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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _____________________ to______________
Commission File Number: 000-21629

KROLL INC.
(Exact name of registrant as specified in its charter)

Ohio 13-1470817
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

900 Third Avenue
New York, NY 10022
(Address of principal executive offices) (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 [ X ] No [ ]

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

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $403,850,550 as of February
28, 2002. As of February 28, 2002, 22,881,051 shares of Common Stock were
outstanding


Documents Incorporated by Reference --- None



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

We are a leading provider of investigations, intelligence, security and
risk mitigation consulting services. Through a network of 55 offices located in
18 countries, we provide information, analysis and solutions, including:

o Consulting services, which is comprised of: (1) business
investigations and intelligence services, including nonfinancial
due diligence, litigation support, fraud investigations,
monitoring services and special inquiries and intellectual
property infringement investigations; and (2) financial
services, including forensic accounting, recovery and
restructuring, asset tracing and analysis services and
pre-acquisition financial due diligence; and

o Security services, which is comprised of: (1) security services,
including threat assessment, risk and crisis management,
corporate security planning and executive protection, security
architecture and design, and electronic countermeasures; and (2)
technology services, including computer forensics and data
recovery, information security and litigation and systems
support services; and

o Employee screening services, including pre-employment background
checking, drug testing and surveillance services.

RECENT DEVELOPMENTS

On April 16, 2001, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group (VDCG), which
offered secure satellite communication equipment and satellite navigation
systems. On June 27, 2001, Kroll sold its ownership in the stock of VDCG. The
results of operations of VDCG have been classified as discontinued operations
and all prior periods have been restated accordingly (see Note 5(b) of the Notes
to the Consolidated Financial Statements).

On April 20, 2001, Kroll entered into a definitive agreement to sell
most of the active companies that comprised its Security Products and Services
Group (SPSG), other than SPSG's subsidiaries that provide kidnap and ransom and
risk information services and its Russian business, to Armor Holdings, Inc.
(Armor).

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 Armor
common stock, and $1.5 million placed in escrow pending agreement on the closing
date balance sheet audit. The purchase price is subject to a post-closing
adjustment in the event that the tangible net assets of SPSG as of the closing
date are less than approximately $35.0 million. Ultimate resolution of this
adjustment is still under review. The agreement also provides for a potential
deferred payment of up to $2.0 million by Armor to Kroll if a gross profit
target is achieved by SPSG for the year ended

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December 31, 2001 (see Note 5(a) of the Notes to the Consolidated Financial
Statements). We do not believe that the gross profit target was achieved.

On September 14, 2001, Kroll converted approximately $14.1 million in
Armor common stock to cash. An additional $0.3 million was converted to cash on
September 21, 2001. There remains a balance of approximately $0.6 million as of
December 31, 2001, which Armor is contractually obligated to pay to Kroll. The
proceeds from the sale of SPSG were used by Kroll to repay approximately $49.4
million of debt during the third quarter of 2001.

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 (see Note 11 of the Notes to the
Consolidated Financial Statements).

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. Borrowings under the
credit facility will bear interest, at Kroll's election, at a rate per annum
equal to (1) a base rate, which will be the prime rate of Wells Fargo Bank,
N.A., plus 0.75% or (2) LIBOR plus 2.75%. During the term of the credit
facility, Kroll will pay Foothill Capital a fee equal to the product of 0.375%
per annum and the unused portion of the credit facility. The credit facility
agreement requires Kroll to maintain a minimum level of EBITDA (earnings before
interest, taxes, depreciation and amortization), and contains 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 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 certain of Kroll's subsidiaries. As of March 21,
2002, there were no amounts borrowed under the credit facility (see Note 20 of
the Notes to the Consolidated Financial Statements).


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SERVICES

Our investigations and intelligence services are divided into three
business segments that include five major service categories. The following
table presents the aggregate net sales for each of our service categories for
the periods indicated.




Years ended December 31,
----------------------------------------------
1999 2000 2001
------------- ------------- --------------
(dollars in thousands)

CONSULTING SERVICES:
Business investigations and intelligence services. $ 58,304 $ 78,283 $ 79,927
Financial services................................ 50,537 45,273 56,950
------------- ------------- -------------
Total Consulting Services...................... 108,841 123,556 136,877
------------- ------------- -------------
SECURITY SERVICES:
Security services................................. 29,108 28,812 24,129
Technology services............................... 625 2,621 4,380
------------- ------------- -------------
Total Security Services........................ 29,733 31,433 28,509
EMPLOYEE SCREENING SERVICES:......................... 44,926 46,588 42,491
------------- ------------- -------------
Total Investigations and Intelligence Services $ 183,500 $ 201,577 $ 207,877
============= ============= =============


Consulting Services

Our consulting services include business investigations and intelligence
services and financial services. These services are provided to similar clients,
are offered together as packaged offerings, generally produce similar margins
and are managed under a consolidated operations management. The following is a
description of each of these services.

Business Investigations and Intelligence Services

Our business investigations and intelligence services include
nonfinancial due diligence, litigation support, fraud investigations, monitoring
services and special inquiries, and intellectual property infringement
investigations.

Nonfinancial due diligence. We help our clients conduct in-depth,
insightful 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. We provide comprehensive background information and intelligence in
areas such as personal and business reputation, financial and operating history,
verification of key representations, records of litigation, liens or judgments,
environmental liabilities and other actual or potential problems.

Litigation Support. We provide litigation support services to a client's
outside counsel and in-house lawyers in preparation for litigation or
arbitration proceedings and in designing settlement strategies. These services
include developing evidence to support a claim or a defense, identifying and
locating material witnesses, investigating adverse witnesses, locating and
evaluating recoverable or relevant assets of adverse parties, assessing the
strategic goals and financial commitment of the opposition and helping to assess
whether an adequate recovery can be obtained if a lawsuit is successful. Our
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.

Fraud Investigations. Through our forensic accounting professionals and
corporate investigators, we have the financial expertise and investigative
capability to respond to suspected wrongdoing wherever it may occur. Our fraud
investigations services encompass civil and criminal fraud, employee fraud and
theft, management fraud and theft,

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procurement fraud and the identification of secret commissions and kickbacks. We
have 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.

Monitoring Services and Special Inquiries. We provide monitoring
services to, and conduct special inquiries for, clients that require an
independent fact finder to uncover and end fraud and install systems that
monitor compliance. Our 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 regarding
establishing systems to audit and ensure compliance with these regulatory
requirements or policies. We serve 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. Our fact finding efforts have been
enlisted by management and by audit committees concerned about problems that
need to be resolved within an enterprise.

Intellectual Property and Infringement Investigations. Our 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. We attempt 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.

Financial Services

Our financial services include forensic accounting, recovery and
restructuring, asset tracing and analysis services and pre-acquisition due
diligence.

Forensic Accounting. Our forensic and investigative accountants work
with corporations, governments, law firms, financial institutions and
individuals to assist them in successfully resolving complex, high risk,
financial and investigative concerns on a worldwide basis. Forensic accounting,
by definition, is the application of financial knowledge and skills, in
conjunction with investigative strategies and techniques, to resolve in a
legally defensible manner matters that are financial in nature. Our services
include commercial litigation support, corporate investigations, statutory and
regulatory compliance, insurance claims, business valuations, financial due
diligence and visual strategies.

Recovery and Restructuring. Our clients include creditors, lenders and
investors as well as companies in difficult financial situations. The services
we provide relate to turnarounds, liquidations, corporate recovery and
pre-lending and refinancing reviews. We have helped hundreds of troubled
companies recover and restructure their operations by investigating and
reviewing their management accounts, financial systems and operations. We also
help them implement turnaround strategies and design innovative solutions that
can increase sales and profits, lower costs and improve efficiency. Our bank
clients also turn to us for financial forecasts, advice and intelligence prior
to taking on new loans or advancing additional funds to current customers.

Asset Tracing and Analysis. Our 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, we have worked with trustees in bankruptcy and
insolvency, creditors' committees, bankers in workout and restructuring
departments and litigation and bankruptcy attorneys in conducting searches for
concealed or undisclosed assets. In other contexts, clients may be interested in
a financial profile or asset analysis of a person in connection with a potential
business relationship, lawsuit or internal investigation. We believe that our
asset searching and analysis techniques are effective both in uncovering assets
and in bringing debtors to the negotiating table.

Pre-Acquisition Due Diligence. The due diligence and background
information and analysis furnished by Kroll is 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

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analysis, intelligence in contests for corporate control, new market entry
intelligence and intelligence on business partners, customers and critical
vendors.

Security Services

Our security services include security services and technology services.
The following is a description of each of these services.

Security Services

After the September 11, 2001 terrorist attacks on the United States, the
world is perceived to be a more dangerous place. Recent events have resulted in
a greater interest in security measures. We believe that there will be an
increased demand for our security services.

Our security services include threat assessment, risk and crisis
management, corporate security planning and executive protection, security
architecture and design and electronic countermeasures.

Threat Assessment. Prior to September 11, 2001, our clients primarily
sought security services in reaction to crises as they arose. In the aftermath
of the recent terrorist attacks, our clients are seeking more preventative
security measures. We review the physical characteristics of buildings and
facilities with a focus on specific items such as access, exits and air
filtration. In addition, we perform vulnerability studies in which we evaluate
physical aspects of facilities and systems in order to identify and select
appropriate security solutions.

Risk and Crisis Management. We provide consulting services to assist
businesses in managing risks to their personnel and assets and in meeting and
managing unexpected crises. Our crisis management services are provided in a
variety of contexts, such as the crisis response to a kidnapping of a company's
executive, the safety of consumers, the contamination of a consumer product or
the environment and the potential damage to the reputation of a corporate client
as a result of disclosure of adverse events. We maintain a crisis management
center in Vienna, Virginia where personnel are available 24 hours a day, 365
days a year, to handle requests for information and provide initial advice and
immediate contact with members of our professional staff specializing in the
particular crisis presented.

As part of our risk and crisis management service, we furnish periodic
information including: reports providing city-specific advisories to business
travelers on conditions and other relevant information with respect to almost
300 cities around the world; a comprehensive country security risk assessment
service that includes daily intelligence briefings containing early warnings of
events and up-to-date information about political unrest, terrorist activities,
product contaminations, health emergencies and other similar events; a monthly
bulletin that reviews and analyzes safety and security issues relating to air
travel around the world; a monthly intelligence review that provides a global
survey of political risk developments in countries around the world; and special
reports on topics, such as kidnapping or specific regions or countries, that are
relevant to business travelers.

Corporate Security Planning and Executive Protection. We design
corporate security programs that help to safeguard clients' operations and
premises. Security programs and systems are designed to protect the safety of
key executives, preserve assets and protect the integrity of computer and
telecommunications systems. In several areas of the world, we also provide
special escort and general protective services to executives and VIPs.

Security Architecture and Design. We offer comprehensive planning,
engineering and design services customized to meet the requirements of customers
for physical site protection. These services are primarily intended to protect
business facilities, embassies, VIPs' homes and public facilities against
unauthorized intrusions. Generally, a project begins with a security survey,
which identifies areas of vulnerability and recommends methods for protecting
the facility. Specific pieces of hardware are recommended, processes and
procedures are outlined, engineering documentation is provided and control
centers are detailed.

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Electronic Countermeasures. We protect our clients by ensuring that they
are able to operate their businesses and communicate confidential matters freely
without electronic intrusion from outsiders. Our clients may face the risk of
electronic eavesdropping from outsiders who wish to procure confidential and
proprietary information in order to gain a competitive advantage in the
marketplace. Other electronic eavesdroppers may wish to jeopardize the personal
safety of our clients. Through sophisticated inspections and equipment we are
able to detect listening devices and disable or remove them before our clients
are compromised.

Technology Services

Our technology services include computer forensics and data recovery,
information security and litigation and systems support.

Computer Forensics and Data Recovery. Businesses face a variety of risks
relating to the use of computers and technology at the workplace, both from
employees and from outsiders. We provide investigative resources to assist
clients in matters such as collecting data from computers, logs, networks and
other sources to facilitate investigations and tracing disgruntled employees,
competitors and others using Internet bulletin boards to start rumors about
stocks, to post trade secrets or to conduct other kinds of cyberterrorism. By
using sophisticated forensic software, we also help clients access information
recovered from hard drives and reconstruct computer data that may be introduced
as evidence in legal proceedings.

Information Security. Our technical expertise is applied to
investigating cyber incidents and finding, preserving and authenticating
electronic evidence. We also perform network security assessments to prevent,
identify and rectify security flaws, and to ensure compliance of businesses with
industry and federal standards.

Litigation and Systems Support. We provide litigation support through
assistance in designing strategy and tactics and also analyze data provided in
the discovery stage of litigation. We also help clients track down web-based
intellectual property thefts, counterfeit goods and criminals that use the
Internet to steal information or property and commit fraud. We provide network
security testing in which we help clients gauge objectively the level of network
protection so that security flaws can be identified and cured.

Employee Screening Services

Our employee screening services include pre-employment background
checking, drug testing and surveillance.

Pre-Employment Background Checking. We verify job applicant background
information for employers. The background investigations are made through the
use of databases and independent contractors. The searches include reviews of
credit histories, reference checks, criminal records, workers' compensation
histories and driving records as well as education and credential verification.

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

Surveillance. We provide video surveillance services to our clients
investigating exaggerated disability claims and other frauds. In performing
surveillance, we utilize our fleet of more than 70 mobile surveillance units
stationed throughout the United States, each containing state-of-the-art
equipment designed to obtain clear footage without detection. Agents with
extensive training and experience perform this service.

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CUSTOMERS

Our clients include multinational corporations, leading law firms,
financial institutions, government agencies and individuals in a wide range of
business sectors. The financial institutions to which we provide services
include many of the largest international investment banks, numerous commercial
banks, insurance companies and other significant credit institutions. We
classify our sales by where the services are delivered; international sales are
services delivered outside the United States. For the years ended December 31,
1999, 2000 and 2001, 60.8%, 61.2% and 59.6%, respectively, of our net sales were
attributable to services delivered in the United States. Although many of our
clients utilize these services on a periodic basis, comparatively few clients
utilize our 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.

In the United States, we generally charge for our services on an hourly
basis at varying rates, depending upon the type of service being provided and
the competition that exists in providing the service. We also provide our
services, particularly outside the United States, on a negotiated project, or
fixed fee, basis. Providing services on a fixed fee basis enhances the potential
for higher profit margins. However, these arrangements can also result in
unexpected losses on a particular project. We believe that this risk is reduced
by being spread over a number of fixed fee arrangements and through our
contracting process that specifies the actual steps that are required to be
performed for the fixed fee.

A significant portion of our business of investigating and negotiating
ransom demands in connection with kidnapping arise from a contract with American
International Group, Inc. (AIG), an international multi-risk insurance company,
under which we investigate claims by AIG's insured customers. Although we are
paid by AIG after claims are made, our customer is the affected person or
entity. The customers for our information services relating to travel safety are
multinational corporations and individuals. We market our information services
to many of our customers for other services.

MARKETING AND SALES

Our services are marketed and sold by three different types of sales
personnel. As of December 31, 2001 we have four global sales managers who market
and sell all our varied services, both domestically and internationally, to our
most significant multinational corporate clients, approximately 122 senior
professional service providers who are also expected to provide marketing
services and 46 full time sales and marketing employees who work in regional
markets.

Our global sales managers are expected to work with targeted clients
with whom we have done significant business in the past to expand their
relationships with Kroll by selling them a broader range of services. In
addition, we rely on our senior professional service providers not only to
service existing clients, but also for new business development and marketing.
We obtain 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 our
marketing efforts consist of maintaining and developing these personal
relationships. Our full time regional marketing staff coordinates local sales
and marketing efforts around the world. These marketing efforts include
seminars, briefings, receptions, breakfast and lunch meetings, direct mail and
selected advertising in trade and other journals. Our services and marketing
events are promoted through our Internet website and mailings periodically sent
to thousands of clients and prospective clients.

Our marketing efforts attempt to increase business with existing clients
by expanding clients' awareness of the range of services we offer and by
increasing the number of decision makers within a client's organization who are
aware of the range of our services. Our business development staff periodically
conducts surveys of clients to assess their perception of the range and quality
of our services and, after the completion of an assignment, clients are often
asked to complete a quality control questionnaire.

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COMPETITION

We compete with local, regional, national and international firms,
including investigative and security firms, guard companies and consultants in
specialized areas such as kidnapping. We believe that we are one of the largest
companies in the world that provide a broad array of risk mitigation services on
a global basis, and that we enjoy strong name recognition in our industry.

Nevertheless, the markets in which we do, and intend to do, business are
highly competitive. In most individual service areas in which we operate, there
is at least one competitor that is significantly larger or more established than
we are in the delivery of that individual service. In general, many of the
national and international accounting firms, along with other companies such as
Forensic Technologies, Inc., Securitas AB, Control Risks Group Limited,
Investigations Group, Inc. and ChoicePoint, Inc., provide consulting services
similar to some of our services. Some of these firms have indicated an interest
in providing corporate investigation and business intelligence services similar
to ours on a broader scale and may prove to be formidable competitors if they
elect to devote the necessary resources to these competitive businesses. The
accounting firms have significantly larger financial and other resources than we
have 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 service providers have indicated an interest in expanding
their services to include value-added services such as some of the investigation
and consulting services we provide. Competitive conditions could have a material
adverse effect on our financial condition, results of operations and cash flows.

SEASONALITY

We do not believe that our business is seasonal.

EMPLOYEES

As of December 31, 2001, we had a total of 1,519 full-time employees, of
whom 46 were in marketing and sales, 298 were in operations, 741 were
professional services providers and 434 performed general and administrative
services. In addition, we had 263 part-time employees. Of a total of 1,782
employees, 1,012 were located in the United States and 770 were located
internationally. Our employees in the United States are not represented by any
union and are not covered by any collective bargaining agreements. We have not
experienced any work stoppages or employee related slowdowns and believe that
our relationship with our employees is good.

GOVERNMENT REGULATION

Our services are subject to various federal, state, local and foreign
laws, including privacy laws. A number of our subsidiaries hold private
investigative licenses from, and their investigative activities are regulated
by, state and local government agencies in various jurisdictions. We also use
some data from outside sources, including data from third party vendors and
various government and public record services, in performing our services. To
date, applicable laws and regulations have not interfered materially with the
manner in which we obtain information and conduct our operations, including our
access to data used in our business. However, changes in these laws and
regulations, particularly those relating to privacy, could interfere with our
method of operations and access to data and, as a result, have a material
adverse effect on us. If additional restrictions were imposed, they could have a
material adverse effect on our financial condition, results of operations and
cash flows. Additionally, the laboratory of our drug 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, we would not be eligible to perform testing for various clients, which
would have a material adverse effect on the drug testing services aspect of our
business. In addition, foreign countries in which we do business have laws and
regulations which may restrict our business. We believe that we currently
conduct our activities and operations in substantial compliance with applicable
governmental laws and regulations.

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ENVIRONMENTAL MATTERS

We and our operations are subject to a number of environmental laws,
regulations and ordinances, both in the United States and various foreign
countries, governing activities that may have adverse environmental effects,
such as discharges to air and water, as well as handling, storage and disposal
practices for solid and hazardous materials. These laws also impose liability
for the cost of remediating, and damages resulting from, sites of past releases
of hazardous materials. We believe that we currently conduct our activities and
operations in substantial compliance with applicable environmental laws.

PATENTS, TRADEMARKS AND COPYRIGHTS

We have numerous copyrights and federally registered trademarks and have
registered our trademarks in numerous foreign countries. Although we have taken
steps to protect our proprietary rights to the extent that we believe
appropriate, there can be no assurance that our protective measures will deter
or prevent unauthorized use. In other countries, our proprietary rights may not
be protected to the same extent as in the United States.

RISK FACTORS

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

We may not be able to implement a strategy of internal growth following the sale
of the Security Products and Services Group.

Our ability to implement our business plan successfully requires
effective planning and growth management. We will continue to manage and attempt
to expand relationships with our clients. We also may enhance the capabilities
of our operational systems and may require additional employees, management and
operational and financial resources to support our growth strategy. If we cannot
manage our growth effectively, our financial condition, results of operations
and cash flow could be adversely affected.

Our business outside the United States exposes us to numerous risks, which,
singly or together, could materially and adversely affect our business.

In addition to our U.S. facilities, we have operations and assets in
Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong, India,
Italy, Japan, Mexico, the Philippines, Russia, Singapore, South Africa and the
United Kingdom. We also offer our services in other foreign countries and are
seeking to increase our level of international business activity. Our
international business exposes us 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, which could have a material
adverse effect on our financial condition, results of operations and cash flow.

In the past, we have occasionally had difficulties in collecting
significant accounts receivable for our services, particularly when the obligor
was located in a foreign country.

We may not operate profitably in the future.

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We reported net losses of approximately $1.9 million, $33.9 million and
$21.4 million for the years ended December 31, 1999, 2000 and 2001,
respectively. Although the net loss in each of those periods included material
non-recurring expenses, even if those items were excluded, results for the years
ended December 31, 2000 and 2001 would have been a net loss. We cannot assure
you that we will generate a profit from continuing operations or that we will
operate profitably in future periods.

The terms of our credit facility could restrict our flexibility and limit our
ability to satisfy obligations under the notes.

We are subject to operational and financial covenants and other
restrictions under our new credit facility. These covenants could limit our
operational flexibility and restrict our ability to borrow additional funds, if
necessary, to finance operations and to make principal and interest payments on
the notes. 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 which, if not cured or waived, could result in amounts borrowed under
the credit facility becoming due and payable. The effect of these covenants, or
our failure to comply with them, could have a material adverse effect on our
business and financial condition.

Our inability or failure to comply with governmental regulations and licensing
requirements could have a material adverse effect on our business.

Our services are subject to various federal, state, local and foreign
laws, including privacy laws. A number of our subsidiaries hold private
investigative licenses from, and their investigative activities are regulated
by, state and local government agencies in various jurisdictions. We also use
some data from outside sources, including data from third party vendors and
various government and public record services, in performing our services. To
date, applicable laws and regulations have not interfered materially with the
manner in which we obtain information and conduct our operations, including our
access to data used in our business. However, changes in these laws and
regulations, particularly those relating to privacy, could interfere with our
method of operations and access to data and, as a result, have a material
adverse effect on us. If additional restrictions were imposed, they could have a
material adverse effect on our financial condition, results of operations and
cash flows. Additionally, the laboratory of our drug testing subsidiary is
certified on the federal level and licensed in a number of states. If the
subsidiary's certification were suspended or lost, we would not be eligible to
perform testing for various clients, which would have a material adverse effect
on the drug testing services aspect of our business. In addition, foreign
countries in which we do business have laws and regulations which may restrict
our business. We believe that we currently conduct our activities and operations
in substantial compliance with applicable governmental laws and regulations.

We are highly dependent on executive management and other key employees and our
success is largely dependent upon our ability to hire and retain skilled
professionals.

We rely heavily on our executive management and key employees to provide
our services and for continued business development. Competition for these
personnel is intense. Our business could be materially and adversely affected if
a number of our senior managers or key employees were to leave and if we were
unable to attract and retain qualified replacements.

Competition for consulting professionals, particularly for personnel
with specific risk mitigation skills necessary to perform the services which we
offer, has caused wages to increase at a rate greater than the general rate of
inflation. We may not be successful in attracting, hiring and retaining
qualified people at favorable rates. Our success is largely dependent upon the
ability to hire and retain skilled professionals.

The risk mitigation industry is very competitive; we may be unable to compete
favorably.

We compete with local, regional, national and international firms,
including investigative and security firms and consultants in specialized areas
such as kidnapping. We believe that we are one of the largest

11


companies in the world that provide a broad array of security and risk
mitigation services on a global basis and that we enjoy strong name recognition
in our industry.

Nevertheless, the markets in which we do, and intend to do, business are
highly competitive. In most service areas in which we operate, there is at least
one competitor that is significantly larger or more established than we are in
the delivery of that individual service. Many of the national and international
accounting firms, along with other companies such as Forensic Technologies,
Inc., Securitas AB, Control Risks Group Limited, Investigations Group, Inc. and
ChoicePoint, Inc., provide consulting services similar to some of our services.
Some of these firms have indicated an interest in providing corporate
investigation and business intelligence services similar to ours on a broader
scale and may prove to be formidable competitors if they elect to devote the
necessary resources to these competitive businesses. The accounting firms have
significantly larger financial and other resources than we have and have
long-established relationships with their clients, which also are likely to be
clients or prospective clients of ours. 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 investigation and
consulting services we provide. Competitive conditions could have a material
adverse effect on our financial condition, results of operations and cash flows.

We may not be able to develop and implement a strategy of growth through
acquisitions following the sale of the Security Products and Services Group.

We made multiple acquisitions in 1998, 1999 and 2000 and currently are
evaluating our acquisition strategy. While we have experience in identifying and
integrating acquisitions, we may not be able to identify suitable acquisition
candidates, obtain the capital necessary to pursue our acquisition strategy or
complete acquisitions on satisfactory terms or at all. When companies are
acquired, we may not be able to integrate or manage these businesses so as to
produce returns that justify the investment. In addition, issues relating to new
acquisitions may divert our management's attention from existing operations. If
we cannot manage our growth for any of these reasons, our financial condition,
results of operations and cash flow could be materially adversely affected.

We may be subject to potentially significant liability claims.

The very nature of our business exposes us to liability claims in
instances in which our clients suffer losses in spite of our efforts to mitigate
their risks. We maintain professional liability insurance with a policy
aggregate limit of $15 million including loss and claim expense. If one or more
successful claims substantially exceeded coverage limits, it would have a
material adverse effect on us. Also, in the ordinary course of our business, we
are subject to claims of third parties other than clients alleging trespass,
invasion of privacy and other tortious conduct by our investigators and other
personnel, which are not covered by insurance. Although we endeavor to minimize
the risk of these claims, a substantial successful claim could have a material
adverse effect on us.

Our business is not predictable and varies from period to period.

We generally do not have long term contracts with our clients and our
ability to generate net sales is dependent upon obtaining many new projects each
year, most of which are of relatively short duration. As a result, our 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. Additionally, the demand for our services is affected by general
economic conditions and the level of corporate acquisitions and other financial
transactions, and clients reduce their reliance on our services during periods
when there is a decline in those activities (see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations").

We will need to use a portion of our cash flow to service our debt.

12


As of December 31, 2001, we had total indebtedness (net of notes
discount) of approximately $22.0 million and total shareholders' equity of
approximately $111.1 million. As of December 31, 2001 our debt was approximately
19.8% of our shareholders' equity.

We have a new revolving credit facility of up to $15 million of senior
debt. As of March 21, 2002 we had not borrowed any amounts under the credit
facility. We anticipate that our cash interest expense for the year ending
December 31, 2002 will be approximately $2 million. Our cash flows from
operating activities from continuing operations were not sufficient to fund cash
interest expense for the year ended December 31, 2000, but were sufficient to
fund cash interest expense for the year ended December 31, 2001. We expect to
use a portion of our cash flow from operations to pay the principal and interest
on our debt, but we do not believe that servicing our debt will materially
affect our cash available for existing operations and future growth. However, we
cannot assure you that this will be the case.

We may not be able to obtain additional financing when we need it or obtain it
on acceptable terms.

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

Our articles of incorporation and code of regulations contain provisions that
allow for the indemnification and exculpation of our directors and officers.

Our articles of incorporation and code of regulations provide that Kroll
will indemnify any current or former director, officer, employee or agent
against expenses, including judgments and fines, if such director, officer,
employee or agent acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of Kroll. Our articles of incorporation
and code of regulations also provide that a director of Kroll shall not be
personally liable to Kroll or its shareholders for monetary damages for breach
of fiduciary duty as a director. However, a director shall remain liable for any
breach of the director's duty of loyalty to Kroll or its shareholders, for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for unlawful payment of dividends or unlawful stock
purchase or redemption (except that any director who may have been absent when
any of these acts were performed may be exonerated from such liability by
causing his or her dissent to be entered in the minutes of Kroll at the time of
the unlawful act, or immediately after the director received notice of that
act), or for any transaction from which the director derived any improper
personal benefit.

We do not intend to pay dividends.

We intend to retain future earnings, if any, that may be generated from
our operations to help finance the growth and development of our business, and
we do not plan to pay cash dividends to our shareholders for the foreseeable
future. Furthermore, we are prohibited from paying cash dividends by the terms
of the notes (see Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters).

Jules B. Kroll, who currently owns approximately 13% of our outstanding common
stock, will have significant influence over the management and direction of
Kroll.

13


Mr. Kroll currently owns approximately 13% of the outstanding shares of
Kroll common stock. As a result, Mr. Kroll will have significant influence over
the management and direction of Kroll, including the election of directors,
appointment of management and approval of actions requiring the approval of
shareholders.

Certain provisions in our articles of incorporation and in our debt could deter
acquisition by a third party.

Our articles of incorporation provide our board of directors with the
authority to issue preferred stock. 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 our capital stock and may
discourage, delay or prevent a takeover attempt that a shareholder might
consider in its best interest. In addition, until November 14, 2003, Kroll
cannot enter into a transaction that would result in a change of control of
Kroll without the prior written consent of holders of a majority of the notes.
Even if the noteholders consent, upon a change in control of Kroll, the notes
would become immediately due and payable. A change in control would also be an
event of default under our credit facility. These events would add to the cost
of acquisition, which could deter a third party from acquiring us.

Future sales of Kroll common stock in the public market could lower the stock
price.

We may, in the future, sell additional shares of our common stock in
subsequent public offerings. We may also issue additional shares of our common
stock to finance future acquisitions, including acquisitions larger than those
we have done in the past through the issuance of equity securities.
Additionally, a substantial number of shares of our common stock is reserved for
issuance pursuant to stock options and upon conversion of the notes. The
antidilution provisions of the notes regarding price protection could result in
additional shares of our common stock being issued, which would increase the
number of shares of common stock outstanding on a fully diluted basis and could
reduce the market price for our common stock.

We cannot predict the size of future issuances of our common stock or
the effect, if any, that future issuances of our common stock will have on the
market price of our common stock. The issuance of substantial amounts of our
common stock (including shares issued in connection with an acquisition or upon
the exercise of stock options or the conversion of the notes), or the perception
that such sales could occur, may adversely affect prevailing market prices for
our common stock.

Our stock price has been highly volatile. You could lose all or part of the
value of your Kroll common stock.

The market price of our common stock has fluctuated and may continue to
fluctuate significantly due to a number of factors, some of which may be beyond
our control, including:

o sale of our common stock by shareholders because our business
profile does not fit their investment objectives;

o actual or anticipated fluctuations in our operating results;

o changes in earnings estimated by securities analysts or our
ability to meet those estimates;

o the operating and stock price performance of other comparable
companies;

o developments and publicity regarding our industry; and

o general economic conditions.

In addition, the stock market in general has experienced volatility that
has often been unrelated to the operating performance of individual companies.
These broad market fluctuations may adversely affect the trading

14


price of our common stock, regardless of our actual performance, and could
enhance the effect of any fluctuations that do relate to our operating results.

Item 2. PROPERTIES

We maintain our 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, we maintain 26 domestic offices
or facilities in 13 states and 24 foreign offices or facilities in 14 foreign
countries around the world. Our principal properties and facilities of over
15,000 square feet as of December 31, 2001 were as follows:




Location Total Sq. Footage Status Expiration of Leases
-------- ----------------- ------ --------------------


New York, New York 47,500 Leased December 31, 2007
Philadelphia, Pennsylvania 21,000 Leased November 30, 2009
Toronto, Canada 20,274 Leased March 31, 2012
Gretna, Louisiana 20,000 Owned N/A
Nashville, Tennessee 22,143 Leased June 30, 2005 and April 30, 2004


New York, New York. This facility contains our principal executive
offices and serves as a regional headquarters. For accounting purposes, this
lease is treated as an operating lease. In addition, we lease a smaller office
near the headquarters for administrative purposes.

Philadelphia, Pennsylvania. This facility primarily houses the most
significant U.S. office of our subsidiary providing financial services.

Toronto, Canada. This facility houses the headquarters of our Canadian
subsidiary providing financial services.

Gretna, Louisiana. This facility houses our drug testing laboratory and
drug testing services group.

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

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. 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 AIG aided and abetted the directors' and officers' alleged breaches of
fiduciary duties. The plaintiffs seek to bring their claims derivatively on
behalf of the Company and also seek class certification. On behalf of Kroll and
the putative plaintiff classes of shareholders, they seek a declaration that the
individual defendants breached their fiduciary duty and damages and attorneys'
fees in an unspecified amount. The defendants believe that the allegations in
the complaints are meritless and will defend the suits vigorously.

15


Kroll Lindquist Avey Co. (formerly Lindquist Avey Macdonald &
Baskerville), 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. While this matter is at
a preliminary stage and no response has yet been filed to the third-party claim
against LAMB and no discovery has been conducted, LAMB and its principals
believe that they have meritorious defenses to the claims and intend to defend
them 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 such litigation, individually or in the aggregate,
is likely to have a material adverse effect on its business, financial
condition, results of operations or cash flows.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.



16


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, 2002, there were approximately 174 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, 2000
Quarter Ended:
March 31, 2000............................................................ $ 16.94 $ 10.94
June 30, 2000............................................................. 10.94 4.56
September 30, 2000........................................................ 6.63 4.88
December 31, 2000......................................................... 6.88 4.94
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


Dividends

We anticipate that any future earnings will be retained to finance our
operations and for the growth and development of our business. Accordingly, we
do not anticipate paying cash dividends on our shares of common stock for the
foreseeable future. Additionally, the terms of our senior secured subordinated
convertible notes provide that we cannot pay dividends other than stock
dividends, and the terms of our revolving credit facility require maintenance of
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 our board of directors and will depend on our 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 our board of
directors deems relevant.

Sale of Unregistered Securities

In November 2001, we 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.

17


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

The notes contain certain customary covenants, including covenants that
prohibit Kroll from disposing of any material subsidiary, incurring or
permitting to exist any debt other than the credit facility, guaranteeing the
obligations of any third party, creating or permitting to exist any material
liens on assets of material subsidiaries or entering into a transaction prior to
November 14, 2003 that involves a "change in control" of Kroll (as defined in
the notes). The notes are payable upon any change in control of Kroll at the
option of the holders.

The note holders may designate an observer to the Board of Directors who
may serve in this capacity as long as 20% of the notes, or shares into which the
notes were converted, are held by the noteholders or investors. The observer may
also attend Audit and Compensation Committee meetings.

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 $30.0 million principal
(see Note 11 of the Notes to the Consolidated Financial Statements).

A significant portion of the proceeds from the new financing was used to
retire Kroll's amended bank loan and senior notes. Excess proceeds of
approximately $8.4 million will be utilized for working capital to fund
operations.

Item 6. SELECTED FINANCIAL DATA

The selected financial data reflects mergers during 1997, 1998 and 1999,
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 1997, 1998, 1999 and 2000 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, 2000 and 2001 and for the
years ended December 31, 1999, 2000 and 2001 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, 1999 and for
the year ended December 31, 1998 have been derived from the audited Consolidated
Financial Statements of Kroll not included in this document. The selected
historical financial data as of December 31, 1997 and 1998 and for the year
ended December 31, 1997 is derived from Kroll's unaudited consolidated financial
statements not included in this document. The selected financial data should be
read in conjunction with the consolidated financial statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."


18





Years Ended December 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001
-------------------------------------------------------------
(dollars in thousands, except per share data)
-------------------------------------------------------------

Statement of Operations Data:

Investigations and intelligence net sales .......... $ 92,147 $ 122,852 $ 183,500 $ 201,577 $ 207,877
Information security net sales ..................... -- 116 4,345 4,033 --
--------- --------- -------- -------- --------
Total net sales .............................. 92,147 122,968 187,845 205,610 207,877
Cost of sales ...................................... 56,517 69,511 104,366 123,791 125,052
--------- --------- -------- -------- --------
Gross profit ................................. 35,630 53,457 83,479 81,819 82,825
Selling and marketing expenses ..................... 6,826 11,916 16,705 21,490 18,724
G&A expenses (including amortization) .............. 23,273 30,435 56,907 64,192 63,078
--------- --------- -------- -------- --------
Total selling, G&A expenses (including
amortization) ................................... 30,099 42,351 73,612 85,682 81,802
--------- --------- -------- -------- --------
Operating income (loss) before non-recurring
expenses ................................... 5,531 11,106 9,867 (3,863) 1,023
Impairment of asset ................................ -- -- -- -- 807
Loss on sale of business unit ...................... -- -- -- -- 528
Failed financing costs ............................. -- -- -- -- 1,043
Failed separation costs ............................ -- -- -- 4,195 607
Failed merger related costs ........................ -- -- 1,562 2,491 --
Merger related costs ............................... 4,273 5,727 4,069 357 --
Restructuring charges .............................. -- -- 4,072 -- 2,726
--------- --------- -------- -------- --------
Total non-recurring operating costs ............. 4,273 5,727 9,703 7,043 5,711
--------- --------- -------- -------- --------
Operating income (loss) ...................... 1,258 5,379 164 (10,906) (4,688)
Interest expense ................................... (1,910) (1,972) (2,753) (4,321) (4,375)
Interest income .................................... 173 801 338 250 127
Other income (expense), net ........................ (29) 890 (58) 1,658 (53)
--------- --------- -------- -------- --------
Total other expense ............................. (1,766) (281) (2,473) (2,413) (4,301)
--------- --------- -------- -------- --------
Income (loss) from continuing operations
before provision for (benefit from) income
taxes ...................................... (508) 5,098 (2,309) (13,319) (8,989)
Provision for (benefit from) income taxes .......... 483 1,374 (1,105) 2,377 2,402
--------- --------- -------- -------- --------
Income (loss) from continuing operations ..... (991) 3,724 (1,204) (15,696) (11,391)
Income (loss) of discontinued Security Products and
Services Group, net of tax ...................... 2,366 9,388 1,043 (10,011) (7,540)
Loss from operations of discontinued Voice and Data
Communications Group, net of tax ................ (305) (1,326) (1,761) (3,199) (104)
Loss on sale of discontinued Voice and Data
Communications Group, net of tax ................ -- -- -- (5,038) (2,008)
--------- --------- -------- -------- --------
Total discontinued operations income (loss) ..... 2,061 8,062 (718) (18,248) (9,652)
--------- --------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary item ......................... 1,070 11,786 (1,922) (33,944) (21,043)
Cumulative effect of change in accounting principle,
net of tax benefit .............................. (360) -- -- -- --
--------- --------- -------- -------- --------
Income (loss) before extraordinary item ...... 710 11,786 (1,922) (33,944) (21,043)
Extraordinary item, net of tax benefit ............. -- -- -- -- (344)
--------- --------- -------- -------- --------
Net income (loss) ............................ $ 710 $ 11,786 $ (1,922) $(33,944) $(21,387)
========= ========= ======== ======== ========
Earnings per Share Data:
Basic income (loss) per share from continuing
operations ...................................... $ (0.07) $ 0.19 $ (0.05) $ (0.70) $ (0.51)
Basic income (loss) per share before extraordinary
item ............................................ $ 0.05 $ 0.61 $ (0.09) $ (1.52) $ (0.94)
Basic loss per share from extraordinary item ....... $ -- $ -- $ -- $ -- $ (0.01)
Basic income (loss) per share ...................... $ 0.05 $ 0.61 $ (0.09) $ (1.52) $ (0.95)
Basic weighted average shares outstanding .......... 14,751 19,337 22,006 22,295 22,479
Diluted income (loss) per share from continuing
operations ...................................... $ (0.07) $ 0.19 $ (0.05) $ (0.70) $ (0.51)
Diluted income (loss) per share before extraordinary
item ............................................ $ 0.05 $ 0.59 $ (0.09) $ (1.52) $ (0.94)
Diluted loss per share from extraordinary item ..... $ -- $ -- $ -- $ -- $ (0.01)
Diluted income (loss) per share .................... $ 0.05 $ 0.59 $ (0.09) $ (1.52) $ (0.95)
Diluted weighted average shares outstanding ........ 15,560 19,908 22,006 22,295 22,479


19





As of December 31,
-----------------------------------------------
1997 1998 1999 2000 2001
-----------------------------------------------
(dollars in thousands, except per share data)
-----------------------------------------------

Balance Sheet Data:

Working capital.................................... $ 38,329 $ 84,890 $ 62,042 $ 25,714 $ 43,914
Net property, plant and equipment.................. 7,772 11,420 21,778 20,272 16,067
Total assets....................................... 97,236 205,546 257,753 227,406 169,786
Total debt, including current portion.............. 31,734 32,439 63,485 75,350 21,958
Shareholders' equity............................... 42,861 144,496 155,868 116,421 111,133



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 1999 and 2000 (see below), financial
results from period-to-period may not be comparable. In addition, on August 22,
2001, we completed the sale of the Security Products and Services Group to Armor
Holdings, Inc., which we refer to in this document as Armor. Historical amounts
have been reclassified to conform to the current categories.

Recent Developments

On April 16, 2001, the Board of Directors approved a plan to discontinue
operations of the Voice and Data Communications Group (VDCG), which offered
secure satellite communication equipment and satellite navigation systems. On
June 27, 2001, Kroll sold its ownership in the stock of VDCG. The results of
operations of VDCG have been classified as discontinued operations and all prior
periods have been restated accordingly (see Note 5(b) of the Notes to the
Consolidated Financial Statements).

On April 20, 2001, the board approved a definitive agreement to sell
most of the active companies that comprise the Security Products and Services
Group, other than SPSG's subsidiaries that provide kidnap and ransom and risk
information services and its Russian business, to Armor.

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 Armor
common stock and $1.5 million placed in escrow pending agreement on the closing
date balance sheet audit. The purchase price is subject to a post-closing
adjustment in the event that the tangible net assets of SPSG as of the closing
date are less than approximately $35.0 million. Ultimate resolution of this
adjustment is still under review. The agreement also provides for a potential
deferred payment of up to $2.0 million by Armor to Kroll if a gross profit
target is achieved by SPSG for the year ended December 31, 2001 (see Note 5(a)
of the Notes to the Consolidated Financial Statements). We do not believe that
the gross profit target was achieved.

On September 14, 2001, Kroll converted approximately $14.1 million in
Armor common stock to cash. An additional $0.3 million was converted to cash on
September 21, 2001. There remains a balance of approximately $0.6 million as of
December 31, 2001, which Armor is contractually obligated to pay to Kroll. The
proceeds from the sale of SPSG were used by Kroll to repay approximately $49.4
million of debt during the third quarter of 2001.

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

20


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. 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 $30.0 million principal
(see Note 11 of the Notes to the Consolidated Financial Statements).

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. Borrowings under the
credit facility will bear interest, at Kroll's election, at a rate per annum
equal to (1) a base rate, which will be the prime rate of Wells Fargo Bank,
N.A., plus 0.75% or (2) LIBOR plus 2.75%. During the term of the credit
facility, Kroll will pay Foothill Capital a fee equal to the product of 0.375%
per annum and the unused portion of the credit facility. The credit facility
agreement requires Kroll to maintain a minimum level of EBITDA, and contains
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 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 certain of Kroll's subsidiaries. As of
March 21, 2002, there were no amounts borrowed under the credit facility (see
Note 20 of the Notes to the Consolidated Financial Statements).

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, we have changed the composition
of our reportable segments. Kroll now operates in three business segments: (1)
consulting services, which is comprised of business investigations and
intelligence services as well as financial services; (2) security services,
which is comprised of security and technology services; and (3) employee
screening services.


21


Acquisitions. Kroll has pursued a strategy of aggressive growth and
completed a number of acquisitions in 1999 and 2000, some of which have been
accounted for by the pooling of interests method of accounting and others of
which have been accounted for by the purchase method of accounting. These
acquisitions are listed in the chart, which follows:

Poolings of Interests (1)




Company Business Segment Date Acquired Price
- ------- -------- ------- ------------- -----


Financial Research, Inc. Business valuation Consulting March 1, 1999 101,555 shares
and economic damage Services of common stock
analysis services

Background America, Inc. Background Employee June 16, 1999 899,243 shares
investigation services Screening of common stock
Services

Purchases (2)


Company Business Segment Date Acquired Price
- ------- -------- ------- ------------- -----


The Buchler Phillips Group Corporate advisory Consulting June 3, 1999 $12.0 million in
practices Services cash and 366,469
shares of common
stock

The Search Is On, Inc. Background Employee May 16, 2000 $0.4 million in
investigation services Screening cash, plus note
Services payable of $0.2
million

Decision Resources, Inc. (3) Market research and Consulting July 11, 2000 $0.3 million in
business intelligence Services cash, plus note
services payable of $0.4
million


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

(1) Pooling of interests accounting requires the restating of all prior
period consolidated financial information as though the acquired entity
had always been a part of Kroll.

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

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

Restructuring of Operations

Due to the number of acquisitions Kroll has completed since 1998,
integration of the operations of the acquired companies with existing operations
became a strategic initiative for Kroll's management. As part of this
initiative, management evaluated its business segments to ensure that its core
businesses within the segments were operating efficiently. As a result of
management's evaluation, the decision was made to close several less profitable
operating facilities so that Kroll could focus on integrating existing
facilities with the newly acquired businesses.

In the first quarter of 1999, Kroll began implementation of a plan to
reduce costs and improve operating efficiencies and recorded a non-recurring
pre-tax restructuring charge of approximately $0.2 million. In the second
quarter of 1999, Kroll completed the restructuring plan with an additional
non-recurring pre-tax restructuring charge of $3.9 million. The principal
elements of the restructuring plan were the closing of two Investigations and
Intelligence Group offices and the elimination of approximately 82 employees.
The primary components of the restructuring charge were severance costs and
lease termination costs (see Note 7(d) of the Notes to the Consolidated
Financial Statements).

22


Kroll's Investigations and Intelligence Group implemented a plan (the
2001 Plan) to reduce costs and improve operating efficiencies and recorded an
associated non-recurring pretax restructuring charge of approximately $2.6
million in the second quarter of 2001, and an additional charge of approximately
$0.1 million during the remainder of 2001. The principal elements of the 2001
Plan were the elimination of 98 employees and the closing of four offices. The
primary components of the restructuring charge were severance costs and lease
termination costs (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. However, some of our accounting policies
require the application of significant judgment by management in the preparation
of our 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.

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

Revenue recognition. 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 costs incurred as
a percentage of the estimated total direct costs of the respective arrangements.
The impact of any revisions in estimated total revenue and direct contract costs
is recognized in the period in which they become known. Kroll records either
billed or unbilled accounts receivable based on case-by-case invoicing
determinations.

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. The effect of transactional gains or
losses is included in other income (expense) in the accompanying consolidated
statements of operations.

23


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,
---------------------------------
1999 2000 2001
------ -------- -------


Investigation and Intelligence net sales .......................... 97.7% 98.0% 100.0%
Information security net sales .................................... 2.3% 2.0% 0.0%
------ ------ ------
Total net sales ............................................. 100.0% 100.0% 100.0%
Cost of sales ..................................................... 55.6 60.2 60.2
------ ------ ------
Gross profit ................................................ 44.4 39.8 39.8
Selling and marketing ............................................. 8.9 10.5 9.0
General and administrative ........................................ 30.3 31.2 30.4
------ ------ ------
Total recurring operating costs ................................ 39.2 41.7 39.4
------ ------ ------
Operating income (loss) before non-recurring operating
costs....................................................... 5.2 (1.9) 0.4
------ ------ ------
Impairment of assets .............................................. 0.0 0.0 0.4
Loss on sale of business unit ..................................... 0.0 0.0 0.2
Failed financing costs ............................................ 0.0 0.0 0.5
Failed separation costs ........................................... 0.0 2.0 0.3
Failed merger related costs ....................................... 0.8 1.2 0.0
Merger related costs .............................................. 2.2 0.2 0.0
Restructuring charges ............................................. 2.2 0.0 1.3
Total non-recurring operating costs ............................ 5.2 3.4 2.7
Operating income (loss) ..................................... 0.0 (5.3) (2.3)
Interest expense .................................................. (1.5) (2.1) (2.1)
Interest income ................................................... 0.2 0.1 0.1
Other, net ........................................................ 0.0 0.8 0.0
------ ------ ------
Total other expense ............................................ (1.3) (1.2) (2.0)
------ ------ ------
Loss from continuing operations before provision for
income taxes............................................... (1.3) (6.5) (4.3)

Provision for (benefit from) income taxes ......................... (0.6) 1.2 1.2
------ ------ ------
Loss from continuing operations ............................. (0.7) (7.7) (5.5)
Income (loss) of discontinued Security Products and Services Group,
net of tax...................................................... 0.6 (4.9) (3.6)
Loss from operations of discontinued Voice and Data Communications
Group, net of tax .............................................. (0.9) (1.6) 0.0
Loss from sale of discontinued Voice and Data Communications Group,
net of tax...................................................... 0.0 (2.4) (1.0)
------ ------ ------
Total loss from discontinued operations ........................ (0.3) (8.9) (4.6)
------ ------ ------
Loss before extraordinary item .................................... (1.0) (16.6) (10.1)
Extraordinary item ................................................ 0.0 0.0 (0.2)
------ ------ ------
Net loss .................................................... (1.0)% (16.6)% (10.3)%
====== ====== ======


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.

Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $6.3 million, or 3.1%, from $201.6 million in
2000 to $207.9 million in 2001.

Consulting Services - Net sales for the Consulting Services segment
increased $13.3 million, or 10.8%, from $123.6 million in 2000 to $136.9 million
in 2001. This increase was primarily attributable to the strong demand for our
corporate recovery and turnaround services in the United Kingdom, where net
sales increased approximately $11.1 million, or 53.9%, from $20.6 million in
2000 to $31.7 million in 2001. Additional increases in our US and Latin American
consulting services were offset, in part, by a $3.4 million decrease in our
Asian operations, where merger and acquisition activity declined sharply in
2001.

24


Security Services - Net sales for the Security Services segment
decreased $2.9 million, or 9.3%, from $31.4 million in 2000 to $28.5 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 net sales from security services decreased as a result of the transition
of its security services business in Latin America from guard services, which
have low margins, to other security services with higher margins. Even with this
overall decrease, our US security services business posted growth of
approximately $3.0 million, or 13.4%, from $22.7 million in 2000 to $25.7
million in 2001 as a result of the increased demand for security services in the
aftermath of the events of September 11th.

Employee Screening Services - Net sales for the Employee 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 our
domestic surveillance business, primarily due to increased competition.

Information Security Group. Net sales for the Information Security Group
decreased $4.0 million, or 100.0%, from $4.0 million in 2000 to $0.0 million 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%. 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. This is a result of
an increase in the cost of sales for the Investigations and Intelligence Group
of $5.7 million, partially offset by the exclusion in 2001 of all of the cost of
sales associated with the Information Security Group of $4.4 million. Gross
margin as a percentage of sales was 39.8% for both 2000 and 2001.

Investigations and Intelligence Group. Gross margin for the
Investigations and Intelligence Group decreased 0.2 percentage points from 40.0%
in 2000 to 39.8% in 2001.

Consulting Services - Gross margin for the Consulting Services segment
decreased 0.8 percentage points from 38.3% in 2000 to 37.5% 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 the change in product mix in sales and a higher percentage
of reimbursable expenses in revenue with no associated profit margin.

Security Services - Gross margin for the Security Services segment
increased 3.0 percentage points from 39.9% in 2000 to 42.9% in 2001. The
increase in gross margin is attributable to the increase in net sales from our
domestic security services business, where we have been able to obtain higher
margins, which was partially offset by the decrease in sales contribution from
our Latin American guard services, which have produced lower margins.

Employee Screening Services - Gross margin for the Employee 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.

Information Security Group. Gross margin for the Information Security
Group increased from (10.0)% in 2000 to 0.0% 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%. 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

25


$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 publicly traded
companies. In 2001, non-recurring expenses primarily consisted of costs
associated with the failed financing, impairment of assets, loss on sale of a
business unit, the 2001 restructuring plan and Kroll's failed separation.

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 increased $0.1 million, or 2.3%, to
$4.4 million in 2001 from $4.3 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
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 a pre-tax loss in 2001, Kroll recorded a
provision for income taxes for certain foreign subsidiaries, which generated
income in the period. In addition, certain foreign subsidiaries realized losses
in 2001 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.

Fiscal Year Ended December 31, 2000 Compared to Fiscal Year Ended December 31,
1999

Net sales. Net sales for the year ended December 31, 2000 increased
$17.8 million, or 9.5%, from $187.8 million in the year ended December 31, 1999
to $205.6 million in 2000.

Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $18.1 million, or 9.9%, from $183.5 million in
1999 to $201.6 million in 2000.

Consulting Services - Net sales for the Consulting Services segment
increased $14.8 million, or 13.5%, from $108.8 million in 1999 to $123.6 million
in 2000. A significant portion of this increase was a result of the purchase
acquisition of Buchler Phillips, which was completed in the second quarter of
1999. Kroll also completed the purchase acquisition of Decision Resources, Inc.
during 2000 to increase its geographic presence in Canada for investigative
services. Excluding the impact of these acquisitions, net sales for consulting
services

26


increased $7.3 million, or 7.7%, from $95.0 million in 1999 to $102.3 million in
2000. The remaining increase in net sales was primarily attributable to the
domestic and Canadian business operations of the Consulting Services businesses.

Security Services - Net sales for the Security Services segment
increased $1.7 million, or 5.7%, from $29.7 million in 1999 to $31.4 million in
2000. Net sales of Kroll's security architecture and design business increased
approximately $1.5 million, or 24.6%, from $6.1 million in 1999 to $7.6 million
in 2000 due to increased demand. This increase was offset by decreased sales of
guard services in our Latin American security business and reduced demand for
crisis management and planning services.

Employee Screening Services - Net sales for the Employee Screening
Services segment increased $1.7 million, or 3.7%, from $44.9 million in 1999 to
$46.6 million in 2000. During 2000, Kroll completed the purchase of The Search
Is On, which provides information utilized in background investigations.
Excluding the impact of this purchase acquisition, net sales increased $0.8
million, or 1.7%, from $44.9 million in 1999 to $45.7 million in 2000. The
increase in net sales was attributable to the increased demand for background
investigations and drug screening services, which increased approximately $2.1
million in 2000, offset by a decrease in net sales of surveillance services of
approximately $1.3 million in 2000.

Information Security Group. Net sales for the Information Security Group
decreased $0.3 million, or 7.2%, from $4.3 million in 1999 to $4.0 million in
2000. 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%. 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 $19.4 million,
or 18.6%, from $104.4 million in 1999 to $123.8 million in 2000. The increase in
cost of sales was partially due to the Buchler Phillips acquisition completed in
the second quarter of 1999. Excluding this acquisition, cost of sales increased
$15.5 million. Gross margin as a percentage of net sales was 44.4% and 39.8% for
1999 and 2000, respectively.

Investigations and Intelligence Group. Gross margin for the
Investigations and Intelligence Group decreased 3.4 percentage points from 44.2%
in 1999 to 40.8% in 2000.

Consulting Services - Gross margin for the Consulting Services segment
decreased 6.3 percentage points from 44.6% in 1999 to 38.3% in 2000. The
decrease in gross margin was due to increased fixed costs associated with
increased employee compensation and benefits as well as increased subcontractor
fees associated with generating professional fee revenue.

Security Services - Gross margin for the Security Services segment
decreased 0.1 percentage points from 40.0% in 1999 to 39.9% in 2000. The
decrease in gross margin was due to increased fixed costs associated with
increased employee compensation and benefits.

Employee Screening Services - Gross margin for the Employee Screening
Services segment increased 1.7 percentage points from 46.2% in 1999 to 47.9% in
2000. The increase in gross margin is attributable to increased sales without a
corresponding increase in fixed costs.

Information Security Group. Gross margin for the Information Security
Group decreased from 52.9% in 1999 to a negative 10.0% in 2000. Gross margin was
negatively impacted in 2000 by a continuing focus on development of this Group's
service capabilities and an increase in professional personnel to support the
establishment of a firm customer base.

Operating expenses. Operating expenses increased $9.4 million, or 11.3%,
to $92.7 million in 2000 from $83.3 million in 1999. This increase was despite a
decrease in non-recurring expenses of $2.7 million, from $9.7 million in 1999 to
$7.0 million in 2000. Non-recurring charges in 2000 consisted of approximately

27


$2.5 million of costs associated with the failed recapitalization merger with
Blackstone as well as $4.2 million of costs associated with the failed
separation of Kroll's Security Products and Services Group and Investigations
and Intelligence Group. In 1999, non-recurring expenses included $4.1 million of
merger-related expenses primarily for the Background America merger, $1.6
million in failed merger expenses associated with the failed recapitalization
merger with Blackstone, as well as a restructuring charge of $4.1 million.

Excluding non-recurring expenses, operating expenses increased $12.1
million in 2000. Approximately $1.6 million of this increase was due to
operating expenses incurred by Buchler Phillips in the first quarter of 2000.
The Buchler Phillips acquisition was not completed until the second quarter of
1999 and its operating expenses are not included in Kroll's historical financial
information until the effective date of the acquisition, April 1, 1999. Also
included in the operating expense increase were increases of $2.5 million for
depreciation and amortization of fixed and intangible assets, including
goodwill, and $2.4 million for bad debt expense. In the third quarter of 1999,
the Investigations and Intelligence Group recovered approximately $1.5 million
of a previously written off bad debt which offset a portion of the Group's bad
debt expense recognized in 1999. In 2000, slow customer payments prompted the
Investigations and Intelligence Group to increase its reserve for uncollectible
accounts receivable. In addition, operating expenses in the Information Security
Group increased $5.1 million as a result of the continuing focus on development
of this Group's software products capabilities, including an increase in
professional and support personnel to support the increased development.

As a percentage of net sales, operating expenses, before non-recurring
charges, increased from 39.2% in 1999 to 41.7% in 2000. The increase in
operating expenses as a percentage of net sales primarily was attributable to
increased fixed costs to develop the Information Security Group's software
products capabilities and to the increases related to depreciation, amortization
and bad debt expenses.

Interest expense. Interest expense increased $1.5 million, or 57%, to
$4.3 million in 2000, from $2.8 million in 1999. This increase was the result of
increased borrowings under Kroll's revolving credit facility. For most of the
first six months of 1999, Kroll had excess funds as a result of a public
offering of stock completed in May 1998 and no borrowings were required on the
revolving credit facility until the purchase of Buchler Phillips on June 3,
1999. In 2000, increased borrowings under Kroll's revolving credit facility
primarily related to the continuing funding of the working capital needs of the
Information Security Group, costs of approximately $4.2 million related to the
failed separation of Kroll's two principal operating groups and failed merger
costs of $2.5 million.

Provision for income taxes. The provision for income taxes was $2.4
million in 2000 compared to $(1.1) million in 1999. The effective tax rates for
the periods were (48)% in 1999 and 18% in 2000. In 2000, Kroll recorded tax
expense despite the pre-tax loss incurred from operations. The tax provision
resulted from the non-deductibility of certain expenses, including the failed
separation costs and a litigation settlement with the U.S. Department of Justice
regarding SPSG, and from income in certain domestic and foreign jurisdictions.
Additionally, certain domestic and foreign entities realized losses in 2000 from
which Kroll was not able to benefit for tax purposes. A valuation allowance
related to all of these net operating loss carryforwards was provided for in
2000.

Discontinued operations. The results from the discontinued Security
Products and Services Group decreased $11.0 million from income of $1.0 million
in 1999 to a loss of $10.0 million in 2000. This decrease was primarily due to a
$12.3 million decrease in sales without a corresponding decrease in the cost of
sales. The $2.1 million increase in cost of sales on lower sales volume resulted
in an increase of 9.4% in the cost of sales as a percentage of sales. Partially
offsetting these factors was a reduction of approximately $3.3 million in the
provision for income taxes and a slight decrease in administrative and sales
costs.

The loss from operations of the discontinued Voice and Data
Communications Group increased from $1.8 million in 1999 to $3.2 million in
2000. This increase was due to an increase in the Group's inventory reserve
resulting from excess stock of technologically outdated telecommunications
equipment as well as an increase in the allowance for doubtful accounts due to
slow paying customers. Due to the uncertainty surrounding

28


the future realizability of the tax benefit associated with the Voice and Data
Communication Group's losses in the future, management concluded that a
valuation allowance for the entire tax benefit was required in both 1999 and
2000. In addition, management estimated a loss on disposal of $5.0 million,
which includes the estimated future results of operations through the
anticipated date of the shutdown. Major components of the estimated loss on
disposal include a writedown of related goodwill and other asset balances of
$4.2 million and estimated severance, operating and shutdown costs of $0.8
million.

Net loss. Net loss increased $32.0 million from a loss of $1.9 million
in 1999 to a loss of $33.9 million in 2000. The increase in net loss was due
primarily to a decrease in gross profit of $1.7 million, increases in operating
expenses of $9.4 million, increases of $3.5 million in provision for taxes,
increases in losses associated with the discontinued Voice and Data
Communications Group of $6.5 million and a loss of $10.0 million in 2000
compared to income of $1.0 million in 1999 for the discontinued Security
Products and Services Group.

Liquidity and Capital Resources

General. Kroll historically has met its operating cash needs by
utilizing borrowings under its credit arrangements and net proceeds from public
offerings to supplement cash provided by operations, excluding non-cash charges
such as depreciation and amortization.

Credit facilities and senior notes. On March 30, 2001, Kroll entered
into an amended and restated loan agreement, which would have expired on May 31,
2002 if not terminated earlier as described below, to provide for a revolving
credit facility that initially amounted to $40.0 million. The agreement also
provided for a letter of credit facility of up to $6.0 million of transactional
letters of credit. Letters of credit cannot be issued or renewed with a maturity
date beyond May 31, 2002. The agreement was secured by substantially all assets
of Kroll and its subsidiaries along with a pledge of the stock of essentially
all the subsidiaries, all of which jointly and severally guaranteed obligations
under the agreement. The revolving credit facility required quarterly reductions
of approximately $1.1 million on September 30, 2001 and approximately $1.7
million on each of December 31, 2001 and March 31, 2002 in the amount that may
be borrowed under the facility and, if necessary, corresponding principal
repayments to the adjusted levels. In addition, the net proceeds from any
lender-approved sale of assets in excess of $1.0 million per transaction or $2.0
million per fiscal year was to be paid proportionately to the revolving credit
facility lender and to the holders of Kroll's outstanding senior notes
(discussed below), with a corresponding reduction in the total permitted
borrowings under the revolving credit facility. This included the net proceeds
from the sale to Armor and any proceeds from sales of Kroll's stock ownership in
Securify or other assets in excess of the threshold amounts. Borrowings under
Kroll's revolving credit facility were approximately $36.5 million at December
31, 2000 and borrowings under Kroll's senior notes were approximately $35.0
million at December 31, 2000. Both the revolving credit facility and senior
notes were retired on November 14, 2001.

In connection with the amended credit facility, Kroll entered into
amended and restated agreements with the holders of its senior notes. These
agreements were also secured by substantially all assets of Kroll and its
subsidiaries and a pledge of the stock of essentially all the subsidiaries and
were jointly and severally guaranteed by essentially all the subsidiaries. The
amended and restated senior note agreements required total principal payments of
$864,200 on September 30, 2001 and $1,296,300 on each of December 31, 2001 and
March 31, 2002. The balance was payable at maturity in May 2003, but maturity
was accelerated to May 31, 2002 if Kroll's revolving credit agreement was not
renewed and, as described below, further accelerated upon closing of the
transaction with Armor. The September 30, 2001 payment referenced above was made
in October 2001.

The amended bank loan and senior note agreements contained substantially
identical financial covenants which, among other restrictions, required the
maintenance of certain financial ratios and other financial requirements,
including an interest coverage ratio, net worth minimums and minimum quarterly
EBITDA that required Kroll to effectively break even before taxes and to
generate EBITDA of $6.0 million per quarter. The agreements also imposed
limitations on mergers, acquisitions, stock redemption, additional indebtedness
and capital expenditures. The loan agreement did not permit the declaration or
payment of any dividend, other than stock dividends. Kroll was not in compliance
with these covenants as of September 30, 2001. As both the facility

29


and the senior notes were retired on November 14, 2001, no adverse consequences
resulted from any event of non-compliance.

The bank loan agreement and senior notes were further amended as of
April 20, 2001 and October 22, 2001 in connection with Kroll's agreement to sell
the Security Products and Services Group to Armor. The March 30, 2001 agreements
required interest on advances under the revolving credit facility and on the
senior notes at the greater of 8.56% or the prime rate plus 1.5%. Effective
April 20, 2001 the interest rate under all of the agreements was changed to the
greater of (a) 8.56% or (b) prime plus 1.5%, plus 0.5% times the number of
30-day periods which expired after April 20, 2001 (or, if less, the highest rate
allowed by law).

At the closing of the sale of the SPSG business to Armor, Kroll received
approximately $53.7 million, of which approximately $15.0 million was paid in
shares of Armor common stock and the balance was paid in cash. Of the
approximately $38.7 million balance, $1.5 million was deposited in escrow for
the satisfaction of some conditions under the agreement. Kroll used
approximately $2.2 million for transaction costs and the remaining $35 million
of cash to repay the revolving credit facility lender and the senior note
holders, in a ratio of 56.8% and 43.2%, respectively.

Following the closing of the transaction with Armor, proceeds from the
sale of the Armor stock of approximately $14.1 million and an additional $0.3
million subsequently received were paid immediately to the revolving credit
facility lender and senior note holders in the same percentages. $0.6 million
remains to be received from Armor.

In November 2001, we 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.

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

The notes contain certain customary covenants, including covenants that
prohibit Kroll from disposing of any material subsidiary, incurring or
permitting to exist any debt other than the credit facility, guaranteeing the
obligations of any third party, creating or permitting to exist any material
liens on assets of material subsidiaries or entering into a transaction prior to
November 14, 2003 that involves a "change in control" of Kroll (as defined in
the notes). The notes are payable upon any change in control of Kroll at the
option of the holders.

The note holders may designate an observer to the Board of Directors who
may serve in this capacity as long as 20% of the notes, or shares into which the
notes were converted, are held by the noteholders or investors. The observer may
also attend Audit and Compensation Committee meetings.

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 $30.0 million principal
(see Note 11 of the Notes to the Consolidated Financial Statements).

30


A significant portion of the proceeds from the new financing was used to
retire Kroll's amended bank loan and senior notes. Excess proceeds of
approximately $8.4 million will be utilized for working capital to fund
operations.

The deferred financing costs associated with Kroll's amended bank loan
and senior notes 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.

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 1.0%. At
December 31, 2001 the interest rate was 5.5%. Maximum borrowings permitted
pursuant to this demand note are $3.6 million. Borrowings outstanding pursuant
to this demand note were approximately $2.8 million and $2.6 million, as
translated at December 31, 2000 and December 31, 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. Borrowings under the
credit facility will bear interest, at Kroll's election, at a rate per annum
equal to (1) a base rate, which will be the prime rate of Wells Fargo Bank,
N.A., plus 0.75% or (2) LIBOR plus 2.75%. During the term of the credit
facility, Kroll will pay Foothill Capital a fee equal to the product of 0.375%
per annum and the unused portion of the credit facility. The credit facility
agreement requires Kroll to maintain a minimum level of EBITDA, and contains
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 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 certain of Kroll's subsidiaries. As of
March 21, 2002, there were no amounts borrowed under the credit facility (see
Note 20 of the Notes to the Consolidated Financial Statements).

We currently believe that the net proceeds from the sale of the notes,
combined with the available borrowings under the demand note, the credit
facility and Kroll's cash from operations, will be sufficient to fund our
operations for at least the next 12 months.

Cash flows from operating activities. Operating activities used $11.5
million in net cash investments in 2000 compared to net cash provided of $3.4
million in 2001. In 2001, cash was used primarily to fund working capital
investments and failed separation and financing costs. In 2000, cash was used
primarily to fund working capital investments, failed separation and merger
costs and the continuing losses of Securify until the sale of a majority
interest in Securify in October 2000 (see Note 6(a) of the Notes to the
Consolidated Financial Statements).

Cash flows from investing activities. In 2000, Kroll used $12.5 million
in investing activities, of which $7.6 million was incurred for capital
expenditures, primarily for upgrades of general information systems as well as
additional leasehold improvements and office furniture and fixtures related to
new office space in the Investigations and Intelligence Group. In 2001, Kroll
used $8.8 million in investing activities, of which $3.4 million was incurred
for capital expenditures. Additions to databases totaled $4.4 million for both
of the years ended December 31, 2000 and 2001, respectively.

Cash flows from financing activities. Net cash provided by financing
activities was $11.5 million compared with net cash used of $41.7 million for
the years ended December 31, 2000 and 2001, respectively. In 2000, cash was
provided by borrowings under bank lines of credit, net of repayments of
long-term debt. In 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 from the $30.0 million of proceeds from the newly issued senior
secured subordinated convertible notes. In addition, in

31


2001, cash in the amount of $2.6 million was provided from proceeds from the
exercise of stock options and warrants.

Kroll's contractual obligations were comprised of the following as of
December 31, 2001:




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............ $ 30,596 $ 318 $ 104 $ 30,058 $ 116
Operating leases.......... 36,680 8,389 17,598 7,933 2,760
------------- ------------ ------------ ------------ ------------
Total.................. $ 67,276 $ 8,707 $ 17,702 $ 37,991 $ 2,876
============= ============ ============ ============ ============



Kroll also had standby letters of credit outstanding at December 31,
2001 in the aggregate amount of approximately $1.5 million.

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

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. When terminated, the contracts had a notional amount
of $3.2 million, which approximated their fair value. Kroll has not since
utilized hedging or derivative financial instruments.

Quarterly fluctuations. Kroll generally does not have long-term
contracts with its clients in its Investigations and Intelligence Group 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 September 2000, the Emerging Issues
Task Force (EITF) announced Issue No. 00-20, "Accounting for Costs Incurred to
Acquire or Originate Information for Database Content and Other Collections of
Information," stating that the EITF is considering different views for the
accounting for database costs. One of the views would require Kroll to expense
some or all of the database costs that Kroll currently capitalizes and
amortizes, which is currently an acceptable alternative. Adoption of a different
method of accounting for database costs could have a material impact on Kroll's
financial position and results of operations. To date, the EITF has not made any
official determinations on this issue.

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
(SFAS No. 141), 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 Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which
establishes accounting and reporting standards for goodwill and

32


other intangible assets that are acquired individually or with a group of other
assets. The provisions of this statement are effective for fiscal years
beginning after December 15, 2001. Kroll had amortization expense related to
goodwill of approximately $2.8 million for the year ended December 31, 2001. Due
to the issuance of the standard, Kroll will not amortize goodwill in future
periods.

In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" (SFAS No. 143), 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
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" (SFAS No. 144), 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 is required to implement SFAS No.
144 on January 1, 2002, and currently believes there will be no material impact
related to the implementation of this statement on its results of operations or
financial position.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Fair Value of Financial Instruments -- The following disclosure of the
estimated fair value of financial instruments is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments". Kroll estimated fair
values of financial instruments by using available market information and
appropriate valuation methodologies.

However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that Kroll could realize in
current market exchange.

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.

Kroll's carrying values of cash, marketable securities, accounts
receivable, accounts payable and accrued expenses are a reasonable approximation
of their fair value.

Kroll's business in this regard is subject to certain risks, including,
but not limited to, differing economic conditions, loss of significant
customers, changes in political climate, differing tax structures, other
regulations and restrictions and foreign exchange rate volatility. Kroll's
future results could be materially and adversely impacted by changes in these or
other factors.


33


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 sheet of Kroll
Inc. and subsidiaries (the Company) as of December 31, 2001 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year 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 audit. The consolidated
financial statements of the Company for the years ended December 31, 2000 and
1999 were audited by other auditors whose report, dated August 22, 2001,
expressed an unqualified opinion on those statements.

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

In our opinion, such 2001 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.


Deloitte & Touche LLP
New York, New York
February 15, 2002 (March 21, 2002 as to Note 20)



34


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



35






KROLL INC.

CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 2001

2000 2001
------------ ------------

ASSETS
CURRENT ASSETS:

Cash and cash equivalents.......................................... $ 6,277,457 $ 11,484,734
Trade accounts receivable, net of allowance for doubtful
accounts of $4,235,975 and $6,798,097 in 2000 and 2001,
respectively (Notes 3(d) and 7(a)).............................. 42,565,577 37,779,643
Unbilled revenues (Note 3(b))...................................... 19,994,597 25,600,220
Related party receivables (Note 9)................................. 2,063,939 2,416,859
Prepaid expenses and other current assets.......................... 6,107,241 4,524,646
Net current assets of discontinued security products and services
group (Note 5(a))............................................... 23,306,280 --
Net current assets of discontinued voice and data communications
group (Note 5(b))............................................... 1,879,237 --
------------ ------------
Total current assets............................................. 102,194,328 81,806,102
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Note 3(e)):
Land............................................................... 194,103 194,103
Buildings and improvements......................................... 1,997,065 2,000,352
Leasehold improvements............................................. 7,303,446 7,440,228
Furniture and fixtures............................................. 5,186,859 5,134,958
Machinery and equipment............................................ 25,967,715 27,905,315
Construction-in-progress........................................... 1,326,425 500,026
------------ ------------
41,975,613 43,174,982
Less--accumulated depreciation and amortization.................... (21,704,107) (27,107,762)
------------ ------------
20,271,506 16,067,220
------------ ------------
DATABASES, net of accumulated amortization of $29,759,496 and
$33,672,282 in 2000 and 2001, respectively (Note 3(f)) 10,204,294 10,529,565

COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS,
net of accumulated amortization of approximately
$8,283,000 and $11,435,751 in 2000 and 2001, respectively
(Notes 3(h), 3(i) and 4(b))....................................... 61,033,258 57,156,485

OTHER ASSETS:
Other assets (Note 7(b)) 2,908,449 4,226,451
Net non-current assets of discontinued security products and
services group (Note 5(a))..................................... 30,793,680 --
------------ ------------
Total Assets $227,405,515 $169,785,823
============ ============




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



36





KROLL INC.

CONSOLIDATED BALANCE SHEETS - (continued)
As of December 31, 2000 and 2001

2000 2001
------------- ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:


Revolving lines of credit (Note 10)............................... $ 39,280,300 $ 2,561,351
Current portion of long-term debt (Note 11)....................... 3,360,029 318,089
Trade accounts payable............................................ 12,623,440 10,359,915
Related party payables (Note 9)................................... 239,145 --
Accrued liabilities (Note 7(c))................................... 12,851,899 16,390,813
Income taxes payable.............................................. 1,526,120 1,434,022
Deferred income taxes (Note 8).................................... 2,554,406 1,935,964
Deferred revenue.................................................. 4,045,292 4,389,449
Net current liabilities of discontinued operation................. -- 502,532
------------- ------------
Total current liabilities...................................... 76,480,631 37,892,135
------------- ------------
OTHER LONG-TERM LIABILITIES.......................................... 1,489,274 1,336,576
DEFERRED INCOME TAXES (Note 8)....................................... 304,585 345,638
CONVERTIBLE NOTES, net of unamortized discount of $11,199,674
(Note 11)...................................................... -- 18,800,326
LONG-TERM DEBT, net of current portion (Note 11)..................... 32,709,552 277,956
------------- ------------
Total liabilities.............................................. 110,984,042 58,652,631
------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 15)
SHAREHOLDERS' EQUITY (Note 14):
Preferred stock, $.01 par value, 1,000,000 shares authorized, none -- --
issued.........................................................
Common stock, $.01 par value, 50,000,000 shares authorized,
22,414,697 and 22,793,871 shares issued and outstanding in 2000
and 2001, respectively......................................... 224,147 227,939
Additional paid-in-capital........................................ 169,467,255 183,420,930
Retained deficit.................................................. (46,583,887) (67,970,733)
Deferred compensation............................................. (337,043) --
Accumulated other comprehensive loss.............................. (6,348,999) (4,544,944)
------------- ------------
Total shareholders' equity..................................... 116,421,473 111,133,192
------------- ------------
$ 227,405,515 $169,785,823
============= ============




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



37





KROLL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 2000 and 2001

1999 2000 2001
------------- ------------- -------------


NET SALES ................................................. $ 187,844,986 $ 205,610,223 $ 207,876,510
COST OF SALES ............................................. 104,366,300 123,791,196 125,051,800
-------------- -------------- --------------
Gross profit ...................................... 83,478,686 81,819,027 82,824,710
OPERATING EXPENSES:
Selling and marketing .................................. 16,704,970 21,490,151 18,724,091
General and administrative ............................. 56,906,914 64,192,143 63,077,503
Impairment of asset (Note 3(g)) ........................ -- -- 806,763
Loss on sale of business unit (Note 6(b)) .............. -- -- 527,964
Failed financing costs (Note 10) ....................... -- -- 1,042,698
Failed separation costs (Note 2) ....................... -- 4,194,188 607,246
Failed merger related costs (Note 2) ................... 1,562,331 2,490,923 --
Merger related costs (Note 4) .......................... 4,069,089 357,279 --
Restructuring charges (Note 7(d)) ...................... 4,071,809 -- 2,726,239
-------------- -------------- --------------
Operating expenses .................................. 83,315,113 92,724,684 87,512,504
-------------- -------------- --------------
Operating income (loss) ........................... 163,573 (10,905,657) (4,687,794)
OTHER INCOME (EXPENSE):
Interest expense ....................................... (2,752,502) (4,321,628) (4,374,809)
Interest income ........................................ 338,586 250,286 127,426
Gain from issuance of subsidiary stock (Note 6(a)) ..... -- 1,616,658 --
Other .................................................. (58,439) 40,958 (53,240)
-------------- -------------- --------------
Loss from continuing operations before provision
for (benefit from) income taxes ................. (2,308,782) (13,319,383) (8,988,416)
Provision for (benefit from) income taxes (Note 8) ..... (1,104,889) 2,376,895 2,402,265
-------------- -------------- --------------
Loss from continuing operations ................... (1,203,893) (15,696,278) (11,390,681)
Discontinued operations (Note 5):
Income (loss) of discontinued security products and
services group, net of taxes ...................... 1,043,109 (10,010,770) (7,540,658)
Loss from operations of discontinued voice and data
communications group, net of taxes ................ (1,761,035) (3,199,618) (103,701)
Loss on sale of discontinued voice and data
communications group, net of taxes ................ -- (5,037,647) (2,007,758)
-------------- -------------- --------------
Loss before extraordinary item ...................... (1,921,819) (33,944,313) (21,042,798)
Extraordinary item, net of taxes (Note 11) ............. -- -- 344,048
-------------- -------------- --------------
Net loss .......................................... $ (1,921,819) $ (33,944,313) $ (21,386,846)
============== ============== ==============
Basic and diluted loss per share from continuing operations
(Note 3(m))............................................. $ (0.05) $ (0.70) $ (0.51)
============== ============== ==============
Basic and diluted loss per share before extraordinary
item (Note 3(m))........................................ $ (0.09) $ (1.52) $ (0.94)
============== ============== ==============
Basic and diluted loss per share from extraordinary
item (Note 3(m))........................................ -- -- $ (0.01)
============== ============== ==============
Basic and diluted loss per share (Note 3(m)) .......... $ (0.09) $ (1.52) $ (0.95)
============== ============== ==============
Basic and diluted Weighted average shares outstanding (Note
3(m))................................................... 22,005,632 22,295,391 22,478,587
============== ============== ==============




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



38





KROLL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 2000 and 2001

Comprehensive
Income Common Additional Retained Deferred
Shares (Loss) Stock Paid-in-Capital Deficit Compensation
----------- ------------- ------------- --------------- -------------- -------------


BALANCE, January 1, 1999 ......... 21,584,872 $ 215,848 $ 157,229,936 $ (10,964,249) $ (1,113,936)
Net issuances of stock under
employee benefit plans, ....... 202,614 2,026 3,293,084 -- --
including related tax benefit
(Note 14)
Issuance of stock in conjunction
with acquisition of businesses 468,024 4,681 8,007,248 246,494 --
(Note 4)
Deferred compensation related to
restricted stock and stock .... -- -- 1,571,661 -- (515,957)
options (Note 14)
Comprehensive income (loss):
Net loss ...................... -- $ (1,921,819) -- -- (1,921,819) --
-------------
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, including .... -- 684,357 -- -- -- --
-------------
$191,000 of tax provision
Other comprehensive income . -- 684,357 -- -- -- --
-------------
Comprehensive loss ....... -- $ (1,237,462) -- -- -- --
---------- ============= ----------- -------------- ------------- -------------
BALANCE, December 31, 1999 ....... 22,255,510 222,555 170,101,929 (12,639,574) (1,629,893)
Net issuances of stock under
employee benefit plans, ....... 115,197 1,152 15,381 -- --
including related tax benefit
(Note 14)
Issuance of restricted stock ..... 43,990 440 43,128 -- --
(Note14)
Deferred compensation related to
restricted stock and stock .... -- -- (693,183) -- 1,292,850
options (Note 14)
Comprehensive income (loss):
Net loss ...................... -- $ (33,944,313) -- -- (33,944,313) --
-------------
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, including .... -- (6,162,021) -- -- -- --
-------------
$335,000 of tax provision
Other comprehensive income . -- (6,162,021) -- -- -- --
-------------
Comprehensive loss ....... -- $ (40,106,334) -- -- -- --
---------- ============= ----------- -------------- ------------- -------------
BALANCE, December 31, 2000 ....... 22,414,697 224,147 169,467,255 (46,583,887) (337,043)




Accumulated Other
Comprehensive
Income (Loss) Total
----------------- -----------


BALANCE, January 1, 1999 ......... $ (871,335) $ 144,496,264
Net issuances of stock under
employee benefit plans, ....... -- 3,295,110
including related tax benefit
(Note 14)
Issuance of stock in conjunction
with acquisition of businesses -- 8,258,423
(Note 4)
Deferred compensation related to
restricted stock and stock .... -- 1,055,704
options (Note 14)
Comprehensive income (loss):
Net loss ...................... -- (1,921,819)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, including .... -- --
$191,000 of tax provision
Other comprehensive income . 684,357 684,357
Comprehensive loss ....... -- --
------------- ------------
BALANCE, December 31, 1999 ....... (186,978) 155,868,039
Net issuances of stock under
employee benefit plans, ....... -- 16,533
including related tax benefit
(Note 14)
Issuance of restricted stock ..... -- 43,568
(Note14)
Deferred compensation related to
restricted stock and stock .... -- 599,667
options (Note 14)
Comprehensive income (loss):
Net loss ...................... -- (33,944,313)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, including .... -- --
$335,000 of tax provision
Other comprehensive income . (6,162,021) (6,162,021)
------------- ------------
BALANCE, December 31, 2000 ....... (6,348,999) 116,421,473



39





KROLL INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 2000 and 2001
(continued)

Comprehensive
Income Common Additional Retained Deferred
Shares (Loss) Stock Paid-in-Capital Deficit Compensation
----------- ------------- ------------- --------------- ------------ -------------



BALANCE, December 31, 2000 ........ 22,414,697 $ 224,147 $169,467,255 $(46,583,887) $ (337,043)
Net issuances of stock under
employee benefit plans, ........ 379,174 3,792 2,565,295 -- --
including related tax benefit
(Note 14)
Deferred compensation related to
restricted stock and stock ..... -- -- -- -- 337,043
options (Note 14)
Discount to market of senior
subordinated convertible notes . -- -- 11,388,380 -- --
(Note 11)
Comprehensive income (loss):
Net loss ....................... -- $(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 -- -- -- --
------------
Comprehensive loss ........ -- $(19,582,791) -- -- -- --
----------- ============ ------------ ------------ ------------ ------------
BALANCE, December 31, 2001 ........ 22,793,871 $ 227,939 $183,420,930 $(67,970,733) $ --
=========== ============ ============ ============ ============



Accumulated Other
Comprehensive
Income (Loss) Total
----------------- -----------



BALANCE, December 31, 2000 ........ $ (6,348,999) $116,421,473
Net issuances of stock under
employee benefit plans,
including related tax benefit
(Note 14) ...................... -- 2,569,087
Deferred compensation related to
restricted stock and stock
options (Note 14)............... -- 337,043
Discount to market of senior
subordinated convertible notes
(Note 11) ...................... -- 11,388,380
Comprehensive income (loss):
Net loss ....................... -- (21,386,846)
Other comprehensive income
(loss), net of tax:
Gain from the sale of SPSG,
net of tax of $2,538,000 .. -- --
Reversal of unrealized gain
from hedging activity, net
of tax..................... -- --
Revaluation of business unit
due to decline in Argentine
peso....................... -- --
Foreign currency translation
adjustment, including $1,173,076
of tax provision .......... -- --
Other comprehensive income .. 1,804,055 1,804,055
Comprehensive loss ........ -- --
------------ ------------
BALANCE, December 31, 2001 ........ $ (4,544,944) $111,133,192
============ ============




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



40





KROLL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 18)
For the Years Ended December 31, 1999, 2000 and 2001

1999 2000 2001
------------ ------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss ................................................ $ (1,921,819) $(33,944,313) $(21,386,846)
Adjustments to reconcile net loss to net cash provided
by (used in) continuing operations--
Loss from discontinued operations .................... 717,926 18,248,035 9,652,117
Depreciation and amortization ........................ 10,139,841 12,629,950 13,904,626
Loss on write-off of notes receivable ................ -- -- 189,215
Bad debt expense ..................................... 2,166,116 4,548,967 5,939,841
Loss on sale of business unit ........................ -- -- 544,461
Gain from issuance of subsidiary stock ............... -- (1,616,658) --
Non-cash gain from investments ....................... -- -- (143,596)
Loss on extraordinary item ........................... -- -- 344,048
Loss on impaired asset ............................... -- -- 806,763
Non-cash compensation expense ........................ 856,280 508,531 337,043
Change in assets and liabilities, net of effects of
acquisitions and dispositions--
Receivables--trade and unbilled ...................... (14,512,195) (16,145,329) (8,268,195)
Prepaid expenses and other current assets ............ (4,159,105) (1,095,394) 1,525,343
Accounts payable and income taxes payable ............ (3,082,854) 10,759,711 (1,906,233)
Amounts due to/from related parties .................. 1,026,370 (63,918) (2,037,678)
Deferred income taxes ................................ (1,731,010) 1,432,709 (567,136)
Accrued liabilities, long-term liabilities, customer
deposits and deferred revenue ...................... 1,971,651 (6,808,029) 4,513,793
------------ ------------ ------------
Net cash provided by (used in) continuing operations (8,528,799) (11,545,738) 3,447,566
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment .............. (12,904,210) (7,627,321) (3,419,900)
Additions to databases .................................. (3,855,750) (4,397,602) (4,392,719)
Additions to intangible assets .......................... -- -- (833,962)
Loss on the retirement of assets ........................ -- -- (32,017)
Acquisitions, net of cash acquired (Note 4) ............. (12,014,287) (470,000) --
Sales of marketable securities, net ..................... 13,285,322 -- --
Purchase of investments ................................. -- -- (84,397)
------------ ------------ ------------
Net cash used in investing activities of continuing
operations.......................................... (15,488,925) (12,494,923) (8,762,995)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit................................................ 24,262,221 13,396,419 (36,649,502)
Borrowings from debt .................................... -- -- 30,000,000
Payments of long-term debt .............................. (849,605) (1,590,243) (35,325,754)
Proceeds from exercise of stock options and warrants .... 3,295,110 60,101 2,569,087
Other ................................................... (512,580) (316,366) (2,253,206)
------------ ------------ ------------
Net cash provided by (used in) financing activities
of continuing operations ........................... 26,195,146 11,549,911 (41,659,375)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 2,177,422 (12,490,750) (46,974,804)
Effects of foreign currency exchange rates on cash and cash
equivalents............................................. (232,393) (163,709) (325,685)
Net cash (used in) received from discontinued operations ... (3,568,461) 9,139,385 52,507,766
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of year ............... 11,415,963 9,792,531 6,277,457
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year ..................... $ 9,792,531 $ 6,277,457 $ 11,484,734
============ ============ ============



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


41


KROLL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 2000 and 2001


(1) Nature of Operations and Basis of Presentation

Kroll Inc., (formerly known as The Kroll-O'Gara Company) an Ohio
corporation, together with its subsidiaries (collectively, Kroll), is a leading
global provider of a broad range of specialized services that are designed to
provide solutions to a variety of risk mitigation and security needs. Kroll's
Investigations and Intelligence Group offers: (1) Consulting Services such as
business investigations and intelligence as well as financial services; (2)
Security Services such as security and technology services; and (3) Employee
Screening Services including pre-employment background checking, drug testing
and surveillance services. 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) and the financial position, results of operations and cash flows of
entities, which were merged with Kroll in connection with pooling of interests
business combinations for all periods presented (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
approximately $1.6 million and $2.5 million for the years ended December 31,
1999 and 2000, respectively, 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 $4.2 million and $0.6 million for the years ended December 31,
2000 and 2001, respectively, and consisted primarily of fees for attorneys,
accountants, investment bankers and other related charges. Kroll does not
anticipate any additional expenses related to this now terminated separation
alternative.

On April 20, 2001, in lieu of the proposed separation, the Board
approved a definitive agreement, subject to a limited number of closing
conditions, to sell most of the active companies that comprise SPSG to Armor
Holdings, Inc. (Armor). On August 22, 2001, Kroll completed the sale of SPSG to
Armor for up to $55.7 million,

42


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 price is subject to a post-closing adjustment in the
event that the tangible net assets of SPSG as of the closing date are less than
approximately $35.0 million. Ultimate resolution of this adjustment is still
under review. 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 March 30, 2001, Kroll entered into amended and restated agreements
for its revolving credit facility, letters of credit facility and its senior
notes, which agreements were further amended in April 2001. The agreements were
amended again on October 22, 2001, which extended the date of repayment of all
outstanding debt to November 16, 2001.

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).

(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 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 from intelligence and investigation
services 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 costs incurred as a percentage of the
estimated total direct costs of the respective arrangements. The impact of any
revisions in estimated total revenues and direct contract costs is recognized in
the period in which they become known. Kroll records either billed or unbilled
accounts receivable based on case-by-case invoicing determinations.

Revenue from information security group services, which consisted of
consulting fees on information security projects, was recognized ratably over
the period of the agreement as services were performed or according to the
completed contract method of accounting for contract revenues, depending on the
nature of the agreement.

43


(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 in overnight repurchase agreements, which
are government-collateralized securities. The carrying amount of cash and cash
equivalents approximates fair value of those instruments due to their short
maturity.

(d) 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 many 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 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, 2001, 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.............................. 5-40 years
Leasehold improvements.................................. Life of lease
Furniture and fixtures.................................. 3-10 years
Machinery and equipment................................. 3-12 years

Depreciation of property, plant and equipment for the years ended
December 31, 1999, 2000 and 2001 was $3,948,502, $5,468,460 and $6,266,322,
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 databases for the years
ended December 31, 1999, 2000 and 2001 was $3,520,624, $3,572,148 and
$4,009,731, 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 this standard, 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, 2001,
except for impairments recognized during 2001 relating to the CRM software
program discussed above. It is possible, due to a change in circumstances, that
carrying values could become impaired in the future. Such impairments could have
a material

44


effect on the results of operations in a particular reporting period. Effective
January 1, 2002, Kroll will apply SFAS 142 relating to the evaluation of long
lived assets (see Note 3(n)).

(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, 2000 and 2001 were
approximately $53,647,000 and $50,436,000, respectively. Amortization is
recorded on a straight-line basis over periods ranging from 12 to 40 years.
Amortization of costs in excess of assets acquired for the years ended December
31, 1999, 2000 and 2001 was approximately $2,524,000 $2,594,000 and $2,432,000,
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.

(i) Other Intangible Assets--Other intangible assets, comprised mainly
of customer lists and non-compete agreements, are amortized on a straight-line
basis. Customer lists are amortized over a fifteen year period and the
non-compete agreements are amortized over the lives of the respective
agreements, which range from six months to five years. Other intangible assets,
net of accumulated amortization, as of December 31, 2000 and 2001 were
approximately $7,386,000 and $6,720,000, respectively. Amortization of other
intangible assets for the years ended December 31, 1999, 2000 and 2001 was
approximately $328,000, $533,000 and $883,000, 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.

Gains or losses resulting from foreign currency transactions are
translated to local currency at the rates of exchange prevailing at the dates of
the transactions. Amounts receivable or payable in foreign currencies, other
than the subsidiary's local currency, are translated at the rates of exchange
prevailing at the balance sheet date. The effect of transactional gains or
losses is included in other income (expense) in the accompanying consolidated
statements of operations.

(k) Use of Estimates--The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
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, 1999, 2000 and 2001 was
approximately $651,000, $1,199,000 and $433,000, respectively.

(m) 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.


45


The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the years ended December 31, 1999, 2000
and 2001:




Year Ended December 31, 1999
-------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------


Basic earnings (loss) per share:
Continuing operations............................. $ (1,203,893) $ (0.05)
Discontinued operations - SPSG.................... 1,043,109 0.04
Discontinued operations - VDCG.................... (1,761,035) (0.08)
------------- -----------
Total................................................ $ (1,921,819) 22,005,632 $ (0.09)
============= ===========
Effect of dilutive securities:
Options........................................... 546,614
Restricted stock.................................. 42,974
Warrants.......................................... 1,188
-------------
Diluted shares....................................... 22,596,408
=============



Year Ended December 31, 2000
--------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------


Basic earnings (loss) per share:
Continuing operations............................. $ (15,696,278) $ (0.70)
Discontinued operations - SPSG.................... (10,010,770) (0.45)
Discontinued operations - VDCG.................... (3,199,618) (0.14)
Disposal of discontinued VDCG..................... (5,037,647) (0.23)
------------- -----------
Total................................................ $ (33,944,313) 22,295,391 $ (1.52)
============= ===========
Effect of dilutive securities:
Options........................................... 287,355
Restricted stock.................................. 15,095
Warrants.......................................... 291
----------
Diluted shares....................................... 22,598,132
==========



Year Ended December 31, 2001
---------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------


Basic earnings (loss) per share:
Continuing operations............................. $ (11,390,681) $ (0.51)
Discontinued operations - SPSG.................... (7,226,739) (0.33)
Discontinued operations - VDCG.................... (2,007,758) (0.09)
Disposal of discontinued - SPSG................... (313,919) (0.01)
Disposal of discontinued - VDCG................... (103,701) (0.00)
Extraordinary Item................................ (344,048) (0.01)
------------- -----------
Total................................................ $ (21,386,846) 22,478,587 $ (0.95)
============= ===========


46




Year Ended December 31, 2001
--------------------------------------------
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------


Effect of dilutive securities:
Options........................................... 385,922
Restricted stock.................................. 5,288
Warrants.......................................... 127
-----------
Diluted shares....................................... 22,869,924
===========


As a result of the net loss recorded in 1999, 2000 and 2001, basic and
diluted loss per share are identical as all options and warrants are
anti-dilutive.

At December 31, 1999, 8,719 warrants and 597,155 options to purchase an
equivalent amount of shares of common stock of Kroll at $25.69 per warrant and
from $26.94 to $34.88 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.

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 $13.01 to $25.69 per
warrant and 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 prices were greater than the average market price of the common shares.

At December 31, 2001, 9,526 warrants and 707,439 options to purchase an
equivalent amount of shares of common stock of Kroll at $19.52 to $25.69 per
warrant and 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 prices were greater than the average market price of the common shares.

(n) New Accounting Pronouncements--In June 2001, the FASB issued SFAS
No. 141, "Business Combinations" (SFAS No. 141), 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" (SFAS No. 142), 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
are effective for fiscal years beginning after December 15, 2001. Due to the
issuance of the standard, Kroll will not amortize goodwill in future periods
(see Note 3(h) for prior year's amortization).

In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" (SFAS No. 143), 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
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" (SFAS No. 144), 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 is required to implement SFAS No.
144 on

47


January 1, 2002, and currently believes there will be no material impact related
to the implementation of this statement on its results of operations or
financial position.

In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 (Interpretation No. 44), "Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion
25." Interpretation No. 44 became effective July 1, 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. See Note 6(a) for a
discussion of the impact of Interpretation No. 44 related to certain stock
option awards held by the employees of a former subsidiary.

In September 2000, the Emerging Issues Task Force (EITF) announced Issue
No. 00-20, "Accounting for Costs Incurred to Acquire or Originate Information
for Database Content and Other Collections of Information," stating that the
EITF is considering different views for the accounting for database costs. One
of the views would require Kroll to expense some or all of the database costs
that Kroll currently capitalizes and amortizes, which is currently an acceptable
alternative. Adoption of a different method of accounting for database costs
could have a material impact on Kroll's financial position and results of
operations. To date, the EITF has not made any official determinations on this
issue.

(o) 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 Accounting
Principles Board Opinion No. 25 (APB Opinion 25) as allowed by SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). 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 123 established a fair value-based
method of accounting for compensation cost related to stock options and other
forms of stock-based compensation plans. SFAS 123 allows an entity to continue
to measure compensation cost using the principles of APB Opinion 25 if certain
pro forma disclosures are made. The pro forma disclosures required by SFAS 123
are presented in Note 14(d).

(p) Derivative Financial Instruments--Financial instruments in the form
of foreign currency exchange contracts were utilized by Kroll to hedge its
exposure to movements in foreign currency exchange rates. Kroll does not hold or
issue derivative financial instruments for trading purposes. In November 2001,
Kroll sold its four remaining foreign currency hedge contracts. When terminated,
the contracts had a notional amount of $3.2 million, which approximated their
fair value. At December 31, 2001, Kroll had no foreign currency exchange
contracts in place.

(4) Mergers and Acquisitions

Kroll has completed numerous business combinations in the periods
presented. The transactions were accounted for as both purchase business
combinations and pooling of interests business combinations as follows:

(a) Pooling of Interests Transactions--In March 1999, a wholly owned
subsidiary of Kroll acquired each then issued and outstanding share of common
stock of Financial Research, Inc. (FRI). Effective upon the consummation of the
transaction a total of 101,555 shares of Kroll's common stock were issued. The
transaction constituted a tax-free reorganization and has been accounted for as
a pooling of interests. The prior period consolidated financial statements would
not be materially different from the reported results and accordingly have not
been restated.

In June 1999, a wholly owned subsidiary of Kroll was merged with and
into Background America, Inc. (BAI). Effective upon the consummation of the
merger, each then issued and outstanding share of BAI common

48


and preferred stock was converted into 0.2689628 shares of common stock of Kroll
or 899,243 shares of Kroll's common stock in total. Outstanding stock options
and stock warrants of BAI were converted at the same exchange factor into
options to purchase 86,844 and 2,018 shares, respectively, of Kroll's common
stock (see Note 14).

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

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




Kroll BAI Adjustments Combined
----------- ------------ ----------- ------------

(Unaudited)
Three months ended March 31, 1999
Revenue $38,196,075 $ 2,492,544 -- $40,688,619
Net income (loss) from discontinued:
SPSG operation..................... 775,310 -- -- 775,310
VDCG operation..................... (170,130) -- -- (170,130)
Net Income............................ 2,418,425 109,930 -- 2,528,355


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

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.

(b) Purchase Transactions--In addition to the mergers during 1999 with
BAI and FRI, Kroll completed an additional acquisition in 1999, which was
accounted for as a purchase business combination. In June 1999, Kroll completed
the acquisition of substantially all of the assets and liabilities of The
Buchler Phillips Group (BP). BP provides financial recovery, restructuring,
insolvency and turnaround services throughout the United Kingdom and Europe. The
purchase price amounted to approximately $20.0 million and consisted of
approximately $12.0 million in cash and 366,469 shares of Kroll's common stock
(valued at approximately $8.0 million or an average of $21.86 per share). For
accounting purposes, the acquisition was effective on April 1, 1999 and the
results of operations of BP are included in the consolidated results of
operations, within the Consulting Services Segment of Kroll from that date
forward. The resulting goodwill from this acquisition is being amortized over 25
years.

During 2000, Kroll completed two acquisitions, which were accounted for
as purchase business combinations. 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 results of operations of the acquired businesses are included in
the consolidated financial statements from the respective effective dates of
acquisition. The resulting goodwill from these transactions is being amortized
over 25 years.

49


Effective January 1, 2002, goodwill relating to the above purchase
acquisitions will no longer be amortized pursuant to SFAS No. 142.

In connection with the purchase acquisitions, assets were acquired and
liabilities were assumed as follows:




Years ended December 31,
--------------------------
1999 2000
---------- ----------
(dollars in thousands)
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:

Cash................................................................ $ 4 $ 262
Accounts receivable................................................. 1,174 326
Unbilled revenue.................................................... 5,441 26
Other current assets................................................ 852 --
Property, plant and equipment....................................... 1,233 28
Other non-current assets............................................ 319 --
Costs in excess of assets acquired and other intangible assets...... 20,835 1,076
--------- ---------
29,858 1,718
Less:
Cash paid for net assets......................................... (12,018) (732)
Fair value of debt issued........................................ -- (625)
Fair value of stock issued....................................... (8,012) --
--------- ---------
$ 9,828 $ 361

LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs........................ 7,508 361
Debt............................................................. 2,320 --
--------- ---------
$ 9,828 $ 361
========= =========


(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.

The purchase price is subject to a dollar for dollar adjustment to the
extent that tangible net assets are less than $35.0 million as of the closing
date, as reflected in an agreed upon closing date balance sheet. The closing
date balance sheet has not been finalized and various adjustments are still
subject to review between

50


Kroll and Armor. The $1.5 million in escrow has not currently been included in
determining the estimated loss on the sale of SPSG. Similarly, 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.

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.

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. Kroll anticipates selling this
business by May 22, 2002, and does not anticipate any material gain or loss on
this future sale. If Kroll does not sell the business of this subsidiary, or
otherwise terminate this business, by May 22, 2002, Kroll has a $0.1 million
liability payable to Armor for each 90-day period of non-compliance subsequent
to May 22, 2002.

Net sales, results of operations and net assets from SPSG are as
follows:




Years Ended December 31, Period Ended
------------------------------- August 22,
1999 2000 2001
------------- --------------- --------------
(dollars in thousands)


NET SALES............................................ $ 117,324 $ 104,992 $ 79,359
COST OF SALES........................................ 84,026 86,127 67,477
------------- ------------- -------------
Gross profit...................................... 33,298 18,865 11,882
OPERATING EXPENSES................................... 25,775 24,383 15,680
------------- ------------- -------------

Operating income (loss)........................ 7,523 (5,518) (3,798)
OTHER EXPENSE........................................ (2,168) (4,218) (3,050)
------------- ------------- -------------
Income (loss) before provision for income taxes
and cumulative effect of change in accounting
principle.................................... 5,355 (9,736) (6,848)

PROVISION FOR INCOME TAXES........................... (3,534) (275) (379)
------------- ------------- -------------
Income (loss) before cumulative effect of change
in accounting principle...................... 1,821 (10,011) (7,227)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
net of applicable tax benefit of $408 in 1999 (Note
5(a)(i)).......................................... (778) -- --
------------- ------------- -------------
Net income (loss) $ 1,043 $ (10,011) $ (7,227)
============= ============= =============





As of December 31, 2000
-----------------------
(dollars in thousands)

CURRENT ASSETS...................................................................... 57,261
PROPERTY, PLANT and EQUIPMENT, net.................................................. 17,078
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization of approximately $3,836................................. 14,453
OTHER ASSETS........................................................................ 652
-----------
Total Assets.................................................................. 89,444
-----------


51




As of December 31, 2000
-----------------------
(dollars in thousands)


CURRENT LIABILITIES................................................................. (33,955)
----------
OTHER LONG-TERM LIABILITIES......................................................... (174)
DEFERRED INCOME TAXES............................................................... (211)
LONG-TERM DEBT DUE TO THIRD PARTIES, net of current portion......................... (1,004)
----------
Total liabilities............................................................. (35,344)
----------
Net assets of discontinued SPSG operations.......................................... $ 54,100
==========


Additional SPSG financial information is as follows:

(i) Change in Accounting Principle--In April 1998, the American
Institute of Certified Public Accountants released Statement of Position
(SOP) 98-5 "Reporting on the Cost of Start-Up Activities." The SOP
requires costs of start-up activities, including preoperating costs,
organization costs and other start-up costs, to be expensed as incurred.
The former practice of Kroll's discontinued SPSG operation was to
capitalize certain of these expenses and amortize them over periods
ranging from one to five years. Kroll's discontinued SPSG operation
adopted the provisions of this statement in the first quarter of fiscal
1999 and recorded a cumulative effect of a change in accounting
principle of $0.8 million, net of a tax benefit of $0.4 million.

(ii) Related Party Transactions

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




Years Ended December 31, Period Ended
------------------------- August 22,
Description 1999 2000 2001
----------- ----------- ----------- -----------

Purchases from shareholder.................... $ 90,350 $ -- $ --
Lease expense to affiliated entities.......... 566,213 450,764 370,998
Non-interest bearing advances to shareholders. 132,707 92,587 --
Non-interest bearing advances to affiliated
entities................................... 282,346 358,480 318,100


(b) Building and Equipment Leases--Affiliated
Entities--SPSG leases various equipment and office space from
several affiliated entities under various five year and
month-to-month lease agreements. Rental expense, net of sub-lease
income, approximated $484,000, $451,000 and $371,000 for the
years ended December 31, 1999 and 2000, and for the period ended
August 22, 2001, respectively.


52


(iii) Long-Term Debt--The components of long-term debt are as follows:




Description As of December 31, 2000
--------------------------------------------------------------- ------------------------


Economic Development Revenue Bonds variable interest rate approximating 85%
of the bond equivalent yield of 13 week U.S. Treasury bills (not to exceed
12%), which approximated 5.84% at December 31, 2000, payable in scheduled
installments through September 2016, subject to optional tender by the
bondholders and a corresponding remarketing agreement, secured by the
property, plant and equipment and a bank letter of credit.................. $ 1,207,224
Notes payable to former shareholders of acquired companies, interest at a
fixed rate of 10.0%, repaid subsequent to December 31, 2000................ 250,000
Notes payable to banks, variable interest rate at prime plus 1.5%, fixed
rates ranging from 6.39% to 20.66%, payable in scheduled installments with
certain instruments subject to prepayment penalties, collateralized by
certain real and personal property......................................... 373,116
Other notes payable, interest at 6.0% to 10.9%, payable in scheduled
installments through September 2007, certain notes secured by various
equipment.................................................................. 952,103
--------------
2,782,443
Less--current portion......................................................... (1,778,147)
--------------
Long-term portion............................................................. $ 1,004,296
=============


(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) includes the estimated future results of operations through the
date of sale. Major components of the estimated loss on disposal include 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 includes $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 is
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. In November 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.


53


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




Years Ended December 31, Period Ended
------------------------- June 27,
Description 1999 2000 2001
----------- ----------- ----------- -----------


Net sales............................................ $ 19,931 $ 16,852 $ 3,134
Interest expense allocation.......................... $ 218 $ 239 $ 60
Net loss from discontinued VDCG operations........... $ (1,761) $ (3,200) $ (104)
Net loss (including estimated net loss) on disposal.. $ -- $ (5,038) $ (2,008)



As of December 31, 2000
-----------------------
(dollars in thousands)

Current assets...................................................................... $ 8,104
Current liabilities................................................................. (6,225)
-----------
Net assets of discontinued VDCG operations.......................................... $ 1,879
===========


A valuation allowance for VDCG's net operating loss carryforwards has
been provided, as the tax benefit will not be realized.

(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 stock 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 total, net of tax,
loss of $0.5 million. The tax effects of this transaction include net operating
loss carryforwards and other deferred tax assets that will not remain with
Kroll. 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 will recognize income in the period that repayments are
received pursuant to the promissory note agreement.

As a result of this transaction, as of December 31, 2000, Kroll's voting
control in Securify approximated 27 percent. The investment in Securify,
previously consolidated, is now accounted for using the equity method. Kroll
does not have any carrying value for its investment as of December 31, 2001.
Securify has realized continuing losses since October 2000. Since Kroll has not
provided any guarantees and is not committed to provide any future funding to
Securify, it has not recorded its equity share of Securify losses.

In January 2002, in connection with Securify's obtaining additional
financing from its preferred stockholders, Kroll agreed with Securify to
restructure its existing debt of approximately $5.4 million. In return for an
agreement to forgive a portion of this debt, Kroll received (1) a promissory
note for $500,000 accruing interest at 9.5% per annum and matures on December 1,
2004, (2) a promissory note for $500,000 that matures at the earlier of (a) the
date on which Securify completes its next financing, or (b) October 17, 2005 and
accrues interest beginning on July 11, 2002 at 9.5% per annum, (3) a promissory
note for $2.5 million that matures on October 17, 2005 but, on the date on which
Securify completes its next financing, will convert into new securities of the
type issued by Securify in its financing with a value of $2.5 million, and
accrues interest beginning on July 11, 2002 at 9.5% per annum and (4) 58,666
shares of Class B common stock of Securify. Also in connection

54


with the restructuring of debt, Kroll received a non-exclusive license to use
proprietary software developed by Securify.

(b) Sale of Decision Resources, Inc.--On September 10, 2001, Kroll sold
Decision Resources, Inc. to the former owner. As payment, Kroll was forgiven
$0.2 million on the unpaid portion of notes payable to the former owner and is
due from the purchaser a payment of approximately $0.1 million, which is
included in prepaid expenses and other current assets. The notes payable that
were forgiven were the unpaid portion of the original purchase price. The
balance of the purchase price is subject to a pending valuation process. Kroll
recognized a provisional loss, subject to the valuation process, on the sale of
its business unit of approximately $0.5 million, which was recorded in the year
ended December 31, 2001.

(7) Balance Sheet Accounts

(a) Trade Accounts Receivable--Kroll had billed trade receivables in the
amount of $42,565,577 and $37,779,643 at December 31, 2000 and 2001,
respectively.

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




Additions
Balance Charged to Balance
Beginning of Costs and End of
Period Expenses Deductions Period
------------- ----------- ----------- -----------


Year ended December 31, 1999............ $ 1,917,314 $ 2,166,116 $(1,378,393) $ 2,705,037
Year ended December 31, 2000............ $ 2,705,037 $ 4,548,967 $(3,018,029) $ 4,235,975
Year ended December 31, 2001............ $ 4,235,975 $ 5,939,841 $(3,377,719) $ 6,798,097


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




As of December 31,
Useful Life ---------------------------
Description (Years) 2000 2001
- ----------- ------------ ------------ ------------


Security deposits...................................... -- $ 878,167 $ 563,831
Long-term receivable................................... -- 659,391 1,701,399
Non-refundable deposit on an equipment lease with a
related party....................................... 7.5 537,784 223,057
Deferred financing fees, net of accumulated amortization
of $772,939 and $48,316 in 2000 and 2001, respectively 5-15 144,613 526,319
Equity investments..................................... -- 199,577 1,158,429
Other long-term assets................................. -- 488,917 53,416
------------- -------------
Total............................................... $ 2,908,449 $ 4,226,451
============= =============



55


(c) Accrued Liabilities--Accrued liabilities consist of the following:




As of December 31,
Description 2000 2001
- ----------- ------------ ------------


Payroll and related benefits........................................ $ 5,515,403 $ 7,621,925
Accrued professional fees........................................... 437,414 1,265,768
Property, sales and other taxes payable............................. 1,994,191 1,873,344
Accrued medical costs............................................... 275,819 371,253
Accrued interest.................................................... 605,325 258,043
Accrued payments to former owners of acquired businesses............ 2,193,652 855,511
Accrued restructuring costs......................................... 412,821 998,090
Other accruals...................................................... 1,417,274 3,146,879
------------- ------------
Total accrued liabilities........................................ $ 12,851,899 $ 16,390,813
============= ============


(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, 2001
were $3.9 million. 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 components of the restructuring charge including accrued balances as of
December 31, 2001 are as follows:




Description Expense Accrual
- ----------- ------------- -------------


Severance and related costs......................................... $ 2,924,546 $ --
Writedown of property, plant and equipment.......................... 129,594 --
Lease termination costs............................................. 984,842 164,326
Other............................................................... 32,827 --
------------- ------------
$ 4,071,809 164,326
=============
Less: current portion............................................... 96,853
------------
$ 67,473
============


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. Total payments or writeoffs made pursuant to the
2001 Plan through December 31, 2001 were $1.8 million. 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 Investigations and Intelligence Group offices and the elimination of
approximately 98 employees. The components of the restructuring charge including
accrued balances as of December 31, 2001 are as follows:

56





Description Expense Accrual
- ----------- ------------- ------------


Severance and related costs......................................... $ 1,965,072 $ 555,708
Writedown of property, plant and equipment.......................... 158,867 --
Lease termination costs............................................. 602,300 345,529
------------- ------------
$ 2,726,239 901,237
=============
Less--Current portion............................................... 901,237
------------
$ --
============


(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 tax rates.

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




Years Ended December 31,
----------------------------------------------
Description 1999 2000 2001
- ----------- -------------- ------------- -------------

Current:

Federal........................................... $ (925,925) $ (2,065,160) $ --
State and local................................... (163,398) 1,216,733 735,963
Foreign........................................... 1,642,357 2,062,676 2,243,691
------------- ------------- -------------
553,034 1,214,249 2,979,654
------------- ------------- -------------
Deferred:
Federal........................................... (1,224,339) 694,601 (210,408)
State and local................................... (216,061) 122,924 7,960
Foreign........................................... (217,523) 345,121 (374,941)
------------- ------------- -------------
(1,657,923) 1,162,646 (577,389)
------------- ------------- -------------
Provision for (benefit from) income taxes......... $ (1,104,889) $ 2,376,895 $ 2,402,265
============= ============= =============




57


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




Years Ended December 31,
----------------------------------------------------------------------
1999 2000 2001
--------------------- ---------------------- -----------------------
Description Amount Rate Amount Rate Amount Rate
- ----------- ----------- ------- ----------- ------- ----------- --------


Provision (benefit) for income taxes
at the federal statutory rate ... $ (784,987) 34.0% $(4,528,590) 34.0% $(3,056,061) 34.0%
State and local income taxes, net of
federal benefit ................. (237,930) 10.3 982,021 (7.4) 461,670 (5.1)
Nondeductible expenses ............. 1,433,443 (62.1) 2,693,242 (20.2) 418,493 (4.7)
Change in valuation allowance ...... (1,589,715) 68.9 137,952 (1.0) 3,578,817 (39.8)
Tax attributes associated with
Securify......................... -- -- 2,068,000 (15.5) -- --
Effect of foreign (income) loss .... 706,515 (30.6) 892,022 (6.7) 1,111,772 (12.3)
Other .............................. (632,215) 27.4 132,248 (1.0) (112,426) 1.2
----------- -------- ----------- ------ ----------- -------
Provision for (benefit from)
income taxes ................. $(1,104,889) 47.9% $ 2,376,895 (17.8)% $ 2,402,265 (26.7)%
=========== ======= =========== ====== =========== =======



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




As of December 31,
----------------------------
Description 2000 2001
- ------------------------------------------------------------------- ----------------------------
Deferred tax assets:

Allowance for doubtful accounts.................................. $ 1,273,428 $ 1,726,002
Depreciation and amortization.................................... 543,188 --
Net operating loss carryforwards................................. 1,887,303 5,466,120
Payroll and other benefits....................................... 968,763 1,860,217
Restructuring.................................................... 230,859 912,267
Other accruals................................................... 366,517 1,036,986
Acquisition costs................................................ 1,050,124 --
Other............................................................ 104,362 --
------------- ------------
6,424,544 11,001,592
Valuation allowance.............................................. (1,917,749) (5,496,566)
------------- ------------
Net deferred tax assets....................................... 4,506,795 5,505,026
Deferred tax liabilities:
------------- ------------
Depreciation and amortization.................................... -- (438,369)
Nonaccrual service fee receivable................................ (215,667) (241,189)
Deferred revenue................................................. (3,547,434) (2,769,249)
Database capitalization.......................................... (3,342,575) (3,372,954)
Other............................................................ (260,110) (964,867)
------------- ------------
(7,365,786) (7,786,628)
------------- ------------
Net deferred tax liability.................................... $ (2,858,991) $ (2,281,602)
============= ============


Kroll has certain foreign and domestic net operating loss carryforwards,
which, in total, approximated $5.2 million and $16.1 million at December 31,
2000 and 2001, respectively, most of which, at December 31, 2000, relate to
discontinued SPSG operations in Mexico and the Philippines. The foreign net
operating loss carryforwards at December 31, 2001 relate primarily to Kroll's
continuing operations in Asia. The domestic carryforwards expire beginning in
2020. A valuation allowance for all existing domestic and foreign loss

58


carryforwards has been provided, as it is not certain that the tax benefit will
be realized in the foreseeable future. Adjustments to the valuation allowance,
if any, will be recorded in the periods in which it is determined the asset is
more likely than not to be realized.

(9) Related Party Transactions

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




Years Ended December 31,
--------------------------------------------
Description 1999 2000 2001
- ----------------------------------------------------- --------------------------------------------

Sales:
to Shareholder.................................... $ 4,779,449 $ 5,776,344 $ 5,120,559
to affiliated entities............................ 70,595 26,248 --
Purchases:
From Shareholder.................................. 270,970 286,589 386,058
From affiliated entities.......................... 296,100 1,045,222 --
Lease expense to affiliated entities................. 226,766 335,992 554,603
Legal services expense to law firm of a Board member. -- 1,719,862 1,321,659
Amounts receivable from an officer................... 281,561 651,000 494,935
Non-interest bearing advances to shareholders........ 167,511 -- --
Trade accounts receivable due from shareholder....... 1,231,685 1,465,474 1,921,930
Trade accounts payable due to affiliate.............. -- 239,145 --


(b) Sales-Shareholder--During the years ended December 31, 1999, 2000
and 2001, 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, 1999, 2000
and 2001 was $4,779,449, $5,776,344 and $5,120,559, 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 $270,970,
$286,589 and $386,058 for the years ended December 31, 1999, 2000 and 2001,
respectively. The year-end accounts receivable balance from AIG was
approximately $1,231,685, $1,465,474 and $1,921,930 at December 31, 1999, 2000
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 $82,000, $90,000 and $90,000 for
the years ended December 31, 1999, 2000 and 2001, respectively. As of December
31, 2000 and 2001, Kroll had $312,929 and $223,057, 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 $227,000,
$246,000 and $465,000 for the years ended December 31, 1999, 2000 and 2001,
respectively.

(d) During 1999, 2000 and 2001, 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, 1999, 2000 and 2001 pursuant to
this agreement were $281,561, $651,000 and $494,935, respectively. Subsequently,
the officer reimbursed $250,000 to Kroll.

59


(10) Revolving Lines of Credit

On March 30, 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 further amended on April 20, 2001.
Additionally, the loan agreement provided for up to $6.0 million of
transactional letters of credit. The loan agreement was secured by substantially
all assets of Kroll and its subsidiaries, and a pledge of the stock of
essentially all the subsidiaries, all of which jointly and severally guaranteed
obligations under the agreement. The security pledge and joint and several
guarantee also extended to the $35.0 million senior notes. Based on the
amendments on March 30, 2001 and April 20, 2001, advances under the revolving
credit facility bear 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). Kroll used 56.79%
of the proceeds from the sale of SPSG including the subsequent conversion of
Armor stock to cash, to pay down this line of credit by approximately $28.2
million in 2001.

The amended agreement required the net proceeds from any lender approved
asset sales in excess of $1.0 million per transaction or $2.0 million per fiscal
year to be paid proportionately to the lender and the holders of the senior
notes, with a corresponding reduction in the total permitted borrowings under
the revolving credit facility. A material adverse change in the business of
Kroll, including a significant sale of net assets, would result in the
acceleration of all amounts due to the lender and the holders of the senior
notes. In accordance with the April 20, 2001 amendment to the loan agreement,
Kroll's agreement to sell the entities that comprise the Security Products and
Services Group discussed in Note 5(a) resulted in 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. All amounts outstanding under this agreement were repaid on
November 14, 2001, thus terminating the agreement.

This loan agreement included financial covenants which, among other
restrictions, require the maintenance of certain financial ratios and other
financial requirements, including an interest coverage ratio, net worth minimums
and minimum quarterly EBITDA (earnings before interest, taxes, depreciation and
amortization), that required Kroll to effectively break even before taxes and to
generate EBITDA of $6.0 million per quarter. The loan agreement also imposed
limitations on mergers, acquisitions, stock redemptions, additional indebtedness
and capital expenditures. The loan agreement did not permit the declaration or
payment of any dividends, other than stock dividends.

Anticipating the sale of SPSG, Kroll endeavored to obtain financing of
approximately $45.0 million at rates comparable to the original unamended bank
loan. Subsequent negotiations did not lead to a financing agreement acceptable
to the Company as of December 31, 2001. As a result, pursuit of this alternative
was terminated. Kroll's direct expense of $1.0 million, including commitment and
due diligence fees and the cost of extending the current amended bank loan has
been written off as failed financing costs in the year ended December 31, 2001.

Average borrowings under the revolving credit facility and its
predecessors were $10,838,273, $29,885,224 and $ 23,094,716 during 1999, 2000
and 2001, respectively, at approximate weighted average interest rates of 7.02%,
8.50% and 9.27%, respectively. The maximum borrowings outstanding during 1999,
2000 and 2001 were $22,822,706, $38,442,798 and $ 37,996,679 respectively.
Borrowings under the revolving credit facility were approximately $36.5 million
at December 31, 2000. The facility was retired November 14, 2001 (see Note 20).

Effective June 3, 1999, with the acquisition of Buchler Phillips, Kroll
acquired a demand note with maximum borrowings of (pound)2.5 million. The demand
note bears interest at the Bank of England's base rate plus 1.0%. Average
borrowings during 2000 and 2001 under the demand note were $2,178,761 and
$2,573,786, as translated, at an approximate weighted average interest rate of
7.13% and 6.79%. The maximum borrowings outstanding during 2000 and 2001 were
$3,547,638 and $4,525,496, respectively, as translated. Maximum

60


borrowings permitted pursuant to this demand note are $3.6 million based on an
exchange rate of 0.69 British pound sterling to the U.S. dollar. Borrowings
outstanding pursuant to this demand note were approximately $2.8 million and
$2.6 million, as translated at December 31, 2000 and 2001, respectively.

(11) Long-Term Debt

The components of long-term debt are as follows:




As of December 31,
-----------------------------
Description 2000 2001
- ---------------------------------------------------------------------- -----------------------------

Senior Secured Subordinated Convertible Notes, interest at 6.0%, net
of discount of $11,199,674 at December 31, 2001.................. $ -- $ 18,800,326
Senior notes payable to various institutions, interest at 8.56%
payable semi-annually. Repaid subsequent to December 31, 2000 as a
result of acceleration due to the disposition of most entities that
comprise SPSG.................................................... 35,000,000 --
Notes payable to former shareholders of acquired companies, interest at
fixed rates ranging from 5.5% to 7.0%, payable in scheduled
installments through January 2003, certain notes secured by
acquired assets.................................................. 625,320 225,000
Notes payable to banks, variable interest rate at prime plus 1.5%, fixed
rates ranging from 9.0% to 18.0%, payable in scheduled installments
through December 2010 with certain instruments subject
to prepayment penalties, collateralized by certain real and
personal property................................................ 392,553 360,081
Other notes payable, interest at 8.5%, payable March 2002........... 51,708 10,964
------------- ------------
36,069,581 19,396,371
Less--current portion (at December 31, 2000, excludes effect of
acceleration of senior notes payable)............................ (3,360,029) (318,090)
------------- ------------
$ 32,709,552 $ 19,078,281
============= ============


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 the Company'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.

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

61


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.

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

The notes contain certain customary covenants, including covenants that
prohibit Kroll from disposing of any material subsidiary, incurring or
permitting to exist any debt other than the $15.0 million credit facility,
guaranteeing the obligations of any third party, creating or permitting to exist
any material liens on assets of material subsidiaries or entering into a
transaction prior to November 14, 2003 that involves a "change in control" of
Kroll (as defined in the notes). The notes are payable upon any change in
control of Kroll at the option of the holders.

Kroll has an effective registration statement with the SEC 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.

The note holders may designate an observer to the Board of Directors who
may serve in this capacity as long as 20% of the notes, or shares into which the
notes were converted, are held by the noteholders or investors. The observer may
also attend Audit and Compensation Committee meetings.

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 $30.0 million principal.

A significant portion of the proceeds from the new financing 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.


62


Scheduled maturities of long-term debt (exclusive of the effect of the
acceleration of the senior notes payable subsequent to year-end) at December 31,
2001 are as follows:

Year Amount
- ---- ------------

2002.............................................................. $ 318,090
2003.............................................................. 53,654
2004.............................................................. 25,311
2005.............................................................. 24,789
2006.............................................................. 30,027,657
Thereafter........................................................ 146,545
------------
30,596,045
Discount on convertible notes..................................... 11,199,674
------------
$ 19,396,371
============

(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, 2001:

Year Amount
- ---- ------------

2002................................................................$ 8,389,315
2003................................................................ 6,930,862
2004................................................................ 5,646,621
2005................................................................ 5,020,250
2006................................................................ 4,672,203
Thereafter.......................................................... 6,020,703
------------
$ 36,679,954
============

Rental expense charged against current operations amounted to
approximately $8,646,000, $10,481,000 and $10,638,000 for the years ended
December 31, 1999, 2000 and 2001, respectively.

(13) Defined Contribution and Bonus Plans

As of December 31, 2001, 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 $954,000, $977,000 and $1,167,000 for the
years ended December 31, 1999, 2000 and 2001, 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

63


amend, modify or terminate these plans at any time. Kroll expensed approximately
$1,235,000, $1,092,000 and $3,835,000 associated with the profit and revenue
sharing plans in 1999, 2000 and 2001, respectively.

(14) Equity Arrangements

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.

(a) Stock Option Plans--In 1996, Kroll adopted a stock option plan (the
1996 Plan) for employees, non-employee directors and consultants. Kroll may
grant options for up to 1,757,000 shares under the 1996 Plan. Options for
647,195, 262,374 and 155,000 shares were granted during 1999, 2000 and 2001,
respectively. The options generally vest in three equal annual installments over
the three years following the date of grant. Options granted under the plan are
generally granted at fair market value at the date of grant and are exercisable
over periods not exceeding ten years.

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 will
be amortized ratably over the vesting periods of the applicable options.
Approximately $298,000 and $236,000 was expensed in the years ended 1999 and
2000, respectively. 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. Kroll may grant options for up to 750,000 shares under
the 2000 Option Plan. 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. Options for 742,400 and 2,027,000 shares were granted during the
years ended 2000 and 2001, 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.

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. 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 in three equal annual installments over
the three years following the date of grant.

At December 31, 2001, there were approximately 619,000, 231,000 and
160,000 authorized shares remaining for grant in the 1996 Plan, the 2000 Option
Plan and the 2001 Option Plan, respectively.

(b) 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 plan, however there were no shares granted under
the plan during 2000 or 2001. In connection with the shares granted under the
Stock Incentive Plan in 1999, Kroll recorded deferred compensation of
$1,571,661, 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. Approximately
$758,000, $364,000 and $337,000 were expensed in 1999, 2000 and 2001,
respectively. The deferred compensation was reduced in 2000 by approximately
$113,000 applicable to options forfeited by employees terminated in 2000. The
restricted stock grants vest ratably over three years.

At December 31, 2001, there were approximately 453,000 authorized shares
remaining for grant in the Stock Incentive Plan.

(c) Common Stock Warrants--As of December 31, 2001, warrants originally
granted by Laboratory Specialists of America, Inc. to purchase 8,719 shares of
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


64


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.

As of December 31, 2001, warrants originally granted by BAI to purchase
807 shares of 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, 2001, Kroll had a total of 9,526 warrants still
outstanding.

(d) Stock Based Compensation Disclosure--SFAS 123 requires, at a
minimum, pro forma disclosures of expense for stock-based awards based on their
fair values. Had compensation cost for these plans been determined consistent
with SFAS 123, Kroll's net loss and basic and diluted loss per share would have
been as follows:




Years Ended December 31,
---------------------------------------------
Description 1999 2000 2001
- ---------------------------------------------------- ------------- ------------- -------------

Net loss:

As reported....................................... $ (1,921,819) $ (33,944,313) $ (21,386,846)
Pro forma......................................... $ (4,844,407) $ (37,332,945) $ (24,863,627)
Basic and diluted loss per share:
As reported....................................... $ (0.09) $ (1.52) $ (0.95)
Pro forma......................................... $ (0.22) $ (1.67) $ (1.11)

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 1999 2000 2001
- ---------------------------------------------------- ------------- ------------- -------------


Dividend yield....................................... -- -- --
Expected volatility.................................. 41.4% 43.7% 74.0%
Risk-free interest rate.............................. 5.29%-5.44% 6.14%-6.7% 4.38%
Expected lives....................................... 7.5 years 7.5 years 5.0 years


The 647,195 options granted by Kroll during 1999 have a weighted-average
exercise price of $27.31, a weighted-average fair value of $15.49 and remaining
contractual lives, on a weighted-average basis, of 7.2 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 8.4 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 9.4 years.


65


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,
------------------------------------------------------------------
1999 2000 2001
--------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Description Shares Price Shares Price Shares Price
- ----------------------------------- --------- --------- --------- ---------- -------- ---------


Outstanding, beginning of year..... 1,459,990 $ 11.54 1,830,039 $ 17.06 2,398,298 $ 13.19
Granted......................... 647,195 27.31 1,004,774 6.37 2,222,000 7.39
Exercised....................... (194,371) 9.11 (115,197) 0.73 (384,204) 6.72
Forfeited/Expired/Cancelled..... (82,775) 23.06 (321,318) 18.39 (910,838) 13.28
--------- --------- --------- --------- --------- ---------
Outstanding, end of year........... 1,830,039 $ 17.06 2,398,298 $ 13.19 3,325,256 $ 10.04
========= ========= ========= ========= ========= =========
Exercisable, end of year........ 983,510 $ 10.53 1,111,084 $ 14.61 993,986 $ 14.50
========= ========= ========= ========= ========= =========


Of the options outstanding at December 31, 2001, 357,904 options are
exercisable at prices per share ranging from $0.52 to $6.375 per share, 228,631
options are exercisable at prices per share ranging from $6.4 to $17.25 per
share and 407,451 options are exercisable at prices per share ranging from
$18.59 to $30.75 per share.

(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. This letter of credit is
personally guaranteed by an officer and shareholder of Kroll.

(b) Employment Agreements--Kroll has employment agreements with its
executive officers and management level personnel with annual compensation
ranging in value up to $450,000, over varying periods extending to April 2005.
The agreements generally provide for salary continuation in the event of
termination without cause for the greater of the remainder of the agreement or
one year. The agreements also contain certain non-competition clauses and
generally provide for one year's salary if the agreement is not renewed.

As of December 31, 2001, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $11.4 million.

(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. 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 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 and also seek class certification.
The plaintiffs seek a declaration that the individual defendants breached their
fiduciary duty and seek damages and attorneys' fees in an unspecified amount.
Kroll believes that the allegations in the complaint are meritless and will
defend the suits vigorously.

In 1999, Kroll learned that an individual had filed a qui tam suit
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

66


part of the settlement. All amounts under this settlement were paid before
December 31, 2001. The qui tam suit 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, 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. While this matter is at
a preliminary stage and no response has yet been filed to the third-party claim
against LAMB and no discovery has been conducted, LAMB and its principals
believe that they have meritorious defenses to the claims and intend to defend
them 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 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 and all prior periods
have been restated accordingly in the accompanying consolidated financial
statements. The segment data in the table below depicts the Investigations and
Intelligence Group in three business segments; Consulting Services, Security
Services and Employee Screening 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 from business
investigations and intelligence services as well as financial services. Business
investigations and intelligence services include revenues from nonfinancial due
diligence, litigation support, fraud investigations, monitoring services and
special inquiries, and intellectual property and infringement investigations.
Financial services include revenues from forensic accounting, recovery and
restructuring, asset tracing and analysis, and pre-acquisition due diligence.

The Security Services segment includes revenues from security and
technology services. Security services include revenues from threat assessment,
risk and crisis management, corporate security planning and executive
protection, security architecture and design, and electronic countermeasures.
Technology services include revenues from computer forensics and data recovery,
information security and litigation and systems support.

67


The Employee Screening Services segment includes revenues from
pre-employment background checking, drug testing and surveillance.

The following summarizes information about Kroll's business segments for
the years ended December 31, 1999, 2000 and 2001:



Investigations and Intelligence Group
-------------------------------------
Information
Consulting Security Employee Security
Services Services Screening Group Other Consolidated
-------- -------- --------- ------------ ----- ------------
(dollars in thousands)

1999
Net sales to unaffiliated
customers ................ $ 108,841 $ 29,733 $ 44,926 $ 4,345 $ -- $ 187,845
========= ========= ========= ======== ========= =========
Gross profit ................ $ 48,518 $ 11,897 $ 20,764 $ 2,300 $ -- $ 83,479
========= ========= ========= ======== ========= =========
Operating income (loss) ..... $ 14,384 $ 2,036 $ (11) $ (1,764) $ (14,481) $ 164
========= ========= ========= ======== ========= =========
Identifiable assets at year-end.$ 76,075 $ 14,204 $ 23,121 $ 3,359 $ -- $ 116,759
========= ========= ========= ======== =========
Corporate assets ............ 53,491
Net assets of discontinued
operations ............... 87,503
---------
Total assets at year-end .... $ 257,753
=========
2000
Net sales to unaffiliated
customers ................ $ 123,556 $ 31,433 $ 46,588 $ 4,033 $ -- $ 205,610
========= ========= ========= ======== ========= =========
Gross profit (loss) ......... $ 47,347 $ 12,537 $ 22,338 $ (403) $ -- $ 81,819
========= ========= ========= ======== ========= =========
Operating income (loss) ..... $ 7,142 $ 3,165 $ 5,305 $ (9,554) $ (16,964) $ (10,906)
========= ========= ========= ======== ========= =========
Identifiable assets at year-end.$ 84,669 $ 14,680 $ 22,258 $ -- $ -- $ 121,607
========= ========= ========= ======== =========
Corporate assets ............ 49,820
Net assets of discontinued
operations ............... 55,979
---------
Total assets at year-end .... $ 227,406
=========

2001
Net sales to unaffiliated
customers ................ $ 136,877 $ 28,509 $ 42,491 $ -- $ -- $ 207,877
========= ========= ========= ======== ========= =========
Gross profit ................ $ 51,284 $ 12,238 $ 19,303 $ -- $ -- $ 82,825
========= ========= ========= ======== ========= =========
Operating income (loss) ..... $ 8,659 $ 4,578 $ 4,330 $ -- $ (22,255) $ (4,688)
========= ========= ========= ======== ========= =========
Identifiable assets at year-end.$ 83,667 $ 13,111 $ 21,107 $ -- $ -- $ 117,885
========= ========= ========= ======== =========
Corporate assets ............ 51,901
---------
Total assets at year-end .... $ 169,786
=========


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 and income taxes. 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.

Depreciation expense and capital expenditures for each of Kroll's
business segments for the years ended December 31, 1999, 2000 and 2001 are as
follows:




Investigations and Intelligence Group
-------------------------------------
Information
Consulting Security Employee Security
Services Services Screening Group Other Consolidated
---------- --------- --------- ----------- ----- ------------
(dollars in thousands)

1999
Depreciation expense............ $ 1,723 $ 399 $ 1,334 $ 93 $ 400 $ 3,949
======== ======== ======== ======== ======== ========
Capital expenditures............ $ 6,981 $ 986 $ 1,745 $ 1,673 $ 1,752 $ 13,137
======== ======== ======== ======== ======== ========

68




Investigations and Intelligence Group
-------------------------------------
Information
Consulting Security Employee Security
Services Services Screening Group Other Consolidated
---------- -------- --------- ---------- ------- ------------
(dollars in thousands)


2000
Depreciation expense............ $ 2,523 $ 488 $ 1,440 $ 254 $ 764 $ 5,469
======== ======== ======== ======== ======== ========
Capital expenditures............ $ 4,463 $ 559 $ 1,020 $ 1,551 $ 105 $ 7,698
======== ======== ======== ======== ======== ========

2001
Depreciation expense............ $ 3,419 $ 732 $ 1,374 $ -- $ 741 $ 6,266
======== ======== ======== ======== ======== ========
Capital expenditures............ $ 956 $ 163 $ 735 $ -- $ -- $ 1,854
======== ======== ======== ======== ======== ========


The following summarizes information about Kroll's different geographic
areas for the years ended December 31, 1999, 2000 and 2001:




United Other
States Europe Asia Foreign Elimination Consolidated
--------- --------- ------- ---------- ----------- ------------
(dollars in thousands)

1999

Net sales to unaffiliated
customers.................... 112,053 $ 26,597 $ 18,840 $ 30,355 $ -- $187,845
Intercompany.................... 3,099 2,796 2,371 570 (8,836) --
-------- -------- -------- -------- -------- --------
Total net sales.............. $115,152 $ 29,393 $ 21,211 $ 30,925 $ (8,836) $187,845
======== ======== ======== ======== ======== ========
Operating income (loss)......... $(11,981) $ 3,457 $ 4,812 $ 3,876 $ -- $ 164
======== ======== ======== ======== ======== ========
Identifiable assets at year-end. $ 71,208 $ 17,448 $ 14,083 $ 14,020 $ -- $116,759
======== ======== ======== ======== ========
Corporate assets................ 53,491
Net assets of discontinued
operations................... 87,503
--------
Total assets at year-end........ $257,753
========

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
========

2001
Net sales to unaffiliated $123,511 $ 47,814 $ 12,232 $ 24,320 $ -- $207,877
customers....................
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
========


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


69


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




Years Ended December 31,
---------------------------------------------
1999 2000 2001
------------- ------------- -------------
(dollars in thousands)
Sales to unaffiliated customers:

United States..................................... $ 114,193 $ 125,779 $ 123,973
Europe............................................ 28,259 34,237 42,586
Asia.............................................. 22,763 16,343 9,926
Central & South America........................... 13,712 16,696 10,285
Other Foreign..................................... 8,918 12,555 21,107
------------- ------------- -------------
Total net sales to unaffiliated customers......... $ 187,845 $ 205,610 $ 207,877
============= ============= =============


Export sales by Kroll's domestic operations were approximately 2%, 2%
and 4% of net sales for each of the years ended December 31, 1999, 2000 and
2001, 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, the Philippines and 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, 1999, 2000 and 2001.


70


(18) Supplemental Cash Flows Disclosures

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




Years Ended December 31,
----------------------------------------------
1999 2000 2001
-------------- ------------- --------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest............................. $ 4,369,443 $ 5,787,084 $ 5,561,807
============= ============= =============
Cash paid for taxes, net of refunds................ $ 3,599,785 $ 318,856 $ 131,070
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Deferred compensations related to options and
restricted stock................................ $ 1,158,066 $ -- $ --
============= ============= =============
Accrued contingent consideration incurred in
connection with acquisition of businesses....... $ 1,071,688 $ 812,033 $ 299,133
============= ============= =============
Fair value of stock issued in connection with
acquisition of businesses....................... $ 8,011,929 $ -- $ --
============= ============= =============
Notes issued in connection with acquisition of
businesses...................................... $ -- $ 625,320 $ --
============= ============= =============
Notes forgiven in connection with the sale of DRI.. $ -- $ -- $ 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)
============= ============= =============


(19) Quarterly Financial Data (unaudited)




First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ------------
(dollars in thousands, except per share data)
2000

Net sales............................... $ 50,955 $ 51,480 $ 56,303 $ 46,872
Gross profit............................ $ 21,970 $ 21,765 $ 22,416 $ 15,668
Loss from continuing operations......... $ (1,415) $ (4,016) $ (4,100) $ (6,165)
Income (loss) from operations of
discontinued SPSG.................... $ 1,330 $ (110) $ (2,967) $ (8,264)
Loss from operations of discontinued
VDCG................................. $ (295) $ (155) $ (121) $ (2,629)
Loss on disposal of discontinued VDCG $ -- $ -- $ -- $ (5,038)
Net loss................................ $ (380) $ (4,281) $ (7,188) $ (22,096)
Basic income (loss) per share from:
Continuing operations................ $ (0.07) $ (0.18) $ (0.18) $ (0.27)
Operations of discontinued SPSG...... $ 0.06 $ -- $ (0.13) $ (0.38)
Operations of discontinued VDCG...... $ (0.01) $ (0.01) $ (0.01) $ (0.11)
Disposal of discontinued VDCG........ $ -- $ -- $ -- $ (0.23)
Total............................. $ (0.02) $ (0.19) $ (0.32) $ (0.99)


71





First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- ------------
(dollars in thousands, except per share data)


Diluted income (loss) per share from:
Continuing operations................ $ (0.07) $ (0.18) $ (0.18) $ (0.27)
Operations of discontinued SPSG...... $ 0.06 $ -- $ (0.13) $ (0.38)
Operations of discontinued VDCG...... $ (0.01) $ (0.01) $ (0.01) $ (0.11)
Disposal of discontinued VDCG........ $ -- $ -- $ -- $ (0.23)
Total............................. $ (0.02) $ (0.19) $ (0.32) $ (0.99)

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) of discontinued SPSG...... $ 751 $ (1,103) $ (6,295) $ (894)
Loss from operations of discontinued
VDCG................................. $ (104) $ -- $ -- $ --
Loss on disposal of discontinued VDCG $ -- $ -- $ (1,831) $ (177)
Loss on extraordinary item.............. $ -- $ -- $ (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)
Operations of discontinued VDCG...... $ (0.00) $ -- $ -- $ --
Disposal of discontinued VDCG........ $ -- $ -- $ (0.08) $ (0.01)
Extraordinary item................... $ -- $ -- $ (0.02) $ --
Total............................. $ 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)
Operations of discontinued VDCG...... $ (0.00) $ -- $ -- $ --
Disposal of discontinued VDCG........ $ -- $ -- $ (0.08) $ (0.01)
Extraordinary item................... $ -- $ -- $ (0.01) $ --
Total............................. $ 0.02 $ (0.25) $ (0.70) $ (0.02)



(20) Subsequent Events

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. The borrowing amount
is calculated based on an analysis of Kroll's accounts receivable and unbilled
revenues as of the month end preceding the borrowing date. Borrowings under the
credit facility will bear interest, at Kroll's election, at a rate per annum
equal to (1) a base rate, which will be the prime rate of Wells Fargo Bank,
N.A., plus 0.75% or (2) LIBOR plus 2.75%. During the term of the credit
facility, Kroll will pay Foothill Capital a fee equal to the product of 0.375%
per annum and the unused portion of the credit facility. The credit facility
agreement requires Kroll to maintain a minimum level of EBITDA, and contains
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 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 certain of Kroll's subsidiaries. As of
March 21, 2002, there were no amounts borrowed under the credit facility.


72


Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.



73


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers and directors of Kroll are as follows:



Name Age Title
- ------------------------------------------- --- -----------------------------------------------


Jules B. Kroll............................. 60 Executive Chairman of the Board

Michael G. Cherkasky....................... 51 President, Chief Executive Officer and Director

Michael D. Shmerling....................... 46 Executive Vice President, Chief Operating
Officer and Director

Michael A. Petrullo........................ 33 Vice President, Acting Chief Financial Officer,
and Controller

Sabrina H. Perel .......................... 40 Vice President, General Counsel and Secretary

Thomas E. Constance........................ 65 Director

Raymond E. Mabus........................... 53 Director

J. Arthur Urciuoli......................... 64 Director


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

Jules B. Kroll has been Executive Chairman of the Board since May 15,
2001. Previously, Mr. Kroll had been Chairman of the Board and Chief Executive
Officer of Kroll since the merger of The O'Gara Company and Kroll Holdings, Inc.
on December 1, 1997. Mr. Kroll was named Co-Chief Executive Officer of Kroll and
Chief Executive Officer of the Investigations and Intelligence Group in April
2000.

He founded Kroll Associates, Inc., a subsidiary of Kroll, in 1972 and
has been the Chairman of the Board of Directors of Kroll Associates since its
founding. Mr. Kroll also is a director of Presidential Life Insurance Company
and Security Technologies Group, Inc. He has been a director of Kroll since
December 1997.

Michael G. Cherkasky has been Chief Executive Officer of Kroll since May
15, 2001. Previously, Mr. Cherkasky had been President and Chief Operating
Officer of Kroll's Investigations and Intelligence Group since December 1997.
Prior to the Kroll Holdings merger, he had been an Executive Managing Director
of Kroll Associates since April 1997 and Chief Operating Officer of Kroll
Associates since January 1997. From November 1995 to January 1997, he was the
head of Kroll Associates' North American Region and from February 1994 to
November 1995 he was the head of Kroll Associates' Monitoring Group. From June
1993 to November 1993, Mr. Cherkasky was a candidate for public office. From
1978 to June 1993, Mr. Cherkasky was with the District Attorney's office for New
York County, his last position being Chief of the Investigation Division. He has
been a director of Kroll since December 1997.

Michael D. Shmerling has been Executive Vice-President of Kroll since
September 20, 2001 and Chief Operating Officer of Kroll since May 15, 2001. He
has held the position of President of the Employee Screening Services practice
of Kroll's Investigation and Intelligence Group since June 1999. He has been
involved in the criminal justice system for over 13 years. From September 1995
to June 1999, Mr. Shmerling was one of the founders of Background America, Inc.,
a company providing background investigations services to governments,
corporations and other professional clients, which was acquired by Kroll in June
1999. In 1989, he co-founded Transcor America, Inc., a nationwide prison
transportation company. In 1990, he co-founded Correction Management Affiliates,
Inc., a private correctional facility management company. He served as Chairman
of the Board of Transcor America, Inc. until he resigned to dedicate his time to
Correction Partners, Inc., a private prison management company majority-owned by
Correction Management Affiliates, Inc., In 1994 and 1995, all

74


of the above correctional management companies were sold to Corrections
Corporation of America. He is also a Certified Public Accountant (inactive), and
a member of the American Institute of Certificate Public Accountants. He
practiced as an accountant for more than 15 years. From 1977 to 1980, he was a
member of the professional staff of certified public accountants at Ernst &
Young. Mr. Shmerling has been a director of Kroll since August 2001.

Michael A. Petrullo has been Acting Chief Financial Officer of Kroll
since November 29, 2001 and Vice President and Controller of Kroll since August
2001. He has been Vice President-Finance of Kroll's Investigations and
Intelligence Group since February 1999. He was Controller of that group from
February 1998 until February 1999. He served as Assistant Controller of Kroll
Associates from April 1995 to February 1998. From 1990 until April 1995 he was
with KPMG Peat Marwick LLP in the audit/assurance practice and in the forensic
accounting group.

Sabrina H. Perel has been Vice President, General Counsel and Secretary
of Kroll since August 2001. Previously, she had held the position of Vice
President and Deputy General Counsel of Kroll from January 1998. From October
1996 until December 1997, she served as Deputy General Counsel of Kroll
Associates. From 1988 until 1996, Ms. Perel was with the law firm of Riker,
Danzig, Scherer, Hyland & Perretti LLP in Morristown, New Jersey. She also
served as a law clerk to a state appellate judge from 1987 to 1988.

Thomas E. Constance has been a partner in the law firm of Kramer Levin
Naftalis & Frankel LLP since 1994. From 1973 to 1994, Mr. Constance was with the
law firm of Shea & Gould. Mr. Constance is a director of Uniroyal Technology
Corp. and Siga Technologies Inc. He has been a director of Kroll since December
2000.

Raymond E. Mabus is President of Frontline Global Resources Development
Group Ltd., a provider of workforce analysis, foreign investment planning and
resource generation services, and of counsel to the law firm of Baker,
Donaldson, Bearman and Caldwell. He also manages a family timber business. He
served as the United States Ambassador to the Kingdom of Saudi Arabia from 1994
until 1996, as a consultant to Mobil Telecommunications Technology from 1992
until 1994 and as Governor of the State of Mississippi from 1988 until 1992. Mr.
Mabus is a director of Foamex International, Inc. and Friede Goldman Halter. Mr.
Mabus has been a director of Kroll since November 1996.

J. Arthur Urciuoli has been Chairman of Archer Group, a provider of
private investment and consulting services, since 1999. Mr. Urciuoli served with
Merrill Lynch & Company, Inc. from 1969 until 1999. He was Chairman of Merrill
Lynch's International Private Client Group and was responsible for strategic
development and acquisitions from 1997 to 1999. He was Director of the Marketing
Group of Merrill Lynch Private Client Group from 1993 to 1997. He has also
served as Chairman of the Mutual Fund Forum/Forum for Investor Advice from 1997
to 1998 and as Chairman of the Sales and Marketing Committee of the Securities
Industry Association from 1986 to 1989. Mr. Urciuoli is an advisory director of
de Visscher, Olson & Allen LLC. He has been a director of Kroll since August
2001.

Our code of regulations provides that the number of Kroll directors will
not be less than the lesser of three or the number of shareholders of record,
the exact number of which may be fixed or changed by a majority vote of
directors at any meeting of the board of directors at which a quorum is present
or at a meeting of the shareholders called for the purpose of electing directors
at which a quorum is present by the affirmative vote of a majority of shares
entitled to vote on such proposal. Directors are elected for a one year term by
the affirmative vote of the majority of the shares actually voted at the
meeting. Directors will remain directors until the next annual meeting of the
shareholders and until their successors are duly elected or until their earlier
death, resignation or removal.

Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934 requires Kroll's executive officers and
directors, and persons who beneficially own more than ten percent of Kroll's
equity securities, to file reports of security ownership and changes in that
ownership with the

75


Securities and Exchange Commission. These persons are also required by SEC
regulations to furnish Kroll with copies of all Section 16(a) forms they file.
Based upon a review of copies of these forms and written representations from
its executive officers and directors, Kroll believes that all Section 16(a)
forms were filed on a timely basis during and for 2001 except that the Form 3 of
Mr. Shmerling, which was timely filed, was later amended.

Item 11. EXECUTIVE COMPENSATION

Summary Information. The following table sets forth compensation paid by
Kroll and its subsidiaries, for services in all capacities, to Kroll's Chief
Executive Officer and each of the four other most highly compensated executive
officers during the years ended December 31, 2001, 2000 and 1999. These persons
are sometimes referred to as the "named executive officers."




Long Term
Annual Compensation Compensation Awards
-------------------------------- ---------------------
Other Restricted Security All
Annual Stock Underlying Other
Name and Current Salary Bonus Compensation Awards Stock Option Compensation
Principal Position Year ($) ($) ($) ($)(3) Grants (#) ($)(4)
------------------ ---- --- --- ------------ -------- ------------- -------------



Jules B. Kroll 2001 375,000 -- -- -- -- 18,218
Executive Chairman of 2000 375,000 -- -- -- -- 16,556
the Board (1) 1999 375,000 -- -- -- -- 14,661

Michael G. Cherkasky 2001 416,000 -- -- -- 75,000 11,869
President and Chief 2000 416,000 116,667 -- -- 20,000 11,768
Executive Officer (2) 1999 400,000 100,000 -- 155,628 50,000 9,740

Michael D. Shmerling 2001 300,000 -- -- -- 55,000 3,031
Chief Operating Officer 2000 225,000 30,000 -- -- 14,000 1,929
Executive Vice President 1999 87,500(5) 31,250 -- -- -- 1,606

Michael A. Petrullo 2001 155,000 20,000 -- -- 25,000 2,432
Acting Chief Financial 2000 155,000 30,000 -- -- 5,000 1,862
Officer, Vice President 1999 115,000 11,700 -- -- 3,000 1,410
and Controller (6)

Sabrina H. Perel 2001 163,334(8) -- -- -- 25,000 2,840
Vice President, General 2000 126,667 20,000 -- -- 2,000 1,987
Counsel, and Secretary 1999 100,000 16,800 -- -- 2,000 1,306
(7)

Wilfred T. O'Gara (9) 2001 233,333 -- -- -- -- 8,638
2000 350,000 -- -- -- 25,000 8,753
1999 350,000 -- -- -- 17,000 8,675



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

(1) On May 15, 2001, Mr. Kroll became Executive Chairman of Kroll. From
April 2000 until May 15, 2001, Mr. Kroll was Co-Chief Executive Officer
of Kroll. Prior to that, Mr. Kroll was Chief Executive Officer of Kroll.

(2) On May 15, 2001, Mr. Cherkasky became President and Chief Executive
Officer of Kroll.

(3) Represents 6,000 shares of restricted stock for Mr. Cherkasky, awarded
on March 25, 1999 under Kroll's 1998 Stock Incentive Plan and having an
aggregate value at December 31, 2001 of $90,600. Mr. Cherkasky holds no
other shares of restricted stock. The shares vest over a three year
period, with 50% vesting ratably over the first 12 months after the date
of grant and an additional 25% vesting ratably over each of the second
and third 12 months after the date of grant. Until vested, the shares
have no dividend rights.

(4) For 2001, represents profit-sharing contributions of $1,688 for Mr.
Kroll, $3,010 for Mr. Cherkasky, $2,100 for Mr. Shmerling, $1,904 for
Mr. Petrullo, $2,180 for Ms. Perel and $2,625 for Mr. O'Gara;
supplemental disability plan

76


benefits of $12,174 for Mr. Kroll, $7,341 for Mr. Cherkasky, $270 for
Mr. Shmerling and $5,708 for Mr. O'Gara; group term life insurance
benefits of $4,356 for Mr. Kroll, $1,518 for Mr. Cherkasky, $661 for Mr.
Shmerling, $528 for Mr. Petrullo, $660 for Ms. Perel and $305 for Mr.
O'Gara. For 2000, represents profit-sharing contributions of $1,172 for
Mr. Kroll, $2,625 for Mr. Cherkasky, $1,575 for Mr. Shmerling, $1,356
for Mr. Petrullo, $1,596 for Ms. Perel and $2,625 for Mr. O'Gara;
supplemental disability plan benefits of $12,174 for Mr. Kroll, $7,341
for Mr. Cherkasky, $270 for Mr. Shmerling and $5,708 for Mr. O'Gara;
group term life insurance benefits of $3,210 for Mr. Kroll, $1,802 for
Mr. Cherkasky, $84 for Mr. Shmerling, $506 for Mr. Petrullo, $391 for
Ms. Perel and $420 for Mr. O'Gara. For 1999, represents profit-sharing
contributions of $2,400 for Mr. Kroll, Mr. Cherkasky and Mr. O'Gara and
$1,252 for Mr. Shmerling, $1,122 for Mr. Petrullo and $1,306 for Ms.
Perel; supplemental disability plan benefits of $7,694 for Mr. Kroll,
$4,639 for Mr. Cherkasky, $270 for Mr. Shmerling and $5,708 for Mr.
O'Gara; group term life insurance benefits of $4,567 for Mr. Kroll,
$2,701 for Mr. Cherkasky and $84 for Mr. Shmerling and $288 for Mr.
Petrullo; and executive disability insurance plan benefits of $567 for
Mr. O'Gara.

(5) Represents compensation from June 1999 to December 1999. Mr. Shmerling
joined Kroll in June 1999.

(6) On November 29, 2001, Mr. Petrullo became Acting Chief Financial Officer
of Kroll. Since August 2001, he has been Vice President and Controller
of Kroll.

(7) Ms. Perel has been Vice President, General Counsel and Secretary of
Kroll since August 2001. Previously, she had held the position of Vice
President and Deputy General Counsel of Kroll from January 1998.

(8) Ms. Perel's salary was increased from $160,000 per year to $170,000 per
year on September 1, 2001.

(9) From April 2000 to May 15, 2001, Mr. O'Gara served as Co-Chief Executive
Officer of Kroll. He left Kroll on August 22, 2001.

Employment Agreements. Kroll had an employment agreement with Jules B.
Kroll, which expired on November 30, 2000, providing for an annual base salary
of $375,000. This employment agreement is being continued on a month-to-month
basis. Mr. Kroll also is entitled to participate in an annual bonus plan
established by the Compensation Committee of the Board of Directors and to
receive up to 50% of the bonus in shares of Kroll common stock. Under the
employment agreement, Kroll can terminate Mr. Kroll's employment at any time
with or without cause, except that, in a case of termination without cause, he
is entitled to receive compensation for the greater of the balance of the term
of the agreement or one year. If Kroll does not renew the agreement for one year
or more at the end of the term, Mr. Kroll will receive an amount equal to one
year's base salary. The employment agreement restricts Mr. Kroll from competing
with Kroll during the term of the agreement, and for two years thereafter if
termination of employment is for cause or voluntary by the employee.
Additionally, Mr. Kroll has agreed that during his employment and for a period
of 10 years thereafter he will not directly or indirectly own any interest in or
perform any services for any entity which uses the word "Kroll" as a business or
trade name and competes with Kroll.

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

77


Kroll has entered into employment agreements with each of the following
executive officers providing for annual base salaries in the listed amounts:
Michael D. Shmerling, $300,000 (expiring on December 31, 2003); Michael A.
Petrullo, $190,000 (beginning on February 2, 2002; expiring on February 1,
2005); and Sabrina H. Perel, $170,000 (expiring on August 31, 2003). Each of
these executive officers is also entitled to participate in an annual bonus plan
established by the Compensation Committee and/or the board of directors of
Kroll. Mr. Shmerling is entitled to receive up to 50% of his bonus in shares of
Kroll common stock. Under the employment agreements for Mr. Shmerling and Ms.
Perel, Kroll can terminate the employee's employment at any time with or without
cause, except that, in a case of termination without cause, the employee is
entitled to receive compensation for the greater of the balance of the term of
the agreement or one year. Under Mr. Petrullo's employment agreement, Kroll can
terminate his employment at any time with or without cause, except that in a
case of termination without cause, he is entitled to receive compensation for
the greater of the balance of the term of the agreement or six months. Each
agreement for Mr. Shmerling and Ms. Perel also provides that if Kroll does not
renew the agreement for one year or more at the end of the term, the employee
will receive an amount equal to one year's base salary. Mr. Petrullo's agreement
also provides that if Kroll does not renew the agreement for one year or more at
the end of the term, he will receive an amount equal to six months' base salary.
Each employment agreement restricts the executive officer from competing with
Kroll during the term of the agreement, and for two years thereafter if
termination of employment is for cause or voluntary by the employee.

Stock Options. The following table presents information on option grants
during 2001 to Mr. Cherkasky and Mr. Shmerling, pursuant to Kroll's 1996 Stock
Option Plan, and to Mr. Petrullo and Ms. Perel, pursuant to Kroll's 2000 Stock
Option Plan, as amended through 2001. Neither plan provides for the grant of
stock appreciation rights.




Options Grants in the Last Fiscal Year

Individual Grants(1)
-----------------------------------------------------
Number of
Securities % of Total
Underlying Options to Exercise Granted
Options Employees in Base Price Expiration Date Present
Name Granted (#) Fiscal Year ($/Share) Date Value(2)
---- ----------- ----------- --------- ---------- -------------


Jules B. Kroll -- -- -- -- --

Michael G. Cherkasky 75,000 3.5% $7.09 5/15/11 $303,420

Michael D. Shmerling 55,000 2.5% $7.09 5/15/11 $222,508

Michael A. Petrullo 25,000 1.2% $7.09 5/15/11 $101,140

Sabrina H. Perel 25,000 1.2% $7.09 5/15/11 $101,140

Wilfred T. O'Gara -- -- -- -- --


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

(1) All options vest in three equal annual installments beginning on May 15,
2002. The exercise price of all options may be paid in cash or by the
transfer of shares of Kroll's common stock valued at their fair market
value on the date of exercise. Each option becomes exercisable in full
in the event of the execution of an agreement of merger, consolidation
or reorganization pursuant to which Kroll is not to be the surviving
corporation or the execution of an agreement of sale or transfer of all
or substantially all of the assets of Kroll.

(2) The grant date present value is derived from a variation of the Black
Scholes pricing model. The model assumes that no dividends will be
declared during the life of these options. Additionally, the model
assumes an expected option exercise life of 60 months (five years) with
a corresponding risk-free interest rate of 4.38% based on the five-year
treasury bond yield as of December 31, 2001. Furthermore, the model
assumes a stock volatility index (beta) of 0.631 or 63.1%.

78


With respect to each named executive officer, the following table sets
forth information concerning option exercises during 2001 and unexercised stock
options held at December 31, 2001.




Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

Number of
Securities Value of
Underlying Unexercised
Value Unexercised In-the-Money
Shares Realized($) Options at Options at
Acquired on (Market Price on FY-End(#) FY-End($)(2)
Exercise Exercise Less Exercisable/ Exercisable/
Name (#)(1) Exercise Price) Unexercisable Unexercisable
---- ------------ --------------- ------------- -------------


Jules B. Kroll........... -- -- -- --

Michael G. Cherkasky..... -- -- 163,862/96,667 1,193,065/644,375

Michael D. Shmerling..... -- -- 10,500/58,500 91,613/471,088

Michael A. Petrullo...... -- -- 5,850/27,250 32,719/211,156

Sabrina H. Perel......... 1,500 11,456 2,583/26,167 --/204,610

Wilfred T. O'Gara........ 27,573 43,193 -- --



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

(1) The shares acquired upon exercise of the options were sold
simultaneously in a cashless exercise of the options.

(2) Based on the December 31, 2001 closing price of Kroll's common stock of
$15.10 per share.


79


Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of Kroll's
common stock as of February 28, 2002, and as adjusted for the sale of the notes
and shares of common stock issuable upon conversion of the notes pursuant to
this document, by (1) each beneficial owner of more than five percent of the
common stock, (2) each director and named executive officer individually, and
(3) all current directors and executive officers of Kroll as a group. Unless
otherwise indicated, all shares are owned directly and the indicated owner has
sole voting and dispositive power with respect to such shares.




Beneficial Ownership
-----------------------
Name Number Percent
- ---- --------- ----------


Jules B. Kroll(2)(3).................................................... 2,929,991 12.9%
Michael G. Cherkasky.................................................... 204,172 *
Michael D. Shmerling(4)................................................. 446,037 2.0
Michael A. Petrullo..................................................... 5,850 *
Sabrina H. Perel........................................................ 2,683 *
Thomas E. Constance..................................................... -- --
Raymond E. Mabus........................................................ 6,000 *
J. Arthur Urciuoli...................................................... 10,000 *
Wilfred T. O'Gara....................................................... 5,000 *
All current directors and executive officers as a group (9 persons)..... 3,604,733 15.6
American International Group, Inc.(2)................................... 1,444,212 6.3
Dimensional Fund Advisors Inc.(2)....................................... 1,277,000 5.6
Cannell Capital LLC(2)(5)............................................... 1,150,300 5.0
Palisade Concentrated Equity Partnership, L.P.(2)(6).................... 1,851,851 7.2
FMR Corp. (2)(7)........................................................ 1,570,402 6.9


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

* Less than 1%.

(1) Includes the following numbers of shares of common stock which may be
acquired through the exercise of currently exercisable stock options or
stock options which become exercisable within 60 days after February 28,
2002: Mr. Kroll, none; Mr. Cherkasky, 163,862 shares; Mr. Shmerling,
10,500 shares; Mr. Petrullo, 5,850 shares; Ms. Perel, 2,583 shares; Mr.
Constance, none; Mr. Mabus, 6,000 shares; Mr. Urciuoli, none; Mr.
O'Gara, none; and all directors and executive officers as a group,
188,795 shares.

(2) Mr. Kroll's address is 900 Third Avenue, New York, New York 10022. AIG's
address is 70 Pine Street, New York. New York 10270. Dimensional Fund
Advisors's address is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401. Cannell Capital's address is 150 California Street,
5th Floor, San Francisco, California 94111. Palisade's address is One
Bridge Plaza, Fort Lee, New Jersey 07024. FMR's address is 82 Devonshire
Street, Boston, Massachusetts 02109.

(3) Does not include 192,560 shares held by trusts for the benefit of Mr.
Kroll's adult children, in which Mr. Kroll disclaims any beneficial
interest.

(4) Includes 431,537 shares that are held in joint tenancy with Mr.
Shmerling's wife and 4,000 shares held as custodian for the benefit of
Mr. Shmerling's children.

(5) Voting and dispositive power over these shares is shared with J. Carlo
Cannell, the managing member of Cannell Capital.

(6) Includes shares of common stock which may be acquired through the
conversion of the notes which are immediately convertible.

80


(7) Voting and dispositive power over these shares is shared with Edward C.
Johnson 3rd, chairman of FMR.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with Kroll's initial public offering, the Board of Directors
adopted a policy requiring that any future transactions, including loans,
between Kroll and its officers, directors, principal shareholders and their
affiliates, be on terms no less favorable to Kroll than could be obtained from
unrelated third parties and that any such transactions be approved by a majority
of the disinterested members of the Board of Directors.

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

Intercompany Notes and Accounts Payable/Receivable and Certain Loans

During 2001, Mr. 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, 2001 pursuant to this agreement was $494,935. Subsequently, Mr.
Kroll reimbursed $250,000 of this amount to Kroll.

During 2001, Kroll rendered risk management services, including marketing
support, and claim investigations services to American International Group, Inc.
and its subsidiaries. Kroll billed AIG and its subsidiaries $3,535,061 in 2001
for these services. The year-end accounts receivable balance for AIG was
$1,228,584 at December 31, 2001. Since 1995, Kroll has purchased some of its
liability insurance, including Professional Errors and Omissions and Directors
and Officers liability insurance, from AIG subsidiaries. AIG's subsidiaries
billed Kroll $386,058 for this insurance during 2001. Kroll obtains the coverage
through an independent insurance broker and where possible obtains competitive
proposals from unrelated third parties.

Kroll Background America leases office space and furnishings in Nashville,
Tennessee from companies controlled by Mr. Shmerling and his family. For the
year ended December 31, 2001, Kroll Background America leased 22,143 square feet
of space and paid rent of $453,687. Kroll Background America subleases a portion
of its Nashville office space to Kroll for its information technology
department. For the year ended December 31, 2001, Kroll subleased 3,510 square
feet of office space from Kroll Background America and paid rent of $57,310.

Victory Aviation

Victory Aviation Services, Inc. is a Delaware corporation of which Messrs.
Thomas M. O'Gara and Wilfred T. O'Gara own approximately 92% and 1%,
respectively, of the outstanding capital stock. Messrs. Thomas O'Gara and
Wilfred O'Gara were executive officers of Kroll until leaving the company in
August 2001.

Lease agreements. Kroll's previously owned subsidiary, O'Gara-Hess & Eisenhardt
Armoring Company, had a Master Equipment Lease with Victory Aviation, entered
into in July 1995, under which it leased various items of equipment from Victory
Aviation. As of December 31, 2000, Kroll had approximately $1,250,000 of
equipment under various month-to-month lease arrangements. Rental expenses were
$361,524 for the period ended August 22, 2001. O'Gara-Hess & Eisenhardt was sold
to Armor in August 2001.

Supplier arrangements. During 1995 and 1996, O'Gara-Hess & Eisenhardt purchased
the dual-hard steel required for its vehicle armoring from Victory Aviation,
which distributed the steel for an unrelated third party. In 2001, the
receivables relating to these purchases were eliminated as part of the sale of
the O'Gara business to Armor. All other aspects of the arrangement have been
terminated.

81


Corporate aircraft. In February 1995, Kroll entered into a lease for a
Gulfstream G-11 aircraft owned by Victory Aviation. Effective June 1, 1998,
Kroll reached an agreement to amend the corporate aircraft lease. The terms of
the aircraft lease addendum provide Kroll with an hourly discount from the
normal commercial hourly rate on future charters of corporate aircraft from
Victory Aviation in order to amortize the remaining portion of existing lease
deposits from the original aircraft lease. Kroll had approximately $223,000 in
unamortized lease deposits with Victory Aviation as of December 31, 2001. Rental
expense related to the Gulfstream lease, including amortization of the deposit,
was $90,000 in 2001.

Other

Mr. Constance, who became a director of Kroll in December 2000, is a partner in
the law firm of Kramer Levin Naftalis & Frankel LLP, which provides legal
services to Kroll.

Severance Arrangements. Thomas O'Gara, who had been Vice Chairman of Kroll, and
Wilfred O'Gara, who had been co-Chief Executive Officer of Kroll, left Kroll in
August 2001. Under Kroll's severance agreement with Thomas O'Gara, he is
entitled to receive an amount equal to two years' base salary, which totals
$550,000, which was reduced by the amount of some payments owed by Mr. O'Gara to
Kroll. Each of Messrs. Thomas and Wilfred O'Gara has agreed that for a period of
ten years after termination of employment he will not directly or indirectly own
any interest in or perform any services for any entity which uses "O'Gara"
as a business or trade name or competes with Kroll. Nicholas Carpinello, who had
been Controller of Kroll, left Kroll on January 15, 2001. Under Kroll's
severance agreement with Mr. Carpinello, he is entitled to receive an amount
equal to eleven months base salary, which totals $165,000.



82


PART IV

Item 14. 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

o As of December 31, 2000 and 2001

Consolidated Statements of Operations

o For the Years Ended December 31, 1999, 2000 and 2001

Consolidated Statements of Shareholders' Equity

o For the Years Ended December 31, 1999, 2000 and 2001

Consolidated Statement of Cash Flows

o For the Years Ended December 31, 1999, 2000 and 2001

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

During the quarter ended December 31, 2001, Kroll filed the following
current reports on Form 8-K.

o Date of Report: September 28, 2001 (filed October 5, 2001) Items
4,7.

o Date of Report: November 14, 2001 (filed November 20, 2001)
Items 4,7.

During the quarter ended December 31, 2001, Kroll filed the following
amendment to its current report on Form 8-K.

o Date of Report: September 28, 2001 (filed December 27, 2001)
Items 4,7.

(c) Exhibits: See the List of Exhibits beginning on page E-1.

(d) Financial Statements: Not applicable



83


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 21st day of
March, 2002.

Kroll Inc.

By: /s/ Michael G. Cherkasky
------------------------------------
Michael G. Cherkasky
President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of the 21st day of March, 2002.

Signature Title
--------- -----

/s/ Jules B. Kroll Executive Chairman of the Board
- -------------------------------------
Jules B. Kroll


/s/ Michael G. Cherkasky President, Chief Executive Officer
- -------------------------------------
and Director
Michael G. Cherkasky (Principal Executive Officer)


/s/ Michael A. Petrullo Acting Chief Financial Officer,
- -------------------------------------
Michael A. Petrullo Vice President and Controller
(Principal Financial and Accounting
Officer)

/s/ Michael D. Shmerling Chief Operating Officer and Director
- -------------------------------------
Michael D. Shmerling


/s/ Thomas E. Constance Director
- -------------------------------------
Thomas E. Constance


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


/s/ J. Arthur Urciuoli Director
- -------------------------------------
J. Arthur Urciuoli



84


LIST OF EXHIBITS

Exhibit
Number Description
------ -----------

3.1 Amended and Restated Articles of Incorporation of the Company (1)

3.2 Amendment to Amended and Restated Articles of Incorporation of the
Company (8)

3.3 Code of Regulations of the Company (2)

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 the Company (3)

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 the Company (3)

4.3 Form of Senior Secured Subordinated Convertible Note (3)

4.4 Security Agreement, dated as of November 14, 2001, by and among
Palisade Concentrated Equity Partnership, L.P., as collateral
agent and the Company (3)

4.5 Pledge Agreement, dated as of November 14, 2001, by and among the
Company to Palisade Concentrated Equity Partnership, L.P., as
collateral agent (3)

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. (8)

10.1 Amended and Restated Lease of Office Space in New York, New York
between Progress Partners and Kroll Associates, Inc. (4)

10.2 Employment Agreement, dated October 17, 1997, between The
Kroll-O'Gara Company and Jules B. Kroll (4)*

10.3 Employment Agreement between Kroll Associates, Inc., The
Kroll-O'Gara Company and Michael G. Cherkasky, dated May 17, 1999
(5)*

10.4 Stock Purchase Agreement dated as of April 20, 2001 by and among
The Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt Armoring
Company, The O'Gara Company and O'Gara Security Associates, Inc.
and Armor Holdings, Inc. and Bengal Acquisition Corp. (6)

10.5 Letter agreement dated August 20, 2001 between Armor Holdings,
Inc., Bengal Acquisition Corp., The Kroll-O'Gara Company;
O'Gara-Hess & Eisenhardt Armoring Company, The O'Gara Company and
O'Gara Security Associates, Inc. (7)

10.6 Letter agreement, dated August 21, 2001 between Armor Holdings,
Inc., Bengal Acquisition Corp., The Kroll-O'Gara Company;
O'Gara-Hess & Eisenhardt Armoring Company, The O'Gara Company and
O'Gara Security Associates, Inc. (7)

10.7 Amended Employment Agreement between the Company and Michael D.
Shmerling (8)

10.8 Employment Agreement between the Company and Michael Petrullo (8)

10.9 Amended Employment Agreement between the Company and Sabrina Perel
(8)

10.10 Lease Agreement by and between Signature Center, G.P. and Kroll
Background America, Inc. (8)

10.11 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 (8)

85


Exhibit
Number Description
------ -----------

10.12 Lease Agreement by and between Omers Realty Corporation, Kroll
Lindquist Avey Co. and the Company, as amended (8)

10.13 1996 Stock Plan, as amended (9)*

10.14 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
(10)

10.15 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 10)

21.1 Subsidiaries of the Company (8)

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Deloitte & Touche LLC

99.1 Letter pursuant to Temporary Note 3T to Article 3 of
Regulation S-X.

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* Executive compensation agreement.


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(1) Filed as an Exhibit to the Company's Registration Statement on Form
S-1, No. 333-48099.

(2) Filed as an Exhibit to the Company's Registration Statement on Form
S-1, No. 333-11093.

(3) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
November 20, 2001.

(4) Filed as an Exhibit to the Company's Registration Statement on Form
S-4, No. 333-35845.

(5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.

(6) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
April 23, 2001.

(7) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
August 22, 2001.

(8) Filed as an Exhibit to the Company's Registration Statement on Form
S-1, No. 333-75972.

(9) Filed as an Exhibit to the Company's Registration Statement on Form
S-4, No. 333-74063.

(10) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
February 21, 2002.



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