Back to GetFilings.com



================================================================================

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

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

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003

Commission File Number: 000-21629

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


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

DELAWARE 13-4131019
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification Number)

900 THIRD AVENUE 10022
NEW YORK, NY (Zip code)
(Address of principal executive offices)

(212) 593-1000
(Registrant's telephone number, including area code)

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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes [ X ] No [ ]

The number of shares outstanding of the Registrant's common stock was
40,768,245 shares as of July 31, 2003.


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



INDEX

Page
PART I - FINANCIAL STATEMENTS

Item 1. Financial Statements

Consolidated Condensed Balance Sheets (unaudited)
as of June 30, 2003 and December 31, 2002 .... ................. 1

Consolidated Condensed Statements of Income and
Comprehensive Income (unaudited) for the three and
six months ended June 30, 2003 and 2002......................... 3

Consolidated Condensed Statements of Cash Flows (unaudited)
for the six months ended June 30, 2003 and 2002................. 4

Notes to Consolidated Condensed Financial Statements
(unaudited) .................................................... 5

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 19

Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 31

Item 4. Controls and Procedures ........................................ 32


PART II - OTHER INFORMATION

Item 1. Legal Proceedings ............................................. . 33

Item 2. Changes in Securities and Use of Proceeds...................... 34

Item 4. Submission of Matters to a Vote of Security Holders ........... 35

Item 6. Exhibits and Reports on Form 8-K .............................. 36

Signatures .................................................... 37


i



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS




KROLL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In thousands, except share data)

June 30, December 31,
2003 2002
--------- ----------
ASSETS
CURRENT ASSETS:

Cash and cash equivalents ........................................... $ 100,411 $ 77,317
Trade accounts receivable, net of allowance for
doubtful accounts of $7,061 and $6,875 at June 30,
2003 and December 31, 2002, respectively .......................... 60,574 48,661
Unbilled revenues ................................................... 28,018 29,921
Related party receivables ........................................... 656 720
Deferred tax assets ................................................. 5,137 5,304
Assets of discontinued operations (Note 7) .......................... 732 9,399
Prepaid expenses and other current assets ........................... 8,262 7,909
--------- ---------
Total current assets .............................................. 203,790 179,231
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land ................................................................ 194 194
Buildings and improvements .......................................... 2,092 2,092
Leasehold improvements .............................................. 13,908 12,420
Furniture and fixtures .............................................. 7,865 7,409
Machinery and equipment ............................................. 43,091 38,268
--------- ---------
67,150 60,383
Less-accumulated depreciation and amortization ...................... (38,826) (33,190)
--------- ---------
28,324 27,193
--------- ---------
DATABASES, net of accumulated amortization of $40,599 and
$38,200 at June 30, 2003 and December 31, 2002,
respectively ........................................................ 10,720 10,715
GOODWILL ............................................................... 292,354 292,095
OTHER INTANGIBLE ASSETS, net of accumulated amortization
of $7,847 and $5,599 at June 30, 2003 and December 31,
2002, respectively (Note 8) ......................................... 29,601 25,195
OTHER ASSETS ........................................................... 8,449 5,193
--------- ---------
Total Assets ...................................................... $ 573,238 $ 539,622
========= =========



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


1






KROLL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In thousands, except share data)

June 30, December 31,
2003 2002
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:


Revolving lines of credit (Note 9) ................................. $ 695 $ 4,209
Current portion of long-term debt (Note 9) ......................... -- 73
Trade accounts payable ............................................. 8,628 10,529
Related party payables ............................................. 962 2,253
Accrued payroll and related benefits ............................... 15,523 9,423
Other accrued liabilities .......................................... 9,905 10,873
Income taxes payable ............................................... 16,023 2,448
Liabilities of discontinued operations (Note 7) .................... 795 857
Deferred revenue ................................................... 10,711 14,488
-------- ---------
Total current liabilities ........................................ 63,242 55,153
DEFERRED INCOME TAXES ................................................. 5,185 5,358
CONVERTIBLE NOTES, net of unamortized discount of $8,693
and $9,599 at June 30, 2003 and December 31, 2002,
respectively (Note 9) .............................................. 21,307 20,401
LONG-TERM DEBT, net of current portion (Note 9) ....................... -- 18
OTHER LONG-TERM LIABILITIES ........................................... 1,435 1,785
--------- ---------
Total liabilities ................................................ 91,169 82,715
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY (Note 11):
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued .......................................... -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 40,671,174 and 36,994,758 shares issued
and outstanding at June 30, 2003 and December 31, 2002,
respectively .................................................... 407 370
Common shares to be issued for acquisition (Note 6) ................ -- 55,280
Additional paid-in-capital ......................................... 520,488 456,843
Accumulated deficit ................................................ (35,348) (51,590)
Accumulated other comprehensive loss ............................... (2,222) (3,952)
Deferred compensation .............................................. (1,256) (44)
--------- ---------
Total stockholders' equity ....................................... 482,069 456,907
--------- ---------
$ 573,238 $ 539,622
========= =========



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


2





KROLL INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Unaudited)
(In thousands, except per share amounts)

Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -------------------------
2003 2002 2003 2002
--------- --------- ---------- ---------



NET SALES .................................................... $ 111,442 $ 58,017 $ 214,930 $ 112,380
COST OF SALES ................................................ 47,368 31,125 94,939 61,138
--------- --------- --------- ---------
Gross profit .............................................. 64,074 26,892 119,991 51,242
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling and marketing ..................................... 9,874 5,202 18,978 9,402
General and administrative ................................ 28,194 15,013 51,400 30,453
Research and development .................................. 2,889 451 6,050 451
Amortization of other intangible assets ................... 1,263 315 2,458 521
--------- --------- --------- ---------
Operating expenses ...................................... 42,220 20,981 78,886 40,827
--------- --------- --------- ---------
Operating income ....................................... 21,854 5,911 41,105 10,415

OTHER INCOME (EXPENSE):
Interest expense, net ..................................... (792) (932) (1,622) (1,844)
Other income (expense) .................................... (35) 132 (37) 84
--------- --------- --------- ---------
Income before provision for income taxes ................ 21,027 5,111 39,446 8,655
Provision for income taxes ................................ 8,095 1,625 15,187 2,859
--------- --------- --------- ---------
Income from continuing operations ....................... 12,932 3,486 24,259 5,796
Discontinued operations (Note 7):
Income (loss) from discontinued operations,
net of tax ............................................. (159) 119 (211) 126
Loss on disposal of discontinued operations,
net of tax ............................................. (7,806) -- (7,806) --
--------- --------- --------- ---------
Net income ............................................. 4,967 3,605 16,242 5,922
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment, net of
tax provision of $1,286 and $355 for the three
months ended June 30, 2003 and 2002,
respectively, and $1,083 and $96 for the six
months ended June 30, 2003 and 2002,
respectively ............................................ 2,054 679 1,730 194
--------- --------- --------- ---------
Comprehensive income ................................... $ 7,021 $ 4,284 $ 17,972 $ 6,116
========= ========= ========= =========
PER SHARE DATA (Note 5):
BASIC
Income from continuing operations ....................... $ 0.32 $ 0.14 $ 0.60 $ 0.24
========= ========= ========= =========
Net income .............................................. $ 0.12 $ 0.15 $ 0.40 $ 0.25
========= ========= ========= =========
Weighted average shares outstanding ..................... 40,299 24,577 40,152 23,675
========= ========= ========= =========
DILUTED
Income from continuing operations ....................... $ 0.31 $ 0.13 $ 0.59 $ 0.23
========= ========= ========= =========
Net income .............................................. $ 0.12 $ 0.14 $ 0.39 $ 0.24
========= ========= ========= =========
Weighted average shares outstanding ..................... 41,462 25,846 41,206 24,945
========= ========= ========= =========


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


3






KROLL INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

Six Months Ended
June 30,
--------------------------
2003 2002
--------- ----------
OPERATING ACTIVITIES:


Net income ......................................................... $ 16,242 $ 5,922
Adjustments to reconcile net income to net cash
provided by operating activities:
(Income) loss from discontinued operations ....................... 8,017 (126)
Bad debt expense ................................................. 2,460 676
Depreciation and amortization .................................... 9,513 5,431
Non-cash interest expense ........................................ 1,119 939
Write-off of deferred financing fees ............................. 85 --
Non-cash compensation expense .................................... 217 --
Changes in operating assets and liabilities, excluding
the impact of acquisitions and dispositions:
Trade accounts receivable and unbilled revenues .................. (10,074) (2,905)
Prepaid expenses and other current assets ........................ (192) (352)
Trade accounts payable ........................................... (4,394) (2,349)
Income taxes payable ............................................. 13,330 1,662
Amounts due to/from related parties .............................. 1,089 863
Deferred income taxes ............................................ (54) --
Deferred revenue ................................................. (3,923) (1,138)
Accrued liabilities .............................................. 4,021 (3,290)
Other long-term liabilities ...................................... (93) (160)
------- -------
Net cash provided by operating activities ........................ 37,363 5,173
------- -------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment ......................... (5,737) (930)
Additions to databases ............................................. (2,046) (2,035)
Additions to other intangible assets (Note 6) ...................... (3,278) (2,933)
Acquisitions, net of cash acquired (Note 6) ........................ (3,117) 29,132
Other investments (Note 6) ......................................... (3,510) (14)
Other .............................................................. (27) 5
------- -------
Net cash provided by (used in) investing activities .............. (17,715) 23,225
------- -------
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving lines of
credit ........................................................... (4,026) (1,765)
Cash collateralization related to letters of credit ................ (450) --
Payments of long-term debt ......................................... (340) (469)
Foreign currency translation ....................................... (219) (470)
Net proceeds from Employee Stock Purchase Plan
contributions .................................................... 444 --
Issuance of stock under Employee Stock Purchase Plan ............... 993 --
Proceeds from exercise of employee stock options ................... 5,981 5,052
------- -------
Net cash provided by financing activities ........................ 2,383 2,348
------- -------
Effect of foreign currency exchange rates on cash and cash
equivalents ........................................................ 437 (58)
------- -------
Net cash provided by discontinued operations .......................... 626 12
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. 23,094 30,700
CASH AND CASH EQUIVALENTS, beginning of period ........................ 77,317 11,485
------- -------
CASH AND CASH EQUIVALENTS, end of period .............................. $ 100,411 $ 42,185
========= =========


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


4



KROLL INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


1. Nature of Operations

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

2. Basis of Presentation

The accompanying consolidated condensed unaudited financial statements
include the historical consolidated financial statements of Kroll; 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 prior to July 1, 2001. All
intercompany accounts and transactions are eliminated in consolidation.
Investments in 20% to 50% owned entities are accounted for using the equity
method. Investments in less than 20% owned entities are accounted for under the
cost method.

On June 18, 2003, Kroll sold its video surveillance subsidiary, InPhoto
Surveillance Inc ("InPhoto"). In connection with this disposition, the account
balances and activities of InPhoto were segregated and reported as a
discontinued operation in the accompanying consolidated condensed unaudited
financial statements for all periods presented. (See Note 7 for further
discussion.)

The consolidated condensed unaudited financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.

In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for fair presentation have been
included. The operating results for the three and six months ended June 30, 2003
and 2002 are not necessarily indicative of the results that may be expected for
a full year or any subsequent interim period. In addition, management is
required to make estimates and assumptions that affect the amounts reported and
related disclosures. Estimates, by their nature, are based on judgement and
available information. Accordingly, actual results could differ from these
estimates. The accompanying consolidated condensed unaudited financial
statements should be read in conjunction with the consolidated financial


5


statements and notes thereto included in Kroll's Annual Report on Form 10-K for
the year ended December 31, 2002.

3. Recent Accounting Pronouncements

On January 1, 2003, Kroll adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS
143 addresses financial accounting and reporting for obligations and costs
associated with the retirement of tangible long-lived assets. The adoption of
SFAS No. 143 did not have a material impact on Kroll's consolidated results of
operations or financial position.

On January 1, 2003, Kroll adopted SFAS No. 145, "Rescission of FASB
Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." This statement eliminates the classification of gains or losses on
the extinguishment of debt as an extraordinary item and requires that such gains
or losses be evaluated for extraordinary classification under the criteria of
Accounting Principal Board ("APB") No. 30 "Reporting Results of Operations". In
addition, any prior period extraordinary items that do not meet the criteria of
APB No. 30 will be required to be reclassified to continuing operations. This
statement also requires sales-leaseback accounting for certain modifications
that have economic effects that are similar to sales-leaseback transactions, and
makes various other technical corrections to existing pronouncements.

On January 1, 2003, Kroll adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 supersedes EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and requires that costs associated with an exit or disposal plan
be recognized when incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used in reporting results.
Management complied with the additional disclosure requirements effective from
December 31, 2002. (See Note 4 for the additional interim disclosures required
by SFAS No. 148.)

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements Nos.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). FIN
No. 45 requires that upon issuance of a guarantee, an entity must recognize a
liability for the fair value of the obligation it assumes under that obligation.
This interpretation is intended to improve the comparability of financial
reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. For Kroll, the initial recognition and measurement
provisions of FIN No. 45 applicable to guarantees issued or modified after
December 31, 2002 did not have an impact on its consolidated results of
operations or financial condition. Kroll adopted the additional disclosure
provisions of FIN No. 45 effective December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities ("FIN No. 46"). In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially

6


passive or it may engage in research and development or other activities on
behalf of another company. The objective of FIN No. 46 is not to restrict the
use of variable interest entities but to improve financial reporting by
companies involved with variable interest entities. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No. 46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The consolidation requirements of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003 and the
first fiscal year or interim period beginning after June 15, 2003 for older
entities. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. Kroll adopted the additional disclosure
provisions of FIN No. 46 effective December 31, 2002 and the consolidation
requirements of FIN No. 46 to variable interest entities created after January
31, 2003. As Kroll does not utilize variable interest entities, the adoption of
FIN No. 46 did not have an effect on its consolidated results of operations or
financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." In general, SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. Kroll does not expect the adoption of SFAS No.
149 to have a material effect on its consolidated results of operations or
financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement of mandatorily
redeemable financial instruments, obligations to repurchase the issuer's equity
shares by transferring assets, and certain obligations to issue a variable
number of shares. SFAS No. 150 is effective on July 1, 2003 for financial
instruments created or modified after May 31, 2003. Kroll does not expect the
adoption of SFAS No. 150 to have a material effect on its consolidated results
of operations or financial position.

4. Stock-Based Compensation

Kroll accounts for the cost of its employee stock options and other forms
of employee stock-based compensation plans utilizing the intrinsic value method
prescribed in APB Opinion 25, as allowed by SFAS No. 123, "Accounting for
Stock-Based Compensation." Under the intrinsic value method prescribed in APB
Opinion 25, compensation cost for stock-based compensation plans is required to
be recognized based on the difference, if any, between the fair market value of
the stock on the date of grant and the option exercise price. SFAS No. 123 also
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS No. 123 allows an entity to continue to measure compensation cost
using the principles of APB Opinion 25 if certain pro forma disclosures are
made.

Under APB Opinion 25, no stock-based employee compensation cost relating
to Kroll's option plans was reflected in net income, as all options granted
under its plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following tables illustrate
the effect on net income and net income per share if Kroll had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation:


7






Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- --------- -------- --------
(in thousands)


Net income, as reported ................................ $ 4,967 $ 3,605 $ 16,242 $ 5,922
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects ............................................ 1,776 1,515 3,537 3,030
-------- --------- -------- --------
Pro forma net income ................................... $ 3,191 $ 2,090 $ 12,705 $ 2,892
======= ======== ======= ========



Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2003 2002 2003 2002
------- ------- -------- --------
Net income per share:
Basic
As Reported ...................... $ 0.12 $ 0.15 $ 0.40 $ 0.25
Pro Forma ........................ $ 0.08 $ 0.09 $ 0.32 $ 0.12
Diluted
As Reported ...................... $ 0.12 $ 0.14 $ 0.39 $ 0.24
Pro Forma ........................ $ 0.08 $ 0.08 $ 0.31 $ 0.12

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:


Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
------ ------- ------ ------

Dividend yield ....................... -- -- -- --
Expected volatility .................. 54.9% 59.0% 54.9% 59.0%
Risk-free interest rate .............. 2.15% 3.0% 2.15% 3.0%
Expected lives ....................... 5.0yrs 5.0yrs 5.0yrs 5.0yrs


5. Earnings Per Share
- ------------------------------------------------------------------------------

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

The beginning weighted average number of shares of common stock
outstanding for the three and six months ended June 30, 2003 in the table below
includes the effect of 2.9 million shares of common stock issued in January 2003
relating to the acquisition of Zolfo Cooper, LLC ("Zolfo Cooper") on September
5, 2002, the closing date of the acquisition (see Notes 6 and 11).


8






Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2003 2002 2003 2002
Income (loss) per share:
Basic

Income from continuing operations .................... $ 0.32 $ 0.14 $ 0.60 $ 0.24
Income (loss) from discontinued operations ........... (0.01) 0.01 0.01
Loss on disposal of discontinued operations .......... (0.19) -- (0.19) --
-------- -------- -------- --------

Net income ........................................ $ 0.12 $ 0.15 $ 0.40 $ 0.25
======== ======== ======== ========
Diluted
Income from continuing operations .................... $ 0.31 $ 0.13 $ 0.59 $ 0.23
Income (loss) from discontinued operations ........... -- 0.01 (0.01) 0.01
Loss on disposal of discontinued operations .......... (0.19) -- (0.19) --
-------- -------- -------- --------
Net income ........................................ $ 0.12 $ 0.14 $ 0.39 $ 0.24
======== ======== ======== ========



Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Weighted average shares outstanding:

Basic .............................................. 40,299 24,577 40,152 23,675
Stock options and non-vested shares ................ 1,163 1,269 1,054 1,270
------- ------- ------- -------
Diluted ............................................ 41,462 25,846 41,206 24,945
======= ======= ======= =======



At June 30, 2003, there were 240,300 options outstanding to purchase an
equivalent number of shares of common stock of Kroll at $26.94 per option that
were not included in the shares in the above table because the options' exercise
prices were greater than the average market price of the common shares. Also
excluded from the above table is the potential conversion of the $30.0 million
6% Convertible Notes into 2,777,777 shares of Kroll common stock, as it was
determined that such conversion would have an anti-dilutive effect on the
earnings per share calculation.

At June 30, 2002, there were 8,719 warrants and 1,647,108 options
outstanding to purchase an equivalent number of shares of common stock of Kroll
at $25.69 per warrant and a range of $20.22 to $26.94 per option that were not
included in the shares in the above table because the warrants' and options'
exercise prices were greater than the average market price of the common shares.
Also excluded from the above table is the potential conversion of the $30.0
million 6% Convertible Notes into 2,777,777 shares of Kroll common stock, as it
was determined that such conversion would have an anti-dilutive effect on the
earnings per share calculation.

Basic weighted average shares outstanding for the three and six months
ended June 30, 2003 exclude the effect of 40,854 shares of restricted stock
awarded during June 2003 as such shares are forfeitable prior to the vesting
provisions of the award being satisfied.

6. Acquisitions

Pending Acquisition

On June 24, 2003, Kroll announced that it had entered into a definitive
agreement to acquire Factual Data Corp. ("Factual Data") for approximately $115
million. The acquisition is subject to customary closing conditions, including
approval by Factual Data's shareholders at Factual Data's special meeting to be
held on August 21, 2003. The acquisition has received clearance under the U.S.
Antitrust regulations.


9



Upon satisfaction of the customary closing conditions, for each share of
Factual Data common stock owned just before the merger, Factual Data
shareholders will be entitled to receive $14.00 in cash and a partial share of
Kroll common stock calculated to have a value equal to $3.50 based on the volume
weighted average price of Kroll common stock over a period of 20 consecutive
trading days ending three trading days before the vote of the Factual Data
shareholders at the Factual Data special meeting. If this average price is
$29.15 or more, Factual Data shareholders will receive 0.1201 of a share of
Kroll common stock. If this average price is $23.85 or less, Factual Data
shareholders will receive 0.1467 of a share of Kroll common stock. However, if
this average price is less than $23.85, the Factual Data board of directors can
terminate the merger agreement unless Kroll agrees to deliver to Factual Data
shareholders Kroll common stock calculated to have a value equal to $3.50 for
each share of Factual Data common stock, based on the volume weighted average
price of Kroll common stock over the period of 20 consecutive trading days
ending three trading days before the vote of the Factual Data shareholders at
the Factual Data special meeting.

Consummated Acquisitions

On January 15, 2003, Kroll issued 2.9 million shares of its common
stock, valued at approximately $55.3 million, to the former owners of Zolfo
Cooper in connection with the acquisition of Zolfo Cooper on September 5, 2002.
(see Note 11).

On March 14, 2003, Kroll consummated an asset purchase agreement with
Certico Verification Services, LLC ("Certico"). Under the agreement, Kroll
acquired most of Certico's assets and assumed certain liabilities, for a
purchase price of $3.3 million paid in cash. Such amount has been included in
the Consolidated Condensed Statement of Cash Flows within Investing activities
as Additions to other intangible assets. Certico provides background checking
services and its results of operations are included within the Background
Screening Services segment subsequent to the date of acquisition.

On March 21, 2003, Kroll completed the acquisition of Personnel Risk
Management ("PRM") for a purchase price of $1.4 million paid in cash. An
additional payment of up to $1.9 million will become payable after one year if
agreed upon profit levels are achieved. PRM provides pre-employment screening
services in the UK, and its results of operations are included within the
Background Screening Services segment subsequent to the date of acquisition.

On March 25, 2003, Kroll acquired the remaining 50% equity ownership
interest it did not own in Invex for a purchase price of $1.2 million in cash.
Invex, which provides corporate financial services in the UK, is included as
part of the Corporate Advisory and Restructuring Services segment.

The amounts paid for PRM and Invex, as well as related transaction costs
and expenses, have been included in the Consolidated Condensed Statement of Cash
Flows within Investing activities as Acquisitions, net of cash acquired.

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

On March 27, 2003, Kroll invested $1.0 million in iJet. The investment
in iJet, which is an intelligence organization focused on delivering proactive
travel risk management services and real-time alerts to travelers, expatriates,
corporations, government and non-governmental organizations, learning
institutions and the travel industry, is convertible into preferred stock of
iJet upon iJet raising additional equity financing. The investment in iJet is
included in Other Assets in the consolidated condensed balance sheet as of June
30, 2003.

On May 22, 2003, Kroll invested $2.0 million in Eid Access Inc. ("EID").
The investment in EID, which provides vendor security solutions, is convertible
into preferred stock of EID at Kroll's option. The investment in EID is included
in Other Assets in the consolidated condensed balance sheet as of June 30, 2003.

The amounts paid for iJet and EID, as well as related transaction costs
and expenses, have been included in the Consolidated Condensed Statement of Cash
Flows within Investing activities as Other investments.


10


7. DISCONTINUED OPERATIONS

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

Summarized Statement of Income data for InPhoto consisted of (in thousands):




Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002


Net sales .................................................... $ 1,064 $ 1,702 $ 2,350 $ 3,355
======= ======= ======= =======
Income (loss) from discontinued operations:
Income (loss) before provision for income tax .............. $ (196) $ 69 $ (280) $ 79
Provision (benefit) for income tax ......................... (37) 20 (69) 23
------- ------- ------- -------
Income (loss) from discontinued operations, net
of tax ................................................... $ (159) $ 49 $ (211) $ 56
======= ======= ======= =======
Loss on disposal of discontinued operations:
Loss on disposal of discontinued operations ................ $(7,767) $ -- $(7,767) $ --
Provision for income tax ................................... 39 -- 39 --
------- ------- ------- -------
Loss on disposal of discontinued operations, net
of tax ................................................... $(7,806) $ -- $(7,806) $ --
======= ======= ======= =======


Summarized Balance Sheet data for InPhoto as of June 30, 2003 and December 31,
2002 consisted of (in thousands):


June 30, December 31,
2003 2002
------- -----------

Assets of discontinued operations:
Current assets ................................. $ 708 $1,170
Property and equipment, net ...................... 24 225
Goodwill, net .................................... -- 7,487
Other assets ..................................... -- 517
------ ------
Total assets of discontinued
operations ..................................... $ 732 $9,399
====== ======
Liabilities of discontinued
operations:
Current liabilities .............................. $ 795 $ 822
Other liabilities ................................ -- 35
------ ------
Total liabilities of discontinued
operations ..................................... $ 795 $ 857
====== ======

During the three and six months ended June 30, 2002, Kroll also recorded
$70,000 of income from its previously discontinued security products and
services group, net of taxes.


11


8. Intangible Assets

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
Kroll did not record any amortization expense for goodwill during the three and
six months ended June 30, 2003 and 2002.

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

As of June 30, 2003, Kroll had recorded cost and accumulated amortization
for other intangible assets of $37.4 million and $7.8 million, respectively. Of
this amount, $19.6 million relates to the cost and $4.7 million relates to
accumulated amortization for acquired customer lists. An additional $12.3
million pertains to the cost and $1.8 million pertains to accumulated
amortization for internally developed software. The remaining $5.5 million and
$1.3 million of cost and accumulated amortization, respectively, is primarily
related to non-compete agreements.

Amortization expense for other intangible assets of $1.3 million and $0.3
million were recognized during the three months ended June 30, 2003 and 2002,
respectively. Amortization expense for other intangible assets of $2.5 million
and $0.5 million were recognized during the six months ended June 30, 2003 and
2002, respectively. Approximately $23.0 million of amortization expense is
anticipated to be recognized over the next five years as follows: $5.1 million
in 2004, $4.8 million in 2005, $4.8 million in 2006, $4.7 million in 2007 and
$3.6 million in 2008.

9. Debt

(a) Revolving Line of Credit

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

On September 5, 2002, Kroll amended and ultimately terminated the $15
million revolving credit facility with Foothill. No borrowings were made under
the terminated $15 million credit facility. Concurrently, Kroll entered into a
new $100 million credit facility with Goldman Sachs that included a $25 million
revolving credit facility and a $75 million term loan (see Note 9(c) for a
discussion of the term loan portion of this facility). Kroll wrote-off financing
fees of $0.4 million related to the replacement of the Foothill revolving credit
facility during the third quarter of 2002.


The $25 million revolving credit facility with Goldman Sachs was subject
to borrowing base limitations and had a three year term. The available borrowing
amount was calculated based on an analysis of Kroll's

12


accounts receivable as of the month end preceding the borrowing date. Borrowings
under the revolving credit facility bore interest, at Kroll's election, at a
rate per annum equal to the base rate plus applicable margin or the Eurodollar
rate plus applicable margin. The applicable margin was determined by the
leverage ratio, calculated as of the last day of any fiscal quarter as the ratio
of consolidated total debt as of that day to adjusted EBITDA for the four fiscal
quarters ending on such date.

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

The Goldman Sachs revolving credit facility also required Kroll to pay a
fee equal to 0.75% per annum of the unused portion of this facility. Upon the
repayment of the term loan in October 2002 with the proceeds of Kroll's common
stock offering, this fee was reduced to 0.375% per annum (see Notes 9(c) and
11). The revolving credit facility was secured by a lien on substantially all of
Kroll's assets and those of most of Kroll's domestic subsidiaries.

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

The $25 million Goldman Sachs revolving credit facility undertaken as part
of the $100 million credit facility on September 5, 2002 was simultaneously
retired on March 6, 2003. As a result, Kroll wrote-off approximately $0.1
million of unamortized deferred financing fees relating to this facility during
the first quarter of 2003. There were no borrowings made under the retired $25
million revolving credit facility.

During the first quarter of 2003, the Company was required to cash
collateralize letters of credit which had been issued under the $25 million
Goldman Sachs revolving credit facility totaling $2.2 million. During the second
quarter of 2003, $1.7 million of this amount was released to Kroll. The
remaining amount is included within other long-term assets on the consolidated
condensed balance sheet at June 30, 2003.

Borrowings under the Fleet revolving credit facility will bear interest,
at Kroll's election, at a rate per annum equal to (1) the prime rate of Fleet or
(2) LIBOR plus 2.00%. During the term of the Fleet revolving credit facility,
Kroll will pay Fleet a quarterly fee equal to 0.375% per annum of the unused
portion of the line of credit. The Fleet revolving credit facility requires
Kroll to maintain a minimum level of EBITDA and net income and maximum leverage
and liabilities requirements and contains restrictions on the incurrence of
additional debt, the creation of any liens, the payment of cash dividends,
certain acquisitions, and distributions to certain subsidiaries. The Fleet
revolving credit facility also contains other affirmative and negative covenants
and events of default customarily contained in debt agreements of this type.
There have been no borrowing made under this facility. At June 30, 2003, Kroll
was in compliance with all covenants and provisions of this facility.

In connection with the acquisition of Buchler Phillips prior to 2002,
Kroll acquired a demand note with maximum borrowings of 2.5 million pounds
sterling. This amount was increased to 4.4 million pounds sterling in March
2002. The demand note bears interest at the Bank of England's base rate plus
1.5%. During the first quarter of 2003, maximum borrowings permitted under the
demand note decreased from 4.4 million pounds sterling to 2.9 million pounds
sterling, or $4.8 million, as translated at June 30, 2003. There were no
borrowings outstanding under this demand note at June 30, 2003, a decrease of
$3.8 million from the amount outstanding at December 31, 2002 due to repayments
primarily made during the first quarter of 2003.

13


(b) Senior Convertible Notes

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

In connection with the issuance of the 6% Convertible Notes, Kroll
recorded a notes discount of approximately $11.4 million based on the difference
between the closing price of its stock on the issuance date and the conversion
price. In addition to the stated 6% interest, the discount is being amortized as
non-cash interest expense over the expected 5-year life of the notes. Barring
early conversion by the noteholders or early redemption by Kroll, the average
additional non-cash interest expense resulting from this discount amortization
is approximately $2.3 million, or 7.6% per year, on the $30.0 million aggregate
principal amount. The amount of non-cash interest expense resulting from this
discount amortization during the three and six months ended June 30, 2003 was
$.5 million and $.9 million, respectively. The amount of non-cash interest
expense resulting from this discount amortization during the three and six
months ended June 30, 2002 was $.4 million and $.8 million, respectively.

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

On September 5, 2002, Kroll amended certain provisions of its outstanding
6% Convertible Notes. Under the amendments, the security interest of the
noteholders was terminated and the collateral securing the 6% Convertible Notes
was released. In addition, the amendments deleted all of the negative covenants
in respect of all of the 6% Convertible Notes. Furthermore, Palisade, the only
note holder who had the right to designate a board observer, no longer has this
right. Palisade also agreed to subordinate the $20.0 million in aggregate
principal amount of the 6% Convertible Notes that it owned to borrowings under
the $100 million Goldman Sachs credit facility (see Notes 9(a) and (c)). In
connection with these amendments, Kroll agreed to compensate Palisade based on
the performance of Kroll's common stock, and as a result of this agreement, paid
Palisade $1.6 million in October 2002. Such amount was recorded as an
extraordinary item during the third quarter of 2002. During 2003, any prior
period extraordinary items that do not meet the criteria of APB No. 30 will be
required to be reclassified to continuing operations.

Kroll has an effective registration statement with the Securities and
Exchange Commission covering the resale of the notes, and the shares of common
stock issuable upon conversion of these notes, and is required to keep the
registration statement effective until November 2003.

(c) Long-term Note

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


The term loan was part of a $100 million credit facility with Goldman
Sachs which included a $25 million revolving credit facility (see Note 9(a)).
The cost of obtaining the credit facility was being amortized

14


over the facility's three year life. The term loan bore interest, at Kroll's
election, at a rate per annum equal to the base rate plus applicable margin or
the Eurodollar rate plus applicable margin. The applicable margin was determined
by the leverage ratio, calculated as of the last day of any fiscal quarter as
the ratio of consolidated total debt, as of that day, to EBITDA for the four
fiscal quarters ending on such date. A provision in the term loan required that
proceeds from any equity offering be used to repay the term loan.

The term loan was repaid in October 2002 with the proceeds from Kroll's
common stock offering (see Note 11). In the fourth quarter of 2002, Kroll
wrote-off financing fees of $1.1 million associated with the repayment of the
$75 million term loan. Such amount was recorded as an extraordinary item during
the fourth quarter of 2002. During 2003, any prior period extraordinary items
that do not meet the criteria of APB No. 30 will be required to be reclassified
to continuing operations.

10. Commitments and Contingencies

Kroll Lindquist Avey Co. (formerly Lindquist Avey Macdonald & Baskerville
("LAMB")), a subsidiary of Kroll, and several of its principals have been named
as third-party defendants in a lawsuit filed in the Ontario Superior Court of
Justice by HSBC Securities (Canada) Inc., formerly Gordon Capital, an investment
dealer ("HSBC"). HSBC filed the underlying suit against Gordon Capital's former
law firm, Davies, Ward & Beck, ("DW&B") seeking damages in the amount of
approximately $40,000,000 (Cdn.). HSBC alleges DW&B negligently advised Gordon
Capital during 1991 through 1993 with respect to its rights concerning trading
losses and irregularities by a client account manager and various insurance
bonds relating to such losses and irregularities. HSBC further alleges various
suits and declaratory judgment actions involving the insurers were filed in 1993
and that summary judgment granted in favor of the insurers in 1996 was affirmed
on appeal to the Supreme Court of Canada on the basis that the limitation period
under the bonds had expired without an action being commenced for recovery of
Gordon Capital's losses. Gordon Capital, DW&B and LAMB entered into various
tolling agreements until the matters pending with the insurers were exhausted.
In April 2000, HSBC filed suit against DW&B. In July 2001, DW&B filed a
third-party claim against LAMB and certain principals for contribution and
indemnity. An amended third-party claim was filed in September 2001. The
third-party claim alleges DW&B retained LAMB in June 1991 to examine the trading
irregularities and to advise Gordon Capital in respect of its dealings with its
insurers and that LAMB acted negligently in carrying out these services. Third
party claims have also been filed against some entities formerly known as Peat
Marwick Thorne, Gordon Capital's alleged former auditors and AON Reed Stenhouse,
Inc., Gordon Capital's alleged former insurance broker. The parties attended
mediation on December 11 and 12, 2002, with additional dates to be scheduled in
2003. LAMB is being defended by its former carrier, the Reliance Insurance
Company. Reliance is in liquidation, and while paying all defense costs, has
advised that any claim for damages or settlement greater than $25,000 (Cdn.)
will be a claim in the liquidation, on which distributions will be made as the
liquidation progresses. Kroll believes it may have other liability insurance
available with respect to this claim. Management of Kroll believes LAMB has
meritorious defenses to the claims and intends to defend the claims vigorously.

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

11. Stockholders' Equity

In October 2002, Kroll sold 6.3 million shares of its common stock to the
public in an underwritten public offering and raised approximately $110.6
million of net proceeds, including $0.2 million of accrued expenses. Kroll used
a portion of these proceeds to repay its three-year $75 million term loan
incurred on September 5, 2002 to acquire Zolfo Cooper (see Note 9(c)). The
remaining proceeds were used for working capital to fund operations and other
general company purposes. Because the repayment effectively terminated

15


the term loan agreement, all unamortized deferred financing fees associated with
this agreement were written-off as an extraordinary item in the fourth quarter
of 2002.

On January 1, 2003, Kroll issued 25,000 shares of restricted stock, valued
at approximately $0.5 million. Such amount will be amortized over the applicable
vesting period of three years as additional compensation expense.

On January 15, 2003, Kroll issued 2.9 million shares of its common stock,
valued at approximately $55.3 million, to the former owners of Zolfo Cooper in
connection with the acquisition of Zolfo Cooper on September 5, 2002. These
shares were presented on the December 31, 2002 balance sheet under the caption
"Common shares to be issued for acquisition."

On June 3, 2003, Kroll issued 40,854 shares of restricted stock, valued at
approximately $0.9 million. Such amount will be amortized over the applicable
vesting period of one and a half years as additional compensation expense.


12. Supplemental Cash Flows Disclosures

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

Six Months Ended
June 30,
---------------------
2003 2002
-------- --------
Supplemental Disclosure of Cash Flow Activities:
Cash paid for interest ............................ $ 995 $ 1,025
======== ========
Cash paid for taxes, net of refunds ............... $ 3,098 $ 1,490
======== ========
Supplemental Disclosure of Non-cash Activities:
Deferred compensation related to restricted
stock issuance .................................. $ 1,429 $ --
======== ========
Issuance of common shares pertaining to the
Zolfo Cooper acquisition ........................ $ 55,280 $ --
======== ========
Issuance of common shares pertaining to the
Ontrack acquisition ............................. $ -- $150,019
======== ========

There was no material change in the amount accrued at December 31, 2002 for
Kroll's restructuring plans during the six months ended June 30, 2003.

13. Customer and Segment Data

Kroll's reportable operating segments include the following five business
segments: Corporate Advisory and Restructuring Services, Consulting Services,
Technology Services, Background Screening Services and Security Services.
Kroll's reportable segments are organized, managed and operated along product
lines. These product lines are provided to similar clients, are offered together
as packaged offerings, generally produce similar margins and are managed under a
consolidated operations management.

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

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

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

16


The Background Screening Services segment includes revenues and expenses
from pre-employment and security background checking and substance abuse
testing.

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

The following summarizes information about Kroll's business segments for
the three and six months ended June 30, 2003 and 2002:





Corporate
Advisory and Background Consoli-
Restructuring Consulting Technology Screening Security Other dated
------------- ---------- ---------- ---------- -------- ---------- --------
(In thousands)

Three Months Ended June 30, 2003
Net sales to unaffiliated customers ......... $ 44,437 $ 30,959 $ 17,981 $ 12,226 $ 5,839 $ -- $111,442
======== ======== ======== ======== ======== ========== ========
Gross profit ................................ $ 29,465 $ 13,514 $ 13,787 $ 5,496 $ 1,812 $ -- $ 64,074
======== ======== ======== ======== ======== ========== ========
Operating income (loss) ..................... $ 20,464 $ 7,486 $ 3,901 $ 2,044 $ (194) $ (11,847) $ 21,854
======== ======== ======== ======== ======== ========== ========

Three Months Ended June 30, 2002
Net sales to unaffiliated customers ......... $ 9,834 $ 25,494 $ 4,144 $ 11,911 $ 6,634 $ -- $ 58,017
======== ======== ======== ======== ======== ========== ========
Gross profit ................................ $ 5,188 $ 11,162 $ 2,780 $ 5,882 $ 1,880 $ -- $ 26,892
======== ======== ======== ======== ======== ========== ========
Operating income (loss) ..................... $ 2,451 $ 3,519 $ 902 $ 3,003 $ 650 $ (4,614) $ 5,911
======== ======== ======== ======== ======== ========== ========

Six Months Ended June 30, 2003
Net sales to unaffiliated customers ......... $ 83,842 $ 61,257 $ 34,892 $ 23,411 $ 11,528 $ -- $214,930
======== ======== ======== ======== ======== ========== ========
Gross profit ................................ $ 53,072 $ 26,746 $ 25,909 $ 10,773 $ 3,491 $ -- $119,991
======== ======== ======== ======== ======== ========== ========
Operating income (loss) ..................... $ 37,953 $ 11,904 $ 6,432 $ 3,888 $ (927) $ (18,145) $ 41,105
======== ======== ======== ======== ======== ========== ========
As of June 30, 2003
Goodwill, net of accumulated
amortization ............................ $171,810 $ 17,297 $ 94,320 $ 3,052 $ 5,875 $ -- $292,354
======== ======== ======== ======== ======== ==========
Identifiable assets ......................... $ 52,490 $ 51,972 $ 29,461 $ 25,921 $ 11,377 $ -- 171,221
======== ======== ======== ======== ======== ==========
Corporate assets ............................ 108,931

Net assets of discontinued
operations ............................... 732
--------
Total assets ................................ $573,238
========
Six Months Ended June 30, 2002
Net sales to unaffiliated customers ......... $ 20,163 $ 51,690 $ 4,907 $ 21,354 $ 14,266 $ -- $112,380
======== ======== ======== ======== ======== ========== ========
Gross profit ................................ $ 11,471 $ 21,342 $ 3,120 $ 10,429 $ 4,880 $ -- $ 51,242
======== ======== ======== ======== ======== ========== ========
Operating income (loss) ..................... $ 4,941 $ 6,701 $ 740 $ 5,078 $ 2,963 $ (10,008) $ 10,415
======== ======== ======== ======== ======== ========== ========



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

17




14. Subsequent Events


On July 18, 2003, Kroll consummated an asset purchase agreement with
Intellifacts Corporation ("Intellifacts"). Under the agreement, Kroll acquired
substantially all the assets of Intellifacts and assumed certain liabilities for
a purchase price of $2.2 million in cash. Intellifacts, which provides
background checking services, will be included within the Background Screening
Services segment.

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




18



Item 2. 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 Condensed
Unaudited Financial Statements and accompanying notes thereto included elsewhere
herein.


Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements can sometimes be identified by the use of forward-looking words
such as "anticipate," "believe," "estimate," "expect," "intend," "may," "will"
and similar expressions. These statements are based on management's current
expectations and are subject to risks, 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.

The following factors, among others, could cause actual results to differ
materially from those described in the forward-looking statements: changes in
the demand for, or in the mix of, Kroll's services; project delays or
cancellations; cost overruns with regard to fixed price projects; competitive
pricing and other competitive pressures; changes in United States and foreign
governmental regulation and licensing requirements; currency exchange rate
fluctuations; foreign currency restrictions; general economic conditions;
political instability in foreign countries in which Kroll operates; Kroll's
ability to implement its internal growth strategy and to integrate and manage
successfully any business Kroll acquires; and other factors that are set forth
in Kroll's Annual Report on Form 10-K for the year ended December 31, 2002.

General

Kroll is a leading global provider of complementary risk consulting
services. Kroll assists businesses, governments and individuals throughout the
world in preventing, mitigating and responding to risk through an integrated
suite of services. Kroll's five business groups enable Kroll to provide its
clients with comprehensive, single source, risk consulting services. These five
business groups are:

o Corporate Advisory and Restructuring Services. Kroll acts both in an
advisory capacity to, and as interim management of, financially
troubled companies throughout North America and Europe, and advises
all the various stakeholders involved in the reorganization process.
In this context, Kroll provides corporate restructuring, operational
turnaround, strategic advisory services, financial crisis management
and corporate finance services.

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

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

o Background Screening Services. Kroll provides pre-employment and
security background screening and substance abuse testing.

19


o Security Services. Kroll provides security architecture and design,
corporate security consulting, emergency management and environmental
services as well as protective services, operations and training.

Critical Accounting Policies

Kroll's significant accounting policies, including the assumptions and
judgments underlying them, are more fully described in Kroll's Annual Report on
Form 10-K for the year ended December 31, 2002. Some of Kroll's accounting
policies require the application of significant judgment by management in the
preparation of the financial statements, and as a result they are subject to a
greater degree of uncertainty. In applying these policies, management uses its
judgment to determine the appropriate assumptions to be used in calculating
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses. Management bases its estimates and assumptions on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Kroll's significant accounting policies include the
following:

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

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

Foreign Currency Translation and Transactions. Assets and liabilities of
foreign operations are translated using exchange rates prevailing at the balance
sheet date and revenues and expenses are translated using exchange rates
prevailing during the period, with gains or losses resulting from translation
included in a separate component of stockholders' equity.

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

Accounting for intangible and long-lived assets. In accordance with SFAS
No. 142, Kroll no longer amortizes goodwill and indefinite-lived intangible
assets. Instead, Kroll conducts annual impairment tests of goodwill and
indefinite-lived intangible assets recorded on its books in order to ascertain
if an impairment has taken place. Impairment tests will be conducted sooner if
circumstances indicate that an impairment has occurred. In accordance with SFAS
No. 144, Kroll tests for impairment its long-lived assets held and used whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. An impairment loss
will be measured as the amount by which the carrying amount of a long-lived
asset exceeds its fair value. In

20


addition, in accordance with SFAS No. 144, Kroll measures long-lived assets to
be disposed of by sale, including discontinued operations, at the lower of
carrying amount or fair value less cost to sell.

Results of Operations

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




Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
2003 2002 2003 2002
--------- ------- -------- -------
Net sales:

Corporate Advisory and Restructuring Services ........... 39.9% 17.0% 39.0% 17.9%
Consulting Services ..................................... 27.8 44.0 28.5 46.0
Technology Services ..................................... 16.1 7.1 16.2 4.4
Background Screening Services ........................... 11.0 20.5 10.9 19.0
Security Services ....................................... 5.2 11.4 5.4 12.7
------- ----- ----- -----
Total net sales ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................................. 42.5 53.6 44.2 54.4
------- ----- ----- -----
Gross profit .......................................... 57.5 46.4 55.8 45.6
------- ----- ----- -----
Selling and marketing ...................................... 8.9 9.0 8.8 8.4
General and administrative ................................. 25.3 25.9 23.9 27.1
Research and development ................................... 2.6 0.8 2.8 0.4
Amortization of other intangible assets .................... 1.1 0.5 1.1 0.5
------- ----- ----- -----
Operating expenses .................................... 37.9 36.2 36.6 36.4
------- ----- ----- -----
Operating income ...................................... 19.6 10.2 19.2 9.2
------- ----- ----- -----
Other income (expense):
Interest expense, net ................................... (0.7) (1.6) (0.8) (1.6)
Other income (expense), net ............................ -- 0.2 -- 0.1
------- ----- ----- -----
Total other income (expense) ........................ (0.7) (1.4) (0.8) (1.5)
------- ----- ----- -----
Income before provision for income taxes .............. 18.9 8.8 18.4 7.7
Provision for income taxes ................................. 7.3 2.8 7.1 2.4
------- ----- ----- -----
Income from continuing operations ....................... 11.6 6.0 11.3 5.3
Income (loss) from discontinued operations, net
of tax .................................................. (7.1) 0.2 (3.7) --
------- ----- ----- -----
Net income ............................................ 4.5% 6.2% 7.6% 5.3%
======= ===== ===== =====


Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Net sales. Net sales increased $53.4 million, or 92.1%, from $58.0 million
in the three months ended June 30, 2002 to $111.4 million in the three months
ended June 30, 2003.

Corporate Advisory and Restructuring Services - Net sales for the
Corporate Advisory and Restructuring Services segment increased $34.6 million,
or 351.9%, from $9.8 million for the three months ended June 30, 2002 to $44.4
million for the three months ended June 30, 2003. This increase is due to a
54.9% increase in revenues from Kroll's European recovery and turnaround
division and the inclusion of Kroll Zolfo Cooper. Zolfo Cooper was acquired on
September 5, 2002. Kroll Zolfo Cooper recognized $9.6 million of success fees
during the three months ended June 30, 2003.


21



Consulting Services - Net sales for the Consulting Services segment
increased $5.5 million, or 21.4%, from $25.5 million for the three months ended
June 30, 2002 to $31.0 million for the three months ended June 30, 2003. This
increase was primarily due to higher revenues in Europe of 21.1% and in the
United States of 50.6%. The increase in Europe was due to strong demand for
Kroll's intelligence and investigative services. The increase in the United
States was due to strong demand for Kroll's forensic and litigation support and
valuation services. Partially offsetting these regions' growth were decreases in
revenue in Kroll's domestic intelligence and investigative services of 13.9% and
in the Canadian and Latin American operations of 3.2% and 3.9%,
respectively.

Technology Services - Net sales for the Technology Services segment
increased $13.8 million from $4.1 million for the three months ended June 30,
2002 to $18.0 million for the three months ended June 30, 2003. This increase is
due to the inclusion of Kroll Ontrack which was acquired on June 13, 2002.

Background Screening Services - Net sales for the Background Screening
Services segment increased $0.3 million, or 2.6%, from $11.9 million for the
three months ended June 30, 2002 to $12.2 million for the three months ended
June 30, 2003. This increase was primarily the result of increases in the demand
for Kroll's European and Canadian pre-employment background checking services.
These increases were partially offset by a decrease of 3.7% in Kroll's
laboratory testing services.

Security Services - Net sales for the Security Services segment decreased
$0.8 million, or 12.0%, from $6.6 million for the three months ended June 30,
2002 to $5.8 million for the three months ended June 30, 2003. This decrease was
primarily the result of a decrease in corporate activity due to the current
domestic economic environment and a delay in the issuance of additional
government contracts.

Cost of sales and gross margin. Cost of sales increased $16.2 million, or
52.2%, from $31.1 million for the three months ended June 30, 2002 to $47.4
million for the three months ended June 30, 2003. Gross margin as a percentage
of sales increased 11.1 percentage points from 46.4% for the three months ended
June 30, 2002 to 57.5% for the three months ended June 30, 2003.

Corporate Advisory and Restructuring Services - Gross margin for the
Corporate Advisory and Restructuring Services segment increased 13.5 percentage
points from 52.8% for the three months ended June 30, 2002 to 66.3% for the
three months ended June 30, 2003. This was primarily attributable to the
increase in revenues by Kroll's European recovery and turnaround division and
the inclusion of Kroll Zolfo Cooper for the quarter. Zolfo Cooper was acquired
on September 5, 2002. Kroll Zolfo Cooper recognized $9.6 million of success fees
during the three months ended June 30, 2003.

Consulting Services - Gross margin for the Consulting Services segment
decreased 0.1 percentage points from 43.8% for the three months ended June 30,
2002 to 43.7% for the three months ended June 30, 2003. Kroll's domestic and
European intelligence and investigative experienced margin decreases. The
domestic decrease is due to the decline in revenues and the European decrease is
due to costs incurred in staffing to meet the increase in demand. These
decreases were partially offset by increases in gross margin in Kroll's Asian
intelligence and investigative services and Kroll's domestic financial valuation
services.

Technology Services - Gross margin for the Technology Services Segment
increased 9.6 percentage points from 67.1% for the three months ended June 30,
2002 to 76.7% for the three months ended June 30, 2003. This increase is
primarily due to the inclusion of Kroll Ontrack which was acquired on June 13,
2002.

Background Screening Services - Gross margin for the Background Screening
Services segment decreased 4.4 percentage points from 49.4% for the three months
ended June 30, 2002 to 45.0% for the three months ended June 30, 2003. This was
primarily attributable to decreased margins in Kroll's drug testing unit due to
the soft domestic economy.

22


Security Services - Gross margin for the Security Services segment
increased 2.7 percentage points from 28.3% for the three months ended June 30,
2002 to 31.0% for the three months ended June 30, 2003. This increase is
primarily attributable to cost management efforts in Kroll's domestic operations
and increased margins in our Latin American operations.

Operating expenses. Operating expenses increased $21.2 million, or 101.2%,
from $21.0 million for the three months ended June 30, 2002 to $42.2 million for
the three months ended June 30, 2003. This increase is primarily due to the
inclusion of the operating expenses for Kroll Ontrack and Kroll Zolfo Cooper for
the three months ended June 30, 2003 and the recording of $5.4 million of
one-time payments of bonuses and contractual adjustments. Ontrack and Zolfo
Cooper were acquired on June 13, 2002 and September 5, 2002, respectively.

As a percent of net sales, selling, general and administrative expenses
decreased 0.6 percentage points from 34.8% for the three months ended June 30,
2002 to 34.2% for the three months ended June 30, 2003.

Interest expense, net. Interest expense, net decreased $0.1 million during
the three months ended June 30, 2003 due to interest earnings from larger
short-term investments made possible by our increased cash position.

Provision for income taxes. The provision for income taxes increased $6.5
million from $1.6 million for the three months ended June 30, 2002 to $8.1
million for the three months ended June 30, 2003. The increase in the provision
for income taxes is due to higher pre-tax income and an increase in Kroll's
effective income tax rate. The increase in the effective tax rate was caused
primarily by the utilization in 2002 of tax loss carry forwards from prior
years.

Income from continuing operations. Income from continuing operations
increased $9.4 million from $3.5 million in the second quarter of 2002 to $12.9
million in the second quarter of 2003 as a result of the above mentioned items.

Income from discontinued operations. Income from discontinued operations
decreased $8.1 million from $0.1 million in the second quarter of 2002 to an
$8.0 million loss in the second quarter of 2003. This is primarily due to the
loss on the sale of InPhoto which was recorded during the second quarter of 2003
(see Note 7.)

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Net sales. Net sales increased $102.6 million, or 91.3%, from $112.4
million in the six months ended June 30, 2002 to $214.9 million in the six
months ended June 30, 2003.

Corporate Advisory and Restructuring Services - Net sales for the
Corporate Advisory and Restructuring Services segment increased $63.7 million,
or 315.8%, from $20.2 million for the six months ended June 30, 2002 to $83.8
million for the six months ended June 30, 2003. This increase is due to a 43.5%
increase in revenues from Kroll's European recovery and turnaround division and
the inclusion of Kroll Zolfo Cooper for the entire period. Zolfo Cooper was
acquired on September 5, 2002. In addition, Kroll Zolfo Cooper recognized $13.0
million of success fees during the six months ended June 30, 2003.

Consulting Services - Net sales for the Consulting Services segment
increased $9.6 million, or 18.5%, from $51.7 million for the six months ended
June 30, 2002 to $61.3 million for the six months ended June 30, 2003. This
increase was primarily driven by increases in demand for Kroll's forensic
accounting, financial and valuation services in the United States of 145.8% and
Latin America, which is a newly developed practice, and increases in Kroll's
intelligence and investigative services in Europe of 33.8%. These increases were
partially offset by decreases in Kroll's domestic intelligence and investigative
services of 10.8%, and in our Canadian financial services unit of 7.2%.

23


Technology Services - Net sales for the Technology Services segment
increased $30.0 million from $4.9 million for the six months ended June 30, 2002
to $34.9 million for the six months ended June 30, 2003. This increase is due to
the inclusion of Kroll Ontrack for the entire six month period. Ontrack was
acquired on June 13, 2002.

Background Screening Services - Net sales for the Background Screening
Services segment increased $2.1 million, or 9.6%, from $21.3 million for the six
months ended June 30, 2002 to $23.4 million for the six months ended June 30,
2003. This increase was primarily the result of an increase of 7.4% in the
demand for Kroll's domestic pre-employment background checking services and
increases in our European and Canadian background checking services.

Security Services - Net sales for the Security Services segment decreased
$2.7 million, or 19.2%, from $14.2 million for the six months ended June 30,
2002 to $11.5 million for the six months ended June 30, 2003. This decrease was
primarily the result of a decrease in corporate activity due to the current
domestic economic environment and a delay in the issuance of additional
government contracts.

Cost of sales and gross margin. Cost of sales increased $33.8 million, or
55.3%, from $61.1 million for the six months ended June 30, 2002 to $94.9
million for the six months ended June 30, 2003. Gross margin as a percentage of
sales increased 10.2 percentage points from 45.6% for the six months ended June
30, 2002 to 55.8% for the six months ended June 30, 2003.

Corporate Advisory and Restructuring Services - Gross margin for the
Corporate Advisory and Restructuring Services segment increased 6.4 percentage
points from 56.9% for the six months ended June 30, 2002 to 63.3% for the six
months ended June 30, 2003. This is primarily attributable to the inclusion of
Kroll Zolfo Cooper for the entire period (Zolfo Cooper was acquired on September
5, 2002), the growth in our Canadian restructuring unit, a newly developed
practice, and the recognition of $13.0 million in success fees in the six months
ended June 30, 2003.

Consulting Services - Gross margin for the Consulting Services segment
increased 2.4 percentage points from 41.3% for the six months ended June 30,
2002 to 43.7% for the six months ended June 30, 2003. This increase was
primarily attributable to increased utilization in our domestic and Latin
American consulting businesses, which was driven by the growth of our forensic
accounting and litigation consulting practice areas.

Technology Services - Gross margin for the Technology Services Segment
increased 10.7 percentage points from 63.6% for the six months ended June 30,
2002 to 74.3% for the six months ended June 30, 2003. This increase is primarily
due to the inclusion of Kroll Ontrack for the entire period. Ontrack was
acquired on June 13, 2002.

Background Screening Services - Gross margin for the Background Screening
Services segment decreased 2.8 percentage points from 48.8% for the six months
ended June 30, 2002 to 46.0% for the six months ended June 30, 2003. This
decrease was primarily attributable to decreased margins in Kroll's drug testing
unit due to the soft domestic economy.

Security Services - Gross margin for the Security Services segment
decreased 3.9 percentage points from 34.2% for the six months ended June 30,
2002 to 30.3% for the six months ended June 30, 2003. This decrease is primarily
attributable to the 19.2% decrease in revenues for the six months ended June 30,
2003.

Operating expenses. Operating expenses increased $38.1 million, or 93.2%,
from $40.8 million for the six months ended June 30, 2002 to $78.9 million for
the six months ended June 30, 2003. This increase is primarily due to the
inclusion of the operating expenses for Kroll Ontrack and Kroll Zolfo Cooper for
the six months ended June 30, 2003 and the recording of $5.4 million of one-time
payments of bonuses and contractual adjustments. Ontrack and Zolfo Cooper were
acquired on June 13, 2002 and September 5, 2002, respectively.

24


As a percent of net sales, selling, general and administrative expenses
decreased 2.8 percentage points from 35.5% for the six months ended June 30,
2002 to 32.7% for the six months ended June 30, 2003.

Interest expense, net. Interest expense, net decreased $0.2 million during
the six months ended June 30, 2003 due to interest earnings from larger
short-term investments made possible by Kroll's increased cash position.

Provision for income taxes. The provision for income taxes increased $12.3
million from $2.9 million for the six months ended June 30, 2002 to $15.2
million for the six months ended June 30, 2003. The increase in the provision
for income taxes is due to higher pre-tax income and an increase in our
effective income tax rate. The increase in the effective tax rate was caused
primarily by the utilization in 2002 of tax loss carry forwards from prior
years.

Income from continuing operations. Income from continuing operations
increased $18.5 million, or 318.5%, from $5.8 million in the six months ended
June 30, 2002 to $24.3 million in the six months ended June 30, 2003, as a
result of the above discussed factors.

Income from discontinued operations. Income from discontinued operations
decreased $8.1 million from $0.1 million income in the six months ended June 30,
2002 to an $8.0 million loss in the six months ended June 30, 2003. This is
primarily due to the loss on the sale of InPhoto which was recorded during the
second quarter 2003 (see Note 7.)

Liquidity and Capital Resources

General

Kroll historically has met its operating cash needs by utilizing
borrowings under its credit arrangements to supplement cash provided by
operations.

Kroll currently believes that cash on hand, cash flows from operations and
available borrowings under its credit facility will be sufficient to meet its
current funding requirements and obligations.

Cash Flows

Cash flows provided by operating activities. Operating activities provided
$37.4 million during the six months ended June 30, 2003, compared with $5.2
million provided from operating activities during the six months

25


ended June 30, 2002. The $32.2 million increase reflects strong sales growth
from existing operations and contributions from strategic acquisitions completed
during 2002. In addition, $7.5 million of cash was used to fund working capital
investments in the 2002 period, compared with $0.2 million used to fund working
capital investments in the 2003 period.

Cash flows provided by (used in) investing activities. Investing
activities used $17.7 million during the six months ended June 30, 2003,
compared with $23.2 million provided by investing activities during the six
months ended June 30, 2002. In the 2002 period, $0.9 million was used for
capital expenditures, $2.0 million was used for database additions and $3.0
million was used for additions to intangible assets, compared to $5.7 million
used for capital expenditures, $2.0 million used for database additions and $3.3
million used for additions to intangible assets in the 2003 period.
Acquisitions, net of cash acquired, provided $29.1 million in the 2002 period
but used $3.1 million in the 2003 period. The $29.1 million provided by
acquisitions, net of cash acquired, in the 2002 period represents the cash
acquired in connection with the acquisition of Ontrack on June 13, 2002. The
purchase price for the Ontrack acquisition consisted solely of shares of common
stock of Kroll. In addition $3.5 million was used for other investments in the
2003 period, including EID and iJet discussed below.

Cash flows provided by financing activities. Financing activities provided
$2.4 million during the six months ended June 30, 2003, compared to $2.3 million
provided from financing activities during the six months ended June 30, 2002. In
the 2002 period, Kroll's net payments on debt were $1.6 million, compared to
payments on debt of $4.1 million in the 2003 period. In 2002, Kroll paid
additional financing fees of $0.6 million. In 2003, Kroll paid additional
financing fees of $0.2 million and segregated $0.5 million to cash-collateralize
certain obligations until additional financing was completed. In addition, $5.1
million was provided from the exercise of stock options in the 2002 period,
compared with $6.0 million provided from the exercise of stock options and $1.4
million provided from Kroll's Employee Stock Purchase Plan in the 2003 period.

Revolving Line of Credit

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

The $25 million Goldman Sachs revolving credit facility undertaken as part
of a $100 million credit facility on September 5, 2002 was simultaneously
retired on March 6, 2003. As a result, Kroll wrote-off approximately $0.1
million of unamortized deferred financing fees relating to this facility during
the first quarter of 2003. There were no borrowings made under the retired $25
million revolving credit facility.

During the first quarter of 2003, the Company was required to cash
collateralize letters of credit which had been issued under the $25 million
Goldman Sachs revolving credit facility totaling $2.2 million. During the second
quarter of 2003, $1.7 million of this amount was released to Kroll.

Borrowings under the Fleet revolving credit facility will bear interest,
at Kroll's election, at a rate per annum equal to (1) the prime rate of Fleet or
(2) LIBOR plus 2.00%. During the term of the Fleet revolving credit facility,
Kroll will pay Fleet a quarterly fee equal to 0.375% per annum of the unused
portion of the line of credit. The Fleet revolving credit facility requires
Kroll to maintain a minimum level of EBITDA and net income and maximum leverage
and liabilities requirements and contains restrictions on the incurrence of
additional debt, the creation of any liens, the payment of cash dividends,
certain acquisitions, and distributions to certain subsidiaries. The Fleet
revolving credit facility also contains other affirmative and negative covenants
and events of default customarily contained in debt agreements of this type.
There have been no borrowing made under this facility. At June 30, 2003, Kroll
was in compliance with all covenants and provisions of this facility.

During the first quarter of 2003, maximum borrowings permitted under a
demand note acquired by Kroll in connection with the acquisition of Buchler
Philips in 1999 decreased from 4.4 million pounds sterling to 2.9 million pounds
sterling, or $4.8 million, as translated at June 30, 2003. The demand note bears
interest at the Bank of England's base rate plus 1.5%. There were no borrowings
outstanding under this demand note at June 30, 2003, a decrease of $3.8 million
from the amount outstanding at December 31, 2002 due to repayments primarily
made during the first quarter of 2003.

Senior Convertible Notes

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

26


Kroll has an effective registration statement with the Securities and
Exchange Commission covering the resale of the notes, and the shares of common
stock issuable upon conversion of these notes, and is required to keep the
registration statement effective until November 2003.

Pending Acquisition

On June 24, 2003, Kroll announced that it had entered into a definitive
agreement to acquire Factual Data for approximately $115 million. The
acquisition is subject to customary closing conditions, including approval by
Factual Data's shareholders at Factual Data's special meeting to be held on
August 21, 2003. The acquisition has received clearance under the U.S. Antitrust
regulations.

Upon satisfaction of the customary closing conditions, for each share of
Factual Data common stock owned just before the merger, Factual Data
shareholders will be entitled to receive $14.00 in cash and a partial share of
Kroll common stock calculated to have a value equal to $3.50 based on the volume
weighted average price of Kroll common stock over a period of 20 consecutive
trading days ending three trading days before the vote of the Factual Data
shareholders at the Factual Data special meeting. If this average price is
$29.15 or more, Factual Data shareholders will receive 0.1201 of a share of
Kroll common stock. If this average price is $23.85 or less, Factual Data
shareholders will receive 0.1467 of a share of Kroll common stock. However, if
this average price is less than $23.85, the Factual Data board of directors can
terminate the merger agreement unless Kroll agrees to deliver to Factual Data
shareholders Kroll common stock calculated to have a value equal to $3.50 for
each share of Factual Data common stock, based on the volume weighted average
price of Kroll common stock over the period of 20 consecutive trading days
ending three trading days before the vote of the Factual Data shareholders at
the Factual Data special meeting. The total amount of cash required is expected
to be approximately $90 million. Kroll expects to have this amount on hand at
the closing of the merger.

Consummated Acquisitions

On January 15, 2003, Kroll issued 2.9 million shares of its common stock,
valued at approximately $55.3 million, to the former owners of Zolfo Cooper in
connection with the acquisition of Zolfo Cooper on September 5, 2002 (see Note
11 of the Notes to the consolidated condensed unaudited financial statements.)

On March 14, 2003, Kroll consummated an asset purchase agreement with
Certico. Under the agreement, Kroll acquired most of Certico's assets and
assumed certain liabilities, for a purchase price of $3.3 million paid in cash.
Certico provides background checking services and its results of operations are
included within the Background Screening Services segment subsequent to the date
of acquisition.

On March 21, 2003, Kroll completed the acquisition of PRM for a purchase
price of $1.4 million paid in cash. An additional payment of up to $1.9 million
will become payable after one year if agreed upon profit levels are achieved.
PRM provides pre-employment screening services in the UK, and its results of
operations are included within the Background Screening Services segment
subsequent to the date of acquisition.

On March 25, 2003, Kroll acquired the remaining 50% equity ownership
interest it did not own in Invex for a purchase price of $1.2 million in cash.
Invex, which provides corporate financial services in the UK, is included as
part of the Corporate Advisory and Restructuring Services segment.

On March, 27, 2003, Kroll invested $1.0 million in iJet. The investment
in iJet, which is an intelligence organization focused on delivering proactive
travel risk management services and real-time alerts to travelers, expatriates,
corporations, government and non-governmental organizations, learning
institutions and the travel industry, is convertible into preferred stock of
iJet upon iJet raising additional equity financing.

On May 22, 2003, Kroll invested $2.0 million in EID. The investment in
EID, which provides vendor security solutions, is convertible into preferred
stock of EID at Kroll's option.

On July 18, 2003, Kroll consummated an asset purchase agreement with
Intellifacts. Under the agreement, Kroll acquired substantially all the assets
of Intellifacts and assumed certain liabilities for a purchase price of $2.2
million in cash. Intellifacts, which provides background checking services, will
be included within the Background Screening Services segment.


27


Kroll's contractual obligations were comprised of the following as of
June 30, 2003:




Payments due by Period
-------------------------------------------------------------------
Contractual Obligation After
- ----------------------- Total Within 1 Year 2-3 Years 4-5 Years 5 Years
------- ------------- --------- --------- --------
(in thousands)

Long-term debt ...................... $30,000 $ -- $ -- $30,000 $ --
Operating leases .................... 45,706 11,357 17,564 13,124 3,661
Other long-term obligations ......... 750 250 500 -- --
------- ------- ------- ------- -------
Total ............................ $76,456 $11,607 $18,064 $43,124 $ 3,661
======= ======= ======= ======= =======


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 insuring equipment to
protect against losses related to political risks and terrorism.

Quarterly fluctuations. Although Kroll does have some long term contracts
with its clients, generally 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.

Recent Accounting Pronouncements

On January 1, 2003, Kroll adopted SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations and costs associated with the retirement of tangible long-lived
assets. The adoption of SFAS No. 143 did not have a material impact on Kroll's
consolidated results of operations or financial position.

On January 1, 2003, Kroll adopted SFAS No. 145, "Rescission of FASB
Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." This statement eliminates the classification of gains or losses on
the extinguishment of debt as an extraordinary item and requires that such gains
or losses be evaluated for extraordinary classification under the criteria of
APB No. 30 "Reporting Results of Operations". In addition, any prior period
extraordinary items that do not meet the criteria of APB No. 30 will be required
to be reclassified to continuing operations. This statement also requires
sales-leaseback accounting for certain modifications that have economic effects
that are similar to sales-leaseback transactions, and makes various other
technical corrections to existing pronouncements.

On January 1, 2003, Kroll adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 supersedes EITF Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and requires that costs associated with an exit or disposal plan
be recognized when incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123". SFAS No. 148 amends SFAS Nos. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this

28


statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used in reporting results. Management complied with the additional
disclosure requirements effective from December 31, 2002.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements Nos.
5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45"). FIN
No. 45 requires that upon issuance of a guarantee, an entity must recognize a
liability for the fair value of the obligation it assumes under that obligation.
This interpretation is intended to improve the comparability of financial
reporting by requiring identical accounting for guarantees issued with
separately identified consideration and guarantees issued without separately
identified consideration. For Kroll, the initial recognition and measurement
provisions of FIN No. 45 applicable to guarantees issued or modified after
December 31, 2002 did not have an impact on its consolidated results of
operations or financial condition. Kroll adopted the additional disclosure
provisions of FIN No. 45 effective December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities ("FIN No. 46"). In general, a variable
interest entity is a corporation, partnership, trust, or any other legal
structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. A
variable interest entity often holds financial assets, including loans or
receivables, real estate or other property. A variable interest entity may be
essentially passive or it may engage in research and development or other
activities on behalf of another company. The objective of FIN No. 46 is not to
restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, a
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN No. 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The consolidation requirements of FIN No. 46
apply immediately to variable interest entities created after January 31, 2003
and the first fiscal year or interim period beginning after June 15, 2003 for
older entities. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. Kroll adopted the additional disclosure
provisions of FIN No. 46 effective December 31, 2002 and the consolidation
requirements of FIN No. 46 to variable interest entities created after January
31, 2003. As Kroll does not utilize variable interest entities, the adoption of
FIN No. 46 did not have a material effect on its consolidated results of
operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." In general, SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. Kroll does not expect the adoption of SFAS No.
149 to have a material effect on its consolidated results of operations or
financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement of mandatorily
redeemable financial instruments, obligations to repurchase the issuer's equity
shares by transferring assets and certain obligations to issue a variable number
of shares. SFAS No. 150 is effective on July 1, 2003 for financial instruments
created or modified after May 31, 2003. Kroll does not expect the adoption of
SFAS No. 150 to have a material effect on its consolidated results of operations
or financial position.

29



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Kroll's carrying values of cash, accounts receivable, accounts payable and
accrued expenses are a reasonable approximation of their fair value. Kroll's
carrying value of its long-term debt is below its fair value as the conversion
price of the Company's 6% Convertible Notes is below the current market price of
its common stock.

Kroll's business 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.



30



ITEM 4. CONTROLS AND PROCEDURES

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

(b) Internal Control Over Financial Reporting. There have not been any changes
in Kroll's internal controls over financial reporting (as such term is
defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during
the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, Kroll's internal
control over financial reporting.




31



PART II. OTHER INFORMATION

item 1. legal proceedings

For information on litigation, please see Kroll's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003.

In addition to the matters referred to in Kroll's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003, Kroll is involved in litigation from
time to time in the ordinary course of its business; however, Kroll does not
believe that there is any currently pending litigation, individually or in the
aggregate, that is likely to have a material adverse effect on its business,
financial position, results of operations or cash flows.




32



Item 2. Changes in Securities and Use of Proceeds

Kroll's revolving credit facility described Under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" includes negative
and financial covenants which, among other things, prohibit the payment of cash
dividends by the Company except in certain limited circumstances, require the
Company to maintain a minimum level of EBITDA, net income and domestic assets
and meet leverage and net worth ratios.




33



Item 4. Submission of matters to a vote of security holders

On June 3, 2003, Kroll held its Annual Meeting of Stockholders. The
following is a brief description of each matter voted upon at the meeting and
the number of votes cast for, against or withheld and the number of abstentions
with respect to each matter.

The three nominees proposed to serve as Class I directors were elected to
new, three-year terms by the following vote:

- -------------------------------------------------------------------------------
Votes Cast Against
Nominees Votes Cast For or Withheld
- -------------------------------------------------------------------------------
Peter A. Cohen 34,180,616 2,480,052
- -------------------------------------------------------------------------------
Thomas E. Constance 22,766,676 13,893,992
- -------------------------------------------------------------------------------
Michael D. Shmerling 34,109,603 2,551,065
- -------------------------------------------------------------------------------

The one nominee proposed to serve as a Class II director was elected to a
new, one-year term by the following vote:

- -------------------------------------------------------------------------------
Votes Cast Against
Nominee Votes Cast For or Withheld
- -------------------------------------------------------------------------------
Simon V. Freakley 34,108,900 2,551,768
- -------------------------------------------------------------------------------

The Stockholders approved the Kroll Inc. Stock Incentive Plan: Shares
voted for: 31,404,807; Shares voted against: 5,204,021; Shares abstaining:
51,839; Broker Non-Votes: 1.

The Stockholders ratified the appointment of Deloitte & Touche LLP as
independent public accountants for Kroll for the fiscal year ending December
31, 2003: Shares voted for: 33,459,256; Shares voted against: 3,176,994;
Shares abstaining: 24,418.



34



Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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


31.1 Certification of Kroll's Chief Executive Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Kroll's Chief Financial Officer, as required by
Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Kroll's Chief Executive Officer, as required by
Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Kroll's Chief Financial Officer, as required by
Section 906 of the Sarbanes-Oxley Act of 2002.



(b) Reports on Form 8-K:

During the three months ended June 30, 2003, Kroll filed the following current
reports on Form 8-K:

Date of report: May 1, 2003 (filed on May 1, 2003); Items 5, 7 and 9.

June 18, 2003 (filed on June 19, 2003); Item 5.

June 23, 2003 (filed on June 30, 2003); Items 5 and 7.





35



SIGNATURES

Pursuant to the requirements 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 13th day of August, 2003.

Kroll Inc.

By: /s/ Steven L. Ford
-------------------------------
Steven L. Ford
Executive Vice President and Chief
Financial Officer



36