##### 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,
    2002                                             
|  
|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.     þ

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 $648,656,462 as of February 28, 2003. As of
February 28, 2003, 39,985,035 shares of Common Stock
were outstanding.

Portions of the registrants definitive
proxy statement, which will be filed within 120 days of
December 31, 2002, are incorporated by reference into
Part III.



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TABLE OF CONTENTS



|                                         |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                  
|                                         | Item 1. Business                                                                             
|                                         | Item 2. Properties                                                                           
|                                         | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                 
|                                         | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                         | Item 8. Financial Statements and Supplementary Data                                          
|                                         | Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III                                
|                                         | Item 14. Controls and Procedures                                                             
|PART IV                                 
|                                         | Item 15. Exhibits, Financial Statement Schedules and Reports of Form 8-K                     
|SIGNATURES                              
|LEASE AGREEMENT                         
|LEASE AGREEMENT                         
|EMPLOYMENT AGREEMENT                    
|AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT 
|EMPLOYMENT AGREEMENT                    
|EMPLOYMENT AGREEMENT                    
|EMPLOYMENT AGREEMENT                    
|SUBSIDIARIES                            
|CONSENT OF DELOITTE & TOUCHE LLP        
|CERTIFICATION OF CHIEF EXECUTIVE OFFICER
|CERTIFICATION OF CHIEF FINANCIAL OFFICER



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PART I

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 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.




Item 1.     Business

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 through a network of
63 offices located in 19 countries. Krolls five
business groups enable Kroll to provide its clients with
comprehensive, single source, risk consulting services. These
five business groups are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consulting Services.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.
|
| |  | 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.                    
|
| |  | Technology Services.Kroll provides electronic discovery,
    data recovery and computer forensics services, along with
    related software solutions.                                                                                                                                                                                                                                                                                                                                           
|
| |  | Background Screening Services.Kroll provides pre-employment and
    security background screening, substance abuse testing and
    surveillance.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Security Services.Kroll provides security architecture
    and design, corporate security consulting, emergency management
    and environmental services as well as protective services,
    operations and training.                                                                                                                                                                                                                                                                           

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 thereto 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 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. On September 5, 2002, Kroll
amended and ultimately terminated the Foothill credit facility
resulting in an extraordinary loss of $0.4 million, net of
taxes, when the remaining unamortized deferred financing costs
of $0.5 million were written-off (see Note 10 of the
Notes to the Consolidated Financial Statements).

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On March 19, 2002, the Board of Directors
approved the establishment of a Kroll Inc. Employee Stock
Purchase Plan (ESPP), which 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 last day of the plans six month
offering period. Employees contributed approximately
$1.0 million to the first offering period, which began on
July 1, 2002 and ended on December 31, 2002. The Board
of Directors authorized that 1,000,000 shares of
Krolls common stock be reserved for issuance pursuant to
the ESPP.

On April 1, 2002, Kroll entered into an
agreement to acquire all of the outstanding shares of Ontrack
Data International, Inc. (Ontrack). The agreement
provided that a wholly owned subsidiary of Kroll would be merged
into Ontrack, resulting in Ontrack becoming a wholly owned
subsidiary of Kroll. The acquisition was consummated effective
June 13, 2002. The transaction, which qualifies as a
tax-free reorganization for federal income tax purposes, is
valued at approximately $154 million. Each share of
outstanding Ontrack common stock was converted into 0.6447 of
one share of Krolls common stock. In addition, pursuant to
the acquisition agreement, Kroll assumed Ontracks existing
stock option plans. As a result of the acquisition, Kroll has
issued approximately 7.2 million shares of its common
stock, including approximately 0.3 million shares issued
upon the exercise of Ontrack options. As of December 31,
2002, an additional 0.7 million shares may be issued upon
the future exercise of Ontrack options (see Note 4(a) of
the Notes to the Consolidated Financial Statements).

In May 2002, Kroll executed agreements to sell to
local management its interest in its Russian armored car
businesses that were not sold to Armor Holdings, Inc.
(Armor). Kroll received $150,000 upon closing and an
additional $10,000 in both the third and fourth quarters of
2002. The agreements provide for Kroll to receive an additional
$107,000 within one year of the closing date, plus $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
these Russian businesses (see Note 5(a) of the Notes to the
Consolidated Financial Statements).

On July 2, 2002, Kroll Inc., formerly an
Ohio corporation, became a Delaware corporation pursuant to a
merger in which the Ohio corporation merged into its
wholly-owned Delaware subsidiary. In connection with the
reincorporation in Delaware, Kroll Inc.s authorized
capital increased to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock.

On September 5, 2002, Kroll amended and
ultimately terminated the $15 million Foothill revolving
credit facility to accommodate a new $100 million credit
facility with Goldman Sachs Credit Partners L.P. (Goldman
Sachs), which provided for a $25 million revolving
credit facility and a $75 million term loan. To obtain the
Goldman Sachs credit facility, Kroll amended certain provisions
of its outstanding 6% convertible notes. Under the amendments,
the security interest of all the noteholders was terminated and
the collateral securing all of the convertible notes was
released. In addition, the amendments deleted all of the
negative covenants in respect of all of the convertible notes.
Furthermore Palisade 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
owns to borrowings under this 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 (see Notes 10, 11(b) and 11(c) of the Notes to the
Consolidated Financial Statements).

On September 5, 2002, Kroll acquired all of
the equity interests of Zolfo Cooper, LLC (Zolfo
Cooper), and certain of its related entities. At the
closing, Kroll paid $100 million in cash and, on
January 15, 2003, Kroll issued 2.9 million shares of
its common stock to the former owners of Zolfo Cooper, valued on
the acquisition date at approximately $55.3 million (see
Note 4(b) of the Notes to the Consolidated Financial
Statements). In addition, Kroll will issue to the former owners
of Zolfo Cooper, as contingent consideration, 625,000 additional
shares of common stock per year if Zolfo Cooper achieves certain
operating profit levels over the next four years. 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 will vest over four years.

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In October 2002, Kroll sold 6.3 million
shares of its common stock in an underwritten public offering.
The offering, which sold at a price of $18.75 per share, raised
approximately $110.6 million of net proceeds for Kroll. The
$75 million term loan obtained by Kroll on
September 5, 2002 was fully repaid on October 18,
2002, using a portion of the proceeds from the public offering
(see Notes 14(b) and 11(c) of the Notes to the Consolidated
Financial Statements). The remaining proceeds were used for
working capital to fund operations and other general company
purposes.

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 this revolving
credit facility are guaranteed by its domestic subsidiaries. The
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 (see Note 21(a) of the Notes to the
Consolidated Financial Statements).

Borrowings under the $25 million 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
revolving credit facility, Kroll will pay Fleet a quarterly fee
equal to 0.375% per annum of the unused portion of the revolving
credit facility. The revolving credit facility requires Kroll to
maintain a minimum level of EBITDA (earnings before interest,
taxes, depreciation and amortization) and net income and maximum
leverage and liabilities requirements and contains restrictions
on the incurrence of additional debt, the creation of any liens,
certain acquisitions, distributions to certain subsidiaries and
the payment of dividends. The revolving credit facility also
contains other affirmative and negative covenants and events of
default customarily contained in debt agreements of this type.

On March 6, 2003, the $25 million
Goldman Sachs revolving credit facility, undertaken as part of
the $100 million credit facility on September 5, 2002,
was retired (see Notes 10, 11(c), 21(a) of the Notes to the
Consolidated Financial Statements).

On March 14, 2003 Kroll consummated an asset
purchase agreement with Certico Verification Services, LLC.
(Certico). Under the agreement, Kroll acquired most
of Certicos assets, and assumed certain liabilities, for a
purchase price of $3.3 million paid in cash. Certico
provides background checking services and its future results of
operations will be included within the Background Screening
Services Segment.

Services

Krolls investigations and intelligence
services are divided into five major service categories or
segments, two of which were created because of recent
acquisitions. The following table presents the aggregate net
sales for each segment for the periods indicated, with prior
periods accordingly restated for the new segments (see
Note 17 of the Notes to the Consolidated Financial
Statements).

|                                              |                           |                          |         |         |  |      |         |         |  |   |         |         | 
|--------------------------------------------- | ------------------------- | ------------------------ | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                              |                           |                         
|                                              |                           | Years Ended December 31,
|                                              |                           |                         
|                                              |                           | 2002                     |         | 2001    |  | 2000
|                                              |                           |                          |         |         |  |     
|                                              |                           |                         
|                                              |                           | (Dollars in thousands)  
|Consulting Services                           |                           | $                        | 106,564 |         |  | $    | 106,126 |         |  | $ | 104,245 |        
|Corporate Advisory and Restructuring Services |                           |                          | 71,386  |         |  |      | 30,751  |         |  |   | 19,311  |        
|Technology Services                           |                           |                          | 36,438  |         |  |      | 4,380   |         |  |   | 2,621   |        
|Background Screening Services                 |                           |                          | 49,284  |         |  |      | 42,491  |         |  |   | 46,588  |        
|Security Services                             |                           |                          | 25,496  |         |  |      | 24,129  |         |  |   | 28,812  |        
|                                              |                           |                          |         |         |  |      |         |         |  |   |         |        
|                                              | Total Continuing Services |                          | $       | 289,168 |  |      | $       | 207,877 |  |   | $       | 201,577 | 
|                                              |                           |                          |         |         |  |      |         |         |  |   |         |        
|Information Security Group                    |                           |                          |        |         |  |      |        |         |  |   | 4,033   |        
|                                              |                           |                          |         |         |  |      |         |         |  |   |         |        
|                                              | Total Services            |                          | $       | 289,168 |  |      | $       | 207,877 |  |   | $       | 205,610 | 
|                                              |                           |                          |         |         |  |      |         |         |  |   |         |        

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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.Through Krolls
multi-disciplinary global team of professionals with backgrounds
in law, law enforcement, intelligence and forensic accounting,
Kroll provides 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 utilized 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, systems consulting, 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 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 develops 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 they, or
    the trier of fact, retain decision-making authority.                                                                                                                                                        
|
| |  | Trier of Fact.Kroll
    serves as arbitrators and also advises clients employing an
    arbitrator or a special master (an individual appointed by a
    court to conduct the examination of complex matters and who
    reports findings and recommendations back to the court for final
    resolution  also referred to as a referee) to resolve
    a dispute.

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

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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 an out-of-court reorganization plan (workout) and
restructuring departments and litigation and bankruptcy
attorneys in conducting searches for concealed or undisclosed
assets. In other contexts, clients may be interested in a
financial profile or asset analysis of a person in connection
with a potential business relationship, lawsuit, or internal
investigation. Krolls asset searching and analysis
techniques can help clients to uncover assets and bring debtors
to the negotiating table.

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.

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 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. Krolls
international presence allows it to act as a single source
provider for the increasing number of large scale cross-border
U.S. based bankruptcies and restructurings.

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Services

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. Tactics aim at
reestablishing credibility to garner support for the
reorganization process and a consensual 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 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.

In the context of its work for debtors and
creditors, Kroll regularly provides:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operational Turnaround Services.Kroll conducts a detailed review of
    the operations of its clients and assist in devising and
    implementing an operational plan that optimizes profits and cash
    flow. Krolls consultants provide clients with assistance
    that optimizes their competitive advantages and improves profits
    and cash flows to augment investment returns and increases
    shareholder values.
|
| |  | Strategic Advisory Services.Kroll assists companies in devising,
    reformulating and executing upon 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 services include
    assistance with and advice on debt and equity restructurings,
    financings, mergers and acquisitions, divestitures and capital
    raising.                                                                                       

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

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



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

Electronic Discovery.Kroll conducts, manages and advises
upon 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.

Data Recovery.Using
Krolls proprietary tools and techniques, Kroll recovers
lost or corrupted data from virtually all operating systems and
types of storage devices through a broad range of service
solutions ranging from engineer assisted in-lab, on-site and
Remote Data Recovery service to do-it yourself software
solutions.

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

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.



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

Kroll provides pre-employment and security
background screening, substance abuse testing and surveillance.



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

Pre-Employment and Security Background
Screening.Kroll verifies job
applicant background information for employers. The background
investigations are made through the use of databases, independent

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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.


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.

Surveillance Services.Kroll provides video surveillance
services to our clients investigating exaggerated disability
claims and other frauds. In performing surveillance, Kroll
utilizes its fleet of mobile surveillance units stationed
throughout the United States, each containing equipment designed
to obtain clear video footage without detection.



| |                        
| | -----------------------
| | 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.



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

Security Architecture and Design.Kroll provides comprehensive planning,
engineering, and design services, 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 (EHS) 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, travel intelligence 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
quarters combat and kidnap avoidance. Krolls personal
security seminars are offered both at Crucible and at client
sites.

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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, 2002, Kroll had 110 senior professional
service providers, who are expected to provide marketing
services; 198 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 consist 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
and marketing sales efforts including 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.

Kroll classifies its sales by where the services
are delivered; international sales are services delivered
outside the United States. 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
retained through referrals from existing clients.

Seasonality

We do not believe that our business is seasonal.
However, certain operations within the Background Screening
Services Segment are cyclical, and results may depend on
employment hiring and general economic trends.

Employees

As of December 31, 2002, Kroll had a total
of 2,067 full-time employees, of whom 198 were in marketing
and sales, 564 were in operations, 799 were professional
services providers and 506 performed general and administrative
services. In addition, Kroll had 292 part-time employees. Of a
total of 2,359 employees, 1,452 were located in the United
States and 907 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

All of Krolls business groups are subject
to various federal, state, local and foreign laws and
regulations. A number 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 Krolls
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.

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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 Kroll 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 The 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 remediating and damages
resulting from, sites of past releases of hazardous materials.
Kroll is not aware of any such matters as of December 31,
2002 and believes that it currently conducts its activities and
operations in substantial compliance with applicable
environmental laws.

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. 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. 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 expected benefits of Krolls recent
acquisitions may not be realized.

Kroll acquired Ontrack on June 13, 2002, and
it acquired Zolfo Cooper on September 5, 2002. There can be
no assurance that these two entities will be successfully
combined into Kroll. If Kroll cannot successfully integrate
these operations, its business could be materially adversely
affected. The acquisitions involve

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combining three companies that have previously
operated separately into one unified company. The combining of
Kroll with Ontrack and Zolfo Cooper involves a number of risks,
including:




| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the diversion of managements attention from
    the combining of operations;                                                                 
|
| |  | the difficulties in the combination of operations
    and systems, particularly sales and marketing organizations;                            
|
| |  | difficulties in the assimilation and retention of
    employees;                                                                              
|
| |  | challenges in keeping existing clients and
    obtaining new clients, including potential conflicts of interest
    and disclosure issues; and
|
| |  | challenges in attracting and retaining qualified
    personnel.                                                                               

Because of difficulties in combining operations,
Kroll may not be able to realize the revenue growth and other
benefits that Kroll hopes to achieve from the acquisitions. In
addition, Kroll may be required to spend additional time or
money on integration that would otherwise be spent on the
development and expansion of its business and services.

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 Krolls 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 the
attention of Krolls management 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 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 as
discussed above in The expected benefits of Krolls
recent acquisitions may not be realized so as to produce
returns that justify the investment.

A number of Krolls competitors have also
adopted the strategy of expanding and diversifying through
acquisitions. Kroll experiences competition, therefore, in its
effort to execute its acquisition strategy, and Kroll 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.

We may not operate profitably in the
future.

For the two years ended December 31, 2001
and 2000, Kroll reported net losses of approximately
$21.4 million and $33.9 million, respectively. While
Kroll reported net income of $16.4 million for the year
ended December 31, 2002, there can be no assurance that
Kroll will be profitable in the future.

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

Kroll relies heavily on its executive management
and key employees to provide its services and for continued
business development. Competition for these personnel is
intense. Although Kroll has non-compete agreements with its
executive management, it does not have non-compete agreements
with many of its professional staff. This means that these
professionals could resign to join one of Krolls
competitors with little advance notice. 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 it were unable to attract and retain qualified
replacements.

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

Competition for competent professionals,
particularly for personnel with 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 highly specialized
skills or advanced degrees and backgrounds in such fields as
law, accounting, law enforcement and engineering. 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 the Companys 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 Krolls reputation or the reputation of its
senior professionals may make it more difficult for Kroll to
compete successfully for either new engagements or to retain
existing clients and therefore could materially adversely affect
its business.

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,
Securitas and its subsidiary Pinkerton Consulting &
Investigations, Alvarez & Marsal, AlixPartners, Control
Risks Group, Investigations Group, Crossroads, ChoicePoint and
Applied Discovery, provide 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. 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 Krolls business investigations, market
intelligence services, financial consulting services and
pre-employment screening 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 Krolls Corporate Advisory and
Restructuring Services Groups practice, once Kroll
finishes an engagement with a debtor client, it is unlikely to
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. 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 services
offering, Krolls ability to control costs and the demand
for its services. The timing of future acquisitions and the cost
of integrating them may cause fluctuations in Krolls
operating results as well.

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

Kroll believes that its current operations and
financing will generate enough cash flow to meet all its cash
requirements and support its growth strategy. However, Kroll may
need additional capital in order to finance internal growth or
pursue acquisitions. In addition, Kroll may 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 cash flow and require Kroll to
obtain additional capital. Kroll may decide to sell additional
shares of common stock to obtain additional capital. If Kroll
sells more shares, the price of its stock may decline
significantly and stockholders ownership may be
substantially diluted. If Kroll requires additional capital, it
may have to borrow funds under new credit facilities or issue
equity, equity-related or debt securities. Kroll cannot assure
you that additional financing will be available, and if so,
whether it will be on acceptable terms. Krolls inability
to obtain any needed financing, or the terms on which the
financing may be available, could have a material adverse effect
on its financial condition, results of operations and cash flow.

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 Krolls 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 Kroll enters into transactions in countries
where intellectual property laws are not well developed or are
poorly enforced. Legal protection of Krolls 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
Krolls intellectual property.

Krolls business outside the United
States exposes the Company to numerous risks that, singly or
together, could materially adversely affect its
business.

In addition to Krolls U.S. facilities,
it has operations and assets in Argentina, Australia, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan,
Mexico, the Philippines, Russia, Singapore, South Africa,
Switzerland and the U.K. Kroll also offers its services in other
countries and is seeking 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.

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 the Companys
liquidity and corporate activities.

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



| |   |                               
| | - | ------------------------------
| |  | pay dividends;                
|
| |  | incur additional indebtedness;

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| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | 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 control of Kroll.                                       

These covenants could limit Krolls
operational flexibility and restrict its ability to raise
additional funds, if necessary, to finance operations and to
make principal and interest payments on its 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 becoming due and
payable. The effect of these covenants, or Krolls failure
to comply with them, could materially adversely affect the
Krolls business.

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

Kroll has pledged substantially all its assets
and its 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
modified, would permit the lenders to foreclose on the
collateral and Kroll could lose its rights in the collateral,
which could have a material adverse effect on Krolls
business.

Krolls failure to comply with government
regulations and licensing requirements could have a material
adverse effect on its business.

Kroll is subject to various federal, state, local
and foreign laws and regulations. A number 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
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 Krolls access to data used in our 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
Krolls business.

Additionally, the laboratory of Krolls
substance abuse testing subsidiary, Laboratory Specialists of
America, 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 certain clients requiring this certification,
which could materially adversely affect the substance abuse
testing services aspect of Krolls business.

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 Krolls efforts to mitigate their
risks. Kroll maintains professional liability insurance with a
policy aggregate limit of $25 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 its business.

Krolls subsidiary, Kroll Lindquist Avey
Co., has been named as a third party defendant in a
CDN$40 million lawsuit in connection with a negligence
claim. Kroll Lindquist Avey Co.s carrier, the Reliance
Insurance Company is in liquidation. Kroll Lindquist Avey
Co.s defense costs are being paid by Reliance, but Kroll
has been advised that any claim for damages or settlement
greater than $25,000 (USD) will be a claim in the
liquidation, on which distributions will be made as the
liquidation progresses (see Item 3  Legal
Proceedings). Should the third party claim succeed, if
large enough (either alone or in combination with other claims),
it could have a material adverse effect on Krolls
business. Also, in the ordinary course of Krolls business,
it is subject to claims of third parties, other than clients,
alleging trespass, invasion of privacy, negligence and other
tortious conduct by Krolls investigators, consultants,
professionals

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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 Krolls business.


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 Krolls 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 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 Krolls clients or prospective
clients preferences for technology solutions. If Kroll
cannot adapt to these changes, its business may be materially
adversely affected.

Krolls certificate of incorporation and
by-laws provide for the indemnification and exculpation of the
Companys directors and officers.

Krolls certificate of incorporation and
by-laws provide for indemnification of Krolls 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 Section 174
of 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 any future earnings that
may be generated from its operations to help finance the growth
and developments 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, Krolls certificate of
incorporation, by-laws and debt instruments contain provisions
that could deter acquisition by a third party.

Provisions contained in Delaware law,
Krolls certificate of incorporation, its by-laws and its
debt instruments could make it difficult for a third party to
acquire Kroll. Krolls certificate of incorporation
provides Krolls 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 incorporation and
by-laws contain the following provisions that may have
anti-takeover effects and may discourage, delay, or prevent a
takeover attempt that a stockholder might consider in it 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 to only the Executive Chairman of the board, the Chief
    Executive Officer, or the board of directors pursuant to a board
    resolution.             

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

15



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##### Table of Contents



Krolls substance abuse testing services
are performed at one location.

Krolls substance abuse testing services are
performed at its laboratory facility located in Gretna,
Louisiana. Should Kroll be unable to use this facility for any
reason, it may be unable to provide substance abuse testing
services which could materially adversely affect its business.






|        |           
|------- | ----------
|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, 2002 were as follows:

|                           |  |                   |         |        |  |                      |        |  |  |  |                                 | 
|-------------------------- |  | ----------------- | ------- | ------ |  | -------------------- | ------ |  |  |  | ------------------------------- | 
|Location                   |  | Total Sq. Footage |         | Status |  | Expiration of Leases
|                           |  |                   |         |        |  |                     
|Eden Prairie, Minnesota    |  |                   | 108,017 |        |  |                      | Leased |  |  |  | November 30, 2009               | 
|New York, New York         |  |                   | 47,500  |        |  |                      | Leased |  |  |  | December 31, 2007               | 
|Nashville, Tennessee       |  |                   | 25,343  |        |  |                      | Leased |  |  |  | May 31, 2007 and April 30, 2004 | 
|Philadelphia, Pennsylvania |  |                   | 21,000  |        |  |                      | Leased |  |  |  | November 30, 2009               | 
|Toronto, Canada            |  |                   | 20,274  |        |  |                      | Leased |  |  |  | March 31, 2012                  | 
|Gretna, Louisiana          |  |                   | 20,000  |        |  |                      | Owned  |  |  |  | N/A                             | 

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.

Nashville,
Tennessee.This facility serves as the
headquarters of our pre-employment background checking
subsidiary within the Background Screening Services Segment. It
consists of two office locations near each other.

Philadelphia,
Pennsylvania.This facility primarily
houses the most 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.

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



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

Kroll has been named as a defendant in eight
lawsuits alleging that its officers and directors breached their
fiduciary duties in connection with the now terminated proposed
acquisition of a majority of Krolls shares by a company
formed by Blackstone Capital Partners III Merchant Banking
Fund L.P. (Blackstone). Five of the lawsuits were
filed in the Court of Common Pleas, Butler County, Ohio, and
were consolidated on November 29, 1999. The remaining three
lawsuits were filed in the United States District Court for the
Southern District of New York and were consolidated on
November 30, 1999. The plaintiffs allege that Krolls
officers and directors breached their fiduciary duties by
deferring acquisitions, by negotiating an inadequate acquisition
price, by failing to engage in arms-length negotiations and by
failing to seek redress from Blackstone after Blackstone
terminated the proposed transaction. The plaintiffs also allege
that Blackstone and American International Group, Inc.
(AIG) aided and abetted the directors and
officers alleged breaches of fiduciary duties. The
plaintiffs seek to bring their claims derivatively on behalf of
Kroll. On behalf of Kroll, they seek a declaration that the
individual defendants breached their fiduciary duty and damages
and attorneys fees in an unspecified amount. The parties
executed a stipulation of settlement providing for the
settlement of these actions. On December 20, 2002, the New
York court signed a Final Judgment and Order Approving the
Settlement. On January 7, 2003, the Ohio court entered a
Final Judgment

16



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##### Table of Contents



dismissing the Ohio action. The Settlement
included defendants agreement not to object to
plaintiffs counsels application for attorneys
fees and reimbursement of costs and expenses not to exceed
$385,000 in the aggregate. Any such fees or costs approved are
to be paid by Krolls insurance carrier.


In 1999, Kroll learned that an individual had
filed a qui tamsuit against Kroll under the Civil False
Claims Act alleging that Kroll and three of its vendors
knowingly violated their contractual requirements with the Army
due to the vendors alleged failure to have certified
welders. In October 2000, Kroll settled this litigation with the
Department of Justice for approximately $1.1 million, plus
legal costs. Kroll admitted no wrongdoing as part of the
settlement. All amounts under this settlement were paid before
December 31, 2001. The qui tamsuit and the
corresponding settlement related entirely to the discontinued
the Security Products and Services Group (SPSG)
operation.

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
on December 11 and 12, 2002 with additional dates to be
scheduled in 2003. 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 (USD) will be a
claim in the liquidation, on which distributions will be made as
the liquidation progresses. Kroll believes it may have other
liability insurance available with respect to this claim.
Management of Kroll believes LAMB has meritorious defenses to
the claims and intends to defend the claims vigorously.

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 business, financial position, results of operations or
cash flows.






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

Not applicable.

17



---



##### Table of Contents






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
February 28, 2003, there were approximately 213 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
|                                        |  |      |       |    
|Fiscal Year Ended December 31,
    2001 |  |      |       |     |  |   |       | 
|Quarter Ended:                          |  |      |       |     |  |   |       | 
|March 31, 2001                          |  | $    | 6.50  |     |  | $ | 4.91  | 
|June 30, 2001                           |  |      | 9.69  |     |  |   | 4.97  | 
|September 30, 2001                      |  |      | 12.45 |     |  |   | 7.00  | 
|December 31, 2001                       |  |      | 18.00 |     |  |   | 10.25 | 
|Fiscal Year Ended December 31,
    2002 |  |      |       |     |  |   |       | 
|Quarter Ended:                          |  |      |       |     |  |   |       | 
|March 31, 2002                          |  | $    | 18.91 |     |  | $ | 15.56 | 
|June 30, 2002                           |  |      | 23.95 |     |  |   | 15.39 | 
|September 30, 2002                      |  |      | 24.99 |     |  |   | 17.80 | 
|December 31, 2002                       |  |      | 22.50 |     |  |   | 16.85 | 

Dividends

Kroll has not paid dividends in the last two
years and anticipates that any future earnings will be retained
to finance our 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. Additionally, the terms of Krolls credit facility
provide that it cannot pay dividends and require 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.



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

The selected financial data reflects mergers
during 1999 and 1998, which were accounted for as poolings of
interests. The prior period consolidated financial information
has been restated as though the entities had always been part of
Kroll. The selected consolidated financial data also includes
the completion of other acquisitions in 2002, 2000, 1999 and
1998 that utilized the purchase method of accounting, which
requires including the reported results of each acquired
business from the effective date of its acquisition. The
selected historical financial data presented as of December 31,
2002 and 2001 and for the years ended December 31, 2002,
2001 and 2000, have been derived from the audited consolidated
financial statements of Kroll presented elsewhere in this
document. The selected historical financial data presented as of
December 31, 2000 and 1999 and for the years ended
December 31, 1999 and 1998, have been derived from the
audited consolidated financial statements of Kroll not included
in this document. The selected historical financial data
presented as of December 31, 1998 has been derived from
unaudited consolidated financial statements of Kroll not
included in this document. The selected financial data should be
read in conjunction with the consolidated

18



---



##### Table of Contents



financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations.


|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |       |         | 
|------------------------------------------------------------------------------------ | ------------------------------------------- | --------------------------------------------------------------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------- | ---- | ------- | ------- | ------- | - | ------- | ------ | ------- | - | ------- | ----- | ------- | 
|                                                                                     |                                             |                                                                                              
|                                                                                     |                                             | Years Ended December 31,                                                                     
|                                                                                     |                                             |                                                                                              
|                                                                                     |                                             | 2002                                                                                          |         | 2001   |         | 2000 |         | 1999   |         | 1998
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |     
|                                                                                     |                                             |                                                                                              
|                                                                                     |                                             | (Dollars and shares in thousands, except per share data)                                     
|Statement of Operations Data:                                                        |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|Ongoing operations net sales                                                         |                                             | $                                                                                             | 289,168 |        |         | $    | 207,877 |        |         | $    | 201,577 |         |         | $ | 183,500 |        |         | $ | 122,852 |      
|Information Security net sales                                                       |                                             |                                                                                               |        |        |         |      |        |        |         |      | 4,033   |         |         |   | 4,345   |        |         |   | 116     |      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Total net sales                                                                               |         |        | 289,168 |      |         |        | 207,877 |      |         |         | 205,610 |   |         |        | 187,845 |   |         |       | 122,968 | 
|Cost of sales                                                                        |                                             |                                                                                               | 147,883 |        |         |      | 125,052 |        |         |      | 123,791 |         |         |   | 104,366 |        |         |   | 69,511  |      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Gross profit                                                                                  |         |        | 141,285 |      |         |        | 82,825  |      |         |         | 81,819  |   |         |        | 83,479  |   |         |       | 53,457  | 
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|Selling and marketing expenses                                                       |                                             |                                                                                               | 27,424  |        |         |      | 18,724  |        |         |      | 21,490  |         |         |   | 16,705  |        |         |   | 11,916  |      
|G&A expenses (including amortization)                                                |                                             |                                                                                               | 76,475  |        |         |      | 63,078  |        |         |      | 64,192  |         |         |   | 56,907  |        |         |   | 30,435  |      
|Research and development                                                             |                                             |                                                                                               | 5,845   |        |         |      |        |        |         |      |        |         |         |   |        |        |         |   |        |      
|Impairment of assets                                                                 |                                             |                                                                                               |        |        |         |      | 807     |        |         |      |        |         |         |   |        |        |         |   |        |      
|Loss on sale of business unit                                                        |                                             |                                                                                               | 102     |        |         |      | 528     |        |         |      |        |         |         |   |        |        |         |   |        |      
|Failed financing costs                                                               |                                             |                                                                                               |        |        |         |      | 1,043   |        |         |      |        |         |         |   |        |        |         |   |        |      
|Failed separation costs                                                              |                                             |                                                                                               |        |        |         |      | 607     |        |         |      | 4,195   |         |         |   |        |        |         |   |        |      
|Failed merger related costs                                                          |                                             |                                                                                               |        |        |         |      |        |        |         |      | 2,491   |         |         |   | 1,562   |        |         |   |        |      
|Merger related costs                                                                 |                                             |                                                                                               |        |        |         |      |        |        |         |      | 357     |         |         |   | 4,069   |        |         |   | 5,727   |      
|Restructuring charges                                                                |                                             |                                                                                               |        |        |         |      | 2,726   |        |         |      |        |         |         |   | 4,072   |        |         |   |        |      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Operating income (loss)                                                                       |         |        | 31,439  |      |         |        | (4,688  | )    |         |         | (10,906 | ) |         |        | 164     |   |         |       | 5,379   | 
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|Interest expense                                                                     |                                             |                                                                                               | (5,456  | )      |         |      | (4,375  | )      |         |      | (4,321  | )       |         |   | (2,753  | )      |         |   | (1,972  | )    
|Interest income                                                                      |                                             |                                                                                               | 1,535   |        |         |      | 127     |        |         |      | 250     |         |         |   | 338     |        |         |   | 801     |      
|Other income (expense), net                                                          |                                             |                                                                                               | 221     |        |         |      | (53     | )      |         |      | 1,658   |         |         |   | (58     | )      |         |   | 890     |      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     | Total other expense                         |                                                                                               |         | (3,700 | )       |      |         | (4,301 | )       |      |         | (2,413  | )       |   |         | (2,473 | )       |   |         | (281  | )      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Income (loss) from continuing operations before
    provision for (benefit from) income taxes |         |        | 27,739  |      |         |        | (8,989  | )    |         |         | (13,319 | ) |         |        | (2,309  | ) |         |       | 5,098   | 
|Provision for (benefit from) income taxes                                            |                                             |                                                                                               | 8,322   |        |         |      | 2,402   |        |         |      | 2,377   |         |         |   | (1,105  | )      |         |   | 1,374   |      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Income (loss) from continuing operations                                                      |         |        | 19,417  |      |         |        | (11,391 | )    |         |         | (15,696 | ) |         |        | (1,204  | ) |         |       | 3,724   | 
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|Income (loss) from discontinued Security Products
    and Services Group, net of tax |                                             |                                                                                               | 81      |        |         |      | (7,540  | )      |         |      | (10,011 | )       |         |   | 1,043   |        |         |   | 9,388   |      
|Loss from discontinued Voice and Data
    Communications Group (VDCG), net of tax  |                                             |                                                                                               |        |        |         |      | (2,112  | )      |         |      | (8,237  | )       |         |   | (1,761  | )      |         |   | (1,326  | )    
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     | Total discontinued operations income (loss) |                                                                                               |         | 81     |         |      |         | (9,652 | )       |      |         | (18,248 | )       |   |         | (718   | )       |   |         | 8,062 |        
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Income (loss) before extraordinary item                                                       |         |        | 19,498  |      |         |        | (21,043 | )    |         |         | (33,944 | ) |         |        | (1,922  | ) |         |       | 11,786  | 
|Extraordinary item, net of tax                                                       |                                             |                                                                                               | (3,117  | )      |         |      | (344    | )      |         |      |        |         |         |   |        |        |         |   |        |      
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      
|                                                                                     |                                             | Net income (loss)                                                                             |         | $      | 16,381  |      |         | $      | (21,387 | )    |         | $       | (33,944 | ) |         | $      | (1,922  | ) |         | $     | 11,786  | 
|                                                                                     |                                             |                                                                                               |         |        |         |      |         |        |         |      |         |         |         |   |         |        |         |   |         |      

19



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|                                                               |  |                                                          |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | -------------------------------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | 
|                                                               |  |                                                         
|                                                               |  | Years Ended December 31,                                
|                                                               |  |                                                         
|                                                               |  | 2002                                                     |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                               |  |                                                          |        |      |  |      |        |      |  |     
|                                                               |  |                                                         
|                                                               |  | (Dollars and shares in thousands, except per share data)
|Earnings per Share Data:                                       |  |                                                          |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        | 
|Basic income (loss) per share from continuing
    operations   |  | $                                                        | 0.66   |      |  | $    | (0.51  | )    |  | $    | (0.70  | ) |  | $ | (0.05  | ) |  | $ | 0.19   | 
|Basic income (loss) per share before
    extraordinary item    |  | $                                                        | 0.66   |      |  | $    | (0.94  | )    |  | $    | (1.52  | ) |  | $ | (0.09  | ) |  | $ | 0.61   | 
|Basic loss per share from extraordinary item                   |  | $                                                        | (0.10  | )    |  | $    | (0.01  | )    |  | $    |       |   |  | $ |       |   |  | $ |       | 
|Basic net income (loss) per share                              |  | $                                                        | 0.56   |      |  | $    | (0.95  | )    |  | $    | (1.52  | ) |  | $ | (0.09  | ) |  | $ | 0.61   | 
|Basic weighted average shares outstanding                      |  |                                                          | 29,449 |      |  |      | 22,479 |      |  |      | 22,295 |   |  |   | 22,006 |   |  |   | 19,337 | 
|Diluted income (loss) per share from continuing
    operations |  | $                                                        | 0.64   |      |  | $    | (0.51  | )    |  | $    | (0.70  | ) |  | $ | (0.05  | ) |  | $ | 0.19   | 
|Diluted income (loss) per share before
    extraordinary item  |  | $                                                        | 0.64   |      |  | $    | (0.94  | )    |  | $    | (1.52  | ) |  | $ | (0.09  | ) |  | $ | 0.59   | 
|Diluted loss per share from extraordinary item                 |  | $                                                        | (0.10  | )    |  | $    | (0.01  | )    |  | $    |       |   |  | $ |       |   |  | $ |       | 
|Diluted net income (loss) per share                            |  | $                                                        | 0.54   |      |  | $    | (0.95  | )    |  | $    | (1.52  | ) |  | $ | (0.09  | ) |  | $ | 0.59   | 
|Diluted weighted average shares outstanding                    |  |                                                          | 30,542 |      |  |      | 22,479 |      |  |      | 22,295 |   |  |   | 22,006 |   |  |   | 19,908 | 

|                                      |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|------------------------------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                      |  |                       
|                                      |  | As of December 31,    
|                                      |  |                       
|                                      |  | 2002                   |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                      |  |                        |         |      |  |      |         |      |  |     
|                                      |  |                       
|                                      |  | (Dollars in thousands)
|Balance Sheet Data:                   |  |                        |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Working capital                       |  | $                      | 115,884 |      |  | $    | 43,914  |      |  | $    | 25,714  |  |  | $ | 62,042  |  |  | $ | 84,890  | 
|Net property, plant and equipment     |  | $                      | 27,418  |      |  | $    | 16,067  |      |  | $    | 20,272  |  |  | $ | 21,778  |  |  | $ | 11,420  | 
|Total assets                          |  | $                      | 539,622 |      |  | $    | 169,786 |      |  | $    | 227,406 |  |  | $ | 257,753 |  |  | $ | 205,546 | 
|Total debt, including current portion |  | $                      | 24,701  |      |  | $    | 21,958  |      |  | $    | 75,350  |  |  | $ | 63,485  |  |  | $ | 32,439  | 
|Shareholders equity                  |  | $                      | 456,907 |      |  | $    | 111,133 |      |  | $    | 116,421 |  |  | $ | 155,868 |  |  | $ | 144,496 | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 notes to the consolidated financial statements. As a result
of the acquisitions made by Kroll in 2000 and 2002 (see below),
financial results from period-to-period may not be
comparable.

Recent Developments

In January 2002, Kroll restructured its debt with
Securify Inc. (Securify), receiving in its place a
$0.5 million short-term note, a $0.5 million long-term
note, a $2.5 million convertible note, approximately 60,000
shares of Securify common stock and a non-exclusive license to
use proprietary software developed by Securify. In May 2002, the
parties restructured the January 2002 agreement, and Kroll
received $0.5 million in payment, recorded as other income,
of the short-term note and converted approximately
$0.3 million of the convertible note into an equivalent
value of preferred stock. The remaining $2.2 million
balance of the convertible note as well as the $0.5 million
long-term note were forgiven. Kroll retained its shares of
Securify stock and the non-exclusive license (see Note 6(a)
of the Notes to the Consolidated Financial Statements).

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
agreement required Kroll to maintain a minimum level of EBITDA
(earnings before interest, taxes, depreciation and
amortization), 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 type.
The credit facility was secured by a security interest in
substantially all of the assets of

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Kroll and its material domestic subsidiaries and
a pledge of the stock of certain of Krolls subsidiaries
(see Note 10 of the Notes to the Consolidated Financial
Statements).


On March 19, 2002, the Board of Directors
approved the establishment of a Kroll Inc. Employee Stock
Purchase Plan (ESPP), which allows participants to
purchase shares of Kroll Inc. common stock at a 15% discount to
the market. The purchase price is calculated as 85% of the
market price of Kroll, Inc. stock on either the first or last
day of the Plans six month offering period, whichever is
lower. Employees contributed approximately $1.0 million to
the first offering period, which began on July 1, 2002 and
ended on December 31, 2002. The Board of Directors
authorized that 1,000,000 shares of Krolls common stock be
reserved for issuance pursuant to the ESPP.

On April 1, 2002, Kroll entered into an
agreement to acquire all of the outstanding shares of Ontrack
Data International, Inc. (Ontrack). The agreement
provided that a wholly owned subsidiary of Kroll would be merged
into Ontrack, resulting in Ontrack becoming a wholly owned
subsidiary of Kroll. The acquisition was consummated effective
June 13, 2002. The transaction, which qualifies as a
tax-free reorganization for federal income tax purposes, is
valued at approximately $154 million. Each share of
outstanding Ontrack common stock was converted into 0.6447 of
one share of Krolls common stock. In addition, pursuant to
the acquisition agreement, Kroll assumed Ontracks existing
stock option plans. As a result of the acquisition, Kroll has
issued approximately 7.2 million shares of its common
stock, including approximately 0.3 million shares issued
upon the exercise of Ontrack options. As of December 31,
2002, an additional 0.7 million shares may be issued upon
the future exercise of Ontrack options (see Note 4(a) of
the Notes to the Consolidated Financial Statements).

In May 2002, Kroll executed agreements to sell to
local management its interest in its Russian armored car
businesses that were not sold to Armor. Kroll received $150,000
upon closing and an additional $10,000 in both the third and
fourth quarters of 2002. The agreements provide for Kroll to
receive an additional $107,000 within one year of the closing
date, plus $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 these Russian businesses (see Note 5(a) of
the Notes to the Consolidated Financial Statements).

On July 2, 2002, Kroll Inc., formerly an
Ohio corporation, became a Delaware corporation pursuant to a
merger in which the Ohio corporation merged into its
wholly-owned Delaware subsidiary. In connection with the
reincorporation in Delaware, Kroll Inc.s authorized
capital increased to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock.

On September 5, 2002, Kroll amended and
ultimately terminated the $15 million Foothill revolving
credit facility to accommodate a new $100 million credit
facility with Goldman Sachs, which provided for a
$25 million revolving credit facility and a
$75 million term loan. To obtain the Goldman Sachs credit
facility, Kroll amended certain provisions of its outstanding 6%
convertible notes. Under the amendments, the security interest
of all the noteholders was terminated and the collateral
securing all of the convertible notes was released. In addition,
the amendments deleted all of the negative covenants in respect
of all of the convertible notes. Furthermore 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 owns to borrowings under the new
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 (see
Notes 10, 11(b) and 11(c) of the Notes to the Consolidated
Financial Statements).

On September 5, 2002, Kroll acquired all of
the equity interests of Zolfo Cooper, LLC (Zolfo
Cooper), and certain of its related entities. At the
closing, Kroll paid $100 million in cash and, on
January 15, 2003, Kroll issued 2.9 million shares of
its common stock, valued at approximately $55.3 million, to
the former owners of Zolfo Cooper (see Note 4(b) of the Notes to
the Consolidated Financial Statements). In addition, Kroll will
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
$30 million, $31 million, $32 million and
$33 million in 2003, 2004, 2005 and 2006, respectively.
Kroll also granted options to purchase 600,000

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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 will vest
over four years.


In October 2002, Kroll sold 6.3 million
shares of its common stock in an underwritten public offering.
The offering, which sold at a price of $18.75 per share, raised
approximately $110.6 million of net proceeds for Kroll. The
$75 million term loan obtained by Kroll on September 5,
2002 was fully repaid on October 18, 2002, using a portion
of the proceeds from the public offering (see Notes 14(b)
and 11(c) of the Notes to the Consolidated Financial
Statements). The remaining proceeds were used for working
capital to fund operations and other general company purposes.

On March 6, 2003, Kroll executed agreements
with Fleet providing a revolving credit facility of up to
$25 million for a term of three years. Krolls
obligations under the revolving credit facility are guaranteed
by its domestic subsidiaries. The 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 (see
Note 21(a) of the Notes to the Consolidated Financial
Statements).

Borrowings under the $25 million 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
revolving credit facility, Kroll will pay Fleet a quarterly fee
equal to 0.375% per annum of the unused portion of the revolving
credit facility. The revolving credit facility requires Kroll to
maintain a minimum level of EBITDA and net income and maximum
leverage and liabilities requirements, and contains restrictions
on the incurrence of additional debt, the creation of any liens,
certain acquisitions distributions to certain subsidiaries and
payments of dividends. The revolving credit facility also
contains other affirmative and negative covenants and events of
default customarily contained in debt agreements of this type.

On March 6, 2003, the $25 million
Goldman Sachs revolving credit facility, undertaken as part of
the $100 million credit facility on September 5, 2002,
was retired (see Notes 10, 11(c) , 21(a) of the Notes to
the Consolidated Financial Statements).

On March 14, 2003 Kroll consummated an asset
purchase agreement with Certico Verification Services, LLC.
(Certico). Under the agreement, Kroll acquired most
of Certicos assets, and assumed certain liabilities, for a
purchase price of $3.3 million paid in cash. Certico
provides background checking services and its future results of
operations will be included within the Background Screening
Services Segment.

General

Kroll is a leading global provider of a broad
range of specialized products and services that are designed to
provide solutions to a variety of risk mitigation needs. Through
October 17, 2000, Kroll reported its net sales from
continuing operations through three groups. The Investigations
and Intelligence Group offered business investigations and
intelligence services and risk mitigation consulting services.
The Security Products and Services Group marketed ballistic and
blast protected vehicles and security services. The Information
Security Group offered information and computer security
services. As a result of the October 2000 sale of Securify
preferred stock, the Information Security Group ceased to be
part of Krolls consolidated results. On April 20,
2001, Kroll entered into a definitive agreement to sell most of
the active companies that comprise the Security Products and
Services Group. On August 22, 2001 these operations were
sold to an unrelated third party. Accordingly, these operations
have been reclassified and reported as discontinued operations.

Since the transactions described above, Kroll has
changed the composition of its reportable segments. Kroll now
operates in five business segments: (1) consulting
services, (2) corporate advisory and restructuring
services, (3) technology services, (4) background
screening services and (5) security services.

Acquisitions.Kroll
has pursued a strategy of aggressive growth and completed a
number of acquisitions in 2000 and 2002, which have been
accounted for by the purchase method of accounting, whereby
Krolls

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consolidated financial statements include the
reported results of each entity from its effective date of
acquisition forward. These acquisitions are listed in the
following chart:


|                                 |  |                                                                        |  |                                               |  |                   |  |                                                                                            
|-------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------------------- |  | ----------------- |  | -------------------------------------------------------------------------------------------
|Company                          |  | Business                                                               |  | Segment                                       |  | Date Acquired     |  | Price                                                                                      
|                                 |  |                                                                        |  |                                               |  |                   |  |                                                                                            
|The Search Is On, Inc.           |  | Background investigation services                                      |  | Background Screening Services                 |  | May 16, 2000      |  | $0.4 million in cash, plus note payable of
    $0.2 million                                
|Decision Resources, Inc.(1)      |  | Market research and intelligence services                              |  | Consulting Services                           |  | July 11, 2000     |  | $0.3 million in cash, plus note payable of
    $0.4 million                                
|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 and 2.9 million
    shares of common stock issued on January 15, 2003.



---



|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | On September 10, 2001, this business was
    sold (see Note 6(b) of the Notes to the Consolidated
    Financial Statements).



| |                            
| | ---------------------------
| | Restructuring of Operations

In the second quarter of 2001, Kroll began
implementation of a restructuring plan (the 2001 Plan) to reduce
costs and improve operating efficiencies. The 2001 Plan was
substantially completed by the end of 2001. The total pre-tax
restructuring charge recorded pursuant to the 2001 Plan was
approximately $2.7 million, of which approximately
$2.6 million was recorded in the second quarter of 2001.
Kroll does not expect to incur any other significant
restructuring charges in future periods related to the 2001
Plan. Total payments or write-offs made pursuant to the 2001
Plan through December 31, 2002, were approximately
$2.3 million. The principal elements of the restructuring
plan were the closure of four offices, and the elimination of
approximately 98 employees (see Note 7(d) of the Notes
to the Consolidated Financial Statements).



| |                             
| | ----------------------------
| | 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 the
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s significant 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. The impact of any

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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, where 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.


Databases.Databases
are capitalized costs incurred in obtaining information from
third party providers. Kroll utilizes this information to create
and maintain its proprietary and non-proprietary databases.
Because of the continuing accessibility of the information and
its usefulness to future investigative procedures, the cost of
acquiring the information is capitalized and amortized over a
five year period.

Foreign Currency Translation and
Transactions.Assets and liabilities
of foreign operations are translated using year-end exchange
rates and revenues and expenses are translated using exchange
rates prevailing during the year, with gains or losses resulting
from translation included in a separate component of
shareholders equity.

Gains or losses resulting from foreign currency
transactions are translated to local currency at the rates of
exchange prevailing at the dates of the transactions. Amounts
receivable or payable in foreign currencies, other than the
subsidiarys local currency, are translated at the rates of
exchange prevailing at the balance sheet date.

Accounting for Intangible and Long-lived
Assets.In accordance with Statement
of Financial Accounting Standards (SFAS)
No. 142, Kroll no longer amortizes goodwill and other
intangible assets. Instead Kroll conducts annual impairment
tests of the goodwill recorded on its books in order to
ascertain if an impairment has taken place. Impairment tests
will be conducted sooner if circumstances indicate that an
impairment has occurred. In accordance with SFAS No. 144,
Kroll measures intangible and 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. Kroll measures
long-lived assets to be held and used whenever events or changes
in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it 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.

24



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| |                      
| | ---------------------
| | Results of Operations

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

|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |      |       |   
|------------------------------------------------------------------------------------ | ------------------------------------------- | ------------------------------------------------------------------------------ | ----- | ---- | ---- | ---- | ----- | ---- | ----- | -- | ----- | ---- | ----- | --
|                                                                                     |                                             |                                                                               
|                                                                                     |                                             | For the Years Ended                                                           
|                                                                                     |                                             | December 31,                                                                  
|                                                                                     |                                             |                                                                               
|                                                                                     |                                             | 2002                                                                           |       | 2001 |      | 2000
|                                                                                     |                                             |                                                                                |       |      |      |     
|Net sales                                                                            |                                             |                                                                                | 100.0 | %    |      |      | 100.0 | %    |       |    | 100.0 | %   
|Cost of sales                                                                        |                                             |                                                                                | 51.1  |      |      |      | 60.2  |      |       |    | 60.2  |     
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     |                                             | Gross profit                                                                   |       |      | 48.9 |      |       |      | 39.8  |    |       |      | 39.8  |   
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|Selling and marketing expenses                                                       |                                             |                                                                                | 9.5   |      |      |      | 9.0   |      |       |    | 10.5  |     
|G&A expenses (including amortization)                                                |                                             |                                                                                | 26.5  |      |      |      | 30.4  |      |       |    | 31.2  |     
|Research and development expenses                                                    |                                             |                                                                                | 2.0   |      |      |      |      |      |       |    |      |     
|Failed separation costs                                                              |                                             |                                                                                |      |      |      |      | 0.3   |      |       |    | 2.0   |     
|Restructuring charges                                                                |                                             |                                                                                |      |      |      |      | 1.3   |      |       |    |      |     
|Impairment of assets                                                                 |                                             |                                                                                |      |      |      |      | 0.4   |      |       |    |      |     
|Failed financing costs                                                               |                                             |                                                                                |      |      |      |      | 0.5   |      |       |    |      |     
|Loss on sale of business unit                                                        |                                             |                                                                                |      |      |      |      | 0.2   |      |       |    |      |     
|Failed merger related costs                                                          |                                             |                                                                                |      |      |      |      |      |      |       |    | 1.2   |     
|Merger related costs                                                                 |                                             |                                                                                |      |      |      |      |      |      |       |    | 0.2   |     
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     |                                             | Operating income (loss)                                                        |       |      | 10.9 |      |       |      | (2.3  | )  |       |      | (5.3  | ) 
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|Interest expense                                                                     |                                             |                                                                                | (1.9  | )    |      |      | (2.1  | )    |       |    | (2.1  | )   
|Interest income                                                                      |                                             |                                                                                | 0.5   |      |      |      | 0.1   |      |       |    | 0.1   |     
|Other income (expense), net                                                          |                                             |                                                                                | 0.1   |      |      |      |      |      |       |    | 0.8   |     
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     | Total other expense                         |                                                                                |       | (1.3 | )    |      |       | (2.0 | )     |    |       | (1.2 | )    
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     |                                             | Income (loss) from continuing operations before
    provision for income taxes |       |      | 9.6  |      |       |      | (4.3  | )  |       |      | (6.5  | ) 
|Provision for income taxes                                                           |                                             |                                                                                | 2.9   |      |      |      | 1.2   |      |       |    | 1.2   |     
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     |                                             | Income (loss) from continuing operations                                       |       |      | 6.7  |      |       |      | (5.5  | )  |       |      | (7.7  | ) 
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|Income (loss) from discontinued Security Products
    and Services Group, net of tax |                                             |                                                                                |      |      |      |      | (3.6  | )    |       |    | (4.9  | )   
|Loss from discontinued Voice and Data
    Communications Group, net of tax           |                                             |                                                                                |      |      |      |      | (1.0  | )    |       |    | (4.0  | )   
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     | Total discontinued operations income (loss) |                                                                                |       |     |      |      |       | (4.6 | )     |    |       | (8.9 | )    
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     |                                             | Income (loss) before extraordinary item                                        |       |      | 6.7  |      |       |      | (10.1 | )  |       |      | (16.6 | ) 
|Extraordinary item, net of tax                                                       |                                             |                                                                                | (1.1  | )    |      |      | (0.2  | )    |       |    |      |     
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     
|                                                                                     |                                             | Net income (loss)                                                              |       |      | 5.8  | %    |       |      | (10.3 | )% |       |      | (16.6 | )%
|                                                                                     |                                             |                                                                                |       |      |      |      |       |      |       |    |       |     



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Fiscal Year Ended December 31, 2002
    Compared to Fiscal Year Ended December 31, 2001

Net Sales.Net sales for the year ended
December 31, 2002 increased $81.3 million, or 39.1%, from
$207.9 million in the year ended December 31, 2001 to
$289.2 million in 2002.

Consulting Services.Net sales for the Consulting Services
segment increased $0.2 million, or 0.2%, from
$106.4 million in 2001 to $106.6 million in 2002.
Strong demand for our financial and investigative services in
Europe (12% revenue increase) and Latin America (8% revenue
increase) were partially offset by decreased revenue in our
Asian operations. A weak economic climate and reduced merger and
acquisition activity have negatively impacted sales in Asia.

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##### Table of Contents



Corporate Advisory and Restructuring
Services.Net sales for the Corporate
Advisory and Restructuring Services segment increased
$40.9 million, or 134.1%, from $30.5 million in 2001
to $71.4 million in 2002. This increase is due to a 38%
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 (see Note 4(b) of the Notes to the
Consolidated Financial Statements).

Technology Services.Net sales for the Technology Services segment increased
$32.0 million, or 731.9%, from $4.4 million in 2001 to
$36.4 million in 2002. This increase is primarily due to
Krolls acquisition of Ontrack on June 13, 2002 (see
Note 4(a) of the Notes to the Consolidated Financial
Statements).

Background Screening
Services.Net sales for the Background
Screening Services segment increased $6.8 million, or
16.0%, from $42.5 million in 2001 to $49.3 million in
2002. This was primarily the result of an increase of
$6.7 million, or 38%, in demand for our domestic
pre-employment background checking services.

Security Services.Net sales for the Security Services segment increased
$1.4 million, or 5.7%, from $24.1 million in 2001 to
$25.5 million in 2002. Our domestic security services
business recorded sales increases of approximately
$6.1 million, or 34%, 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 Margin.Cost of sales for the year ended
December 31, 2002 increased $22.8 million, or 18.3%,
from $125.1 million in the year ended December 31,
2001 to $147.9 million in 2002. Gross margin as a
percentage of sales increased 9.1 percentage points from
39.8% in 2001 to 48.9% in 2002.

Consulting Services.Gross margin for the Consulting Services segment increased
7.8 percentage points from 33.1% in 2001 to 40.9% in 2002.
In a relatively flat sales environment, this was accomplished
through close management of expenses which resulted in each
region of Krolls consulting segment, even those which
experienced sales declines, posting margin improvements.

Corporate Advisory and Restructuring
Services.Gross margin for the
Corporate Advisory and Restructuring Services segment increased
4.3 percentage points from 52.6% 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 (see
Note 4(b) of the Notes to the Consolidated Financial
Statements).

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 (see Note 4(a) of the Notes
to the Consolidated Financial Statements).

Background Screening
Services.Gross margin for the
Background Screening Services segment increased
1.3 percentage points from 45.4% in 2001 to 46.7% in 2002.
This increase is primarily attributable to improved margins in
our domestic background checking business and our substance
abuse testing business.

Security Services.Gross margin for the Security Services segment decreased
5.1 percentage points from 39.8% in 2001 to 34.7% in 2002,
primarily as a result of difficult economic conditions in the
second half of 2002, and the reduction in gross margin of the
Crisis Management business which Kroll exited in June 2002.

Operating Expenses.Operating expenses increased
$22.3 million, or 25.5%, from $87.5 million in 2001 to
$109.8 million in 2002. Operating expenses in 2001 included
$5.7 million of non-recurring costs. Non-recurring costs in
2001 primarily consisted of expenses associated with the 2001
restructuring plan, $2.7 million; failed financing costs,
$1.0 million; and impairment of assets, $0.8 million.
Excluding the non-recurring costs, operating expenses increased
$27.9 million, or 34.2%, from $81.8 million in 2001 to
$109.7 million in 2002. The increase in operating expenses
was primarily due to the inclusion of operating expenses of
Ontrack and 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.

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In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, beginning
January 1, 2002, Kroll ceased amortizing goodwill. If SFAS
No. 142 were applied to Krolls results for the year
ended December 31, 2001, operating expenses for that period
would have been reduced by $2.4 million, or
$1.6 million after taxes (see Note 20 of the Notes to
the Consolidated Financial Statements).

As a percentage of net sales, general and
administrative expenses, after adjustment for goodwill
amortization, decreased from 28.8% in 2001 to 25.6% in 2002.

Interest Expense.Interest expense, net of interest
income, decreased $0.3 million, or 7.7%, from
$4.2 million in 2001 to $3.9 million in 2002. 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.

Provision for Income Taxes.The provision for income taxes
increased $5.9 million from $2.4 million in 2001 to
$8.3 million in 2002. In 2001, Kroll reported tax expense
despite a pretax loss from operations, largely as a result 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.

Discontinued Operations.Results from discontinued
operations improved from a loss of $9.6 million in 2001 to
income of $0.1 million in 2002. The Voice and Data
Communications Group (VDCG) was sold in June 2001
and the Security Products and Services Group (SPSG)
was sold to Armor on August 22, 2001 (see Notes 5(a)
and 5(b) of the Notes to the Consolidated Financial Statements).

Extraordinary Items.Kroll recorded a $3.1 million
extraordinary loss, net of tax, in 2002, an increase of
$2.8 million from the $0.3 million loss, net of tax,
recorded in 2001. In 2002, Kroll wrote off financing fees
associated with the early repayment of the $75 million term
loan, a payment to Palisade in connection with certain
amendments to the convertible notes, and financing fees related
to the replacement of the $15 million Foothill revolving
credit facility. In 2001, Kroll wrote off financing fees when it
retired an amended bank loan and senior notes.

Net Income.Net income improved
$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 $58.5 million increase in gross
profit as a result of increased sales and improved margins in
2002, a $5.6 million decrease in non-recurring expenses,
and a $9.7 million decrease in the loss from discontinued
operations. These were partially offset by a $27.9 million
increase in recurring operating expenses, a $5.9 million
tax provision increase, and a $2.8 million increase in
extraordinary items.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Fiscal Year Ended December 31, 2001
    Compared to Fiscal Year Ended December 31, 2000

Net Sales.Net sales for the year ended
December 31, 2001 increased $2.3 million, or 1.1%,
from $205.6 million in the year ended December 31,
2000 to $207.9 million in 2001.

Consulting Services.Net sales for the Consulting Services segment increased
$2.2 million, or 2.1%, from $104.2 million in 2000 to
$106.4 million in 2001. Increases in Krolls Canadian
and Latin American business of approximately 10% and 43%,
respectively, were offset, in part, by a 26% decrease in
Krolls Asian operations, where merger and acquisition
activity declined sharply in 2001.

Corporate Advisory and Restructuring
Services.Net sales for the Corporate
Advisory and Restructuring Services segment increased
$11.2 million, or 58.0%, from $19.3 million in 2000 to
$30.5 million in 2001. This increase is primarily
attributable to strong demand for our corporate recovery and
turnaround services in the United Kingdom.

Technology Services.Net sales for the Technology Services segment increased
$1.8 million, or 67.1%, from $2.6 million in 2000 to
$4.4 million in 2001. This was due to increased demand for
our domestic data collection and data discovery services as we
built and promoted this new practice.

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Background Screening
Services.Net sales for the Background
Screening Services segment decreased $4.1 million, or 8.8%,
from $46.6 million in 2000 to $42.5 million in 2001.
This decrease is attributable to the decline in Krolls
surveillance business, primarily due to increased competition.

Security Services.Net sales for the Security Services segment decreased
$4.7 million, or 16.3%, from 28.8 million in 2000 to
$24.1 million in 2001. This decrease was primarily the
result of decreased demand for security services in Latin
America, where poor economic conditions existed. In addition,
Krolls Latin American revenues decreased due to
Krolls transition out of guard services, which have low
margins, and to develop a security consulting practice which
returns higher margins. This decrease was offset, in part, by a
30% increase in our domestic security consulting and design
services due to the national and international climate following
the events of September 11th.

Information Security Group.Net sales for the Information Security
Group decreased $4.0 million, or 100.0%, from
$4.0 million in 2000 to zero in 2001. In October 2000,
Krolls then wholly owned subsidiary, Securify, sold
preferred stock to unrelated third parties, which decreased
Krolls ownership to approximately 27%. Additional
financing obtained by Securify since this sale has reduced
Krolls voting interest to approximately 1%.
Securifys operations subsequent to the sale have been
excluded from Krolls results of operations (see
Note 6(a) of the Notes to the Consolidated Financial
Statements).

Cost of Sales and Gross Profit.Cost of sales increased
$1.3 million, or 1.0%, from $123.8 million in 2000 to
$125.1 million in 2001. Gross margin as a percentage of
sales was 39.8% for both 2000 and 2001.

Consulting Services.Gross margin for the Consulting Services segment decreased
3.0 percentage points from 36.1% in 2000 to 33.1% in 2001.
The decrease in gross margin was due to increased write-offs
associated with bad debts and fixed costs associated with
increased employee compensation and benefits, as well as a
change in product mix and a higher percentage of reimbursable
expenses in revenue with no associated profit margin.

Corporate Advisory and Restructuring Services.Gross margin for the Corporate
Advisory and Restructuring Services segment increased
2.1 percentage points from 50.5% in 2000 to 52.6% in 2001.
This was primarily the result of increased revenues and staffing
at our corporate recovery and turnaround business in the United
Kingdom.

Technology Services.Gross margin for the Technology
Services segment was unchanged at 60% for the years ended
December 31, 2000 and December 31, 2001. The revenue
increases in this segment were accompanied with a corresponding
increase in professional staff as Kroll built and promoted this
new practice.

Background Screening Services.Gross margin for the Background
Screening Services segment decreased 2.5 percentage points
from 47.9% in 2000 to 45.4% in 2001. The decrease in gross
margin is attributable to the decline in net sales, which caused
fixed costs to increase as a percentage of net sales, impacting
gross margin unfavorably.

Security Services.Gross margin for the Security Services segment increased
1.7 percentage points from 38.1% in 2000 to 39.8% in 2001.
The increase in gross margin is attributable to the improvement
in the domestic Security services business, where we
traditionally have higher margins. This was offset, in part, by
lower margins in our Latin American operations.

Information Security Group.Gross margin for the Information
Security Group improved from (10.0)% in 2000 to zero in 2001. In
October 2000, Krolls then wholly owned subsidiary,
Securify, sold preferred stock to unrelated third parties, which
decreased Krolls ownership to approximately 27%.
Additional financing obtained by Securify since this sale has
reduced Krolls voting interest to approximately 1%.
Securifys operations subsequent to the sale have been
excluded from Krolls results of operations (see
Note 6(a) of the Notes to the Consolidated Financial
Statements).

Operating
Expenses.Operating expenses
decreased $5.2 million, or 5.6%, from $92.7 million in
2000 to $87.5 million in 2001. Included in this decrease
are non-recurring expenses, which decreased $1.3 million,
from $7.0 million in 2000 to $5.7 million in 2001.
Non-recurring charges in 2000 primarily consisted of costs
associated with the failed recapitalization merger with
Blackstone and the failed separation of Kroll into two

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publicly traded companies. In 2001, non-recurring
expenses primarily consisted of expenses associated with the
2001 restructuring plan, failed financing costs and impairment
of assets.


Excluding non-recurring expenses, operating
expenses decreased $3.9 million, or 4.5%, from
$85.7 million in 2000 to $81.8 million in 2001. This
decrease is primarily due to the exclusion in 2001 of
$9.2 million of operating expenses associated with the
Information Security Group. This decrease was offset, in part,
by increases in employee compensation and benefits.

As a percent of net sales, operating expenses,
before non-recurring expenses, decreased from 41.7% in 2000 to
39.4% in 2001.

Interest Expense.Interest expense net of interest
income increased $0.2 million, or 4.9%, to
$4.3 million in 2001 from $4.1 million in 2000. This
increase was the result of the 0.5% increase in the monthly
interest factor charged to the outstanding debt under the
renegotiated credit agreement, effective April 20, 2001,
which was somewhat offset by lower average borrowings in the
latter half of 2001.

Provision for Income Taxes.The provision for income taxes was
$2.4 million in both 2000 and 2001. Despite recording a
pre-tax loss in each year, Kroll recorded a provision for income
taxes for certain foreign subsidiaries which generated income in
the period. In addition, certain foreign subsidiaries realized
losses from which Kroll was not able to benefit for tax purposes
due to the uncertainty relating to the future realizability of
the net operating loss carry forward.

Discontinued Operations.The loss from the discontinued
Security Products and Services Group decreased $2.5 million
from a loss of $10.0 million in 2000 to a loss of
$7.5 million in 2001. SPSG was sold to Armor on
August 22, 2001 (see Note 5(a) of the Notes to the
Consolidated Financial Statements).

The loss from the discontinued Voice and Data
Communications Group decreased $6.1 million from
$8.2 million in 2000 to $2.1 million in 2001. This
decrease was due to provisions made in 2000, anticipating the
sale of VDCG, which was subsequently sold in June 2001 (see Note
5(b) of the Notes to the Consolidated Financial Statements).

Net Loss.Net
loss decreased $12.5 million from a loss of
$33.9 million in 2000 to a loss of $21.4 million in
2001. The decrease in net loss was due primarily to an increase
in gross profit of $1.0 million, a decrease in operating
expenses of $5.2 million, the decrease in losses associated
with the discontinued Voice and Data Communications Group of
$6.1 million and the decrease in losses associated with the
discontinued Security Products and Services Group of
$2.5 million. Other expense and extraordinary item expense
increased $2.3 million, partially offsetting these net loss
improvements.



| |                                    
| | -----------------------------------
| | 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 the net proceeds
from its equity offering in October 2002, combined with the
available borrowings under the credit facility, the cash
acquired in the acquisition of Ontrack and Zolfo Cooper and
Krolls anticipated cash from future operations, will be
sufficient to fund operations for at least the next
12 months.

Credit Facilities and Senior
Notes.In November 2001, Kroll
obtained financing of $30.0 million in the form of 6%
Senior Secured Subordinated Convertible Notes due 2006. The
notes mature on 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 on 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
immediately convertible into 2,777,777 shares of Kroll common
stock, subject to customary and other anti-dilution adjustments
(see Note 11(b) of the Notes to the Consolidated Financial
Statements).

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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 will be 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 additional
non-cash interest expense resulting from this discount
amortization will average approximately $2.3 million or
7.7% per year on the $30.0 million aggregate principal
amount. Upon conversion or redemption of the notes, Kroll will
record a non-cash interest expense equal to the unamortized
notes discount at the time of conversion. A significant portion
of the proceeds from these notes was used to retire a bank loan
and senior notes. Excess proceeds of approximately
$8.4 million were used for working capital to fund
operations.

The 6% convertible notes were originally secured
by assets of Kroll and its material domestic subsidiaries and
the pledge of the stock of certain of Krolls subsidiaries
and were subordinate to the security interest and rights of the
then existing credit facility lender. The 6% convertible notes
also contained certain customary covenants, including covenants
that prohibited Kroll from disposing of any material subsidiary,
incurring or permitting to exist any senior or pari-passu debt
other than the $15.0 million credit facility with Foothill
Capital Corporation described below, or any liability for
borrowed money, guaranteeing the obligations for borrowed money
of any third party, creating or permitting to exist any material
liens on assets of material subsidiaries, or entering into
transaction prior to November 14, 2003 that involves a
change in control of Kroll (as defined in the
notes). The 6% convertible notes are payable upon any change in
control of Kroll at the option of the holders and the holders
had the right to designate an observer to the board of directors.

Kroll amended certain provisions of its
outstanding 6% convertible notes. Under the amendments, the
security interest of all the noteholders was terminated and the
collateral securing all of the convertible notes was released.
In addition, the amendments deleted all of the negative
covenants in respect of all of the convertible notes.
Furthermore 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 owns to
borrowings under the 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.

Effective June 3, 1999, with the acquisition
of Buchler Phillips, Kroll acquired a demand note with maximum
borrowings of 2.5 million pounds sterling. The demand note
bears interest at the Bank of Englands base rate plus
1.5%. At December 31, 2002, the interest rate was 5.5%. In
March 2002, maximum borrowings permitted under the demand note
were increased from 2.5 million pounds sterling to
4.4 million pounds sterling, or $7.1 million as
translated at December 31, 2002. Borrowings outstanding
under this demand note were approximately $3.8 million and
$2.6 million, as translated at December 31, 2002 and
2001, respectively.

On February 21, 2002, Kroll executed
agreements with Foothill Capital Corporation to provide a
revolving credit facility of up to $15 million, subject to
borrowing base limitations, for a term of three years (see
Note 10 of the Notes to the Consolidated Financial
Statements). On September 5, 2002, Kroll terminated this
credit facility.

In May 2002, Kroll and Armor resolved
post-closing adjustments to the SPSG closing date balance sheet,
which resulted in the payment to Kroll of $1.1 million of
the $1.5 million held in escrow.

In connection with the Zolfo Cooper acquisition
(see Note 4(b) of the Notes to the Consolidated Financial
Statements), Kroll entered into a new $100 million credit
facility that provided for a $25 million revolving line of
credit and $75 million in term loan financing through a
syndicate arranged by Goldman Sachs (see Notes 10 and 11(c)
of the Notes to the Consolidated Financial Statements).

Both the revolving credit facility and 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 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

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capital expenditures, additional indebtedness and
dividends. At December 31, 2002 Kroll was in compliance
with all covenants and provisions of this facility.


The revolving credit facility required Kroll to
pay a fee equal to 0.375% per annum of the unused portion of the
facility. 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.

In October 2002, Kroll sold 6.3 million
shares of its common stock in an underwritten public offering.
The offering, which sold at a price of $18.75 per share, raised
for Kroll approximately $110.6 million of net proceeds,
including $0.2 million of accrued expenses (see Note 14(b)
of the Notes to the Consolidated Financial Statements). Kroll
repaid the $75.0 million term loan on October 18,
2002, using a portion of the proceeds from the public offering.
The remaining proceeds were used for working capital to fund
operations and other general company purposes.

On March 6, 2003, Kroll executed agreements
with Fleet providing a revolving credit facility of up to
$25 million for a term of three years. Krolls
obligations under the revolving credit facility are guaranteed
by its domestic subsidiaries. The 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 (see
Note 21 of the Notes to the Consolidated Financial
Statements).

Cash Flows from Operating
Activities.Continuing operations
provided $33.1 million in net cash in 2002 compared to net
cash provided of $3.4 million in 2001 and
$11.5 million net cash used in 2000. The year to year
increase is due to the improvement in Krolls income from
continuing operations. In 2002, net income adjusted for
depreciation, amortization and other non-cash items was
$39.7 million. The funds provided were partially offset by
a $13.1 million increase in working capital and a reduction
of $6.5 million in long term net assets, most of which
related to deferred taxes. In 2001, net income from continuing
operations was $10.2 million, after adjusting for
$21.9 million of non-cash items and a $9.7 million
loss from discontinued operations. The funds provided were
partially offset by a $7.6 million increase in working
capital and a reduction of $1.1 million in long term net
assets. In 2000, net income from continuing operations was
$0.4 million, after adjusting for $16.0 million of
non-cash items and a $18.3 million loss from discontinued
operations. Funds in 2000 were used to increase working capital
by $9.9 million, and long term net assets by
$2.0 million.

Cash Flows from Investing
Activities.In 2002, Kroll used
$85.5 million in investing activities compared to
$8.8 million used in 2001 and $12.5 million used in
2000. In 2002, Kroll made two significant acquisitions that
accounted for substantially all of its reported
$72.9 million of acquisitions net of cash received. In
2002, Kroll purchased Zolfo Cooper, including $3.3 million
in cash, for approximately $103.3 million in cash,
including related transaction fees. This transaction resulted in
$100.0 million of net cash used (see Note 4(b) of the
Notes to the Consolidated Financial Statements). Additionally,
in 2002, Kroll acquired Ontrack through an exchange of common
shares and transaction fees of approximately $3.7 million.
Kroll obtained $32.0 million in cash, resulting in
$28.3 million in net cash provided (see Note 4(a) of
the Notes to the Consolidated Financial Statements) and after
the acquisition realized approximately $5.6 million from
the sale of Ontrack marketable securities. In addition, in 2002,
Kroll made expenditures totaling $15.7 million, consisting
of fixed asset additions, $6.1 million; database additions,
$4.7 million; and additions to other intangible assets,
$4.9 million. Cash used in investing activities in 2001
were primarily additions to fixed assets, $3.4 million and
database additions, $4.4 million. In addition, Kroll used
$0.8 million in additions to other intangible assets. In
2000, Kroll used $7.6 million to purchase fixed assets and
$4.4 million to acquire additional databases. An additional
$0.5 million was used for acquisitions, net of cash
acquired.

Cash Flows from Financing
Activities.Net cash provided by
financing activities in 2002 was $118.8 million. Kroll
borrowed $75.0 million to acquire Zolfo Cooper in September
2002 (see Note 4(b) of the Notes to the Consolidated
Financial Statements). In October 2002, Kroll realized net cash
of approximately $110.8 million from the sale of common
stock to the public, $75.0 million of which was used to repay
the aforementioned September loan (see Note 14(b) of the
Notes to the Consolidated Financial Statements). Also in 2002,
Kroll received $9.5 million of proceeds from the Employee
Stock Purchase Plan and from the

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exercise of stock options. In 2001, net cash used
in financing activities was $41.7 million. During the 2001,
$35.3 million of senior debt and $36.7 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 Senior Secured Subordinated
Convertible Notes issued in November 2001. In 2000, net cash
provided by financing activities was $11.5 million. Net
borrowings under revolving lines of credit were
$13.4 million and net payments of long term debt were
$1.6 million.


Krolls contractual obligations were
comprised of the following as of December 31, 2002:

Payments due by Period

|                            |       |                        |        |               |  |           |        |           |  |               |        |        |  |   |        |        |  |   |       |       | 
|--------------------------- | ----- | ---------------------- | ------ | ------------- |  | --------- | ------ | --------- |  | ------------- | ------ | ------ |  | - | ------ | ------ |  | - | ----- | ----- | 
|Contractual Obligation      |       | Total                  |        | Within 1 Year |  | 1-3 Years |        | 4-5 Years |  | After 5 Years
|                            |       |                        |        |               |  |           |        |           |  |              
|                            |       |                       
|                            |       | (Dollars in thousands)
|Long-term debt              |       | $                      | 30,090 |               |  | $         | 73     |           |  | $             | 17     |        |  | $ | 30,000 |        |  | $ |      |      
|Operating leases            |       |                        | 60,646 |               |  |           | 13,508 |           |  |               | 22,630 |        |  |   | 17,399 |        |  |   | 7,109 |      
|Other long-term obligations |       |                        | 1,000  |               |  |           | 250    |           |  |               | 500    |        |  |   | 250    |        |  |   |      |      
|                            |       |                        |        |               |  |           |        |           |  |               |        |        |  |   |        |        |  |   |       |      
|                            | Total |                        | $      | 91,736        |  |           | $      | 13,831    |  |               | $      | 23,147 |  |   | $      | 47,649 |  |   | $     | 7,109 | 
|                            |       |                        |        |               |  |           |        |           |  |               |        |        |  |   |        |        |  |   |       |      

Kroll also had standby letters of credit
outstanding at December 31, 2002 in the aggregate amount of
approximately $2.2 million.

Cash Flows from Discontinued Operations.Net cash used by discontinued
operations was $0.4 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. Cash of $52.5 million provided in 2001
primarily reflects the net effect of the sale of the Security
Products and Services Group to Armor for $55.7 million,
offset by its net loss from operations prior to the sale. Cash
of $9.1 million provided in 2000 reflects a significant
increase in net cash provided by working capital items by the
Security Products and Services Group offset by its net loss and
capital expenditures.

Foreign Operations.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
maintaining insurance on equipment to protect against losses
related to political risks and terrorism. For most of 2001,
Kroll utilized derivative financial instruments, in the form of
forward contracts, to hedge some of its exposure to foreign
currency rate fluctuations. 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. Kroll has not since utilized hedging
or derivative financial instruments and does not hold or issue
derivative financial instruments for trading purposes.

Quarterly
Fluctuations.Kroll generally does not
have long-term contracts with its clients and its ability to
generate net sales is dependent upon obtaining many new projects
each year, most of which are of a relatively short duration.
Period-to-period comparisons within a given year or between
years may not be meaningful or indicative of operating results
over a full fiscal year.

New Accounting Pronouncements.

In June 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.
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.

In June 2001, the FASB issued
SFAS No. 142, Goodwill and Other Intangible
Assets, which establishes accounting and reporting
standards for goodwill and other intangible assets that are
acquired individually or with a group of other assets. The
provisions of this statement became effective on January 1,
2002, and accordingly, Kroll ceased amortizing goodwill and
indefinite-lived intangible assets. In addition,

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Kroll has conducted impairment tests of the
goodwill recorded on its books, as required by
SFAS No. 142. The tests determined that Krolls
recorded goodwill is not impaired. Impairment tests will be
conducted annually, or sooner if circumstances indicate an
impairment may have taken place (see Note 3(o) of the Notes
to the Consolidated Financial Statements).


In June 2001, the FASB issued
SFAS No. 143 Accounting for Asset Retirement
Obligations, which addresses financial accounting and
reporting for obligations and costs associated with the
retirement of tangible long-lived assets. Kroll is required to
implement SFAS No. 143 on January 1, 2003, and
does not expect its adoption to have a material effect on its
consolidated results of operations or financial position.

In August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets, which replaces SFAS No. 121
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of and establishes
accounting and reporting standards for long-lived assets to be
disposed of by sale. This standard applies to all long-lived
assets, including discontinued operations. SFAS No. 144
requires that those assets be measured at the lower of carrying
amount or fair value less cost to sell. SFAS No. 144
also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be
distinguished from the rest of the entity that will be
eliminated from the ongoing operations of the entity in a
disposal transaction. Kroll implemented SFAS No. 144
on January 1, 2002, and there was no material impact on its
consolidated results of operations or financial position as a
result of the implementation of this statement.

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4,44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections. This statement eliminates the
automatic classification of gain or loss on extinguishment of
debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under
the criteria of Accounting Principal Board (APB)
No. 30 Reporting Results of Operations. This
statement also requires sales-leaseback accounting for certain
modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical
corrections to existing pronouncements. This statement will be
effective for Kroll for the year ending December 31, 2003.
For the 2003 financial statements, Kroll will reclassify as
operating expenses prior period extraordinary items that do not
meet the criteria of APB No. 30.

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 will
supersede EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that costs
associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after
December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123.
SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used in reporting
results. Management has adopted the additional disclosure
requirements of SFAS No. 123 effective December 31,
2002.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34 (FIN No. 45). The
interpretation requires that upon issuance of a guarantee, the
entity must recognize a liability for the fair value of the
obligation it assumes under that obligation. This interpretation
is intended to improve the comparability of financial reporting
by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued
without separately identified consideration. For Kroll, the
initial recognition and measurement provision of FIN No. 45
are applicable to guarantees issued or modified after
December 31, 2002. Management has adopted the additional
disclosure provisions of FIN No. 45 effective

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##### Table of Contents



December 31, 2002. Kroll is currently
evaluating what impact, if any, adoption of FIN No. 45 will
have on its consolidated results of operations or financial
position.


In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities, which addresses consolidation by business
enterprises of variable interest entities. In general, a
variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that
either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other
property. A variable interest entity may be essentially passive
or it may engage in research and development or other activities
on behalf of another company. The objective of Interpretation
No. 46 is not to restrict the use of variable interest
entities but to improve financial reporting by companies
involved with variable interest entities. Until now, a company
generally has included another entity in its consolidated
financial statements only if it controlled the entity through
voting interests. Interpretation No. 46 changes that by
requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entitys activities or
entitled to receive a majority of the entitys residual
returns or both. The consolidation requirements of
Interpretation No. 46 apply immediately to variable
interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
Kroll does not expect the adoption of Interpretation No. 46
to have a material effect on its consolidated results of
operations or financial position.






|         |                                                               
|-------- | --------------------------------------------------------------
|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.

34



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##### Table of Contents








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

INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of

Kroll Inc.


New York, New York:


We have audited the accompanying consolidated
balance sheets of Kroll Inc. and subsidiaries (the
Company) as of December 31, 2002 and 2001, and
the related consolidated statements of operations,
shareholders equity and comprehensive income (loss), and
cash flows for the years then ended. These consolidated
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. The
consolidated financial statements of the Company for the year
ended December 31, 2000, before the inclusion of the
disclosures discussed in Note 20 to the consolidated
financial statements, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified
opinion on those financial statements and included an
explanatory paragraph for a change in accounting related to
accounting for costs of start up activities, in their report
dated August 22, 2001.

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
financial position of the Company as of December 31, 2002
and 2001, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Note 3 of the notes to the
consolidated financial statements, the Company changed its
method of accounting for goodwill and other intangible assets to
conform to Statement of Financial Accounting Standards
No. 142 (SFAS No. 142) effective on
January 1, 2002.

As discussed above, the financial statements of
the Company for the year ended December 31, 2000, were
audited by other auditors who have ceased operations. As
described in Note 20, these financial statements have been
revised to include the transitional disclosures required by
SFAS 142, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the
disclosures in Note 20 with respect to 2000 included
(1) comparing the previously reported net income to the
previously issued financial statements and the adjustments to
reported net income representing amortization expense (including
any related tax effects) recognized in those periods related to
goodwill to the Companys underlying analysis obtained from
management, and (2) testing the mathematical accuracy of
the reconciliation of adjusted net income to reported net income
and the related earnings-per-share amounts. In our opinion, the
disclosures for 2000 in Note 20 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to
the 2000 financial statements of the Company other than with
respect to such disclosures and, accordingly, we do not express
an opinion or any other form of assurance on the 2000 financial
statements taken as a whole.

DELOITTE & TOUCHE LLP

New York, New York


February 13, 2003 (March 14, 2003 as to
Notes 2 and 21)


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The following report of Arthur Andersen LLP
(Andersen) is a copy of the report previously issued
by Andersen on August 22, 2001 The report of Andersen is
included in this annual report on Form 10-K pursuant to
rule 2-02(e) of regulation S-X. Kroll has not been
able to obtain a reissued report from Andersen.

Andersen has not consented to the inclusion of
its report in this annual report on Form 10-K. Because
Andersen has not consented to the inclusion of its report in
this annual report, it may be difficult to seek remedies against
Andersen, and the ability to seek relief against Andersen may be
impaired.

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To Kroll Inc.:

We have audited the accompanying consolidated
balance sheet of Kroll Inc. (Note 1) and subsidiaries as of
December 31, 2000 and the related consolidated statements
of operations, shareholders equity and cash flows for each
of the two years in the period ended December 31, 2000.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Kroll Inc. and subsidiaries
as of December 31, 2000 and the results of their operations
and their cash flows for each of the two years in the period
ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

As explained in Note 5(a)(i) to the
consolidated financial statements, effective in the first
quarter of 1999, the Company changed its method of accounting
for costs of start-up activities.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Cincinnati, Ohio

August 22, 2001


36



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##### Table of Contents



KROLL INC.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2002 and
2001


|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |             |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------- | ----------- | ----------- | ----------- |  | ---------- | ----------- | ----------- | 
|                                                                                                                                                                    |                                                                                                                                                             | 2002                 |             | 2001       
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |            
|ASSETS                                                                                                                                                             
|CURRENT ASSETS:                                                                                                                                                     |                                                                                                                                                             |                      |             |             |             |  |            |            
|                                                                                                                                                                    | Cash and cash equivalents                                                                                                                                   |                      | $           | 77,317,169  |             |  | $          | 11,484,734  |            
|                                                                                                                                                                    | Trade accounts receivable, net of allowance for
    doubtful accounts of $6,992,118 and $6,798,097 in 2002 and 2001,
    respectively (Notes 3(d) and 7(a)) |                      |             | 49,346,958  |             |  |            | 37,779,643  |            
|                                                                                                                                                                    | Unbilled revenues (Note 3(b))                                                                                                                               |                      |             | 29,998,767  |             |  |            | 25,600,220  |            
|                                                                                                                                                                    | Related party receivables (Note 9)                                                                                                                          |                      |             | 720,193     |             |  |            | 2,416,859   |            
|                                                                                                                                                                    | Deferred tax asset (Note 8)                                                                                                                                 |                      |             | 5,304,314   |             |  |            |            |            
|                                                                                                                                                                    | Prepaid expenses and other current assets                                                                                                                   |                      |             | 8,314,292   |             |  |            | 4,524,646   |            
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            
|                                                                                                                                                                    |                                                                                                                                                             | Total current assets |             |             | 171,001,693 |  |            |             | 81,806,102  | 
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            
|PROPERTY, PLANT AND EQUIPMENT, at cost
    (Note 3(e)):                                                                                                             |                                                                                                                                                             |                      |             |             |             |  |            |            
|                                                                                                                                                                    | Land                                                                                                                                                        |                      |             | 194,103     |             |  |            | 194,103     |            
|                                                                                                                                                                    | Buildings and improvements                                                                                                                                  |                      |             | 2,092,297   |             |  |            | 2,000,352   |            
|                                                                                                                                                                    | Leasehold improvements                                                                                                                                      |                      |             | 12,555,198  |             |  |            | 7,440,228   |            
|                                                                                                                                                                    | Furniture and fixtures                                                                                                                                      |                      |             | 7,496,361   |             |  |            | 5,134,958   |            
|                                                                                                                                                                    | Machinery and equipment                                                                                                                                     |                      |             | 39,590,266  |             |  |            | 27,905,315  |            
|                                                                                                                                                                    | Construction-in-progress                                                                                                                                    |                      |             |            |             |  |            | 500,026     |            
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            
|                                                                                                                                                                    |                                                                                                                                                             |                      | 61,928,225  |             |             |  | 43,174,982 |            
|                                                                                                                                                                    | Less  accumulated depreciation and
    amortization                                                                                                        |                      |             | (34,510,480 | )           |  |            | (27,107,762 | )          
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            
|                                                                                                                                                                    |                                                                                                                                                             |                      | 27,417,745  |             |             |  | 16,067,220 |            
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            
|DATABASES, net of accumulated amortization of
    $38,199,651 and $33,672,282 in 2002 and 2001, respectively
    (Note 3(f))                                        |                                                                                                                                                             |                      | 10,714,664  |             |             |  | 10,529,565 |            
|COSTS IN EXCESS OF ASSETS ACQUIRED, net of
    accumulated amortization of $8,000,971 and $8,032,494 in 2002
    and 2001, respectively (Notes 3(h), 4(a) and 4(b)) |                                                                                                                                                             |                      | 299,582,299 |             |             |  | 50,436,835 |            
|OTHER INTANGIBLE ASSETS, net of accumulated
    amortization of $5,809,327 and $3,403,257 in 2002 and 2001,
    respectively (Notes 3(i), 4(a) and 4(b))            |                                                                                                                                                             |                      | 25,685,407  |             |             |  | 6,719,650  |            
|OTHER ASSETS (NOTE 7(b)):                                                                                                                                           |                                                                                                                                                             |                      | 5,220,523   |             |             |  | 4,226,451  |            
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            
|                                                                                                                                                                    |                                                                                                                                                             | Total Assets         |             | $           | 539,622,331 |  |            | $           | 169,785,823 | 
|                                                                                                                                                                    |                                                                                                                                                             |                      |             |             |             |  |            |            

The accompanying notes to consolidated financial
statements

are an integral part of these consolidated
financial statements.


37



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##### Table of Contents



KROLL INC.


CONSOLIDATED BALANCE
SHEETS  (Continued)

As of December 31, 2002 and
2001


|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |             |             |             | 
|-------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------- | ----------- | ----------- | ---------- | ----------- | ----------- | ----------- | 
|                                                                                                                                 |                                                                                                                                                                                         | 2002                       |                                            | 2001       
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |            
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                        
|CURRENT LIABILITIES:                                                                                                             |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|                                                                                                                                 | Revolving lines of credit (Note 10)                                                                                                                                                     |                            | $                                          | 4,208,786   |             |             | $          | 2,561,351   |            
|                                                                                                                                 | Current portion of long-term debt (Note 11)                                                                                                                                             |                            |                                            | 72,703      |             |             |            | 318,089     |            
|                                                                                                                                 | Trade accounts payable                                                                                                                                                                  |                            |                                            | 10,870,473  |             |             |            | 10,359,915  |            
|                                                                                                                                 | Related party payables (Note 9)                                                                                                                                                         |                            |                                            | 2,252,708   |             |             |            |            |            
|                                                                                                                                 | Accrued payroll and related benefits                                                                                                                                                    |                            |                                            | 9,903,724   |             |             |            | 7,621,925   |            
|                                                                                                                                 | Other accrued liabilities (Note 7(c))                                                                                                                                                   |                            |                                            | 10,873,626  |             |             |            | 8,768,888   |            
|                                                                                                                                 | Income taxes payable (Note 8)                                                                                                                                                           |                            |                                            | 2,448,010   |             |             |            | 1,434,022   |            
|                                                                                                                                 | Deferred income taxes (Note 8)                                                                                                                                                          |                            |                                            |            |             |             |            | 1,935,964   |            
|                                                                                                                                 | Deferred revenue                                                                                                                                                                        |                            |                                            | 14,488,264  |             |             |            | 4,389,449   |            
|                                                                                                                                 | Net current liabilities of discontinued operation                                                                                                                                       |                            |                                            |            |             |             |            | 502,532     |            
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|                                                                                                                                 |                                                                                                                                                                                         | Total current liabilities  |                                            |             | 55,118,294  |             |            |             | 37,892,135  |            
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|DEFERRED INCOME TAXES (Note 8)                                                                                                   |                                                                                                                                                                                         |                            | 5,357,962                                  |             |             |             | 345,638    |            
|CONVERTIBLE NOTES, net of unamortized discount of
    $9,598,522 and $11,199,674 in 2002 and 2001, respectively
    (Note 11(b)) |                                                                                                                                                                                         |                            | 20,401,478                                 |             |             |             | 18,800,326 |            
|LONG-TERM DEBT, net of current portion
    (Note 11)                                                                             |                                                                                                                                                                                         |                            | 17,591                                     |             |             |             | 277,956    |            
|OTHER LONG-TERM LIABILITIES                                                                                                      |                                                                                                                                                                                         |                            | 1,820,233                                  |             |             |             | 1,336,576  |            
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|                                                                                                                                 |                                                                                                                                                                                         | Total liabilities          |                                            |             | 82,715,558  |             |            |             | 58,652,631  |            
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|COMMITMENTS AND CONTINGENCIES (Note 15)                                                                                          |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|SHAREHOLDERS EQUITY (Note 14):                                                                                                  |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|                                                                                                                                 | Preferred stock, $.01 par value, 5,000,000 and
    1,000,000 shares authorized in 2002 and 2001, respectively, none
    issued                                                          |                            |                                            |            |             |             |            |            |            
|                                                                                                                                 | Common stock, $.01 par value, 100,000,000 and
    50,000,000 shares authorized, 36,994,758 and 22,793,871 shares
    issued and outstanding in 2002 and 2001, respectively
    (Note 2) |                            |                                            | 369,948     |             |             |            | 227,939     |            
|                                                                                                                                 | Common shares to be issued for acquisition
    (Note 4(b))                                                                                                                              |                            |                                            | 55,279,800  |             |             |            |            |            
|                                                                                                                                 | Additional paid-in-capital                                                                                                                                                              |                            |                                            | 456,842,788 |             |             |            | 183,420,930 |            
|                                                                                                                                 | Accumulated deficit                                                                                                                                                                     |                            |                                            | (51,589,590 | )           |             |            | (67,970,733 | )          
|                                                                                                                                 | Accumulated other comprehensive loss                                                                                                                                                    |                            |                                            | (3,951,698  | )           |             |            | (4,544,944  | )          
|                                                                                                                                 | Deferred compensation                                                                                                                                                                   |                            |                                            | (44,475     | )           |             |            |            |            
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|                                                                                                                                 |                                                                                                                                                                                         | Total shareholders equity |                                            |             | 456,906,773 |             |            |             | 111,133,192 |            
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            
|                                                                                                                                 |                                                                                                                                                                                         |                            | Total liabilities and shareholders equity |             | $           | 539,622,331 |            |             | $           | 169,785,823 | 
|                                                                                                                                 |                                                                                                                                                                                         |                            |                                            |             |             |             |            |            

The accompanying notes to consolidated financial
statements

are an integral part of these consolidated
financial statements.


38



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##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

For the Years Ended December 31, 2002,
2001 and 2000


|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |            |             |             |  
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------- | ----------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | ----------- | ----------- | -
|                                             |                                                                                                                             | 2002                                                                                   |                                                                                | 2001       |             | 2000       
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |            
|NET SALES                                    |                                                                                                                             | $                                                                                      | 289,168,278                                                                    |            |             | $           | 207,876,510 |            |            | $           | 205,610,223 |           
|COST OF SALES                                |                                                                                                                             |                                                                                        | 147,882,916                                                                    |            |             |             | 125,051,800 |            |            |             | 123,791,196 |           
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             |                                                                                        | Gross profit                                                                   |            |             | 141,285,362 |             |            |            | 82,824,710  |             |            |             | 81,819,027  |  
|OPERATING EXPENSES:                          |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Selling and marketing                                                                                                       |                                                                                        |                                                                                | 27,424,229 |             |             |             | 18,724,091 |            |             |             | 21,490,151 |            
|                                             | General and administrative                                                                                                  |                                                                                        |                                                                                | 73,933,967 |             |             |             | 62,194,028 |            |             |             | 63,361,714 |            
|                                             | Research and development (Note 3(m))                                                                                        |                                                                                        |                                                                                | 5,845,216  |             |             |             |           |            |             |             |           |            
|                                             | Amortization of other intangible assets (Note
    3(i))                                                                     |                                                                                        |                                                                                | 2,541,736  |             |             |             | 883,475    |            |             |             | 830,429    |            
|                                             | Failed separation costs (Note 2)                                                                                            |                                                                                        |                                                                                |           |             |             |             | 607,246    |            |             |             | 4,194,188  |            
|                                             | Restructuring expenses (Note 7(d))                                                                                          |                                                                                        |                                                                                |           |             |             |             | 2,726,239  |            |             |             |           |            
|                                             | Impairment of assets (Note 3(g))                                                                                            |                                                                                        |                                                                                |           |             |             |             | 806,763    |            |             |             |           |            
|                                             | Failed financing costs (Note 10)                                                                                            |                                                                                        |                                                                                |           |             |             |             | 1,042,698  |            |             |             |           |            
|                                             | Loss on sale of business unit (Note 6(b))                                                                                   |                                                                                        |                                                                                | 101,543    |             |             |             | 527,964    |            |             |             |           |            
|                                             | Failed merger related costs (Note 2)                                                                                        |                                                                                        |                                                                                |           |             |             |             |           |            |             |             | 2,490,923  |            
|                                             | Merger related costs (Note 4)                                                                                               |                                                                                        |                                                                                |           |             |             |             |           |            |             |             | 357,279    |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             | Operating expenses                                                                     |                                                                                |            | 109,846,691 |             |             |            | 87,512,504 |             |             |            | 92,724,684  |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             |                                                                                        | Operating income (loss)                                                        |            |             | 31,438,671  |             |            |            | (4,687,794  | )           |            |             | (10,905,657 | )
|OTHER INCOME (EXPENSE):                      |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Interest expense                                                                                                            |                                                                                        |                                                                                | (4,436,252 | )           |             |             | (4,374,808 | )          |             |             | (4,321,628 | )          
|                                             | Interest income                                                                                                             |                                                                                        |                                                                                | 515,634    |             |             |             | 127,426    |            |             |             | 250,286    |            
|                                             | Gain from issuance of subsidiary stock (Note 6(a))                                                                          |                                                                                        |                                                                                |           |             |             |             |           |            |             |             | 1,616,658  |            
|                                             | Other                                                                                                                       |                                                                                        |                                                                                | 221,332    |             |             |             | (53,240    | )          |             |             | 40,958     |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             |                                                                                        | Income (loss) from continuing operations
    before provision for income taxes |            |             | 27,739,385  |             |            |            | (8,988,416  | )           |            |             | (13,319,383 | )
|                                             | Provision for income taxes (Note 8)                                                                                         |                                                                                        |                                                                                | 8,321,815  |             |             |             | 2,402,265  |            |             |             | 2,376,895  |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             |                                                                                        | Income (loss) from continuing operations                                       |            |             | 19,417,570  |             |            |            | (11,390,681 | )           |            |             | (15,696,278 | )
|                                             | Discontinued operations (Note 5):                                                                                           |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |            |            
|                                             |                                                                                                                             | Income (loss) from discontinued security
    products and services group, net of taxes |                                                                                |            | 80,943      |             |             |            | (7,540,658 | )           |             |            | (10,010,770 | )          
|                                             |                                                                                                                             | Loss from discontinued voice and data
    communications group, net of taxes           |                                                                                |            |            |             |             |            | (2,111,459 | )           |             |            | (8,237,265  | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             |                                                                                        | Income (loss) before extraordinary item                                        |            |             | 19,498,513  |             |            |            | (21,042,798 | )           |            |             | (33,944,313 | )
|                                             | Extraordinary item, net of tax benefit of
    $1,336,016 (Notes 10 and 11) and $193,527 for 2002 and 2001,
    respectively |                                                                                        |                                                                                | (3,117,372 | )           |             |             | (344,048   | )          |             |             |           |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             |                                                                                                                             |                                                                                        | Net income (loss)                                                              |            | $           | 16,381,141  |             |            | $          | (21,386,846 | )           |            | $           | (33,944,313 | )
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|BASIC INCOME (LOSS) PER SHARE (Note 3(n)):   |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Income (loss) from continuing operations                                                                                    |                                                                                        | $                                                                              | 0.66       |             |             | $           | (0.51      | )          |             | $           | (0.70      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Income (loss) from discontinued operations                                                                                  |                                                                                        | $                                                                              | 0.00       |             |             | $           | (0.43      | )          |             | $           | (0.82      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Income (loss) before extraordinary item                                                                                     |                                                                                        | $                                                                              | 0.66       |             |             | $           | (0.94      | )          |             | $           | (1.52      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Extraordinary item                                                                                                          |                                                                                        | $                                                                              | (0.10      | )           |             | $           | (0.01      | )          |             | $           |           |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Net income (loss) per share                                                                                                 |                                                                                        | $                                                                              | 0.56       |             |             | $           | (0.95      | )          |             | $           | (1.52      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Weighted average shares outstanding                                                                                         |                                                                                        |                                                                                | 29,448,531 |             |             |             | 22,478,587 |            |             |             | 22,295,391 |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|DILUTED INCOME (LOSS) PER SHARE (Note 3(n)): |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Income (loss) from continuing operations                                                                                    |                                                                                        | $                                                                              | 0.64       |             |             | $           | (0.51      | )          |             | $           | (0.70      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Income (loss) from discontinued operations                                                                                  |                                                                                        | $                                                                              | 0.00       |             |             | $           | (0.43      | )          |             | $           | (0.82      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Income (loss) before extraordinary item                                                                                     |                                                                                        | $                                                                              | 0.64       |             |             | $           | (0.94      | )          |             | $           | (1.52      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Extraordinary item                                                                                                          |                                                                                        | $                                                                              | (0.10      | )           |             | $           | (0.01      | )          |             | $           |           |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Net income (loss) per share                                                                                                 |                                                                                        | $                                                                              | 0.54       |             |             | $           | (0.95      | )          |             | $           | (1.52      | )          
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           
|                                             | Weighted average shares outstanding                                                                                         |                                                                                        |                                                                                | 30,542,142 |             |             |             | 22,478,587 |            |             |             | 22,295,391 |            
|                                             |                                                                                                                             |                                                                                        |                                                                                |            |             |             |             |            |            |             |             |           

The accompanying notes to consolidated financial
statements

are an integral part of these consolidated
financial statements.


39



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##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2000,
2001 and 2002


|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |             |            |   | 
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------ | ------ | - | ------------ | ------- | --------------- | - | ----------- | - | ------------- | - | ------------- | ----------- | ------------ | - | ----- | ----------- | ----------- | - | - | - | ----------- | ---------- | ----------- | ---------- | - | ---------- | - | ---------- | - | - | - | ----------- | ----------- | ---------- | - | 
|                                                                                                    |                                                |                                                                                               |                    |        |   | Common       |         |                 |   |             |   |               |   | Accumulated   |             |              |   |      
|                                                                                                    |                                                |                                                                                               |                    |        |   | Shares to be |         |                 |   |             |   |               |   | Other         |             |              |   |      
|                                                                                                    |                                                |                                                                                               |                    | Common |   | Issued for   |         | Additional      |   | Accumulated |   | Comprehensive |   | Comprehensive |             | Deferred     |   |      
|                                                                                                    |                                                | Shares                                                                                        |                    | Stock  |   | Acquisition  |         | Paid-in-Capital |   | Deficit     |   | Income (Loss) |   | Income (Loss) |             | Compensation |   | Total
|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |      
|BALANCE, January 1, 2000                                                                            |                                                |                                                                                               | 22,255,510         |        |   | $            | 222,555 |                 |   | $           |  |               |   | $             | 170,101,929 |              |   | $     | (12,639,574 | )           |   |   |   |             |            | $           | (186,978   | ) |            | $ | (1,629,893 | ) |   | $ | 155,868,039 |            
|Net issuances of stock under employee benefit
    plans, including related tax benefit (Note 14(a)) |                                                |                                                                                               | 115,197            |        |   |              | 1,152   |                 |   |             |  |               |   |               | 15,381      |              |   |       |            |             |   |   |   |             |            |             |           |   |            |   |           |   |   |   | 16,533      |            
|Issuance of restricted stock (Note 14(a))                                                           |                                                |                                                                                               | 43,990             |        |   |              | 440     |                 |   |             |  |               |   |               | 43,128      |              |   |       |            |             |   |   |   |             |            |             |           |   |            |   |           |   |   |   | 43,568      |            
|Deferred compensation related to restricted stock
    and stock options (Note 14(a))                |                                                |                                                                                               |                   |        |   |              |        |                 |   |             |  |               |   |               | (693,183    | )            |   |       |            |             |   |   |   |             |            |             |           |   |            |   | 1,292,850  |   |   |   | 599,667     |            
|Comprehensive income (loss):                                                                        |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|                                                                                                    | Net loss                                       |                                                                                               |                    |       |   |              |         |                |   |             |   |              |   |               |             |             |   |       |             | (33,944,313 | ) |   | $ | (33,944,313 | )          |             |            |  |            |   |            |  |   |   |             | (33,944,313 | )         
|                                                                                                    | Other comprehensive income (loss), net of tax: |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |             |           
|                                                                                                    |                                                | Foreign currency translation adjustment,
    including $335,000 of tax provision              |                    |        |  |              |         |                 |  |             |   |               |  |               |             |              |  |       |             |             |  |   |   |             | (6,162,021 | )           |            |   | (6,162,021 | ) |            |   |  |   |             |             | (6,162,021 | )
|                                                                                                    |                                                |                                                                                               | Comprehensive loss |        |   |             |         |                 |   |            |   |               |   |              |             |              |   |      |             |             |   |  |   |             | $          | (40,106,334 | )          |   |            |  |            |   |   |  |             |             |            |  | 
|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|BALANCE, December 31, 2000                                                                          |                                                |                                                                                               | 22,414,697         |        |   |              | 224,147 |                 |   |             |  |               |   |               | 169,467,255 |              |   |       | (46,583,887 | )           |   |   |   |             |            |             | (6,348,999 | ) |            |   | (337,043   | ) |   |   | 116,421,473 |            
|Net issuances of stock under employee benefit
    plans, including related tax benefit (Note 14(a)) |                                                |                                                                                               | 379,174            |        |   |              | 3,792   |                 |   |             |  |               |   |               | 2,565,295   |              |   |       |            |             |   |   |   |             |            |             |           |   |            |   |           |   |   |   | 2,569,087   |            
|Deferred compensation related to restricted stock
    and stock options (Note 14(a))                |                                                |                                                                                               |                   |        |   |              |        |                 |   |             |  |               |   |               |            |              |   |       |            |             |   |   |   |             |            |             |           |   |            |   | 337,043    |   |   |   | 337,043     |            
|Discount to market of senior subordinated
    convertible notes (Note 11(b))                        |                                                |                                                                                               |                   |        |   |              |        |                 |   |             |  |               |   |               | 11,388,380  |              |   |       |            |             |   |   |   |             |            |             |           |   |            |   |           |   |   |   | 11,388,380  |            
|Comprehensive income (loss):                                                                        |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|                                                                                                    | Net loss                                       |                                                                                               |                    |       |   |              |         |                |   |             |   |              |   |               |             |             |   |       |             | (21,386,846 | ) |   | $ | (21,386,846 | )          |             |            |  |            |   |            |  |   |   |             | (21,386,846 | )         
|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|                                                                                                    | Other comprehensive income (loss), net of tax: |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |             |           
|                                                                                                    |                                                | Reversal of foreign currency translation from the
    sale of SPSG, net of tax of $2,538,000. |                    |        |  |              |         |                 |  |             |   |               |  |               |             |              |  |       |             |             |  |   |   |             | 4,140,151  |             |            |   |           |   |            |   |  |   |             |             |           |  
|                                                                                                    |                                                | Foreign currency translation adjustment,
    including $1,173,076 of tax provision            |                    |        |  |              |         |                 |  |             |   |               |  |               |             |              |  |       |             |             |  |   |   |             | (2,336,096 | )           |            |   |           |   |            |   |  |   |             |             |           |  
|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|                                                                                                    |                                                | Other comprehensive income                                                                    |                    |        |  |              |         |                 |  |             |   |               |  |               |             |              |  |       |             |             |  |   |   |             | 1,804,055  |             |            |   | 1,804,055  |   |            |   |  |   |             |             | 1,804,055  |  
|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|                                                                                                    |                                                |                                                                                               | Comprehensive loss |        |   |             |         |                 |   |            |   |               |   |              |             |              |   |      |             |             |   |  |   |             | $          | (19,582,791 | )          |   |            |  |            |   |   |  |             |             |            |  | 
|                                                                                                    |                                                |                                                                                               |                    |        |   |              |         |                 |   |             |   |               |   |               |             |              |   |       |             |             |   |   |   |             |            |             |            |   |            |   |            |   |   |   |             |            
|BALANCE, December 31, 2001                                                                          |                                                |                                                                                               | 22,793,871         |        |   | $            | 227,939 |                 |   | $           |  |               |   | $             | 183,420,930 |              |   | $     | (67,970,733 | )           |   |   |   |             |            | $           | (4,544,944 | ) |            | $ |           |   |   | $ | 111,133,192 |            

40



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##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND COMPREHENSIVE INCOME
(LOSS)  (Continued)

For the Years Ended December 31, 2000,
2001 and 2002


|                                                                                                    |                                                                                  |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |       |             |            |   |  |   |            |            |   |            |         |   |   |         |   |   |   |             |            |   | 
|--------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | -------------------- | ---------- | ------ | - | ------------ | ------- | --------------- | - | ----------- | ---------- | ------------- | - | ------------- | ----------- | ------------ | - | ----- | ----------- | ---------- | - |  | - | ---------- | ---------- | - | ---------- | ------- | - | - | ------- | - | - | - | ----------- | ---------- | - | 
|                                                                                                    |                                                                                  |                      |            |        |   | Common       |         |                 |   |             |            |               |   | Accumulated   |             |              |   |      
|                                                                                                    |                                                                                  |                      |            |        |   | Shares to be |         |                 |   |             |            |               |   | Other         |             |              |   |      
|                                                                                                    |                                                                                  |                      |            | Common |   | Issued for   |         | Additional      |   | Accumulated |            | Comprehensive |   | Comprehensive |             | Deferred     |   |      
|                                                                                                    |                                                                                  | Shares               |            | Stock  |   | Acquisition  |         | Paid-in-Capital |   | Deficit     |            | Income (Loss) |   | Income (Loss) |             | Compensation |   | Total
|                                                                                                    |                                                                                  |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |      
|BALANCE, January 1, 2002                                                                            |                                                                                  |                      | 22,793,871 |        |   | $            | 227,939 |                 |   | $           |           |               |   | $             | 183,420,930 |              |   | $     | (67,970,733 | )          |   |  |   |            |            | $ | (4,544,944 | )       |   | $ |        |   |   | $ | 111,133,192 |           
|Net issuances of stock under employee benefit
    plans, including related tax benefit (Note 14(a)) |                                                                                  |                      | 1,025,477  |        |   |              | 10,255  |                 |   |             |           |               |   |               | 8,534,558   |              |   |       |            |            |   |  |   |            |            |   |           |         |   |   | (44,475 | ) |   |   | 8,500,338   |           
|Issuance of shares for purchase of Ontrack (Note
    4(a))                                          |                                                                                  |                      | 6,850,410  |        |   |              | 68,504  |                 |   |             |           |               |   |               | 149,949,949 |              |   |       |            |            |   |  |   |            |            |   |           |         |   |   |        |   |   |   | 150,018,453 |           
|Issuance of common stock, public offering,
    including over allotment shares (Note 14(b)          |                                                                                  |                      | 6,325,000  |        |   |              | 63,250  |                 |   |             |           |               |   |               | 110,504,698 |              |   |       |            |            |   |  |   |            |            |   |           |         |   |   |        |   |   |   | 110,567,948 |           
|Shares to be issued January 2003 related to Zolfo
    Cooper acquisition (Note 4(b))                |                                                                                  |                      |           |        |   |              |        |                 |   |             | 55,279,800 |               |   |               |            |              |   |       |            |            |   |  |   |            |            |   |           |         |   |   |        |   |   |   | 55,279,800  |           
|Stock-based compensation tax benefit                                                                |                                                                                  |                      |           |        |   |              |        |                 |   |             |           |               |   |               | 4,432,679   |              |   |       |            |            |   |  |   |            |            |   |           |         |   |   |        |   |   |   | 4,432,679   |           
|Other                                                                                               |                                                                                  |                      |           |        |   |              |        |                 |   |             |           |               |   |               | (26         | )            |   |       | 2           |            |   |  |   |            |            |   |           |         |   |   |        |   |   |   | (24         | )         
|Comprehensive income (loss):                                                                        |                                                                                  |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |       |             |            |   |  |   |            |            |   |            |         |   |   |         |   |   |   |             |           
|                                                                                                    | Net income                                                                       |                      |            |       |   |              |         |                |   |             |            |              |   |               |             |             |   |       |             | 16,381,141 |   |  | $ | 16,381,141 |            |   |            |        |   |   |         |  |   |   |             | 16,381,141 |  
|                                                                                                    | Other comprehensive income (loss), net of tax:                                   |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |       |             |            |   |  |   |            |            |   |            |         |   |   |         |   |   |   |             |            |  
|                                                                                                    | Foreign currency translation adjustment,
    including $254,248 of tax provision |                      |            |       |   |              |         |                |   |             |            |              |   |               |             |             |   |       |             |           |   |  |   | 593,246    |            |   |            | 593,246 |   |   |         |  |   |   |             | 593,246    |  
|                                                                                                    |                                                                                  |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |       |             |            |   |  |   |            |            |   |            |         |   |   |         |   |   |   |             |           
|                                                                                                    |                                                                                  | Comprehensive income |            |        |  |              |         |                 |  |             |            |               |  |               |             |              |  |       |             |            |  |  |   | $          | 16,974,387 |   |            |         |  |   |         |   |  |   |             |            |  | 
|                                                                                                    |                                                                                  |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |       |             |            |   |  |   |            |            |   |            |         |   |   |         |   |   |   |             |           
|BALANCE, December 31, 2002                                                                          |                                                                                  |                      | 36,994,758 |        |   | $            | 369,948 |                 |   | $           | 55,279,800 |               |   | $             | 456,842,788 |              |   | $     | (51,589,590 | )          |   |  |   |            |            | $ | (3,951,698 | )       |   | $ | (44,475 | ) |   | $ | 456,906,773 |           
|                                                                                                    |                                                                                  |                      |            |        |   |              |         |                 |   |             |            |               |   |               |             |              |   |       |             |            |   |  |   |            |            |   |            |         |   |   |         |   |   |   |             |           

The accompanying notes to consolidated financial
statements

are an integral part of these consolidated
financial statements.


41



---



##### Table of Contents



KROLL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 18)

For the Years Ended December 31, 2002,
2001 and 2000


|                                      |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |             |             |             |  
|------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------------ | ----------- | ---------- | ----------- | - | ----------- | ---------- | ---------- | - | ----------- | ----------- | ----------- | -
|                                      |                                                                                                 | 2002                                         |                                                                    | 2001        |            | 2000       
|                                      |                                                                                                 |                                              |                                                                    |             |            |            
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |            
|                                      | Net income (loss)                                                                               |                                              | $                                                                  | 16,381,141  |            |             | $ | (21,386,846 | )          |            | $ | (33,944,313 | )          
|                                      | Adjustments to reconcile net loss to net cash
    provided by (used in) continuing operations  |                                              |                                                                    |             |            |             |   |             |            |            |   |             |            
|                                      |                                                                                                 | (Income) loss from discontinued operations   |                                                                    |             | (80,943    | )           |   |             | 9,652,117  |            |   |             | 18,248,035  |            
|                                      |                                                                                                 | Depreciation and amortization                |                                                                    |             | 14,336,994 |             |   |             | 13,692,896 |            |   |             | 12,234,874  |            
|                                      |                                                                                                 | Bad debt expense                             |                                                                    |             | 3,919,938  |             |   |             | 5,939,841  |            |   |             | 4,548,967   |            
|                                      |                                                                                                 | Loss on sale of business unit (Note 6)       |                                                                    |             | 101,543    |             |   |             | 544,461    |            |   |             |            |            
|                                      |                                                                                                 | Gain from issuance of subsidiary stock       |                                                                    |             |           |             |   |             |           |            |   |             | (1,616,658  | )          
|                                      |                                                                                                 | Non-cash gain from investments               |                                                                    |             |           |             |   |             | (143,596   | )          |   |             |            |            
|                                      |                                                                                                 | Loss on extraordinary item (Notes 10 and 11) |                                                                    |             | 3,117,372  |             |   |             | 344,048    |            |   |             |            |            
|                                      |                                                                                                 | Non-cash interest expense                    |                                                                    |             | 1,933,795  |             |   |             | 400,945    |            |   |             | 395,076     |            
|                                      |                                                                                                 | Loss on impaired assets                      |                                                                    |             |           |             |   |             | 806,763    |            |   |             |            |            
|                                      |                                                                                                 | Non-cash compensation expense                |                                                                    |             |           |             |   |             | 337,043    |            |   |             | 508,531     |            
|                                      | Change in assets and liabilities, net of effects
    of acquisitions and dispositions          |                                              |                                                                    |             |            |             |   |             |            |            |   |             |            
|                                      |                                                                                                 | Receivablestrade and unbilled               |                                                                    |             | (3,259,646 | )           |   |             | (8,268,195 | )          |   |             | (16,145,329 | )          
|                                      |                                                                                                 | Prepaid expenses and other current assets    |                                                                    |             | (2,118,544 | )           |   |             | 1,525,343  |            |   |             | (1,095,394  | )          
|                                      |                                                                                                 | Trade accounts payable                       |                                                                    |             | 17,540     |             |   |             | (1,920,770 | )          |   |             | 10,758,696  |            
|                                      |                                                                                                 | Income taxes payable                         |                                                                    |             | 6,829,374  |             |   |             | 14,537     |            |   |             | 1,015       |            
|                                      |                                                                                                 | Amounts due to/from related parties          |                                                                    |             | (6,237,119 | )           |   |             | (2,037,678 | )          |   |             | (63,918     | )          
|                                      |                                                                                                 | Deferred income taxes                        |                                                                    |             | (3,452,627 | )           |   |             | (567,136   | )          |   |             | 1,432,709   |            
|                                      |                                                                                                 | Deferred revenue                             |                                                                    |             | 5,027,368  |             |   |             | 352,262    |            |   |             | 1,243,901   |            
|                                      |                                                                                                 | Accrued liabilities                          |                                                                    |             | (3,159,579 | )           |   |             | 3,096,250  |            |   |             | (7,531,008  | )          
|                                      |                                                                                                 | Other long-term liabilities                  |                                                                    |             | (293,035   | )           |   |             | 1,065,281  |            |   |             | (520,922    | )          
|                                      |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |            
|                                      |                                                                                                 |                                              | Net cash provided by (used in) operating
    activities            |             |            | 33,063,572  |   |             |            | 3,447,566  |   |             |             | (11,545,738 | )
|                                      |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |            
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |            
|                                      | Purchases of property, plant and equipment                                                      |                                              |                                                                    | (6,104,234  | )          |             |   | (3,419,900  | )          |            |   | (7,627,321  | )          
|                                      | Additions to databases                                                                          |                                              |                                                                    | (4,721,207  | )          |             |   | (4,392,719  | )          |            |   | (4,397,602  | )          
|                                      | Additions to other intangible assets                                                            |                                              |                                                                    | (4,852,758  | )          |             |   | (833,962    | )          |            |   |            |            
|                                      | Loss on the retirement of assets                                                                |                                              |                                                                    | (2,193,714  | )          |             |   | (32,017     | )          |            |   |            |            
|                                      | Acquisitions, net of cash acquired (Note 4)                                                     |                                              |                                                                    | (72,898,619 | )          |             |   |            |            |            |   | (470,000    | )          
|                                      | Sales of marketable securities, net                                                             |                                              |                                                                    | 5,594,219   |            |             |   |            |            |            |   |            |            
|                                      | Purchase of investments                                                                         |                                              |                                                                    | (354,631    | )          |             |   | (84,397     | )          |            |   |            |            
|                                      |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |            
|                                      |                                                                                                 |                                              | Net cash used in investing activities of
    continuing operations |             |            | (85,530,944 | ) |             |            | (8,762,995 | ) |             |             | (12,494,923 | )
|                                      |                                                                                                 |                                              |                                                                    |             |            |             |   |             |            |            |   |            

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KROLL INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 18)

For the Years Ended December 31, 2002,
2001 and 2000


|                                                                            |                                                                 |                                                                                  |            |             |             |      |             |             |             |   |             |            |            | 
|--------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---------- | ----------- | ----------- | ---- | ----------- | ----------- | ----------- | - | ----------- | ---------- | ---------- | 
|                                                                            |                                                                 | 2002                                                                             |            | 2001        |             | 2000
|                                                                            |                                                                 |                                                                                  |            |             |             |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |                                                                 |                                                                                  |            |             |             |      |             |             |             |   |             |           
|                                                                            | Net borrowings (repayments) under revolving
    lines of credit |                                                                                  |            | 748,836     |             |      |             | (36,649,502 | )           |   |             | 13,396,419 |           
|                                                                            | Borrowings from long-term debt                                  |                                                                                  |            | 75,000,000  |             |      |             | 30,000,000  |             |   |             |           |           
|                                                                            | Payments of long-term debt                                      |                                                                                  |            | (75,797,073 | )           |      |             | (35,325,754 | )           |   |             | (1,590,243 | )         
|                                                                            | Proceeds from exercise of stock options and
    warrants        |                                                                                  |            | 8,500,338   |             |      |             | 2,569,087   |             |   |             | 60,101     |           
|                                                                            | Proceeds from issuance of common stock                          |                                                                                  |            | 110,762,640 |             |      |             |            |             |   |             |           |           
|                                                                            | Proceeds from Employee Stock Purchase Plan
    contributions    |                                                                                  |            | 996,141     |             |      |             |            |             |   |             |           |           
|                                                                            | Other                                                           |                                                                                  |            | (1,402,622  | )           |      |             | (2,253,206  | )           |   |             | (316,366   | )         
|                                                                            |                                                                 |                                                                                  |            |             |             |      |             |             |             |   |             |           
|                                                                            |                                                                 | Net cash provided by (used in) financing
    activities of continuing operations |            |             | 118,808,260 |      |             |             | (41,659,375 | ) |             |            | 11,549,911 | 
|                                                                            |                                                                 |                                                                                  |            |             |             |      |             |             |             |   |             |           
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                    |                                                                 |                                                                                  | 66,340,888 |             |             |      | (46,974,804 | )           |             |   | (12,490,750 | )         
|Effects of foreign currency exchange rates on
    cash and cash equivalents |                                                                 |                                                                                  | (86,864    | )           |             |      | (325,685    | )           |             |   | (163,709    | )         
|Net cash provided by (used in) discontinued
    operations                  |                                                                 |                                                                                  | (421,589   | )           |             |      | 52,507,766  |             |             |   | 9,139,385   |           
|CASH AND CASH EQUIVALENTS, beginning of year                                |                                                                 |                                                                                  | 11,484,734 |             |             |      | 6,277,457   |             |             |   | 9,792,531   |           
|                                                                            |                                                                 |                                                                                  |            |             |             |      |             |             |             |   |             |           
|CASH AND CASH EQUIVALENTS, end of year                                      |                                                                 | $                                                                                | 77,317,169 |             |             | $    | 11,484,734  |             |             | $ | 6,277,457   |           
|                                                                            |                                                                 |                                                                                  |            |             |             |      |             |             |             |   |             |           

The accompanying notes to consolidated financial
statements

are an integral part of these consolidated
financial statements.


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KROLL INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For the Years Ended December 31, 2002,
2001 and 2000


(1) Nature of Operations and Basis of
Presentation

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. Krolls five business groups
enable Kroll to provide its clients with comprehensive, single
source, risk consulting services. These five business groups
are: (1) 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; (2) Corporate Advisory and
Restructuring Services, which provides corporate restructuring,
operational turnaround, strategic advisory services, financial
crisis management and corporate finance services;
(3) Technology Services, which provides electronic
discovery, data recovery and computer forensics services, along
with related software solutions; (4) Background Screening
Services, which provides pre-employment and security background
screening, substance abuse testing and surveillance services;
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. The former
Security Products and Services Group (SPSG) marketed
ballistic and blast protected vehicles and security services
(see Note 5 for a discussion of the discontinuance of SPSG
and the Voice and Data Communications Group (VDCG)).
The former Information Security Group offered information and
computer security services, including network and system
security review and repair (see Note 6(a) for a discussion
of the preferred stock sale completed during fiscal 2000 by the
Information Security Group subsidiary).

The consolidated financial statements include the
historical consolidated financial statements of Kroll, and the
businesses it has acquired since their respective dates of
acquisition, under the purchase method of accounting (see
Note 4).

(2) Corporate Initiatives

Kroll has considered a variety of corporate
initiatives within the periods presented in the accompanying
consolidated financial statements. Mergers and acquisitions are
discussed in Note 4.

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 shareholders, 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 Kroll shares. Costs associated
with the failed merger were $2.5 million for the year ended
December 31, 2000, and consisted primarily of fees for
attorneys, accountants, investment bankers, travel and other
related charges.

On April 18, 2000, Kroll announced it would
explore structuring a transaction that would result in the
separation of its two principal operating segments, SPSG and the
Investigations and Intelligence Group, and it would seek an
equity investment for its Information Security Group. In
September 2000, the Board of Directors (Board)
approved an agreement and plan of reorganization and dissolution
of Kroll that would have resulted in the spinoff of net assets
into two new public companies. Had the spinoff been completed,
Kroll shareholders, other than members of management of the
separated companies, would have owned shares in both companies.
On April 20, 2001, the Board decided not to pursue this
separation alternative. Costs associated with this proposed
separation were approximately $0.6 million and
$4.2 million for the years ended December 31, 2001 and
2000, respectively, and consisted primarily of fees for
attorneys, accountants, investment bankers and other related
charges.

On April 20, 2001, in lieu of the proposed
separation, the Board approved a definitive agreement to sell
most of the active companies that comprise SPSG to Armor
Holdings, Inc. (Armor). On August 22, 2001,

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Kroll completed the sale of SPSG to Armor for up
to $55.7 million, consisting of $37.2 million in cash,
$15.0 million in Armor common stock and $1.5 million
placed in escrow, pending agreement on the closing date balance
sheet audit. The purchase and sale agreement also provides for a
potential deferred payment of up to $2.0 million by Armor
to Kroll based on the achievement of a gross profit target by
SPSG for the year ended December 31, 2001 (see
Note 5(a)).

On May 6, 2002, agreement was reached on
SPSGs closing date balance sheet, which resulted in a
payment to Kroll of $1.1 million of the amount held in
escrow. In conjunction with this 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 residual balance
due from the sale of the $15.0 million in common stock (see
Note 5(a)).

In March, April and October, 2001, Kroll entered
into amended and restated agreements for its revolving credit
facility, letters of credit facility and its senior notes, which
extended the date of repayment of all outstanding debt to
November 16, 2001. On November 14, 2001, these debt
instruments were retired using the proceeds from the issuance of
the convertible notes discussed below (see Notes 10 and
11(a)).

In November 2001, Kroll obtained new financing of
$30.0 million in the form of 6% Senior Secured Subordinated
Convertible Notes due 2006. On November 14, 2001, Kroll
issued $25.0 million of notes and issued an additional
$5.0 million of notes on November 20, 2001. 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 immediately
convertible into 2,777,777 shares of Kroll common stock,
subject to customary and other anti-dilution adjustments.
Barring early conversion by the noteholders or early redemption
by Kroll, the average additional non-cash interest expense
resulting from this discount amortization will be approximately
$2.3 million or 7.6% per year on $30.0 million
principal (see Note 11(b)).

On September 5, 2002, the convertible notes
agreement was amended to accommodate a new $100 million
credit facility (see Notes 10, 11(b) and 11(c)). The
amendment terminated the noteholders security interest in
the assets of Kroll and its subsidiaries.

On March 19, 2002, the Board of Directors
approved the establishment of a Kroll Inc. Employee Stock
Purchase Plan (ESPP), which 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 last day of the plans six month
offering period. Employees contributed approximately
$1.0 million to the first offering period, which began on
July 1, 2002 and ended on December 31, 2002. The Board
of Directors further authorized that 1,000,000 shares of
Krolls common stock be reserved for issuance pursuant to
the ESPP.

On April 1, 2002, Kroll entered into an
agreement to acquire all of the outstanding shares of Ontrack
Data International, Inc. (Ontrack). The agreement
provided that a wholly-owned subsidiary of Kroll would be merged
into Ontrack, resulting in Ontrack becoming a wholly-owned
subsidiary of Kroll. The acquisition was consummated effective
June 13, 2002. The transaction, which qualifies as a
tax-free reorganization for federal income tax purposes, is
valued at approximately $154 million. Each share of
outstanding Ontrack common stock was converted into 0.6447 of
one share of Krolls common stock. In addition, pursuant to
the acquisition agreement, Kroll assumed Ontracks existing
stock option plans. As a result of the acquisition, Kroll has
issued approximately 7.2 million shares of its common
stock, including approximately 0.3 million shares issued
upon the exercise of Ontrack options. As of December 31,
2002, an additional 0.7 million shares may be issued upon
the future exercise of Ontrack options (see Note 4(a)).

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In May 2002, Kroll executed agreements to sell to
local management its interest in its Russian armored car
businesses that were not sold to Armor. Kroll received $150,000
upon closing and an additional $10,000 in both the third and
fourth quarters. The agreements provide for Kroll to receive an
additional $107,000 within one year of the closing date, plus
$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 these Russian businesses (see Note 5(a)).

On May 23, 2002, Kroll received $500,000
from Securify, representing payment of an unsecured short-term
note, issued as part of the refinancing and restructuring of
Securifys debt (see Note 6(a)).

On July 2, 2002, Kroll Inc., formerly an
Ohio corporation, became a Delaware corporation pursuant to a
merger in which the Ohio corporation merged into its
wholly-owned Delaware subsidiary. In connection with the
reincorporation in Delaware, Kroll Inc.s authorized
capital increased to 100,000,000 shares of common stock and
5,000,000 shares of preferred stock.

On September 5, 2002, Kroll acquired all of
the equity interests of Zolfo Cooper, LLC (Zolfo
Cooper), and certain of its related parties. At the
closing, Kroll paid $100 million in cash and, on
January 15, 2003, Kroll issued 2.9 million shares of
its common stock to the former owners of Zolfo Cooper, valued at
approximately $55.3 million, to the former owners of Zolfo
Cooper. The value of the 2.9 million shares of Kroll common
stock issued for this acquisition was determined 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. In addition, Kroll
will issue to the former owners of Zolfo Cooper, as contingent
consideration, 625,000 additional shares of common stock per
year if Zolfo Cooper achieves certain operating profit levels
over the next four years. 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 will vest
over four years (see Note 4(b)).

In October 2002, Kroll sold 6.3 million
shares of its common stock in an underwritten public offering.
The offering, which sold at a price of $18.75 per share, raised
for Kroll approximately $110.6 million of net proceeds,
including $0.2 million of accrued expenses (see
Note 14(b)). Kroll repaid a $75.0 million term loan
with Goldman Sachs Credit Partners L.P (Goldman
Sachs) on October 18, 2002, using a portion of the
proceeds received from the public offering (see
Note 11(c)). The remaining proceeds were used for working
capital to fund operations and other general company purposes.
Kroll also recorded an extraordinary loss of $2.7 million,
$1.1 million of which was unamortized deferred financing
fees associated with the $75.0 million term loan and
$1.6 million of which resulted from a payment made to
Palisade Concentrated Equity Partnership, L.P.
(Palisade) to amend certain provisions of the 6%
convertible notes in order to obtain the $75.0 million term
loan.

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 revolving
credit facility are guaranteed by its domestic subsidiaries. The
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 (see Note 21).

(3) Summary of Significant Accounting
Policies

(a) Consolidation  The
consolidated financial statements include the accounts of all
majority-owned subsidiaries. All material intercompany accounts
and transactions are eliminated. Investments in 20% to 50% owned
entities are accounted for on the equity method and investments
in less than 20% owned entities are accounted for on the cost
method. Affiliated entities are not included in the accompanying
consolidated

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

financial statements, and include entities that
are directly or indirectly owned by current shareholders or
former shareholders.

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

(b) 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. Revenues related to
fixed price arrangements are recognized based upon the
achievement of certain milestones or progress points within the
project plan. The impact of any revisions in estimated total
revenues 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 product, where 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 upon
satisfaction of all conditions to their payment.

(c) 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.

(d) 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 does not anticipate incurring any
significant losses on its trade receivables in excess of
established allowances.

(e) Property, Plant and
Equipment  Property, plant and equipment are
stated at cost. As of December 31, 2002, depreciation is
computed utilizing the straight-line method over the estimated
useful lives of the related assets as follows:

|                           |  |             |               | 
|-------------------------- |  | ----------- | ------------- | 
|Description                |  | Useful Life
|                           |  |            
|Buildings and improvements |  |             | 10-31.5 years | 
|Leasehold improvements     |  |             | Life of lease | 
|Furniture and fixtures     |  |             | 3-10 years    | 
|Machinery and equipment    |  |             | 1.5-10 years  | 

Depreciation of property, plant and equipment for
the years ended December 31, 2002, 2001 and 2000 was $7,666,349,
$6,266,322 and $5,468,460, respectively.

(f) Databases  Databases
are capitalized costs incurred in obtaining information from
third party providers. Kroll utilizes this information to create
and maintain its proprietary and non-proprietary databases.
Because of the continuing accessibility of the information and
its usefulness to future investigative procedures, the cost of
acquiring the information is capitalized and amortized over a
five year period. Amortization of

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

databases for the years ended December 31,
2002, 2001 and 2000 was $4,128,910, $4,009,731 and $3,572,148,
respectively.

(g) Impairment of Long-Lived
Assets  In June 2000, Kroll began to develop
a contact and relationship management (CRM) database
software program. Kroll had capitalized approximately
$0.4 million in software and hardware costs along with an
additional $0.4 million in consulting and related costs to
prepare the database for its intended purpose. Kroll chose not
to implement the CRM software program in 2001 and charged
impairment of assets for the accumulated costs of approximately
$0.8 million. No salvage value is considered to be
realizable.

Pursuant to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, long-lived assets,
certain identifiable intangibles and goodwill related to those
assets must be reviewed for impairment by asset group for which
the lowest level of independent cash flows can be identified. In
accordance with these standards, Kroll periodically reviews the
carrying value of these assets by subsidiary acquired giving
rise to the goodwill and other intangible assets for impairment.
Impairments are recognized when the expected undiscounted future
cash flows, including eventual disposition, are less than the
carrying amount of the asset. Based on its most recent analysis,
Kroll believes no impairments exist at December 31, 2002
and 2001. It is possible, due to a change in circumstances, that
carrying values could become impaired in the future. Such
impairments could have a material effect on the results of
operations in a particular reporting period. Effective
January 1, 2002, Kroll adopted SFAS No. 142 and
SFAS No. 144 relating to the evaluation of long-lived
assets.

(h) Costs in Excess of Assets
Acquired  Costs in excess of assets acquired
represents the excess of the purchase cost over the fair value
of net assets acquired in purchase business combinations. Costs
in excess of assets acquired, net of accumulated amortization,
as of December 31, 2002 and 2001 were approximately
$299,582,000 and $50,437,000, respectively. Prior to the
implementation of SFAS No. 142 amortization was
recorded on a straight-line basis over periods ranging from 12
to 40 years. Amortization of costs in excess of assets
acquired for the years ended December 31, 2001 and 2000 was
approximately $2,432,000 and $2,594,000, respectively. Effective
January 1, 2002, in compliance with SFAS No. 142,
assets with an indefinite life are no longer amortized but are
reviewed for impairment on at least an annual basis. Kroll has
conducted impairment tests of the goodwill recorded on its books
as required by SFAS No. 142. These tests determined
that Krolls recorded goodwill was not impaired as of
January 1, 2002. As part of Krolls review of
intangible assets under SFAS No. 142, certain assets
were re-evaluated at year end. As a result of this review, Kroll
determined that these assets were not impaired at
December 31, 2002. Impairment tests will be conducted
annually in July, or sooner if circumstances indicate an
impairment may have taken place.

(i) Other Intangible
Assets  Other intangible assets, comprised
mainly of customer lists, internally-developed software and
non-compete agreements, are amortized on a straight-line basis.
Customer lists are amortized over periods ranging from five to
fifteen years. In-house software systems, recorded as part of
Krolls acquisition of Ontrack, are amortized over periods
ranging from five to ten years. The non-compete agreements are
amortized over the lives of the respective agreements, which
range from three to fifteen years. Other intangible assets, net
of accumulated amortization, as of December 31, 2002 and
2001 were approximately $25,685,000 and $6,720,000,
respectively. Amortization of other intangible assets for the
years ended December 31, 2002, 2001 and 2000 was
approximately $2,542,000, $883,000 and $533,000, respectively.

(j) Foreign Currency Translation and
Transactions  Assets and liabilities of
foreign operations are translated using year-end exchange rates
and revenues and expenses are translated using exchange rates
prevailing during the year, with gains or losses resulting from
translation included in a separate component of
shareholders equity.

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(k) Use of Estimates  The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.

(l) Advertising  Kroll
expenses the cost of advertising as incurred. Advertising
expense for the years ended December 31, 2002, 2001 and
2000 was approximately $2,168,000, $433,000 and $1,199,000,
respectively.

(m) 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.

(n) Earnings Per Share 
Pursuant to the provisions of SFAS No. 128 Earnings
Per Share, basic earnings per share are computed by
dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the year. Diluted
earnings per share are computed by dividing net income
(loss) by the weighted average number of shares of common
stock and common stock equivalents outstanding during the year.
Dilutive common stock equivalents represent shares issuable upon
assumed exercise of stock options and warrants and assumed
issuance of restricted stock.

The following is a reconciliation of the
numerator and denominator for basic and diluted earnings per
share for the years ended December 31, 2002, 2001 and 2000:

|                                 |                                                            |                              |            |               |   |           |            |           |  |   |      |       |  
|-------------------------------- | ---------------------------------------------------------- | ---------------------------- | ---------- | ------------- | - | --------- | ---------- | --------- |  | - | ---- | ----- | -
|                                 |                                                            |                             
|                                 |                                                            | Year Ended December 31, 2002
|                                 |                                                            |                             
|                                 |                                                            | Net Income                   |            | Shares        |   | Per Share
|                                 |                                                            | (Numerator)                  |            | (Denominator) |   | Amount   
|                                 |                                                            |                              |            |               |   |          
|Basic earnings (loss) per share: |                                                            |                              |            |               |   |           |            |           |  |   |      |      
|                                 | Income from continuing operations                          |                              | $          | 19,417,570    |   |           |            |           |  |   | $    | 0.66  |  
|                                 | Income from discontinued operations 
    SPSG, net of tax |                              |            | 80,943        |   |           |            |           |  |   |      | 0.00  |  
|                                 |                                                            |                              |            |               |   |           |            |           |  |   |      |      
|                                 | Income before extraordinary item                           |                              |            | 19,498,513    |   |           |            |           |  |   |      | 0.66  |  
|                                 | Extraordinary item, net of tax                             |                              |            | (3,117,372    | ) |           |            |           |  |   |      | (0.10 | )
|                                 |                                                            |                              |            |               |   |           |            |           |  |   |      |      
|Net income                       |                                                            | $                            | 16,381,141 |               |   |           | 29,448,531 |           |  | $ | 0.56 |      
|                                 |                                                            |                              |            |               |   |           |            |           |  |   |      |      
|Effect of dilutive securities:   |                                                            |                              |            |               |   |           |            |           |  |   |      |      
|                                 | Options                                                    |                              |            |               |   |           |            | 1,093,611 |  |   |      |       |  
|                                 |                                                            |                              |            |               |   |           |            |           |  |   |      |      
|Diluted earnings per share       |                                                            | $                            | 16,381,141 |               |   |           | 30,542,142 |           |  | $ | 0.54 |      
|                                 |                                                            |                              |            |               |   |           |            |           |  |   |      |      

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |       |  
|--------------------------------- | -------------------------------------------------------- | ---------------------------- | ----------- | ------------- | - | --------- | ---------- |  |  | - | ----- | ----- | -
|                                  |                                                          |                             
|                                  |                                                          | Year Ended December 31, 2001
|                                  |                                                          |                             
|                                  |                                                          | Net Loss                     |             | Shares        |   | Per Share
|                                  |                                                          | (Numerator)                  |             | (Denominator) |   | Amount   
|                                  |                                                          |                              |             |               |   |          
|Basic and diluted loss per share: |                                                          |                              |             |               |   |           |            |  |  |   |       |      
|                                  | Loss from continuing operations                          |                              | $           | (11,390,681   | ) |           |            |  |  |   | $     | (0.51 | )
|                                  | Loss from discontinued operations 
    SPSG, net of tax |                              |             | (7,540,658    | ) |           |            |  |  |   |       | (0.34 | )
|                                  | Loss from discontinued operations 
    VDCG, net of tax |                              |             | (2,111,459    | ) |           |            |  |  |   |       | (0.09 | )
|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |      
|                                  | Loss before extraordinary item                           |                              |             | (21,042,798   | ) |           |            |  |  |   |       | (0.94 | )
|                                  | Extraordinary item, net of tax                           |                              |             | (344,048      | ) |           |            |  |  |   |       | (0.01 | )
|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |      
|Net loss                          |                                                          | $                            | (21,386,846 | )             |   |           | 22,478,587 |  |  | $ | (0.95 | )    
|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |      

|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |       |  
|--------------------------------- | -------------------------------------------------------- | ---------------------------- | ----------- | ------------- | - | --------- | ---------- |  |  | - | ----- | ----- | -
|                                  |                                                          |                             
|                                  |                                                          | Year Ended December 31, 2000
|                                  |                                                          |                             
|                                  |                                                          | Net Loss                     |             | Shares        |   | Per Share
|                                  |                                                          | (Numerator)                  |             | (Denominator) |   | Amount   
|                                  |                                                          |                              |             |               |   |          
|Basic and diluted loss per share: |                                                          |                              |             |               |   |           |            |  |  |   |       |      
|                                  | Loss from continuing operations                          |                              | $           | (15,696,278   | ) |           |            |  |  |   | $     | (0.70 | )
|                                  | Loss from discontinued operations 
    SPSG, net of tax |                              |             | (10,010,770   | ) |           |            |  |  |   |       | (0.45 | )
|                                  | Loss from discontinued operations 
    VDCG, net of tax |                              |             | (8,237,265    | ) |           |            |  |  |   |       | (0.37 | )
|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |      
|Net loss                          |                                                          | $                            | (33,944,313 | )             |   |           | 22,295,391 |  |  | $ | (1.52 | )    
|                                  |                                                          |                              |             |               |   |           |            |  |  |   |       |      

As a result of the net loss recorded in 2001 and
2000, basic and diluted loss per share are identical in those
years, as all options and warrants are anti-dilutive.

At December 31, 2002, 9,526 warrants and
1,679,581 options to purchase an equivalent amount of shares of
common stock of Kroll at a range from $19.52 to $25.69 per
warrant and a range from $20.17 to $22.19 per option were
outstanding but were not included in the shares in the above
tables because the warrants and options exercise
prices were greater than the average market price of the common
shares. Also excluded from the above table is the potential
conversion of the $30.0 million Senior Secured Subordinated
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.

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

At December 31, 2000, 9,661 warrants and
1,304,866 options to purchase an equivalent amount of shares of
common stock of Kroll at a range from $13.01 to $25.69 per
warrant and a range from $9.00 to $28.54 per option were
outstanding but were not included in the shares in the above
tables because the warrants and options exercise
price were greater than the average market price of the common
shares.

(o)New Accounting
Pronouncements  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.
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.

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which
established accounting and reporting standards for goodwill and
other intangible assets that are acquired individually or with a
group of other assets. The provisions of this statement became
effective January 1, 2002, and accordingly, Kroll ceased
amortizing goodwill and indefinite-lived intangible assets. In
addition, Kroll has conducted impairment tests of the goodwill
recorded on its books as required by SFAS No. 142. These
tests determined that Krolls recorded goodwill is not
impaired. Impairment tests will be conducted annually in July,
or sooner if circumstances indicate an impairment may have taken
place. Refer to Note 20 for the effect of implementation of
SFAS No. 142.

In June 2001, the FASB issued SFAS No. 143
Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations and
costs associated with the retirement of tangible long-lived
assets. Kroll is required to implement SFAS No. 143 on
January 1, 2003, and has not yet determined the impact that
this statement will have on its consolidated results of
operations or financial position.

In August 2001, the FASB issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets, which replaces SFAS No. 121 Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of and establishes accounting and
reporting standards for long-lived assets to be disposed of by
sale. This standard applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those
assets be measured at the lower of carrying amount or fair value
less cost to sell. SFAS No. 144 also broadens the reporting
of discontinued operations to include all components of an
entity with operations that can be distinguished from the rest
of the entity that will be eliminated from the ongoing
operations of the entity in a disposal transaction. Kroll
implemented SFAS No. 144 on January 1, 2002, and there
was no material impact on its consolidated results of operations
or financial position as a result of the implementation of this
statement.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections. This statement eliminates the automatic
classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss
be evaluated for extraordinary classification under the criteria
of Accounting Principal Board (APB) No. 30
Reporting Results of Operations. This statement also
requires sales-leaseback accounting for certain modifications
that have economic effects that are similar to sales-leaseback
transactions, and makes various other technical corrections to
existing pronouncements. This statement will be effective for
Kroll for the year ending December 31, 2003. For the 2003
financial statements, Kroll will reclassify as operating
expenses prior period extraordinary items that do not meet the
criteria of APB No. 30.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 will supersede EITF Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
SFAS No. 146 requires that costs associated with an exit or
disposal plan be recognized when incurred rather than at the
date of a commitment to an exit or disposal plan. SFAS
No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123. SFAS
No. 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used in reporting results. Management has adopted
the additional disclosure requirements effective
December 31, 2002 (see Note 3(p)).

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation
No. 34 (FIN No. 45). The
interpretation requires that upon issuance of a guarantee, the
entity must recognize a liability for the fair value of the
obligation it assumes under that obligation. This interpretation
is intended to improve the comparability of financial reporting
by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued
without separately identified consideration. For Kroll, the
initial recognition and measurement provision of FIN No. 45
are applicable to guarantees issued or modified after
December 31, 2002. Management has adopted the additional
disclosure provisions of FIN No. 45 effective
December 31, 2002. Kroll is currently evaluating what
impact, if any, adoption of FIN No. 45 will have on its
consolidated results of operations or financial position.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest
Entities, which addresses consolidation by business
enterprises of variable interest entities. In general, a
variable interest entity is a corporation, partnership, trust,
or any other legal structure used for business purposes that
either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its
activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other
property. A variable interest entity may be essentially passive
or it may engage in research and development or other activities
on behalf of another company. The objective of Interpretation
No. 46 is not to restrict the use of variable interest
entities but to improve financial reporting by companies
involved with variable interest entities. Until now, a company
generally has included another entity in its consolidated
financial statements only if it controlled the entity through
voting interests. Interpretation No. 46 changes that by
requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entitys activities or
entitled to receive a majority of the entitys residual
returns or both. The consolidation requirements of
Interpretation No. 46 apply immediately to variable
interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first
fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
Kroll does not expect the adoption of Interpretation No. 46
to have a material effect on its consolidated results of
operations or financial position.

(p) Stock-Based
Compensation  Kroll has elected to account for
the cost of its employee stock options and other forms of
employee stock-based compensation plans utilizing the intrinsic
value method prescribed in APB Opinion 25 as allowed by
SFAS No. 123, Accounting for Stock-Based
Compensation APB Opinion 25 requires compensation
cost for stock-based compensation plans to be recognized based
on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS
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. SFAS No. 123 allows an
entity to continue to measure compensation cost using the
principles of APB Opinion 25 if certain pro forma
disclosures are made.

Under APB Opinion 25, no stock-based
employee compensation cost relating to Krolls option plans
is reflected in net income, 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 and

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

earnings per share if Kroll had applied the fair
value recognition provisions of SFAS No. 123 to stock-based
employee compensation:

|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------ | ---------- | ---------- |  | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                                                                                                    |                             |                         
|                                                                                                                                                    |                             | Years Ended December 31,
|                                                                                                                                                    |                             |                         
|Description                                                                                                                                         |                             | 2002                     |            | 2001       |  | 2000
|                                                                                                                                                    |                             |                          |            |            |  |     
|Net income (loss) as reported:                                                                                                                      |                             | $                        | 16,381,141 |            |  | $    | (21,386,846 | )           |   | $ | (33,944,313 | )          
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                             |                          | (6,061,210 | )          |  |      | (3,476,781  | )           |   |   | (3,388,632  | )          
|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |            
|                                                                                                                                                    | Pro forma net income (loss) |                          | $          | 10,319,931 |  |      | $           | (24,863,627 | ) |   | $           | (37,332,945 | )
|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |            
|Earnings (loss) per share:                                                                                                                          |                             |                          |            |            |  |      |             |             |   |   |             |            
|                                                                                                                                                    | Basic-as reported           |                          | $          | 0.56       |  |      | $           | (0.95       | ) |   | $           | (1.52       | )
|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |            
|                                                                                                                                                    | Basic-pro forma             |                          | $          | 0.35       |  |      | $           | (1.11       | ) |   | $           | (1.67       | )
|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |            
|                                                                                                                                                    | Diluted-as reported         |                          | $          | 0.54       |  |      | $           | (0.95       | ) |   | $           | (1.52       | )
|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |            
|                                                                                                                                                    | Diluted-pro forma           |                          | $          | 0.34       |  |      | $           | (1.11       | ) |   | $           | (1.67       | )
|                                                                                                                                                    |                             |                          |            |            |  |      |             |             |   |   |             |            

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,
|                        |  |                         
|Description             |  | 2002                     |           | 2001 |  | 2000
|                        |  |                          |           |      |  |     
|Dividend yield          |  |                          |          |      |  |      |          |   |  |  |           |  
|Expected volatility     |  |                          | 59.0      | %    |  |      | 74.0      | % |  |  | 43.7       | %
|Risk-free interest rate |  |                          | 3.0       | %    |  |      | 4.38      | % |  |  | 6.14%- 6.7 | %
|Expected lives          |  |                          | 5.0 years |      |  |      | 5.0 years |   |  |  | 7.5 years  |  

The 2,337,150 options granted by Kroll during
2002 have a weighted-average exercise price of $20.31, a
weighted-average fair value of $10.73 and remaining contractual
lives, on a weighted-average basis, of 9.5 years. The
2,222,000 options granted by Kroll during 2001 have a
weighted-average exercise price of $7.39, a weighted-average
fair value of $4.69 and remaining contractual lives, on a
weighted-average basis, of 8.4 years. The 1,004,774 options
granted by Kroll during 2000 have a weighted-average exercise
price of $6.37, a weighted-average fair value of $3.73 and
remaining contractual lives, on a weighted-average basis, of
7.4 years.

(q) Derivative Financial
Instruments  SFAS No. 133, Accounting
for Derivative Financial Instruments and Hedging
Activities, as amended, 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. The Company adopted SFAS
No. 133 effective January 1, 2001.

Kroll utilized 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. Kroll has not
since utilized hedging or derivative instruments and does not
hold or issue derivative financial instruments for trading
purposes.

53



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(4) Mergers and Acquisitions

Kroll has completed several business combinations
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.

(a) Ontrack Acquisition 
On April 1, 2002, Kroll entered into an agreement to
acquire all of the outstanding shares of Ontrack. The agreement
provided that a wholly-owned subsidiary of Kroll would merge
into Ontrack, resulting in Ontrack becoming a wholly-owned
subsidiary of Kroll. 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 in the consolidated financial statements within the
Technology Services Segment since the acquisition date. As a
result of this acquisition, Kroll expects to be in a leadership
position in the growing data recovery and electronic discovery
markets. Ontracks services and expertise also complement
Krolls current offerings in security and technology
services. The transaction is valued at approximately
$154 million, and qualifies as a tax-free reorganization.
Accordingly, the goodwill recorded in this acquisition is not
deductible for federal income tax purposes. Ontrack shareholders
received 0.6447 shares of Kroll common stock for each share of
Ontrack. The value of the 6.9 million shares of Kroll
common stock issued for this acquisition was determined 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. In addition,
pursuant to the acquisition agreement, Kroll assumed
Ontracks existing stock option plans. As a result of the
acquisition, Kroll has issued approximately 7.2 million
shares of its common stock, including approximately
0.3 million shares issued on the exercise of Ontrack
options. At December 31, 2002, an additional
0.7 million shares may be issued upon the future exercise
of Ontrack options.

In connection with the acquisition with Ontrack,
assets were acquired and liabilities assumed as follows (dollars
in thousands):

|                                  |                                    |                             |                            |         |        |         | 
|--------------------------------- | ---------------------------------- | --------------------------- | -------------------------- | ------- | ------ | ------- | 
|                                  |                                    | Ontrack                    
|                                  |                                    |                            
|VALUATION OF ONTRACK TRANSACTION: |                                    |                             |                            |        
|                                  | Value of shares issued             |                             | $                          | 137,706 |       
|                                  | Value of options assumed           |                             |                            | 12,313  |       
|                                  | Transaction costs                  |                             |                            | 3,722   |       
|                                  |                                    |                             |                            |        
|                                  | Purchase price                     |                             |                            | 153,741 |       
|ASSETS ACQUIRED:                  |                                    |                             |                            |        
|                                  | Current assets                     |                             |                            | 44,331  |       
|                                  | Property, plant and equipment, net |                             |                            | 9,451   |       
|                                  | Other non-current assets           |                             |                            | 2,922   |       
|                                  |                                    |                             |                            |        
|                                  |                                    | Total assets acquired       |                            |         | 56,704 |        
|                                  |                                    | Current liabilities assumed |                            |         | (4,468 | )      
|                                  |                                    |                             |                            |        
|                                  |                                    |                             | Net assets acquired        |         |        | 52,236  | 
|                                  |                                    |                             |                            |        
|                                  |                                    |                             | Intangible assets acquired |         | $      | 101,505 | 
|                                  |                                    |                             |                            |        

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                   |                                                                      |                            |   |        |         | 
|------------------ | -------------------------------------------------------------------- | -------------------------- | - | ------ | ------- | 
|                   |                                                                      | Ontrack                   
|                   |                                                                      |                           
|INTANGIBLE ASSETS: |                                                                      |                            |   |       
|                   | Identifiable intangible assets  gross
    (useful lives 5-10 years) |                            | $ | 12,280 |        
|                   | Less: applicable deferred tax liability                              |                            |   | (4,728 | )      
|                   |                                                                      |                            |   |       
|                   | Identifiable intangible assets  net                                 |                            |   | 7,552  |        
|                   | Goodwill recognized                                                  |                            |   | 93,953 |        
|                   |                                                                      |                            |   |       
|                   |                                                                      | Intangible assets acquired |   | $      | 101,505 | 
|                   |                                                                      |                            |   |       

(b) Zolfo Cooper
Acquisition  On September 5, 2002, Kroll
acquired all of the equity interests of Zolfo Cooper, and
certain of its related entities. At the closing, Kroll paid
$100 million in cash and, on January 15, 2003, Kroll
issued 2.9 million shares of its common stock, valued at
approximately $55.3 million, to the former owners of Zolfo
Cooper. The value of the 2.9 million shares of Kroll common
stock issued for this acquisition was determined 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. These shares
appear on the December 31, 2002 consolidated balance sheet
under the caption Common share to be issued for
acquisition. In addition, Kroll will 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 $30 million, $31
million, $32 million and $33 million in 2003, 2004,
2005 and 2006, respectively. To the extent Zolfo Coopers
operating profit exceeds the targeted level for a particular
year, 100% of 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
contingency 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. 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 will vest over four years.

In connection with the acquisition, the three
former principal owners and other senior professionals of Zolfo
Cooper entered into employment agreements to serve as executives
of Kroll Zolfo Cooper following the acquisition. The employment
agreements expire December 31, 2006 and include customary
non-compete and non-solicitation provisions that remain in
effect during the terms of the employment agreements and for one
year thereafter, unless the employee is terminated without cause
prior to January 1, 2005. Kroll has also 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 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 period ended December 31, 2002 were
$0.7 million, of which $0.1 million was reimbursed to
Kroll.

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 in the consolidated
financial statements, within the Corporate Advisory and
Restructuring Services Segment, since September 1, 2002.
Kroll believes that Zolfo Cooper is one of the premier firms in
the corporate restructuring and turnaround business in North
America. As a result of this acquisition, Kroll, in concert with
our European restructuring business, will be able to act as a
single source provider on an international level for the
increasing number of large scale cross-border U.S. based
bankruptcies and restructurings.

Kroll recorded approximately $153.1 million
of goodwill related to this acquisition. This goodwill can be
amortized and deducted for federal income tax purposes.

55



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the acquisition of Zolfo
Cooper, assets were acquired and liabilities assumed as follows
(dollars in thousands):

|                                       |                                                          |                             |                            |         |         |         | 
|-------------------------------------- | -------------------------------------------------------- | --------------------------- | -------------------------- | ------- | ------- | ------- | 
|                                       |                                                          | Zolfo Cooper               
|                                       |                                                          |                            
|VALUATION OF ZOLFO COOPER TRANSACTION: |                                                          |                             |                            |        
|                                       | Cash                                                     |                             | $                          | 100,000 |        
|                                       | Common stock issuable                                    |                             |                            | 55,280  |        
|                                       | Transaction costs                                        |                             |                            | 3,518   |        
|                                       |                                                          |                             |                            |        
|                                       | Purchase price                                           |                             |                            | 158,798 |        
|ASSETS ACQUIRED:                       |                                                          |                             |                            |        
|                                       | Current assets                                           |                             |                            | 15,199  |        
|                                       | Property, plant and equipment, net                       |                             |                            | 652     |        
|                                       | Other non-current assets                                 |                             |                            | 43      |        
|                                       |                                                          |                             |                            |        
|                                       |                                                          | Total assets acquired       |                            |         | 15,894  |        
|                                       |                                                          | Current liabilities assumed |                            |         | (15,242 | )      
|                                       |                                                          |                             |                            |        
|                                       |                                                          |                             | Net assets acquired        |         |         | 652     | 
|                                       |                                                          |                             |                            |        
|                                       |                                                          |                             | Intangible assets acquired |         | $       | 158,146 | 
|                                       |                                                          |                             |                            |        
|                                      
|INTANGIBLE ASSETS:                     |                                                          |                             |                            |        
|                                       | Goodwill recognized                                      |                             | $                          | 153,146 |        
|                                       | Identifiable intangible assets (useful life
    5 years) |                             |                            | 5,000   |        
|                                       |                                                          |                             |                            |        
|                                       |                                                          | Intangible assets acquired  |                            | $       | 158,146 |        
|                                       |                                                          |                             |                            |        

Kroll is in the process of obtaining third party
valuations of certain intangible assets; thus, the allocation of
the purchase price is subject to refinement.

(c) Crucible Acquisition 
On July 3, 2002, Kroll acquired Crucible Inc., a privately
held company which provides elite training and protective
services. Kroll paid $1.0 million 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, with the first payment due July 3, 2003. At
December 31, 2002, $750,000 has been included in other long
term liabilities and $250,000 has been included in accrued
liabilities on the balance sheet.

(d) 2001 Acquisitions 
There were no acquisitions in 2001.

(e) 2000 Acquisitions 
During 2000, Kroll completed two acquisitions. The aggregate
purchase price of these acquisitions amounted to approximately
$1.3 million and consisted of $0.7 million in cash and
notes payable of $0.6 million to the former owners of the
businesses. The resulting goodwill from these transactions was
being amortized over 25 years. Effective January 1,
2002, goodwill relating to these acquisitions is no longer
amortized, pursuant to SFAS No. 142.

In 2000, Kroll recorded a charge to operating
expenses of approximately $0.4 million ($0.02 per diluted
share) for merger integration related costs. These costs relate
primarily to mergers and acquisitions completed in 1999.

(f) Unaudited Pro Forma Financial Data

The following unaudited pro forma combined
results of operations are for the year ended December 31,
2002. The left column of data assumes that the Ontrack
acquisition occurred as of January 1, 2002, while the

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

right column of data assumes that the Ontrack and
Zolfo Cooper acquisitions occurred as of January 1, 2001.
Unaudited pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of
the operating results that would have been achieved if the
Ontrack and Zolfo Cooper acquisitions had been consummated on
January 1, 2002 or January 1, 2001 (in thousands,
except per share data):

|                                  |         |                    |         |                    |  |         |         |          |  |   |         |       |   |   |         |       |  
|--------------------------------- | ------- | ------------------ | ------- | ------------------ |  | ------- | ------- | -------- |  | - | ------- | ----- | - | - | ------- | ----- | -
|                                  |         |                    |         |                   
|                                  |         | For the Year Ended |         | For the Year Ended
|                                  |         | December 31, 2002  |         | December 31, 2001 
|                                  |         |                    |         |                   
|                                  |         |                    |         | Kroll/             |  |         |         | Kroll/  
|                                  |         |                    |         | Ontrack/           |  |         |         | Ontrack/
|                                  |         | Kroll/             |         | Zolfo              |  | Kroll/  |         | Zolfo   
|                                  |         | Ontrack            |         | Cooper             |  | Ontrack |         | Cooper  
|                                  |         |                    |         |                    |  |         |         |         
|Sales                             |         | $                  | 315,565 |                    |  | $       | 358,594 |          |  | $ | 263,724 |       |   | $ | 322,965 |      
|Income from continuing operations |         | $                  | 20,981  |                    |  | $       | 35,616  |          |  | $ | (12,365 | )     |   | $ | 4,304   |      
|Net income (loss)                 |         | $                  | 17,945  |                    |  | $       | 32,580  |          |  | $ | (22,361 | )     |   | $ | (5,692  | )    
|Earnings (loss) per share:        |         |                    |         |                    |  |         |         |          |  |   |         |       |   |   |         |      
|                                  | Basic   |                    | $       | 0.57               |  |         | $       | 0.95     |  |   | $       | (0.76 | ) |   | $       | (0.15 | )
|                                  | Diluted |                    | $       | 0.55               |  |         | $       | 0.92     |  |   | $       | (0.76 | ) |   | $       | (0.15 | )



|    |                        
|--- | -----------------------
|(5) | Discontinued Operations

(a) Security Products and Services
Group  On April 20, 2001, the Board approved
a definitive agreement to sell the common stock of most of the
active companies that comprise SPSG to Armor. The results of
operations have been classified as discontinued and all prior
periods have been restated accordingly. 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 continues to operate.
Also excluded from the sale was the Russian 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 up to $55.7 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 provides for a potential deferred
payment of up to $2.0 million by Armor to Kroll based on
the achievement of a gross profit 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. Additionally, as a result of the
reversal of foreign currency translation, an increase of
$4.1 million was recorded in equity for the gain in
accumulated other comprehensive loss, net of tax. As a result,
the net increase to equity for the disposal of SPSG was
approximately $3.8 million.

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 residual balance
due from the sale of the $15.0 million in Armor common
stock.

Kroll has not included any impact of the
potential $2.0 million deferred payment by Armor to Kroll
in determining the estimated loss on the sale of SPSG.

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Although Krolls Russian 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 and an additional $10,000 in both the third and fourth
quarters of 2002. The agreements provide for Kroll to receive an
additional $107,000 within one year of the closing date, plus
$50,000 within two years of the closing date. Payments not
received on the due date will accrue interest at 10% per annum.

As a result of the 2002 transactions, Kroll
recorded a gain of approximately $0.1 million on the sale
of the discontinued SPSG.

Net sales and results of operations from SPSG
were as follows:

|                           |              |                                        |        |              |        |   |         |        |         |  
|-------------------------- | ------------ | -------------------------------------- | ------ | ------------ | ------ | - | ------- | ------ | ------- | -
|                           |              | Period Ended                           |        | Year Ended  
|                           |              | August 22,                             |        | December 31,
|                           |              | 2001                                   |        | 2000        
|                           |              |                                        |        |             
|                           |              |                                       
|                           |              | (Dollars in thousands)                
|Net Sales                  |              | $                                      | 79,359 |              |        | $ | 104,992 |       
|Cost of sales              |              |                                        | 67,477 |              |        |   | 86,127  |       
|                           |              |                                        |        |              |        |   |         |       
|                           | Gross profit |                                        |        | 11,882       |        |   |         | 18,865 |        
|Operating expenses         |              |                                        | 15,680 |              |        |   | 24,383  |       
|                           |              |                                        |        |              |        |   |         |       
|                           |              | Operating loss                         |        |              | (3,798 | ) |         |        | (5,518  | )
|Other expense              |              |                                        | (3,050 | )            |        |   | (4,218  | )     
|                           |              |                                        |        |              |        |   |         |       
|                           |              | Loss before provision for income taxes |        |              | (6,848 | ) |         |        | (9,736  | )
|Provision for income taxes |              |                                        | (379   | )            |        |   | (275    | )     
|                           |              |                                        |        |              |        |   |         |       
|                           |              | Net loss                               |        | $            | (7,227 | ) |         | $      | (10,011 | )
|                           |              |                                        |        |              |        |   |         |       

(b) Voice and Data Communications
Group  On April 16, 2001, the Board of
Directors approved a formal plan to discontinue operations of
VDCG, which offered secure satellite communication equipment and
satellite navigation systems. Kroll has divested itself of the
operations of this segment.

The results of operations of VDCG have been
classified as discontinued operations and all prior periods have
been restated accordingly. 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.

The fiscal 2000 estimated loss on disposal of
$5.0 million ($0.23 per diluted share) included the
estimated future results of operations through the date of sale.
Major components of the estimated loss on disposal included a
writedown of related goodwill and other asset balances of
$4.2 million and estimated severance, operating and
shutdown costs of $0.8 million. The loss on disposal
calculation included $0.2 million of allocated interest
expense.

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 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 collectibility 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 and an additional
$2.0 million loss on the sale of VDCG was recorded in 2001.

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net sales, results of operations from this
discontinued operation are as follows:

|                                           |  |                        |        |              |  |   |        |  
|------------------------------------------ |  | ---------------------- | ------ | ------------ |  | - | ------ | -
|                                           |  | Period Ended           |        | Year Ended  
|                                           |  | June 27,               |        | December 31,
|                                           |  | 2001                   |        | 2000        
|                                           |  |                        |        |             
|                                           |  |                       
|                                           |  | (Dollars in thousands)
|Net sales                                  |  | $                      | 3,134  |              |  | $ | 16,852 |  
|Interest expense allocation                |  | $                      | 60     |              |  | $ | 239    |  
|Net loss from discontinued VDCG operations |  | $                      | (104   | )            |  | $ | (3,200 | )
|Net loss on disposal                       |  | $                      | (2,008 | )            |  | $ | (5,037 | )

(6) Sale of Subsidiaries

(a) Sale of Stock by Information Security
Group  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. Under the terms of
the stock purchase agreement, Securify issued approximately
49.2 million shares of Series A Convertible Preferred
Stock, valued at $0.68 per share, for total gross proceeds of
approximately $33.5 million. These preferred shares are
convertible into an equivalent number of shares of
Securifys common stock. Kroll recognized a pre-tax gain on
this transaction of approximately $1.6 million. The tax
effects of this transaction approximate $2.1 million,
resulting in a loss, net of tax, of $0.5 million. The tax
effects of this transaction include net operating loss
carryforwards and other deferred tax assets that would not
remain with Kroll. As a result of this transaction, as of
December 31, 2000, Krolls voting control in Securify
approximated 27 percent and the investment in Securify,
previously consolidated, was then accounted for using the equity
method.

As of December 31, 2001, Kroll had an amount
receivable from Securify, totaling approximately
$5.4 million, which was fully reserved, that is subject to
an unsecured promissory note agreement with repayment terms
scheduled over a five-year period. Kroll would recognize income
in the period that repayments were received pursuant to the
promissory note agreement. Kroll did not have any carrying value
for its investment as of December 31, 2001. Securify had
realized continuing losses since October 2000. Since Kroll had
not provided any guarantees and was not committed to provide any
future funding to Securify, it had not recorded its equity share
of Securify losses.

In January and May 2002, Securify obtained
additional equity financing, which resulted in the restructuring
of Securifys existing debt with Kroll. The net impact of
these transactions has left Kroll with the following in lieu of
the Series A Convertible Stock and the promissory note
discussed above, both of which were cancelled:



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | (1) Securify paid Kroll $500,000 in May
    2002, which was recorded in Other Income,
|
| | (2) 131,854 shares of Securify common stock,                                           
|
| | (3) $250,000 of Securify Series B
    Preferred Stock, and                             
|
| | (4) A non-exclusive license to use
    proprietary software developed by Securify.     

As a result of the additional financing obtained
by Securify, Krolls voting interest in Securify was
reduced to approximately 1%. Accordingly, Securify, formerly
accounted for under the equity method, is now accounted for as a
cost basis investment, which Kroll has valued at zero.

(b) Sale of Decision Resources,
Inc.  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
provisional loss, on the sale of its business unit of
approximately

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$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.

(7) Balance Sheet Accounts

(a) Trade Accounts
Receivable  Kroll had outstanding net trade
receivables in the amount of $49,346,958 and $37,779,643 at
December 31, 2002 and 2001, respectively.

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

|                             |  |              |           |            |  |             |           |         |  |   |            |   |  |   |           | 
|---------------------------- |  | ------------ | --------- | ---------- |  | ----------- | --------- | ------- |  | - | ---------- | - |  | - | --------- | 
|                             |  |              |           | Additional |  |             |           |        
|                             |  | Balance      |           | Charges to |  | Write-offs, |           | Balance
|                             |  | Beginning of |           | Costs and  |  | Deductions  |           | End of 
|                             |  | Period       |           | Expenses   |  | And Other   |           | Period 
|                             |  |              |           |            |  |             |           |        
|Year ended December 31, 2002 |  | $            | 6,798,097 |            |  | $           | 3,919,938 |         |  | $ | (3,725,917 | ) |  | $ | 6,992,118 | 
|Year ended December 31, 2001 |  | $            | 4,235,975 |            |  | $           | 5,939,841 |         |  | $ | (3,377,719 | ) |  | $ | 6,798,097 | 
|Year ended December 31, 2000 |  | $            | 2,705,037 |            |  | $           | 4,548,967 |         |  | $ | (3,018,029 | ) |  | $ | 4,235,975 | 

(b) Other Long-Term
Assets  Other long-term assets are stated at
cost less accumulated amortization and are being amortized on a
straight line basis over their estimated useful lives, as
applicable. Other long-term assets consist of the following:

|                                                                                                                        |       |             |     |                    |  |      |           |           |  |   |           |           | 
|----------------------------------------------------------------------------------------------------------------------- | ----- | ----------- | --- | ------------------ |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                                                                                                        |       |             |     |                   
|                                                                                                                        |       |             |     | As of December 31,
|                                                                                                                        |       | Useful Life |     |                   
|Description                                                                                                             |       | (Years)     |     | 2002               |  | 2001
|                                                                                                                        |       |             |     |                    |  |     
|Security deposits                                                                                                       |       |             |    |                    |  | $    | 1,037,200 |           |  | $ | 563,831   |          
|Long-term receivable                                                                                                    |       |             |    |                    |  |      |          |           |  |   | 1,701,399 |          
|Non-refundable deposit on an equipment lease with
    a related party                                                   |       |             | 7.5 |                    |  |      | 133,185   |           |  |   | 223,057   |          
|Deferred financing fees, net of accumulated
    amortization of $226,886 and $48,316 in 2002 and 2001,
    respectively |       |             | 3-5 |                    |  |      | 1,213,084 |           |  |   | 526,319   |          
|Receivable from sale of Russian business                                                                                |       |             |    |                    |  |      | 50,000    |           |  |   |          |          
|Investments(1)                                                                                                          |       |             |    |                    |  |      | 2,485,033 |           |  |   | 1,158,429 |          
|Other long-term assets                                                                                                  |       |             |    |                    |  |      | 302,021   |           |  |   | 53,416    |          
|                                                                                                                        |       |             |     |                    |  |      |           |           |  |   |           |          
|                                                                                                                        | Total |             |     |                    |  |      | $         | 5,220,523 |  |   | $         | 4,226,451 | 
|                                                                                                                        |       |             |     |                    |  |      |           |           |  |   |           |          



---



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Includes an investment in 2002 in iJet
    Travel Intelligence Inc. of approximately $1.5 million of
    iJet Series B Preferred Stock and iJet warrants, resulting
    in a primary ownership of approximately 13%. This investment is
    being accounted for using the cost method for recording
    investments.

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(c) Other Accrued
Liabilities  Other accrued liabilities
consist of the following:

|                                                             |                                 |                    |           |            |  |   |           |           | 
|------------------------------------------------------------ | ------------------------------- | ------------------ | --------- | ---------- |  | - | --------- | --------- | 
|                                                             |                                 |                   
|                                                             |                                 | As of December 31,
|                                                             |                                 |                   
|Description                                                  |                                 | 2002               |           | 2001      
|                                                             |                                 |                    |           |           
|Accrued professional fees                                    |                                 | $                  | 990,454   |            |  | $ | 1,265,768 |          
|Property, sales and other taxes payable                      |                                 |                    | 1,345,430 |            |  |   | 1,873,344 |          
|Accrued medical costs                                        |                                 |                    | 475,083   |            |  |   | 371,253   |          
|Accrued interest                                             |                                 |                    | 240,000   |            |  |   | 258,043   |          
|Accrued payments to former owners of acquired
    businesses |                                 |                    | 898,411   |            |  |   | 855,511   |          
|Accrued restructuring costs                                  |                                 |                    | 445,081   |            |  |   | 998,090   |          
|Accrued facility shutdown                                    |                                 |                    | 505,852   |            |  |   |          |          
|Accrued office relocation                                    |                                 |                    | 981,970   |            |  |   |          |          
|Accrued leasehold renovation reserve                         |                                 |                    | 929,680   |            |  |   | 706,735   |          
|Other accruals                                               |                                 |                    | 4,061,665 |            |  |   | 2,440,144 |          
|                                                             |                                 |                    |           |            |  |   |           |          
|                                                             | Total other accrued liabilities |                    | $         | 10,873,626 |  |   | $         | 8,768,888 | 
|                                                             |                                 |                    |           |            |  |   |           |          

(d) Restructuring of
Operations  In the first quarter of 1999,
Kroll began implementation of a restructuring plan (the
1999 Plan) to reduce costs and improve operating
efficiencies. The 1999 Plan was substantially completed by the
end of the second quarter of 1999. The total pre-tax
restructuring charge recorded pursuant to the 1999 Plan was
approximately $4.1 million. Total payments or writeoffs
made pursuant to the 1999 Plan through December 31, 2002
were $4.0 million, all of which were expensed in 1999.
Kroll does not expect to incur any other significant
restructuring charges in future periods related to the 1999
Plan. The principal elements of the restructuring plan were the
closure of two Investigations and Intelligence Group offices and
the elimination of approximately 82 employees. The remaining
components of the restructuring charge, including accrued
balances in the amount of $67,473 as of December 31, 2002,
represent lease termination costs, which are expected to be
fully completed by December 31, 2003.

In the second quarter of 2001, Kroll began
implementation of a restructuring plan (the 2001
Plan) to reduce costs and improve operating efficiencies.
The 2001 Plan was substantially completed by the end of 2001.
Total payments or writeoffs made pursuant to the 2001 Plan
through December 31, 2002 were $2.3 million, all of
which were expensed in 2001. Kroll does not expect to incur any
other significant restructuring charges in future periods
related to the 2001 Plan. The principal elements of the
restructuring plan were the closure of four offices and the
elimination of approximately 98 employees. The components of the
restructuring charge including accrued balances as of
December 31, 2002 are as follows:

|                                           |  |         |           |         |  |   |         | 
|------------------------------------------ |  | ------- | --------- | ------- |  | - | ------- | 
|Description                                |  | Expense |           | Accrual
|                                           |  |         |           |        
|Severance and related costs                |  | $       | 1,965,072 |         |  | $ | 107,723 | 
|Writedown of property, plant and equipment |  |         | 158,867   |         |  |   |        | 
|Lease termination costs                    |  |         | 602,300   |         |  |   | 269,885 | 
|                                           |  |         |           |         |  |   |         | 
|                                           |  | $       | 2,726,239 |         |  |   | 377,608 | 
|                                           |  |         |           |         |  |   |         | 
|Less  Current portion                     |  |         |           |         |  |   | 377,608 | 
|                                           |  |         |           |         |  |   |         | 
|                                           |  |         |           |         |  | $ |        | 
|                                           |  |         |           |         |  |   |         | 

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(8) Income Taxes

Kroll accounts for income taxes under the
liability method pursuant to SFAS No. 109,
Accounting for Income Taxes. Under the liability
method, deferred tax liabilities and assets are determined based
on the differences between the financial reporting and tax bases
of assets and liabilities using enacted income tax rates.

Krolls provision for income taxes on income
(loss) is summarized as follows:

|            |                            |                          |            |            |   |      |           |           |   |  |           |            |  
|----------- | -------------------------- | ------------------------ | ---------- | ---------- | - | ---- | --------- | --------- | - |  | --------- | ---------- | -
|            |                            |                         
|            |                            | Years Ended December 31,
|            |                            |                         
|Description |                            | 2002                     |            | 2001       |   | 2000
|            |                            |                          |            |            |   |     
|Current:    |                            |                          |            |            |   |      |           |           |   |  |           |           
|            | Federal                    |                          | $          | 4,045,158  |   |      | $         |          |   |  | $         | (2,065,160 | )
|            | State and local            |                          |            | 1,753,042  |   |      |           | 735,963   |   |  |           | 1,216,733  |  
|            | Foreign                    |                          |            | 3,859,233  |   |      |           | 2,243,691 |   |  |           | 2,062,676  |  
|            |                            |                          |            |            |   |      |           |           |   |  |           |           
|            |                            |                          | 9,657,433  |            |   |      | 2,979,654 |           |   |  | 1,214,249 |           
|            |                            |                          |            |            |   |      |           |           |   |  |           |           
|Deferred:   |                            |                          |            |            |   |      |           |           |   |  |           |           
|            | Federal                    |                          |            | (1,225,113 | ) |      |           | (210,408  | ) |  |           | 694,601    |  
|            | State and local            |                          |            | (110,505   | ) |      |           | 7,960     |   |  |           | 122,924    |  
|            | Foreign                    |                          |            |           |   |      |           | (374,941  | ) |  |           | 345,121    |  
|            |                            |                          |            |            |   |      |           |           |   |  |           |           
|            |                            |                          | (1,335,618 | )          |   |      | (577,389  | )         |   |  | 1,162,646 |           
|            |                            |                          |            |            |   |      |           |           |   |  |           |           
|            | Provision for income taxes |                          | $          | 8,321,815  |   |      | $         | 2,402,265 |   |  | $         | 2,376,895  |  
|            |                            |                          |            |            |   |      |           |           |   |  |           |           

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

|                                                                       |                            |                          |            |           |  |        |       |      |   |        |            |           |  |  |       |       |    |   |            |           |  |  |       |       |   
|---------------------------------------------------------------------- | -------------------------- | ------------------------ | ---------- | --------- |  | ------ | ----- | ---- | - | ------ | ---------- | --------- |  |  | ----- | ----- | -- | - | ---------- | --------- |  |  | ----- | ----- | --
|                                                                       |                            |                         
|                                                                       |                            | Years Ended December 31,
|                                                                       |                            |                         
|                                                                       |                            |                          |            |           |  |       
|                                                                       |                            | 2002                     |            | 2001      |  | 2000  
|                                                                       |                            |                          |            |           |  |       
|Description                                                            |                            | Amount                   |            | Rate      |  | Amount |       | Rate |   | Amount |            | Rate     
|                                                                       |                            |                          |            |           |  |        |       |      |   |        |            |          
|Provision (benefit) for income taxes at the
    federal statutory rate |                            | $                        | 9,708,785  |           |  |        | 35.0  | %    |   | $      | (3,056,061 | )         |  |  | 34.0  | %     |    | $ | (4,528,590 | )         |  |  | 34.0  | %    
|State and local income taxes, net of federal
    benefit               |                            |                          | 1,178,010  |           |  |        | 4.3   |      |   |        | 461,670    |           |  |  | (5.1  | )     |    |   | 982,021    |           |  |  | (7.4  | )    
|Nondeductible expenses                                                 |                            |                          | 443,392    |           |  |        | 1.6   |      |   |        | 418,493    |           |  |  | (4.7  | )     |    |   | 2,693,242  |           |  |  | (20.2 | )    
|Change in valuation allowance                                          |                            |                          | (5,496,566 | )         |  |        | (19.8 | )    |   |        | 3,578,817  |           |  |  | (39.8 | )     |    |   | 137,952    |           |  |  | (1.0  | )    
|Tax attributes associated with Securify                                |                            |                          |           |           |  |        |      |      |   |        |           |           |  |  |      |       |    |   | 2,068,000  |           |  |  | (15.5 | )    
|Effect of foreign (income) loss                                        |                            |                          | 2,452,387  |           |  |        | 8.8   |      |   |        | 1,111,772  |           |  |  | (12.3 | )     |    |   | 892,022    |           |  |  | (6.7  | )    
|Other                                                                  |                            |                          | 35,807     |           |  |        | 0.1   |      |   |        | (112,426   | )         |  |  | 1.2   |       |    |   | 132,248    |           |  |  | (1.0  | )    
|                                                                       |                            |                          |            |           |  |        |       |      |   |        |            |           |  |  |       |       |    |   |            |           |  |  |       |      
|                                                                       | Provision for income taxes |                          | $          | 8,321,815 |  |        |       | 30.0 | % |        | $          | 2,402,265 |  |  |       | (26.7 | )% |   | $          | 2,376,895 |  |  |       | (17.8 | )%
|                                                                       |                            |                          |            |           |  |        |       |      |   |        |            |           |  |  |       |       |    |   |            |           |  |  |       |      

62



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of Krolls consolidated
deferred income tax assets and liabilities are summarized below:

|                          |                                   |                            |            |            |           |   |            |            |            |  
|------------------------- | --------------------------------- | -------------------------- | ---------- | ---------- | --------- | - | ---------- | ---------- | ---------- | -
|                          |                                   |                           
|                          |                                   | As of December 31,        
|                          |                                   |                           
|Description               |                                   | 2002                       |            | 2001      
|                          |                                   |                            |            |           
|Deferred tax assets:      |                                   |                            |            |            |           |   |            |           
|                          | Allowance for doubtful accounts   |                            | $          | 2,037,210  |           |   | $          | 1,726,002  |           
|                          | Net operating loss carryforwards  |                            |            |           |           |   |            | 5,466,120  |           
|                          | Payroll and other benefits        |                            |            | 1,422,286  |           |   |            | 1,860,217  |           
|                          | Restructuring                     |                            |            | 363,254    |           |   |            | 912,267    |           
|                          | Other accruals                    |                            |            | 3,169,224  |           |   |            | 1,036,986  |           
|                          | Other foreign                     |                            |            | 1,067,342  |           |   |            |           |           
|                          |                                   |                            |            |            |           |   |            |           
|                          |                                   |                            | 8,059,316  |            |           |   | 11,001,592 |           
|                          | Valuation allowance               |                            |            |           |           |   |            | (5,496,566 | )         
|                          |                                   |                            |            |            |           |   |            |           
|                          |                                   | Net deferred tax assets    |            |            | 8,059,316 |   |            |            | 5,505,026  |  
|                          |                                   |                            |            |            |           |   |            |           
|Deferred tax liabilities: |                                   |                            |            |            |           |   |            |           
|                          | Depreciation and amortization     |                            |            | (1,918,981 | )         |   |            | (438,369   | )         
|                          | Nonaccrual service fee receivable |                            |            | (206,970   | )         |   |            | (241,189   | )         
|                          | Deferred revenue                  |                            |            | (1,368,176 | )         |   |            | (2,769,249 | )         
|                          | Database capitalization           |                            |            | (3,111,712 | )         |   |            | (3,372,954 | )         
|                          | Other                             |                            |            | (1,507,125 | )         |   |            | (964,867   | )         
|                          |                                   |                            |            |            |           |   |            |           
|                          |                                   |                            | (8,112,964 | )          |           |   | (7,786,628 | )         
|                          |                                   |                            |            |            |           |   |            |           
|                          |                                   | Net deferred tax liability |            | $          | (53,648   | ) |            | $          | (2,281,602 | )
|                          |                                   |                            |            |            |           |   |            |           

Kroll had certain foreign and domestic net
operating loss carryforwards, which approximated
$16.1 million at December 31, 2001, and were available
to offset 2002s taxable income. At December 31, 2002,
Kroll had no net operating loss carryforward. A valuation
allowance for all existing domestic and foreign loss
carryforwards as of January 1, 2002 was $5,496,566. The net
change in the total valuation allowance for the year ended
December 31, 2002 was a decrease of $5,496,566.

(9) Related Party Transactions

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

|                                                                                             |                          |                          |           |           |  |      |           |           |  |   |           |           | 
|-------------------------------------------------------------------------------------------- | ------------------------ | ------------------------ | --------- | --------- |  | ---- | --------- | --------- |  | - | --------- | --------- | 
|                                                                                             |                          |                         
|                                                                                             |                          | Years Ended December 31,
|                                                                                             |                          |                         
|Description                                                                                  |                          | 2002                     |           | 2001      |  | 2000
|                                                                                             |                          |                          |           |           |  |     
|Sales:                                                                                       |                          |                          |           |           |  |      |           |           |  |   |           |          
|                                                                                             | to Shareholder           |                          | $         | 2,780,144 |  |      | $         | 5,120,559 |  |   | $         | 5,776,344 | 
|                                                                                             | to affiliated entities   |                          | $         | 808,999   |  |      | $         |          |  |   | $         | 26,248    | 
|Purchases:                                                                                   |                          |                          |           |           |  |      |           |           |  |   |           |          
|                                                                                             | From Shareholder         |                          | $         | 906,911   |  |      | $         | 386,058   |  |   | $         | 286,589   | 
|                                                                                             | From affiliated entities |                          | $         |          |  |      | $         |          |  |   | $         | 1,045,222 | 
|Lease expense to affiliated entities                                                         |                          | $                        | 624,144   |           |  | $    | 554,603   |           |  | $ | 335,992   |          
|Legal services expense to law firm of a Board
    member                                     |                          | $                        | 2,453,415 |           |  | $    | 1,321,659 |           |  | $ | 1,719,862 |          
|Payment to related party for operation of
    airplane for business purposes (see Note 4(b)) |                          | $                        | 605,142   |           |  | $    |          |           |  | $ |          |          

63



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                               |  |                    |         |      |  |   |           | 
|---------------------------------------------- |  | ------------------ | ------- | ---- |  | - | --------- | 
|                                               |  |                   
|                                               |  | As of December 31,
|                                               |  |                   
|Description                                    |  | 2002               |         | 2001
|                                               |  |                    |         |     
|Amounts receivable from an officer             |  | $                  | 50,017  |      |  | $ | 494,935   | 
|Trade accounts receivable due from shareholder |  | $                  | 670,176 |      |  | $ | 1,921,930 | 
|Trade accounts payable due to affiliate        |  | $                  |        |      |  | $ |          | 

(b) Sales-Shareholder 
During the years ended December 31, 2002, 2001 and 2000,
the continuing operations of 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, 2002, 2001 and 2000 was
$2,780,144, $5,120,559 and $5,776,344, respectively.
Additionally, AIG provides certain services to the continuing
operations of Kroll, which have been included in cost of sales
and operating expenses in the accompanying consolidated
statements of operations. These costs were approximately
$906,911, $386,058 and $286,589 for the years ended
December 31, 2002, 2001 and 2000, respectively. The
year-end accounts receivable balance from AIG was approximately
$670,176 and $1,921,930 at December 31, 2002 and 2001,
respectively.

(c) Building and Equipment
Leases  Affiliated Entities  Effective
June 1, 1998, Kroll reached an agreement to terminate the
corporate aircraft lease which originated in February 1995 with
an affiliated entity. The terms of the aircraft lease addendum
provide Kroll with a future hourly discount from the normal
commercial hourly rate in order to amortize the remaining
portion of existing lease deposits from the original aircraft
lease. Rental expense, including amortization recognized,
approximated $90,000 in each of the years ended
December 31, 2002, 2001 and 2000. As of December 31,
2002, 2001 and 2000, Kroll had $133,185, $223,057 and $312,929,
respectively, in unamortized lease deposits with this affiliated
entity.

Kroll is also currently leasing 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 $534,000, $465,000 and
$246,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

(d) During 2002, 2001 and 2000, an 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, 2002 and 2001
pursuant to this agreement were $50,017 and $494,935
respectively.

(10) Revolving Line of Credit

In April 2001, Kroll entered into an amended and
restated loan agreement to provide for a revolving credit
facility that initially amounted to $40.0 million. The loan
agreement was secured by substantially all assets of Kroll and
its subsidiaries, and a pledge of the stock of essentially all
Krolls subsidiaries, all of which jointly and severally
guaranteed obligations under the agreement. The assets and the
joint and several guarantee also secured Krolls
$35.0 million senior notes. Advances under the revolving
credit facility bore interest at the greater of (a) 8.56%
or (b) the prime rate plus 1.5%, plus 0.5% times the number
of 30-day periods which expired since April 20, 2001 (or,
if less, the highest rate allowed by law). Krolls
agreement to sell the entities that comprise the Security
Products and Services Group discussed in Note 5(a) caused
an acceleration of all amounts due under the loan agreement
60 days after the closing of the sale, resulting in the
expiration of the agreement on October 22, 2001, which was
then extended to November 16, 2001. Kroll used
approximately $28.2 million of the proceeds from the sale
of SPSG to pay down this line of credit during the third quarter
of 2001. The remaining balance under this agreement was
subsequently repaid on November 14, 2001, thus terminating
the agreement.

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

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expense of $1.0 million, including
commitment and due diligence fees and the cost of extending the
then-existing bank loan, was written off as failed financing
costs in 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
agreement 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 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 agreement. The remaining unamortized deferred financing
costs associated with the facility in the amount of
$0.5 million was written-off, resulting in an extraordinary
loss of $0.4 million, net of taxes. No borrowings were made
under the terminated $15 million credit agreement.
Concurrently, Kroll entered into a new $100 million credit
facility with Goldman Sachs that included a $25 million
revolving credit facility (see Note 11(c)).

The $25 million revolving credit facility
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 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 credit facility required Kroll
to pay a fee equal to 0.75% per annum of the unused revolving
credit facility. Upon the repayment of the term loan in October
2002, this fee was reduced to 0.375% per annum (see
Note 11(c)). Through December 31, 2002, Kroll did not
borrow any funds under the revolving credit facility. 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 obtained new
financing and terminated the above revolving credit facility and
will write off approximately $0.2 million of unamortized
deferred financing costs as a one time charge to operating
expenses in the first quarter of 2003 (see Note 21(a)).

Effective June 3, 1999, with the acquisition
of Buchler Phillips, Kroll acquired a demand note with maximum
borrowings of 2.5 million pounds sterling. The demand note
bears interest at the Bank of Englands base rate plus
1.5%. At December 31, 2002, the interest rate was 5.5%. In
March 2002, maximum borrowings permitted under the demand note
were increased from 2.5 million pounds sterling to
4.4 million pounds sterling, or $7.1 million as
translated at December 31, 2002. Borrowings outstanding
under this demand note were approximately $3.8 million and
$2.6 million, as translated at December 31, 2002 and
2001, respectively.

65



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(11) Long-Term Debt

The components of long-term debt are as follows:

|                                                                                                                                                                                                                                                                                                                                  |  |                    |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                                                                                                                                                                                                                  |  |                   
|                                                                                                                                                                                                                                                                                                                                  |  | As of December 31,
|                                                                                                                                                                                                                                                                                                                                  |  |                   
|Description                                                                                                                                                                                                                                                                                                                       |  | 2002               |            | 2001
|                                                                                                                                                                                                                                                                                                                                  |  |                    |            |     
|Senior Secured Subordinated Convertible Notes,
    interest at 6.0%, net of discount of $9,598,522 and $11,199,674
    in 2002 and 2001, respectively                                                                                                                                                                             |  | $                  | 20,401,478 |      |  | $ | 18,800,326 |  
|Notes payable to former shareholders of acquired
    companies, interest at fixed rate of 5.5%, payable in scheduled
    installments through January 2002, certain notes secured by
    acquired assets                                                                                                                          |  |                    |           |      |  |   | 225,000    |  
|Notes payable to banks, variable interest rate at
    prime plus 1.5%, fixed rates ranging from 8.6% to 18.0%, payable
    in scheduled installments through May 2004. Bank mortgage, with
    variable interest rate at prime plus 1.5%, originally scheduled
    for payments through December 2010, was paid off in June 2002. |  |                    | 50,016     |      |  |   | 360,081    |  
|Other notes payable                                                                                                                                                                                                                                                                                                               |  |                    | 40,278     |      |  |   | 10,964     |  
|                                                                                                                                                                                                                                                                                                                                  |  |                    |            |      |  |   |            |  
|                                                                                                                                                                                                                                                                                                                                  |  |                    | 20,491,772 |      |  |   | 19,396,371 |  
|Less  current portion                                                                                                                                                                                                                                                                                                            |  |                    | (72,703    | )    |  |   | (318,089   | )
|                                                                                                                                                                                                                                                                                                                                  |  |                    |            |      |  |   |            |  
|                                                                                                                                                                                                                                                                                                                                  |  | $                  | 20,419,069 |      |  | $ | 19,078,282 |  
|                                                                                                                                                                                                                                                                                                                                  |  |                    |            |      |  |   |            |  



| |                 
| | ----------------
| | (a) Senior Notes

Krolls $35.0 million of senior notes
were amended on March 30, 2001 and April 20, 2001.
Based on the amendments, the senior notes bore interest at the
greater of (a) 8.56% or (b) the prime rate plus 1.5%,
plus 0.5% times the number of 30-day periods which have expired
since April 20, 2001 (or, if less, the highest rate allowed
by law). The senior notes also contained financial covenants,
which among other restrictions required the maintenance of a
minimum level of net worth and a fixed charge coverage ratio.
The senior notes were cross-collateralized and guaranteed with
Krolls revolving credit facility and contained similar
acceleration provisions that required the net proceeds from
asset sales to be paid proportionately to the revolving credit
facility lender and the holders of the senior notes. In
accordance with the April 20, 2001 amendment to the senior
notes, Krolls sale of the entities that comprised the
Security Products and Services Group on August 22, 2001
(see Note 5(a)) resulted in the acceleration of all amounts
due under the revolving credit facility and the senior notes to
a date 60 days after the closing of the sale. Kroll
obtained from the lender an extension from October 22, 2001
to November 16, 2001. Kroll used 43.21% of the proceeds
from the sale of SPSG to repay these notes by approximately
$21.2 million during the third quarter of 2001. On
November 14, 2001, all outstanding debt under the senior
notes was repaid, with no adverse consequences resulting from
any event of non-compliance.



| |                                                      
| | -----------------------------------------------------
| | (b) Senior Secured Subordinated
    Convertible Notes

In November 2001, Kroll obtained new financing of
$30.0 million in the form of 6% Senior Secured Subordinated
Convertible Notes due 2006. On November 14, 2001, Kroll
issued $25.0 million of notes and issued an additional
$5.0 million of notes on November 20, 2001. 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

66



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

conversion price of $10.80 per share. The
$30.0 million of notes are immediately convertible into
2,777,777 shares of Kroll common stock, subject to
customary and other anti-dilution adjustments.

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 credit
facility, except that the notes were subordinate to the security
interest and rights of the credit facility lender.

Kroll has an effective registration statement
with the Securities and Exchange Commission covering the resale
of the notes, and the shares of common stock issuable upon
conversion of these notes, and is required to keep the
registration statement effective for at least two years.

In connection with the issuance of the 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 will
be 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 will be approximately $2.3 million or 7.6% per
year on the $30.0 million principal amount.

A significant portion of the proceeds from the
sale of these notes was used to retire Krolls amended bank
loan and senior notes. The deferred financing costs associated
with the former financing in the amount of $0.5 million was
accelerated, resulting in an extraordinary loss of
$0.3 million, net of taxes, in the year ended
December 31, 2001.

On September 5, 2002, Kroll amended certain
provisions of its outstanding 6% convertible notes. Under the
amendments, the security interest of all the noteholders was
terminated and the collateral securing all of the convertible
notes was released. In addition, the amendments deleted all of
the negative covenants in respect of all of the convertible
notes. Furthermore, 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
owns to borrowings under the Goldman Sachs credit facility.
Kroll recorded the $1.6 million payment as an extraordinary
item in 2002. 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.



| |                    
| | -------------------
| | (c) Long-term Notes

In connection with the Zolfo Cooper acquisition
(see Note 4(b)), 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 ($51.0 million) within
three years of closing.

The term loan was part of a $100 million
credit facility which included a $25 million revolving
credit facility (see Note 10). 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.

The term loan was repaid in October 2002 with the
proceeds from Krolls common stock offering (see
Note 14(b)). In 2002 Kroll wrote off financing fees of
$1.1 million associated with the repayment of the
$75 million term loan, made a payment to Palisade of
$1.6 million to amend certain provisions of the convertible
notes, and wrote off financing fees of $0.4 million related
to the replacement of the Foothill revolving credit facility.

67



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Scheduled maturities of long-term debt at
December 31, 2002 are as follows:

|                              |  |        |            | 
|----------------------------- |  | ------ | ---------- | 
|Year                          |  | Amount
|                              |  |       
|2003                          |  | $      | 72,703     | 
|2004                          |  |        | 17,591     | 
|2005                          |  |        |           | 
|2006                          |  |        | 30,000,000 | 
|2007                          |  |        |           | 
|Thereafter                    |  |        |           | 
|                              |  |        |            | 
|                              |  |        | 30,090,294 | 
|Discount on convertible notes |  |        | 9,598,522  | 
|                              |  |        |            | 
|                              |  | $      | 20,491,772 | 
|                              |  |        |            | 

(12) Operating Leases

Kroll leases office space and certain equipment
and supplies under agreements with terms from one to fifteen
years. The following is a schedule, by year, of approximate
future minimum rental or usage payments required under operating
leases that have initial or non-cancelable lease terms in excess
of one year as of December 31, 2002:

|           |  |        |            | 
|---------- |  | ------ | ---------- | 
|Year       |  | Amount
|           |  |       
|2003       |  | $      | 13,508,019 | 
|2004       |  |        | 12,000,186 | 
|2005       |  |        | 10,629,696 | 
|2006       |  |        | 9,109,772  | 
|2007       |  |        | 8,289,476  | 
|Thereafter |  |        | 7,109,116  | 
|           |  |        |            | 
|           |  | $      | 60,646,265 | 
|           |  |        |            | 

Rental expense charged against current operations
amounted to approximately $12,784,000, $10,638,000 and
$10,481,000 for the years ended December 31, 2002, 2001 and
2000, respectively.

(13) Defined Contribution and Bonus
Plans

As of December 31, 2002, Kroll had the
following employee benefit plans in place:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) 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 expense charged
    against current operations for all such plans amounted to
    approximately $1,108,500, $1,167,000 and $977,000 for the years
    ended December 31, 2002, 2001 and 2000, respectively.
|
| | (b) 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 $8,971,000,                                                                                                                                                                                                                                                                             

68



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | $3,835,000 and $1,092,000 associated with the
    profit and revenue sharing plans in the years ended
    December 31, 2002, 2001 and 2000, respectively.



|     |                                                 
|---- | ------------------------------------------------
|(14) | Equity, Equity Arrangements and
    Transactions

(a) The following equity arrangements
include all obligations and rights of Kroll, including those
that pertain to employees, division, units and subsidiaries that
are accounted for as discontinued operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Stock Option Plans  In
    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 April 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 850,000,
    155,000 and 262,374 shares were granted during the years ended
    December 31, 2002, 2001 and 2000, respectively. The options
    generally vest over the three years following the date of grant.
    Options granted under the 1996 Option Plan are generally granted
    at fair market value at the date of grant and are exercisable
    over periods not exceeding ten years. In 2002, 50,386 options
    were exercised and 168,932 options were cancelled under this
    plan.                                                                                                                                                                                                                                
|
| | In connection with stock options granted by
    Securify during the year ended December 31, 1998, Kroll
    recorded deferred compensation of $1,192,096, representing the
    difference between the deemed value of the common stock for
    accounting purposes and the option exercise price of such
    options at the date of grant. This amount is presented as a
    reduction of shareholders equity and was expected to be
    amortized ratably over the vesting periods of the applicable
    options. Approximately $236,000 was expensed in the year ended
    December 31, 2000. The unamortized balance of the deferred
    compensation relating to these stock options was reversed to
    shareholders equity upon the sale of Securify in October
    2000.                                                                                                                                                                                                                                                                                                                                                                      
|
| | In 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. Options for 1,447,150, 2,027,000 and 742,400
    shares were granted during the years ended December 31,
    2002, 2001 and 2000, respectively. Options under the 2000 Option
    Plan are generally 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 the
    three years following the date of grant. In 2002, 484,334
    options were exercised and 128,941 options were cancelled under
    the 2000 Option Plan.
|
| | In 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
    shareholders on August 16, 2001. An additional 40,000
    options were granted following Krolls 2002 annual meeting
    of shareholders on June 13, 2002. Options under the 2001
    Option Plan are generally 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 2002, no options were exercised or
    cancelled under the 2001 Option Plan.                                                                                                                                                                                                                                                                                                                              
|
| | At December 31, 2002, there were
    approximately 1,125,000, 87,000 and 120,000 authorized shares
    remaining for grant in the 1996 Option Plan, the 2000 Option
    Plan and the 2001 Option Plan, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

69



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | A summary of the status of Krolls stock
    option plans and the changes during the years then ended is
    presented in the table below:

|                               |                               |                    |           |            |   |        |       |          |  |        |           |           |   |   |       |       |  |  |           |           |   |   |       |       | 
|------------------------------ | ----------------------------- | ------------------ | --------- | ---------- | - | ------ | ----- | -------- |  | ------ | --------- | --------- | - | - | ----- | ----- |  |  | --------- | --------- | - | - | ----- | ----- | 
|                               |                               |                   
|                               |                               | As of December 31,
|                               |                               |                   
|                               |                               |                    |           |            |   |       
|                               |                               | 2002               |           | 2001       |   | 2000  
|                               |                               |                    |           |            |   |       
|                               |                               |                    |           | Weighted   |   |        |       | Weighted |  |        |           | Weighted 
|                               |                               |                    |           | Average    |   |        |       | Average  |  |        |           | Average  
|                               |                               |                    |           | Exercise   |   |        |       | Exercise |  |        |           | Exercise 
|Description                    |                               | Shares             |           | Price      |   | Shares |       | Price    |  | Shares |           | Price    
|                               |                               |                    |           |            |   |        |       |          |  |        |           |          
|Outstanding, beginning of year |                               |                    | 3,325,256 |            |   | $      | 10.04 |          |  |        | 2,398,298 |           |   | $ | 13.19 |       |  |  | 1,830,039 |           |   | $ | 17.06 |      
|                               | Acquired through acquisition  |                    |           | 1,037,490  |   |        |       | 11.35    |  |        |           |          |   |   |       |      |  |  |           |          |   |   |       |      | 
|                               | Granted                       |                    |           | 2,337,150  |   |        |       | 20.31    |  |        |           | 2,222,000 |   |   |       | 7.39  |  |  |           | 1,004,774 |   |   |       | 6.37  | 
|                               | Exercised                     |                    |           | (1,016,871 | ) |        |       | 8.34     |  |        |           | (384,204  | ) |   |       | 6.72  |  |  |           | (115,197  | ) |   |       | 0.73  | 
|                               | Forfeited/ Expired/ Cancelled |                    |           | (305,570   | ) |        |       | 14.39    |  |        |           | (910,838  | ) |   |       | 13.28 |  |  |           | (321,318  | ) |   |       | 18.39 | 
|                               |                               |                    |           |            |   |        |       |          |  |        |           |           |   |   |       |       |  |  |           |           |   |   |       |      
|Outstanding, end of year       |                               |                    | 5,377,455 |            |   | $      | 14.83 |          |  |        | 3,325,256 |           |   | $ | 10.04 |       |  |  | 2,398,298 |           |   | $ | 13.19 |      
|                               |                               |                    |           |            |   |        |       |          |  |        |           |           |   |   |       |       |  |  |           |           |   |   |       |      
|Exercisable, end of year       |                               |                    | 1,738,779 |            |   | $      | 13.09 |          |  |        | 993,986   |           |   | $ | 14.50 |       |  |  | 1,111,084 |           |   | $ | 14.61 |      
|                               |                               |                    |           |            |   |        |       |          |  |        |           |           |   |   |       |       |  |  |           |           |   |   |       |      



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | A summary of Krolls stock options
    outstanding and exercisable at December 31, 2002 is
    presented in the table below:

|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |           | 
|------------ | --------------------------------------------------------------------------------- | ---------------------- | - | ----------- |  | ----------- | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|             |                                                                                   |                       
|             |                                                                                   | Per Share Price Ranges
|             |                                                                                   |                       
|             |                                                                                   |                        |   | Totals From
|             |                                                                                   | From $2.40             |   | From $10.34 |  | From $20.22 |   | $2.40 to 
|Description  |                                                                                   | to $10.25              |   | to $19.55   |  | to $26.94   |   | $26.94   
|             |                                                                                   |                        |   |             |  |             |   |          
|Outstanding: |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|             | Number of stock options                                                           |                        |   | 1,907,732   |  |             |   | 1,798,668 |  |  |   | 1,671,055 |  |  |   | 5,377,455 | 
|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|             | Weighted-average exercise price (per share)                                       |                        | $ | 7.47        |  |             | $ | 15.41     |  |  | $ | 22.62     |  |  | $ | 14.83     | 
|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|             | Weighted-average remaining contractual life of
    options outstanding (in years) |                        |   | 8.5         |  |             |   | 8.1       |  |  |   | 8.7       |  |  |   | 8.4       | 
|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|Exercisable: |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|             | Number of stock options                                                           |                        |   | 636,143     |  |             |   | 700,831   |  |  |   | 401,805   |  |  |   | 1,738,779 | 
|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|             | Weighted-average exercise price (per share)                                       |                        | $ | 8.17        |  |             | $ | 11.03     |  |  | $ | 24.45     |  |  | $ | 13.09     | 
|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          
|             | Weighted-average remaining contractual life of
    options exercisable (in years) |                        |   | 8.7         |  |             |   | 5.8       |  |  |   | 6.0       |  |  |   | 6.9       | 
|             |                                                                                   |                        |   |             |  |             |   |           |  |  |   |           |  |  |   |          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (ii) Restricted Stock
    Plan  Effective August 12, 1998, Kroll
    adopted a stock incentive plan (the Stock Incentive
    Plan) for employees. Kroll may grant up to 500,000 shares
    under the Stock Incentive Plan. During fiscal 1999, 47,500
    shares were granted under the Stock Incentive Plan. In
    connection with these shares, Kroll recorded deferred
    compensation of $1,571,661 in the year ended December 31,
    1999, representing the difference between the fair market value
    of Kroll common stock on the date of grant and the purchase
    price of the shares. This amount is presented as a reduction of
    shareholders equity and will be amortized ratably over the
    vesting periods of the applicable grants. No expense was
    recorded in the year ended December 31, 2002 and
    approximately $337,000 and $364,000 were expensed in the years
    ended December 31, 2001 and 2000, respectively. The
    deferred compensation was reduced in the year ended
    December 31, 2000 by approximately $113,000 applicable to
    options forfeited by employees

70



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | terminated in that year. The 1999 restricted
    stock grants generally vest ratably over three years. There were
    no shares granted under the Stock Incentive Plan in 2000 and
    2001. In March 2002, 2,500 shares were granted to an officer
    pursuant to terms of an employment agreement with Kroll, with
    such shares vesting over a one year period; 50% vesting
    immediately and 50% vesting ratably over one year from date of
    grant.                                                                                                                                                                                                                                              
|
| | At December 31, 2002, there were
    approximately 450,000 authorized shares remaining for grant in
    the Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (iii) 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. 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 were
    issued in June 1998 to certain consultants and underwriters in
    connection with the completion of a private offering of common
    stock in 1998 and were recognized as compensation paid for
    services rendered and treated as a reduction in the recognized
    net proceeds from the offering.
|
| | Warrants originally granted by Background
    America, Inc. (BAI) were converted to the equivalent
    warrants to purchase Kroll stock when Kroll acquired BAI. 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 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, Kroll had a total
    of 9,526 warrants still outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

(b) 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, including $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 (see
Notes 4(b) and 11(c)). The remaining proceeds were used for
working capital to fund operations and other general company
purposes. Because the repayment effectively terminated the term
loan agreement, all unamortized deferred financing fees in the
amount of $1.7 million, net of tax, were written off as an
extraordinary item in the fourth quarter of 2002.

(c) On July 2, 2002, Kroll Inc.,
formerly an Ohio corporation, became a Delaware corporation
pursuant to a merger in which the Ohio corporation merged into
its wholly-owned Delaware subsidiary. In connection with the
reincorporation in Delaware, Kroll Inc.s authorized
capital increased from 50,000,000 to 100,000,000 shares of
common stock and from 1,000,000 to 5,000,000 shares of preferred
stock.



|     |                              
|---- | -----------------------------
|(15) | Commitments and Contingencies

(a) 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, 2002.

(b) Employment Agreements 
Kroll has employment agreements with its executive officers and
management level personnel with annual compensation ranging in
value up to $2,000,000, over varying periods extending to
December 2006. The agreements generally provide for salary
continuation in the event of termination without cause for the
greater of the remainder of the agreement or one year. The
agreements also contain certain non-competition clauses and
generally provide for one years salary if the agreement is
not renewed.

As of December 31, 2002, the remaining
aggregate commitment under these employment agreements if all
individuals were terminated without cause was approximately
$42.2 million.

71



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(c) Legal Matters  Kroll
has been named as a defendant in eight lawsuits alleging that
its officers and directors breached their fiduciary duties in
connection with the now terminated proposed acquisition of a
majority of Krolls shares by a company formed by
Blackstone Capital Partners III Merchant Banking Fund L.P.
(Blackstone). Five of the lawsuits were filed in the
Court of Common Pleas, Butler County, Ohio, and were
consolidated on November 29, 1999. The remaining three
lawsuits were filed in the United States District Court for the
Southern District of New York and were consolidated on
November 30, 1999. The plaintiffs allege that Krolls
officers and directors breached their fiduciary duties by
deferring acquisitions, by negotiating an inadequate acquisition
price, by failing to engage in arms-length negotiations and by
failing to seek redress from Blackstone after Blackstone
terminated the proposed transaction. The plaintiffs also allege
that Blackstone and American International Group, Inc.
(AIG) aided and abetted the directors and
officers alleged breaches of fiduciary duties. The
plaintiffs seek to bring their claims derivatively on behalf of
Kroll. On behalf of Kroll, they seek a declaration that the
individual defendants breached their fiduciary duty and seek
damages and attorneys fees in an unspecified amount The
parties executed a stipulation of settlement providing for the
settlement of these actions. On December 20, 2002, the New
York court signed a Final Judgment and Order Approving the
Settlement. On January 7, 2003, the Ohio court entered a
Final Judgment dismissing the Ohio action. The Settlement
included defendants agreement not to object to
plaintiffs counsels application for attorneys
fees and reimbursement of costs and expenses not to exceed
$385,000 in the aggregate. Any such fees or costs approved are
to be paid by Krolls insurance carrier.

In 1999, Kroll learned that an individual had
filed a qui tamsuit against Kroll under the Civil False
Claims Act alleging that Kroll and three of its vendors
knowingly violated their contractual requirements with the Army
due to the vendors alleged failure to have certified
welders. In October 2000, Kroll settled this litigation with the
Department of Justice for approximately $1.1 million, plus
legal costs. Kroll admitted no wrongdoing as part of the
settlement. All amounts under this settlement were paid before
December 31, 2001. The qui tamsuit and the
corresponding settlement related entirely to the discontinued
SPSG operation.

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
on December 11 and 12, 2002, with additional dates to be
scheduled in 2003. 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 (USD) will be a claim
in the liquidation, on which distributions will be made as the
liquidation progresses. Management of Kroll believes LAMB has
meritorious defenses to the claims and intends to defend the
claims vigorously.

72



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



|     |                                    
|---- | -----------------------------------
|(16) | Fair Value of Financial Instruments

The fair value of long-term debt approximates its
historical carrying amount. 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.



|     |                          
|---- | -------------------------
|(17) | Customer and Segment Data

(a) Segment Data  Through
October 17, 2000, Kroll operated in three business
segments, the Security Products and Services Group, the
Investigations and Intelligence Group and the Information
Security Group. As a result of the preferred stock sale
completed by the Information Security Group on October 17,
2000, the Group ceased to be a part of the consolidated results
of Kroll from that date forward. See Note 6(a) for more
information on this transaction.

As a result of the sale of SPSG to Armor on
August 22, 2001 (see Note 5(a)), SPSG was accounted
for as a discontinued operation. The segment data in the table
below depicts the Investigations and Intelligence Group in five
business segments; Consulting Services, Corporate Advisory &
Restructuring, Technology Services, Background Screening
Services and Security Services, restated historically for
segment presentation. Krolls reportable segments are now
organized, managed and operated along product lines, as 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.

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

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

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 pre-employment background
screening, substance abuse testing and surveillance.

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.

73



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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, 2002, 2001 and 2000:

|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|------------------------------------- |  | ---------------------- | ------- | ------------- |  | ---------- | ------ | ---------- |  | -------- | ------ | ----------- |  | ----- | ------ | ------------ |  | - | ------ |  |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                      |  |                        |         | Corporate     |  |            |        |            |  |          |        |             |  |       |        |             
|                                      |  |                        |         | Advisory &    |  |            |        | Background |  |          |        | Information |  |       |        |             
|                                      |  | Consulting             |         | Restructuring |  | Technology |        | Screening  |  | Security |        | Security    |  |       |        |             
|                                      |  | Services               |         | Services      |  | Services   |        | Services   |  | Services |        | Group       |  | Other |        | Consolidated
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |             
|                                      |  |                       
|                                      |  | (Dollars in thousands)
|2002                                  |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Net sales to unaffiliated customers   |  | $                      | 106,564 |               |  | $          | 71,386 |            |  | $        | 36,438 |             |  | $     | 49,284 |              |  | $ | 25,496 |  |  | $ |       |   |  | $ |        |   |  | $ | 289,168 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Gross profit                          |  | $                      | 43,583  |               |  | $          | 40,629 |            |  | $        | 25,201 |             |  | $     | 23,022 |              |  | $ | 8,850  |  |  | $ |       |   |  | $ |        |   |  | $ | 141,285 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Operating income (loss)               |  | $                      | 13,324  |               |  | $          | 23,128 |            |  | $        | 5,479  |             |  | $     | 9,725  |              |  | $ | 3,047  |  |  | $ |       |   |  | $ | (23,264 | ) |  | $ | 31,439  |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Identifiable assets at year-end       |  | $                      | 59,625  |               |  | $          | 41,618 |            |  | $        | 32,597 |             |  | $     | 26,853 |              |  | $ | 13,941 |  |  | $ |       |   |  | $ |        |   |  | $ | 174,634 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Corporate assets                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   | 364,988 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Total assets at year-end              |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  | $ | 539,622 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|2001                                  |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Net sales to unaffiliated customers   |  | $                      | 106,126 |               |  | $          | 30,751 |            |  | $        | 4,380  |             |  | $     | 42,491 |              |  | $ | 24,129 |  |  | $ |       |   |  | $ |        |   |  | $ | 207,877 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Gross profit                          |  | $                      | 35,239  |               |  | $          | 16,045 |            |  | $        | 2,628  |             |  | $     | 19,303 |              |  | $ | 9,610  |  |  | $ |       |   |  | $ |        |   |  | $ | 82,825  |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Operating income (loss)               |  | $                      | 2,975   |               |  | $          | 5,684  |            |  | $        | 1,084  |             |  | $     | 4,330  |              |  | $ | 3,494  |  |  | $ |       |   |  | $ | (22,255 | ) |  | $ | (4,688  | )
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Identifiable assets at year-end       |  | $                      | 67,996  |               |  | $          | 15,671 |            |  | $        | 1,195  |             |  | $     | 21,107 |              |  | $ | 11,916 |  |  | $ |       |   |  | $ |        |   |  | $ | 117,885 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Corporate assets                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   | 51,901  |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Total assets at year-end              |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  | $ | 169,786 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|2000                                  |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Net sales to unaffiliated customers   |  | $                      | 104,245 |               |  | $          | 19,311 |            |  | $        | 2,621  |             |  | $     | 46,588 |              |  | $ | 28,812 |  |  | $ | 4,033  |   |  | $ |        |   |  | $ | 205,610 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Gross profit (loss)                   |  | $                      | 37,593  |               |  | $          | 9,754  |            |  | $        | 1,573  |             |  | $     | 22,338 |              |  | $ | 10,964 |  |  | $ | (403   | ) |  | $ |        |   |  | $ | 81,819  |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Operating income (loss)               |  | $                      | 5,065   |               |  | $          | 2,076  |            |  | $        | 550    |             |  | $     | 5,305  |              |  | $ | 2,616  |  |  | $ | (9,554 | ) |  | $ | (16,964 | ) |  | $ | (10,906 | )
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Identifiable assets at year-end       |  | $                      | 73,591  |               |  | $          | 11,078 |            |  | $        | 547    |             |  | $     | 22,258 |              |  | $ | 14,133 |  |  | $ |       |   |  | $ |        |   |  | $ | 121,607 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Corporate assets                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   | 49,820  |  
|Net assets of discontinued operations |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   | 55,979  |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  
|Total assets at year-end              |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  | $ | 227,406 |  
|                                      |  |                        |         |               |  |            |        |            |  |          |        |             |  |       |        |              |  |   |        |  |  |   |        |   |  |   |         |   |  |   |         |  

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, other expenses, income taxes,
gain on the issuance of subsidiary stock, discontinued
operations and extraordinary items. The Other column includes
Krolls corporate headquarters 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, costs in excess of assets acquired,
certain intangible assets and certain prepaid expenses.

Prior to the sale of the Security Products and
Services Group to Armor, corporate costs relating to the above
five segments (excluding Information Security Group, which is
not an ongoing business) were allocated in the calculation of
operating income for each of those segments. At that time, this
mirrored the management

74



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##### Table of Contents



KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of those businesses as one segment, the
Investigations and Intelligence Group. Subsequent to the sale of
SPSG, Krolls remaining business, the Investigations and
Intelligence Group, was broken out into the five described
segments. Corporate costs relating to each of these segments are
now included in the table above under Other
corporate costs in order to reflect the post-sale management
structure of Kroll. For the years ended December 31, 2001
and 2000, corporate costs of approximately $10.8 million
and $11.4 million, respectively, relating to these five
segments, were included in the calculation of segment operating
income. Had these costs been included with Other
corporate costs, the operating loss relating to
Other would have been approximately
$33.1 million and $28.4 million for the years ended
December 31, 2001 and 2000, respectively.

Depreciation expense and capital expenditures for
each of Krolls business segments for the years ended
December 31, 2002, 2001 and 2000 are as follows:

|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |         | 
|---- | --------------------------------- | ---------------------- | - | ------------- |  | ---------- | - | -------- |  | ---------- | - | ----------- |  | ----- | - | ------------ |  |  | - | ------ | - |  | - | ----- |  |  | - | ----- |  |  | - | ------- | 
|     |                                   |                        |   | Corporate     |  |            |   |          |  |            |   |             |  |       |   |             
|     |                                   |                        |   | Advisory &    |  |            |   |          |  | Background |   | Information |  |       |   |             
|     |                                   | Consulting             |   | Restructuring |  | Technology |   | Security |  | Screening  |   | Security    |  |       |   |             
|     |                                   | Services               |   | Services      |  | Services   |   | Services |  | Services   |   | Group       |  | Other |   | Consolidated
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |             
|     |                                   |                       
|     |                                   | (Dollars in thousands)
|2002 |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Depreciation expense              |                        | $ | 2,059         |  |            | $ | 878      |  |            | $ | 1,878       |  |       | $ | 290          |  |  | $ | 1,154  |   |  | $ |      |  |  | $ | 1,407 |  |  | $ | 7,666   | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Capital expenditures              |                        | $ | 5,085         |  |            | $ | 3,506    |  |            | $ | 2,312       |  |       | $ | 509          |  |  | $ | (592   | ) |  | $ |      |  |  | $ | 5     |  |  | $ | 10,825  | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Cost in excess of assets acquired |                        | $ | 19,700        |  |            | $ | 171,811  |  |            | $ | 93,953      |  |       | $ | 3,631        |  |  | $ | 10,487 |   |  | $ |      |  |  | $ |      |  |  | $ | 299,582 | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|2001 |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Depreciation expense              |                        | $ | 2,798         |  |            | $ | 621      |  |            | $ | 179         |  |       | $ | 553          |  |  | $ | 1,374  |   |  | $ |      |  |  | $ | 741   |  |  | $ | 6,266   | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Capital expenditures              |                        | $ | 5,152         |  |            | $ | 823      |  |            | $ | 329         |  |       | $ | 624          |  |  | $ | 885    |   |  | $ |      |  |  | $ |      |  |  | $ | 7,813   | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Cost in excess of assets acquired |                        | $ | 16,270        |  |            | $ | 18,665   |  |            | $ |            |  |       | $ | 5,015        |  |  | $ | 10,487 |   |  | $ |      |  |  | $ |      |  |  | $ | 50,437  | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|2000 |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Depreciation expense              |                        | $ | 2,178         |  |            | $ | 345      |  |            | $ | 71          |  |       | $ | 417          |  |  | $ | 1,440  |   |  | $ | 254   |  |  | $ | 764   |  |  | $ | 5,469   | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        
|     | Capital expenditures              |                        | $ | 7,781         |  |            | $ | 466      |  |            | $ | 319         |  |       | $ | 768          |  |  | $ | 1,035  |   |  | $ | 1,551 |  |  | $ | 105   |  |  | $ | 12,025  | 
|     |                                   |                        |   |               |  |            |   |          |  |            |   |             |  |       |   |              |  |  |   |        |   |  |   |       |  |  |   |       |  |  |   |        

The following summarizes information about
Krolls different geographic areas for the years ended
December 31, 2002, 2001 and 2000:

|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |         |         | 
|---- | ----------------------------------- | ---------------------- | - | ------- | ------- | ---- | - | ------- | ------ | ------------ | - | ------------ | ----- |  | - | ------ | ------ |  | - | ------ | ------ | - | - | ------- | ------- | 
|     |                                     | United                 |   |         |         |      |   | Other   |        |              |   |             
|     |                                     | States                 |   | Europe  |         | Asia |   | Foreign |        | Eliminations |   | Consolidated
|     |                                     |                        |   |         |         |      |   |         |        |              |   |             
|     |                                     |                       
|     |                                     | (Dollars in thousands)
|2002 |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        
|     | Net sales to unaffiliated customers |                        | $ | 186,803 |         |      | $ | 70,608  |        |              | $ | 9,663        |       |  | $ | 22,094 |        |  | $ |       |        |   | $ | 289,168 |        
|     | Intercompany                        |                        |   | 5,376   |         |      |   | 777     |        |              |   | 274          |       |  |   | 2,761  |        |  |   | (9,188 | )      |   |   |        |        
|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        
|     |                                     | Total net sales        |   | $       | 192,179 |      |   | $       | 71,385 |              |   | $            | 9,937 |  |   | $      | 24,855 |  |   | $      | (9,188 | ) |   | $       | 289,168 | 
|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        
|     | Operating income (loss)             |                        | $ | 16,809  |         |      | $ | 11,622  |        |              | $ | (1,179       | )     |  | $ | 4,187  |        |  | $ |       |        |   | $ | 31,439  |        
|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        
|     | Identifiable assets at year-end     |                        | $ | 121,847 |         |      | $ | 35,359  |        |              | $ | 7,963        |       |  | $ | 9,465  |        |  | $ |       |        |   | $ | 174,634 |        
|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        
|     | Corporate assets                    |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   | 364,988 |        
|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        
|     | Total assets at year-end            |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   | $ | 539,622 |        
|     |                                     |                        |   |         |         |      |   |         |        |              |   |              |       |  |   |        |        |  |   |        |        |   |   |        

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |         |         | 
|---- | ------------------------------------- | ---------------------- | - | ------- | ------- | ---- | - | ------- | ------ | ------------ | - | ------------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | - | - | ------- | ------- | 
|     |                                       | United                 |   |         |         |      |   | Other   |        |              |   |             
|     |                                       | States                 |   | Europe  |         | Asia |   | Foreign |        | Eliminations |   | Consolidated
|     |                                       |                        |   |         |         |      |   |         |        |              |   |             
|     |                                       |                       
|     |                                       | (Dollars in thousands)
|2001 |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Net sales to unaffiliated customers   |                        | $ | 123,511 |         |      | $ | 47,814  |        |              | $ | 12,232       |        |  | $ | 24,320 |        |  | $ |       |        |   | $ | 207,877 |        
|     | Intercompany                          |                        |   | 3,140   |         |      |   | 758     |        |              |   | 313          |        |  |   | 2,299  |        |  |   | (6,510 | )      |   |   |        |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     |                                       | Total net sales        |   | $       | 126,651 |      |   | $       | 48,572 |              |   | $            | 12,545 |  |   | $      | 26,619 |  |   | $      | (6,510 | ) |   | $       | 207,877 | 
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Operating income (loss)               |                        | $ | (12,959 | )       |      | $ | 8,128   |        |              | $ | (3,294       | )      |  | $ | 3,437  |        |  | $ |       |        |   | $ | (4,688  | )      
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Identifiable assets at year-end       |                        | $ | 75,850  |         |      | $ | 22,785  |        |              | $ | 8,765        |        |  | $ | 10,485 |        |  | $ |       |        |   | $ | 117,885 |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Corporate assets                      |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   | 51,901  |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Total assets at year-end              |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   | $ | 169,786 |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|2000 |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Net sales to unaffiliated customers   |                        | $ | 120,911 |         |      | $ | 34,272  |        |              | $ | 15,997       |        |  | $ | 34,430 |        |  | $ |       |        |   | $ | 205,610 |        
|     | Intercompany                          |                        |   | 3,597   |         |      |   | 1,755   |        |              |   | 699          |        |  |   | 362    |        |  |   | (6,413 | )      |   |   |        |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     |                                       | Total net sales        |   | $       | 124,508 |      |   | $       | 36,027 |              |   | $            | 16,696 |  |   | $      | 34,792 |  |   | $      | (6,413 | ) |   | $       | 205,610 | 
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Operating income (loss)               |                        | $ | (18,886 | )       |      | $ | 3,752   |        |              | $ | 557          |        |  | $ | 3,671  |        |  | $ |       |        |   | $ | (10,906 | )      
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Identifiable assets at year-end       |                        | $ | 75,925  |         |      | $ | 19,200  |        |              | $ | 11,371       |        |  | $ | 15,111 |        |  | $ |       |        |   | $ | 121,607 |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Corporate assets                      |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   | 49,820  |        
|     | Net assets of discontinued operations |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   | 55,979  |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        
|     | Total assets at year-end              |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   | $ | 227,406 |        
|     |                                       |                        |   |         |         |      |   |         |        |              |   |              |        |  |   |        |        |  |   |        |        |   |   |        

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

The following summarizes Krolls sales in
the United States and foreign locations:

|                                 |                                           |                          |   |         |  |      |   |         |  |  |   |         | 
|-------------------------------- | ----------------------------------------- | ------------------------ | - | ------- |  | ---- | - | ------- |  |  | - | ------- | 
|                                 |                                           |                         
|                                 |                                           | Years Ended December 31,
|                                 |                                           |                         
|                                 |                                           | 2002                     |   | 2001    |  | 2000
|                                 |                                           |                          |   |         |  |     
|                                 |                                           |                         
|                                 |                                           | (Dollars in thousands)  
|Sales to unaffiliated customers: |                                           |                          |   |         |  |      |   |         |  |  |   |        
|                                 | United States                             |                          | $ | 182,787 |  |      | $ | 123,973 |  |  | $ | 125,779 | 
|                                 | Europe                                    |                          |   | 68,782  |  |      |   | 42,586  |  |  |   | 34,237  | 
|                                 | Asia                                      |                          |   | 9,192   |  |      |   | 9,926   |  |  |   | 16,343  | 
|                                 | Central & South America                   |                          |   | 9,376   |  |      |   | 10,285  |  |  |   | 16,696  | 
|                                 | Other Foreign                             |                          |   | 19,031  |  |      |   | 21,107  |  |  |   | 12,555  | 
|                                 |                                           |                          |   |         |  |      |   |         |  |  |   |        
|                                 | Total net sales to unaffiliated customers |                          | $ | 289,168 |  |      | $ | 207,877 |  |  | $ | 205,610 | 
|                                 |                                           |                          |   |         |  |      |   |         |  |  |   |        

Export sales by Krolls domestic operations
were approximately 2%, 4% and 2% of net sales for the years
ended December 31, 2002, 2001 and 2000, respectively.

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 the
consolidated financial statements.

Kroll has foreign operations and assets in
Argentina, Australia, Brazil, Canada, China, France, Germany,
Hong Kong, India, Italy, Japan, Mexico, Russia, Singapore, South
Africa, Switzerland, the Philippines and

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the United Kingdom. In addition, Kroll sells its
products and services in other foreign countries and continues
to 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.

(b) Major Customers  Kroll
had no major customer that accounted for a significant
percentage of sales from continuing operations during the years
ended December 31, 2002, 2001 and 2000.

(18) Supplemental Cash Flows
Disclosures

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

|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |           | 
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------ | - | ----------- |  | ---- | - | ---------- | - |  | - | --------- | 
|                                                  |                                                                                                                               |                         
|                                                  |                                                                                                                               | Years Ended December 31,
|                                                  |                                                                                                                               |                         
|                                                  |                                                                                                                               | 2002                     |   | 2001        |  | 2000
|                                                  |                                                                                                                               |                          |   |             |  |     
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Cash paid for interest, net                                                                                                   |                          | $ | 2,440,833   |  |      | $ | 5,561,807  |   |  | $ | 5,787,084 | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Cash paid for taxes, net of refunds                                                                                           |                          | $ | 4,040,427   |  |      | $ | 131,070    |   |  | $ | 318,856   | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:   |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Deferred compensation related to options and
    restricted stock                                                             |                          | $ | 44,475      |  |      | $ |           |   |  | $ |          | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Accrued contingent consideration incurred in
    connection with acquisition of businesses                                    |                          | $ | 490,198     |  |      | $ | 299,133    |   |  | $ | 812,033   | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Total price of acquired businesses                                                                                            |                          | $ | 313,524,250 |  |      | $ |           |   |  | $ | 470,000   | 
|                                                  | Fair value of stock issued and options assumed in
    connection with acquisition of businesses                               |                          |   | 205,298,253 |  |      |   |           |   |  |   |          | 
|                                                  | Cash acquired in connection with acquisition of
    businesses                                                                |                          |   | 35,327,378  |  |      |   |           |   |  |   |          | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Cash used in acquisitions, net of cash acquired                                                                               |                          | $ | 72,898,619  |  |      | $ |           |   |  | $ | 470,000   | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Notes issued in connection with acquisition of
    businesses                                                                 |                          | $ | 1,040,278   |  |      | $ |           |   |  | $ | 625,320   | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Amount forgiven in connection with the sale of DRI                                                                            |                          | $ | 100,934     |  |      | $ | 189,960    |   |  | $ |          | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Receipts of notes receivable from the sale of
    businesses including VDCG, SPSG and DRI (see Notes 5(a),
    5(b) and 6(b)) |                          | $ |            |  |      | $ | 2,543,273  |   |  | $ |          | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          
|                                                  | Write-down of discounted notes receivable from
    the sale of VDCG (see Note 5(b))                                           |                          | $ |            |  |      | $ | (1,830,578 | ) |  | $ |          | 
|                                                  |                                                                                                                               |                          |   |             |  |      |   |            |   |  |   |          

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(19) Quarterly Financial Data
(unaudited)

|     |                                          |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |        |       |       |  
|---- | ---------------------------------------- | --------------------------------------------- | ----------------- | ------- | ----- | ------- | - | ------- | ----- | ----- | - | ------- | ----- | ----- | - | ------ | ----- | ----- | -
|     |                                          | First                                         |                   | Second  |       | Third   |   | Fourth 
|     |                                          | Quarter                                       |                   | Quarter |       | Quarter |   | Quarter
|     |                                          |                                               |                   |         |       |         |   |        
|     |                                          |                                              
|     |                                          | (Dollars in thousands, except per share data)
|2002 |                                          |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |       
|     | Net sales                                |                                               | $                 | 56,016  |       |         | $ | 59,719  |       |       | $ | 79,699  |       |       | $ | 93,734 |      
|     | Gross profit                             |                                               | $                 | 24,987  |       |         | $ | 27,549  |       |       | $ | 41,090  |       |       | $ | 47,659 |      
|     | Income from continuing operations        |                                               | $                 | 2,317   |       |         | $ | 3,535   |       |       | $ | 5,748   |       |       | $ | 7,817  |      
|     | Income from discontinued SPSG            |                                               | $                 |        |       |         | $ | 70      |       |       | $ |        |       |       | $ | 11     |      
|     | Extraordinary item, net of tax           |                                               | $                 |        |       |         | $ |        |       |       | $ | (371    | )     |       | $ | (2,746 | )    
|     | Net income                               |                                               | $                 | 2,317   |       |         | $ | 3,605   |       |       | $ | 5,377   |       |       | $ | 5,082  |      
|     | Basic income (loss) per share from:      |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |        |      
|     |                                          | Continuing operations                         |                   | $       | 0.10  |         |   | $       | 0.15  |       |   | $       | 0.18  |       |   | $      | 0.20  |      
|     |                                          | Discontinued SPSG                             |                   | $       |      |         |   | $       | 0.00  |       |   | $       |      |       |   | $      | 0.00  |      
|     |                                          | Extraordinary item, net of tax                |                   | $       |      |         |   | $       |      |       |   | $       | (0.01 | )     |   | $      | (0.07 | )    
|     |                                          |                                               | Net income        |         | $     | 0.10    |   |         | $     | 0.15  |   |         | $     | 0.17  |   |        | $     | 0.13  |  
|     | Diluted income (loss) per share from:    |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |        |      
|     |                                          | Continuing operations                         |                   | $       | 0.10  |         |   | $       | 0.14  |       |   | $       | 0.18  |       |   | $      | 0.20  |      
|     |                                          | Discontinued SPSG                             |                   | $       |      |         |   | $       | 0.00  |       |   | $       |      |       |   | $      | 0.00  |      
|     |                                          | Extraordinary item, net of tax                |                   | $       |      |         |   | $       |      |       |   | $       | (0.01 | )     |   | $      | (0.07 | )    
|     |                                          |                                               | Net income        |         | $     | 0.10    |   |         | $     | 0.14  |   |         | $     | 0.17  |   |        | $     | 0.13  |  
|2001 |                                          |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |       
|     | Net sales                                |                                               | $                 | 50,775  |       |         | $ | 48,585  |       |       | $ | 49,356  |       |       | $ | 59,161 |      
|     | Gross profit                             |                                               | $                 | 21,105  |       |         | $ | 20,050  |       |       | $ | 17,280  |       |       | $ | 24,390 |      
|     | Income (loss) from continuing operations |                                               | $                 | (177    | )     |         | $ | (4,575  | )     |       | $ | (7,257  | )     |       | $ | 618    |      
|     | Income (loss) from discontinued SPSG     |                                               | $                 | 751     |       |         | $ | (1,103  | )     |       | $ | (6,295  | )     |       | $ | (894   | )    
|     | Loss from discontinued VDCG              |                                               | $                 | (104    | )     |         | $ |        |       |       | $ | (1,831  | )     |       | $ | (177   | )    
|     | Extraordinary item, net of tax           |                                               | $                 |        |       |         | $ |        |       |       | $ | (344    | )     |       | $ |       |      
|     | Net income (loss)                        |                                               | $                 | 470     |       |         | $ | (5,678  | )     |       | $ | (15,727 | )     |       | $ | (452   | )    
|     | Basic income (loss) per share from:      |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |        |      
|     |                                          | Continuing operations                         |                   | $       | (0.01 | )       |   | $       | (0.20 | )     |   | $       | (0.33 | )     |   | $      | 0.03  |      
|     |                                          | Discontinued SPSG                             |                   | $       | 0.03  |         |   | $       | (0.05 | )     |   | $       | (0.28 | )     |   | $      | (0.04 | )    
|     |                                          | Discontinued VDCG                             |                   | $       | (0.00 | )       |   | $       |      |       |   | $       | (0.08 | )     |   | $      | (0.01 | )    
|     |                                          | Extraordinary item, net of tax                |                   | $       |      |         |   | $       |      |       |   | $       | (0.02 | )     |   | $      |      |      
|     |                                          |                                               | Net income (loss) |         | $     | 0.02    |   |         | $     | (0.25 | ) |         | $     | (0.70 | ) |        | $     | (0.02 | )
|     | Diluted income (loss) per share from:    |                                               |                   |         |       |         |   |         |       |       |   |         |       |       |   |        |      
|     |                                          | Continuing operations                         |                   | $       | (0.01 | )       |   | $       | (0.20 | )     |   | $       | (0.32 | )     |   | $      | 0.03  |      
|     |                                          | Discontinued SPSG                             |                   | $       | 0.03  |         |   | $       | (0.05 | )     |   | $       | (0.28 | )     |   | $      | (0.04 | )    
|     |                                          | Discontinued VDCG                             |                   | $       | (0.00 | )       |   | $       |      |       |   | $       | (0.08 | )     |   | $      | (0.01 | )    
|     |                                          | Extraordinary item, net of tax                |                   | $       |      |         |   | $       |      |       |   | $       | (0.01 | )     |   | $      |      |      
|     |                                          |                                               | Net income (loss) |         | $     | 0.02    |   |         | $     | (0.25 | ) |         | $     | (0.70 | ) |        | $     | (0.02 | )

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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(20) Effect of the Implementation of SFAS
No. 142

In accordance with SFAS No. 142, Kroll no
longer records amortization expense for goodwill. This had the
following effect on reported earnings:

|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |         |  
|------------------------------------------- | -------------------------------- | ------------------------------------- | ------ | ------ |  | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                            |                                  |                                      
|                                            |                                  | Years Ended December 31,             
|                                            |                                  |                                      
|                                            |                                  | 2002                                  |        | 2001   |  | 2000
|                                            |                                  |                                       |        |        |  |     
|                                            |                                  |                                      
|                                            |                                  | (In thousands, except per share data)
|Net income (loss) as reported               |                                  | $                                     | 16,381 |        |  | $    | (21,387 | )       |   | $ | (33,944 | )      
|Amortization of goodwill, net of tax        |                                  |                                       |       |        |  |      | 1,605   |         |   |   | 1,712   |        
|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |        
|                                            | Adjusted net income (loss)       |                                       | $      | 16,381 |  |      | $       | (19,782 | ) |   | $       | (32,232 | )
|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |        
|Basic income (loss) per share as reported   |                                  | $                                     | 0.56   |        |  | $    | (0.95   | )       |   | $ | (1.52   | )      
|Amortization of goodwill, net of tax        |                                  |                                       |       |        |  |      | 0.07    |         |   |   | 0.07    |        
|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |        
|                                            | Adjusted income (loss) per share |                                       | $      | 0.56   |  |      | $       | (0.88   | ) |   | $       | (1.45   | )
|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |        
|Diluted income (loss) per share as reported |                                  | $                                     | 0.54   |        |  | $    | (0.95   | )       |   | $ | (1.52   | )      
|Amortization of goodwill, net of tax        |                                  |                                       |       |        |  |      | 0.07    |         |   |   | 0.07    |        
|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |        
|                                            | Adjusted income (loss) per share |                                       | $      | 0.54   |  |      | $       | (0.88   | ) |   | $       | (1.45   | )
|                                            |                                  |                                       |        |        |  |      |         |         |   |   |         |        

Kroll has not changed the amortization periods or
ceased amortizing intangible assets other than goodwill as a
result of our review of indefinite lived assets to date. Kroll
has conducted impairment tests of the goodwill recorded on its
books as required by SFAS No. 142. These tests determined
that Krolls recorded goodwill was not impaired as of
January 1, 2002. As part of Krolls review of
intangible assets under SFAS No. 142, certain assets were
re-evaluated at year end. As a result of this review Kroll
determined that these assets were not impaired at
December 31, 2002. Impairment tests will be conducted
annually in July, or sooner if circumstances indicate an
impairment may have taken place.

As of December 31, 2002, Kroll had recorded
cost and accumulated amortization of intangible assets of
$31.5 million and $5.8 million, respectively. Of this
amount, $16.3 million and $3.6 million related to the
cost and accumulated amortization of intangible assets of
acquired customer lists. An additional $12.3 million and
$0.9 million pertaining to the cost valuation and related
accumulated amortization of in-house systems software was
recorded as part of Krolls acquisition of Ontrack. The
remaining $2.9 million and $1.3 million of cost and
accumulated amortization are primarily related to non-compete
agreements.

As of December 31, 2001, Kroll had recorded
cost and accumulated amortization of intangible assets of
$10.1 million and $3.4 million, respectively. Of this
amount, $8.1 million and $2.6 million related to the
cost and accumulated amortization of intangible assets of
acquired customer lists, $1.9 million and $0.7 million
related to non-compete agreements, and the remaining
$0.1 million and $0.1 million of cost and accumulated
amortization are related to publishing rights.

Amortization expense for other intangible assets
of $2.5 million, $0.9 million and $0.5 million
was recognized in the years ended December 31, 2002, 2001
and 2000, respectively. Approximately $18.4 million of
amortization expense is anticipated to be recognized over the
next five years as follows: $4.3 million in 2003,
$3.8 million in 2004, $3.6 million in 2005,
$3.5 million 2006 and $3.2 million in 2007.

(21) Subsequent Events

(a) Revolving Credit Facility.On
March 6, 2003, Kroll executed agreements with Fleet
providing a revolving credit facility of up to $25 million
for a term of three years (the Fleet Credit
Facility). Krolls obligations under the Fleet Credit
Facility are guaranteed by its domestic subsidiaries. The Fleet
Credit Facility is secured by a security interest in
substantially all of the assets of Kroll and its material
domestic

79



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Borrowings under the Fleet 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 Credit Facility, Kroll will
pay Fleet a quarterly fee equal to the product of 0.375% per
annum and the unused portion of the line of credit. The Fleet
Credit Facility requires Kroll to maintain a minimum level of
EBITDA and net income and maximum leverage and liabilities
requirements and contains restrictions on the incurrence of
additional debt, the creation of any liens, certain
acquisitions, and distributions to certain subsidiaries. The
Fleet Credit Facility also contains other affirmative and
negative covenants and events of default customarily contained
in debt agreements of this type.

The $25 million Goldman Sachs revolving
credit facility undertaken as part of the $100 million
credit line on September 5, 2002 (see Notes 10 and
11(c)), was simultaneously retired on March 6, 2003. As a
result Kroll will write-off approximately $0.2 million of
unamortized deferred financing fees as a one time charge to
operating expenses in the first quarter of 2003.

(b) Asset Purchase.On March 14,
2003 Kroll consummated an asset purchase agreement with Certico
Verification Services, LLC. (Certico). Under
the agreement, Kroll acquired most of Certicos assets, and
assumed certain liabilities, for a purchase price of
$3.3 million paid in cash. Certico provides background
checking services and its future results of operations will be
included within the Background Screening Services Segment.

80



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KROLL INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.




PART III






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within the 90-day period prior to the filing date
of this report, Krolls Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness
of Krolls disclosure controls and procedures (as defined
in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange
Act of 1934, as amended). Based on that evaluation, these
officers concluded that Krolls disclosure controls and
procedures are adequate and effective. There have been no
significant changes in Krolls internal controls or in
other factors that could significantly affect these controls
subsequent to the date of that evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.




PART IV






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

(a)(1) The following consolidated financial
statements of Kroll Inc. and its subsidiaries are included in
Item 8:



| |                                         
| | ----------------------------------------
| | Report of Independent Public Accountants
|
|
| | Consolidated Balance Sheets             



| |   |                                 
| | - | --------------------------------
| |  | As of December 31, 2002 and 2001



| |                                      
| | -------------------------------------
| | Consolidated Statements of Operations



| |   |                                                         
| | - | --------------------------------------------------------
| |  | For the Years Ended December 31, 2002, 2001
    and 2000



| |                                                    
| | ---------------------------------------------------
| | Consolidated Statements of Shareholders
    Equity



| |   |                                                         
| | - | --------------------------------------------------------
| |  | For the Years Ended December 31, 2002, 2001
    and 2000



| |                                     
| | ------------------------------------
| | Consolidated Statement of Cash Flows



| |   |                                                         
| | - | --------------------------------------------------------
| |  | For the Years Ended December 31, 2002, 2001
    and 2000



| |                                           
| | ------------------------------------------
| | Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules



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

(b) Financial Statement Schedules



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | The registrant did not file any reports on
    Form 8-K for the quarter ended December 31, 2002.

(c) Exhibits: See the List of Exhibits
beginning on page 86.

(d) Financial Statements: Not applicable

81



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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 28th day of
March, 2003.



| |           
| | ----------
| | 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, 2002,
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 28th day of March, 2003.

|                                             |  |                                                                                                      
|-------------------------------------------- |  | -----------------------------------------------------------------------------------------------------
|Signature                                    |  | Title                                                                                                
|                                             |  |                                                                                                      
|/s/ JULES B. KROLLJules 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/ BEN F. ALLENBen F. Allen                 |  | President of Technology Services Group and
    Director                                              
|                                            
|/s/ MICHAEL D. SHMERLINGMichael D. Shmerling |  | President of Background Screening Services Group
    and Director                                    
|                                            
|/s/ JUDITH AREENJudith Areen                 |  | Director                                                                                             
|                                            
|/s/ PETER A. COHENPeter A. Cohen             |  | Director                                                                                             

82



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|                                           |  |         
|------------------------------------------ |  | --------
|Signature                                  |  | Title   
|                                           |  |         
|                                          
|/s/ THOMAS E. CONSTANCEThomas E. Constance |  | Director
|                                          
|/s/ RAYMOND E. MABUSRaymond E. Mabus       |  | Director
|                                          
|/s/ J. ARTHUR URCIUOLIJ. Arthur Urciuoli   |  | Director

83



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##### Table of Contents



I, Michael G. Cherkasky, certify that



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of Kroll Inc.;                                                                                                                                                                                                                                                                          
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this annual report whether
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



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

| |                                                                   
| | ------------------------------------------------------------------
| | ______________________________________ 
     Michael G. Cherkasky,
| | Chief Executive Officer                                           

Date: March 28, 2003

84



---



##### Table of Contents



I, Steven L. Ford, certify that



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on
    Form 10-K of Kroll Inc.;                                                                                                                                                                                                                                                                          
|
| | 2. Based on my knowledge, this annual report
    does not contain any untrue statement of a material fact or omit
    to state a material fact necessary to make the statements made,
    in light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. Based on my knowledge, the financial
    statements, and other financial information included in this
    annual report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this annual
    report;                   
|
| | 4. The registrants other certifying
    officers and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                          



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying
    officers and I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of registrants board of directors (or persons
    performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying
    officers and I have indicated in this annual report whether
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |     |                   
| | --- | ------------------
| | By: | /s/ STEVEN L. FORD

| |                                                             
| | ------------------------------------------------------------
| | ______________________________________ 
     Steven L. Ford,
| | Chief Financial Officer                                     

Date: March 28, 2003

85



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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  |             |  | Security Agreement, dated as of November 14,
    2001, by and among Palisade Concentrated Equity Partnership,
    L.P., as collateral agent and Kroll Inc. (previously filed as
    Exhibit 4.5 to the November 8-K).                                                                                                                                                                                                                                                                                                                        
|        | 4.5  |             |  | Pledge Agreement, dated as of November 14,
    2001, by and among Kroll Inc. to Palisade Concentrated Equity
    Partnership, L.P., as collateral agent (previously filed as
    Exhibit 4.4 to the November 8-K).                                                                                                                                                                                                                                                                                                                           
|        | 4.6  |             |  | Form of Intercreditor and Subordination Agreement
    by and among Foothill Capital Corporation, Palisade Concentrated
    Equity Partnership, L.P. and Pegasus Partners II, L.P.
    (previously filed as Exhibit 4.6 to Kroll Inc.s
    Registration Statement on Form S-1 (Reg.
    No. 333-75972), as filed with the SEC on December 26,
    2001 (the S-1)).                                                                                                                                                                         
|        | 4.7  | 4.8         |  | 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)).
    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.                                                                                                                                                                                                                                                                                                                                                                                     

86



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.6  |             |  | Lease Agreement by and between Liberty Property
    Limited Partnership and Ontrack Data International, as amended.                                                                                                                                                                                                                                                      
|        | 10.7  |             |  | Employment Agreement, dated October 17,
    1997, between The Kroll-OGara Company and Jules B. Kroll.*                                                                                                                                                                                                                                                                  
|        | 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.*                                                                                                                                                                                     
|        | 10.10 |             |  | Amended Employment Agreement between Kroll Inc.
    and Michael D. Shmerling Amended Employment (previously filed as
    Exhibit 10.7 to the S-1).*                                                                                                                                                                                                                      
|        | 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.*                                                                                                                                                                                                                                                                                    
|        | 10.14 |             |  | Employment Agreement Dated January 1, 2002
    between Kroll Inc. and James R. Bucknam.*                                                                                                                                                                                                                                                                                 
|        | 10.15 |             |  | Employment Agreement Dated June 1, 1998
    between Lindquist Avey Macdonald Baskerville Inc. and Michael
    Beber.*                                                                                                                                                                                                                                                    
|        | 10.16 |             |  | Loan and Security Agreement dated as of
    February 15, 2002, by and among Kroll Inc. and each of its
    subsidiaries that is a signatory thereto, as Borrowers, and
    Foothill Capital Corporation, as Lender (previously filed as
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K filed with the SEC on March 1, 2002 (the
    March 2003 8-K)).
|        | 10.17 |             |  | Stock Pledge Agreement dated as of
    February 15, 2002, by and among Kroll Inc., Kroll Holdings,
    Inc. LAMB Acquisition, Inc., Kroll Holdings SA, Laboratory
    Specialists of America, Inc., US Holdings, Inc., Kroll
    Associates, Inc. and Foothill Capital Corporation (previously
    filed as Exhibit 99.2 to the March 2002 8-K).                         
|        | 10.18 |             |  | Form of $75 Million Term Loan Note by and
    among Goldman Sachs Credit Partners L.P. and Kroll Inc.
    (previously filed as Exhibit 4.2 to the September 8-K).                                                                                                                                                                                                        
|        | 10.19 |             |  | Form of Revolving Loan Note by and among Goldman
    Sachs Credit Partners L.P. and Kroll Inc. (previously filed as
    Exhibit 4.3 to the September 8-K).                                                                                                                                                                                                               
|        | 10.20 |             |  | Credit and Guaranty Agreement by and among
    Goldman Sachs Credit Partners L.P. and Kroll Inc. (previously
    filed as Exhibit 10.1 to the September 8-K).                                                                                                                                                                                                            
|        | 10.21 |             |  | Pledge and Security Agreement by and among
    Goldman Sachs Credit Partners L.P. and Kroll Inc. (previously
    filed as Exhibit 10.2 to the September 8-K).                                                                                                                                                                                                            
|        | 10.22 |             |  | 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)).                                                                                                        
|        | 10.23 |             |  | 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).                                                                                                                                                   
|        | 10.24 |             |  | 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).                                                                                                                                                 

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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                   
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.25 |             |  | 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).
|        | 10.26 |             |  | 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).                                                                   
|        | 10.27 |             |  | 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).                                  
|        | 21.1  |             |  | Subsidiaries of Kroll Inc.                                                                                                                                                                                                        
|        | 23.2  |             |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                  
|        | 24.1  |             |  | Power of Attorney (included on signature page).                                                                                                                                                                                   
|        | 99.1  |             |  | Certification of Chief Executive Officer                                                                                                                                                                                          
|        | 99.2  |             |  | Certification of Chief Financial Officer                                                                                                                                                                                          



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|  |                                  
|- | ---------------------------------
|* | Executive compensation agreement.

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