UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

COMMISSION FILE NUMBER: 000-21629

KROLL INC.

(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 40,052,403 shares as of April 30, 2004.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KROLL INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(In thousands)

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

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KROLL INC.

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

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KROLL INC.

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

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KROLL INC.

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

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KROLL INC.

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. Effective January 1, 2004, Kroll’s Security Services segment was integrated into its Consulting Services segment, reducing the number of business groups to four. These four business groups enable Kroll to provide its clients with comprehensive, single source, risk consulting services as follows: (1) Consulting Services, which provides business and financial investigations, forensic accounting, business valuation, litigation consulting, due diligence, litigation intelligence, asset tracing and analysis, monitoring and special inquiries, market intelligence, intellectual property and infringement investigations, security architecture and design, corporate security consulting, emergency management and environmental services and protective services, operations and training; (2) Corporate Advisory and Restructuring Services, which provides corporate restructuring, operational turnaround, strategic advisory services, financial crisis management and corporate finance services; (3) Background Screening Services, which provides employee and vendor background investigations, credit screening, substance abuse testing and identity fraud solutions and (4) Technology Services, which provides electronic discovery, data recovery and computer forensics services, along with related software solutions.

2.

Basis of Presentation

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

     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 months ended March 31, 2004 and 2003 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 judgment 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 statements and notes thereto included in Kroll’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

3.

Stock-Based Compensation

     As permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123,” Kroll accounts for the cost of its employee stock options and other forms of employee stock-based compensation plans utilizing the intrinsic value

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method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. Under this method, compensation expense is recognized based on the difference, if any, between the fair market value of the stock option award on the date of grant and the option exercise price. SFAS No. 123 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. 148 allows an entity to continue to measure compensation cost using the principles of APB Opinion No. 25 only if certain pro forma disclosures are made which are included below. With respect to restricted stock awards, the market value at date of grant of the shares of restricted stock issued is recorded as compensation expense over the period of restriction.

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

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

     Diluted net income per share amounts for the three months ended March 31, 2004 reflect the impact of adding back interest expense, net of tax, or $828,000, on Kroll’s $30 million 6% Senior Subordinated Convertible Notes due 2006 since such securities were dilutive for the period.

     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:

4.

Earnings per Share

     Pursuant to the provisions of SFAS No. 128, “Earnings per Share,” basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, excluding non-vested restricted stock. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the

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period. Common stock equivalents represent shares issuable upon the assumed exercise of stock options and warrants and the assumed vesting of restricted stock, shares issuable under contingent stock agreements and shares issuable upon potential conversion of convertible debt securities.

     Basic and diluted earnings per share were as follows:

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

     At March 31, 2004, there were 274,300 options outstanding to purchase an equivalent number of shares of common stock of Kroll at a range of $26.29 to $26.94 per option that were not included in the shares in the above table because the options’ exercise prices were greater than the average market price of the common shares. Also excluded from the above table for the three months ended March 31, 2004 is the potential conversion of Kroll’s $175 million 1.75% Convertible Subordinated Notes due 2014 into 4,991,087 shares of common stock, as the conditions for their conversion were not satisfied (see Note 9). In addition, diluted net income per share amounts for the three months ended March 31, 2004 reflect the impact of adding back interest expense, net of tax, or $828,000, on Kroll’s $30 million 6% Senior Subordinated Convertible Notes due 2006 since such securities were dilutive for the period.

     At March 31, 2003, there were 8,719 warrants and 1,675,441 options outstanding to purchase an equivalent number of shares of common stock of Kroll at $25.69 per warrant and a range of $19.21 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. The warrants expired during the second quarter of 2003. Also excluded from the above table for the three months ended March 31, 2003 is the potential conversion of Kroll’s $30.0 million 6% Senior Subordinated Convertible Notes due 2006 into 2,777,777 shares of Kroll common stock, as it was determined that such conversion would have an anti-dilutive effect on the earnings per share calculation.

5.

Acquisitions and Other Investments

     On February 5, 2004, Kroll acquired AIR Credit Reporting, Inc. (“AIR Credit”), a mortgage credit reporting company, for a purchase price of $1.3 million in cash. In addition, Kroll issued a note for $0.9 million, which accrues interest at 6% per year and is payable over three years. The results of operations of AIR Credit are included within the Background Screening Services Group subsequent to the date of acquisition.

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     On March 2, 2004, Kroll acquired The Credit Network Trust, a mortgage credit reporting company, for a purchase price of $19.0 million in cash. In addition, $1.5 million is to be paid in annual installments of $500,000 over the next three years to the extent aggregate gross revenue is in excess of a predetermined amount. The results of operations of The Credit Network Trust are included within the Background Screening Services Group subsequent to the date of acquisition.

     In connection with the above acquisitions, the amount assigned to amortizable and non-amortizable intangible assets consisted of the following:

     The goodwill recorded by Kroll above is deductible for federal income tax purposes. In addition, any adjustments to the fair value of amortizable intangible assets or other identifiable net assets recorded would result in an adjustment to the amount of goodwill recorded.

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

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

6.

Discontinued Operations

     On June 18, 2003, Kroll sold its video surveillance subsidiary, InPhoto Surveillance Inc. (“InPhoto”), which was part of Kroll’s Background Screening Services segment.

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

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

7.

Restructuring Charge

     During 2003, Kroll recorded restructuring expenses of $6.2 million in connection with the closure of 10 non-hub offices worldwide and the elimination of 102 employees (the “2003 Plan”). The 2003 Plan was undertaken to reduce costs and improve operating efficiencies. Approximately $4.2 million of the 2003 Plan represents severance and related benefits. The remaining $2.0 million relates primarily to lease rental payments, net of sublease income, associated with the elimination of offices. The total cash portion of the 2003 Plan is $5.8 million, of which $4.2 million relates to employee severance costs, $1.2 million relates to lease rental payments and $0.4 million relates to other exit costs. The breakdown was $4.9 million, $0.8 million, $0.3 million and $0.2 million within Consulting Services, Corporate Advisory and Restructuring Services, Background Screening Services and Corporate, respectively.

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

     The 2003 Plan was substantially completed during the first quarter of 2004. Liabilities associated with these initiatives are classified as a component of other accrued liabilities.

     During 2001, Kroll recorded a $2.7 million restructuring charge (the “2001 Plan”) in connection with the closure of four offices and the elimination of 98 employees. The 2001 Plan was substantially completed by the end of 2001. During 2003, the accrued balance related to the 2001 Plan was reduced by $0.4 million as a result of a change in the original estimate of costs to be incurred. Total payments and write-offs from inception of the 2001 Plan through March 31, 2004 were $2.1 million. The remaining accrued balance of $0.2 million represents severance and lease termination costs.

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8. Intangible Assets

     Intangible assets consisted of the following (in thousands):

     Evergreen contracts were recorded as part of Kroll’s acquisition of Factual Data Corp. on August 21, 2003 and consist of contracts with Fannie Mae and Freddie Mac for which a useful life is indeterminate.

     Amortization of other intangible assets for the three months ended March 31, 2004 and 2003 was $3.1 million and $1.2 million, respectively. Approximately $54.0 million of amortization expense is anticipated to be recognized over the next five years as follows: $12.0 million in 2005, $11.4 million in 2006, $11.0 million in 2007, $10.6 million 2008 and $9.0 million in 2009.

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

     During the three months ended March 31, 2004, goodwill increased by $4.1 million primarily due to the acquisitions of The Credit Network Trust ($3.7 million) and AIR Credit ($0.4 million). Other adjustments reflect currency fluctuations from Kroll’s foreign operations of approximately $18,000 included in “Accumulated other comprehensive income” on the Consolidated Condensed Balance Sheet.

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9.

Debt

     Revolving Lines of Credit

     On March 6, 2003, Kroll executed an agreement 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.

     Borrowings under the Fleet revolving credit facility will bear interest, at Kroll’s election, at a rate per annum equal to (1) the prime rate of Fleet or (2) LIBOR plus 2.00%. During the term of the Fleet revolving credit facility, Kroll will pay Fleet a quarterly fee equal to 0.375% per annum of the unused portion of the line of credit. The Fleet revolving credit facility requires Kroll to maintain a minimum level of EBITDA and net income, contains maximum leverage and liabilities requirements and contains restrictions on the incurrence of additional debt, the creation of any liens, the payment of cash dividends, certain acquisitions and distributions to certain subsidiaries. The Fleet revolving credit facility also contains other affirmative and negative covenants and events of default customarily contained in agreements of this type. There have been no borrowings made under this facility. At March 31, 2004, Kroll was in compliance with all covenants and provisions of this facility.

     In addition, a UK subsidiary of Kroll maintains a demand note facility. The demand note bears interest at the Bank of England’s base rate plus 1.5%. During 2003, maximum borrowings permitted under the demand note decreased from 4.4 million pounds sterling to 4.0 million pounds sterling, or $7.1 million, as translated at December 31, 2003. During the three months ended March 31, 2004, maximum borrowings permitted under the demand note decreased to 2.5 million pounds sterling, or $4.9 million, as translated at March 31, 2004. There were no borrowings outstanding under this demand note at March 31, 2004, a decrease of $2.2 million from the amount outstanding at December 31, 2003 due to repayments made during the three months ended March 31, 2004. The interest rate at March 31, 2004 was 5.5%.

     Convertible Senior Subordinated Notes

     During 2001, Kroll obtained additional financing of $30.0 million in the form of 6% Senior Subordinated Convertible Notes due 2006, as amended (“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 debt 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. The discount is being amortized as non-cash interest expense over the 5-year life of the notes in addition to the stated 6% interest. The amount of non-cash interest expense resulting from this discount amortization for the three months ended March 31, 2004 and 2003 was $0.5 million and $0.4 million, respectively. Kroll currently intends to redeem the 6% Convertible Notes in November 2004.

     Convertible Subordinated Notes

     On January 2, 2004, Kroll issued $175.0 million aggregate principal amount of 1.75% Convertible Subordinated Notes due January 2014 (“1.75% Convertible Notes”). Kroll will pay interest on the notes on

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January 15 and July 15 of each year, beginning on July 15, 2004. The interest rate is subject to upward adjustment during certain periods and under certain circumstances.

     The notes may be converted into shares of Kroll common stock initially at a conversion rate of 28.5205 shares of common stock per $1,000 principal amount of notes, or 4,991,087 shares, which is equivalent to an initial conversion price of approximately $35.06 per share (subject to adjustment in certain events), under the following circumstances: (1) during specified periods, if the closing sale price of Kroll’s common stock reaches, or the trading price of the notes falls below, specified levels, (2) Kroll calls the notes for redemption, (3) during any period in which the credit ratings assigned to the notes by Moody’s and S&P are below specified levels or are suspended or withdrawn by both rating agencies or (4) specified corporate transactions occur.

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

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

     Kroll is required to mark to market an embedded interest rate derivative instrument contained within the convertible notes. Any increase or decrease in the fair value of the derivative instrument is recorded as an adjustment to interest expense in Kroll’s Consolidated Statement of Income. There was no value related to this derivative instrument at March 31, 2004.

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

     Other Long-term Debt

     Other long-term debt at March 31, 2004 consists of $7.5 million (including current portion) of Kroll Factual Data debt as follows: $3.0 million of notes issued in connection with acquisitions, $4.3 million of capitalized service license agreements for consumer credit reporting services and $0.2 million related to capitalized lease obligations for office furniture and fixtures and computer equipment and software.

     The $3.0 million of notes payable bears interest at different rates ranging from 5% to 12% per annum and matures at different times from May 2004 through November 2008.

     The capitalized service license agreements for consumer credit reporting services have an initial term of ten years and continue for successive one-year periods unless either party delivers a written notice of intent not to

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renew the agreement at least six months before the end of the initial ten-year term or any one-year renewal period. These agreements expire in April and November 2010 and January 2011 and are payable over a five-year term.

     The $0.2 million of capitalized lease obligations have interest rates ranging from 8.47% to 10.43% and expire June 2005.

10.

Commitments and Contingencies

     Legal Matters

     Kroll Lindquist Avey Co. (formerly Lindquist Avey Macdonald & Baskerville (“LAMB”)), a subsidiary of Kroll, and several of its principals have been named as third-party defendants in a lawsuit filed in the Ontario Superior Court of Justice by HSBC Securities (Canada) Inc., formerly Gordon Capital, an investment dealer (“HSBC”). HSBC filed the underlying suit against Gordon Capital’s former law firm, Davies, Ward & Beck, (“DW&B”) seeking damages in the amount of approximately $40,000,000 (Cdn.). HSBC alleges DW&B negligently advised Gordon Capital during 1991 through 1993 with respect to its rights concerning trading losses and irregularities by a client account manager and various insurance bonds relating to such losses and irregularities. HSBC further alleges various suits and declaratory judgment actions involving the insurers were filed in 1993 and that summary judgment granted in favor of the insurers in 1996 was affirmed on appeal to the Supreme Court of Canada on the basis that the limitation period under the bonds had expired without an action being commenced for recovery of Gordon Capital’s losses. Gordon Capital, DW&B and LAMB entered into various tolling agreements until the matters pending with the insurers were exhausted. In April 2000, HSBC filed suit against DW&B. In July 2001, DW&B filed a third-party claim against LAMB and certain principals for contribution and indemnity. An amended third-party claim was filed in September 2001. The third-party claim alleges DW&B retained LAMB in June 1991 to examine the trading irregularities and to advise Gordon Capital in respect of its dealings with its insurers and that LAMB acted negligently in carrying out these services. Third party claims have also been filed against some entities formerly known as Peat Marwick Thorne, Gordon Capital’s alleged former auditors, and AON Reed Stenhouse, Inc., Gordon Capital’s alleged former insurance broker. The parties attended mediation in December 2002 and October 2003. Representatives of LAMB attended but did not participate. LAMB is being defended by its former carrier, the Reliance Insurance Company. Reliance is in liquidation, and while paying all defense costs, has advised that any claim for damages or settlement greater than $25,000 (Cdn.) will be a claim in the liquidation, on which distributions will be made as the liquidation progresses. A hearing on the parties’ motions for summary judgment originally scheduled for January 2004 was postponed while DW&B seeks to examine a former employee of Gordon Capital with respect to the motions for summary judgment. A trial date has been scheduled for September 2006. Management of Kroll believes LAMB has meritorious defenses to the claims and intends to defend the claims vigorously.

     On June 27, 2003, a shareholder of Factual Data filed a lawsuit against Factual Data and its directors in the District Court for the County of Larimer, Colorado, styled Troxler v. Factual Data Corporation [sic], Jerald H. Donnan, Todd A. Neiberger, Robert J. Terry, J. Barton Goodwin, Daniel G. Helle, Abdul H. Rajput and James N. Donnan. On August 1, 2003, the plaintiff filed an amended complaint. In the amended complaint, the plaintiff alleges, among other things, that the individual defendants engaged in self-dealing in connection with the negotiation and approval of the merger agreement and the merger. The plaintiff also claims the individual defendants obtained benefits not shared by the plaintiff, and that they breached their fiduciary duties of care, loyalty, candor and independence owed under Colorado law to Factual Data’s public shareholders. The plaintiff seeks certification of the case as a class action. The plaintiff requests damages, certain equitable relief, attorneys’ fees and costs and an order rescinding the merger. On August 12, 2003, Factual Data moved to dismiss the plaintiff’s amended complaint. On September 15, 2003, the plaintiff filed a response to Factual Data’s motion to dismiss. On September 26, 2003, Factual Data filed an amended reply in support of its motion to dismiss the first amended complaint. On December 9, 2003, the court denied Factual Data’s motion to dismiss the amended

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complaint. The parties have not engaged in any discovery to date. Kroll and Factual Data believe that the allegations in the amended complaint are without merit and will defend the suit vigorously.

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

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

11.

Stockholders’ Equity

     During the three months ended March 31, 2004, Kroll repurchased 2,527,477 shares of its common stock pursuant to a repurchase plan approved by Kroll’s Board of Directors in December 2003. Of this amount, approximately 2.0 million shares were repurchased on January 2, 2004 concurrently with the completion of the offering of the 1.75% Convertible Subordinated Notes (see Note 9). As of March 31, 2004, Kroll had repurchased an aggregate of approximately 2.78 million shares of its common stock for approximately $70.8 million, resulting in the completion of its repurchase plan.

     On March 15, 2004, Kroll issued 625,000 additional shares of its common stock, valued at approximately $16.3 million, to the former owners of Zolfo Cooper LLC as a result of Kroll Zolfo Cooper’s operating profit for 2003 exceeding the targeted level for that year pursuant to the contingent consideration provisions of the acquisition agreement entered into during 2002, as amended. These shares appeared on the December 31, 2003 Consolidated Condensed Balance Sheet under the caption “Common shares to be issued for acquisition.”

12.

Supplemental Cash Flows Disclosures

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

     For the three months ended March 31, 2004, cash paid for taxes reflects tax savings of approximately $1.0 million. These tax savings result from the amortization of goodwill, for tax purposes, in connection with Kroll’s acquisition of Zolfo Cooper in 2002.

13.

Customer and Segment Data

     As previously discussed, Kroll’s Security Services segment was integrated into the Consulting Services segment effective January 1, 2004 and the segment data for the period ended March 31, 2003 has been restated to conform to current period presentation. Kroll’s reportable operating segments include the following four

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business segments: Consulting Services, Corporate Advisory and Restructuring Services, Background Screening Services and Technology 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 Consulting Services segment includes revenues and expenses from business and financial investigations, forensic accounting, business valuation, litigation consulting, due diligence, litigation intelligence, asset tracing and analysis, monitoring and special inquiries, marketing intelligence, intellectual property and infringement investigations, security architecture and design, corporate security consulting, emergency management and environmental services and protective services, operations and training.

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

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

     The following summarizes information about Kroll’s business segments as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 (in thousands):

     Total net sales by segment include sales to unaffiliated customers. Inter-segment sales are not material. Operating income is 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 costs of Kroll’s corporate headquarters and other centralized administrative costs. Identifiable assets by segment are those assets that are used in Kroll’s operations in each segment. Corporate assets are principally cash, computer software and certain prepaid expenses.

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14.

Subsequent Events

     Quality Credit Corporation

     On April 7, 2004, Kroll acquired Quality Credit Corporation, a mortgage credit reporting company, for a purchase price of $1.2 million in cash. In addition, Kroll issued a note for $1.0 million, which accrues interest at 6% per year and is payable over three years. The results of operations of Quality Credit Corporation will be included within the Background Screening Services Group subsequent to the date of acquisition.

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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 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, estimated, expected, intended 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, 2003.

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. Effective January 1, 2004, Kroll’s Security Services segment was integrated into its Consulting Services segment, reducing the number of business groups to four. These business groups enable Kroll to provide its clients with comprehensive, single source, risk consulting services as follows: (1) Consulting Services, which provides business and financial investigations, forensic accounting, business valuation, litigation consulting, due diligence, litigation intelligence, asset tracing and analysis, monitoring and special inquiries, market intelligence, intellectual property and infringement investigations, security architecture and design, corporate security consulting, emergency management and environmental services and protective services, operations and training; (2) Corporate Advisory and Restructuring Services, which provides corporate restructuring, operational turnaround, strategic advisory services, financial crisis management and corporate finance services; (3) Background Screening Services, which provides employee and vendor background investigations, credit screening, substance abuse testing and identity fraud solutions and (4) Technology Services, which provides electronic discovery, data recovery and computer forensics services, along with related software solutions.

Overview

     Kroll continued to experience strong operating results in the first quarter of 2004. Net sales in the first quarter of 2004 were $165.3 million, an increase of 59.7% from the first quarter of 2003. Each of Kroll’s consulting services, background screening services and technology services segments had increases in net sales, primarily as a result of an improving US economy. An increase in mergers and acquisitions activity has led to increased demand for many of Kroll’s consulting services. In addition, the demand for Kroll’s background screening services has increased as a result of improvements in employment, increased employment screening for security reasons, additional government screening contracts and continued low mortgage interest rates. Net sales

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for the corporate advisory and restructuring segment declined, primarily attributable to a decline in Kroll’s Domestic restructuring business. However, Kroll expects its domestic restructuring business in 2004 to perform consistently with 2003.

     Gross margin for the first quarter of 2004, as a percentage of net sales, was 47.3%, a decrease of 5.5 percentage points from the first quarter of 2003, primarily as a result of the declines in the higher margin restructuring business, increased costs for the technology services segment as Kroll made additional investments to support the growth of its electronic evidence business and lower margins in Kroll’s new security services contracts for Iraq. Kroll’s cost of sales increased by 78.4%, primarily as a result of the inclusion of the expenses of Kroll Factual Data Corp. and Kroll Ontrack Legal Technologies Limited (“OLT”), the additional investment in technology services and the start-up costs of the new Iraq security services contracts.

     Income from continuing operations in the first quarter of 2004 was $14.7 million, an increase of 29.8% from the first quarter of 2003.

     Effective January 1, 2004, Kroll combined its security services segment with its consulting services segment. As a result of this integration, Kroll has been able to realign and refocus its security services. In the first quarter of 2004, Kroll experienced increased demand within its Consulting Services segment, due in part by packaging certain security and intelligence services for high-risk markets such as the Middle East and Latin America. Kroll expects continued growth for its integrated consulting services segment as a result of increased security related to terrorism, an improving economy and a trend in which major corporations are seeking a single global service provider for both security and investigative needs.

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, 2003. Some of Kroll’s accounting policies require the application of significant judgment by management in the preparation of the financial statements, and as a result, they are subject to a greater degree of uncertainty. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Kroll has identified certain of its accounting policies as the ones that are most important to the portrayal of Kroll’s financial condition and results of operations and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Kroll’s critical accounting policies include the following:

Revenue Recognition

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

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     Accounting for Intangible and Long-lived Assets

     In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Kroll conducts annual impairment tests of goodwill and indefinite-lived intangible assets recorded on its books in order to determine if any impairment of value may have taken place. Impairment tests will be conducted sooner if circumstances indicate that impairment may have occurred. At its annual evaluation of its goodwill and indefinite-lived intangible assets during the third quarter of 2003, Kroll determined that such assets were not impaired.

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

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

     Foreign Currency Translation and Transactions

     Assets and liabilities of Kroll’s foreign operations are translated using period-end exchange rates. 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 and are recorded within the statement of operations. Amounts receivable or payable in foreign currencies, other than the subsidiary’s local currency, are translated at the rates of exchange prevailing at the balance sheet date.

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Results of Operations

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

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Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

     Net Sales

     Net sales increased $61.8 million, or 59.7%, from $103.5 million in the first quarter of 2003 to $165.3 million in the first quarter of 2004.

     Consulting Services – Effective January 1, 2004, our Security Services segment was consolidated into our Consulting Services segment. Accordingly, prior period results have been restated to conform to the current year’s presentation. Net sales for the Consulting Services segment increased $26.5 million, or 73.6%, from $36.0 million in the first quarter of 2003 to $62.5 million in the first quarter of 2004, primarily due to increased demand in our core Consulting Services businesses in both the US and Europe. The US increase is primarily a result of the improving economy and increased mergers and acquisitions activity, including an increase in our litigation support and valuation practices resulting from cross marketing our different services to existing clients and the improving domestic economy. Our European practice increased 218%, primarily due to our new security services contracts providing protection in the Middle East, specifically Iraq. Revenues from these contracts were approximately $13 million in the first quarter of 2004.

     Corporate Advisory and Restructuring Services – Net sales for the Corporate Advisory and Restructuring (“CARG”) segment decreased $1.3 million, or 3.3%, from $39.4 million in the first quarter of 2003 to $38.1 million in the first quarter of 2004. This was primarily due to a 16.1% reduction in the domestic restructuring business resulting from fewer large restructuring assignments and increased competition for this work. In addition, there were $2.0 million in success fees recognized in the first quarter of 2004 compared to $3.5 million in the first quarter of 2003. This decrease was partially offset by a 45% increase in our European restructuring practice, which is engaging larger and longer-term assignments.

     Background Services Group – Net sales for the Background Services segment increased 260.6% from $11.2 million in the first quarter of 2003 to $40.3 million in the first quarter of 2004. This was primarily due to the inclusion of operations of Kroll Factual Data, which was acquired in August 2003. Excluding Kroll Factual Data, net sales for the Background Services segment grew 35%, primarily as a result of increased demand for our employment screening services, resulting from the improving employment environment and the growth in government screening, and the introduction of our new identity theft product.

     Technology Services Group – Net sales for the Technology Services segment increased 44.1% from $16.9 million in the first quarter of 2003 to $24.4 million in the first quarter of 2004. This increase resulted from strong demand for electronic evidence and data recovery services both domestically and in Europe, as well as the inclusion of operations of OLT, which was acquired in December 2003. Net sales of our electronic evidence services increased 104% from the first quarter of 2003, and net sales of our data recovery services increased 25% from the first quarter of 2003.

     Cost of Sales and Gross Profit

     Cost of sales increased $38.3 million, or 78.4%, from $48.8 million in the first quarter of 2003 to $87.1 million in the first quarter of 2004, primarily due to the inclusion of a full quarter of operations of Kroll Factual Data and OLT, which were acquired in August and December 2003, respectively. Cost of sales was also impacted by our continued investment in our Technology Services segment and the start-up costs of the Middle East security work being done from our London office.

     Gross margin as a percent of sales decreased 5.5 percentage points from 52.8% in the first quarter of 2003 to 47.3% in the first quarter of 2004. This reduction was due to lower margins in our Iraq contract work, including start-up costs, increased investment in equipment, personnel and physical space in our Technology Services segment and lower margins in our CARG segment due to lower sales and increased competition for domestic assignments.

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     Consulting Services – Gross margins for the Consulting Services segment decreased 0.9 percentage points from 38.5% in the first quarter of 2003 to 37.6% in the first quarter of 2004. This decrease is due to lower margins on approximately $13 million of Iraq security contract work and increased expenses to support the increase in net sales of our domestic litigation support and valuation services.

     Corporate Advisory and Restructuring Service – Gross margins for the Corporate Advisory and Restructuring segment decreased 7.6 percentage points from 59.5% in the first quarter of 2003 to 51.9% in the first quarter of 2004. This decrease is primarily due to the 16.1% reduction in net sales of the domestic CARG business, the $1.5 million decline in success fees in the first quarter of 2004 compared to the first quarter of 2003 and increases in personnel costs in our European operations to support its increase in net sales.

     Background Screening Services – Gross margins for the Background Screening segment increased 1.1 percentage points from 47.2% in the first quarter of 2003 to 48.3% in the first quarter of 2004. This increase is primarily due to the inclusion of Kroll Factual Data in 2004 results. Kroll Factual Data was acquired in August 2003 and had a strong quarter due to a continued high level of activity in the mortgage market.

     Technology Services – Gross margins for the Technology Services segment decreased 8.4 percentage points from 71.7% in the first quarter of 2003 to 63.3% in the first quarter of 2004. This decrease was primarily due to increased investment in equipment, personnel and physical space to support growth in the electronic evidence business. In addition, results for the first quarter of 2004 included a full quarter’s operations of OLT, which historically had lower margins than the electronic evidence and data recovery businesses.

     Operating Expenses

     Operating expenses increased $16.0 million, or 45.2%, from $35.4 million in the first quarter of 2003 to $51.4 million in the first quarter of 2004. The increase in selling, general and administrative expenses of $14.0 million is primarily due to the 59.7% increase in net sales and the inclusion of expenses from Kroll Factual Data and OLT, which were acquired in August and December 2003, respectively. The increase in amortization of other intangible assets of $20 million is primarily due to intangible assets acquired in connection with these acquisitions.

     General and administrative expenses as a percent of net sales decreased 3.8 percentage points from 23.3% in the first quarter of 2003 to 19.5% in the first quarter of 2004.

     During 2003, Kroll recorded restructuring expenses of $6.2 million in connection with its 2003 Plan, which involved the closure of 10 non-hub offices worldwide and the elimination of 102 employees. The 2003 Plan was undertaken to reduce costs and improve operating efficiencies. Approximately $4.2 million of the 2003 Plan represents severance and related benefits. The remaining $2.0 million relates primarily to lease rental payments, net of sublease income, associated with the elimination of offices. The total cash portion of the 2003 Plan is $5.8 million, of which $4.2 million relates to employee severance costs, $1.2 million relates to lease rental payments and $0.4 million relates to other exit costs. The breakdown was $4.9 million, $0.8 million, $0.3 million and $0.2 million within Consulting Services, Corporate Advisory and Restructuring Services, Background Screening Services and Corporate, respectively.

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

     The 2003 Plan was substantially completed in early 2004.

     During 2001, Kroll recorded a $2.7 million restructuring charge in connection with its 2001 Plan, which involved the closure of four offices and the elimination of 98 employees. The 2001 Plan was substantially completed by the end of 2001. During 2003, the accrued balance related to the 2001 Plan was reduced by $0.4 million as a result of a change in the original estimate of costs to be incurred. Total payments and write-offs from inception of the 2001 Plan through March 31, 2004 were $2.1 million. The remaining accrued balance of $0.2 million represents severance and lease termination costs.

     Interest Expense

     Interest expense increased $1.1 million, or 100%, from $1.1 million in the first quarter of 2003 to $2.2 million in the first quarter of 2004. This is primarily due to the interest and amortization of deferred financing costs relating to our $175 million 1.75% Convertible Notes, which were issued on January 2, 2004.

     Interest Income

     Interest income was essentially flat at $0.3 million and $0.2 million in the first quarter of 2004 and 2003, respectively.

     Other Income (Expense)

     Other income was $0.1 million in the first quarter of 2004 and $0.0 million in the first quarter of 2003.

     Provision for Income Taxes

     The provision for income taxes increased $3.1 million, or 44.1%, due to a 35.3% increase in pre-tax income. In addition, our tax rate increased 2.5 percentage points from 38.5% in the first quarter of 2003 to 41.0% in the first quarter of 2004. The rate increase is due to a greater proportion of our income being attributable to US based income in the first quarter of 2004, which is taxed at a higher rate than our foreign income.

     Income from Continuing Operations

     Income from continuing operations increased $3.4 million, or 29.8%, from $11.3 million in the first quarter of 2003 to $14.7 million in the first quarter of 2004 as a result of the above-discussed factors.

     Loss from Discontinued Operations

     Loss from discontinued operations of $0.1 million for the three months ended March 31, 2003 represents operating losses of InPhoto, which was sold on June 18, 2003.

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     Net Income

     Net income improved $3.4 million, or 30.4%, from $11.3 million in the first quarter of 2003 to $14.7 million in the first quarter of 2004 due to a $23.5 million increase in gross profit which was partially offset by a $16.0 million increase in operating expenses, a $1.1 million increase in interest expense and a $3.1 million increase in the tax provision.

Liquidity and Capital Resources

     General

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

Cash Flows

     Cash Flows from Operating Activities

     Cash provided by operating activities amounted to $0.5 million and $16.6 million during the three months ended March 31, 2004 and 2003, respectively. The $16.1 million decrease is primarily due to a higher proportion of net sales in March 2004, which resulted in higher than normal billed and unbilled receivables at March 31, 2004.

     Cash Flows Used in Investing Activities

     Kroll used $27.5 million and $9.0 million during the three months ended March 31, 2004 and 2003, respectively. The $18.5 million increase is primarily a result of higher acquisition expenditures in the 2004 period. In 2004, Kroll spent $19.0 million to acquire The Credit Network Trust and $1.3 million to acquire AIR Credit. In 2003, Kroll spent $3.3 million to acquire Certico Verification Services, LLC, $1.4 million to acquire Personnel Risk Management and $1.0 million to acquire Invex Partners Limited.

     In addition, expenditures for capital equipment totaled $7.5 million in the 2004 period, an increase of $5.6 million over the 2003 period, which totaled $1.9 million. The increase is primarily due to Kroll’s investments of $3.6 million in computer equipment and leasehold improvements in its Technology Services Group and $2.5 million for computer equipment and software in its Background Screening Services Group in the first quarter of 2004, compared with $1.2 million and $0.1 million, respectively, in the first quarter of 2003 for these business groups.

     Cash Flows from (Used in) Financing Activities

     Financing activities provided $102.4 million during the 2004 period and used $5.3 million during the 2003 period. In the first quarter of 2004, Kroll issued convertible notes in the amount of $175.0 million. Payments on debt and deferred financing fees incurred totaled $9.8 million, compared with $6.2 million in the first quarter of 2003. In addition, Kroll spent $64.3 million purchasing treasury stock and received $2.6 million from the exercise of employee stock options and contributions from its employee stock purchase plan during the 2004 period. In the first quarter of 2003, Kroll received $1.2 million from the exercise of employee stock options and contributions from its employee stock purchase plan.

     Revolving Lines of Credit

     On March 6, 2003, Kroll executed an agreement 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

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material domestic subsidiaries and 65% of the stock of certain of the foreign subsidiaries of Kroll and its domestic subsidiaries.

     Borrowings under the Fleet revolving credit facility will bear interest, at Kroll’s election, at a rate per annum equal to (1) the prime rate of Fleet or (2) LIBOR plus 2.00%. During the term of the Fleet revolving credit facility, Kroll will pay Fleet a quarterly fee equal to 0.375% per annum of the unused portion of the line of credit. The Fleet revolving credit facility requires Kroll to maintain a minimum level of EBITDA and net income, contains maximum leverage and liabilities requirements and contains restrictions on the incurrence of additional debt, the creation of any liens, the payment of cash dividends, certain acquisitions and distributions to certain subsidiaries. The Fleet revolving credit facility also contains other affirmative and negative covenants and events of default customarily contained in agreements of this type. There have been no borrowings made under this facility. At March 31, 2004, Kroll was in compliance with all covenants and provisions of this facility.

     In addition, a UK subsidiary of Kroll maintains a demand note facility. The demand note bears interest at the Bank of England’s base rate plus 1.5%. During 2003, maximum borrowings permitted under the demand note decreased from 4.4 million pounds sterling to 4.0 million pounds sterling, or $7.1 million, as translated at December 31, 2003. During the three months ended March 31, 2004, maximum borrowings permitted under the demand note decreased to 2.5 million pounds sterling, or $4.9 million, as translated at March 31, 2004. There were no borrowings outstanding under this demand note at March 31, 2004, a decrease of $2.2 million from the amount outstanding at December 31, 2003 due to repayments made during the three months ended March 31, 2004. The interest rate at March 31, 2004 was 5.5%.

     Convertible Senior Subordinated Notes

     The $30 million aggregate principal amount of 6% Convertible Notes mature November 14, 2006 and bear interest at the rate of 6% per annum payable semi-annually. However, 12% per annum will accrue on any principal payment that is past due. Kroll may redeem these convertible notes at par plus accrued interest, in whole or in part, beginning November 14, 2004, provided the note holders have been notified in writing 20 days in advance. The note holders may, at any time prior to one day before the earlier of the maturity date or the redemption date, convert all or a portion of the principal amount of the notes into Kroll common stock at the conversion price of $10.80 per share. The $30.0 million of notes are presently convertible into 2,777,777 shares of Kroll common stock, subject to customary and other anti-dilution adjustments.

     In connection with the issuance of the 6% Convertible Notes, Kroll recorded a debt 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. The discount is being amortized as non-cash interest expense over the 5-year life of the notes in addition to the stated 6% interest. The amount of non-cash interest expense resulting from this discount amortization for the three months ended March 31, 2004 and 2003 was $0.5 million and $0.5 million, respectively. Kroll currently intends to redeem the 6% Convertible Notes in November 2004.

     Convertible Subordinated Notes

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

     The notes may be converted into shares of Kroll common stock initially at a conversion rate of 28.5205 shares of common stock per $1,000 principal amount of notes, or 4,991,087 shares, which is equivalent to an initial conversion price of approximately $35.06 per share (subject to adjustment in certain events), under the following circumstances: (1) during specified periods, if the closing sale price of Kroll’s common stock reaches, or the trading price of the notes falls below, specified levels, (2) Kroll calls the notes for redemption, (3) during any period in which the credit ratings assigned to the notes by Moody’s and S&P are below specified levels or are suspended or withdrawn by both rating agencies or (4) specified corporate transactions occur.

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

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

     Kroll is required to mark to market an embedded interest rate derivative instrument contained within the convertible notes. Any increase or decrease in the fair value of the derivative instrument is recorded as an adjustment to interest expense in Kroll’s Consolidated Statement of Income. There was no value related to this derivative instrument at March 31, 2004.

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

     Other Long-term Debt

     Other long-term debt at March 31, 2004 consists of $7.5 million (including current portion) of Kroll Factual Data debt as follows: $3.0 million of notes issued in connection with acquisitions, $4.3 million of capitalized service license agreements for consumer credit reporting services and $0.2 million related to capitalized lease obligations for office furniture and fixtures and computer equipment and software.

     The $3.0 million of notes payable bears interest at different rates ranging from 5% to 12% per annum and matures at different times from May 2004 through November 2008.

     The capitalized service license agreements for consumer credit reporting services have an initial term of ten years and continue for successive one-year periods unless either party delivers a written notice of intent not to renew the agreement at least six months before the end of the initial ten-year term or any one-year renewal period. These agreements expire in April and November 2010 and January 2011 and are payable over a five-year term.

     The $0.2 million of capitalized lease obligations have interest rates ranging from 8.47% to 10.43% and expire June 2005.

     Stockholders’ Equity

     During the three months ended March 31, 2004, Kroll repurchased 2,527,477 shares of its common stock pursuant to a repurchase plan approved by Kroll’s Board of Directors in December 2003. Of this amount, approximately 2.0 million shares were repurchased on January 2, 2004 concurrently with the completion of the

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offering of the 1.75% Convertible Notes. As of March 31, 2004, Kroll had repurchased an aggregate of approximately 2.78 million shares of its common stock for approximately $70.8 million, resulting in the completion of its repurchase plan.

     On March 15, 2004, Kroll issued 625,000 additional shares of its common stock, valued at approximately $16.3 million, to the former owners of Zolfo Cooper, LLC as a result of Kroll Zolfo Cooper’s operating profit for 2003 exceeding the targeted level for that year pursuant to the contingent consideration provisions of the acquisition agreement entered into during 2002, as amended.

     Acquisitions

     On February 5, 2004, Kroll acquired AIR Credit, a mortgage credit reporting company, for a purchase price of $1.3 million in cash. In addition, Kroll issued a note for $0.9 million, which accrues interest at 6% per year and is payable over three years. The results of operations of AIR Credit are included within the Background Screening Services Group subsequent to the date of acquisition.

     On March 2, 2004, Kroll acquired The Credit Network Trust, a mortgage credit reporting company, for a purchase price of $19.0 million in cash. In addition, $1.5 million is to be paid in annual installments of $500,000 over the next three years to the extent aggregate gross revenue is in excess of a predetermined amount. The results of operations of The Credit Network Trust are included within the Background Screening Services Group subsequent to the date of acquisition.

     On April 7, 2004, Kroll acquired Quality Credit Corporation, a mortgage credit reporting company, for a purchase price of $1.2 million in cash. In addition, Kroll issued a note for $1.0 million, which accrues interest at 6% per year and is payable over three years. The results of operations of Quality Credit Corporation will be included within the Background Screening Services Group subsequent to the date of acquisition.

     Contractual Obligations

     Kroll’s contractual obligations were comprised of the following as of March 31, 2004 (dollars in thousands):

     Foreign Operations

     In addition to its U.S. facilities, Kroll has operations and assets in Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Iraq, Italy, Japan, Mexico, the Philippines, Russia, South Africa, Spain, Switzerland and the United Kingdom. Kroll also offers its services in other countries and seeks to increase its level of international business activity. Kroll’s international business exposes it to various risks. For a

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discussion of these risks, see the risk factors in Kroll’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

     Quarterly Fluctuations

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

     At March 31, 2004, the fair value of Kroll’s long-term debt exceeds the carrying amount of such debt due primarily to the intrinsic value of the conversion feature of the 6% Convertible Notes of approximately $45 million. The book carrying value of cash equivalents, other current assets and current liabilities approximates fair value due to the short-term nature of these items.

     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.

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ITEM 4. CONTROLS AND PROCEDURES

     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.

     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.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     For information on litigation, please see Note 10 of the Notes to Consolidated Condensed Financial Statements (Unaudited) included elsewhere in this Quarterly Report on Form 10-Q.

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ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Issuance of Securities

     On January 2, 2004, Kroll issued $175 million aggregate principal amount of 1.75% Convertible Subordinated Notes due 2014 in an offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. For a description of these notes, see Note 9 of the Notes to Consolidated Condensed Financial Statements (Unaudited).

     Issuer Purchases of Securities

     The following table describes purchases of Kroll common stock made by or on behalf of Kroll or any affiliated purchaser pursuant to the December 16, 2003 repurchase plan during the first quarter of 2004.

(1)		All of these shares were purchased in open-market transactions pursuant to a repurchase plan that was publicly announced on December 16, 2003. Under the repurchase plan, Kroll would repurchase up to 2.78 million shares of its common stock in connection with its anticipated offering of $175 million aggregate principal amount of 1.75% Convertible Subordinated Notes due 2014. No shares were purchased other than through a publicly announced plan or program.
(2)		Kroll does not intend to purchase any additional shares of its common stock under this repurchase plan and considers this repurchase plan to have been completed.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K:

     During the three months ended March 31, 2004, Kroll filed the following current report on Form 8-K:

Date of Report: February 12, 2004 (filed on February 12, 2004); Items 5 and 7.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 7th day of May 2004.

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

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