  |     
|Net income (loss) as reported                                                                                                                       |                             | $                        | 37,892 |        |  | $    | 16,381 |        |  | $ | (21,387 | )      
|Deduct: total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                             |                          | (8,893 | )      |  |      | (6,061 | )      |  |   | (3,477  | )      
|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |        
|                                                                                                                                                    | Pro forma net income (loss) |                          | $      | 28,999 |  |      | $      | 10,320 |  |   | $       | (24,864 | )
|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |        
|Net Income (Loss) Per Share:                                                                                                                        |                             |                          |        |        |  |      |        |        |  |   |         |        
|Basic                                                                                                                                               |                             |                          |        |        |  |      |        |        |  |   |         |        
|                                                                                                                                                    | As reported                 |                          | $      | 0.93   |  |      | $      | 0.56   |  |   | $       | (0.95   | )
|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |        
|                                                                                                                                                    | Pro forma                   |                          | $      | 0.71   |  |      | $      | 0.35   |  |   | $       | (1.11   | )
|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |        
|Diluted                                                                                                                                             |                             |                          |        |        |  |      |        |        |  |   |         |        
|                                                                                                                                                    | As reported                 |                          | $      | 0.90   |  |      | $      | 0.54   |  |   | $       | (0.95   | )
|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |        
|                                                                                                                                                    | Pro forma                   |                          | $      | 0.69   |  |      | $      | 0.34   |  |   | $       | (1.11   | )
|                                                                                                                                                    |                             |                          |        |        |  |      |        |        |  |   |         |        

Detailed information regarding Krolls stock
plans and the assumptions used in the fair value based method
set forth in the table above can be found in Note 19.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

Kroll adopted several other accounting
pronouncements that contained provisions that became effective
during 2003 and 2002. Except as noted, none of the
pronouncements had a material impact on Krolls
consolidated results of operations or financial position. They
are as follows:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 143, Accounting for Asset
    Retirement Obligations;                                                                         
|
| |  | SFAS No. 145, Rescission of FASB
    Statements No. 4, 44, and 64, Amendment of FASB Statement
    No. 13, and Technical Corrections;  
|
| |  | SFAS No. 146, Accounting for Costs
    Associated with Exit or Disposal Activities;                                                    
|
| |  | SFAS No. 148, Accounting for
    Stock-Based Compensation  Transition and
    Disclosure  an amendment of FASB Statement
    No. 123;
|
| |  | SFAS No. 149, Amendment of SFAS
    No. 133 on Derivative Instruments and Hedging
    Activities;                                      
|
| |  | SFAS No. 150, Accounting for Certain
    Financial Instruments with Characteristics of Both Liabilities
    and Equity;                

F-13



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS No. 132 (revised 2003),
    Employers Disclosures about Pensions and Other
    Postretirement Benefits  an amendment of FASB
    Statements No. 87, 88, and 106;                                                                                                                
|
| |  | FASB Interpretation No. 45,
    Guarantors Accounting and Disclosure Requirements
    for Guarantees, Including Indirect Guarantees of Indebtedness of
    Others, an Interpretation of FASB Statements Nos. 5, 57,
    and 107, and Rescission of FASB Interpretation
    No. 34; and
|
| |  | FASB Interpretation No. 46 (revised December
    2003), Consolidation of Variable Interest
    Entities  an Interpretation of ARB No. 51.                                                                                                                                             

In connection with the adoption of SFAS
No. 145, Kroll had reclassified to continuing operations
losses it incurred on the extinguishment of debt of $4.5 million
and $0.5 million for the years ended December 31, 2002
and 2001, respectively. Such losses had been recorded as an
Extraordinary Item in the Consolidated Statements of Operations.

4.     Earnings Per
Share

Pursuant to the provisions of SFAS No. 128
Earnings Per Share, basic earnings per share is
computed by dividing net income by the weighted average number
of shares of common stock outstanding during the period,
excluding restricted stock. Diluted earnings per share is
computed by dividing net income by the weighted average number
of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents
represent shares issuable upon the assumed exercise of stock
options and warrants and the assumed issuance of non-vested
stock and shares under contingent stock agreements.

Basic and diluted earnings per share were as
follows:

|        |                                            |                          |   |       |      |      |   |      |      |  |   |       |       |  
|------- | ------------------------------------------ | ------------------------ | - | ----- | ---- | ---- | - | ---- | ---- |  | - | ----- | ----- | -
|        |                                            |                         
|        |                                            | Years Ended December 31,
|        |                                            |                         
|        |                                            | 2003                     |   | 2002  |      | 2001
|        |                                            |                          |   |       |      |     
|Basic   |                                            |                          |   |       |      |      |   |      |      |  |   |      
|        | Income (loss) from continuing operations   |                          | $ | 1.13  |      |      | $ | 0.56 |      |  | $ | (0.50 | )    
|        | Income (loss) from discontinued operations |                          |   | (0.20 | )    |      |   |     |      |  |   | (0.45 | )    
|        |                                            |                          |   |       |      |      |   |      |      |  |   |      
|        |                                            | Net income (loss)        |   | $     | 0.93 |      |   | $    | 0.56 |  |   | $     | (0.95 | )
|        |                                            |                          |   |       |      |      |   |      |      |  |   |      
|Diluted |                                            |                          |   |       |      |      |   |      |      |  |   |      
|        | Income (loss) from continuing operations   |                          | $ | 1.09  |      |      | $ | 0.54 |      |  | $ | (0.50 | )    
|        | Income (loss) from discontinued operations |                          |   | (0.19 | )    |      |   |     |      |  |   | (0.45 | )    
|        |                                            |                          |   |       |      |      |   |      |      |  |   |      
|        |                                            | Net income (loss)        |   | $     | 0.90 |      |   | $    | 0.54 |  |   | $     | (0.95 | )
|        |                                            |                          |   |       |      |      |   |      |      |  |   |      

Basic and diluted weighted average shares
outstanding were as follows (in thousands):

|                                     |                                                                      |                          |  |        |  |      |  |        |  |  |  |        | 
|------------------------------------ | -------------------------------------------------------------------- | ------------------------ |  | ------ |  | ---- |  | ------ |  |  |  | ------ | 
|                                     |                                                                      |                         
|                                     |                                                                      | Years Ended December 31,
|                                     |                                                                      |                         
|                                     |                                                                      | 2003                     |  | 2002   |  | 2001
|                                     |                                                                      |                          |  |        |  |     
|Weighted Average Shares Outstanding: |                                                                      |                          |  |        |  |      |  |        |  |  |  |       
|                                     | Basic                                                                |                          |  | 40,820 |  |      |  | 29,448 |  |  |  | 22,479 | 
|                                     | Stock options, non-vested shares and contingent
    stock agreements |                          |  | 1,403  |  |      |  | 1,094  |  |  |  |       | 
|                                     |                                                                      |                          |  |        |  |      |  |        |  |  |  |       
|                                     | Diluted                                                              |                          |  | 42,223 |  |      |  | 30,542 |  |  |  | 22,479 | 
|                                     |                                                                      |                          |  |        |  |      |  |        |  |  |  |       

At December 31, 2003, there were 1,932,247
options outstanding to purchase an equivalent number of shares
of common stock of Kroll at a range of $23.73 to $26.94 per
option that were not included in the shares in the above table
because the options exercise prices were greater than the
average market price of the common shares.

F-14



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

At December 31, 2002, there were 9,526
warrants and 1,679,581 options outstanding to purchase an
equivalent number of shares of common stock of Kroll at a range
of $19.52 to $25.69 per warrant and a range of $20.17 to $22.19
per option that were not included in the shares in the above
table because the warrants and options exercise
prices were greater than the average market price of the common
stock.

At December 31, 2001, there were 9,526
warrants and 707,439 options outstanding to purchase an
equivalent number of shares of common stock of Kroll at a range
of $19.52 to $25.69 per warrant and a range of $9.00 to $30.75
per option that were not included in the shares in the above
table because the warrants and options exercise
prices were greater than the average market price of the common
stock.

Also excluded from the above tables is the
potential conversion of Krolls $30.0 million 6%
Convertible Notes into 2,777,777 shares of Kroll common stock,
as it was determined that such conversion would have an
anti-dilutive effect on the earnings per share calculation.

5.     Acquisitions

Kroll has completed a number of acquisitions in
the periods presented. These transactions were accounted for as
purchase business combinations, whereby the results of
operations of the acquired businesses are included in the
consolidated financial statements from the respective dates of
acquisition.



| |                  
| | -----------------
| | 2003 Acquisitions



| |             
| | ------------
| | Factual Data

On June 23, 2003, Kroll entered into an
agreement to acquire all of the outstanding shares of Factual
Data Corp. (Factual Data). The acquisition was
consummated on August 21, 2003. Factual Data is a provider
of customized information services to businesses across the
United States that assist them in making decisions regarding
whether to make a mortgage or other loan, offer employment,
accept new tenants or enter into a business relationship. Its
results of operations are included within the Background
Screening Services segment subsequent to the date of acquisition.

Kroll paid $87.4 million in cash and issued
934,712 shares of its common stock in exchange for the shares of
Factual Data outstanding at closing. In addition, Kroll assumed
Factual Datas existing stock option plans, resulting in
the conversion of Factual Data stock options outstanding at
closing into options to acquire 445,904 shares of Kroll common
stock.

The total purchase price, based on the number of
Factual Data shares outstanding at closing, transaction costs
and expenses and the fair value of employee stock options
assumed by Kroll, was approximately $119 million. The value
assigned to the number of shares of Kroll common stock issued in
connection with the acquisition of Factual Data was based on the
average market price of Kroll common stock on August 12,
2003 and the two days before and after such date. The
measurement date was the date the volume-weighted average
trading price of Krolls common stock was less than the
lowest end of the purchase price collar described in the
acquisition agreement.

The following table sets forth the components of
the total purchase price (in thousands):

|                               |                      |   |        |         | 
|------------------------------ | -------------------- | - | ------ | ------- | 
|Cash                           |                      | $ | 87,415 |        
|Value of common stock issued   |                      |   | 21,087 |        
|Value of options assumed       |                      |   | 7,760  |        
|Transaction costs and expenses |                      |   | 2,704  |        
|                               |                      |   |        |        
|                               | Total purchase price |   | $      | 118,966 | 
|                               |                      |   |        |        

F-15



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table sets forth the preliminary
allocation of the fair value of identifiable net assets of
Factual Data acquired and acquisition goodwill based on
independent appraisals and managements estimates. Such
estimate of fair value could change based on the completion of
Krolls evaluation of the assets and liabilities of Factual
Data, including finalization of an independent appraisal of the
assets acquired (in thousands).

|                  |                                                             |                                                                     |         |        |         | 
|----------------- | ----------------------------------------------------------- | ------------------------------------------------------------------- | ------- | ------ | ------- | 
|Assets Acquired:  |                                                             |                                                                     |         |       
|                  | Current assets                                              |                                                                     | $       | 22,786 |        
|                  | Property, plant and equipment                               |                                                                     |         | 5,735  |        
|                  | Goodwill                                                    |                                                                     |         | 68,395 |        
|                  | Other intangible assets                                     |                                                                     |         | 50,600 |        
|                  | Other assets                                                |                                                                     |         | 140    |        
|                  |                                                             |                                                                     |         |       
|                  |                                                             |                                                                     | 147,656 |       
|Less Liabilities: |                                                             |                                                                     |         |       
|                  | Current liabilities                                         |                                                                     |         | 19,348 |        
|                  | Long-term debt, including capitalized lease
    obligations |                                                                     |         | 3,790  |        
|                  | Deferred income taxes                                       |                                                                     |         | 5,552  |        
|                  |                                                             |                                                                     |         |       
|                  |                                                             | Total identifiable net assets acquired and
    acquisition goodwill |         | $      | 118,966 | 
|                  |                                                             |                                                                     |         |       

The goodwill recorded by Kroll in this
transaction is not deductible for federal income tax purposes.

The amount assigned to other intangible assets
consisted of the following (in thousands):

|                 |                                  |            |   |              |        |  |  |          |          | 
|---------------- | -------------------------------- | ---------- | - | ------------ | ------ |  |  | -------- | -------- | 
|                 |                                  |            |   | Weighted    
|                 |                                  |            |   | Average     
|                 |                                  |            |   | Amortization
|                 |                                  | Fair Value |   | Period      
|                 |                                  |            |   |             
|Amortizable:     |                                  |            |   |              |        |  |  |         
|                 | Customer relationships           |            | $ | 27,200       |        |  |  | 15 years |         
|                 | Franchise and license agreements |            |   | 7,800        |        |  |  | 6 years  |         
|                 | Internally developed software    |            |   | 3,200        |        |  |  | 7 years  |         
|                 | Trademarks                       |            |   | 1,000        |        |  |  | 5 years  |         
|                 | Non-compete agreements           |            |   | 800          |        |  |  | 5 years  |         
|                 |                                  |            |   |              |        |  |  |         
|                 |                                  | Total      |   | $            | 40,000 |  |  |          | 10 years | 
|                 |                                  |            |   |              |        |  |  |         
|Non-amortizable: |                                  |            |   |              |        |  |  |         
|                 | Evergreen contracts              |            | $ | 10,600       |        |  |  |          |         
|                 |                                  |            |   |              |        |  |  |         

Kroll is in the process of finalizing its
analysis of the acquired intangible assets of Factual Data and
their related fair values. Certain amounts and estimated useful
lives could be revised based on final appraisal.

F-16



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                   
| | ----------------------------------
| | Unaudited Pro Forma Financial Data

The following unaudited pro forma financial data
gives effect to the acquisition of Factual Data, as if it
occurred on January 1 of each period presented, and the
acquisitions of Ontrack and Zolfo Cooper during 2002 discussed
below, as if they occurred on January 1, 2002. The
unaudited pro forma financial data is presented for illustrative
purposes only and is not necessarily indicative of the operating
results that would have been achieved if all of these
acquisitions had occurred on the dates indicated, nor are they
necessarily indicative of future consolidated results (in
thousands, except per share amounts).

|                                  |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |      | 
|--------------------------------- | ------- | ----------------- | ------- | ----------------- |  | ---------- | ------- | --------- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                                  |         |                   |         |                  
|                                  |         | Year Ended        |         | Year Ended       
|                                  |         | December 31, 2003 |         | December 31, 2002
|                                  |         |                   |         |                  
|                                  |         | Historical        |         | Pro Forma         |  | Historical |         | Pro Forma
|                                  |         |                   |         |                   |  |            |         |          
|Net sales                         |         | $                 | 485,476 |                   |  | $          | 541,702 |           |  | $ | 284,248 |      |  | $ | 416,746 |     
|                                  |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |     
|Income from continuing operations |         | $                 | 46,202  |                   |  | $          | 53,135  |           |  | $ | 16,491  |      |  | $ | 38,322  |     
|                                  |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |     
|Net income                        |         | $                 | 37,892  |                   |  | $          | 44,825  |           |  | $ | 16,381  |      |  | $ | 38,212  |     
|                                  |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |     
|Net Income Per Share:             |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |     
|                                  | Basic   |                   | $       | 0.93              |  |            | $       | 1.08      |  |   | $       | 0.56 |  |   | $       | 1.08 | 
|                                  |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |     
|                                  | Diluted |                   | $       | 0.90              |  |            | $       | 1.04      |  |   | $       | 0.54 |  |   | $       | 1.05 | 
|                                  |         |                   |         |                   |  |            |         |           |  |   |         |      |  |   |         |     



| |                   
| | ------------------
| | Other Acquisitions

On March 14, 2003, Kroll acquired most of
the assets and assumed certain liabilities of Certico
Verification Services, LLC (Certico), for a purchase
price of $3.5 million in cash. The business acquired by
Kroll provides background-checking services, and its results of
operations are included within the Background Screening Services
segment subsequent to the date of acquisition.

On March 21, 2003, Kroll completed the
acquisition of Personnel Risk Management (PRM) for a
purchase price of $1.4 million in cash. Kroll will be
required to make an additional payment of up to
$2.1 million, if PRM achieves agreed upon profit levels
through the period ended February 29, 2004. Kroll is
currently determining whether such profit levels have been
achieved. If paid, such amount would be recorded as an
adjustment to goodwill. PRM provides pre-employment screening
services in the United Kingdom, and its results of operations
are included within the Background Screening Services segment
subsequent to the date of acquisition.

On March 25, 2003, Kroll acquired the 50%
equity ownership interest it did not own in Invex Partners
Limited (Invex) for a purchase price of $1.2 million
in cash. Invex provides corporate financial services in the
United Kingdom and its results of operations is included as part
of the Corporate Advisory and Restructuring Services segment
subsequent to the date of acquisition.

On July 18, 2003, Kroll acquired
substantially all of the assets and assumed certain liabilities
of Intellifacts Corporation (Intellifacts) for a
purchase price of $2.2 million in cash. The business
acquired by Kroll provides background-checking services, and its
results of operations are included within the Background
Screening Services segment subsequent to the date of acquisition.

On August 15, 2003, Kroll acquired MIE
Resource Services (Pty) Limited, renamed Kroll MIE (Pty) Ltd.
(MIE), for $0.5 million in cash plus a
contingent payment of up to $0.3 million. MIE is a
credentials verification company located in South Africa, and
its results of operations are included within the Background
Screening Services segment subsequent to the date of acquisition.

F-17



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On December 1, 2003, Kroll acquired Oyez
Legal Technologies Limited, renamed Kroll Ontrack Legal
Technologies Limited (OLT), for $18.9 million
in cash. In addition to electronic data disclosure services, OLT
offers a full suite of legal information management services,
including trial and evidence management solutions, database
hosting, courtroom presentation services, consultancy, project
management, scanning, high volume printing and both objective
and subjective coding. Its results of operations are included
within the Technology Services segment subsequent to the date of
acquisition.

Pro forma financial data for the preceding six
acquisitions is not presented as such acquisitions were not
material to Krolls consolidated results of operations or
financial position.

The aggregate amount assigned to other intangible
assets for these six acquisitions and asset purchases consisted
of the following (in thousands):

|                 |                                           |            |   |              |        |  |  |         |         | 
|---------------- | ----------------------------------------- | ---------- | - | ------------ | ------ |  |  | ------- | ------- | 
|                 |                                           |            |   | Weighted    
|                 |                                           |            |   | Average     
|                 |                                           |            |   | Amortization
|                 |                                           | Fair Value |   | Period      
|                 |                                           |            |   |             
|Amortizable:     |                                           |            |   |              |        |  |  |        
|                 | Customer lists and customer relationships |            | $ | 8,395        |        |  |  | 9 years |        
|                 | Trademarks                                |            |   | 225          |        |  |  | 3 years |        
|                 | Non-compete agreements                    |            |   | 4,253        |        |  |  | 4 years |        
|                 |                                           |            |   |              |        |  |  |        
|                 |                                           | Total      |   | $            | 12,873 |  |  |         | 7 years | 
|                 |                                           |            |   |              |        |  |  |        
|Non-amortizable: |                                           |            |   |              |        |  |  |        
|                 | Goodwill                                  |            | $ | 13,379       |        |  |  |         |        
|                 |                                           |            |   |              |        |  |  |        



| |                  
| | -----------------
| | 2002 Acquisitions



| |        
| | -------
| | Ontrack

On April 1, 2002, Kroll entered into an
agreement to acquire all of the outstanding shares of Ontrack
Data International, Inc. (Ontrack). The acquisition
was consummated effective June 13, 2002. Ontrack provides
electronic discovery, data recovery and computer forensics
services, along with related software solutions, and its results
of operations have been included within the Technology Services
Segment subsequent to the date of acquisition.

Kroll issued 6.9 million shares of its
common stock in exchange for the shares of Ontrack outstanding
at closing. In addition, Kroll assumed Ontracks existing
stock option plans, resulting in the conversion of Ontrack stock
options outstanding at closing into options to acquire 1,037,490
shares of Kroll common stock.

The total purchase price, based on the number of
Ontrack shares outstanding at closing, transaction costs and
expenses and the fair value of employee stock options assumed by
Kroll, was approximately $154 million. The value assigned
to the number of shares of Kroll common stock issued in
connection with the acquisition of Ontrack is based on the
average market price of Kroll stock for the five-day period
beginning two days before and ending two days after the terms of
the acquisition were agreed to and announced.

The following table sets forth the components of
the purchase price (in thousands):

|                               |                      |   |         |         | 
|------------------------------ | -------------------- | - | ------- | ------- | 
|Value of common stock issued   |                      | $ | 137,706 |        
|Value of options assumed       |                      |   | 12,313  |        
|Transaction costs and expenses |                      |   | 3,658   |        
|                               |                      |   |         |        
|                               | Total purchase price |   | $       | 153,677 | 
|                               |                      |   |         |        

F-18



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table sets forth the final
allocation of the fair value of identifiable net assets of
Ontrack acquired and acquisition goodwill (in thousands):

|                  |                                                       |                                                                     |         |        |         | 
|----------------- | ----------------------------------------------------- | ------------------------------------------------------------------- | ------- | ------ | ------- | 
|Assets Acquired:  |                                                       |                                                                     |         |       
|                  | Current assets                                        |                                                                     | $       | 44,331 |        
|                  | Property, plant and equipment                         |                                                                     |         | 9,451  |        
|                  | Goodwill                                              |                                                                     |         | 94,320 |        
|                  | Other intangible assets (useful lives
    5-10 years) |                                                                     |         | 12,280 |        
|                  | Other assets                                          |                                                                     |         | 2,922  |        
|                  |                                                       |                                                                     |         |       
|                  |                                                       |                                                                     | 163,304 |       
|Less Liabilities: |                                                       |                                                                     |         |       
|                  | Current liabilities                                   |                                                                     |         | 4,930  |        
|                  | Deferred income taxes                                 |                                                                     |         | 4,697  |        
|                  |                                                       |                                                                     |         |       
|                  |                                                       | Total identifiable net assets acquired and
    acquisition goodwill |         | $      | 153,677 | 
|                  |                                                       |                                                                     |         |       

Kroll initially recorded approximately
$93.9 million of goodwill related to this acquisition.
During the third quarter of 2003, Kroll completed its evaluation
of the fair value assigned to Ontracks identifiable net
assets recorded at acquisition. Such evaluation resulted in an
increase to goodwill of $0.4 million and an increase to
current liabilities of $0.4 million.

The goodwill recorded by Kroll in this
transaction is not deductible for federal income tax purposes.



| |             
| | ------------
| | Zolfo Cooper

On September 5, 2002, Kroll acquired all of
the equity interests of Zolfo Cooper, LLC (Zolfo
Cooper), and certain of its related entities. Zolfo Cooper
provides corporate restructuring, operational turnaround,
strategic advisory services, financial crisis management and
corporate finance services, and its results of operations have
been included within the Corporate Advisory and Restructuring
Services Segment subsequent to the date of acquisition.

Kroll paid $100 million in cash on
September 5, 2002 and issued 2.9 million shares of its
common stock on January 15, 2003. These shares appear on
the December 31, 2002 Consolidated Balance Sheet under the
caption Common shares to be issued for acquisition.
The valued assigned to the number of shares of Kroll common
stock issued on January 15, 2003 in connection with the
acquisition of Zolfo Cooper is based on the average market price
of Krolls common stock for the five day period beginning
two days before and ending two days after the terms of the
acquisition were agreed to and announced. In addition, Kroll
also granted options to purchase 600,000 shares of Kroll
common stock to Kroll Zolfo Coopers professional staff.
The options were granted at the September 5, 2002 closing
price of $18.37 and vest over four years.

Kroll will also issue to the former owners of
Zolfo Cooper, as contingent consideration, 625,000 additional
shares of common stock per year, if Zolfo Cooper achieves
operating profit levels of $24.0 million,
$24.8 million, $25.6 million and $26.4 million in
2003, 2004, 2005 and 2006, respectively. To the extent Zolfo
Coopers operating profit exceeds the targeted level for a
particular year, the excess will be credited to the previous
years operating profit to determine if a contingent
payment should have been made in that year. Additionally, 50% of
the remaining excess, up to $5 million, will be credited to
the following years operating profit to determine if a
contingent consideration payment is payable. All of the
contingent consideration is payable in full if Kroll undergoes a
change of control or if the employment of any one of the three
former principal owners of Zolfo Cooper is terminated without
cause. If paid, such amount would be recorded as an adjustment
to goodwill.

F-19



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During 2003, Kroll Zolfo Coopers operating
profit exceeded the targeted level for such period. Accordingly,
625,000 additional shares of Kroll common stock will be issued
during March 2004. These shares appear on the December 31,
2003 Consolidated Balance Sheet under the caption Common
shares to be issued for acquisition.

Kroll had agreed to pay an entity controlled by
the former principal owners of Zolfo Cooper for the cost of
operating for business purposes an airplane owned by the entity,
up to a total of $2.0 million per year. To the extent the
airplane is used in connection with a client engagement, the
client may reimburse Kroll. The costs to operate the airplane
for the years ended December 31, 2003 and 2002 were
$1.7 million and $0.6 million, respectively. Kroll was
reimbursed $0.3 million and $0.1 million for the years
ended December 31, 2003 and 2002, respectively.

The following table sets forth the components of
the purchase price, as adjusted for contingent consideration
earned (in thousands):

|                                                                             |                      |   |         |         | 
|---------------------------------------------------------------------------- | -------------------- | - | ------- | ------- | 
|Cash                                                                         |                      | $ | 100,000 |        
|Value of common stock issued                                                 |                      |   | 55,280  |        
|Value of common stock issuable under contingent
    consideration provisions |                      |   | 16,250  |        
|Transaction costs and expenses                                               |                      |   | 3,573   |        
|                                                                             |                      |   |         |        
|                                                                             | Total purchase price |   | $       | 175,103 | 
|                                                                             |                      |   |         |        

The following table sets forth the allocation of
the fair value of identifiable net assets of Zolfo Cooper
acquired and acquisition goodwill, as adjusted for contingent
consideration earned (in thousands):

|                  |                                                         |                                                                     |         |         |         | 
|----------------- | ------------------------------------------------------- | ------------------------------------------------------------------- | ------- | ------- | ------- | 
|Assets Acquired:  |                                                         |                                                                     |         |        
|                  | Current assets                                          |                                                                     | $       | 15,199  |        
|                  | Property, plant and equipment                           |                                                                     |         | 652     |        
|                  | Goodwill                                                |                                                                     |         | 156,033 |        
|                  | Other intangible assets (useful life 2 to
    25 years) |                                                                     |         | 18,418  |        
|                  | Other assets                                            |                                                                     |         | 43      |        
|                  |                                                         |                                                                     |         |        
|                  |                                                         |                                                                     | 190,345 |        
|Less Liabilities: |                                                         |                                                                     |         |        
|                  | Current liabilities                                     |                                                                     |         | 15,242  |        
|                  |                                                         |                                                                     |         |        
|                  |                                                         | Total identifiable net assets acquired and
    acquisition goodwill |         | $       | 175,103 | 
|                  |                                                         |                                                                     |         |        

Kroll initially recorded approximately
$153.1 million of goodwill related to this acquisition.
During the third quarter of 2003, Kroll completed its evaluation
of the fair value assigned to Zolfo Coopers identifiable
net assets recorded at acquisition. Such evaluation resulted in
an increase to other intangible assets of $13.4 million, a
decrease to goodwill of $13.4 million and an adjustment of
$1.2 million to amortization expense (see Note 10). In
addition, the value of the 625,000 additional shares of Kroll
common stock that became issuable at December 31, 2003
increased goodwill by $16.3 million.

The goodwill in this transaction can be amortized
and deducted for federal income tax purposes.



| |                                   
| | ----------------------------------
| | Unaudited Pro Forma Financial Data

The following unaudited pro forma financial data
gives effect to the acquisitions of Ontrack and Zolfo Cooper, as
if they occurred on January 1 of each period presented. The
unaudited pro forma financial data is presented for illustrative
purposes only and is not necessarily indicative of the operating
results that would

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

have been achieved if these acquisitions had
occurred on the dates indicated, nor are they necessarily
indicative of future consolidated results (in thousands, except
per share amounts).

|                                         |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |       |  
|---------------------------------------- | ------- | ----------------- | ------- | ----------------- |  | ---------- | ------- | --------- |  | - | ------- | ----- | - | - | ------- | ----- | -
|                                         |         |                   |         |                  
|                                         |         | Year Ended        |         | Year Ended       
|                                         |         | December 31, 2002 |         | December 31, 2001
|                                         |         |                   |         |                  
|                                         |         | Historical        |         | Pro Forma         |  | Historical |         | Pro Forma
|                                         |         |                   |         |                   |  |            |         |          
|Net sales                                |         | $                 | 284,248 |                   |  | $          | 353,674 |           |  | $ | 201,058 |       |   | $ | 316,146 |      
|                                         |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |      
|Income (loss) from continuing operations |         | $                 | 16,491  |                   |  | $          | 32,793  |           |  | $ | (11,132 | )     |   | $ | 4,563   |      
|                                         |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |      
|Net income (loss)                        |         | $                 | 16,381  |                   |  | $          | 32,683  |           |  | $ | (21,387 | )     |   | $ | (5,692  | )    
|                                         |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |      
|Net Income (Loss) Per Share:             |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |      
|                                         | Basic   |                   | $       | 0.56              |  |            | $       | 0.95      |  |   | $       | (0.95 | ) |   | $       | (0.15 | )
|                                         |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |      
|                                         | Diluted |                   | $       | 0.54              |  |            | $       | 0.92      |  |   | $       | (0.95 | ) |   | $       | (0.15 | )
|                                         |         |                   |         |                   |  |            |         |           |  |   |         |       |   |   |         |      



| |                   
| | ------------------
| | Other Acquisitions

On July 3, 2002, Kroll acquired Crucible
Inc., a privately held company that provides elite training and
protective services. Kroll paid $1.0 million in cash upon
closing and the purchase agreement provides for an additional
$1.0 million to be paid in equal annual installments over
the next four years, the first of which was paid on July 3,
2003. The next annual installment of $250,000 is included in
accrued liabilities and the last two remaining installments
totaling $500,000 are included in other long-term liabilities in
the Consolidated Balance Sheet as of December 31, 2003.

Kroll recorded approximately $2.1 million of
goodwill related to this transaction. During the third quarter
of 2003, Kroll completed its evaluation of the fair value
assigned to Crucibles identifiable net assets recorded at
acquisition. Such evaluation resulted in an increase to other
assets of $0.2 million and a decrease to goodwill of
$0.2 million.

The goodwill in this transaction cannot be
amortized and deducted for federal income tax purposes.

Pro forma financial data for the preceding
acquisition is not presented as such acquisition was not
material to Krolls consolidated results of operations or
financial position.



|   |                        
|-- | -----------------------
|6. | Discontinued Operations



| |                             
| | ----------------------------
| | 2003 Discontinued Operations

On June 18, 2003, Kroll sold its video
surveillance subsidiary, InPhoto, for $850,000 in cash. In
connection with this disposition, Kroll wrote off
$7.5 million of related goodwill, which is included in
Loss on Disposal of Discontinued Operations in the
summarized statement of operations data below. InPhoto, which
was part of Krolls Background Screening Services segment,
provided surveillance services primarily to the insurance
industry.

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Summarized statement of operations data for
InPhoto consisted of (in thousands):

|                                             |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |      |      |  
|-------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----- | ------ | ------ | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                             |                                                                                   |                                                              
|                                             |                                                                                   | Years Ended December 31,                                     
|                                             |                                                                                   |                                                              
|                                             |                                                                                   | 2003                                                          |       | 2002   |        | 2001
|                                             |                                                                                   |                                                               |       |        |        |     
|Net sales                                    |                                                                                   | $                                                             | 2,350 |        |        | $    | 6,299 |      |      | $ | 6,819 |     
|                                             |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     
|Loss from Discontinued Operations:           |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     
|                                             | Loss before benefit from income taxes                                             |                                                               |       | (680   | )      |      |       | (272 | )    |   |       | (603 | )   
|                                             | Benefit from income taxes                                                         |                                                               |       | (176   | )      |      |       | (81  | )    |   |       |     |     
|                                             |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     
|                                             |                                                                                   | Loss from discontinued operations, net of taxes               |       | $      | (504   | )    |       | $    | (191 | ) |       | $    | (603 | )
|                                             |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     
|Loss on Disposal of Discontinued Operations: |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     
|                                             | Loss on disposal of discontinued operations
    before provision for income taxes |                                                               | $     | (7,767 | )      |      |       |      |      |   |       |      |     
|                                             | Provision for income taxes                                                        |                                                               |       | 39     |        |      |       |      |      |   |       |      |     
|                                             |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     
|                                             |                                                                                   | Loss on disposal of discontinued operations, net
    of taxes |       | $      | (7,806 | )    |       |      |      |   |       |      |      |  
|                                             |                                                                                   |                                                               |       |        |        |      |       |      |      |   |       |     

Summarized balance sheet data for InPhoto
consisted of (in thousands):

|                                        |                             |                                              |   |      |     |  |   |       |       | 
|--------------------------------------- | --------------------------- | -------------------------------------------- | - | ---- | --- |  | - | ----- | ----- | 
|                                        |                             |                                             
|                                        |                             | December 31,                                
|                                        |                             |                                             
|                                        |                             | 2003                                         |   | 2002
|                                        |                             |                                              |   |     
|Assets of Discontinued Operations:      |                             |                                              |   |      |     |  |   |      
|                                        | Current assets              |                                              | $ | 169  |     |  | $ | 1,170 |      
|                                        | Property and equipment, net |                                              |   |     |     |  |   | 225   |      
|                                        | Goodwill                    |                                              |   |     |     |  |   | 7,487 |      
|                                        | Other assets                |                                              |   |     |     |  |   | 517   |      
|                                        |                             |                                              |   |      |     |  |   |      
|                                        |                             | Total assets of discontinued operations      |   | $    | 169 |  |   | $     | 9,399 | 
|                                        |                             |                                              |   |      |     |  |   |      
|Liabilities of Discontinued Operations: |                             |                                              |   |      |     |  |   |      
|                                        | Current liabilities         |                                              | $ | 250  |     |  | $ | 823   |      
|                                        | Other liabilities           |                                              |   |     |     |  |   | 34    |      
|                                        |                             |                                              |   |      |     |  |   |      
|                                        |                             | Total liabilities of discontinued operations |   | $    | 250 |  |   | $     | 857   | 
|                                        |                             |                                              |   |      |     |  |   |      



| |                             
| | ----------------------------
| | 2001 Discontinued Operations

On April 20, 2001, the Board of Directors of
Kroll (the Board) approved a definitive agreement to
sell the common stock of most of the active companies that
comprised the Security Products and Services Group
(SPSG) to Armor Holdings Inc. (Armor).
The results of the discontinued SPSG reflect an allocation of
Krolls administrative costs attributable to SPSG and, to
the extent that such identification was not practicable, on the
basis of SPSGs sales as a percentage of Krolls
sales. The results of the discontinued SPSG also reflect an
allocation of corporate interest expense based on Krolls
weighted average interest rate applied to intercompany advances.
The sale did not include the subsidiaries that provide kidnap
and ransom and risk information services, which Kroll continued
to operate. Also excluded from the sale was the Russian armored
car business although it was included in SPSG discontinued
operations, as further described below.

On August 22, 2001, Kroll completed the sale
of SPSG to Armor for $53.7 million, consisting of
$37.2 million in cash, $15.0 million in common stock
and an additional $1.5 million placed in escrow, pending
agreement on the closing date balance sheet audit. The purchase
and sale agreement also provided for a potential deferred
payment of up to $2.0 million by Armor to Kroll based on
the achievement of a gross profit

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

target by SPSG for the year ended
December 31, 2001. In September 2001, Kroll converted
approximately $14.4 million of Armor common stock to cash.

For the year ended December 31, 2001, Kroll
recorded a loss of approximately $0.3 million on the sale
of the discontinued SPSG. Kroll did not include the impact of
the potential $2.0 million deferred payment by Armor to
Kroll in determining the estimated loss on the sale of SPSG.
Because of the recognition of foreign currency translation
included in accumulated other comprehensive loss, an additional
$4.1 million loss was recognized, net of tax.

On May 6, 2002, agreement was reached on
SPSGs closing balance sheet, which resulted in a payment
to Kroll of $1.1 million of the amount held in escrow. In
conjunction with the escrow payment, Kroll forgave certain
obligations due to Kroll by Armor of approximately
$1.6 million primarily relating to SPSGs Central
American operations. On May 15, 2002, Kroll received
$0.6 million from Armor, representing the balance due from
the sale of the $15.0 million in Armor common stock.

Although Krolls Russian armored car
business was not sold to Armor, the Russian business was part of
the plan to discontinue SPSG and, therefore, has been included
in discontinued operations of SPSG. In May 2002, Kroll executed
agreements to sell to local management its interest in its
Russian armored car businesses. Kroll received $150,000 upon
closing, $10,000 in both the third and fourth quarters of 2002
and an additional $107,000 during 2003. The agreements provide
for Kroll to receive an additional $50,000 within two years of
the closing date. Payments not received on the due date will
accrue interest at 10% per annum. These transactions
relieve Kroll of any liability associated with the Russian
business.

As a result of the sale of the Russian business
and other adjustments related to the sale of SPSG, Kroll
recorded a gain of approximately $0.1 million during 2002.

Summarized statement of operations data for the
SPSG consisted of (in thousands):

|                                                          |                                                                                            |                                                                        |   |      |    |   |        |        |        |  
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------- | - | ---- | -- | - | ------ | ------ | ------ | -
|                                                          |                                                                                            |                                                                       
|                                                          |                                                                                            | Years Ended                                                           
|                                                          |                                                                                            | December 31,                                                          
|                                                          |                                                                                            |                                                                       
|                                                          |                                                                                            | 2002                                                                   |   | 2001
|                                                          |                                                                                            |                                                                        |   |     
|Net sales                                                 |                                                                                            | $                                                                      |  |      |    | $ | 79,359 |       
|                                                          |                                                                                            |                                                                        |   |      |    |   |        |       
|Loss from Discontinued Operations:                        |                                                                                            |                                                                        |   |      |    |   |        |       
|                                                          | Loss before provision for income taxes                                                     |                                                                        | $ |     |    |   | $      | (6,848 | )     
|                                                          | Provision for income taxes                                                                 |                                                                        |   |     |    |   |        | 379    |       
|                                                          |                                                                                            |                                                                        |   |      |    |   |        |       
|                                                          |                                                                                            | Loss from discontinued operations, net of taxes                        |   | $    |   |   |        | $      | (7,227 | )
|                                                          |                                                                                            |                                                                        |   |      |    |   |        |       
|Income (Loss) on Disposal of Discontinued
    Operations: |                                                                                            |                                                                        |   |      |    |   |        |       
|                                                          | Income (loss) on disposal of discontinued
    operations before provision for income taxes |                                                                        | $ | 116  |    |   | $      | (314   | )     
|                                                          | Provision for income taxes                                                                 |                                                                        |   | (35  | )  |   |        |       |       
|                                                          |                                                                                            |                                                                        |   |      |    |   |        |       
|                                                          |                                                                                            | Income (loss) on disposal of discontinued
    operations, net of taxes |   | $    | 81 |   |        | $      | (314   | )
|                                                          |                                                                                            |                                                                        |   |      |    |   |        |       

On April 16, 2001, the Board of Directors
approved a formal plan to discontinue the operations of the
Voice and Data Communications Group (VDCG), which
offered secure satellite communication equipment and satellite
navigation systems. Kroll has divested itself of the operations
of this segment. The results of VDCG reflect an allocation of
interest expense based on VDCGs average net assets. The
tax effects of the results of operations of VDCG were not
significant for the periods presented.

On June 27, 2001, Kroll sold its ownership
in the stock of VDCG to an unrelated third party for notes that
are due and payable in 2004 with a contingent value of up to
$4.0 million. Originally, Kroll valued these

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

notes at $1.8 million because the
realization of the full value of these notes was contingent upon
certain factors, including the subsequent sale of VDCG by the
purchaser. Since this valuation approximated the net assets of
VDCG at the date of the sale, no gain or loss was recognized.
Later in 2001, Kroll re-evaluated the collectability of the
notes and determined that the ultimate resale of VDCG and
collection on the notes was uncertain. As a result, the notes
were written down to zero.

Summarized statement of operations data for VDCG
consisted of (in thousands):

|                                             |                                                                                   |                                                               |       |        |        |  
|-------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----- | ------ | ------ | -
|                                             |                                                                                   | Year Ended                                                   
|                                             |                                                                                   | December 31,                                                 
|                                             |                                                                                   | 2001                                                         
|                                             |                                                                                   |                                                              
|Net sales                                    |                                                                                   | $                                                             | 3,134 |       
|                                             |                                                                                   |                                                               |       |       
|Loss from Discontinued Operations:           |                                                                                   |                                                               |       |       
|                                             | Loss before provision for income taxes                                            |                                                               | $     | (104   | )     
|                                             | Provision for income taxes                                                        |                                                               |       |       |       
|                                             |                                                                                   |                                                               |       |       
|                                             |                                                                                   | Loss from discontinued operations, net of taxes               |       | $      | (104   | )
|                                             |                                                                                   |                                                               |       |       
|Loss on Disposal of Discontinued Operations: |                                                                                   |                                                               |       |       
|                                             | Loss on disposal of discontinued operations
    before provision for income taxes |                                                               | $     | (2,007 | )     
|                                             | Provision for income taxes                                                        |                                                               |       |       |       
|                                             |                                                                                   |                                                               |       |       
|                                             |                                                                                   | Loss on disposal of discontinued operations, net
    of taxes |       | $      | (2,007 | )
|                                             |                                                                                   |                                                               |       |       



|   |                   
|-- | ------------------
|7. | Other Dispositions

In October 2000, Krolls then wholly-owned
subsidiary, Securify Inc. (Securify), completed the
sale of preferred shares through a private equity offering to
certain unrelated third parties. As a result of this
transaction, Krolls voting interest in Securify was
reduced to approximately 27 percent and the investment in
Securify, previously consolidated, was then accounted for using
the equity method. At December 31, 2001, Krolls
carrying value in its investment was reduced to zero as a result
of losses generated by Securify. Kroll had not provided any
guarantees nor was it committed to providing any future funding
to Securify. Also at December 31, 2001, Kroll had an amount
receivable from Securify of $5.4 million, which was fully
reserved. Such receivable was subject to an unsecured promissory
note agreement with repayment terms scheduled over a five-year
period. During 2002, Securify obtained additional equity
financing which resulted in the restructuring of Securifys
existing debt with Kroll. As a result of this restructuring, the
promissory note was cancelled and Kroll received $500,000 in
cash, $250,000 of Securify Series B Preferred Stock and a
non-exclusive license to use proprietary software developed by
Securify. In addition, Krolls voting interest in Securify
was reduced to approximately 1% after the completion of the
additional equity financing. The $500,000 payment received was
included within Other Income (Expense) in the
Consolidated Statement of Operations for the year ended
December 31, 2002. There was no value recorded for the
$250,000 Securify Series B Preferred Stock received.

On September 10, 2001, Kroll sold Decision
Resources, Inc. (DRI) to the former owner. As
payment, the former owner forgave Krolls notes payable of
$0.2 million and agreed to pay Kroll $0.1 million. The
notes payable that were forgiven were the unpaid portion of the
original purchase price. In 2001, Kroll recognized a loss on the
sale of its business unit of approximately $0.5 million. In
2002, Kroll recorded an additional loss of approximately
$0.1 million, representing the write-off of a note
receivable, which was a portion of the original purchase price.

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|8. | Other Charges (Credits)



| |                       
| | ----------------------
| | Restructuring Expenses

During the third quarter of 2003, Kroll recorded
a restructuring charge of $5.8 million in connection with
the closure of 10 non-hub offices worldwide and the elimination
of 102 employees (the 2003 Plan). During the fourth
quarter of 2003, the amount of the 2003 Plan was increased by
$0.4 million to reflect additional restructuring expenses
incurred. The restructuring charges recognized during 2003 were
based on SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. The 2003 Plan
was undertaken to reduce costs and improve operating
efficiencies. Also during the third quarter of 2003, the accrued
balance related to Krolls 2001 restructuring plan,
discussed below, was reduced by $0.4 million as a result of
a change in the original estimate of costs to be incurred. The
net effect of these restructuring charges and credits is
$5.8 million as presented in the Consolidated Statement of
Operations for the year ended December 31, 2003.

Approximately $4.2 million of the 2003 Plan,
as adjusted during the fourth quarter of 2003, represents
severance and related benefits. The remaining $1.9 million
relates primarily to lease rental payments, net of sublease
income, associated with the elimination of offices. The total
cash portion of the 2003 Plan is $5.8 million, of which
$4.2 million relates to employee severance costs,
$1.2 million relates to lease rental payments and
$0.4 million relates to other exit costs. The breakdown by
segment was $4.3 million, $0.8 million,
$0.6 million, $0.3 million and $0.2 million
within Consulting Services, Corporate Advisory and Restructuring
Services, Security Services, Background Screening Services and
Corporate, respectively.

The initial recognition of the 2003 restructuring
expense and the corresponding utilization from inception by
category is as follows (in thousands):

|                                    |  |               |       |          |  |            |        |              |  |   |      |   |  |   |       | 
|----------------------------------- |  | ------------- | ----- | -------- |  | ---------- | ------ | ------------ |  | - | ---- | - |  | - | ----- | 
|                                    |  |               |       |          |  |            |        | Balance at  
|                                    |  | Restructuring |       | Cash     |  | Other      |        | December 31,
|                                    |  | Expense       |       | Payments |  | Reductions |        | 2003        
|                                    |  |               |       |          |  |            |        |             
|Employee related                    |  | $             | 4,167 |          |  | $          | (2,415 | )            |  | $ |     |   |  | $ | 1,752 | 
|Lease rentals                       |  |               | 1,218 |          |  |            | (546   | )            |  |   |     |   |  |   | 672   | 
|Write-off of leasehold improvements |  |               | 205   |          |  |            |       |              |  |   | (205 | ) |  |   |      | 
|Impairment of equipment             |  |               | 120   |          |  |            |       |              |  |   | (120 | ) |  |   |      | 
|Other exit costs                    |  |               | 443   |          |  |            | (443   | )            |  |   |     |   |  |   |      | 
|                                    |  |               |       |          |  |            |        |              |  |   |      |   |  |   |       | 
|                                    |  | $             | 6,153 |          |  | $          | (3,404 | )            |  | $ | (325 | ) |  | $ | 2,424 | 
|                                    |  |               |       |          |  |            |        |              |  |   |      |   |  |   |       | 

The 2003 Plan is expected to be substantially
completed in early 2004. Liabilities associated with these
initiatives at December 31, 2003 are classified as a
component of other accrued liabilities.

During 2001, Kroll recorded a $2.7 million
restructuring charge (the 2001 Plan) in connection
with the closure of four offices and the elimination of 98
employees. The 2001 Plan was substantially completed by the end
of 2001. Total payments and write-offs from inception of the
2001 Plan through December 31, 2003 were $2.1 million.
During 2003, the accrued balance related to the 2001 Plan was
reduced by $0.4 million as a result of a change in the
original estimate of costs to be incurred. The remaining accrued
balance of $0.2 million represents severance and lease
termination costs.

During 1999, Kroll recorded a $4.1 million
restructuring charge (the 1999 Plan) in connection
with the closure of two offices and the elimination of 82
employees. The 1999 Plan was substantially completed by the end
of the second quarter of 1999. During 2003, the remaining
accrued balance of $67,473 was paid. Total payments and
write-offs from inception of the 1999 Plan through
December 31, 2003 were $4.1 million.

F-25



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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Loss on Sale of Business Unit

As discussed in Note 7, Kroll recognized
losses of $0.1 million and $0.5 million during 2002
and 2001, respectively, in connection with the sale of DRI.



| |                       
| | ----------------------
| | Failed Financing Costs

During 2001, anticipating the sale of SPSG, Kroll
endeavored to obtain approximately $45.0 million of
financing but did not reach an acceptable agreement. As a
result, pursuit of this alternative was terminated. Krolls
direct expenses of approximately $1.0 million, including
commitment and due diligence fees and the cost of extending the
then-existing bank loan, were written off as failed financing
costs in 2001.



| |                     
| | --------------------
| | Impairment of Assets

During 2001, Kroll wrote off $0.8 million of
previously capitalized costs because of a decision not to
implement a contact and relationship management database
software program it was developing. This charge consisted of
$0.4 million for software and hardware costs and
$0.4 million for consulting and related costs to prepare
the database software program for its intended purpose.



| |                        
| | -----------------------
| | Failed Separation Costs

On April 20, 2001, the Board decided not to
pursue the separation of Krolls two principal operating
segments at the time, SPSG and the Investigations and
Intelligence Group, which it had been exploring since the second
quarter of 2000. Costs associated with this proposed separation
were approximately $0.6 million during 2001, and consisted
primarily of fees for attorneys, accountants, investment bankers
and other related charges.



|   |                                
|-- | -------------------------------
|9. | Allowance for Doubtful Accounts

The following summarizes activity in the
allowance for doubtful accounts on trade accounts receivable (in
thousands):

|                                         |  |                          |        |      |  |      |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |  |                         
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2003                     |        | 2002 |  | 2001
|                                         |  |                          |        |      |  |     
|Beginning balance                        |  | $                        | 6,875  |      |  | $    | 6,628  |   |  | $ | 4,041  |  
|Additional charges to costs and expenses |  |                          | 7,118  |      |  |      | 3,934  |   |  |   | 5,879  |  
|Write-offs, deductions and other         |  |                          | (7,558 | )    |  |      | (3,687 | ) |  |   | (3,292 | )
|                                         |  |                          |        |      |  |      |        |   |  |   |        |  
|Ending balance                           |  | $                        | 6,435  |      |  | $    | 6,875  |   |  | $ | 6,628  |  
|                                         |  |                          |        |      |  |      |        |   |  |   |        |  

F-26



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|10. | Intangible Assets

Intangible assets consisted of the following (in
thousands):

|                         |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |       |  | 
|------------------------ | ----------------------------------------- | ----------------------------- | ------- | ----------------- | ------- | ---- | ------ | ------------ |  | - | ------- | ------ | ------ | - | ----- | ----- |  | 
|                         |                                           |                               |         |                  
|                         |                                           | December 31, 2003             |         | December 31, 2002
|                         |                                           |                               |         |                  
|                         |                                           |                               |         | Accumulated       |         |      |        | Accumulated 
|                         |                                           | Cost                          |         | Amortization      |         | Cost |        | Amortization
|                         |                                           |                               |         |                   |         |      |        |             
|Goodwill                 |                                           | $                             | 376,988 |                   |         |      |        |              |  | $ | 292,095 |        |        |   |       |      
|                         |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|Other Intangible Assets: |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|Amortizable              |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|                         | Customer lists and customer relationships |                               | $       | 51,139            |         |      | $      | 6,397        |  |   | $       | 16,301 |        |   | $     | 3,640 | 
|                         | Internally developed software             |                               |         | 15,650            |         |      |        | 2,934        |  |   |         | 12,280 |        |   |       | 880   | 
|                         | Franchise and license agreements          |                               |         | 7,800             |         |      |        | 484          |  |   |         |       |        |   |       |      | 
|                         | Trademarks                                |                               |         | 9,901             |         |      |        | 566          |  |   |         |       |        |   |       |      | 
|                         | Non-compete agreements and other          |                               |         | 13,864            |         |      |        | 3,085        |  |   |         | 2,213  |        |   |       | 1,079 | 
|                         |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|                         |                                           |                               | 98,354  |                   |         | $    | 13,466 |              |  |   | 30,794  |        |        | $ | 5,599 |      
|                         |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|Non-Amortizable          |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|                         | Evergreen contracts                       |                               |         | 10,600            |         |      |        |              |  |   |         |       |        |   |       |       | 
|                         |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      
|                         |                                           | Total other intangible assets |         | $                 | 108,954 |      |        |              |  |   |         | $      | 30,794 |   |       |       |  | 
|                         |                                           |                               |         |                   |         |      |        |              |  |   |         |        |        |   |       |      

As discussed in Note 5, Kroll completed its
evaluation of the fair value assigned to Zolfo Coopers
identifiable net assets recorded at acquisition during the third
quarter of 2003. Such evaluation resulted in an increase to
other intangible assets of $13.4 million, a decrease to
goodwill of $13.4 million and an adjustment of
$1.2 million to amortization of other intangible assets.

Non-amortizable assets recorded as part of
Krolls acquisition of Factual Data consist of evergreen
contracts with Fannie Mae and Freddie Mac for which a useful
life is indeterminate.

Amortization of other intangible assets for the
years ended December 31, 2003, 2002 and 2001 was
$8.8 million, $2.5 million and $0.5 million,
respectively. Approximately $49.8 million of amortization
expense is anticipated to be recognized over the next five years
as follows: $11.1 million in 2004, $10.4 million in
2005, $9.9 million in 2006, $9.8 million 2007 and
$8.6 million in 2008.

The following table summarizes the changes in the
carrying amount of goodwill by segment (in thousands):

|                                              |  |            |        |          |  |       |         |               |  |          |      |       |  |               |         |  |  |   |        |  |  |   |         |   |  |   |         | 
|--------------------------------------------- |  | ---------- | ------ | -------- |  | ----- | ------- | ------------- |  | -------- | ---- | ----- |  | ------------- | ------- |  |  | - | ------ |  |  | - | ------- | - |  | - | ------- | 
|                                              |  | Balance    |        | Goodwill |  |       |         |               |  | Goodwill |      |       |  |              
|                                              |  | as of      |        | Acquired |  |       |         | Balance as of |  | Acquired |      |       |  | Balance as of
|                                              |  | January 1, |        | During   |  |       |         | December 31,  |  | During   |      |       |  | December 31, 
|                                              |  | 2002       |        | 2002     |  | Other |         | 2002          |  | 2003     |      | Other |  | 2003         
|                                              |  |            |        |          |  |       |         |               |  |          |      |       |  |              
|Corporate Advisory and Restructuring Services |  | $          | 18,665 |          |  | $     | 153,146 |               |  | $        |     |       |  | $             | 171,811 |  |  | $ | 16,241 |  |  | $ | (13,355 | ) |  | $ | 174,697 | 
|Consulting Services                           |  |            | 17,130 |          |  |       |        |               |  |          | 4    |       |  |               | 17,134  |  |  |   |       |  |  |   | 107     |   |  |   | 17,241  | 
|Technology Services                           |  |            |       |          |  |       | 93,953  |               |  |          |     |       |  |               | 93,953  |  |  |   | 10,373 |  |  |   | 368     |   |  |   | 104,694 | 
|Background Screening Services                 |  |            | 3,000  |          |  |       |        |               |  |          | 77   |       |  |               | 3,077   |  |  |   | 71,395 |  |  |   | 10      |   |  |   | 74,482  | 
|Security Services                             |  |            | 4,155  |          |  |       | 2,073   |               |  |          | (108 | )     |  |               | 6,120   |  |  |   |       |  |  |   | (246    | ) |  |   | 5,874   | 
|                                              |  |            |        |          |  |       |         |               |  |          |      |       |  |               |         |  |  |   |        |  |  |   |         |   |  |   |         | 
|Consolidated                                  |  | $          | 42,950 |          |  | $     | 249,172 |               |  | $        | (27  | )     |  | $             | 292,095 |  |  | $ | 98,009 |  |  | $ | (13,116 | ) |  | $ | 376,988 | 
|                                              |  |            |        |          |  |       |         |               |  |          |      |       |  |               |         |  |  |   |        |  |  |   |         |   |  |   |         | 

F-27



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

During the year ended December 31, 2003,
goodwill increased by $98.0 million primarily due to the
acquisitions of Factual Data ($68.4 million), Oyez
($10.4 million), Certico ($1.9 million), MIE
($0.6 million) and Intellifacts ($0.4 million) and the
issuance of 625,000 additional shares of common stock to the
former owners of Zolfo Cooper ($16.3 million). Other
adjustments include a decrease of $13.4 million and
$0.2 million due to the revaluation of Zolfo Cooper and
Crucibles identifiable net assets, respectively and an
increase of $0.4 million due to the revaluation of
Ontracks identifiable net assets (see Note 5).
Additionally there was an increase to goodwill of $0.1 due to
currency fluctuations from Krolls foreign operations.

During the year ended December 31, 2002,
goodwill increased by $249.1 million primarily due to the
acquisitions of Ontrack ($93.9 million), Zolfo Cooper
($153.1 million) and Crucible ($2.1 million). Other
adjustments are due to currency fluctuations from our foreign
operations.

In accordance with SFAS No. 142, Kroll
ceased amortizing goodwill on January 1, 2002. Had the
non-amortization provisions of SFAS No. 142 been
applied to 2001, the effect on reported earnings would have been
as follows (in thousands, except per share data):

|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |       |         |  
|------------------------------ | ---------------------------------------- | ---------------------------------------- | ------ | ---- | ------ | ---- | ------ | ---- | ------ | - | ------- | ----- | ------- | -
|                               |                                          |                                         
|                               |                                          | Years Ended December 31,                
|                               |                                          |                                         
|                               |                                          | 2003                                     |        | 2002 |        | 2001
|                               |                                          |                                          |        |      |        |     
|Net income (loss), as reported |                                          | $                                        | 37,892 |      |        | $    | 16,381 |      |        | $ | (21,387 | )    
|                               | Amortization of goodwill, net of tax     |                                          |        |     |        |      |        |     |        |   |         | 1,605 |        
|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|                               |                                          | Net income (loss), as adjusted           |        | $    | 37,892 |      |        | $    | 16,381 |   |         | $     | (19,782 | )
|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|Basic:                         |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|                               | Net income (loss) per share, as reported |                                          | $      | 0.93 |        |      | $      | 0.56 |        |   | $       | (0.95 | )      
|                               | Amortization of goodwill, net of tax     |                                          |        |     |        |      |        |     |        |   |         | 0.07  |        
|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|                               |                                          | Net income (loss) per share, as adjusted |        | $    | 0.93   |      |        | $    | 0.56   |   |         | $     | (0.88   | )
|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|Diluted:                       |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|                               | Net income (loss) per share, as reported |                                          | $      | 0.90 |        |      | $      | 0.54 |        |   | $       | (0.95 | )      
|                               | Amortization of goodwill, net of tax     |                                          |        |     |        |      |        |     |        |   |         | 0.07  |        
|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |      
|                               |                                          | Net income (loss) per share, as adjusted |        | $    | 0.90   |      |        | $    | 0.54   |   |         | $     | (0.88   | )
|                               |                                          |                                          |        |      |        |      |        |      |        |   |         |      



|    |             
|--- | ------------
|11. | Other Assets

Other assets consist of the following (in
thousands):

|                                                                                                             |       |             |     |              |  |      |        |        |  |   |       |       | 
|------------------------------------------------------------------------------------------------------------ | ----- | ----------- | --- | ------------ |  | ---- | ------ | ------ |  | - | ----- | ----- | 
|                                                                                                             |       |             |     |             
|                                                                                                             |       | Estimated   |     | December 31,
|                                                                                                             |       | Useful Life |     |             
|                                                                                                             |       | (Years)     |     | 2003         |  | 2002
|                                                                                                             |       |             |     |              |  |     
|Security deposits                                                                                            |       |             |    |              |  | $    | 1,246  |        |  | $ | 1,011 |      
|Deferred financing fees, net of accumulated
    amortization of $605 and $227 in 2003 and 2002, respectively |       |             | 3-5 |              |  |      | 1,172  |        |  |   | 1,213 |      
|Receivable from sale of Russian business                                                                     |       |             |    |              |  |      |       |        |  |   | 50    |      
|Investments                                                                                                  |       |             |    |              |  |      | 19,655 |        |  |   | 2,485 |      
|Other assets                                                                                                 |       |             |    |              |  |      | 1,148  |        |  |   | 946   |      
|                                                                                                             |       |             |     |              |  |      |        |        |  |   |       |      
|                                                                                                             | Total |             |     |              |  |      | $      | 23,221 |  |   | $     | 5,705 | 
|                                                                                                             |       |             |     |              |  |      |        |        |  |   |       |      

Certain assets are being amortized on a straight
line basis over their estimated useful lives, as applicable.

F-28



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On March 27, 2003, Kroll invested
$1.0 million in convertible notes of iJet Travel
Intelligence Inc. (iJet) and received warrants to
purchase shares of iJet preferred stock. The notes are
convertible into preferred stock of iJet upon iJet raising
additional equity financing. This $1.0 million investment
is in addition to $1.5 million of Series B preferred
stock of iJet that Kroll acquired in August 2002. At that time,
Kroll also received warrants to purchase approximately
2.6 million shares of iJet common stock. In February 2004,
Kroll converted $500,000 of the iJet convertible notes into
shares of Series C preferred stock of iJet and received
approximately $535,000, including accrued interest, in cash from
iJet as repayment in full of the remaining convertible notes.
iJet is an intelligence organization focused on delivering
proactive travel risk management services and real-time alerts
to travelers, expatriates, corporations, government and
non-governmental organizations, learning institutions and the
travel industry. This investment is accounted for under the cost
basis method.

On May 22, 2003, Kroll purchased
2,000,000 shares of Series A preferred stock of EID
Access Inc. (EID) for $2.0 million in cash. In
conjunction with this investment, EID issued warrants to
purchase 963,000 additional shares of preferred stock at
Krolls option. Kroll also received 100,000 options to
purchase shares of common stock. EID provides vendor security
solutions. This investment is accounted for under the cost basis
method.

In the fourth quarter of 2003, Kroll purchased
$15 million aggregate principal amount of 15% Secured
Senior Subordinated Notes due 2006 (the Notes) of
Color Spot Nurseries, Inc. (Color Spot) through
its new indirect, wholly-owned, subsidiary, Kroll Zolfo Cooper
Structured Equity LLC. At the time of investment, Color Spot
paid Kroll a commitment fee of $1.5 million. The commitment
fee was deferred and is being amortized over the life of the
notes using the interest rate method. In addition, Color Spot is
obligated to pay Kroll an annual fee of 5% of the original
aggregate principal amount of the Notes on each anniversary of
the date that the Notes were issued and a fee of 5% of the
prepaid principal amount of the Notes upon any prepayment of the
Notes, except that if any portion of the Notes is prepaid after
the second anniversary of the Notes and prior to 240 days
after the second anniversary of the Notes, the prepayment fee
will be 2.5% of the prepaid principal amount of the Notes. The
Notes are secured by a security interest in substantially all of
the assets of Color Spot and its subsidiaries and a pledge of
the stock of Color Spots subsidiaries. Kroll invested in
Color Spot concurrently with Catalyst Equity Partners, LLP
(Catalyst), an investment partnership, which is
indirectly controlled by senior management of Kroll Zolfo
Cooper. Catalyst restructured its existing investment in Color
Spot and invested some additional funds to purchase
$15 million aggregate principal amount of the Notes.

The amounts paid for iJet, EID and Color Spot,
including transaction costs and expenses, have been included as
Other investments in the Consolidated Statement of
Cash Flows for the year ended December 31, 2003.



|    |                          
|--- | -------------------------
|12. | Revolving Lines of Credit

As discussed in Note 8, during 2001 Kroll
was unable to obtain $45.0 million of financing in
connection with the anticipated sale of SPSG. As a result,
approximately $1.0 million of expenses were written off
during 2001, including commitment and due diligence fees and the
cost of extending the then-existing bank loan, which expired on
November 16, 2001.

On February 21, 2002, Kroll executed
agreements with Foothill Capital Corporation
(Foothill) to provide a revolving credit facility of
up to $15 million, subject to borrowing base limitations,
for a term of three years. During the term of the credit
facility, Kroll paid Foothill a fee equal to 0.375% per
annum of the unused portion of the credit facility. The credit
facility required Kroll to maintain a minimum level of earnings
before interest, taxes, depreciation and amortization
(EBITDA), and contained restrictions on the
incurrence of additional debt, the creation of any liens on any
of Krolls assets, certain acquisitions, distributions to
certain subsidiaries and other affirmative and negative
covenants customarily contained in debt agreements of this

F-29



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

type. The credit facility was secured by a
security interest in substantially all of the assets of Kroll
and its material domestic subsidiaries and a pledge of the stock
of certain of Krolls subsidiaries.

On September 5, 2002, Kroll amended and
ultimately terminated the $15 million revolving credit
facility with Foothill. No borrowings were made under the
terminated $15 million credit facility. Kroll wrote off
financing fees of $0.5 million related to the replacement
of the Foothill revolving credit facility during the third
quarter of 2002. Such amount is reflected in Other income
(expense) in the Consolidated Statement of Operations for
the year ended December 31, 2002.

Concurrently with the termination of the Foothill
facility, Kroll entered into a new $100 million credit
facility with Goldman Sachs & Co. (Goldman
Sachs) that included a $25 million revolving credit
facility and a $75 million term loan (see Note 16 for
a discussion of the term loan portion of this facility). The
$25 million revolving credit facility with Goldman Sachs
was subject to borrowing base limitations and had a three-year
term. The available borrowing amount was calculated based on an
analysis of Krolls accounts receivable as of the month end
preceding the borrowing date. Borrowings under the revolving
credit facility bore interest, at Krolls election, at a
rate per annum equal to the base rate plus applicable margin or
the Eurodollar rate plus applicable margin. The applicable
margin was determined by the leverage ratio, calculated as of
the last day of any fiscal quarter as the ratio of consolidated
total debt as of that day to adjusted EBITDA for the four fiscal
quarters ending on such date.

The Goldman Sachs revolving credit facility
required Kroll to comply with certain customary restrictive
covenants, including maintaining certain ratios such as EBITDA
to fixed charges and EBITDA to debt, and limiting capital
expenditures, additional indebtedness and dividends.

The Goldman Sachs revolving credit facility also
required Kroll to pay a fee equal to 0.75% per annum of the
unused portion of this facility. Upon the repayment of the
$75 million Goldman Sachs term loan in October 2002 with
the proceeds of Krolls common stock offering, discussed in
Note 18, this fee was reduced to 0.375% per annum. The
revolving credit facility was secured by a lien on substantially
all of Krolls assets and those of most of Krolls
domestic subsidiaries.

On March 6, 2003, Kroll executed agreements
with Fleet National Bank (Fleet) providing a
revolving credit facility of up to $25 million for a term
of three years. Krolls obligations under the Fleet
revolving credit facility are guaranteed by its domestic
subsidiaries. In addition, the Fleet revolving credit facility
is secured by a security interest in substantially all of the
assets of Kroll and its material domestic subsidiaries and a
pledge of the stock of Krolls material domestic
subsidiaries and 65% of the stock of certain of the foreign
subsidiaries of Kroll and its domestic subsidiaries.

The $25 million Goldman Sachs revolving
credit facility undertaken as part of the $100 million
credit facility on September 5, 2002 was simultaneously
retired on March 6, 2003. As a result, Kroll wrote off
approximately $0.1 million of unamortized deferred
financing fees relating to this facility during the first
quarter of 2003. Such amount is reflected in Other income
(expense) in the Consolidated Statement of Operations for
the year ended December 31, 2003. There were no borrowings
made under the retired $25 million revolving credit
facility.

Borrowings under the Fleet revolving credit
facility will bear interest, at Krolls election, at a rate
per annum equal to (1) the prime rate of Fleet or
(2) LIBOR plus 2.00%. During the term of the Fleet
revolving credit facility, Kroll will pay Fleet a quarterly fee
equal to 0.375% per annum of the unused portion of the line
of credit. The Fleet revolving credit facility requires Kroll to
maintain a minimum level of EBITDA and net income, contains
maximum leverage and liabilities requirements and contains
restrictions on the incurrence of additional debt, the creation
of any liens, the payment of cash dividends, certain
acquisitions and distributions to certain subsidiaries. The
Fleet revolving credit facility also contains other affirmative
and negative covenants and events of default customarily
contained in agreements of this type. There have been no

F-30



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

borrowings made under this facility. At
December 31, 2003, Kroll was in compliance with all
covenants and provisions of this facility.

In connection with the acquisition of Buchler
Phillips during 1999, Kroll acquired a demand note with maximum
borrowings of 2.5 million pounds sterling. This amount was
increased to 4.4 million pounds sterling during 2002. The
demand note bears interest at the Bank of Englands base
rate plus 1.5%. During 2003, maximum borrowings permitted under
the demand note decreased from 4.4 million pounds sterling
to 4.0 million pounds sterling, or $7.1 million, as
translated at December 31, 2003. The amount outstanding
under this demand note at December 31, 2003 was
$2.2 million, a decrease of $1.6 million from the
amount outstanding at December 31, 2002 due primarily to
repayments made during 2003. The interest rate at
December 31, 2003 was 5.25%.



|    |                           
|--- | --------------------------
|13. | Related Party Transactions

The following summarizes transactions with
related parties (in thousands):

|                                                                                       |  |                               |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------------------------------------- |  | ----------------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                       |  |                              
|                                                                                       |  | As of and for the Years Ended
|                                                                                       |  | December 31,                 
|                                                                                       |  |                              
|                                                                                       |  | 2003                          |       | 2002 |  | 2001
|                                                                                       |  |                               |       |      |  |     
|Sales to shareholder                                                                   |  | $                             | 567   |      |  | $    | 2,780 |  |  | $ | 5,121 | 
|Purchases from shareholder                                                             |  |                               | 1,440 |      |  |      | 907   |  |  |   | 386   | 
|Lease expense to affiliated entities                                                   |  |                               | 588   |      |  |      | 534   |  |  |   | 465   | 
|Legal services expense to law firm of a Board
    member                               |  |                               | 1,335 |      |  |      | 2,453 |  |  |   | 1,322 | 
|Payments to related party for operation of
    airplane for business purposes (Note 5) |  |                               | 1,702 |      |  |      | 605   |  |  |   |      | 
|Amounts receivable due from officer                                                    |  |                               | 138   |      |  |      | 50    |  |  |   |      | 
|Trade accounts receivable due from shareholder                                         |  |                               | 17    |      |  |      | 670   |  |  |   |      | 
|Trade accounts payable due to affiliate                                                |  |                               | 606   |      |  |      | 2,253 |  |  |   |      | 



| |                                      
| | -------------------------------------
| | Sales and Purchases 
    Shareholder

During the years ended December 31, 2003,
2002 and 2001, Kroll rendered services to American International
Group, Inc. and its subsidiaries (AIG), which
is also a shareholder of Kroll. Total revenue recognized for the
years ended December 31, 2003, 2002 and 2001 was $566,813,
$2,780,144 and $5,120,559, respectively. In addition, AIG
provides certain services to Kroll, which have been included in
cost of sales and operating expenses in the accompanying
Consolidated Statements of Operations. These costs were
$1,439,570, $906,911 and $386,058 for the years ended
December 31, 2003, 2002 and 2001, respectively. The
year-end accounts receivable balance from AIG was $17,073 and
$670,176 at December 31, 2003 and 2002, respectively.



| |                                         
| | ----------------------------------------
| | Lease Expense to Affiliated
    Entities

Kroll currently leases various equipment and
office space from several affiliated entities under various five
year and month-to-month lease agreements. Rental expense, net of
sub-lease income, approximated $588,000, $534,000 and $465,000
for the years ended December 31, 2003, 2002 and 2001,
respectively.



| |                                                         
| | --------------------------------------------------------
| | Legal Services Expense to Law Firm of a
    Board Member

Kroll retains the law firm of a Board member for
various legal services provided to it in the normal course of
business. These expenses were $1,335,000, $2,453,000 and
$1,322,000 for the years ended December 31, 2003, 2002 and
2001, respectively.

F-31



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                                                              
| | -----------------------------------------------------------------------------
| | Payments to Related Party for Operation of
    Airplane for Business Purposes

Kroll had agreed to pay an entity controlled by
the former principal owners of Zolfo Cooper (see Note 5)
for the cost of operating for business purposes an airplane
owned by the entity, up to a total of $2.0 million per
year. To the extent the airplane is used in connection with a
client engagement, the client may reimburse Kroll. The costs to
operate the airplane for the years ended December 31, 2003
and 2002 were $1.7 million and $0.6 million,
respectively. Kroll was reimbursed $0.3 million and
$0.1 million for the years ended December 31, 2003 and
2002, respectively.



| |                                        
| | ---------------------------------------
| | Amounts Receivable Due from
    Officer

During 2003, 2002 and 2001, an executive officer
of Kroll agreed to reimburse Kroll for a portion of general and
administrative expenses, including outside professional fees,
office rent and travel expenses, which were incurred on his
behalf. Amounts due to Kroll at December 31, 2003 and 2002
pursuant to this agreement were $137,563 and $50,017
respectively. The amount receivable at December 31, 2003
was subsequently repaid during January 2004.



|    |                          
|--- | -------------------------
|14. | Other Accrued Liabilities

Other accrued liabilities consist of the
following (in thousands):

|                                                 |                                 |              |       |        |  |   |       |        | 
|------------------------------------------------ | ------------------------------- | ------------ | ----- | ------ |  | - | ----- | ------ | 
|                                                 |                                 |             
|                                                 |                                 | December 31,
|                                                 |                                 |             
|                                                 |                                 | 2003         |       | 2002  
|                                                 |                                 |              |       |       
|Professional fees                                |                                 | $            | 1,401 |        |  | $ | 990   |       
|Property, sales and other taxes payable          |                                 |              | 3,104 |        |  |   | 1,345 |       
|Medical costs                                    |                                 |              | 939   |        |  |   | 475   |       
|Interest                                         |                                 |              | 363   |        |  |   | 240   |       
|Payments to former owners of acquired businesses |                                 |              | 250   |        |  |   | 898   |       
|Restructuring expenses                           |                                 |              | 2,574 |        |  |   | 445   |       
|Facility shutdown                                |                                 |              | 554   |        |  |   | 506   |       
|Office relocation                                |                                 |              |      |        |  |   | 982   |       
|Leasehold renovation reserve                     |                                 |              | 536   |        |  |   | 930   |       
|Other accruals                                   |                                 |              | 4,147 |        |  |   | 4,062 |       
|                                                 |                                 |              |       |        |  |   |       |       
|                                                 | Total other accrued liabilities |              | $     | 13,868 |  |   | $     | 10,873 | 
|                                                 |                                 |              |       |        |  |   |       |       

F-32



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |             
|--- | ------------
|15. | Income Taxes

Krolls provision for income taxes is
summarized as follows (in thousands):

|          |                            |                          |        |        |  |      |        |        |   |  |       |       |  
|--------- | -------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ | - |  | ----- | ----- | -
|          |                            |                         
|          |                            | Years Ended December 31,
|          |                            |                         
|          |                            | 2003                     |        | 2002   |  | 2001
|          |                            |                          |        |        |  |     
|Current:  |                            |                          |        |        |  |      |        |        |   |  |       |      
|          | Federal                    |                          | $      | 15,748 |  |      | $      | 3,105  |   |  | $     |      |  
|          | State and local            |                          |        | 7,628  |  |      |        | 1,439  |   |  |       | 542   |  
|          | Foreign                    |                          |        | 3,059  |  |      |        | 3,859  |   |  |       | 2,244 |  
|          |                            |                          |        |        |  |      |        |        |   |  |       |      
|          |                            |                          | 26,435 |        |  |      | 8,403  |        |   |  | 2,786 |      
|          |                            |                          |        |        |  |      |        |        |   |  |       |      
|Deferred: |                            |                          |        |        |  |      |        |        |   |  |       |      
|          | Federal                    |                          |        | 2,855  |  |      |        | (1,225 | ) |  |       | (210  | )
|          | State and local            |                          |        | 653    |  |      |        | (111   | ) |  |       | 8     |  
|          | Foreign                    |                          |        |       |  |      |        |       |   |  |       | (375  | )
|          |                            |                          |        |        |  |      |        |        |   |  |       |      
|          |                            |                          | 3,508  |        |  |      | (1,336 | )      |   |  | (577  | )    
|          |                            |                          |        |        |  |      |        |        |   |  |       |      
|          | Provision for income taxes |                          | $      | 29,943 |  |      | $      | 7,067  |   |  | $     | 2,209 |  
|          |                            |                          |        |        |  |      |        |        |   |  |       |      

Reconciliation between the statutory federal
income tax rate and the effective tax rate is summarized as
follows (dollars in thousands):

|                                                                       |                            |                          |        |        |  |        |      |      |   |        |        |       |  |  |       |      |   |   |        |       |  |  |       |      |  
|---------------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ------ |  | ------ | ---- | ---- | - | ------ | ------ | ----- |  |  | ----- | ---- | - | - | ------ | ----- |  |  | ----- | ---- | -
|                                                                       |                            |                         
|                                                                       |                            | Years Ended December 31,
|                                                                       |                            |                         
|                                                                       |                            |                          |        |        |  |       
|                                                                       |                            | 2003                     |        | 2002   |  | 2001  
|                                                                       |                            |                          |        |        |  |       
|                                                                       |                            | Amount                   |        | Rate   |  | Amount |      | Rate |   | Amount |        | Rate 
|                                                                       |                            |                          |        |        |  |        |      |      |   |        |        |      
|Provision (benefit) for income taxes at the
    federal statutory rate |                            | $                        | 26,651 |        |  |        | 35.0 | %    |   | $      | 8,245  |       |  |  | 35.0  | %    |   | $ | (3,034 | )     |  |  | (34.0 | )%  
|State and local income taxes, net of federal tax
    benefit           |                            |                          | 5,665  |        |  |        | 7.4  |      |   |        | 1,107  |       |  |  | 4.7   |      |   |   | 462    |       |  |  | 5.2   |     
|Nondeductible expenses                                                 |                            |                          | 281    |        |  |        | 0.4  |      |   |        | 597    |       |  |  | 2.5   |      |   |   | 418    |       |  |  | 4.7   |     
|Change in valuation allowance                                          |                            |                          |       |        |  |        |     |      |   |        | (5,497 | )     |  |  | (23.3 | )    |   |   | 3,579  |       |  |  | 40.1  |     
|Effect of foreign earnings                                             |                            |                          | 1,181  |        |  |        | 1.6  |      |   |        | 2,453  |       |  |  | 10.4  |      |   |   | 1,112  |       |  |  | 12.5  |     
|Research and development tax credits                                   |                            |                          | (1,294 | )      |  |        | (1.7 | )    |   |        |       |       |  |  |      |      |   |   |       |       |  |  |      |     
|Other                                                                  |                            |                          | (2,541 | )      |  |        | (3.4 | )    |   |        | 162    |       |  |  | 0.7   |      |   |   | (328   | )     |  |  | (3.8  | )   
|                                                                       |                            |                          |        |        |  |        |      |      |   |        |        |       |  |  |       |      |   |   |        |       |  |  |       |     
|                                                                       | Provision for income taxes |                          | $      | 29,943 |  |        |      | 39.3 | % |        | $      | 7,067 |  |  |       | 30.0 | % |   | $      | 2,209 |  |  |       | 24.7 | %
|                                                                       |                            |                          |        |        |  |        |      |      |   |        |        |       |  |  |       |      |   |   |        |       |  |  |       |     

Pre-tax income (loss) for domestic and foreign
operations consisted of the following (in thousands):

|                       |          |                             |   |        |        |      |   |        |        |  |   |        |        |  
|---------------------- | -------- | --------------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | -
|                       |          |                            
|                       |          | Years Ended December 31,   
|                       |          |                            
|                       |          | 2003                        |   | 2002   |        | 2001
|                       |          |                             |   |        |        |     
|Pre-tax Income (Loss): |          |                             |   |        |        |      |   |        |        |  |   |       
|                       | Domestic |                             | $ | 69,220 |        |      | $ | 18,436 |        |  | $ | (8,658 | )     
|                       | Foreign  |                             |   | 6,925  |        |      |   | 5,122  |        |  |   | (265   | )     
|                       |          |                             |   |        |        |      |   |        |        |  |   |       
|                       |          | Total pre-tax income (loss) |   | $      | 76,145 |      |   | $      | 23,558 |  |   | $      | (8,923 | )
|                       |          |                             |   |        |        |      |   |        |        |  |   |       

F-33



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The components of Krolls current deferred
income tax assets and liabilities are summarized below (in
thousands):

|                                  |                                    |                                  |   |       |       |  |   |       |       | 
|--------------------------------- | ---------------------------------- | -------------------------------- | - | ----- | ----- |  | - | ----- | ----- | 
|                                  |                                    |                                 
|                                  |                                    | December 31,                    
|                                  |                                    |                                 
|                                  |                                    | 2003                             |   | 2002 
|                                  |                                    |                                  |   |      
|Current Deferred Tax Assets:      |                                    |                                  |   |       |       |  |   |      
|                                  | Allowance for doubtful accounts    |                                  | $ | 1,544 |       |  | $ | 2,037 |      
|                                  | Payroll and other benefits         |                                  |   | 1,235 |       |  |   | 1,543 |      
|                                  | Other accruals                     |                                  |   | 1,742 |       |  |   | 2,629 |      
|                                  | Other foreign                      |                                  |   | 175   |       |  |   |      |      
|                                  |                                    |                                  |   |       |       |  |   |      
|                                  |                                    | Current deferred tax assets      |   |       | 4,696 |  |   |       | 6,209 | 
|                                  |                                    |                                  |   |       |       |  |   |      
|Current Deferred Tax Liabilities: |                                    |                                  |   |       |       |  |   |      
|                                  | Non-accrual service fee receivable |                                  |   | 192   |       |  |   | 207   |      
|                                  | Deferred revenue                   |                                  |   | 1,389 |       |  |   | 378   |      
|                                  | Other                              |                                  |   | 1,028 |       |  |   | 320   |      
|                                  |                                    |                                  |   |       |       |  |   |      
|                                  |                                    | Current deferred tax liabilities |   |       | 2,609 |  |   |       | 905   | 
|                                  |                                    |                                  |   |       |       |  |   |      
|                                  |                                    | Net current deferred tax assets  |   | $     | 2,087 |  |   | $     | 5,304 | 
|                                  |                                    |                                  |   |       |       |  |   |      

The components of Krolls non-current
deferred income tax assets and liabilities are summarized below
(in thousands):

|                                      |                               |                                        |   |        |        |  |   |       |       | 
|------------------------------------- | ----------------------------- | -------------------------------------- | - | ------ | ------ |  | - | ----- | ----- | 
|                                      |                               |                                       
|                                      |                               | December 31,                          
|                                      |                               |                                       
|                                      |                               | 2003                                   |   | 2002  
|                                      |                               |                                        |   |       
|Non-current Deferred Tax Assets:      |                               |                                        |   |        |        |  |   |      
|                                      | Payroll and other benefits    |                                        | $ | 149    |        |  | $ |      |      
|                                      | Restructuring                 |                                        |   | 737    |        |  |   | 363   |      
|                                      | Other accruals                |                                        |   | 97     |        |  |   | 1,144 |      
|                                      | Other foreign                 |                                        |   | 2,394  |        |  |   | 1,068 |      
|                                      |                               |                                        |   |        |        |  |   |      
|                                      |                               | Non-current deferred tax assets        |   |        | 3,377  |  |   |       | 2,575 | 
|                                      |                               |                                        |   |        |        |  |   |      
|Non-current Deferred Tax Liabilities: |                               |                                        |   |        |        |  |   |      
|                                      | Depreciation and amortization |                                        |   | 10,312 |        |  |   | 1,922 |      
|                                      | Deferred revenue              |                                        |   |       |        |  |   | 1,567 |      
|                                      | Other                         |                                        |   | 783    |        |  |   | 1,137 |      
|                                      |                               |                                        |   |        |        |  |   |      
|                                      |                               | Non-current deferred tax liabilities   |   |        | 11,095 |  |   |       | 4,626 | 
|                                      |                               |                                        |   |        |        |  |   |      
|                                      |                               | Net non-current deferred tax liability |   | $      | 7,718  |  |   | $     | 2,051 | 
|                                      |                               |                                        |   |        |        |  |   |      

At December 31, 2003, Kroll had no net
operating loss carry-forward.

At December 31, 2003, Kroll had
$8.7 million of accumulated and undistributed income from
foreign subsidiaries. These earnings are intended by management
to be reinvested abroad indefinitely. Accordingly, applicable
deferred US federal income taxes have not been provided nor is a
determination of the amount of unrecognized deferred US federal
income taxes practicable.

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |               
|--- | --------------
|16. | Long-Term Debt



| |                         
| | ------------------------
| | Senior Convertible Notes

During 2001, Kroll obtained additional financing
of $30.0 million in the form of 6% Senior Secured
Subordinated Convertible Notes due 2006
(6% Convertible Notes). The notes mature
November 14, 2006 and bear interest at the rate of
6% per annum payable semi-annually. However, 12% per
annum will accrue on any principal payment that is past due.
Kroll may redeem these convertible notes at par plus accrued
interest, in whole or in part, beginning November 14, 2004,
provided the note holders have been notified in writing
20 days in advance. The note holders may, at any time prior
to one day before the earlier of the maturity date or the
redemption date, convert all or a portion of the principal
amount of the notes into Kroll common stock at the conversion
price of $10.80 per share. The $30.0 million of notes
are presently convertible into 2,777,777 shares of Kroll
common stock, subject to customary and other anti-dilution
adjustments.

In connection with the issuance of the
6% Convertible Notes, Kroll recorded a notes discount of
approximately $11.4 million based on the difference between
the closing price of its stock on the issuance date and the
conversion price. In addition to the stated 6% interest, the
discount is being amortized as non-cash interest expense over
the expected 5-year life of the notes. Barring early conversion
by the noteholders or early redemption by Kroll, the average
additional non-cash interest expense resulting from this
discount amortization is approximately $2.3 million, or
7.6% per year, on the $30.0 million aggregate
principal amount. The amount of non-cash interest expense
resulting from this discount amortization for the years ended
December 31, 2003, 2002 and 2001 was $1.9 million,
$1.6 million and $0.2 million, respectively.

Until September 2002, the notes were secured by
the same assets of Kroll and its material subsidiaries and the
same pledge of stock of certain of Krolls subsidiaries as
the Foothill revolving credit facility, except that the notes
were subordinate to the security interest and rights of the
credit facility lender.

On September 5, 2002, Kroll amended certain
provisions of its outstanding 6% Convertible Notes. Under
the amendments, the security interest of the noteholders was
terminated and the collateral securing the 6% Convertible
Notes was released. In addition, the amendments deleted all of
the negative covenants in respect of all of the
6% Convertible Notes. Furthermore, Palisades Concentrated
Equity Partnership, L.P. (Palisade), the only note
holder who had the right to designate a board observer, no
longer has this right. Palisade also agreed to subordinate the
$20.0 million in aggregate principal amount of the
6% Convertible Notes that it owned to borrowings under the
$100 million Goldman Sachs credit facility. In connection
with these amendments, Kroll agreed to compensate Palisade based
on the performance of Krolls common stock, and as a result
of this agreement, paid Palisade $1.6 million in October
2002. Such amount is reflected in Other income
(expense) in the Consolidated Statement of Operations for
the year ended December 31, 2002.

Other
Long-Term Debt

In connection with the acquisition of Zolfo
Cooper in September 2002, Kroll obtained $75 million in
term loan financing through a syndicate arranged by Goldman
Sachs to be repaid under the following terms: $0.8 million
by December 31, 2002, an additional $4.5 million
within one year of the closing date, $18.7 million within
two years of closing and the balance of $51.0 million
within three years of closing.

The term loan was part of a $100 million
credit facility with Goldman Sachs, which included the
$25 million revolving credit facility discussed in
Note 12. The cost of obtaining the credit facility was
being amortized over the facilitys three-year life. The
term loan bore interest, at Krolls election, at a rate per
annum equal to the base rate plus applicable margin or the
Eurodollar rate plus applicable margin. The applicable margin
was determined by the leverage ratio, calculated as of the last
day of any fiscal quarter as the ratio of consolidated total
debt, as of that day, to EBITDA for the four fiscal quarters
ending on such date. A provision in the term loan required that
proceeds from any equity offering be used to repay the term loan.

F-35



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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The term loan was repaid in October 2002 with the
proceeds from Krolls common stock offering discussed in
Note 18. In the fourth quarter of 2002, Kroll wrote off
financing fees of $1.1 million associated with the
repayment of the $75 million term loan. Such amount is
reflected in Other income (expense) in the
Consolidated Statement of Operations for the year ended
December 31, 2002.

In connection with the acquisition of Factual
Data on August 21, 2003, Kroll assumed Factual Datas
capitalized service license agreements with Experian Information
Solutions, Inc. (Experian) for consumer credit
reporting services. Under these agreements, Factual Data has
access, on a non-exclusive basis, to all credit and other
information contained in Experians database associated
with consumers living in certain geographic areas. Each
agreement has an initial term of ten years and continues for
successive one-year periods unless either party delivers a
written notice of intent not to renew the agreement at least six
months before the end of the initial ten-year or any one-year
renewal period. These agreements expire in April and November of
2010 and January 2011 and are payable over a five-year term.

The components of long-term debt are as follows
(in thousands):

|                                                                                                                                                                                                                          |  |              |        |      |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                                                                                                                                                                                                          |  |             
|                                                                                                                                                                                                                          |  | December 31,
|                                                                                                                                                                                                                          |  |             
|                                                                                                                                                                                                                          |  | 2003         |        | 2002
|                                                                                                                                                                                                                          |  |              |        |     
|6% Convertible Notes, net of discount of
    $7,695 and $9,599 at December 31, 2003 and 2002,
    respectively                                                                                                            |  | $            | 22,305 |      |  | $ | 20,401 | 
|Capitalized service license agreements for
    consumer credit reporting services, interest at 9.985%, due
    April and November of 2005 and January 2006                                                                |  |              | 5,030  |      |  |   |       | 
|Notes payable issued in connection with
    acquisitions of businesses by Kroll Factual Data, interest rates
    ranging from 5% to 12% per annum, payable at different
    times from January 2004 through November 2008 |  |              | 2,643  |      |  |   |       | 
|Various capitalized lease obligations for office
    furniture and fixtures and computer equipment and software,
    interest rates ranging from 8.47% to 10.43%, expiring through
    June 2005                          |  |              | 263    |      |  |   |       | 
|Other notes payable                                                                                                                                                                                                       |  |              |       |      |  |   | 91     | 
|                                                                                                                                                                                                                          |  |              |        |      |  |   |        | 
|                                                                                                                                                                                                                          |  |              | 30,241 |      |  |   | 20,492 | 
|Less current portion                                                                                                                                                                                                      |  |              | 4,328  |      |  |   | 73     | 
|                                                                                                                                                                                                                          |  |              |        |      |  |   |        | 
|                                                                                                                                                                                                                          |  | $            | 25,913 |      |  | $ | 20,419 | 
|                                                                                                                                                                                                                          |  |              |        |      |  |   |        | 

Scheduled maturities of long-term debt at
December 31, 2003 are as follows (in thousands):

|           |                                                                                                               |   |        |       | 
|---------- | ------------------------------------------------------------------------------------------------------------- | - | ------ | ----- | 
|2004       |                                                                                                               | $ | 4,608  |      
|2005       |                                                                                                               |   | 2,648  |      
|2006       |                                                                                                               |   | 30,483 |      
|2007       |                                                                                                               |   | 400    |      
|2008       |                                                                                                               |   | 262    |      
|Thereafter |                                                                                                               |   |       |      
|           |                                                                                                               |   |        |      
|           |                                                                                                               |   | 38,401 |      
|Less:      |                                                                                                               |   |        |      
|           | Unamortized discount on 6% Convertible Notes                                                                  |   |        | 7,695 | 
|           | Portion of capitalized service license agreements
    and capitalized lease obligations representing interest |   |        | 465   | 
|           |                                                                                                               |   |        |      
|           |                                                                                                               | $ | 30,241 |      
|           |                                                                                                               |   |        |      

F-36



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|17. | Commitments and Contingencies

Letters of
Credit

In connection with the sale of SPSG, Kroll
provided a $1.5 million standby letter of credit in favor
of Armor to cover certain potential foreign tax liabilities of
SPSG, which is outstanding as of December 31, 2003 (see
Note 6).

Legal
Matters

Kroll Lindquist Avey Co. (formerly Lindquist Avey
Macdonald & Baskerville (LAMB)), a
subsidiary of Kroll, and several of its principals have been
named as third-party defendants in a lawsuit filed in the
Ontario Superior Court of Justice by HSBC Securities (Canada)
Inc., formerly Gordon Capital, an investment dealer
(HSBC). HSBC filed the underlying suit against
Gordon Capitals former law firm, Davies, Ward &
Beck, (DW&B) seeking damages in the amount of
approximately $40,000,000 (Cdn.). HSBC alleges DW&B
negligently advised Gordon Capital during 1991 through 1993 with
respect to its rights concerning trading losses and
irregularities by a client account manager and various insurance
bonds relating to such losses and irregularities. HSBC further
alleges various suits and declaratory judgment actions involving
the insurers were filed in 1993 and that summary judgment
granted in favor of the insurers in 1996 was affirmed on appeal
to the Supreme Court of Canada on the basis that the limitation
period under the bonds had expired without an action being
commenced for recovery of Gordon Capitals losses. Gordon
Capital, DW&B and LAMB entered into various tolling
agreements until the matters pending with the insurers were
exhausted. In April 2000, HSBC filed suit against DW&B. In
July 2001, DW&B filed a third-party claim against LAMB and
certain principals for contribution and indemnity. An amended
third-party claim was filed in September 2001. The third-party
claim alleges DW&B retained LAMB in June 1991 to examine the
trading irregularities and to advise Gordon Capital in respect
of its dealings with its insurers and that LAMB acted
negligently in carrying out these services. Third party claims
have also been filed against some entities formerly known as
Peat Marwick Thorne, Gordon Capitals alleged former
auditors, and AON Reed Stenhouse, Inc., Gordon
Capitals alleged former insurance broker. The parties
attended mediation in December 2002 and October 2003.
Representatives of LAMB attended but did not participate. LAMB
is being defended by its former carrier, the Reliance Insurance
Company. Reliance is in liquidation, and while paying all
defense costs, has advised that any claim for damages or
settlement greater than $25,000 (Cdn.) will be a claim in the
liquidation, on which distributions will be made as the
liquidation progresses. A hearing on the parties motions
for summary judgment originally scheduled for January 2004 has
been postponed and a new date has not yet been scheduled while
DW&B seeks to examine a former employee of Gordon Capital
with respect to the motions for summary judgment. A trial date
has been scheduled for September 2004. Management of Kroll
believes LAMB has meritorious defenses to the claims and intends
to defend the claims vigorously.

On June 27, 2003, a shareholder of Factual
Data filed a lawsuit against Factual Data and its directors in
the District Court for the County of Larimer, Colorado, styled
Troxler v. Factual Data Corporation [sic], Jerald H.
Donnan, Todd A. Neiberger, Robert J. Terry, J. Barton Goodwin,
Daniel G. Helle, Abdul H. Rajput and James N. Donnan. On
August 1, 2003, the plaintiff filed an amended complaint.
In the amended complaint, the plaintiff alleges, among other
things, that the individual defendants engaged in self dealing
in connection with the negotiation and approval of the merger
agreement and the merger. The plaintiff also claims the
individual defendants obtained benefits not shared by the
plaintiff, and that they breached their fiduciary duties of
care, loyalty, candor and independence owed under Colorado law
to Factual Datas public shareholders. The plaintiff seeks
certification of the case as a class action. The plaintiff
requests damages, certain equitable relief, attorneys fees
and costs and an order rescinding the merger. On August 12,
2003, Factual Data moved to dismiss the plaintiffs amended
complaint. On September 15, 2003, the plaintiff filed a
response to Factual Datas motion to dismiss. On
September 26, 2003, Factual Data filed an amended reply in

F-37



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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

support of its motion to dismiss the first
amended complaint. On December 9, 2003, the court denied
Factual Datas motion to dismiss the amended complaint. The
parties have not engaged in any discovery to date. Kroll and
Factual Data believe that the allegations in the amended
complaint are without merit and will defend the suit vigorously.

The ultimate outcome of these matters cannot
presently be determined. Accordingly, the ultimate resolution of
these matters could have a material adverse effect on its
consolidated financial position, results of operations or its
cash flows.

In addition to the matters discussed above, Kroll
is involved in litigation from time to time in the ordinary
course of its business; however, Kroll does not believe that
there is any currently pending litigation, individually or in
the aggregate, that is likely to have a material adverse effect
on Krolls consolidated financial position, results of
operations or its cash flows.

Other
Matters

Krolls laboratory testing operations are
certified and subject to frequent inspections and proficiency
tests by certain federal, state or local jurisdictions.
Management believes that potential claims from such audits and
investigations will not have a material adverse effect on
Krolls consolidated financial statements.

Kroll is self-insured with respect to certain of
its employee medical benefit plans. Management believes that the
reserves for such plans are adequate at December 31, 2003.

Operating
Leases

Kroll leases office space and certain equipment
and supplies under agreements with terms from one to fifteen
years. The following table 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, 2003 (in
thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 14,732 | 
|2005       |  |   | 12,998 | 
|2006       |  |   | 11,542 | 
|2007       |  |   | 10,758 | 
|2008       |  |   | 7,973  | 
|Thereafter |  |   | 16,372 | 
|           |  |   |        | 
|           |  | $ | 74,375 | 
|           |  |   |        | 

Rental expense charged against current operations
amounted to approximately $19,873,000, $12,608,000 and
$10,378,000 for the years ended December 31, 2003, 2002 and
2001, respectively.



|    |                     
|--- | --------------------
|18. | Stockholders Equity

In October 2002, Kroll sold 6.3 million
shares of its common stock to the public in an underwritten
public offering and raised approximately $110.6 million of
net proceeds, after $0.2 million of accrued expenses. As
discussed in Note 16, Kroll used a portion of these
proceeds to repay its three-year $75 million term loan
incurred on September 5, 2002 to acquire Zolfo Cooper. The
remaining proceeds were used for working capital to fund
operations and other general company purposes.

As discussed in Note 5, Kroll issued
2.9 million shares of its common stock on January 15,
2003, valued at approximately $55.3 million, to the former
owners of Zolfo Cooper in connection with the acquisition of
Zolfo Cooper on September 5, 2002. These shares appear on
the December 31, 2002 Consolidated Balance

F-38



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Sheet under the caption Common shares to be
issued for acquisition. Furthermore, 625,000 additional
shares of Kroll common stock became issuable to the former
owners of Zolfo Cooper as of December 31, 2003 as a result
of Kroll Zolfo Coopers operating profit exceeding the
targeted level for 2003 outlined in the contingent consideration
provisions of the acquisition agreement, as amended. These
shares appear on the December 31, 2003 Consolidated Balance
Sheet under the caption Common shares to be issued for
acquisition.

On August 21, 2003, Kroll issued
934,712 shares of its common stock in exchange for shares
of Factual Data outstanding at closing in connection with the
acquisition of Factual Data (see Note 5).

During 2003, Kroll issued 82,854 shares of
restricted stock, valued at approximately $1.8 million.
Such amount is being amortized over the applicable vesting
period as additional compensation expense (see Note 19).

On December 16, 2003, the Board of Directors
approved the repurchase of up to 2,780,000 shares of Kroll
common stock in conjunction with Krolls anticipated
offering of convertible subordinated notes (see Note 26).
As of December 31, 2003, Kroll had purchased
250,300 shares of its common stock for approximately
$6.4 million. As discussed in Note 26, Kroll purchased
2,527,477 additional shares of its common stock subsequent to
December 31, 2003 for approximately $64.4 million.

During the fourth quarter of 2003, the Board of
Directors also approved a repurchase program of up to
$35.0 million of Kroll common stock, none of which has been
purchased.



|    |            
|--- | -----------
|19. | Stock Plans



| |                   
| | ------------------
| | Stock Option Plans

During 1996, Kroll adopted a stock option plan
(the 1996 Option Plan) for employees, non-employee
directors and advisors. Kroll may grant options for up to
1,757,000 shares under the 1996 Option Plan. In June 2002,
the 1996 Option Plan was amended to increase by 1,243,000 the
number of options that could be granted to a total of 3,000,000.
Options for 877,647, 850,000 and 155,000 shares were
granted during the years ended December 31, 2003, 2002 and
2001, respectively. The options generally vest over the three
years following the date of grant. Certain options granted in
2003, however, will vest as discussed below under
Inducement Awards. Options granted under the 1996
Option Plan are granted at fair market value at the date of
grant and are exercisable over periods not exceeding ten years.
In 2003, 380,443 options were exercised and 27,983 options were
cancelled under this plan.

During 2000, Kroll adopted a stock option plan
(the 2000 Option Plan) for non-officer employees.
The 2000 Option Plan provided that Kroll may grant options for
up to 750,000 shares. In May 2001, the 2000 Option Plan was
amended to increase by 2,250,000 the number of options that
could be granted to a total of 3,000,000. The 2000 Option Plan
was further amended in June 2002 to increase by an additional
750,000 the number of options that could be granted to a total
of 3,750,000. The 2000 Option Plan was subsequently amended in
August 2003 to increase by an additional 337,500 the number of
options that could be granted to a total of 4,087,500. Options
for 450,700, 1,447,150 and 2,027,000 shares were granted
during the years ended December 31, 2003, 2002 and 2001,
respectively. Options under the 2000 Option Plan are granted at
fair market value at the date of grant and are exercisable over
periods not exceeding ten years. The options vest according to a
formula determined by the Board of Directors on the date of the
grant, but generally over three years. Certain options granted
in 2003, however, will vest as discussed below under
Inducement Awards. In 2003, 467,967 options were
exercised and 35,347 options were cancelled under the 2000
Option Plan.

During 2001, Kroll adopted a stock option plan
(the 2001 Option Plan) for non-employee directors.
Kroll may grant options for up to 200,000 shares under the
2001 Option Plan. Options for 10,000 shares were granted to
each of the four non-employee directors following Krolls
annual meeting of stockholders on

F-39



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

August 16, 2001. An additional 40,000
options were granted following Krolls 2002 annual meeting
of stockholders on June 13, 2002 and 50,000 additional
options were granted to non-employee directors following
Krolls 2003 annual meeting of stockholders on June 3,
2003. Options under the 2001 Option Plan are granted at fair
market value at the date of grant and are exercisable over
periods not exceeding ten years. The options vest ratably over
the three years following the date of grant. In 2003, no options
were exercised and 10,000 options were cancelled under the 2001
Option Plan.

At December 31, 2003, there were
approximately 278,684, 9,229 and 80,000 authorized shares
remaining for grant in the 1996 Option Plan, the 2000 Option
Plan and the 2001 Option Plan, respectively.

Inducement
Awards

During 2003, Kroll granted options to certain
persons as an inducement to those persons to accept employment
with Kroll. These options were granted outside of any of
Krolls option plans described above, pursuant to a
NASDAQ-approved exception to the recently adopted NASDAQ rule
requiring stockholder approval of option plans and/or grants.
Kroll granted 29,600 inducement award options to five people
which vest as follows: (a) 50% of these options will vest
over time (the Time Award), with one third of the
Time Award vesting on the first anniversary of the date of grant
(Grant Date), one sixth of the Time Award vesting
eighteen months after the Grant Date, one sixth of the Time
Award vesting twenty-four months after the Grant Date, one sixth
of the Time Award vesting thirty months after the Grant Date and
one sixth of the Time Award vesting thirty-six months after the
Grant Date; and (b) 50% of these options will vest, after
the first anniversary of the Grant Date, according to
performance (the Performance Award), with one third
of the Performance Award vesting upon Krolls achieving a
stock price equal to or greater than 115% of the exercise price
for twenty consecutive trading days, one third of the
Performance Award vesting upon Krolls achieving a stock
price equal to or greater than 115% of the first performance
vesting price for twenty consecutive trading days and one third
of the Performance Award vesting upon Krolls achieving a
stock price equal to or greater than 115% of the second
performance vesting price for twenty consecutive trading days.
Notwithstanding this vesting schedule for the Performance Award,
the unvested portion of the Performance Award will vest in full
on the fifth anniversary of the Grant Date. Kroll also granted
400,000 inducement award options to 12 people in connection with
the acquisition of Factual Data, which vest as follows: 25% on
the first anniversary of grant, 25% on the second anniversary of
grant and 50% on the third anniversary of grant. The inducement
awards were granted with an exercise price equal to the per
share fair market value of Kroll common stock on the date of
grant.

A summary of the status of Krolls stock
option plans (including the inducement awards) and the changes
during the years then ended is presented in the table below:

|                               |                               |                                            |           |           |   |        |       |          |  |        |           |            |   |   |       |       |  |  |           |           |   |   |       |       | 
|------------------------------ | ----------------------------- | ------------------------------------------ | --------- | --------- | - | ------ | ----- | -------- |  | ------ | --------- | ---------- | - | - | ----- | ----- |  |  | --------- | --------- | - | - | ----- | ----- | 
|                               |                               |                                           
|                               |                               | As of and for the Years Ended December 31,
|                               |                               |                                           
|                               |                               |                                            |           |           |   |       
|                               |                               | 2003                                       |           | 2002      |   | 2001  
|                               |                               |                                            |           |           |   |       
|                               |                               |                                            |           | Weighted  |   |        |       | Weighted |  |        |           | Weighted  
|                               |                               |                                            |           | Average   |   |        |       | Average  |  |        |           | Average   
|                               |                               |                                            |           | Exercise  |   |        |       | Exercise |  |        |           | Exercise  
|                               |                               | Shares                                     |           | Price     |   | Shares |       | Price    |  | Shares |           | Price     
|                               |                               |                                            |           |           |   |        |       |          |  |        |           |           
|Outstanding, beginning of year |                               |                                            | 5,377,455 |           |   | $      | 14.83 |          |  |        | 3,325,256 |            |   | $ | 10.04 |       |  |  | 2,398,298 |           |   | $ | 13.19 |      
|                               | Acquired through acquisition  |                                            |           | 445,904   |   |        |       | 10.54    |  |        |           | 1,037,490  |   |   |       | 11.35 |  |  |           |          |   |   |       |      | 
|                               | Granted                       |                                            |           | 1,807,947 |   |        |       | 24.17    |  |        |           | 2,337,150  |   |   |       | 20.31 |  |  |           | 2,222,000 |   |   |       | 7.39  | 
|                               | Exercised                     |                                            |           | (848,410  | ) |        |       | 9.85     |  |        |           | (1,016,871 | ) |   |       | 8.34  |  |  |           | (384,204  | ) |   |       | 6.72  | 
|                               | Forfeited/ Expired/ Cancelled |                                            |           | (73,330   | ) |        |       | 11.74    |  |        |           | (305,570   | ) |   |       | 14.39 |  |  |           | (910,838  | ) |   |       | 13.28 | 
|                               |                               |                                            |           |           |   |        |       |          |  |        |           |            |   |   |       |       |  |  |           |           |   |   |       |      
|Outstanding, end of year       |                               |                                            | 6,709,566 |           |   | $      | 17.72 |          |  |        | 5,377,455 |            |   | $ | 14.83 |       |  |  | 3,325,256 |           |   | $ | 10.04 |      
|                               |                               |                                            |           |           |   |        |       |          |  |        |           |            |   |   |       |       |  |  |           |           |   |   |       |      
|Exercisable, end of year       |                               |                                            | 2,465,727 |           |   | $      | 15.28 |          |  |        | 1,738,779 |            |   | $ | 13.09 |       |  |  | 993,986   |           |   | $ | 14.50 |      
|                               |                               |                                            |           |           |   |        |       |          |  |        |           |            |   |   |       |       |  |  |           |           |   |   |       |      

F-40



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of Krolls stock options
outstanding and exercisable at December 31, 2003 is
presented in the table below:

|             |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |           | 
|------------ | --------------------------------------------------------------------------------- | ---------------------- | - | --------- |  | --------- | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|             |                                                                                   |                       
|             |                                                                                   | Per Share Price Ranges
|             |                                                                                   |                       
|             |                                                                                   | $2.40 to               |   | $10.34 to |  | $20.22 to |   |          
|             |                                                                                   | $10.25                 |   | $19.55    |  | $26.94    |   | Total    
|             |                                                                                   |                        |   |           |  |           |   |          
|Outstanding: |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          
|             | Number of stock options                                                           |                        |   | 1,554,427 |  |           |   | 1,797,459 |  |  |   | 3,357,680 |  |  |   | 6,709,566 | 
|             |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          
|             | Weighted average exercise price                                                   |                        | $ | 7.22      |  |           | $ | 15.95     |  |  | $ | 23.56     |  |  | $ | 17.72     | 
|             |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          
|             | Weighted average remaining contractual life of
    options outstanding (in years) |                        |   | 7.0       |  |           |   | 8.0       |  |  |   | 8.7       |  |  |   | 8.1       | 
|             |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          
|Exercisable: |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          
|             | Number of stock options                                                           |                        |   | 865,758   |  |           |   | 634,898   |  |  |   | 965,071   |  |  |   | 2,465,727 | 
|             |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          
|             | Weighted average exercise price                                                   |                        | $ | 7.18      |  |           | $ | 14.51     |  |  | $ | 23.04     |  |  | $ | 15.28     | 
|             |                                                                                   |                        |   |           |  |           |   |           |  |  |   |           |  |  |   |          

The weighted average grant-date fair value of
options granted by Kroll during 2003, 2002 and 2001 were $11.87,
$10.73 and $4.69, respectively.

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants:

|                        |  |                          |            |      |  |      |            |   |  |  |            |  
|----------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                        |  |                         
|                        |  | Years Ended December 31,
|                        |  |                         
|                        |  | 2003                     |            | 2002 |  | 2001
|                        |  |                          |            |      |  |     
|Dividend yield          |  |                          |           |      |  |      |           |   |  |  |           |  
|Expected volatility     |  |                          | 55.3       | %    |  |      | 59.0       | % |  |  | 74.0       | %
|Risk-free interest rate |  |                          | 3.3        | %    |  |      | 3.0        | % |  |  | 4.38       | %
|Expected lives          |  |                          | 5.0  years |      |  |      | 5.0  years |   |  |  | 5.0  years |  

See Note 3 for the effect on net income
(loss) and net income (loss) per share had Kroll elected to
recognize and measure compensation expense for its stock option
grants to employees based on the fair value method pursuant to
SFAS No. 123, as amended by SFAS No. 148.

Restricted
Stock Plan

Effective August 12, 1998, Kroll adopted a
stock incentive plan for employees. On June 3, 2003, this
stock incentive plan was amended and restated (as so amended and
restated, the Stock Incentive Plan) to modify
restrictions on the number of shares of common stock that may by
awarded to executive officers, provide that non-employee
directors be eligible to receive awards, allow no more than
50,000 shares to be awarded annually to any eligible
person, provide that shares of common stock be granted without
requiring payment from participants, and include some minor
changes from the original plan. Kroll may grant up to
500,000 shares under the Stock Incentive Plan.

During 1999, 47,500 restricted shares were
granted under the Stock Incentive Plan at a value of $1,571,661.
The 1999 restricted stock grants generally vested ratably over
three years. There were no shares granted under the Stock
Incentive Plan during 2000 and 2001. In March 2002,
2,500 shares valued at $44,000 were granted to an officer
pursuant to terms of an employment agreement with Kroll, with
such shares vesting over a one year period; 50% vested
immediately and 50% vested ratably over one year from date of
grant. On June 2, 2003, Kroll issued 40,854 shares of
restricted stock to executive officers and employees, valued at
approximately $0.9 million. Such shares will be amortized
over the applicable vesting period of one and one-

F-41



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

half years as additional expense. On
December 9, 2003, Kroll issued 17,000 shares of
restricted stock to certain executive officers and employees,
valued at approximately $0.4 million. Such shares will be
amortized over the applicable vesting period of three years as
additional compensation expense.

At December 31, 2003, there were
approximately 307,000 authorized shares remaining for grant in
the Stock Incentive Plan.

On January 1, 2003, 25,000 shares of
restricted stock, valued at $0.5 million, were granted to
the chief executive officer pursuant to terms of his employment
agreement with Kroll, with such shares vesting over a three-year
period.

Compensation expense related to restricted stock
issued amounted to $863,000 and $337,000 for the years ended
December 31, 2003 and 2001, respectively.

Employee
Stock Purchase Plan

On March 19, 2002, the Board approved the
establishment of the Kroll Inc. Employee Stock Purchase Plan
(ESPP), which was approved by Kroll stockholders on
June 13, 2002. The ESPP allows participants to purchase
shares of Kroll Inc. common stock at a 15% discount from the
lesser of the stocks fair market value as of either the
first or the last day of the plans six-month offering
period. The Board further authorized that 1,000,000 shares
of Krolls common stock be reserved for issuance pursuant
to the ESPP. Employees contributed approximately
$1.0 million to the first offering period, which began on
July 1, 2002 and ended on December 31, 2002. During
2003, employees contributed approximately $3.2 million. At
December 31, 2003, 777,307 shares were available for
future issuance.



| |                      
| | ---------------------
| | Common Stock Warrants

Warrants originally granted by Laboratory
Specialists of America, Inc. (LSI) were
converted to the equivalent warrants to purchase Kroll stock
when Kroll acquired LSI. These warrants were issued in June 1998
to certain consultants and underwriters in connection with the
completion of a private offering of common stock and were
recognized as compensation paid for services rendered and
treated as a reduction in the recognized net proceeds from the
offering. As of December 31, 2002, warrants representing
the right to purchase 8,719 shares of Kroll common stock at
$25.69 per share were outstanding. These warrants expired
during 2003.

Warrants originally granted by Background
America, Inc. (BAI) were converted to the
equivalent warrants to purchase Kroll stock when Kroll acquired
BAI. These warrants were issued in June and July of 1996 and
January of 1998 to certain consultants and other non-employees
with exercise prices equal to or greater than the then fair
value of BAIs common stock on those dates. As of
December 31, 2002, warrants representing the right to
purchase 807 shares of Kroll common stock at
$19.52 per share were outstanding. These warrants expired
during 2003.



|    |                                                      
|--- | -----------------------------------------------------
|20. | Defined Contribution Plans and Other
    Arrangements

As of December 31, 2003, Kroll had the
following employee benefit plans in place:



| |                           
| | --------------------------
| | Defined Contribution Plans

Kroll and its subsidiaries have established
various non-contributory profit sharing/401(k) plans covering
substantially all of Krolls employees. Contributions to
the plans are discretionary and are determined annually by
Krolls Board of Directors. Certain plans also offer a
matching contribution whereby Kroll will contribute a percentage
of the amount a participant contributes, limited to certain
maximum amounts. Plan contribution

F-42



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

expense charged against current operations for
all such plans amounted to approximately $1,408,000, $1,085,000
and $1,150,000 for the years ended December 31, 2003, 2002
and 2001, respectively.



| |                                     
| | ------------------------------------
| | Profit and Revenue Sharing
    Plans

Kroll and its subsidiaries have established
various profit and revenue sharing plans covering substantially
all of Krolls employees. The plans were established to
provide employees an annual cash incentive bonus based on
various operating and non-operating criteria. Kroll may amend,
modify or terminate these plans at any time. Kroll expensed
approximately $39,425,000, $8,971,000 and $3,835,000 associated
with the profit and revenue sharing plans during the years ended
December 31, 2003, 2002 and 2001, respectively.



|    |                                    
|--- | -----------------------------------
|21. | Fair Value of Financial Instruments

At December 31, 2003, the fair value of
long-term debt exceeds the carrying amount of such debt. This is
primarily due to the intrinsic value of the conversion feature
of the 6% Convertible Notes of $42.2 million. Cash
equivalents, other current assets and current liabilities are
reflected in the financial statements at cost, which
approximates fair value due to the short-term nature of these
items.

At December 31, 2002, the fair value of
long-term debt approximated its historical carrying amount.



|    |                          
|--- | -------------------------
|22. | Customer and Segment Data

During 2003, Krolls reportable operating
segments consisted of the following five business segments:
Corporate Advisory and Restructuring Services, Consulting
Services, Technology Services, Background Screening Services and
Security Services. Krolls reportable segments are
organized, managed and operated along product lines. These
product lines are provided to similar clients, are offered
together as packaged offerings, generally produce similar
margins and are managed under a consolidated operations
management. Effective January 1, 2004, the Security
Services segment was integrated into the Consulting Services
segment (see Note 26).

The Corporate Advisory and Restructuring Services
segment includes revenues and expenses from corporate
restructuring, operational turnaround, strategic advisory
services, financial crisis management and corporate finance
services.

The Consulting Services segment includes revenues
and expenses from business and financial investigations,
forensic accounting, business valuation, litigation consulting,
due diligence, litigation intelligence, asset tracing and
analysis, monitoring and special inquiries, marketing
intelligence and intellectual property and infringement
investigations.

The Technology Services segment includes revenues
and expenses from electronic discovery, data recovery and
computer forensics services, along with related software
solutions.

The Background Screening Services segment
includes revenues and expenses from employee and vendor
background investigations, credit screening, substance abuse
testing and identity fraud solutions.

The Security Services segment includes revenues
and expenses from security architecture and design, corporate
security consulting, emergency management and environmental
services as well as protective services, operations and training.

F-43



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following summarizes information about
Krolls business segments for the years ended
December 31, 2003, 2002 and 2001 on a selling subsidiary
basis (in thousands):

|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |         | 
|----------------------------------- | ------------------------ | ------------- | ------- | ---------- |  | ---------- | ------- | ---------- |  | -------- | ------- | ----- |  | ------------ | ------ |  |  | - | ------ |  |  | - | ------- | - |  | - | ------- | ------- | 
|                                    |                          | Corporate     |         |            |  |            |         |            |  |          |         |       |  |             
|                                    |                          | Advisory and  |         |            |  |            |         | Background |  |          |         |       |  |             
|                                    |                          | Restructuring |         | Consulting |  | Technology |         | Screening  |  | Security |         |       |  |             
|                                    |                          | Services      |         | Services   |  | Services   |         | Services   |  | Services |         | Other |  | Consolidated
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |             
|2003                                |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Net sales to unaffiliated customers |                          | $             | 160,110 |            |  | $          | 130,906 |            |  | $        | 83,273  |       |  | $            | 78,022 |  |  | $ | 33,165 |  |  | $ |        |   |  | $ | 485,476 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Gross profit                        |                          | $             | 92,610  |            |  | $          | 58,727  |            |  | $        | 61,280  |       |  | $            | 37,714 |  |  | $ | 10,224 |  |  | $ |        |   |  | $ | 260,555 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Operating income (loss)             |                          | $             | 62,225  |            |  | $          | 23,029  |            |  | $        | 19,498  |       |  | $            | 13,376 |  |  | $ | 83     |  |  | $ | (38,233 | ) |  | $ | 79,978  |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Identifiable assets at year-end     |                          | $             | 63,174  |            |  | $          | 53,734  |            |  | $        | 24,835  |       |  | $            | 41,274 |  |  | $ | 8,919  |  |  | $ |        |   |  | $ | 191,936 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Goodwill                            |                          | $             | 174,697 |            |  | $          | 17,241  |            |  | $        | 104,694 |       |  | $            | 74,482 |  |  | $ | 5,874  |  |  | $ |        |   |  |   | 376,988 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Corporate assets                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | 110,516 |        
|Assets of discontinued operations   |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | 169     |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|                                    | Total assets at year-end |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | $       | 679,609 | 
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|2002                                |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Net sales to unaffiliated customers |                          | $             | 71,386  |            |  | $          | 106,564 |            |  | $        | 36,438  |       |  | $            | 44,364 |  |  | $ | 25,496 |  |  | $ |        |   |  | $ | 284,248 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Gross profit                        |                          | $             | 40,629  |            |  | $          | 43,583  |            |  | $        | 25,201  |       |  | $            | 20,927 |  |  | $ | 8,850  |  |  | $ |        |   |  | $ | 139,190 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Operating income (loss)             |                          | $             | 23,128  |            |  | $          | 13,324  |            |  | $        | 5,479   |       |  | $            | 10,069 |  |  | $ | 3,047  |  |  | $ | (23,217 | ) |  | $ | 31,830  |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Identifiable assets at year-end     |                          | $             | 41,618  |            |  | $          | 44,381  |            |  | $        | 32,597  |       |  | $            | 22,243 |  |  | $ | 13,941 |  |  | $ |        |   |  | $ | 154,780 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Goodwill                            |                          | $             | 171,811 |            |  | $          | 17,134  |            |  | $        | 93,953  |       |  | $            | 3,077  |  |  | $ | 6,120  |  |  | $ |        |   |  |   | 292,095 |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Corporate assets                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | 73,144  |        
|Assets of discontinued operations   |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | 9,399   |        
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|                                    | Total assets at year-end |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | $       | 529,418 | 
|                                    |                          |               |         |            |  |            |         |            |  |          |         |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |         | 
|----------------------------------- | ------------------------ | ------------- | ------ | ---------- |  | ---------- | ------- | ---------- |  | -------- | ----- | ----- |  | ------------ | ------ |  |  | - | ------ |  |  | - | ------- | - |  | - | ------- | ------- | 
|                                    |                          | Corporate     |        |            |  |            |         |            |  |          |       |       |  |             
|                                    |                          | Advisory and  |        |            |  |            |         | Background |  |          |       |       |  |             
|                                    |                          | Restructuring |        | Consulting |  | Technology |         | Screening  |  | Security |       |       |  |             
|                                    |                          | Services      |        | Services   |  | Services   |         | Services   |  | Services |       | Other |  | Consolidated
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |             
|2001                                |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Net sales to unaffiliated customers |                          | $             | 30,751 |            |  | $          | 106,126 |            |  | $        | 4,380 |       |  | $            | 35,672 |  |  | $ | 24,129 |  |  | $ |        |   |  | $ | 201,058 |        
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Gross profit                        |                          | $             | 16,045 |            |  | $          | 35,239  |            |  | $        | 2,628 |       |  | $            | 16,809 |  |  | $ | 9,610  |  |  | $ |        |   |  | $ | 80,331  |        
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Operating income (loss)             |                          | $             | 5,684  |            |  | $          | 2,975   |            |  | $        | 1,084 |       |  | $            | 4,730  |  |  | $ | 3,494  |  |  | $ | (21,860 | ) |  | $ | (3,893  | )      
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Identifiable assets at year-end     |                          | $             | 15,671 |            |  | $          | 52,756  |            |  | $        | 1,195 |       |  | $            | 15,969 |  |  | $ | 11,808 |  |  | $ |        |   |  | $ | 97,399  |        
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Goodwill                            |                          | $             | 18,665 |            |  | $          | 17,130  |            |  | $        |      |       |  | $            | 3,000  |  |  | $ | 4,155  |  |  | $ |        |   |  |   | 42,950  |        
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|Corporate assets                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | 9,182   |        
|Assets of discontinued operations   |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | 13,168  |        
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        
|                                    | Total assets at year-end |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   | $       | 162,699 | 
|                                    |                          |               |        |            |  |            |         |            |  |          |       |       |  |              |        |  |  |   |        |  |  |   |         |   |  |   |         |        

Total net sales by segment include sales to
unaffiliated customers Inter-segment sales are nominal.
Operating income (loss) is gross profit less operating expenses.
Operating income (loss) does not include the following items:
interest expense, interest income, other income (expense) and
income taxes. The Other column includes the costs of
Krolls corporate headquarters and other centralized
administrative costs. Identifiable assets by segment are those
assets that are used in Krolls operations in each segment.
Corporate assets are principally cash, computer software and
certain prepaid expenses.

Depreciation expense and capital expenditures for
each of Krolls business segments for the years ended
December 31, 2003, 2002 and 2001 are as follows (in
thousands):

|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|-------------------- |  | ------------- | ----- | ---------- |  | ---------- | ----- | ---------- |  | -------- | ----- | ----- |  | ------------ | ----- | - |  | - | --- |  |  | - | ----- |  |  | - | ------ | 
|                     |  | Corporate     |       |            |  |            |       |            |  |          |       |       |  |             
|                     |  | Advisory and  |       |            |  |            |       | Background |  |          |       |       |  |             
|                     |  | Restructuring |       | Consulting |  | Technology |       | Screening  |  | Security |       |       |  |             
|                     |  | Services      |       | Services   |  | Services   |       | Services   |  | Services |       | Other |  | Consolidated
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |             
|2003                 |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|Depreciation expense |  | $             | 1,766 |            |  | $          | 1,440 |            |  | $        | 4,200 |       |  | $            | 1,381 |   |  | $ | 456 |  |  | $ | 1,555 |  |  | $ | 10,798 | 
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|Capital expenditures |  | $             | 1,391 |            |  | $          | 1,511 |            |  | $        | 7,327 |       |  | $            | 2,394 |   |  | $ | 271 |  |  | $ | 1,240 |  |  | $ | 14,134 | 
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|2002                 |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|Depreciation expense |  | $             | 878   |            |  | $          | 2,059 |            |  | $        | 1,878 |       |  | $            | 806   |   |  | $ | 290 |  |  | $ | 1,407 |  |  | $ | 7,318  | 
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|Capital expenditures |  | $             | 3,506 |            |  | $          | 377   |            |  | $        | 2,312 |       |  | $            | (653  | ) |  | $ | 509 |  |  | $ | 4     |  |  | $ | 6,055  | 
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|2001                 |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|Depreciation expense |  | $             | 621   |            |  | $          | 2,798 |            |  | $        | 179   |       |  | $            | 783   |   |  | $ | 553 |  |  | $ | 741   |  |  | $ | 5,675  | 
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 
|Capital expenditures |  | $             | 823   |            |  | $          | 767   |            |  | $        | 329   |       |  | $            | 857   |   |  | $ | 624 |  |  | $ |      |  |  | $ | 3,400  | 
|                     |  |               |       |            |  |            |       |            |  |          |       |       |  |              |       |   |  |   |     |  |  |   |       |  |  |   |        | 

Kroll has foreign operations and assets in
Argentina, Australia, Brazil, Canada, China, France, Germany,
Hong Kong, India, Italy, Japan, Mexico, the Philippines, Russia,
South Africa, Spain, Switzerland and the United Kingdom. In
addition, Kroll sells its products and services in other foreign
countries and continues to

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KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

increase its level of international activity.
Accordingly, Kroll is subject to various risks including, among
others, foreign currency restrictions, exchange rate
fluctuations, government instability and complexities of local
laws and regulations.

Kroll accounts for transfers between geographic
areas at cost plus a proportionate share of operating profit,
which is eliminated in consolidation.

The following summarizes information about
Krolls business activities worldwide for the years ended
December 31, 2003, 2002 and 2001 on a selling subsidiary
basis (in thousands):

|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |         | 
|----------------------------------- | ------------------------ | ------ | ------- | ------- |  | ---- | ------- | ------- |  | ------------ | ------ | ------------ |  | - | ------ | ------ |  | - | ------- | ------- | - | - | ------- | ------- | 
|                                    |                          | United |         |         |  |      |         | Other   |  |              |        |             
|                                    |                          | States |         | Europe  |  | Asia |         | Foreign |  | Eliminations |        | Consolidated
|                                    |                          |        |         |         |  |      |         |         |  |              |        |             
|2003                                |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Net sales to unaffiliated customers |                          | $      | 331,520 |         |  | $    | 117,612 |         |  | $            | 10,916 |              |  | $ | 25,428 |        |  | $ |        |         |   | $ | 485,476 |        
|Intercompany                        |                          |        | 15,928  |         |  |      | 151     |         |  |              | 119    |              |  |   | 1,086  |        |  |   | (17,284 | )       |   |   |        |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|                                    | Total net sales          |        | $       | 347,448 |  |      | $       | 117,763 |  |              | $      | 11,035       |  |   | $      | 26,514 |  |   | $       | (17,284 | ) |   | $       | 485,476 | 
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Operating income (loss)             |                          | $      | 60,764  |         |  | $    | 16,663  |         |  | $            | (1,120 | )            |  | $ | 3,671  |        |  | $ |        |         |   | $ | 79,978  |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Identifiable assets at year-end     |                          | $      | 130,419 |         |  | $    | 44,419  |         |  | $            | 5,267  |              |  | $ | 11,831 |        |  | $ |        |         |   | $ | 191,936 |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Goodwill                            |                          | $      | 327,029 |         |  | $    | 29,037  |         |  | $            | 4,732  |              |  | $ | 16,190 |        |  | $ |        |         |   |   | 376,988 |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Corporate assets                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   | 110,516 |        
|Assets of discontinued operations   |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   | 169     |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|                                    | Total assets at year-end |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   | $       | 679,609 | 
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|2002                                |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Net sales to unaffiliated customers |                          | $      | 181,883 |         |  | $    | 70,608  |         |  | $            | 9,663  |              |  | $ | 22,094 |        |  | $ |        |         |   | $ | 284,248 |        
|Intercompany                        |                          |        | 5,376   |         |  |      | 777     |         |  |              | 274    |              |  |   | 2,761  |        |  |   | (9,188  | )       |   |   |        |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|                                    | Total net sales          |        | $       | 187,259 |  |      | $       | 71,385  |  |              | $      | 9,937        |  |   | $      | 24,855 |  |   | $       | (9,188  | ) |   | $       | 284,248 | 
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Operating income (loss)             |                          | $      | 17,200  |         |  | $    | 11,622  |         |  | $            | (1,179 | )            |  | $ | 4,187  |        |  | $ |        |         |   | $ | 31,830  |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Identifiable assets at year-end     |                          | $      | 109,206 |         |  | $    | 34,244  |         |  | $            | 2,624  |              |  | $ | 8,706  |        |  | $ |        |         |   | $ | 154,780 |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Goodwill                            |                          | $      | 252,502 |         |  | $    | 18,664  |         |  | $            | 4,710  |              |  | $ | 16,219 |        |  | $ |        |         |   |   | 292,095 |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|Corporate assets                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   | 73,144  |        
|Assets of discontinued operations   |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   | 9,399   |        
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        
|                                    | Total assets at year-end |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   | $       | 529,418 | 
|                                    |                          |        |         |         |  |      |         |         |  |              |        |              |  |   |        |        |  |   |         |         |   |   |         |        

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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |         | 
|----------------------------------- | ------------------------ | ------ | ------- | ------- |  | ---- | ------ | ------- |  | ------------ | ------ | ------------ |  | - | ------ | ------ |  | - | ------ | ------ | - | - | ------- | ------- | 
|                                    |                          | United |         |         |  |      |        | Other   |  |              |        |             
|                                    |                          | States |         | Europe  |  | Asia |        | Foreign |  | Eliminations |        | Consolidated
|                                    |                          |        |         |         |  |      |        |         |  |              |        |             
|2001                                |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|Net sales to unaffiliated customers |                          | $      | 116,692 |         |  | $    | 47,814 |         |  | $            | 12,232 |              |  | $ | 24,320 |        |  | $ |       |        |   | $ | 201,058 |        
|Intercompany                        |                          |        | 3,140   |         |  |      | 758    |         |  |              | 313    |              |  |   | 2,299  |        |  |   | (6,510 | )      |   |   |        |        
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|                                    | Total net sales          |        | $       | 119,832 |  |      | $      | 48,572  |  |              | $      | 12,545       |  |   | $      | 26,619 |  |   | $      | (6,510 | ) |   | $       | 201,058 | 
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|Operating income (loss)             |                          | $      | (12,164 | )       |  | $    | 8,128  |         |  | $            | (3,294 | )            |  | $ | 3,437  |        |  | $ |       |        |   | $ | (3,893  | )      
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|Identifiable assets at year-end     |                          | $      | 62,495  |         |  | $    | 21,670 |         |  | $            | 3,426  |              |  | $ | 9,808  |        |  | $ |       |        |   | $ | 97,399  |        
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|Goodwill                            |                          | $      | 3,437   |         |  | $    | 18,665 |         |  | $            | 4,711  |              |  | $ | 16,137 |        |  | $ |       |        |   |   | 42,950  |        
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|Corporate assets                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   | 9,182   |        
|Assets of discontinued operations   |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   | 13,168  |        
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        
|                                    | Total assets at year-end |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   | $       | 162,699 | 
|                                    |                          |        |         |         |  |      |        |         |  |              |        |              |  |   |        |        |  |   |        |        |   |   |         |        

Kroll had no major customer that accounted for a
significant percentage of sales from continuing operations
during the years ended December 31, 2003, 2002 and 2001.



|    |                                    
|--- | -----------------------------------
|23. | Supplemental Cash Flows Disclosures

The following is a summary of cash paid related
to certain items (in thousands):

|                                                 |                                             |                                                                                                 |         |         |        |      |        |         |         |   |   |       |   | 
|------------------------------------------------ | ------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------- | ------- | ------ | ---- | ------ | ------- | ------- | - | - | ----- | - | 
|                                                 |                                             |                                                                                                
|                                                 |                                             | Years Ended December 31,                                                                       
|                                                 |                                             |                                                                                                
|                                                 |                                             | 2003                                                                                            |         | 2002    |        | 2001
|                                                 |                                             |                                                                                                 |         |         |        |     
|Supplemental Disclosure of Cash Flow Activities: |                                             |                                                                                                 |         |         |        |      |        |         |         |   |   |      
|                                                 | Cash paid for interest                      |                                                                                                 | $       | 2,034   |        |      | $      | 2,441   |         |   | $ | 5,562 |  
|                                                 |                                             |                                                                                                 |         |         |        |      |        |         |         |   |   |      
|                                                 | Cash paid for taxes                         |                                                                                                 | $       | 13,077  |        |      | $      | 4,040   |         |   | $ | 131   |  
|                                                 |                                             |                                                                                                 |         |         |        |      |        |         |         |   |   |      
|                                                 | Total purchase price of acquired businesses |                                                                                                 | $       | 162,601 |        |      | $      | 318,377 |         |   | $ |      |  
|                                                 | Less:                                       |                                                                                                 |         |         |        |      |        |         |         |   |   |       |  
|                                                 |                                             | Fair value of stock issued and options assumed in
    connection with acquisition of businesses |         |         | 45,097 |      |        |         | 205,298 |   |   |       |  | 
|                                                 |                                             | Cash acquired in connection with acquisition of
    businesses                                  |         |         | 8,410  |      |        |         | 35,327  |   |   |       |  | 
|                                                 |                                             |                                                                                                 |         |         |        |      |        |         |         |   |   |      
|Cash used in acquisitions, net of cash acquired  |                                             | $                                                                                               | 109,094 |         |        | $    | 77,752 |         |         | $ |  |      
|                                                 |                                             |                                                                                                 |         |         |        |      |        |         |         |   |   |      

F-47



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |        |  
|----------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------ | - | ----- |  | ---- | - | ----- |  |  | - | ------ | -
|                                                |                                                                                                           |                         
|                                                |                                                                                                           | Years Ended December 31,
|                                                |                                                                                                           |                         
|                                                |                                                                                                           | 2003                     |   | 2002  |  | 2001
|                                                |                                                                                                           |                          |   |       |  |     
|Supplemental Disclosure of Non-Cash Activities: |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       
|                                                | Deferred compensation related to restricted stock                                                         |                          | $ | 1,842 |  |      | $ | 44    |  |  | $ |       |  
|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       
|                                                | Accrued contingent consideration incurred in
    connection with acquisition of businesses                |                          | $ |      |  |      | $ | 491   |  |  | $ | 299    |  
|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       
|                                                | Notes issued in connection with acquisition of
    businesses                                             |                          | $ |      |  |      | $ | 1,040 |  |  | $ |       |  
|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       
|                                                | Amount of note receivable forgiven in connection
    with the sale of DRI                                 |                          | $ |      |  |      | $ | 101   |  |  | $ | 190    |  
|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       
|                                                | Receipts of notes receivable from the sale of
    businesses including VDCG, SPSG and DRI (Notes 6 and 7) |                          | $ |      |  |      | $ |      |  |  | $ | 2,543  |  
|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       
|                                                | Write-down of discounted notes receivable from
    the sale of VDCG (Note 6)                              |                          | $ |      |  |      | $ |      |  |  | $ | (1,831 | )
|                                                |                                                                                                           |                          |   |       |  |      |   |       |  |  |   |       

For the year ended December 31, 2003, cash
paid for taxes includes tax savings of approximately
$4.0 million. These tax savings result from the
amortization of goodwill, for tax purposes, in connection with
Krolls acquisition of Zolfo Cooper in 2002 (see
Note 5).



|    |                                     
|--- | ------------------------------------
|24. | Quarterly Financial Data (Unaudited)

|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |      |      | 
|--------------------------------------- | ------------------------------------------ | ---------------------------------------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | - | ------- | ----- | ---- | - | ------- | ---- | ---- | 
|                                        |                                            | First                                    |         | Second  |      | Third   |         | Fourth 
|                                        |                                            | Quarter                                  |         | Quarter |      | Quarter |         | Quarter
|                                        |                                            |                                          |         |         |      |         |         |        
|                                        |                                            |                                         
|                                        |                                            | (In thousands, except per share amounts)
|2003                                    |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|Net sales                               |                                            | $                                        | 103,488 |         |      | $       | 111,442 |         |      | $ | 125,960 |       |      | $ | 144,586 |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|Gross profit                            |                                            | $                                        | 55,917  |         |      | $       | 64,074  |         |      | $ | 65,813  |       |      | $ | 74,751  |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|Income from continuing operations       |                                            | $                                        | 11,328  |         |      | $       | 12,932  |         |      | $ | 9,012   |       |      | $ | 12,930  |     
|Income (loss) from discontinued InPhoto |                                            |                                          | (52     | )       |      |         | (7,965  | )       |      |   | (310    | )     |      |   | 17      |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|Net income                              |                                            | $                                        | 11,276  |         |      | $       | 4,967   |         |      | $ | 8,702   |       |      | $ | 12,947  |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|Basic Per Share Data:                   |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|                                        | Income from continuing operations          |                                          | $       | 0.28    |      |         | $       | 0.32    |      |   | $       | 0.22  |      |   | $       | 0.31 |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|                                        | Income (loss) from discontinued operations |                                          | $       |        |      |         | $       | (0.20   | )    |   | $       | (0.01 | )    |   | $       |     |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|                                        |                                            | Net income                               |         | $       | 0.28 |         |         | $       | 0.12 |   |         | $     | 0.21 |   |         | $    | 0.31 | 
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|Diluted Per Share Data:                 |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|                                        | Income from continuing operations          |                                          | $       | 0.28    |      |         | $       | 0.31    |      |   | $       | 0.21  |      |   | $       | 0.30 |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|                                        | Income (loss) from discontinued operations |                                          | $       |        |      |         | $       | (0.19   | )    |   | $       | (0.01 | )    |   | $       |     |     
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     
|                                        |                                            | Net income                               |         | $       | 0.28 |         |         | $       | 0.12 |   |         | $     | 0.20 |   |         | $    | 0.30 | 
|                                        |                                            |                                          |         |         |      |         |         |         |      |   |         |       |      |   |         |     

F-48



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |      |      | 
|--------------------------------------- | ------------------------------------------ | ---------------------------------------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | - | ------ | ---- | ---- | - | ------ | ---- | ---- | 
|                                        |                                            | First                                    |        | Second  |      | Third   |        | Fourth 
|                                        |                                            | Quarter                                  |        | Quarter |      | Quarter |        | Quarter
|                                        |                                            |                                          |        |         |      |         |        |        
|                                        |                                            |                                         
|                                        |                                            | (In thousands, except per share amounts)
|2002                                    |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|Net sales                               |                                            | $                                        | 54,778 |         |      | $       | 58,432 |         |      | $ | 78,489 |      |      | $ | 92,549 |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|Gross profit                            |                                            | $                                        | 24,381 |         |      | $       | 26,939 |         |      | $ | 40,540 |      |      | $ | 47,330 |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|Income from continuing operations       |                                            | $                                        | 2,329  |         |      | $       | 3,521  |         |      | $ | 5,414  |      |      | $ | 5,227  |     
|Income (loss) from discontinued InPhoto |                                            |                                          | (12    | )       |      |         | 14     |         |      |   | (37    | )    |      |   | (156   | )   
|Income from discontinued SPSG           |                                            |                                          |       |         |      |         | 70     |         |      |   |       |      |      |   | 11     |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|Net income                              |                                            | $                                        | 2,317  |         |      | $       | 3,605  |         |      | $ | 5,377  |      |      | $ | 5,082  |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|Basic Per Share Data:                   |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|                                        | Income from continuing operations          |                                          | $      | 0.10    |      |         | $      | 0.15    |      |   | $      | 0.17 |      |   | $      | 0.13 |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|                                        | Income (loss) from discontinued operations |                                          | $      |        |      |         | $      |        |      |   | $      |     |      |   | $      |     |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|                                        |                                            | Net income                               |        | $       | 0.10 |         |        | $       | 0.15 |   |        | $    | 0.17 |   |        | $    | 0.13 | 
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|Diluted Per Share Data:                 |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|                                        | Income from continuing operations          |                                          | $      | 0.10    |      |         | $      | 0.14    |      |   | $      | 0.17 |      |   | $      | 0.13 |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|                                        | Income (loss) from discontinued operations |                                          | $      |        |      |         | $      |        |      |   | $      |     |      |   | $      |     |     
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     
|                                        |                                            | Net income                               |        | $       | 0.10 |         |        | $       | 0.14 |   |        | $    | 0.17 |   |        | $    | 0.13 | 
|                                        |                                            |                                          |        |         |      |         |        |         |      |   |        |      |      |   |        |     

As discussed in Note 5, Kroll completed its
evaluation of the fair value assigned to Zolfo Coopers
identifiable net assets recorded at acquisition during the third
quarter of 2003. Such evaluation resulted in an increase to
other intangible assets of $13.4 million, a decrease to
goodwill of $13.4 million and an adjustment of
$1.2 million to amortization expense, which was reflected
during the third quarter of 2003.

As discussed in Note 8, Kroll recorded
restructuring charges of $5.4 million and $0.4 million
during the third and fourth quarters of 2003, respectively.



|    |                     
|--- | --------------------
|25. | Database Restatement

Kroll has had a long established practice of
capitalizing the cost of certain databases. This practice was
reported and maintained annually, fully disclosed in the periods
presented and consistently applied for the last fifteen years.
In connection with the preparation of Krolls consolidated
financial statements for the year ended December 31, 2003,
management determined, after consultation with its auditors,
that in accordance with generally accepted accounting
principles, costs incurred in connection with the creation of
certain databases should be expensed in the year such costs are
incurred and should not be capitalized. As a result, Kroll has
restated its consolidated balance sheet as of December 31,
2002 and the related consolidated statements of cash flows and
stockholders equity for each of the two years in the
period ended December 31, 2002 to reflect adjustments to
its database, deferred income tax and stockholders equity
accounts. These restatement adjustments were not applied to the
consolidated statements of operations for 2002 and 2001 due to
the immaterial amounts involved. As a result, there has been no
change to previously reported net income and net loss in 2002
and 2001, respectively. Accumulated deficit and
stockholders equity have been adjusted by
$6.9 million as of January 1, 2001.

F-49



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of the significant effects of the
restatement is as follow (in thousands):

|                           |  |                   |         |             |  |   |         |  
|-------------------------- |  | ----------------- | ------- | ----------- |  | - | ------- | -
|                           |  |                  
|                           |  | December 31, 2002
|                           |  |                  
|                           |  | As Previously     |         |            
|                           |  | Reported          |         | As Restated
|                           |  |                   |         |            
|Account:                   |  |                   |         |             |  |   |         |  
|Databases                  |  | $                 | 10,715  |             |  | $ | 510     |  
|Total assets               |  | $                 | 539,622 |             |  | $ | 529,418 |  
|Deferred income taxes      |  | $                 | 5,358   |             |  | $ | 2,051   |  
|Accumulated deficit        |  | $                 | (51,590 | )           |  | $ | (58,487 | )
|Total stockholders equity |  | $                 | 456,907 |             |  | $ | 450,010 |  

Databases, as restated, are included in
Other assets in the Consolidated Balance Sheet as of
December 31, 2002.



|    |                  
|--- | -----------------
|26. | Subsequent Events



| |                                         
| | ----------------------------------------
| | 1.75% Convertible Subordinated
    Notes

On January 2, 2004, Kroll issued
$175.0 million aggregate principal amount of Convertible
Subordinated Notes due January 2014. The notes bear interest at
a rate of 1.75% per annum. Kroll will pay interest on the
notes on January 15 and July 15 of each year,
beginning on July 15, 2004. The interest rate is subject to
upward adjustment during certain periods and under certain
circumstances.

The notes may be converted into shares of Kroll
common stock initially at a conversion rate of
28.5205 shares of common stock per $1,000 principal amount
of notes, which is equivalent to an initial conversion price of
approximately $35.06 per share (subject to adjustment in
certain events), under the following circumstances:
(1) during specified periods, if the closing sale price of
Krolls common stock reaches, or the trading price of the
notes falls below, specified levels, (2) Kroll calls the
notes for redemption, (3) during any period in which the
credit ratings assigned to the notes by Moodys and S&P
are below specified levels or are suspended or withdrawn by both
rating agencies, or (4) specified corporate transactions
occur.

The notes are subordinated, unsecured obligations
and rank equal in right of payment with all of Krolls
other unsecured and subordinated indebtedness. The notes are
subordinated in right of payment to all of Krolls existing
and future senior indebtedness. The notes are not guaranteed by
any of Krolls subsidiaries and, accordingly, the notes are
structurally subordinated to any existing and future
indebtedness and other liabilities of Krolls subsidiaries.
The indenture governing the notes does not limit Krolls
right or the right of Krolls subsidiaries to incur
indebtedness in the future.

The notes will mature on January 15, 2014.
On or after January 15, 2009, Kroll may redeem all or a
portion of these convertible notes at a price equal to 100% of
the principal amount, plus accrued and unpaid interest to, but
not including, the date of redemption. On January 15, 2009
and 2011, or upon a change in control (as defined in the
indenture governing the notes), the note holders may require
Kroll to repurchase all or a portion of the notes at 100% of the
principal amount, plus accrued and unpaid interest to, but not
including, the date of repurchase. Kroll will pay cash for any
notes so repurchased on January 15, 2009 but, at
Krolls option, may pay cash, shares of Kroll common stock
(valued at 95% of its market price) or a combination of cash and
shares of Kroll common stock for repurchases made on
January 15, 2011 or upon a change of control.

Kroll will be required to mark to market an
embedded interest rate derivative instrument contained within
the convertible notes. Any increase or decrease in the
derivative instrument will be recorded as an adjustment to
interest expense in Krolls Consolidated Statement of
Operations.

F-50



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Kroll has agreed to file a shelf registration
statement covering resales of the notes and the shares of common
stock into which the notes are convertible. If this registration
statement is not filed by April 1, 2004 or if the
registration statement is not declared effective by
June 29, 2004, liquidated damages will accrue as additional
interest on the notes until the registration statement is filed
or declared effective, as the case may be. The liquidated
damages will accrue at rates of 0.25% of the principal amount
per annum up to and including the 90th day after the
failure to file or have the registration statement declared
effective and 0.5% of the principal amount per annum from and
after the 91st day after the failure to file or have the
registration statement declared effective. Liquidated damages on
the notes may also accrue if the registration statement ceases
to be effective or Kroll prevents or restricts sales under an
effective registration statement for certain periods of time.



| |               
| | --------------
| | Treasury Stock

During 2004, Kroll repurchased 2,527,477 shares
of its common stock. Of this amount, approximately
2.0 million shares were repurchased on January 2,
2004, concurrently with the completion of the offering of the
1.75% Convertible Subordinated Notes. As of February 9,
2004, Kroll had repurchased an aggregate of approximately
2.78 million shares of its common stock for an aggregate
purchase price of approximately $70.8 million pursuant to
its repurchase plan (see Note 18).



| |                                          
| | -----------------------------------------
| | Change in Segment Reporting
    Structure

Effective January 1, 2004, the Security
Services segment was integrated into the Consulting Services
segment as a result of a change in the management structure of
these businesses.



| |                         
| | ------------------------
| | The Credit Network Trust

On March 2, 2004, Kroll acquired The Credit
Network Trust, a mortgage credit reporting company, for a
purchase price of $19.0 million in cash. In addition,
$1.5 million is to be paid in annual installments of
$500,000 over the next three years subject to the retention of
certain customer accounts. The results of operations of The
Credit Network will be included within the Background Screening
Services Group subsequent to the date of acquisition.

F-51



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##### Table of Contents



LIST OF EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Purchase Agreement, by and between the
    Registrant, the members of Zolfo Cooper, LLC and the
    stockholders of Zolfo Cooper Holdings, Inc. (previously
    filed as Exhibit 2 to the Registrants Current Report
    on Form 8-K as filed with the Securities and Exchange
    Commission (the SEC) on September 5, 2002 (the
    8-K)).
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of Kroll Inc. (previously filed as Exhibit 3.4 to Kroll
    Inc.s Post-Effective Amendment No. 1 on Form S-3
    to Form S-1 (Reg. No. 222-75972), as filed with
    the SEC on May 3, 2002 (the Post-Effective
    Amendment).                                                         
|        | 3  | .2          |  | Amended and Restated By-laws of the Registrant
    (previously filed as Exhibit 3.4 to the Post-Effective
    Amendment).                                                                                                                                                                                                                        
|        | 4  | .1          |  | Securities Purchase Agreement, dated as of
    November 14, 2001, by and among Palisade Concentrated
    Equity Partnership, L.P., Pegasus Partners II, L.P. and
    Kroll Inc. (previously filed as Exhibit 4.1 to Kroll
    Inc.s Current Report on Form 8-K as filed with the
    SEC on November 20, 2001 (the November 8-K)).            
|        | 4  | .2          |  | Registration Rights Agreement, dated as of
    November 14, 2001, by and among Palisade Concentrated
    Equity Partnership, L.P., Pegasus Partners II, L.P. and
    Kroll Inc. (previously filed as Exhibit 4.2 to the November
    8-K).                                                                                                       
|        | 4  | .3          |  | Form of Senior Secured Subordinated Convertible
    Note (previously filed as Exhibit 4.3 to the November 8-K).                                                                                                                                                                                                                                  
|        | 4  | .4          |  | Termination, Amendment and Consent Agreement by
    and between Kroll Inc. and Palisade Concentrated Equity
    Partnership, L.P. (previously filed as Exhibit 10.3 to
    Kroll Inc.s Current Report on Form 8-K as filed with
    the SEC on September 5, 2002 (the
    September 8-K)).                                                     
|        | 4  | .5          |  | Registration Rights Agreement, dated as of
    November 14, 2001, by and among the members of Zolfo
    Cooper, LLC, the stockholders of Zolfo cooper
    Holdings, Inc. and Kroll Inc. (previously filed as
    Exhibit 4.1 to the September 8-K).                                                                                              
|        | 10 | .1          |  | Amended and Restated Lease of Office Space in
    New York, New York between Progress Partners and Kroll
    Associates, Inc. (previously filed as Exhibit 10.41 to
    Kroll Inc.s Registration Statement on Form S-4
    (Reg. No. 333-35845), as filed with the SEC on
    September 17, 1997).                                              
|        | 10 | .2          |  | Lease Agreement by and between Signature Center,
    G.P. and Kroll Background America, Inc. (previously filed
    as Exhibit 10.10 to the S-1).                                                                                                                                                                                                 
|        | 10 | .3          |  | Lease Agreement between Eight Penn Center
    Partners, L.P., Gerald Wolkoff and Klondike Realty Corp. as
    nominee for Gerald Wolkoff and Lindquist Avey Macdonald
    Baskerville Inc., as amended (previously filed as
    Exhibit 10.11 to the S-1).                                                                                       
|        | 10 | .4          |  | Lease Agreement by and between Omers Realty
    Corporation, Kroll Lindquist Avey Co. and Kroll Inc., as amended
    (previously filed as Exhibit 10.12 to the S-1).                                                                                                                                                                             
|        | 10 | .5          |  | Lease Agreement by and between Liberty Property
    Limited Partnership and Ontrack Data International, Inc.
    and First Amendment to Lease Agreement (previously filed as an
    Exhibit to Kroll Inc.s Annual Report on Form 10-K for
    the year ended December 31, 2002 (the
    2002 10-K).                                           
|        | 10 | .6          |  | Lease Agreement by and between Liberty Property
    Limited Partnership and Ontrack Data International, as amended
    (previously filed as an Exhibit to the 2002 10-K).                                                                                                                                                                        
|        | 10 | .7          |  | Employment Agreement, dated March 13, 2003,
    between Kroll Inc. and Jules B. Kroll (previously filed as an
    Exhibit to the 2002 10-K).*                                                                                                                                                                                                    
|        | 10 | .8          |  | Employment Agreement between Kroll
    Associates, Inc., The Kroll-OGara Company and Michael
    G. Cherkasky, dated May 17, 1999 (previously filed as an
    Exhibit to Kroll Inc.s Quarterly Report on Form 10.Q
    for the quarter ended June 30, 1999).*                                                                                  
|        | 10 | .9          |  | Amendment No. 1 to Michael G.
    Cherkaskys Employment Agreement, dated June 13, 2002,
    between Kroll Associates, Inc., The Kroll OGara
    Company and Michael G. Cherkasky (previously filed as an Exhibit
    to the 2002 10-K).*                                                                                                       
|        | 10 | .10         |  | Amended Employment Agreement between Kroll Inc.
    and Michael D. Shmerling Amended Employment (previously filed as
    Exhibit 10.7 to the S-1).*                                                                                                                                                                                              

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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .11         |  | Employment Agreement between Kroll Inc. and
    Michael Petrullo (previously filed as Exhibit 10.8 to the
    S-1).*                                                                                                                                             
|        | 10 | .12         |  | Amended Employment Agreement between Kroll Inc.
    and Sabrina Perel (previously filed as Exhibit 10.9 to the
    S-1).*                                                                                                                                        
|        | 10 | .13         |  | Employment Agreement dated April 30, 2002
    between Kroll Inc. and Steven L. Ford (previously filed as an
    Exhibit to the 2002 10-K).*                                                                                                                      
|        | 10 | .14         |  | Employment Agreement dated January 1, 2002
    between Kroll Inc. and James R. Bucknam (previously filed as an
    Exhibit to the 2002 10-K).*                                                                                                                   
|        | 10 | .15         |  | Employment Agreement dated June 1, 1998
    between Lindquist Avey Macdonald Baskerville Inc. and Michael
    Beber (previously filed as an Exhibit to the 2002 10-K).*                                                                                          
|        | 10 | .16         |  | Loan Agreement dated as of March 6, 2003, by
    and between Kroll Inc. and Fleet National Bank, as Lender
    (previously filed as Exhibit 99.1 to the Registrants
    Current Report on Form 8-K as filed with the SEC on
    March 7 (the March 2003 8-K)).
|        | 10 | .17         |  | Pledge Agreement dated as of March 6, 2003,
    by and among Kroll Inc. each of its subsidiaries that is a
    signatory thereto and Fleet National Bank (previously filed as
    Exhibit 99.2 to the March 2003 8-K).                                           
|        | 10 | .18         |  | Security Agreement dated as of March 6, 2003
    by and among Kroll Inc., each of its subsidiaries that is a
    signatory thereto and Fleet National Bank (previously filed as
    Exhibit 99.3 to the March 2003 8-K).                                         
|        | 10 | .19         |  | Trademark Security Agreement dated as of
    March 6, 2003 by and among Kroll Inc., each of its
    subsidiaries that is a signatory thereto and Fleet National Bank
    (previously filed as Exhibit 99.4 to the March
    2003 8-K).                           
|        | 10 | .20         |  | Revolving Credit Note dated as of March 6,
    2003 by Kroll Inc. in favor of Fleet National Bank (previously
    filed as Exhibit 99.5 to the March 2003 8-K).                                                                                                  
|        | 10 | .21         |  | Guaranty dated as of March 6, 2003 by each
    of the subsidiaries that is a signatory thereto in favor of
    Fleet National Bank (previously filed as Exhibit 99.6 to
    the March 2003 8-K).                                                                 
|        | 10 | .22         |  | Office Lease between FDC Office I, LLC and
    Factual Data Corp. (as successor to Lenders Resource
    Incorporated), as amended.                                                                                                                               
|        | 10 | .23         |  | Office Lease between FDC Office II, LLC and
    Factual Data Corp., as amended.                                                                                                                                                                                  
|        | 14 | .1          |  | Kroll Inc. Specific Code for Financial and
    Certain Other Officers.                                                                                                                                                                                           
|        | 14 | .2          |  | Kroll Inc. Code of Business Conduct and Ethics.                                                                                                                                                                                                                  
|        | 21 | .1          |  | Subsidiaries of Kroll Inc.                                                                                                                                                                                                                                       
|        | 23 | .1          |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                 
|        | 24 | .1          |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                  
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
    Exchange Act of 1934, as amended.                                                                                                               
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
    Exchange Act of 1934, as amended.                                                                                                               
|        | 32 | .1          |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                               
|        | 32 | .2          |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                               



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|  |                                  
|- | ---------------------------------
|* | Executive compensation agreement.

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