SECURITY ASSOCIATES INTERNATIONAL INC, DEFS14A, 2000-10-06

SECURITY ASSOCIATES INTERNATIONAL INC
DEFS14A, 2000-10-06
DETECTIVE, GUARD & ARMORED CAR SERVICES

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<PAGE> 1

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under Rule 14a-12

SECURITY ASSOCIATES INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.

(1) Title of each class of securities to which transaction applies:

COMMON STOCK, $0.001 PAR VALUE
SERIES B CONVERTIBLE PREFERRED STOCK, $10.00 PAR VALUE
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(2) Aggregate number of securities to which transaction applies:

2,500,000 SHARES OF COMMON STOCK
45,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK

OPTION TO PURCHASE 3,000,000 SHARES OF COMMON STOCK AT $5.00 PER SHARE

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):

THE FILING FEE WAS DETERMINED BASED UPON THE SUM OF: (A) THE 2,500,000 SHARES OF
COMMON STOCK, PAR VALUE $0.001 PER SHARE MULTIPLIED BY $2.56, WHICH IS THE
AVERAGE OF THE HIGH AND LOW PRICES REPORTED ON THE AMERICAN STOCK EXCHANGE ON
AUGUST 31, 2000 ($6,400,000), PLUS (B) THE COMMON STOCK EQUIVALENT VALUE OF
45,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK, PAR VALUE $10.00 PER
SHARE, PROPOSED TO BE ISSUED, WHICH IS CONVERTIBLE INTO 4,500,000 SHARES OF
COMMON STOCK ($11,520,000), PLUS (C) $5,000,000 IN CASH, AND (D) OPTIONS TO
PURCHASE UP TO 3,000,000 SHARES OF COMMON STOCK AT $5.00 PER SHARE, WHICH ARE
OUT OF THE MONEY AND TO WHICH NO VALUE HAS BEEN ASCRIBED, FOR A TOTAL OF
$22,920,000 ("TOTAL CONSIDERATION").

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(4) Proposed maximum aggregate value of transaction:

$22,920,000

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(5) Total fee paid:

$4,584

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[X] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

--------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:

--------------------------------------------------------------------------------
(3) Filing Party:

--------------------------------------------------------------------------------
(4) Date Filed:

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SECURITY ASSOCIATES INTERNATIONAL, INC.
2101 SOUTH ARLINGTON HEIGHTS ROAD, SUITE 100
ARLINGTON HEIGHTS, ILLINOIS 60005
(847) 956-8650

October 6, 2000

Dear Stockholder:

It is my pleasure to invite you to a special meeting of the stockholders of
Security Associates International, Inc. The special meeting will be held at
10:00 a.m., central time, on November 17, 2000, at the Sheraton Suites located
at 121 Northwest Point Boulevard, Elk Grove Village, Illinois.

The accompanying Notice of Special Meeting of Stockholders and proxy
statement describe the matters that will be discussed at the special meeting. It
is important that you vote your shares whether or not you plan to attend the
meeting. To be sure your vote is counted, we urge you to review the proxy
statement carefully and COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD
IN THE ACCOMPANYING ENVELOPE AS SOON AS POSSIBLE. If you attend the meeting and
wish to vote in person, the ballot that you submit at the meeting will supersede
your proxy.

You may also obtain information about our company from publicly available
documents that we have filed with the Securities and Exchange Commission.

I look forward to seeing you at the special meeting. On behalf of the
management and directors of Security Associates International, Inc., I thank you
in advance for your continued support and confidence.

Sincerely,

/s/ RONALD I. DAVIS

------------------------------------
Ronald I. Davis
Chairman of the Board
<PAGE> 3

NOTICE OF SPECIAL MEETING

(TO BE HELD ON NOVEMBER 17, 2000)

TO THE STOCKHOLDERS OF SECURITY ASSOCIATES INTERNATIONAL, INC.:

A special meeting of our stockholders will be held at 10 a.m., central
time, on November 17, 2000, at the Sheraton Suites located at 121 Northwest
Point Boulevard, Elk Grove Village, Illinois. All of our stockholders are
entitled and encouraged to attend this meeting. The board of directors has set
the following agenda:

(1) To approve:

- the issuance of up to 45,000 shares of our Series B convertible
preferred stock, which are convertible into up to 4.5 million
shares of our common stock, to KC Acquisition Corp.'s stockholders
in connection with the proposed merger with our company; and

- the issuance of 2.5 million shares of our common stock and an
option to purchase up to 3.0 million shares of our common stock to
SecurityVillage.com, Inc. in connection with transactions required
to be completed at the time of the proposed merger of our company
and KC Acquisition Corp.; and

(2) To transact any other business as may properly come before the
meeting or any adjournment or postponement thereof.

The proposed merger and related transactions are described in detail in the
accompanying proxy statement and its exhibits. Please read all of these
materials carefully.

OUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER OF KC ACQUISITION
CORP. AND SECURITY ASSOCIATES AND THE RELATED TRANSACTIONS ARE FAIR TO AND IN
THE BEST INTERESTS OF OUR COMPANY AND OUR STOCKHOLDERS. ACCORDINGLY, THE BOARD
HAS UNANIMOUSLY APPROVED THE MERGER AND RELATED TRANSACTIONS AND RECOMMENDS THAT
YOU VOTE IN FAVOR OF THE ISSUANCE OF THE SECURITIES IN CONNECTION WITH THE
MERGER AND RELATED TRANSACTIONS.

Owners of our common stock and Series A convertible preferred stock
appearing on our stock register at the close of business on October 2, 2000 (the
date fixed by our board of directors, and known as the "record date"), are
entitled to receive notice of the special meeting and to vote in person or by
proxy. For ten days before the meeting, we will keep a list with the names,
addresses, and holdings of the stockholders entitled to vote at the meeting
available at our home office, and at the offices of our transfer agent, LaSalle
National Bank, located at 135 South LaSalle Street, Chicago, Illinois 60628. Any
stockholder may inspect the list during normal business hours. The list will
also be available for inspection at the meeting.

In order to be certain that enough votes are present to conduct business at
the meeting, we urge all stockholders who cannot attend to complete, sign, date
and return the enclosed proxy card in the envelope provided, as soon as
possible. Any stockholder has the right to revoke their proxy at any time before
it is voted. If you attend the meeting in person and wish to revoke your proxy,
you may do so at that time. In that event, your proxy will be cancelled and you
will be able to cast your vote in person.

By Order of the Board of Directors:

/s/ JAMES S. BRANNEN

------------------------------------
James S. Brannen
President and CEO

Arlington Heights, Illinois

October 6, 2000

PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD TODAY.
<PAGE> 4

SECURITY ASSOCIATES INTERNATIONAL, INC.
2101 SOUTH ARLINGTON HEIGHTS ROAD, SUITE 100
ARLINGTON HEIGHTS, ILLINOIS 60005

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

PROXY STATEMENT

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

This proxy statement is being furnished to the holders of our common stock
and Series A convertible preferred stock in connection with the solicitation of
proxies by our board of directors for use at a special meeting of our
stockholders to be held on November 17, 2000, at 10:00 a.m., central time, at
the Sheraton Suites located at 121 Northwest Point Boulevard, Elk Grove Village,
Illinois, for the purpose of voting on the following matters:

(1) To approve:

(2) To transact any other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.

Our board of directors, the board of directors of our subsidiary created
specifically to accomplish the merger, King Acquisition Corp., and the board of
directors of KC Acquisition have agreed to the merger of King Acquisition with
KC Acquisition in a transaction designed to create one of the leading providers
of security alarm monitoring services for residences and businesses. Pursuant to
the merger agreement, we will be required to pay to the stockholders of KC
Acquisition up to an aggregate of $5.0 million in cash and to issue to the
stockholders of KC Acquisition up to an aggregate of 45,000 shares of our Series
B convertible preferred stock, which are convertible into up to an aggregate of
4.5 million shares of our common stock.

Concurrently and in connection with the proposed merger, our board of
directors has approved certain transactions with SecurityVillage.com involving
the issuance of our common stock and options to SecurityVillage.com. First, we
have agreed to sell 1.2 million shares of our common stock to
SecurityVillage.com for $6.0 million, most of which will be used to fund the
proposed merger with KC Acquisition. Second, we have agreed to issue to
SecurityVillage.com up to one million shares of our common stock as a fee for
its services in arranging our merger with KC Acquisition. Third, we have agreed
to issue to SecurityVillage.com 300,000 shares of our newly issued common stock
in exchange for a $1.5 million note of a subsidiary of KC Acquisition held by
SecurityVillage.com. Fourth, we have agreed to grant to SecurityVillage.com an
option, exercisable upon the closing of our proposed merger with
SecurityVillage.com, to purchase up to 3.0 million shares of our newly issued
common stock at an exercise price of $5.00 per share.

Under the American Stock Exchange rules, we cannot issue the securities
required to complete the proposed merger of King Acquisition and KC Acquisition
and related transactions unless our stockholders approve. The related Plan and
Agreement of Merger, as well as the transactions related to the proposed merger,
are described in detail in this proxy statement and its exhibits. Please read
all of the materials carefully. We encourage you to read the "Risk Factors"
section, which is attached hereto as Exhibit B.

We are mailing this proxy statement and the enclosed proxy card on behalf
of our board of directors, on or about October 6, 2000, to request your proxy
for the special meeting. The purpose of proxy voting is to ensure that all
stockholders of record have an opportunity to vote on matters presented at the
meeting,

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whether or not they attend in person. You may vote your shares only if you are
present, or if you give your proxy to a person who will be present, at the
meeting.

As of the record date, October 2, 2000, 7,719,355 shares of common stock
and 137,109 shares of Series A convertible preferred stock were issued and
outstanding. Each share of common stock represented at the special meeting is
entitled to one vote and each share of Series A convertible preferred stock is
entitled to 100 votes. However, any holder of Series A convertible preferred
stock is limited to a maximum of 45% of the votes eligible to vote on any matter
presented for a vote of the stockholders.

If you intend to vote by proxy, please specify your choices by marking the
appropriate boxes on the enclosed proxy card and completing, signing, dating and
returning the proxy card to us, in the envelope provided, before 10:00 a.m.,
central time, on November 17, 2000.

Any matter submitted to the stockholders must be approved by 60% of the
votes cast at a special meeting where a quorum is present. The holders of a
majority of the votes represented by the issued and outstanding shares of common
stock and Series A convertible preferred stock must be present in person or
represented by proxy for a quorum to be present. If you mark your proxy to deny
discretionary authority on other matters, your vote will not be counted in
determining whether the requisite 60% vote was obtained in such matters.

Abstentions and broker non-votes (proxies from brokers or nominees
indicating that they have not received instructions from the persons entitled to
vote) will be considered present for the purpose of establishing a quorum. If a
broker or other nominee does not vote on a proposal, the votes represented by
that stock will not be counted in determining the number of votes cast.

If you sign the proxy card without giving any instructions, your proxy will
vote in favor of issuing the securities. Your proxy will also exercise his
discretion in voting on any other matter brought before the special meeting,
unless you mark your proxy to deny such exercise. We know of no matters, other
than those described in the Notice of Special Meeting, that are to come before
the meeting. Stockholders voting by proxy may revoke their proxy at any time
before it is voted by delivering a proxy bearing a later date or a written
revocation of the proxy or by attending the meeting in person and casting a
ballot.

YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD
PROMPTLY, EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON. THIS WILL
ENSURE THAT YOUR SHARES ARE REPRESENTED.

YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE ISSUANCE OF SECURITIES IN
CONNECTION WITH THE PROPOSED MERGER AND RELATED TRANSACTIONS AND HAS DETERMINED
THAT THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT ARE FAIR TO AND IN
THE BEST INTERESTS OF OUR COMPANY AND OUR STOCKHOLDERS. YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ISSUANCE OF THE SECURITIES IN
CONNECTION WITH THE MERGER AND THE RELATED TRANSACTIONS.

THE DATE OF THIS PROXY STATEMENT IS OCTOBER 6, 2000.

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We have not authorized anyone to give any information or make any
representation about the matters discussed in this document that differs from or
adds to the information in this document or any of the exhibits attached to this
document. Therefore, if anyone does give you different or additional
information, you should not rely on it. The information contained in this
document speaks only as of its date unless the information specifically
indicates that another date applies.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS....................................... 4
SUMMARY OF THE PROXY STATEMENT.............................. 6
THE BACKGROUND OF THE MERGER AND RELATED TRANSACTIONS....... 9
OUR REASONS FOR THE MERGER AND RELATED TRANSACTIONS......... 12
OUR BOARD'S RECOMMENDATION.................................. 13
RISKS RELATED TO THE MERGER AND RELATED TRANSACTIONS........ 13
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS... 13
THE PRINCIPAL TERMS OF THE MERGER........................... 14
OTHER AGREEMENTS RELATED TO THE MERGER AGREEMENT AND THE
RELATED TRANSACTIONS...................................... 20
POTENTIAL ANCILLARY TRANSACTIONS AND AGREEMENTS............. 21
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER...... 23
ACCOUNTING TREATMENT OF THE MERGER AND RELATED
TRANSACTIONS.............................................. 23
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED
TRANSACTIONS.............................................. 23
INFORMATION RELATING TO VOTING MATTERS...................... 25
SECURITY ASSOCIATES INTERNATIONAL MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................ 26
INFORMATION REGARDING SECURITY ASSOCIATES INTERNATIONAL..... 36
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION............................................... 50
KC ACQUISITION MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 53
INFORMATION REGARDING KC ACQUISITION........................ 58
MANAGEMENT AFTER THE MERGER AND RELATED TRANSACTIONS........ 62
PRINCIPAL HOLDERS........................................... 63
DESCRIPTION OF CAPITAL STOCK................................ 65
PROPOSED POSTPONEMENT OR ADJOURNMENT OF THE SPECIAL
MEETING................................................... 66
WHERE TO FIND MORE INFORMATION.............................. 66
EXPENSES OF SOLICITATION.................................... 66
STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING........... 67
EXHIBITS
Exhibit A -- Plan and Agreement of Merger................. A-1
Exhibit B -- Risk Factors................................. B-1
Exhibit C -- Security Associates International, Inc.
Financial Statements................................... C-1
Exhibit D -- KC Acquisition Corp., King Central, Inc. and
Griptight Holdings, Inc. Financial
Statements................................... D-1
</TABLE>

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QUESTIONS AND ANSWERS

Q: WHEN AND WHERE WILL THE SPECIAL MEETING TAKE PLACE?

A: The special meeting will be held on November 17, 2000, at 10:00 a.m.,
central time, at the Sheraton Suites located at 121 Northwest Point
Boulevard, Elk Grove Village, Illinois.

Q: WHAT IS THE PURPOSE OF THE SPECIAL MEETING?

A: At the special meeting you will be asked to approve:

- the issuance of up to 45,000 shares of our Series B convertible preferred
stock, which are convertible into up to an aggregate of 4.5 million
shares of our common stock, to KC Acquisition's stockholders in
connection with the proposed merger of our company and KC Acquisition;
and

- the issuance of an aggregate of 2.5 million shares of our common stock
and an option to purchase up to 3.0 million shares of our common stock to
SecurityVillage.com in connection with transactions required to be
completed at the time of the proposed merger of our company and KC
Acquisition.

Q: WHAT IS THE VOTE REQUIRED TO APPROVE THE PROPOSAL?

A: The affirmative vote of 60% of the shares of our common stock and Series A
convertible preferred stock, voting together, present in person or by proxy
and entitled to vote is required to approve the proposal.

Q: WHEN DO YOU EXPECT THE MERGER AND RELATED TRANSACTIONS TO BE COMPLETED?

A: We expect to complete the merger and related transactions as soon as
possible after obtaining stockholder approval for the issuance of the
securities.

Q: WHAT WILL KC ACQUISITION STOCKHOLDERS RECEIVE IN THE MERGER?

A: The stockholders of KC Acquisition will receive, as a group, up to an
aggregate of 45,000 shares of our Series B convertible preferred stock,
which are convertible into up to an aggregate of 4.5 million shares of
common stock, plus up to an aggregate of $5.0 million in cash.

Q: WHAT WILL SECURITYVILLAGE.COM RECEIVE IF THE PROPOSAL IS APPROVED?

A: First, SecurityVillage.com will be obligated to purchase 1.2 million shares
of our newly issued common stock for $6.0 million, most of which will be
used to fund the proposed merger with KC Acquisition. Second,
SecurityVillage.com will receive 1.0 million shares of our newly issued
common stock as a fee for its services in arranging our merger with KC
Acquisition. Third, SecurityVillage.com will receive 300,000 shares of our
newly issued common stock in exchange for a $1.5 million note of a
subsidiary of KC Acquisition held by SecurityVillage.com. Fourth,
SecurityVillage.com will receive an option, exercisable upon the closing of
a proposed SAI/SecurityVillage.com merger, to purchase up to 3.0 million
shares of our newly issued common stock at an exercise price of $5.00 per
share.

Q. WILL THE PROPOSAL BE APPROVED?

A. Yes. TJS Partners, L.P., James S. Brannen and Ronald I. Davis expect to
enter into a voting agreement with SecurityVillage.com, KC Acquisition and
the stockholders of KC Acquisition. Under this proposed voting agreement,
they would agree to vote all of their shares of our capital stock in favor
of the proposal at the special meeting. In the aggregate they have the
right to vote shares of our capital stock in favor of the proposal at the
special meeting, representing approximately 56% of the total number of
shares of our capital stock entitled to vote at the special meeting.
However, it is expected that over 60% of the votes will be cast in favor of
the proposal when the votes of the remaining of named executive officers
and directors are counted.

Q. WHO WILL VOTE AT THE SPECIAL MEETING?

A. All persons who are owners of record of our common stock and Series A
convertible preferred stock at the close of business on October 2, 2000 may
vote at the special meeting.

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Q. WHAT DO I NEED TO DO NOW?

A. After carefully reviewing this proxy statement, indicate on your proxy card
how you want to vote, sign it, and mail it in the enclosed return envelope
as soon as possible. If you sign and send in your proxy card and do not
indicate how you want to vote, your proxy will be counted as a vote in
favor of the issuance of the securities in connection with the merger and
at the discretion of the proxy in regard to any other proposals at the
special meeting, if any. Our board of directors unanimously recommends that
you vote in favor of the proposal.

Q. CAN I VOTE MY SHARES IN PERSON?

A. Yes. You may attend the special meeting and vote your shares in person.
However, we recommend that you send in your proxy card even if you plan to
attend the special meeting in person. Sending in your proxy card will
ensure that your vote is counted in the event that you cannot attend the
special meeting.

Q. WHAT DO I DO IF I WANT TO CHANGE MY VOTE?

A. You may change your vote by delivering a signed notice of revocation or a
later-dated, signed proxy to us before the stockholders' meeting, or by
attending the stockholders' meeting and voting in person.

Q. IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?

A. Your broker cannot vote your shares without instructions from you. You
should instruct your broker how to vote your shares, following the
directions provided by your broker.

Q. WHO CAN HELP ANSWER MY QUESTIONS?

A. If you have any questions about the proposed issuance of securities in
connection with the merger and related transactions or any other questions
relating to this proxy statement, please contact James S. Brannen, our
President, at (847) 956-8650.

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SUMMARY OF THE PROXY STATEMENT

This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
merger and related transactions more fully and for a more complete description
of the terms of the merger, you should carefully read this document and the Plan
and Agreement of Merger, a copy of which is attached as Exhibit A.

THE COMPANIES THAT WILL BE PARTICIPATING IN THE MERGER AND RELATED TRANSACTIONS
(SEE PAGES 36-49 AND PAGES 58-62) ARE:

Security Associates International, Inc.
2101 South Arlington Heights Road, Suite 100
Arlington Heights, Illinois 60005
(847) 956-8650

Security Associates provides security alarm monitoring services for both
residences and businesses. We provide these services as subcontractor for the
independent alarm dealers who own the subscriber accounts. Independent alarm
dealers are primarily owner-operated companies. Our ability to attract new
monitoring business is enhanced and supported by a network of over 2,700
independent alarm dealers to whom we provide industry-related education in the
areas of technology, finance, management and marketing. Our company was
incorporated in 1990 as an Illinois corporation and, through a merger in 1992,
became a Delaware corporation.

KC Acquisition Corp.
P.O. Box 1943
South Hackensack, New Jersey 07606

(800) 932-0128

KC Acquisition is also in the business of providing security alarm
monitoring services for residences and businesses as subcontractor for
independent alarm dealers for subscriber accounts owned by them. KC Acquisition
is privately held. Monital Signal Corporation was acquired by KC Acquisition
through a merger with Griptight Holdings, Inc. in May 2000. Griptight was the
parent company to Monital Signal Corporation, the capital stock of which was
Griptight's sole asset.

King Acquisition Corp.
2101 South Arlington Heights Road, Suite 100
Arlington Heights, Illinois 60005
(847) 956-8650

King Acquisition is a Delaware corporation organized by us for the purpose
of effecting the proposed merger of our company and KC Acquisition. It has no
material assets and has not engaged in any activities except those undertaken in
connection with its merger with KC Acquisition. Our company owns all of the
issued and outstanding shares of King Acquisition.

SecurityVillage.com, Inc.
430 East 86th Street, 9th Floor
New York, New York 10228
(212) 249-1200

SecurityVillage.com intends to become the leading provider of a new
category of Internet-based, security-related services, products and information
for residential and commercial consumers. SecurityVillage.com intends to create
a new Internet communication service that will allow subscribers to
interactively view, protect and control their homes and businesses; to locate
and communicate with family and colleagues; and to monitor the health and
well-being of family and community members. SecurityVillage.com

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is a Delaware corporation organized in 1993 that has consolidated into a single
entity a number of predecessor, existing and start-up companies.

THE PRINCIPAL REASONS FOR THE MERGER AND RELATED TRANSACTIONS (SEE PAGES 12-13)

We have identified the following benefits that are expected to result from
the merger and related transactions:

- we will create the fourth largest security event monitoring company in
the United States, serving over 700,000 subscribers through a dealer
network of over 5,700 independent security service companies;

- working with and through our combined dealer network, we will be able to
provide installation, field service and remote monitoring services to
existing and potential new subscribers throughout the United States;

- we will create a nationwide platform for the delivery of
SecurityVillage.com's security and Internet-based products, such as
allowing potential subscribers to order security systems directly over
the Internet and allowing subscribers to view and change their personal
information and access event data in real time; and

- operational and administrative cost savings following the merger.

OUR RECOMMENDATION TO OUR STOCKHOLDERS (SEE PAGE 13)

Our board of directors has unanimously approved the issuance of our
securities in connection with the merger and related transactions. The board
believes that the merger is advisable and in your best interest and recommends
that you vote FOR the proposal to issue the securities in connection with the
merger and related transactions.

A SUMMARY DESCRIPTION OF THE TERMS OF THE MERGER AND RELATED TRANSACTIONS (SEE
PAGES 14-23)

This proxy statement solicits your vote for the issuance of shares of
common stock, Series B convertible preferred stock and options in connection
with the merger of KC Acquisition with King Acquisition, our wholly owned
subsidiary. The Plan and Agreement of Merger, dated as of May 11, 2000, by and
among King Acquisition, KC Acquisition, the stockholders of KC Acquisition and
us, is the document that governs the merger.

When the merger is completed, KC Acquisition will be our wholly owned
subsidiary. The stockholders of KC Acquisition will receive, as a group, up to
an aggregate of 45,000 shares of our Series B convertible preferred stock, which
are convertible into up to an aggregate of 4.5 million shares of common stock,
plus up to an aggregate of $5.0 million in cash. The merger agreement provides
for a proportionate reduction in the consideration payable to the KC Acquisition
stockholders to the extent that the total recurring monthly revenue of KC
Acquisition is less than $1.1 million at the closing of the merger between our
company and KC Acquisition.

SecurityVillage.com will be obligated to purchase 1.2 million shares of our
newly issued common stock for $6.0 million, most of which will be used to fund
the proposed merger with KC Acquisition; 1.0 million shares of our newly issued
common stock as a fee for its services in arranging our merger with KC
Acquisition; 300,000 shares of our newly issued common stock in exchange for a
$1.5 million note of a subsidiary of KC Acquisition held by SecurityVillage.com;
and an option, exercisable upon the closing of our proposed merger with
SecurityVillage.com, to purchase up to 3.0 million shares of our newly issued
common stock at an exercise price of $5.00 per share.

THE STOCKHOLDER VOTE REQUIRED TO APPROVE THE ISSUANCE OF THE SECURITIES (SEE
PAGE 25)

The affirmative vote of holders of 60% of the votes cast by holders of
common stock and Series A convertible preferred stock, voting together, is
required to approve the issuance of the securities in connection with the
merger.
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You are entitled to cast one vote per share of common stock and 100 votes
per share of Series A convertible preferred stock (subject to certain limits)
that you owned of record at the close of business on October 2, 2000, the record
date.

CERTAIN CONDITIONS TO THE COMPLETION OF THE MERGER (SEE PAGES 17-18)

Completion of the merger is conditioned upon stockholder approval of the
issuance of the securities as described in this Proxy Statement and certain
other conditions outlined in the merger agreement, described below.

Other substantial conditions to our obligation to complete the merger
include, but are not limited to, the following: the total recurring monthly
revenue for monitoring services of KC Acquisition is not less than $600,000 at
the closing of the merger of our company and KC Acquisition; KC Acquisition must
have a tax basis of at least $18 million in depreciable and/or amortizable
assets for federal income tax purposes, less the amount by which such assets
have been depreciated and/or amortized for federal income tax purposes since
January 1, 2000; and there shall have been no material adverse change in the
condition (financial or otherwise), liabilities, business or prospects of KC
Acquisition or any of its subsidiaries. In addition, although not a specific
condition, our obligations to consummate the merger and related transactions
require the consent of our company's lenders.

In the event that SecurityVillage.com has not purchased 1.2 million shares
of our newly issued common stock at or prior to the contemplated closing date of
the merger, we have 120 days to obtain other financing to fund the cash portion
of the merger consideration to be paid to KC Acquisition's stockholders.

THE MERGER MAY BE ABANDONED BEFORE COMPLETION IF CERTAIN EVENTS OCCUR (SEE PAGES
18-19)

The merger agreement between KC Acquisition and us may be terminated and
the merger may be abandoned at any time before the transaction is completed by
any one of the following means:

- by mutual consent of KC Acquisition and us;

- by either party if any final decision of a governmental authority
prohibits concluding the merger;

- subject to certain conditions, by either party if the merger is not
completed by December 29, 2000;

- by us, if KC Acquisition has breached the merger agreement and the breach
is not cured within ten days of notice from us; or

- by KC Acquisition, if we have breached the merger agreement and the
breach is not cured within ten days of notice from KC Acquisition.

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<PAGE> 12

THE BACKGROUND OF THE MERGER AND RELATED TRANSACTIONS

Since our company was founded in l990, we have sought to build a platform
of monitored accounts and affiliated independent alarm dealers that would
command the attention of other entities seeking to penetrate the residential and
commercial security market in order to introduce new products and services. We
started with a single central station opened in partnership with an alarm dealer
in Grand Rapids, Michigan in l991. By January 1, 2000, our network had expanded
to ten central stations regionally located throughout the United States. Through
these facilities, we monitor approximately 393,000 alarm systems installed by
2,700 independent alarm dealers who have subcontracted the monitoring services
to us.

From the date our company was founded until June 1999, we also provided
financing services directly to independent alarm dealers by purchasing alarm
contracts from them, billing the customer for the monitoring service and
sub-contracting the maintenance back to the dealer. Late in 1998, we concluded
that our opportunities were greater in the wholesale monitoring business than
they were in financing. This conclusion was reached in part because we did not
believe that we could command sufficient human or financial resources to become
a major force in both segments of the marketplace. Since the financial segment
was already occupied by several competitors who had access to capital resources
significantly greater than ours, we began to focus exclusively on a wholesale
monitoring strategy. As a result, we sold our retail portfolio in June 1999.

By early 1999, we had put in place a network of regional central stations
that gave us nationwide coverage, with the exception of California and the
Northeast United States. In November 1999, we acquired a small central station
in southern California, which initiated our expansion on the west coast. Prior
to this acquisition, we had been aware that the owners of Monital Signal
Corporation were considering the sale of this New Jersey-based monitoring
company. Monital is a well-regarded national wholesale monitoring facility with
approximately 95,000 monitored accounts, concentrated primarily in the
Northeast, but also with some concentration in the West through a satellite
facility located in Denver. In August 1998, Ronald I. Davis, our Chairman of the
Board, initiated a meeting with Ray Sacks, the President of Monital, at the
International Security Conference and Exposition trade show in New York,
regarding a potential acquisition of Monital. Both men had several additional
informal meetings at industry trade shows and on the phone regarding our
proposed acquisition of Monital.

In July 1998, we signed a non-disclosure agreement and thereafter we were
provided with information about Monital. We submitted an initial proposal to
acquire Monital in August 1998. In October 1998, we were informed that Monital
had decided to retain a consultant to assist Monital's shareholders in
completing the sale transaction. Several weeks later we learned that person
would be Peter Fidelman, a principal of Securetech Partners and an individual
previously associated with ADT Security Services, Inc. In May 1999, we submitted
a new proposal to acquire Monital. After several weeks had elapsed, we were told
by Mr. Fidelman that other parties were also submitting proposals, and that
additional information was being prepared and disseminated to the bidders for
the purpose of having the bidders reconsider their offers. In September 1999, we
submitted a revised proposal. Late in 1999, we were advised that Monital had
decided to pursue a transaction with a non-U.S. bidder, which we later learned
was Nomura.

During the bidding process for Monital, Mr. Davis developed a business
relationship with Mr. Fidelman. On several occasions, Mr. Davis shared his
vision of our future and the future of the alarm industry with him. Mr. Fidelman
indicated that he shared that vision, and discussions took place from time to
time about the potential strategic fits between us and other clients of Mr.
Fidelman.

In early January 2000, Mr. Fidelman met with Messrs. Davis and Brannen and
suggested a meeting in New York between the unidentified potential purchaser of
Monital and us to see if there was any synergy. A meeting was held in late
January 2000. At the meeting, Nomura Securities was identified as the potential
purchaser of Monital through an entity in which it had invested named
SecurityVillage.com. In addition to Messrs. Davis and Fidelman, Craig Marshak, a
managing director of Nomura and a director of SecurityVillage.com, and Thomas J.
Salvatore, one of our directors and a principal stockholder, attended the
meeting. Mr. Marshak explained that Nomura was in the process of putting
together a consortium of

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<PAGE> 13

companies that would become the first Internet security web site, offering a
broad array of security products, services and relationships. In addition, Mr.
Marshak reported that Nomura/SecurityVillage.com had adopted a strategy similar
to ours, namely using the alarm dealer installation and service capability and
the hundreds of thousands of customers they represent as a platform to launch an
Internet venture. He also told us that SecurityVillage.com was pursuing several
other central station acquisitions.

In November 1999, we began discussions among management and members of the
board of directors about our annual strategic objectives. We decided to seek one
or more partners that could bring technology or marketing resources to a venture
that would enable us to capitalize on the installation and service capability of
our independent alarm dealer network and the marketing potential through our
dealers to their customer base. In January 2000, lists of potential partners
were assembled and plans were made to evaluate each potential partner and design
a strategy to initiate contact with those deemed most promising.

The decision to pursue this strategy was made in the context of our having
acquired a customer base of approximately 393,000 monitored accounts serviced by
approximately 2,700 dealers. In addition, discussions were continuing with
several central station owners for the acquisition of their companies. The
successful conclusion of these transactions would have increased the number of
accounts we monitored to more than 700,000. We believed that this size was
necessary to attract a joint venture partner or alliance that would be
interested in bundling and cross-marketing services to our customer base. In our
opinion, attractive alliance partners do not want to deal with a small
fragmented customer base.

When we discovered that we and Nomura were pursuing similar strategies,
both parties agreed that by combining our efforts, we could accelerate the
implementation of our strategies and maintain the time advantage we believed we
had over others who might be implementing the same strategy, some of whom we
believed were much larger, better capitalized companies. As a result it was
decided that our company and SecurityVillage.com should explore the possibility
of joining forces.

We began discussing a merger with KC Acquisition in June 1999 when Mr.
Davis, Mr. Salvatore and James Brannen, our President and Chief Executive
Officer, met with Messrs. Thomas J. Few and Tim McGinn, KC Acquisition's largest
shareholders, in New Jersey. They rejected our informal proposal made at that
time and no further discussions were held until November 1999, when Mr. Davis
called Mr. Few and renewed the discussions. During the course of those
negotiations, we learned that another suitor existed. This new suitor turned out
to be SecurityVillage.com. Because the acquisition of KC Acquisition was key to
completing our strategic expansion, we did not want to lose this transaction. KC
Acquisition monitored more than 240,000 accounts. If KC Acquisition was acquired
by SecurityVillage.com, we would be slowed down in our effort to reach a
critical mass of accounts. Therefore, our management and directors decided to
aggressively pursue the acquisition of KC Acquisition.

Mr. Brannen and Mr. Salvatore conferred by phone in early January 2000 to
develop a strategy for completing the acquisition of KC Acquisition. In late
January 2000, Mr. Davis went to New Jersey to meet with Mr. Few. Their objective
was to persuade the KC Acquisition shareholders that a combination of the two
companies would create economies of scale and lead to a significantly stronger
negotiating position with other strategic partners or acquisition targets,
including SecurityVillage.com.

During this meeting with the KC Acquisition shareholders, we determined
that our company and KC Acquisition shared a similar vision for integrating the
companies into the new Internet economy. Both parties understood the advantages
of a merger. The merger would make the consolidated company far larger and would
bring us closer in size to the larger, fully integrated companies. In addition,
the combined company would bring significant cost savings through consolidation
of marketing efforts and accounting, legal, administrative, human resources and
other back-office functions. KC Acquisition also had a bi-coastal presence with
multiple regional customer care centers that would make us a truly national
wholesale security monitoring firm.

On February 1, 2000, Mr. Few came to Chicago to visit us and continue the
merger discussions. On February 8, 2000, Messrs. Brannen and Davis went back to
New Jersey to visit KC Acquisition and continue

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<PAGE> 14

merger discussions. On February 22, 2000, Mr. Salvatore was chosen to represent
us in negotiations, partly because he lives in the New York area in proximity to
KC Acquisition and its major shareholders.

Messrs. Salvatore, Brannen, Few and McGinn spent considerable time
discussing the valuation of the proposed merger between KC Acquisition and our
company. The parties multiplied the number of fully diluted shares of our stock
by the then-current market price. This was used to establish the value of our
company. Next the parties examined the relative recurring monthly revenues of
Security Associates and of KC Acquisition/Monital as the baseline value and made
modest adjustments for historic and prospective growth rates. In addition, we
looked at the existing capital structure of both companies and the substantial
indebtedness of KC Acquisition. Based upon these calculations, KC Acquisition
shareholders would receive 4.5 million common stock equivalent shares in our
company plus $5 million in cash.

In late March and early April 2000, negotiations with the KC Acquisition
shareholders intensified. The mutual goal was to execute a letter of intent and
then jointly negotiate with SecurityVillage.com for the acquisition of Monital
and a joint venture with SecurityVillage.com. Mr. Salvatore negotiated a letter
of intent among our company, KC Acquisition and its principal shareholders which
was signed on April 4, 2000. Under the letter of intent, KC Acquisition and our
company agreed to refrain from independently seeking any business or economic
relationship with SecurityVillage.com. The intent of this provision was to
present a united front to SecurityVillage.com.

After KC Acquisition and our company signed this letter of intent on April
5, 2000, Messrs. Salvatore and McGinn approached Nomura, represented by Messrs.
Marshak and Fidelman, about a strategic alliance with SecurityVillage.com. The
parties had spirited discussions about strategies and the conditions for an
alliance or merger to take place. The parties agreed that the security industry
had been largely unresponsive to the advances that the Internet had brought to
other industries, such as cable, telephone and utilities. All agreed that a
combination of KC Acquisition/Monital, SecurityVillage.com and our company would
facilitate the implementation of a business model for the new economy.
SecurityVillage.com brought a new vision of how the Internet could work to
interactively empower customers and streamline the delivery process and
perception of security solutions.

Additional discussions among the parties took place during the second and
third week of April regarding valuation. We valued our company using the
prevailing market price of $3.75 per share during this period. Assuming the
merger with KC Acquisition was consummated, this would place the value of our
company at approximately $95 million. If SecurityVillage.com raised $20 million
in a private offering at a post-money valuation of $95 million, the parties
agreed that the value of each constituent company would be equal and a merger
could proceed. This condition to raise capital was designed to validate the
market value of SecurityVillage.com, which is not publicly traded.

During these negotiations, Nomura and SecurityVillage.com agreed to give up
the right to purchase Monital and permitted KC Acquisition to complete the
acquisition of Monital instead. On April 21, 2000, SecurityVillage.com agreed to
accept a fee for bringing Monital, our company and KC Acquisition together.

In addition, because of the extraordinary efforts of Mr. Salvatore in
connection with these transactions, the parties agreed that he should receive an
option to acquire shares representing 1% of the total outstanding common stock
of SecurityVillage.com at a strike price equal to the price per share in the
next round of financing.

Following the execution of the letter of intent on April 21, 2000, KC
Acquisition and our company negotiated a Plan and Agreement of Merger. See
"Terms of the Merger." The Merger Agreement was signed on May 11, 2000.
Negotiations with SecurityVillage.com are ongoing. See "Potential Ancillary
Transactions and Agreements."

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<PAGE> 15

OUR REASONS FOR THE MERGER AND RELATED TRANSACTIONS

In reaching its decision to approve the merger and related transactions and
to recommend that our stockholders vote to approve the issuance of the
securities in connection with the merger and related transactions, our board of
directors consulted with senior management and our financial, accounting and
legal advisors and considered a number of factors. The following is not intended
to be an exhaustive discussion of those factors, but rather a summary of the
primary factors considered by the board of directors in making its determination
that the merger and related transactions will be fair to and in the best
interests of our company and our stockholders.

When making its determination, the board of directors considered, among
other things, the following factors:

- the number and geographic location of the independent alarm dealers and
subscribers served by our company, KC Acquisition and their respective
subsidiaries;

- the opportunity for the combined company to effectuate a future merger
with SecurityVillage.com with a view to providing Internet-based
interactive security and other services, initially in the United States;

- the judgment, advice and analyses of our management with respect to the
strategic, financial and potential operational benefits of the merger;

- operating efficiencies that may result from the merger;

- the advice of counsel that the merger should be tax-free to us for U.S.
federal income tax purposes;

- the number of shares of Series B convertible preferred stock to be issued
in connection with the merger and the terms of those shares;

- the number of shares of our common stock to be issued in connection with
the merger and the related transactions and upon conversion of the Series
B convertible preferred stock and exercise of the options; and

- the terms of the merger agreement.

We have identified the following benefits that are expected to result from
the merger:

- in the event that our combined company does merge with
SecurityVillage.com, we will have created a nationwide platform for the
delivery of SecurityVillage.com's security and Internet-based products;
and

- unquantified operational and administrative cost savings following the
merger.

In addition to the factors described above, the board of directors also
considered the following negative factors relating to the merger:

- the challenges inherent in combining our operations with those of KC
Acquisition, including managing potential conflicts in the business
cultures of our companies;

- differences between the type of monitoring software that Monital uses and
the type that we use, and the related costs of standardizing and
integrating these systems;

- the danger that our competitors might aggressively solicit our
independent alarm dealers during the period of our consolidation;

- the danger that our competitors might aggressively recruit our employees
during the period of our consolidation;

- the substantial debt service obligations relating to the indebtedness of
KC Acquisition and its subsidiaries that we will assume in the merger;

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<PAGE> 16

- our need to provide working capital of approximately $3.5 million to fund
the operations and capital expenditures of KC Acquisition for the next
twelve months;

- the likelihood of the Series B convertible preferred stock conversion
rights being exercised; and

- the dilution of our stockholders' voting interest.

The board of directors believed that some of these risks were unlikely to
occur, that we could avoid or mitigate others, and that overall, these risks
were outweighed by the benefits of the merger. See Exhibit B -- "Risk Factors"
for additional risks that you should consider.

In reaching its determination to approve and recommend the merger, the
board of directors did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given differing weights to
different factors.

OUR BOARD'S RECOMMENDATION

Our board of directors has unanimously approved the issuance of common
stock, options and Series B convertible preferred stock in connection with the
merger and related transactions. The board believes that the merger and related
transactions are advisable and in our company's and your best interest, and it
recommends that you vote for the proposal to approve the issuance of the
securities.

RISKS RELATED TO THE MERGER AND RELATED TRANSACTIONS

In deciding whether to approve the issuance of the securities in connection
with the merger, you should carefully consider the risk factors described in
Exhibit B.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, including information incorporated by reference,
contains forward-looking statements within the meaning of the federal securities
laws with respect to various matters, including: the business strategies and
projected benefits to be derived from the merger; pro forma information relating
to the merger; tax treatment of the merger; regulatory matters; competitive
positions; growth opportunities for the combined company; and plans and
objectives of management. Statements in this proxy statement that are not
historical facts are identified as "forward-looking statements" for the purpose
of the safe harbor provided by the federal securities laws. These
forward-looking statements are necessarily estimates reflecting the best
judgment of the senior management of our company. They involve a number of risks
and uncertainties that could cause actual results to differ materially from
those suggested by the forward-looking statements. These forward-looking
statements should be considered in light of various factors, including those set
forth in this proxy statement. Important factors that could cause actual results
to differ materially from estimates or projections contained in the
forward-looking statements include those stated in Exhibit B -- "Risk Factors."

Words such as "estimate," "project," "plan," "intend," "expect," "believe"
and similar expressions often identify forward-looking statements.
Forward-looking statements are found at various places throughout this proxy
statement. You are cautioned not to place undue reliance on these
forward-looking statements, which, in any event, speak only as of the date of
this proxy statement or, in the case of documents incorporated by reference, as
of the date of those documents.

It is not possible to predict or identify all factors that could affect our
ability to achieve the results described in any forward-looking statement. The
factors referred to above should not be considered a complete statement of all
the potential risks and uncertainties. If underlying assumptions prove
inaccurate or unknown risks or uncertainties materialize, actual results could
vary materially from our expectations. We undertake no obligation to revise
these forward-looking statements to reflect any future events or circumstances.

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<PAGE> 17

THE PRINCIPAL TERMS OF THE MERGER

This discussion summarizes the material provisions of the Plan and
Agreement of Merger. A copy of the merger agreement is included as Exhibit A.
This summary is qualified by reference to the full agreement, which you are
encouraged to read.

THE RESULT OF THE MERGER

KC Acquisition will merge with and into King Acquisition, our wholly owned
subsidiary created specifically to accomplish the merger, and KC Acquisition
will be the surviving corporation. KC Acquisition will continue its corporate
existence under the laws of the State of New Jersey as our wholly owned
subsidiary. The officers and directors of King Acquisition will be the officers
and directors of KC Acquisition immediately after the merger.

The merger will be effective at the time a certificate of merger is duly
filed with each of the Delaware Secretary of State and the New Jersey Secretary
of State. The merger will occur as soon as possible after all conditions to the
merger, including stockholder approval of the issuance of the securities, are
satisfied.

WHAT WILL BE RECEIVED BY THE PARTIES UPON COMPLETION OF THE MERGER AND THE
RELATED TRANSACTIONS

If we complete the merger, we will become the sole stockholder of KC
Acquisition and the stockholders of KC Acquisition will receive, as a group, up
to an aggregate of 45,000 shares of our Series B convertible preferred stock,
which are convertible into up to an aggregate of 4.5 million shares of common
stock, plus up to an aggregate of $5.0 million in cash. The merger agreement
provides for a proportionate reduction in the consideration payable to the KC
Acquisition stockholders to the extent that the total recurring monthly revenue
of KC Acquisition is less than $1.1 million closing of the merger of our company
and KC Acquisition.

SecurityVillage.com is expected to receive:

- 1.2 million shares of our newly issued common stock for $6.0 million,
most of which will be used to fund the proposed merger with KC
Acquisition;

- 1.0 million shares of our newly issued common stock as a fee for its
services in arranging our merger with KC Acquisition;

- an option, exercisable in connection with and contingent upon the closing
of the proposed merger of our company with SecurityVillage.com, to
purchase up to 3.0 million shares of our newly issued common stock at an
exercise price of $5.00 per share; and

- 300,000 shares of our newly issued common stock in exchange for a $1.5
million note of Monital, a subsidiary of KC Acquisition, which is held by
SecurityVillage.com.

THE EFFECT OF THE ISSUANCES ON OUR COMMON STOCK AND SERIES A CONVERTIBLE
PREFERRED STOCK

Nothing will happen to the existing shares of our common stock as a result
of the merger. They will not be converted, and you will not need to surrender
them for exchange. The number of shares you hold will remain unchanged; however,
the issuance of additional securities will result in the dilution of existing
stockholders' ownership percentage. In addition, the Series B convertible
preferred stock will have a senior liquidation preference superior to our common
stock and Series A convertible preferred stock.

EACH PARTY TO THE MERGER AGREEMENT HAS MADE REPRESENTATIONS AND WARRANTIES

The merger agreement contains representations and warranties by us and King
Acquisition with respect to incorporation, corporate power and authority, the
securities to be issued in connection with the merger, filings made by our
company under the Securities Act of 1933 and the Securities Exchange Act of
1934, including the financials included in such filings, and litigation.

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<PAGE> 18

The merger agreement also contains detailed representations and warranties
by the KC Acquisition stockholders that are primarily concerned with their
ownership of the capital stock of KC Acquisition and various aspects of KC
Acquisition's business and operations, such as:

- factual information regarding the central stations from which it monitors
security systems

- capitalization

- required consents and authorizations

- financial statements

- the absence of changes in its business and operations since December 31,
1999

- assets, liabilities and liens

- material contracts, including leases, dealer monitoring agreements

- compliance with laws and other instruments

- litigation

- related party transactions

- tax matters

- insurance

- benefit plans

- directors, officers and employees

- recent operations and financial condition and capital structure

The KC Acquisition stockholders did limit their representations with
respect to the financial condition, business, operations, assets and liabilities
of Monital and its affiliates to their knowledge and the knowledge of a limited
number of key employees of KC Acquisition as to occurrences before KC
Acquisition acquired Monital.

EACH PARTY ALSO MADE CERTAIN COVENANTS IN THE MERGER AGREEMENT

Under the merger agreement, the KC Acquisition stockholders have agreed,
among other things, to:

- cause KC Acquisition and its subsidiaries to carry on and preserve the
business, goodwill and relationships of the company and its subsidiaries;

- obtain required consents;

- provide us with access to KC Acquisition's properties, books and records
and other information;

- provide us with prompt notice of defaults, litigation or threatened
litigation;

- assist in the transition of the ownership and management of KC
Acquisition and its subsidiaries;

- assist us with loan negotiations;

- maintain, and cause KC Acquisition and its subsidiaries and their
respective officers, directors and employees to maintain, the
confidentiality of our proprietary information;

- cause KC Acquisition to file all requisite tax returns for periods prior
to the closing of the merger;

- permit independent audits of the books and records of KC Acquisition;

- make all necessary disclosures relating to the exchange of securities in
connection with the merger to the appropriate state taxing authorities;

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<PAGE> 19

- update disclosures made to us prior to the closing of the merger;

- release all claims against KC Acquisition, its subsidiaries and their
respective officers, employees, agents and other representatives;

- cause KC Acquisition to use its best efforts to replace all verbal dealer
or subscriber monitoring agreements with written agreements prior to the
closing of the merger; and

- comply with all applicable laws with respect to their transfer of
securities received from us in the merger.

The merger agreement also places specific restrictions on the ability of KC
Acquisition to, among other things:

- incur additional indebtedness outside of the ordinary course of business;

- pay dividends or make distributions to its stockholders;

- issue stock, options, warrants, or rights to acquire capital stock;

- enter into, amend or terminate any agreement outside of the ordinary
course of business;

- increase the compensation of any employee or adopt or amend any employee
benefit plan;

- acquire or dispose of properties other than in the ordinary course of
business;

- permit any change in its business or change the manner in which the
business's books are maintained;

- create or allow the imposition of any lien or security interest on any of
its businesses, properties or assets;

- acquire any new subscriber accounts without our consent; and

- engage in any other acts outside of the ordinary course of business.

The merger agreement also imposes obligations and restrictions on us and
certain of our principal stockholders, including the following:

- to use our best efforts to obtain such third-party consents as may be
necessary for completion of the merger;

- to offer employment to certain employees of KC Acquisition;

- to comply, subject to certain exceptions, with our agreements relating to
confidentiality;

- to call a meeting of our stockholders to vote on the issuance of our
securities in connection with the merger and related transactions;

- to recommend, through our board of directors, to our stockholders the
approval of the securities issuance; and

- to prepare and file with the SEC a proxy statement as soon as
practicable, but in any event on or prior to September 1, 2000, and to
use our best efforts to cause the proxy statement to be approved by the
SEC.

KC ACQUISITION MAY NOT SEEK COMPETING OFFERS

The KC Acquisition stockholders will not, and will cause KC Acquisition's
officers and directors not to, initiate discussions or negotiate, authorize
negotiations on their behalf or on behalf of KC Acquisition, or entertain any
offers or proposals from any other party concerning the possible disposition of
all or any portion of the business, assets or capital stock of KC Acquisition or
its subsidiaries.

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<PAGE> 20

KC ACQUISITION'S STOCKHOLDERS HAVE AGREED NOT TO COMPETE WITH US FOLLOWING THE
MERGER

The KC Acquisition stockholders will not:

- for five years following the merger, compete with us by establishing a
remote alarm system monitoring center providing monitoring services to
any location within 25 miles of any location where we or our subsidiaries
provide such services;

- provide or solicit any dealer or subscriber for the purpose of providing
services similar to those provided by us or our subsidiaries;

- reveal the customer list of KC Acquisition or its subsidiaries to any
person;

- employ any of our employees or our subsidiaries' employees for a period
of one year after their employment terminates; or

- take any other action that might adversely affect our or our
subsidiaries' relationship with any dealer or subscriber.

CERTAIN CONDITIONS MUST BE SATISFIED BEFORE WE ARE OBLIGATED TO COMPLETE THE
MERGER

Our obligation to complete the merger is subject to satisfaction or waiver
of certain conditions on or before the closing. These include:

- our stockholders' approval of the issuance of the securities in
connection with the merger and related transactions;

- the representations and warranties of KC Acquisition's stockholders must
be true as of the closing date as though made on that date;

- KC Acquisition and its stockholders shall have performed all of the
covenants required to be performed by them at or prior to the closing
date;

- the closing of the merger shall not violate any court or governmental
order or decree and no action shall have been instituted or threatened
which in our reasonable judgment has the probability of preventing the
merger or making it unlawful;

- the recurring monthly revenue payable to KC Acquisition and its
subsidiaries for monitoring services must be at least $600,000 at the
closing of the merger of our company and KC Acquisition;

- KC Acquisition and its subsidiaries must have a tax basis of at least $18
million in depreciable and/or amoritizable assets for federal income tax
purposes less the amount by which such assets have been depreciated
and/or amortized for federal income tax purposes since January 1, 2000;

- KC Acquisition shall have delivered a closing balance sheet as provided
in the merger agreement;

- the sale of certain retail accounts of Monital shall have been
consummated;

- all required third-party and governmental consents must have been
obtained;

- Thomas Few, Sr. shall have forgiven KC Acquisition's indebtedness of
approximately $120,000 to him represented by an outstanding promissory
note dated January 9, 1998;

- there shall have been no material adverse change in the condition
(financial or otherwise), liabilities, business or prospects of KC
Acquisition or its subsidiaries;

- we must have entered into a multi-year employment agreement with Thomas
Few, Sr.;

- we shall have received various certificates and other documents from KC
Acquisition and its stockholders and all other documents required to be
delivered to us in connection with the closing of the merger;

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<PAGE> 21

- KC Acquisition and its stockholders shall have delivered to us all of the
schedules required to be delivered by KC Acquisition and/or KC
Acquisition stockholders, and nothing disclosed in such schedules shall
have or result, or reasonably be expected to have or result, in a
material adverse effect on the financial condition, results or
operations, business, prospects or properties of KC Acquisition or its
subsidiaries; and

- we shall have received an opinion from counsel to KC Acquisition's
stockholders with respect to certain matters including, without
limitation, the existence and authority of KC Acquisition and its
subsidiaries, the capitalization of KC Acquisition, the ownership of its
assets, the receipt of required consents and approvals, and its
compliance with environmental laws.

Further, in the event that SecurityVillage.com has not purchased 1.2
million shares of our newly issued common stock for $6.0 million on or before
completion of the KC Acquisition merger, we may elect to delay the closing for
up to 120 days to obtain financing to replace the financial consideration to
have been received by us.

CERTAIN CONDITIONS MUST BE SATISFIED BEFORE KC ACQUISITION'S STOCKHOLDERS ARE
OBLIGATED TO COMPLETE THE MERGER

KC Acquisition stockholders' obligation to close the merger is subject to
the satisfaction or waiver of certain conditions on or before the closing. These
include:

- our representations and warranties shall be true and correct when made
and as of the closing of the merger as though made as of the closing;

- we shall have performed all covenants required to be performed by us at
or prior to the closing of the merger;

- the closing of the merger shall not violate any court or governmental
order or decree and no action shall have been instituted or threatened
which in the reasonable judgment of KC Acquisition stockholders, has the
probability of preventing the merger or making it unlawful;

- the stockholders must have received all documents to be delivered under
the terms of the merger agreement; and

- all required third-party and governmental consents must have been
obtained.

CERTAIN REGULATORY APPROVALS MUST BE OBTAINED

Prior to the merger, the approval of FCC for transfer of the radio licenses
held by KC Acquisition and Monital must be obtained.

AT ANY TIME BEFORE OR AFTER THE MERGER CLOSES, THE ANTITRUST DIVISION, THE
FEDERAL TRADE COMMISSION, STATE ANTITRUST AUTHORITIES OR A PRIVATE PERSON COULD
SEEK TO ENJOIN THE MERGER OR CAUSE EITHER OF THE COMPANIES TO DIVEST CERTAIN
ASSETS.

THE MERGER MAY BE ABANDONED BEFORE COMPLETION UNDER CERTAIN CIRCUMSTANCES

The merger agreement may be terminated and the merger abandoned at any time
before the transaction is completed by any of the following means:

- by mutual consent of KC Acquisition and us;

- by either party if any final decision of a governmental authority
prohibits concluding the merger;

- by either party if the merger is not completed by December 29, 2000;

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<PAGE> 22

- by us if the KC Acquisition stockholders have breached the merger
agreement and the breach is not cured within ten days of notice; or

- by KC Acquisition if we have breached the merger agreement and the breach
is not cured within ten days of notice by KC Acquisition.

THE MERGER AGREEMENT CONTAINS INDEMNIFICATION PROVISIONS FOR THE BENEFIT OF THE
PARTIES

For our benefit. The KC Acquisition stockholders will indemnify us for
claims brought within one year against all losses, expenses or liabilities
arising out of any breach by KC Acquisition of the merger agreement. However, we
are not entitled to indemnification payments unless our damages are greater than
$150,000 with respect to claims relating to the failure of the KC Acquisition
stockholders to obtain required consents and $50,000 with respect to other
claims.

For the benefit of KC Acquisition's stockholders. We will indemnify KC
Acquisition's stockholders against all losses, expenses or liabilities arising
out of our misrepresentations or breach of the merger agreement.

Termination. The representations and warranties in the merger agreement
terminate on the fourth anniversary of the closing, except for those relating to
taxes, title to stock and environmental matters and claims of the nature covered
by insurance carried by KC Acquisition and its subsidiaries, which survive until
the expiration of the applicable statute of limitations, and except for claims
for fraudulent breach, which do not terminate.

AMENDMENTS AND WAIVERS OF OBLIGATIONS

The merger agreement may be amended only by mutual written agreement.
Waivers under the agreement must be in writing.

THE SHARES ISSUED IN CONNECTION WITH THE MERGER WILL BE LISTED ON THE AMERICAN
STOCK EXCHANGE

We expect to list the shares of common stock to be issued in connection
with the merger and the shares of common stock issuable upon conversion of the
Series B convertible preferred stock and options for trading on the American
Stock Exchange.

WE DO NOT EXPECT TO PAY DIVIDENDS ON OUR COMMON STOCK OR PREFERRED STOCK
FOLLOWING THE MERGER

After the merger, we intend to retain any earnings to finance the expansion
of our businesses. Any future change in our dividend policy will be at the
discretion of the board of directors, who will consider factors such as our
earnings, financial condition, cash flows from operations, current and
anticipated cash needs, expansion plans and any restrictions that may be imposed
under our credit facilities.

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<PAGE> 23

OTHER AGREEMENTS RELATED TO THE MERGER AGREEMENT AND THE RELATED TRANSACTIONS

This discussion summarizes the material provisions of certain agreements
related to the proposed merger and the related transactions. The following
agreements are still under negotiation and therefore are subject to change.

SECURITY ASSOCIATES/SECURITYVILLAGE.COM SUBSCRIPTION AGREEMENTS

SecurityVillage.com and our company have agreed to enter into subscription
agreements pursuant to which SecurityVillage.com will receive:

- 1.2 million shares of our newly issued common stock for $6.0 million,
most of which will be used to fund the merger with KC Acquisition;

- 1.0 million shares of our newly issued common stock as a fee for its
services in arranging our acquisition of KC Acquisition; and

- 300,000 shares of our newly issued common stock in exchange for a $1.5
million note of a subsidiary of KC Acquisition held by
SecurityVillage.com representing funds loaned by SecurityVillage.com to
KC Acquisition in connection with its acquisition of Monital and its
affiliates.

SECURITY ASSOCIATES/SECURITYVILLAGE.COM OPTION AGREEMENT

SecurityVillage.com and our company have agreed to enter into an option
agreement pursuant to which we grant to SecurityVillage.com an option,
exercisable upon the closing of our proposed merger with SecurityVillage.com, to
purchase up to 3.0 million shares of our common stock at an exercise price of
$5.00 per share. The number of shares subject to the option will be equal to the
lesser of (1) 3.0 million shares, or (2) the sum of (a) the total number of
shares of common stock that may be acquired upon the exercise of all stock
options and other equity participation rights issued by us that are outstanding
as of the consummation of the merger, plus (b) the total number of shares of
common stock issued by us in connection with the exercise of any options and
other equity participation rights between April 21, 2000 and the consummation of
the merger. As of the date of this proxy statement, the number of shares that
would be subject to this option is estimated to be approximately 2.8 million.

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<PAGE> 24

POTENTIAL ANCILLARY TRANSACTIONS AND AGREEMENTS

This discussion summarizes the material provisions of certain ancillary
transactions and agreements which may be related to the proposed merger and the
related transactions referred to above, but which are not to be voted upon at
this special meeting. The following agreements are still under negotiation and
therefore are subject to change. The merger referred to in the following
agreements will be submitted to our stockholders at a future meeting.

MASTER AGREEMENT

SecurityVillage.com and our company anticipate entering into a master
agreement which will provide a framework for all of the transactions related to
a merger between our company and SecurityVillage.com. The documents related to
this proposed transaction are described below and will be subject to
modification.

SECURITY ASSOCIATES/SECURITYVILLAGE.COM MERGER AGREEMENT

SecurityVillage.com and our company anticipate entering into a merger
agreement under which each will grant to the other "put/call" rights which, if
exercised, will result in a merger between the two companies. The ability to
exercise these put/call rights will be subject to certain conditions being met.
Our stockholders will have the opportunity to vote on any such merger if the
put/call rights are exercised. The following is a summary of what we expect will
be the parties' various put/call options.

1. If SecurityVillage.com raises at least $35.0 million by December 31,
2001, based on a valuation, not including the raise, of at least $400.0
million for the combined SecurityVillage.com/SAI entity, we will have a
"put" option to allows us to merge with SecurityVillage.com, with
SecurityVillage.com as the surviving entity.

2. If SecurityVillage.com raises at least $35.0 million by December 31,
2001, based on a valuation, not including the raise, of at least $400.0
million for the combined SecurityVillage.com/SAI entity,
SecurityVillage.com will have a "call" option to require us to merge with
SecurityVillage.com, with SecurityVillage.com as the surviving entity.

3. If SecurityVillage.com sells common stock in a firm commitment
underwriting and either (i) receives proceeds of less than $35.0 million,
or (ii) the raise is based on a valuation, not including the raise, of less
than $400.0 million for the combined SAI/SecurityVillage.com entity, then
SecurityVillage.com will have a "call" option to require us to merge into
them, provided that our stockholders receive the greater of (a) $5.00 or
(b) the average trading price of our common stock during the 20 trading
days ending 10 days prior to the closing of the underwriting.

4. If the average trading price of our common stock during any
consecutive 20 trading days is equal to or greater than $5.00 per share,
SecurityVillage.com will have a "put" option, which expires December 31,
2001, to require us to merge with them, with SAI as the surviving entity.

5. If none of the foregoing options has been exercised by December 31,
2001, we will have a "call" option to require SecurityVillage.com to merge
with us, with our company as the surviving entity, provided that the
average trading price of our common stock during the 20 trading days ending
10 days immediately prior to the exercise of the option is not less than
$5.00, and the SecurityVillage.com stockholders receive shares of our
common stock worth no less than $5.00 per share, based on the average
trading price during the 20 trading days immediately prior to the closing
of the merger.

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<PAGE> 25

SecurityVillage.com's right to exercise any of the options described above
will be conditioned on it, or investors solicited by it, undertaking all of the
following:

- investing at least $6.0 million in our common stock at a minimum price of
$5.00 per share;

- investing at least $1.5 million in KC Acquisition; and

- receiving at least $20.0 million of equity funding representing valuation
of at least $95.0 million, including the proceeds of the funding.

PROPORTIONATE OWNERSHIP OF THE MERGED ENTITY

Assuming the purchase of our common stock by Security Village and the
exercise of all options and warrants and the conversion of all shares of
convertible preferred stock into shares of common stock outstanding and subject
to certain other adjustments, it is anticipated that the stockholders of
SecurityVillage.com will hold approximately 58% and our stockholders will hold
approximately 42% shares of the combined Security Associates/SecurityVillage.com
entity.

KING OPTION AGREEMENT

KC Acquisition stockholders anticipate that they will receive an option to
purchase up to 2% of the fully diluted outstanding shares of common stock of
SecurityVillage.com exercisable upon the earlier to occur of (i) the effective
date of SecurityVillage.com's registration statement pursuant to its initial
public offering, or (ii) the closing date of our merger or combination with
SecurityVillage.com.

SECURITYVILLAGE.COM/KC ACQUISITION WARRANT AGREEMENT

SecurityVillage.com and the KC Acquisition stockholders anticipate entering
into an option purchase and warrant agreement pursuant to which, simultaneously
with the closing of our merger with KC Acquisition, SecurityVillage.com will:

- pay $3.0 million for an option to purchase 30,000 shares of Series B
convertible preferred stock (convertible into 3.0 million shares of SAI
common stock). The option is expected to expire January 2, 2002 and to
have an exercise price of $500 per share ($5.00 per common equivalent
share).

- pay $75,000 for an option to purchase 2,500 shares of Series B
convertible preferred stock (convertible into 250,000 shares of SAI
common stock). The option is expected to expire on January 2, 2002 and to
have an exercise price of $620 per share ($6.20 per common equivalent
share).

SECURITY ASSOCIATES/SECURITYVILLAGE.COM REGISTRATION RIGHTS AGREEMENT

SecurityVillage.com and our company anticipate entering into a registration
rights agreement which will require us, among other things, to register the
common stock issued to SecurityVillage.com at the time of our merger with KC
Acquisition within six months after obtaining stockholder approval of the
issuance or sooner if practicable, and to maintain such registration for a
period of one year.

Additionally, if we merge into SecurityVillage.com, all shares of our
capital stock that are not subject to trading restrictions will be exchanged for
shares of SecurityVillage.com that are registered and not subject to contractual
trading restrictions immediately following its initial public offering. Shares
of our capital stock which were subject to trading restrictions will be
exchanged for registered shares of SecurityVillage.com subject to a restriction
on resale for a period of 180 days following the closing of the initial public
offering.

If SecurityVillage.com merges into us, all shares of SecurityVillage.com
capital stock that are not subject to trading restrictions will be exchanged for
our registered shares, subject to a restriction on resale for a period of 180
days following the closing of the proposed merger.

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<PAGE> 26

DEALER AGREEMENTS

SecurityVillage.com, KC Acquisition and our company anticipate entering
into dealer agreements which will provide that SecurityVillage.com will have
access to our dealer networks for the purposes of marketing its services and
soliciting the dealers for enrollment in the SecurityVillage.com dealer program.
The terms of the dealer agreements will be six years. Palisades Partners or M&S
Partners (affiliates of the current KC Acquisition stockholders) will have the
right of first refusal to provide financing to dealers in KC Acquisition's
independent alarm dealer network through December 31, 2005.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

The following discussion is a summary description of the material United
States federal income tax consequences of the merger. The discussion is based
upon the provisions of the Internal Revenue Code of 1986, as amended, applicable
Treasury Regulations, judicial decisions and administrative rulings and
practices, all as in effect on the date of this proxy statement. All of these
are subject to change at any time, possibly with retroactive effect. Any such
change could alter the tax consequences to Security Associates, KC Acquisition
or a KC Acquisition stockholder. The discussion does not address the effects of
any state, local or foreign tax laws or any federal tax laws other than federal
income tax laws.

Our counsel, Sachnoff & Weaver, Ltd., have advised us that our existing
stockholders will not recognize any gain or loss as a result of the merger for
federal income tax purposes. Similarly, neither we, nor King Acquisition, our
merger subsidiary, nor KC Acquisition will recognize any gain or loss as a
result of the merger for federal income tax purposes.

ACCOUNTING TREATMENT OF THE MERGER AND RELATED TRANSACTIONS

We will account for the merger as a purchase for accounting and financial
reporting purposes under generally accepted accounting principles. On the date
of the merger, we will record the assets and liabilities of KC Acquisition at
their estimated fair market values, and the results of operations of KC
Acquisition will be included in our results of operations for the periods after
the merger.

The 1.2 million shares of our common stock expected to be purchased by
SecurityVillage.com for $6.0 million will be treated as a sale of stock in a
private placement. The one million shares of common stock to be issued to
SecurityVillage.com in connection with the merger will be treated as a fee
payable to SecurityVillage.com for its services in arranging our merger with KC
Acquisition. The 300,000 shares of common stock will be issued to
SecurityVillage.com in exchange for outstanding KC Acquisition indebtedness. The
option granted to SecurityVillage.com to acquire up to 3.0 million shares of
common stock at $5.00 per share will be treated as part of the fee in connection
with the transactions contemplated in this proxy statement.

INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED TRANSACTIONS

In considering our board of directors' recommendation that our stockholders
should approve the proposed issuance of our securities in connection with the
merger and related transactions, you should be aware that some of our executive
officers, directors and principal stockholders will receive benefits as a result
of the merger and related transactions that are separate from and in addition to
the interests of our stockholders generally. Our board of directors was aware of
these interests and considered them before approving the merger agreement and
the related transactions.

THOMAS J. SALVATORE WILL RECEIVE OPTIONS TO PURCHASE STOCK OF
SECURITYVILLAGE.COM

Upon completion of our merger with KC Acquisition, Thomas J. Salvatore, one
of our directors, is expected to receive an option to acquire shares
representing 1% of the outstanding common stock of SecurityVillage.com, on a
fully diluted basis, as of the date of the closing of the next round of
financing following April 21, 2000, at a strike price equal to the price per
common-equivalent share paid in that round of

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<PAGE> 27

financing. SecurityVillage.com and Mr. Salvatore are expected to enter into a
registration rights agreement providing for the registration by
SecurityVillage.com of the shares of SecurityVillage.com common stock received
by Mr. Salvatore, subject to restrictions on resale for a period of 180 days.

Mr. Salvatore has agreed to vote all shares held personally and by TJS in
favor of the issuances of stock in connection with the merger and the related
transactions. Mr. Salvatore currently personally owns 275,000 shares and is the
beneficial owner of 137,109 shares of Series A convertible preferred stock,
which is convertible into 13,710,900 of our common shares, held by TJS Partners,
L.P.

Mr. Salvatore has been a director of our company since December 1996. Since
1991, Mr. Salvatore has been the Managing General Partner of TJS Partners, L.P.,
our principal stockholder.

THE COMPOSITION OF OUR BOARD OF DIRECTORS IS EXPECTED TO CHANGE AFTER THE MERGER

Prior to the closing of our merger with KC Acquisition, SecurityVillage.com
and our company each expect to obtain the right to appoint a representative to
observe and be included in all discussions with the board of directors of the
other party. After the consummation of our merger with KC Acquisition, our
company and SecurityVillage.com each expect to have the right to designate one
member and one observer to the board of directors of the other company.

TJS PARTNERS AND CERTAIN SECURITYVILLAGE.COM STOCKHOLDERS ARE EXPECTED TO
RECEIVE REGISTRATION RIGHTS

If our company merges into SecurityVillage.com, following an initial public
offering of the stock of SecurityVillage.com, TJS Partners, L.P. and certain
other holders of non-registered capital stock of SecurityVillage.com will be
entitled to participate in subsequent registrations of SecurityVillage.com stock
in the following proportions: (i) for all amounts up to $30 million, the
participations will be 75% to TJS Partners, L.P. and 25% to the preferred
stockholders of SecurityVillage.com; and (ii) for all amounts in excess of $30
million, on a cumulative basis with all prior registrations, the participations
will be 50% to TJS Partners, L.P. and 50% to the preferred stockholders of
SecurityVillage.com. If SecurityVillage.com does not acquire at least 80% of the
45,000 shares of Series B convertible preferred stock held by KC Acquisition's
stockholders pursuant to its option described above, the KC Acquisition
stockholders will be entitled to participate in a registration in excess of $50
million, on a cumulative basis with all prior registrations, as follows: with
respect to each dollar in excess of $50 million, 45% to TJS Partners, L.P., 45%
to preferred stockholders of SecurityVillage.com, and 10% to KC Acquisition
stockholders.

The merger of our company and SecurityVillage.com will be subject to
stockholder approval, which we will seek at a future date.

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<PAGE> 28

INFORMATION RELATING TO VOTING MATTERS

VOTE REQUIRED TO APPROVE THE ISSUANCE OF SECURITIES

Approval of the issuance of the securities in connection with the merger
requires the affirmative vote of 60% of the votes cast at a special meeting
where a quorum is present. The holders of a majority of the issued and
outstanding shares of common stock and Series A convertible preferred stock must
be present in person or represented by proxy at the meeting for a quorum to be
present. As of October 2, 2000, there were 7,719,355 shares of common stock
issued and outstanding and 137,109 shares of Series A convertible preferred
stock issued and outstanding (representing 13,710,900 votes, subject to certain
limitations).

VOTING AGREEMENTS

James S. Brannen, Ronald I. Davis, Thomas J. Salvatore and TJS Partners,
L.P. expect to enter into a voting agreement with SecurityVillage.com, KC
Acquisition and the stockholders of KC Acquisition. Under this proposed voting
agreement, they would agree to vote all of their shares of our capital stock in
favor of the proposal at the special meeting. In the aggregate they own the
equivalent of 7,781,446 shares of common stock, which after taking into account
the voting restrictions on TJS Partners' Series A convertible preferred stock,
represents approximately 56% of the total number of votes entitled to be cast at
the special meeting.

OUR STOCKHOLDERS WILL NOT HAVE APPRAISAL RIGHTS

The stockholders of our company who object to the transaction are not
entitled to appraisal rights.

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<PAGE> 29

SECURITY ASSOCIATES INTERNATIONAL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Certain statements in this proxy statement that are not historical facts
constitute "forward-looking statements" within the meaning of the federal
securities laws. Discussions containing such forward-looking statements may be
found in this section and "Information Regarding Security Associates
International," as well in this proxy statement generally. In addition, when
used in this document, the words "anticipates," "intends," "seeks," "believes,"
"plans," "estimates," and "expects" and similar expressions as they relate to us
or our management are intended to identify such forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. We undertake no
obligation to revise these forward-looking statements to reflect any future
events or circumstances.

OVERVIEW

Our revenues are derived from recurring payments for monitoring services
provided to subscribers and alarm dealers pursuant to agreements. Monitoring
contracts have initial terms typically ranging from one to five years with
provisions for automatic renewal for periods of one year. Monitoring contracts
entered into with alarm dealers generally permit cancellation with notice of
30-60 days before the end of the original, or any renewal, term.

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<PAGE> 30

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected
statements of operations data:

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDING DECEMBER 31, ENDED JUNE 30,
------------------------------------ ---------------------------
1997 1998 1999 2000 1999
---------- ---------- ---------- ---------- --------------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue................ $ 10,814 $ 20,203 $ 22,689 $ 11,267 $ 12,631
Operating Unit Expense..... 7,018 12,610 14,900 8,345 7,645
---------- ---------- ---------- ---------- ----------
Operating Unit Margin...... 3,796 7,593 7,789 2,922 4,986
Operating Expenses:
Amortization &
depreciation.......... 3,704 6,288 5,714 2,428 3,681
General &
administrative........ 1,595 2,488 2,546 1,034 1,345
Selling, marketing &
business
development........... 297 1,614 2,460 1,293 1,230
Deferred Compensation
Expense.................. 862 609 -- -- --
---------- ---------- ---------- ---------- ----------
Loss From Operations....... (2,662) (3,406) (2,931) (1,833) (1,270)
Gain on Sale of Owned
Subscriber Accounts...... -- -- 1,899 -- 2,649
Interest Expense........... (1,863) (2,870) (2,565) (743) (1,797)
---------- ---------- ---------- ---------- ----------
Net Loss................... (4,525) (6,276) (3,597) (2,576) (418)
Dividends Accrued on
Preferred Stock.......... 413 522 450 -- 300
---------- ---------- ---------- ---------- ----------
Net Loss to Common
Stockholders............. $ (4,938) $ (6,798) $ (4,047) $ (2,576) $ (718)
Net Loss Per Share......... $ (1.16) $ (1.06) $ (.59) $ (.36) $ (.11)
Total Weighted Average
Number of Common Shares
Outstanding.............. 4,266,151 6,394,048 6,897,200 7,223,473 6,818,695
</TABLE>

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<PAGE> 31

The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDING DECEMBER 31, ENDED JUNE 30,
------------------------- --------------
1997 1998 1999 2000 1999
----- ----- ----- ---- ----
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue............................................ 100% 100% 100% 100% 100%
Operating Unit Expense................................. 65% 63% 66% 74% 61%
Operating Unit Margin.................................. 35% 37% 34% 26% 39%
Operating Expenses:
Amortization & depreciation.......................... 34% 31% 25% 22% 29%
General & administrative............................. 14% 12% 11% 9% 10%
Selling, marketing & business development............ 3% 8% 11% 11% 10%
Deferred compensation expense........................ 8% 3% -- -- --
Loss From Operations................................... (24)% (17)% (13)% (16)% (10)%
Gain On Sale Of Owned Subscriber Accounts.............. -- -- 8% -- 21%
Interest Expense....................................... (17)% (14)% (11)% (7)% (14)%
Net Loss............................................... (41)% (31)% (16)% (23)% (3)%
</TABLE>

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1999 AND 2000

For the six months ended June 30, 2000, revenues were $11,267,325 compared
to $12,630,568 for the same period in the prior year, a decrease of 10.8%. The
change in revenue was due to an increase in revenues from central station
operations of $1,564,957 or 16.1% and a decrease in revenue from the retail
operation of $3,720,169. The increase in central station revenues is due to
acquisitions completed in 1999. The decrease in revenue from the retail
operation is due to the sale of the owned accounts that occurred on June 30,
1999.

Operating unit expenses increased by $699,999 from $7,645,012 to $8,345,011
or 9.2%. The increase in operating unit cost attributable to central station
operations was $1,647,796 or 24.6%. The decrease in operating unit cost
attributable to retail operations was $947,797. The increase in central station
costs is due to acquisitions completed in 1999. The decrease in retail costs is
due to the sale of the owned accounts that occurred on June 30, 1999.

General and administrative expenses for the six months ended June 30, 2000,
decreased by $310,436 or 23.1% over the same period in the prior year. The
decrease was primarily attributable to the sale of the owned accounts and a
realignment of management responsibilities in the central stations.

Business development expenses increased by $62,485 or 5.1% as salespeople
and related expenses were added to focus on bringing new dealers into our
central stations. Included in these expenses were non-cash expenses related to
the dealer stock incentive program of $110,414.

The decrease of $1,252,383 in amortization and depreciation expenses is
related to the increased amortization of goodwill of $751,571, due to
acquisitions of central stations completed over the previous twelve months,
combined with a decrease in amortization related to the retail operation of
$2,003,954.

The gain from the sale of the owned accounts of $2,649,184 reported for the
six months ended June 30, 1999 is the result of the sale of the owned account
portfolio, which occurred on June 30, 1999. The gain reflects the total cash
proceeds of $22,800,000 less the net book value of the account portfolio, and
the net book value of goodwill related to the purchase of the owned accounts.

Interest expense decreased from $1,797,024 in the second quarter of 1999 to
$742,819 in the second quarter of 2000. Debt decreased by approximately
$27,626,000 from the second quarter of 1998 to the second quarter of 1999 due to
the reduction in the FINOVA debt of $20,000,000 and the conversion of
$10,000,000 of subordinated debt to preferred stock on September 30, 1999.

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<PAGE> 32

1999 COMPARED TO 1998

Revenue. Revenue for fiscal 1999 increased by $2,485,282, or 12.3%, to
$22,689,132 from $20,203,850 for fiscal 1998. The change in revenue is
attributable to an increase in revenue in our central station operations of
$5,707,149 and a decrease in revenue from our owned subscriber account portfolio
of $3,221,867. The increase in revenue related to central station operations is
due to acquisitions completed during 1998 and 1999, from revenue related to the
monitoring of the subscriber accounts sold to SAFE and from an increase of
approximately 33,000 monitored accounts in our existing central stations. The
increase in revenue consists of the following approximate amounts: acquisitions,
$4,423,150; monitoring of our previously owned subscriber accounts, $477,000;
monitored accounts added to our existing central stations, $807,000. The
decrease in revenue related to our owned subscriber account portfolio is
attributable to the sale of the owned subscriber accounts on June 30, 1999.

Operating Unit Expense and Margin. Operating Unit Expense includes all
costs directly attributable to each operating unit rendering monitoring
services. During 1998 and until June 30, 1999, these expenses also include the
customer service function related to our owned subscriber account portfolio.
These expenses increased from $12,610,489 in 1998 to $14,899,687 in 1999 or
18.2%. Expenses related to the central station operation increased from
$10,291,901 in 1998 to $13,952,037 in 1999 or 35.6%. This increase is primarily
attributable to acquisitions of central stations in 1998 and 1999 and to the
hiring of additional personnel devoted to quality assurance and training. The
margin attributable to the central station operations decreased from 29.8% in
1998 to 29.4% in 1999. Expenses related to our owned subscriber account
portfolio decreased from $3,723,986 in 1998 to $1,746,967 in 1999 due to the
sale of our owned subscriber account portfolio on June 30,1999. The margin
attributable to our owned subscriber account portfolio was 46.4% in 1998 and
53.2% in 1999. The increase is due to the greater number of owned subscriber
accounts in 1999, which allowed us to increase efficiency. Intercompany revenue
and costs decreased from $1,405,398 in 1998 to $799,318 in 1999 due to the sale
of our owned subscriber accounts on June 30, 1999.

Operating Expenses. Amortization and depreciation decreased by $574,599, or
9.1%, from $6,288,489 to $5,713,890. The change in amortization and depreciation
is due to a decrease in amortization related to our owned subscriber account
portfolio of $1,972,988 offset by an increase in the amortization of goodwill of
$1,398,389. The decrease is related to the sale of the owned subscriber
accounts, and the increase is related to central station acquisitions in 1998
and 1999.

General and administrative expenses increased by $58,877, or 2.4%, from
$2,488,058 to $2,546,935 due to central station acquisitions.

Selling, marketing and business development expenses increased by $845,838,
or 52.4%, from $1,614,007 to $2,459,845. We decentralized our sales efforts in
1999 to better serve our customers. We added six salespeople to cover our
regional sales areas. We also increased our marketing initiatives to focus on
growth in existing central stations. Included in these expenses are $255,282 of
non-cash expense related to our stock based dealer incentive plan. Dealer
incentive expenses increased by $184,880 in 1999.

Our deferred compensation plan was terminated in 1999. As a result, there
is no expense to record. Deferred compensation expense in 1998 was $609,103.

Gain on Sale of Owned Subscriber Accounts. As a result of the sale of our
owned subscriber account portfolio to SAFE on June 30, 1999, we recorded a gain
of $1,899,155. The gain reflects the total cash proceeds of $22,800,000 less the
net book value of the account portfolio and the net book value of goodwill
related to acquisitions made in connection with the owned subscriber accounts.
Additionally, the $1,800,000 note payable to SAFE and accrued expenses related
to the attrition guarantee, account reprogramming and severance expenses of
$3,097,278 were charged against the gain on the sale. Included in the $3,097,278
are additional accruals of approximately $750,000, which were recorded in the
fourth quarter based on our projected obligations under the attrition guarantee
and the additional expenses we expect to incur to reprogram a portion of the
accounts sold to phone lines owned by SAFE.

Interest Expense. Interest expense decreased by $305,028 or 10.6% from
$2,869,593 in 1998 to $2,564,565 in 1999. Total debt decreased from $35,980,500
at the end of 1998 to $14,287,812 at the end of

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<PAGE> 33

1999. The decrease in debt was attributable to a payment of $20,000,000 made to
FINOVA on June 30, 1999 and the exchange of $10,000,000 of subordinated debt,
plus accrued interest, for Series A convertible preferred stock on September 30,
1999. The interest rate on the subordinated debt was 12%. The interest rate on
the FINOVA debt decreased from 9.75% to 9.25% on September 30, 1999 and
subsequently increased to 9.5% in November when the prime rate was raised.

BUSINESS SEGMENT OPERATING RESULTS

The following is a discussion of our industry segment operating results. We
define operating earnings as income or loss before interest and income taxes. We
do not allocate corporate general and administrative or corporate payroll
expenses to our operating segments.

Central Station Operations. Operating income from our central station
segment decreased from $1,684,500 to $1,063,340 or a decrease of 36.9%. Revenue
related to this segment increased from $14,667,212 to $19,768,281 or an increase
of 34.8%. The decrease in operating income was caused by an increase in sales
and marketing expenses of $851,125 related to the decentralization of our sales
force and new marketing initiatives, including an increase in non-cash expenses
related to our stock-based dealer incentive plan of $184,880. Amortization and
depreciation increased by $1,334,935 or 66.9% related to acquisitions. Cash
flow, defined as operating income plus depreciation and amortization and
stock-based dealer incentive expense, related to central station operations
increased from $3,680,818 to $4,649,875 or 26.3%.

Owned Subscriber Accounts. Operating loss related to our owned subscriber
accounts segment decreased from ($1,074,121) to ($338,779), or a decrease of
68.5%. Revenue decreased from $6,942,036 to $3,720,169, or 46.4%. Cash flow,
defined as operating income plus depreciation and amortization, decreased from
$3,218,050 to $1,980,404, or 38.5%. The changes in the results from this segment
are primarily related to the sale of the owned subscriber accounts on June 30,
1999.

Corporate Expenses. Corporate expenses decreased from $4,016,675 to
$3,655,786, or 9.0%. The decrease is due primarily to the elimination of
$609,103 of deferred compensation expense offset by an increase in depreciation
expense and non-salary related general and administrative expense associated
with the overall growth of the business in 1999.

1998 COMPARED TO 1997

Revenue. Revenues for fiscal 1998 increased by $9,389,763, or 86.8%, to
$20,203,850 from $10,814,087 for fiscal 1997. The increase in revenues was
primarily related to acquisitions completed at the end of 1997 which resulted in
a full year's revenue generated in 1998 as opposed to a partial year in 1997,
and to acquisitions completed during 1998. The increase in revenues related to
Telecommunications Associates Group, Inc. ("TAG") was approximately $3,878,000.
The acquisition of TAG was completed on November 24, 1997. The increase in
revenues related to the acquisition of Texas Security Central, Inc. ("TSC") and
Alarm Central Monitoring, Inc. ("ACM") was approximately $2,237,000. The
acquisitions of TSC and ACM were completed in June and October 1998,
respectively. The acquisitions of the monitoring business of Fire Protection
Services Corporation d/b/a Mountain Alarm (acquired in May, 1998), the assets of
World Security Services Corp. (acquired in October, 1998) and Reliance
Protection Services, Ltd. (acquired in July, 1998) increased revenue by
approximately $1,040,000. The balance of the increase in revenue between the
years 1998 and 1997, approximately $1,902,000, was the result of a net increase
in the number of subscriber accounts owned during the year and internally
generated revenue growth related to the central stations.

Operating Unit Expense and Margin. Operating Unit Expense includes all
costs directly attributable to each operating unit rendering monitoring
services. In 1998 and 1997 these expenses included direct expenses related to
the central station operations and the customer service function related to the
owned subscriber account portfolio. These expenses increased from $7,018,392 in
1997 to $12,610,489 in 1998 or 79.7%. Expenses related to the central station
operation increased from $5,102,119 in 1997 to $10,291,901 in 1998 or 101.72%.
This increase is primarily attributable to acquisitions of central stations in
1997 and 1998. The margin attributable to the central station operations
increased from 23.6% in 1997 to 29.8% in 1998. The

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<PAGE> 34

increase in margin is related to an increase in the number of accounts monitored
and the consolidation of the Michigan central station with Ohio. Expenses
related to the owned subscriber account portfolio increased from $2,801,302 in
1997 to $3,723,986 in 1998. The margin attributable to the owned subscriber
account portfolio was 44.2% in 1997 and 46.4% in 1998. The increase is due to
the larger number of accounts owned in 1998. Intercompany revenue and costs
increased from $885,029 in 1997 to $1,405,398 in 1998 due to an increase in the
number of owned subscriber accounts monitored in 1998.

Operating Expenses. Amortization and depreciation increased by $2,584,946,
or 69.8%, from $3,703,543 to $6,288,489 due to an increase in the amortization
of goodwill related to acquisitions and an increase in amortization of contract
rights of $1,326,000.

General and administrative expenses increased from $1,595,181 in 1997 to
$2,488,058 in 1998 or 56.0% due to increased payroll costs related to hiring
four additional management personnel in the fourth quarter of 1997 and an
increase in support staff to manage the growth in the business. Non payroll
expenses including state franchise taxes and professional fees also increased
significantly in 1998.

Selling, marketing and business development expenses increased from
$296,977 in 1997 to $1,614,007 in 1998, or 443.48%. The increase in these
expenses is related to the addition of two employees devoted to marketing
initiatives, three employees devoted to a national sales effort and two
employees devoted to business development efforts primarily related to central
station acquisitions. The total increase in payroll and related costs is
approximately $525,000. Approximately $575,000 in additional costs related to
marketing the dealer incentive program and overall advertising and marketing
efforts, including $70,400 of expense related to the stock-based dealer
incentive program were incurred in 1998. There was also an increase in travel
expenses and professional fees related to acquisitions and sales efforts of
approximately $200,000.

Deferred compensation expense decreased from $862,034 in 1997 to $609,130
in 1998. The decrease is related primarily to the decrease in the common stock
value from $5.00 per share at the end of 1997 to $3.93 at the end of 1998, as
this plan is a variably priced plan. Awards under this plan are approved
annually by the Board of Directors. No future awards will be made under this
plan for any period after December 31, 1998.

Interest Expense. Interest expense increased $1,006,987 from $1,862,606 in
1997 to $2,869,593 in 1998, an increase of 54.1%. This increase was caused
primarily by an increase in borrowings under our credit facility with FINOVA
Capital Corporation from $16,521,813 at the end of 1997 to $26,609,730 at the
end of 1998. In addition, we incurred interest expense of $733,055 in 1998
compared to $585,000 in 1997 related to outstanding debt on subordinated
borrowings from our principal stockholder. We had $8,500,000 of debt outstanding
under those subordinated notes at the end of 1998, compared to $5,500,000
outstanding at the end of 1997.

BUSINESS SEGMENT OPERATING RESULTS

Central Station Operations. Operating income from our central station
segment increased from $816,678 to $1,684,500 or an increase of 106.2%. Revenue
related to this segment increased from $6,680,882 to $14,667,212 or an increase
of 119.5%. The increase in both operating income and revenue are the result of
acquiring seven central station operations in 1998 and internal revenue growth
from various programs of approximately 10%.

Owned Subscriber Accounts. Operating loss related to the owned subscriber
accounts segment increased from ($724,526) to ($1,074,121) or an increase of
48.3%. Revenue increased from $5,018,234 to $6,942,036 or 38.3%. Cash flow,
defined as operating income plus depreciation and amortization, increased from
$2,216,932 to $3,218,050 or 45.2%. The increase in the operating loss in this
segment was caused by an increase in amortization and depreciation. The increase
in revenue and cash flow is directly related to accounts acquired during the
year.

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<PAGE> 35

Corporate Expenses. Corporate expenses increased from $2,754,192 to
$4,016,675 or 145.8%. The increase is due primarily to increased payroll costs
related to additional executive and supervisory level personnel added in 1998.
The addition of these people was required to enable us to effectively manage the
growth that occurred during 1998 and that is anticipated in the future.

CAPITAL EXPENDITURES

We made capital expenditures during 1999 and 1998 totaling $1,629,484 and
$1,752,860, respectively. Of these capital expenditures in 1999 and 1998,
approximately $1,000,000 and $1,130,000, respectively, relates to the
installation of new financial and operating systems. The remaining expenditures
in both years relate primarily to new phone systems in the central stations and
the purchase of computer equipment.

LIQUIDITY AND CAPITAL RESOURCES

General. Since January 1994, we have financed our operations and growth
from a combination of internally generated cash flow, borrowings under our
credit facilities and sales of equity securities. Our principal uses of cash are
for capital expenditures to support internal growth, the acquisition of central
monitoring station businesses and operating expenses. We intend to continue to
pursue growth through the acquisition of additional central monitoring station
businesses.

We are continuing to implement our strategy to attract new dealers to our
wholesale central station monitoring facilities. We intend to continue issuing
shares of common stock throughout the remainder of the year under our Dealer
Partner and ValueBuilder programs. The number of shares of common stock to be
issued cannot be estimated at this time, but may not exceed 2,000,000 shares,
including those that may be issued upon exercise of warrants previously issued
to alarm dealers under these programs.

On April 21, 2000, we entered into a letter of intent, which commits us to
combine with KC Acquisition Corp. subsequent to KC Acquisition Corp.'s purchase
of Griptight Holdings, Inc./Monital Signal Corporation. Both KC Acquisition and
Monital operate wholesale monitoring stations in the United States. Griptight
Holdings, Inc. is the parent company to Monital, the capital stock of which was
Griptight's sole asset.

The consideration for this transaction includes $5,000,000 in cash, the
equivalent of 4,500,000 shares of our common stock and the assumption of
approximately $35,000,000 of debt. The letter of intent also calls for us to
issue to SecurityVillage.com the equivalent of 2,500,000 shares of common stock
and options to purchase up to 3,000,000 shares of our common stock at a $5.00
per share exercise price in exchange for cash, as a fee in connection with the
merger transactions, and for entering into a series of put and call options
between our company and SecurityVillage.com. The issuance of stock and options
and the put and call agreement require us to file this proxy statement and
obtain stockholder approval.

During the second quarter of 2000 we raised $1,037,250 through the exercise
of options to purchase common stock. Of these options, $781,250 was exercised by
two directors and an officer/director and the balance by unrelated parties. On
August 9, 2000, we received an additional $250,000 from a director in exchange
for 100,000 shares of our common stock. These funds have been used to pay
approximately $370,000 for earn-outs on acquisitions, for the repayment of
holdback notes and deferred acquisition costs, and approximately $650,000 was
used for working capital. Additionally, in the third quarter we signed an
agreement to provide marketing and sales services to SecurityVillage.com for
$85,000 per month beginning in September 2000. In the event that our company and
SecurityVillage.com do not sign a merger agreement by October 1, 2000, the
agreement for the provision of marketing and sales services will terminate.

In August, we amended our loan with FINOVA. FINOVA agreed to waive all
covenant violations for March 31, 2000 and June 30, 2000. FINOVA also bought out
the portion of the loan extended by Citizens Bank of Massachusetts. The loan
facility was decreased from $45 million to $17.5 million. We currently have
$13.476 million outstanding under the FINOVA loan. Of the remaining $4.0 million
available, $3.8 million is reserved for obligations related to the sale of our
retail portfolio and the remaining $200,000 is

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<PAGE> 36

reserved for capital expenditures. Funding for future acquisitions will be
sought as needed. We have obligations to SAFE ranging between $1.4 and $3.6
million that may come due in the third quarter.

1999 COMPARED TO 1998

During the year ended December 31, 1999, contract rights to monitor
security systems were purchased for $1,517,537 in cash. During the same period
goodwill, net of accumulated amortization, increased from $23,123,820 to
$25,911,332 due to the acquisition of central stations during the year. Cash
expenditures for acquisitions were $5,232,197 in 1999.

Our owned account subscriber portfolio was sold to SAFE on June 30, 1999
for $22,800,000 in cash. We signed a note for $1,800,000, which was part of the
$22,800,000 purchase price, payable within a year from the sale. This note is
extinguished if SAFE purchases contracts from alarm dealers referred by us with
total recurring monthly revenue of $230,000 during the term of the loan.
Management cannot predict whether we will be able to meet this requirement. As
of December 31, 1999, SAFE has purchased contracts with $34,263 of recurring
monthly revenue. Additionally, as of December 31, 1999, dealers we had referred
have signed letters of intent with SAFE for the sale of contracts with $53,024
of recurring monthly revenue and there were dealers with contracts with
recurring monthly revenue totaling over $71,858 that had not yet responded to
the letters of intent sent to them. There can be no assurance that SAFE will
purchase all or any of the contracts referred even if letters of intent are
signed.

Of the proceeds from the sale of our owned subscriber account portfolio,
$20 million was used to pay down debt on our previous line of credit with FINOVA
Capital Corporation, which left a principal balance outstanding of approximately
$6,600,000. The remaining cash from the sale was used for the completion of
capital projects, payment of holdback notes and to pay for transition
obligations related to the sale of the owned subscriber account portfolio.

On September 30, 1999, we refinanced our previous $30 million line of
credit with FINOVA Capital Corporation. The refinancing with FINOVA and Citizens
Bank of Massachusetts, a wholly owned subsidiary of the Royal Bank of Scotland,
consists of a term loan and an acquisition line of credit. The term loan was in
the principal amount of $7 million, which covered our existing indebtedness to
FINOVA and working capital. The acquisition line of credit of up to $38 million
is solely for acquisitions of central monitoring station businesses. We may draw
on this line of credit through March 31, 2001. On March 10, 2000, we entered
into a second amendment to loan instruments which created a $1 million capital
expenditure line and a line of credit up to $2 million to cover contingent
obligations related to the SAFE attrition guarantee and referral obligation.
This combined $3 million was taken out of, and thereby reduced, the acquisition
portion of the $45 million facility discussed above. Both the term loan and the
acquisition line of credit bear initial interest at a variable rate of prime
plus 0.75%. The Interest Rate is, however, subject to an upward adjustment
depending on the loan-to-recurring-monthly-revenue ratio. These obligations
mature in five years.

As of December 31, 1999, we had approximately $32,686,000 available for
acquisitions on our existing line of credit with FINOVA Capital Corporation and
Citizens National Bank of Massachusetts.

On September 30, 1999, we entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS Partners, L.P., our principal stockholder. Pursuant to this agreement,
(i) $10,000,000 of subordinated debt and accrued interest we owed to TJS
Partners, L.P., (ii) 66,910 shares of convertible preferred stock, and (iii)
500,000 shares of 12% redeemable preferred stock, together with all accrued
dividends, were exchanged for 135,709 shares of newly designated Series A
convertible preferred stock.

The Series A convertible preferred stock has a $10 par value and a
liquidation preference of $350 per share, and each share is convertible into 100
shares of our common stock. The Series A convertible preferred stock is also
entitled to receive dividends equal to those that would have been received if
the holder had converted into common stock.

In November 1999, we purchased central stations in Seattle, Washington and
Chino, California. The total purchase price for these acquisitions was
approximately $4,300,000 in cash, 100,000 shares of our

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<PAGE> 37

common stock and certain assumed liabilities. We also purchased an additional
central station in Metairie, Louisiana and a central station monitoring business
in Idaho in December 1999. The total purchase for these two acquisitions
approximated $1,000,000 plus the assumption of liabilities.

Current liabilities decreased during the year ended December 31, 1999
compared to 1998 from $9,850,442 to $6,859,791. Unearned revenue decreased by
$3,209,921 due to the sale of our owned subscriber account portfolio and a
concerted effort to convert our subscribers from quarterly, semi-annual and
annual billing cycles to monthly. This was done to smooth cash flow and expedite
the collection of receivables. Accrued expenses increased by $471,523 due to the
exchange of $3,576,166 of accrued interest and dividends by TJS Partners for
Series A convertible preferred stock, offset by additional accruals related to
the sale of the owned accounts of $3,097,278. Additional increases in accruals
in 1999 are approximately $950,000. Accruals of approximately $460,000 are
related to acquisitions in the fourth quarter of 1999, including an accrual of
$250,000 for expenses related to moving the Metairie, Louisiana facility.
Additionally, accrued payroll increased approximately $400,000 in 1999 and an
accrual of $90,000 related to the Employee Stock Purchase Plan is recorded in
1999. Current maturities decreased by $200,956 during the year. In 1998, current
maturities were comprised of the short-term portion of the FINOVA debt
($1,330,000) and other short-term debt of $844,038. In 1999, current maturities
were comprised of a short-term note of $1,800,000 due to SAFE and other
short-term debt of $173,352. Senior debt borrowings decreased by approximately
$14,322,002 and subordinated borrowing decreased by $8,500,000. Net capital of
$192,500 was raised during the year through warrant and option exercises for the
purchase of common and preferred stock. These proceeds were used to fund central
station acquisitions, the purchase of fixed assets and for general corporate
purposes.

1998 COMPARED TO 1997

During the year ended December 31, 1998, contract rights to monitor
security systems, net of accumulated amortization, increased $1,344,336 to
$15,252,814 due to a net increase of 3,883 subscriber accounts. During the same
period goodwill, net of accumulated amortization, increased from $11,933,074 to
$23,123,820 due to the acquisition of seven central stations during the year.
Cash expenditures for acquisitions were $12,431,112 in 1998. Cash paid for 7,032
subscriber accounts purchased was $3,897,659 in 1998.

Current liabilities increased during the year ended December 31, 1998
compared to 1997 from $6,756,199 to $9,850,442. Unearned revenue increased by
$662,402 due to acquisitions and our overall growth. Accrued liabilities
increased by $1,316,541 primarily due to an increase in accrued interest and
dividends due to TJS Partners, L.P. and our overall growth. Current maturities
increased by $1,276,585 during the year. Senior debt borrowing increased by
approximately $10,088,000 and subordinated borrowing increased by $3,000,000.
Net capital of $2,048,351 was raised during the year through warrant and option
exercises for the purchase of common and preferred stock. These proceeds were
used to fund central station acquisitions and the acquisition of subscriber
accounts from alarm dealers, the purchase of fixed assets and for general
corporate purposes.

TJS Partners, L.P.'s Investment

During the first three quarters of 1999, TJS exercised options to purchase
250 shares of convertible preferred stock for an aggregate purchase price of
$25,000. On September 30, 1999 TJS exchanged its subordinated debt, convertible
preferred stock and redeemable preferred stock for Series A convertible
preferred stock on the terms discussed above. Subsequently, TJS purchased 650
shares of Series A convertible preferred stock for an aggregate purchase price
of $71,250. On February 9, 2000 and February 25, 2000, TJS advanced $125,000 to
us in anticipation of the exercise of standby options to purchase 500 shares of
Series A convertible preferred stock and $79,093 in anticipation of the exercise
of standby options to purchase 827 shares of Series A convertible preferred
stock, respectively.

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<PAGE> 38

Loan Agreement with FINOVA Capital Corporation

On December 31, 1996, we entered into a loan agreement with FINOVA. The
maximum amount available under the FINOVA loan agreement was originally $15
million. On December 2, 1997, our loan agreement with FINOVA was amended. Under
the amended loan agreement, our credit facility was increased to $30 million. On
September 30, 1999, the loan agreement was renegotiated to increase the facility
to $45 million. Certain financial covenants were changed and Citizens Bank of
Massachusetts now participates in the facility with FINOVA. Our new loan
agreement allows us to draw on the acquisition portion through March 31, 2001
and matures on December 31, 2004, subject to earlier termination. On March 10,
2000, we entered into a second amendment to loan instruments which created a $1
million capital expenditure line and a line of credit up to $2 million to cover
contingent obligations related to the SAFE attrition guarantee and referral
obligation. This combined $3 million was taken out of, and thereby reduced, the
acquisition portion of the $45 million facility discussed above.

The interest rate on borrowings under the new loan agreement is the base
rate in effect from time to time plus the applicable margin. At December 31,
1999, the applicable margin was 0.75% and the interest rate was 9.50%. We paid a
loan fee of $262,500 on the original closing in December 1996, and an additional
$222,000 on the effective date of the increase in December 1997. We paid a loan
fee of $337,500 on the new loan agreement on September 30, 1999. We are
obligated to pay a commitment fee of 0.5% on the unused portion of the facility
during the period we are able to draw on the facility.

The loan agreement with FINOVA and Citizens Bank of Massachusetts contains
customary covenants. The most important covenants can be summarized as follows:
until all obligations under the FINOVA loan agreement are paid or performed in
full, neither we nor our covered subsidiaries may, except as specifically
permitted: (i) incur indebtedness; (ii) encumber our properties; (iii) merge
with or acquire other companies; (iv) incur contingent liabilities; (v) make
distributions on or redeem equity securities; (vi) prepay debt; (vii) enter into
operating leases (in excess of scheduled amounts); (viii) make investments in or
loans to other companies; (ix) make fundamental changes in our businesses; (x)
change the locations of our facilities; (xi) dispose of assets; (xii) amend our
organizational documents; (xiii) issue additional membership interests in
certain subsidiaries; (xiv) enter into contracts with members; (xv) permit the
occurrence of any violations of ERISA; or (xvi) pay management compensation in
excess of permitted amounts; (xvii) allow the ratio of total debt to operating
cash flow (as defined) to exceed 3.50; (xviii) allow the total debt to exceed 15
times RMR for subscriber accounts we monitor for alarm dealers; (xix) the ratio
of operating cash flow (as defined) to interest expense must be at least 1 to 1;
(xx) the fixed charge coverage ratio (as defined) must be at least 1.05 to 1;
and (xxi) mandatory prepayments from excess cash flow as defined in the loan
agreement.

In August 2000, we amended our loan with FINOVA. FINOVA agreed to waive all
covenant violations for March 31, 2000 and June 30, 2000. FINOVA also bought out
the portion of the loan extended by Citizens Bank of Massachusetts. The loan
facility was decreased from $45 million to $17.5 million. We currently have
$13.476 million outstanding under the FINOVA loan. Of the remaining $4.0 million
available, $3.8 million is reserved for obligations related to the sale of our
retail portfolio and the remaining $200,000 is reserved for capital
expenditures. Funding for future acquisitions will be sought as needed. We have
obligations to SAFE ranging between $1.4 and $3.6 million which may come due in
the third quarter.

INFLATION

Management does not believe that inflation had a significant impact on our
results of operations for the periods presented.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We currently do not invest excess funds in derivative financial instruments
or other market rate sensitive instruments for the purpose of managing interest
rate or foreign currency exchange rate risk or for any other purpose.

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<PAGE> 39

We incur debt from three sources: dealers from whom we acquire subscriber
accounts, senior debt from FINOVA and a note related to the sale of our retail
account portfolio. Debt owed to dealers is in the form of a "holdback note,"
which is collateral to a guaranty of the aggregate revenue produced by
subscriber accounts purchased from the dealer for a period of time. These notes
are non-interest-bearing and comprise less than 0.5% of our total debt. At June
30, 2000 we had $13,189,460 in senior debt due to FINOVA at an interest rate of
prime (9.5%) plus 0.75%. We also have a note due currently of $1,800,000 at an
8% annual rate related to the sale of the owned account portfolio. There is a
referral transaction pending that will satisfy our obligations under the note if
SAFE closes the transaction. It cannot be determined when or if we will have to
pay the note. We do not have exposure to foreign currency fluctuations and do
not use derivatives for trading purposes.

INTEREST RATE RISK

The table below provides information about our debt obligations that are
sensitive to changes in interest rates. For these debt obligations, the table
presents principal cash flows and related average interest rates by expected
maturity dates.

<TABLE>
<CAPTION>
MATURITY DATE
-----------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 TOTAL VALUE
---- ----- ------ ------ ------ ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $1.8 $ 1.8 $ 1.8
Average Interest Rate 8% 8%
Variable Rate Debt $.725 $1.550 $2.077 $8.837 $13.189 $13.189
Average Interest Rate 9.5% 9.5% 9.5% 9.5% 9.5%
</TABLE>

INFORMATION REGARDING SECURITY ASSOCIATES INTERNATIONAL

OVERVIEW

We provide security alarm monitoring services for both residences and
businesses as subcontractor for independent alarm dealers for subscribers who
have entered into monitoring contracts with them. Independent alarm dealers are
primarily owner-operated companies that have less than 10,000 subscribers. Our
ability to attract new monitoring business is enhanced and supported by a
network of 2,700 independent alarm dealers, to whom we also provide
industry-related education in the areas of technology, finance, management and
marketing.

We were incorporated in 1990 as an Illinois corporation and, through a
merger in 1992, we became a Delaware corporation. Our original stockholders were
thirty independent alarm dealers, in addition to our four founders. Three of our
four founders are still active in our management: Ronald I. Davis, Chairman of
the Board of Directors, James S. Brannen, President, and Stephen Rubin, Senior
Vice President. We conduct our operations directly through central monitoring
stations we own and through three wholly owned operating subsidiaries which
operate central monitoring stations (which are the locations where the actual
monitoring of the subscriber's alarms is conducted).

We intend to continue to merge our wholly owned subsidiaries into our
company in an effort to reduce costs and realize economies of scale. We may also
consolidate the operations of our central monitoring stations where we believe
we can realize operating economies while maintaining our regional relationships
with independent alarm dealers.

Prior to June 30, 1999, we also provided monitoring services directly to
residences and businesses. On June 30, 1999, we sold our portfolio of
approximately 27,000 owned (retail) subscriber accounts to Security Alarm
Financing Enterprises, Inc. (SAFE). We continue to monitor these accounts under
contract with SAFE and are SAFE's preferred provider of alarm monitoring
services.

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<PAGE> 40

The sale of our subscriber accounts to SAFE represented a major turning
point in our progress. As a result of that transaction, we disposed of a
non-core asset and re-focused our efforts on our core wholesale monitoring
business and on our dealer network.

Most of the proceeds of the sale of the subscriber accounts went to pay
down our line of credit with FINOVA Capital Corporation. Following the
subscriber account sale, we entered into a new $45,000,000 line of credit with
FINOVA and Citizens Bank of Massachusetts, a wholly owned subsidiary of the
Royal Bank of Scotland. At the same time, our principal outside investor, TJS
Partners, L.P., agreed to restructure its investment in our company, further
improving our balance sheet and our ability to expand our core wholesale
monitoring business. In August 2000, we amended our loan with FINOVA. FINOVA
agreed to waive all covenant violations for March 31, 2000 and June 30, 2000.
FINOVA also bought out the portion of the loan extended by Citizens Bank of
Massachusetts. The loan facility was decreased from $45 million to $17.5
million. We currently have $13.476 million outstanding under the FINOVA loan. Of
the remaining $4.0 million available, $3.8 million is reserved for obligations
related to the sale of our retail portfolio and the remaining $200,000 is
reserved for capital expenditures. Funding for future acquisitions will be
sought as needed. We have obligations to SAFE ranging between $1.4 and $3.6
million, which may come due in the third quarter.

Our revenues consist of recurring monthly revenue ("RMR") payments under
written contracts with independent alarm dealers to provide monitoring services
to their subscribers. Total revenues increased from $2,733,253 for the fiscal
year ended December 31, 1995 to $22,689,132 for the fiscal year ended December
31, 1999. Operating cash flow increased from $251,073 for the fiscal year ended
December 31, 1995 to $3,105,173 for the fiscal year ended December 31, 1999.
Operating cash flow is defined as earnings before depreciation, amortization,
interest expense, income taxes and certain other expenses that are paid for with
common stock or warrants. Our loss per share of common stock for the fiscal year
ended December 31, 1999 was $0.59 per share. As a result of the sale of our
subscriber account portfolio on June 30, 1999 and our new focus on the wholesale
monitoring business, our results for the current fiscal year are not completely
comparable to our results for prior periods. See "Security Associates
International Management's Discussion and Analysis of Financial Condition and
Results of Operations."

As of June 30, 2000, we provide monitoring services for approximately
393,000 residences and businesses from our national network of regional central
monitoring stations. All of these locations were monitored under contracts with
approximately 2,700 alarm dealers for subscriber accounts owned by them. From
January 1, 1995 through June 30, 2000, the number of subscriber accounts we
monitored increased from approximately 51,471 to approximately 393,000.

We estimate that our central monitoring stations are currently capable of
monitoring at least 750,000 subscriber accounts. We expect to be able to monitor
1,000,000 subscriber accounts by the end of 2000, without any major investment
and not taking into account any future acquisitions.

Our network of independent alarm dealers consists of 2,700 dealers
nationwide that are estimated to own approximately 600,000 subscriber accounts,
some of which are presently monitored at central stations owned by our
competitors. In order to attract new alarm dealers, and to continue to develop
our relationships with those dealers already using our central monitoring
stations, we, among other things, host an annual convention for independent
alarm dealers. At this meeting, developments in the security industry are
discussed and industry experts make numerous presentations. This meeting is
designed to keep the alarm dealers abreast of new developments in technology,
marketing and management as well as new business opportunities.

We also distribute an "audio magazine" to our network of dealers on a
quarterly basis and conduct numerous smaller meetings throughout the year. Our
relationships with independent alarm dealers are important because dealers are
the source of our revenues. We intend to continue to increase the number of
subscriber accounts we monitor. In pursuing this goal, we anticipate acquiring
additional central monitoring station businesses and adding additional
subscriber accounts as the businesses of our existing alarm dealers grow and as
new dealers join our central monitoring stations.

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In the future, we believe that we can develop future business opportunities
based on our network of 2,700 independent alarm dealers representing over 15,000
trained installation and service personnel, all of whom are experts in
low-voltage technology. We have also created through our dealers a network of
approximately 393,000 consumers electronically connected to our regional,
secure, redundant, UL-listed central monitoring stations. We believe that these
networks uniquely position us to become a key participant in the delivery of
in-home services as technologies converge.

INDUSTRY OVERVIEW

General. The electronic security alarm industry is characterized by a large
number of small individually owned companies involved in security alarm system
installation and monitoring. According to Barnes Associates, a well-known
investment banking and consulting firm in the industry, the top five companies
account for approximately 45% of the market, with an estimated 10,000 to 12,000
dealers constituting the remainder of the market. Taken together, however, these
10,000 to 12,000 alarm dealers represent a nationwide presence with expertise in
the installation and servicing of low voltage electronic systems. It is the
needs of this nationwide market of alarm dealers, and the opportunities they
represent, that we seek to address.

We believe that another characteristic of the security alarm industry is
its continuing growth. Industry statistics published by Security Sales in the
2000 Security Sales Fact Book, an industry publication, indicate that revenues
for the electronic security alarm segment of the security industry grew from
$9.7 billion in 1991 to $15.8 billion in 1999. The Central Station Alarm
Association reported in the summer 1998 issue of Dispatch that the security
services market in the United States is expected to grow at a rate of 6.4%
annually between 1998 and 2004.

The growth in the security alarm industry has been fueled by several
factors. We believe the aging of the population and the increase in two-career
families have both contributed to an increased focus on the security of the
home. Security Sales reported in January 1999 that residences without alarm
systems are more than twice as likely to be burglarized as those with systems
(14.8% vs. 6.6%) and that commercial sites without alarm systems are 4.5 times
more likely to be burglarized than those with systems (7.59% vs. 1.66%). Many
insurance companies also offer discounts to home and business owners who install
alarm systems.

Several large, well-capitalized companies, including Western Resources,
Inc. and Tyco International, Inc., are active in the security alarm industry
directly or through subsidiaries. We believe that these companies were attracted
by the fragmented nature of the industry and its growth potential. Additionally,
utility and telephone companies are attracted by the similarity between the
services provided in the security alarm industry and the services they already
perform, which also involve providing services via wire connections in return
for monthly fees.

As larger participants have entered the security alarm industry, they have
introduced mass-marketing techniques which have included heavy advertising and
low-cost system installations tied to multi-year monitoring contracts. These
long-term contracts typically have one-to-five-year initial terms and one-year
automatic renewals if they are not canceled. The monthly cash flow generated by
the monitoring contracts subsidizes the cost of installations. Large,
well-capitalized companies can afford to initially subsidize the costs of
installing alarm systems. As competition has driven the average price of
installed alarm systems down, independent alarm dealers, who have more
restricted access to capital, continue to search for an appropriate competitive
response.

THE NEEDS OF THE INDEPENDENT DEALER COMMUNITY

Among the major issues confronting independent alarm dealers are:

Retaining Subscriber Accounts. Independent dealers sell and install alarm
systems in homes and businesses and, at the same time, enter into contracts to
provide monitoring services, typically with one-to-five-year terms. The dealer
generally subcontracts with a third-party central station to provide the actual
monitoring. The dealer retains as profit the difference between what it charges
the subscriber as a monitoring

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fee and the cost of buying monitoring services from the third-party central
station plus general and administrative expenses. This recurring monthly
monitoring revenue is an important component of a dealer's total revenue stream.
According to SDM Magazine's "Insider Report for 2000," approximately 33% of
dealers' revenues consist of monitoring and service fees.

Financing. For most independent dealers, their subscriber accounts
represent their most substantial asset. Banks and other commercial lenders,
which are a very important source of financing for most small businesses, have
historically been unwilling to lend against subscriber accounts as collateral or
to provide financing for subscriber purchases of alarm systems. Because of their
more limited access to financing, independent dealers have a difficult task
competing with the larger companies, who have greater access to capital. This
issue has become more pronounced as the market has forced dealers to subsidize
the cost of alarm system installations. The limited ability to turn subscriber
accounts into the cash needed to support other aspects of their businesses and
to be able to offer financing to purchasers of alarm systems is a very important
concern of independent dealers.

Training and Support. Dealers must not only be financially sophisticated,
they must also be able to run their businesses economically and with a
relatively small amount of resources, both human and financial. In addition,
independent dealers must be able to choose effectively between competing new
technologies. Dealers need the tools that will allow them to identify and
exploit new opportunities both within the alarm industry and in related fields.
Dealers must also be aware of regulatory changes affecting the industry. There
are limited resources available to help the independent dealer meet these needs.

New Business Opportunities. The skills needed to install security alarm
systems can also be applied to the installation of other low-voltage systems,
such as closed circuit television, home automation, audio and home entertainment
centers and satellite dishes. Many alarm dealers currently provide these
services to their subscribers. We believe that application of these same skills
can generate other new business opportunities. We are seeking new opportunities
for ourselves and our dealers through alliances with providers of services that
are complementary with the services that we and our dealers already provide. We
believe that potential partners that embrace this vision will desire to offer a
broad range of related services without incurring the expense or experiencing
the uncertainties of entering unfamiliar product markets or developing a
nationwide network of servicing and installing dealers. Through our relationship
with SecurityVillage.com we plan to offer a broad range of security and
Internet-related products and services to security businesses and end-users.
Independent alarm dealers who elect to participate in the SecurityVillage.com
programs will realize incremental revenues. Independent dealers must be aware of
and learn how to respond to new market opportunities if they are to survive and
prosper in the future.

ALARM MONITORING

Our Relationships with Independent Alarm Dealers. Our response to the
challenges and opportunities presented by the security alarm industry has been
significantly influenced by the personal and business experience of two of our
founders. Both Ron Davis, the Chairman of the Board of Directors and Steve
Rubin, a Senior Vice President, were principals of the Davis Marketing Group, an
organization formed in the mid-1970s to provide consulting services to alarm
dealers. Davis Marketing evolved into a franchiser of alarm installation
businesses, which later became a network of dealers, initially made up of the
former franchisees. The network provided its members with group buying, training
and education services. In 1990, our company was formed to purchase subscriber
accounts from independent alarm dealers for our own portfolio and to acquire an
interest in a central monitoring station located in Grand Rapids, Michigan. The
initial stockholders (other than the founders) were almost all independent alarm
dealers. The relationship with our dealer network remains a key part of our
growth strategy. It is this history that has made us keenly aware of, and
uniquely able to address the needs of independent alarm dealers and of the
opportunities that those needs represent.

One of the unique aspects of our position in the security alarm industry is
what we do not do: we do not sell and install security systems. As a result, we
are not viewed as a competitor in the alarm dealer

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community. Several of our competitors in the monitoring business also sell and
install security systems, and some are even leading mass-marketers of low-cost
system installations.

Another service we provide our dealers who wish to sell subscriber
accounts, or obtain loans using subscriber accounts as collateral, is referral
to Security Alarm Financing Enterprises, Inc., with whom we have formed an
alliance. This alliance involves SAFE using our central stations to monitor
accounts that we refer to them and which they purchase from us, paying us
commissions for the referrals on accounts they purchase over agreed-upon
thresholds and making us their preferred provider of monitoring services. SAFE
is an alarm-industry-specialized financing company that does not sell or install
security systems. SAFE's policy is to contract with the selling alarm dealer to
continue servicing the underlying alarm system. SAFE also refers all inquiries
relating to system enhancements to the servicing alarm dealer. This allows
dealers to further enhance their businesses. By working with our company and
SAFE, dealers can purchase monitoring services and obtain financing from
companies they view as allies rather than competitors.

In a market where the competition for providing monitoring service is high,
we believe that the depth of our relationships with alarm dealers gives us a
competitive edge.

Provide High-Quality Monitoring Services to Independent Dealers. A
subscriber account represents a stream of income that may continue for many
years if the monitoring contracts are extended for additional renewal terms. An
enterprising dealer can even increase the value of a subscriber account by
selling add-on services such as:

- security and other Internet-related products and services such as those
offered through SecurityVillage.com;

- alarm system maintenance and servicing;

- two-way voice communications between the subscriber and the central
monitoring station; and

- cellular telephone or long-range radio backup to the normal land-line
telephone links to the central monitoring station.

Subscriber accounts are subject to attrition (cancellation) for many
reasons that are beyond the dealer's control, such as nonpayment by the
subscriber, the sale of a home or business or, to some extent, lower-cost
service offerings by competitors. One element that the dealer can control,
however, is attrition due to poor monitoring services provided by the central
station from which it purchases those services. Dealers address this problem by
contracting with companies that have a demonstrated record of providing
high-quality service.

We strive to own and operate superior central monitoring stations with
highly efficient equipment and a well-trained staff to deliver high-quality
monitoring services. All of our central stations are listed with Underwriters
Laboratory (UL). To obtain and maintain a UL listing, a central station must be
located in a building meeting UL's structural requirements, have a backup and
uninterruptible power supply and have secure telephone lines and redundant
computer systems that meet UL criteria. Access to the facility must also be
strictly controlled. Our central stations are also capable of supporting a full
range of add-on services such as two-way voice communications, cellular
transmission and long-range radio access.

Another of our objectives is to substantially increase the number of
subscriber accounts to which we provide monitoring services and to increase the
profitability of the services we provide. We are adding monitoring capacity and
continuing the consolidation of our monitoring operations to realize additional
economies of scale. We will continue to maintain and further enhance the quality
of the services we provide and market to the alarm dealer community. Ron Carr,
our Senior Vice President for Central Station Operations, leads this effort. Mr.
Carr was formerly Director of Telecommunications and Central Station Operations
for SecurityLink and, prior to that, Director of Telecommunications for ADT,
Inc.

Integrate Central Station Operations and Realize Economies of
Scale. Historically, our central monitoring stations were separately owned and
operated as independent business units by the original owners. Our acquisition
and consolidation of the formerly independent monitoring companies has presented
us with

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opportunities to increase the profitability of each of these operations. We seek
to exploit these opportunities by eliminating duplicative efforts. Under this
program:

- we have implemented a single centralized accounting system;

- we have created a centralized billing, customer service and collections
department to service all of our central monitoring stations; and

- we will continue the consolidation of monitoring operations into regional
central monitoring stations.

Utilizing the additional monitoring capacity in our central stations means that
the incremental cost of servicing additional subscriber accounts should be
substantially reduced. This can be illustrated by the acquisition in August 1998
of Reliance Protection Services, Ltd., a central monitoring station located in
Schaumburg, Illinois. In that transaction, the physical facility located in
Schaumburg was not purchased. Instead, all of the subscriber accounts monitored
there were transferred in bulk, along with certain equipment and software, to
our central station located in Des Plaines, Illinois. Only five additional
personnel were necessary to accommodate the additional 11,500 subscriber
accounts. By contrast, the old Reliance operation required twelve full-time
employees plus a leased facility and associated expenses. Further consolidations
will take place, as we deem appropriate.

Maintain and Enhance the Quality of Monitoring Services. In the normal
course of our business, we sometimes experience cancellation of accounts for
various reasons, some of which are beyond our control. Accounts may be lost
because, for example, dealers go out of business or subscribers relocate.
Accounts may also be lost because of problems with service. Among our
initiatives are the implementation of a statistical quality control system and a
formal training and advancement program. We also conduct continuous reviews of
the operations of each of our central monitoring stations to improve the
functionality and profitability of our monitoring services.

Previously, each of our central monitoring stations used slightly different
event monitoring software and hardware. However, we have recently conformed and
upgraded the computer systems used in all of our central stations. The
system-wide upgrade was designed to:

- Standardize the central station information systems to allow better
information flow between the central stations.

- Allow more efficient information exchange between the central stations,
the alarm dealer and the home office.

- Create fully redundant systems in case of system failure in one or more
of the central stations.

- Increase the efficiency of our customer service department.

We believe that these improvements will allow us to conduct our operations
in a more efficient and cost effective manner. Furthermore, we anticipate that
the new systems will provide a platform from which we can offer a wider
selection of value-added services to our alarm dealers. These services include
providing dealers with after-hours answering services, Internet or direct access
to end-user information for a dealer's subscriber accounts and automated
interactive alarm system testing services.

Implement Regional Marketing Program. We have reorganized and changed the
focus of our sales force. In the past, we relied on the existing subscriber
account base of the acquired central monitoring station businesses and the
"natural increase" in subscriber accounts that occurs as alarm dealers who are
already customers install additional alarm systems for our growth. Additionally,
our sales force was centrally located and approached alarm dealers on a national
basis. We have redirected our sales effort by organizing a decentralized sales
force based in our regional locations. The design of our marketing programs has
remained a home office function.

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The salespeople in each of our regional locations are responsible for
selling our services in the region where they are located. It is our belief that
we will be more successful in selling monitoring services to alarm dealers if
our salespeople and customer service managers are geographically close to the
dealers.

As part of our relationship oriented strategy, we have implemented a "Value
Added" providers program that allows alarm dealers to obtain discounts and
preferential pricing from selected service and equipment suppliers.

DEALER FINANCING PROGRAMS

General. Alarm dealers, like many other small businesses, from time to time
need financing in order to operate and grow their businesses. The reasons a
dealer might need access to cash are extremely varied and include the need to
manage cash shortfalls, to finance expansion or inventory and to subsidize the
costs of system installations. In addition, many dealers would like to be able
to offer financing for potential purchasers of alarm systems. As is common with
small businesses, access to capital is limited. Access to bank financing is also
limited for both the dealers and for their subscribers who may wish to finance
the purchase of the alarm system.

For many dealers, the most significant assets they own are the contract
rights for monitoring the subscriber accounts. Unfortunately, such contract
rights are generally not treated as tangible assets against which banks, or
other traditional lending institutions, will lend on a secured basis. This
situation creates a dilemma for dealers, and an opportunity for us to strengthen
our relationship with our alarm dealers because we are able to accurately assess
the value of these assets and assist dealers in obtaining financing.

Steve Rubin heads our dealer financing programs. Mr. Rubin has over
twenty-eight years of experience counseling alarm dealers as to their financing
options and assisting them with their financing needs.

Sale of Subscriber Accounts. One method of financing that has developed in
the security alarm industry is the sale of subscriber accounts to third parties.
While we no longer purchase subscriber accounts, we do offer a referral program
for our dealers through Security Alarm Financing Enterprises, Inc. (SAFE). In a
typical transaction, the alarm dealer will sell subscriber contracts for a price
that is a multiple of the current monthly payment amount generated by that
subscriber account. This monthly payment amount is commonly called RMR in the
industry, which stands for recurring monthly revenue. For example, if a single
contract provided for monthly payments of $25 per month it might sell for $750,
or thirty times RMR.

Assisting Dealers in Obtaining Loans. Because high quality subscriber
accounts represent a reliable future stream of revenue with little incremental
costs, some dealers prefer to borrow using their subscriber accounts as
collateral. As previously mentioned, banks have historically been reluctant to
lend against subscriber accounts as collateral. We believe that only three
sizable finance companies exist with active lending programs in the industry and
their lending capacity is relatively small compared to what we believe is the
potential demand for loans secured by accounts.

Because of our familiarity with the security industry, our strategic
alliance with SAFE and our knowledge of other potential lenders, we believe we
are well prepared to assist alarm dealers in obtaining loans.

The SAFE Loan Program. In November 1999, SAFE introduced its loan program.
Under this program, SAFE will lend to qualified dealers for periods of up to 60
months, secured by dealer owned monitoring accounts. We refer qualified dealers
to SAFE and attempt to facilitate the loan approval process. Because the SAFE
program is presently only available for loan transactions in excess of $500,000
we also refer dealers to other lenders under our ValueBuilder Program

The ValueBuilder Program. The ValueBuilder program was developed to assist
alarm dealers in obtaining subscriber financing for installed alarm systems, to
allow alarm dealers to obtain substantial discounts on alarm equipment and to
compete in the "low" or "no" money down market.

Under this program, dealers are able to obtain financing for their
subscribers, which is repaid in 36 to 60 months. From the subscriber's point of
view, only a small down payment is required to purchase the system. The
subscriber account and its revenue stream secure the loan. In the event the
account cancels during the

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first year of the program, the dealer is required to provide another account and
its revenue stream to secure payment to the finance company that advanced the
funds. At the end of the repayment period, the dealer retains all rights to the
subscriber account and the revenue stream it generates.

DEALER SUPPORT STRATEGY

Offer High-Quality Support Programs. The marketplace in which the
independent alarm dealer competes is undergoing rapid change. The presence of
large, well-capitalized companies creates a much more competitive environment.
It is in this context that we believe our ongoing educational and management
development program is not only valuable to our network of alarm dealers, but
also can add depth and permanence to our relationships with independent dealers.
Our efforts are headed by Ron Davis, Chairman of the Board, with more than
twenty-eight years of experience as a speaker and author on a broad range of
subjects concerning the security alarm industry, independent alarm dealers and
the changes in the marketplace that have and will continue to impact them.

We conduct numerous meetings each year at locations around the country at
which issues and opportunities facing the industry are presented. We also host
an annual three day educational conference attended by alarm dealers, where
presentations are made by both our personnel and other professionals from within
the industry, as well as specialists in such fields as finance and marketing and
motivational speakers.

Our Audio Insight program supplements these activities. Audio Insight is an
audio magazine that is distributed quarterly. Each edition of Audio Insight,
hosted by Mr. Davis, is a cassette of about one-hour in length, which contains
ideas, interviews and insights relating to the alarm industry. We also
distribute camera-ready consumer newsletters that can be customized by alarm
dealers for mailing to their own subscriber base as a marketing tool. The Audio
Insight cassette and the consumer newsletter program are only available to
members of our dealer network.

Assisting Dealers in Exploiting Future Opportunities. We anticipate that
new business opportunities for alarm dealers will continue to develop as a
result of the convergence of the technologies by which such services as
telecommunications, entertainment and security are delivered with the Internet.
Because of the size and geographic diversity of our dealer network and their
subscribers, we intend to present our company to service and equipment providers
as an easy and cost-effective way of approaching independent installers and
their subscribers. We believe that the collective strength of our independent
dealer network enables us to more effectively exploit these and other emerging
market opportunities.

One outstanding opportunity in this regard is our potential merger with
SecurityVillage. com. SecurityVillage.com was established to become the leading
provider of a new category of Web based security-related services, products and
information for consumers and for the businesses participating in the security
business. As the first mover into this category, SecurityVillage.com intends to
create a new Internet communication service that allows subscribers to
interactively view, protect and control their homes and businesses; to locate
and communicate with family and colleagues; and to monitor the health and
well-being of family and members of the community. See "Background of the
Merger."

Building a Deeper Relationship with Independent Dealers. We view our
overall marketing strategy as an attempt to build a broad range of relationships
with independent alarm dealers through which we can develop and market a range
of services designed to address alarm dealer needs and build recurring revenue
for our dealers and us. Our strategy is built around the premise that dealers
are best served when our regional central monitoring station personnel develop a
personal relationship with them. To implement this strategy we have developed a
force of regional dealer liaison personnel. These dealer liaisons provide
personalized one stop service to alarm dealers to address their individual needs
as they arise. Meetings of central station based user groups and a national
advisory council supplement their efforts.

We implemented our user group and national council programs to gain dealer
insight into the quality of the services that we provide. Each of our central
stations has a user group of alarm dealer customers in its service area. These
user groups meet periodically and serve as a regular source of feedback for both
the central stations and for our company as a whole. We also utilize the user
groups as forums at which we can

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test the attractiveness and demand for proposed new services before making major
commitments of time and money to new programs. In addition, we have formed a
national advisory council made up of representatives of our regional dealer user
groups. We meet with the members of our national council twice a year. One of
these meetings occurs at our annual conference.

We believe that these initiatives will greatly enhance the quality of our
monitoring services, and, therefore, their attractiveness to alarm dealers. We
also believe our access to, and knowledge of, the alarm industry and independent
alarm dealers is of value to others who may wish to use the services of, or sell
products to, or through, our network of alarm dealers and their subscribers.

SALE OF RETAIL PORTFOLIO TO SAFE

Sale of Retail Portfolio. On June 30, 1999, we sold our portfolio of
approximately 27,000 retail subscriber accounts to Security Alarm Financing
Enterprises, Inc. ("SAFE"), a leading finance company serving independent alarm
dealers. We will continue to monitor these accounts and we are SAFE's preferred
provider of alarm monitoring services. The total transaction value was
$22,800,000, of which $1,800,000 was a loan extended by SAFE to SAI. The loan is
due in one year and bears interest at the rate of 8% per year.

The loan will be considered paid in full if during the term of the loan we
refer to SAFE $230,000 in recurring monthly revenue ("RMR") from alarm dealers
for purchase or for collateral for loans, which SAFE then closes, under SAFE's
financing programs. There can be no assurance that we will be able to refer, or
that SAFE will purchase, $230,000 in RMR during the term of the loan. If we
refer $230,000 or more in RMR during the term of the loan, we will receive
commissions that are calculated from the first dollar of RMR referred and
purchased. We have the opportunity to earn additional commissions in the second
and third year of our referral agreement if we refer and SAFE closes on $460,000
and $690,000 in RMR, respectively. At the end of the first year, SAFE has closed
on transactions representing a total of $53,084 in RMR. There is a referral
transaction pending that will satisfy our obligations under the note if SAFE
closes the transaction. It cannot be determined when or if we will have to pay
the note.

The sale of our retail accounts to SAFE allows us to fully concentrate our
resources on our primary business of providing wholesale monitoring services to
independent alarm dealers.

Line of Credit for Acquisitions and Capital Expenditures. On September 30,
1999, we refinanced our previous $30,000,000 line of credit with FINOVA Capital
Corporation. The refinancing with FINOVA and Citizens Bank of Massachusetts
consisted of a $7,000,000 term loan and a $38,000,000 acquisition line of
credit. In August 2000, we amended our loan with FINOVA. FINOVA agreed to waive
all covenant violations for March 31, 2000 and June 30, 2000. FINOVA also bought
out the portion of the loan extended by Citizens Bank of Massachusetts. The loan
facility was decreased from $45 million to $17.5 million. We currently have
$13.476 million outstanding under the FINOVA loan. Of the remaining $4.0 million
available, $3.8 million is reserved for obligations related to the sale of our
retail portfolio and the remaining $200,000 is reserved for capital
expenditures. Funding for future acquisitions will be sought as needed. We have
obligations to SAFE ranging between $1.4 and $3.6 million which may come due in
the third quarter.

The loan bears initial interest at a variable rate of prime plus 0.75% or
the LIBOR rate plus 3.5%, at our discretion. The interest rate is, however
subject to an upward adjustment depending on the loan to recurring monthly
revenue ratio. This obligation matures in five years.

Restructuring of TJS Partners' Investment. On September 30, 1999, we
entered into the Second Amendment to Security Associates International, Inc.
Common Stock Subscription and Purchase Agreement with TJS Partners, L.P., our
principal stockholder. Pursuant to this agreement: (i) $10,000,000 of
subordinated debt and accrued interest owed by us to TJS Partners, L.P.; (ii)
66,910 shares of convertible preferred stock; and (iii) 500,000 shares of 12%
redeemable preferred stock, together with all accrued dividends, which were held
by TJS Partners, L.P., were exchanged for 135,709 shares of newly designated
Series A convertible preferred stock.

Each share of Series A convertible preferred stock has a $10 par value, a
liquidation preference of $350 per share and is convertible into 100 shares of
our common stock. The Series A convertible preferred

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stock is also entitled to receive dividends equal to those that would have been
received if the holder had converted into common stock.

The holder of Series A convertible preferred stock is entitled to vote on
all matters on which holders of our common stock are entitled to vote, on an
as-converted basis. However, the total voting power of all securities owned by
the holder of Series A convertible preferred stock is limited to a maximum of
45% of the total number of votes eligible to vote on a matter submitted to our
stockholders.

In connection with the restructuring, our By-laws were amended to increase
the percentage of votes required to approve matters presented to the
stockholders from a simple majority to requiring greater than 60%. This
super-majority provision will be in effect for as long as TJS Partners, L.P.
owns at least 30% of our common stock on an as-converted basis. Additionally,
for so long as TJS Partners, L.P. owns at least 15% of our common stock on an
as-converted basis, our board of directors will consist of five directors, two
of which may be designated by TJS.

LARGER CENTRAL STATION ACQUISITIONS

Acquisition of Telecommunications Associates Group, Inc. On November 24,
1997, we purchased all of the outstanding capital stock of Telecommunications
Associates Group, Inc., an Ohio corporation ("TAG"), from an unaffiliated party.
The purchase price was $5,000,000, which was paid in cash at closing, plus the
assumption of TAG's liabilities of approximately $1,500,000. $4,800,000 of the
purchase price was financed from our general corporate funds and the balance
were either liabilities assumed by us or financed by drawing on our existing
credit facility with FINOVA Capital Corporation. The acquisition was accounted
for under the purchase method for financial reporting purposes. TAG was a
third-party alarm monitoring company that served approximately 98,000 subscriber
accounts (which included approximately 48,000 two-way voice accounts which were
scheduled to be, and were, returned to the owner's central monitoring station by
December 31, 1998) and 350 independent alarm dealers from central monitoring
stations located in Euclid, Ohio and Austin, Texas. The Austin central station
was subsequently consolidated into our Houston central station.

Acquisition of Texas Security Central, Inc. On June 17, 1998, we purchased
all of the outstanding capital stock of Texas Security Central, Inc., a Texas
corporation ("TSC"), from unaffiliated parties. The purchase price was
$6,846,000, which was paid in cash at closing. $2,396,000 of the purchase price
was financed from our general corporate funds and drawing on our existing credit
facility with FINOVA Capital Corporation financed the balance. The acquisition
was accounted for under the purchase method for financial reporting purposes.
TSC was a third-party alarm monitoring company that served approximately 65,000
alarm monitoring subscribers and approximately 300 independent alarm dealers
from central monitoring stations located in Dallas, Texas; Houston, Texas and
San Antonio, Texas. The San Antonio central station was consolidated with the
Houston central station in the third quarter of 1999.

Acquisition of Alarm Monitoring Services, Inc. On November 5, 1999, we
purchased all of the outstanding capital stock of Alarm Monitoring Services,
Inc., a Washington corporation ("AMS"), from unaffiliated parties. The purchase
price was $4,000,000, which was paid in cash at closing. The purchase price was
financed by drawing on our existing credit facility with FINOVA Capital
Corporation and Citizens Bank of Massachusetts. The acquisition was accounted
for under the purchase method for financial reporting purposes. The acquisition
was accounted for under the purchase method for financial reporting purposes.
AMS was a third-party alarm monitoring company serving approximately 20,000
alarm monitoring subscribers and approximately 150 independent alarm dealers
from a central monitoring station located in Seattle, Washington.

OTHER CENTRAL STATION ACQUISITIONS

Alert Answering Service. On March 2, 1998, we purchased all of the
operating assets of Camak, Inc., d/b/a Alert Communications d/b/a Alert
Answering Service, an Ohio corporation ("Alert"), from an unaffiliated party.
Alert was a third-party alarm monitoring company that served approximately 1,966
subscriber accounts and ten independent alarm dealers and also is a telephone
answering service business

45
<PAGE> 49

serving approximately 250 subscribers. In March 1998 and June 1998, the
monitoring business and the answering service business, respectively, were moved
to our central monitoring station located in Euclid, Ohio. This acquisition
allows us to provide expanded telephone answering services for our alarm dealers
nationwide.

Guardian Security Systems, Inc. On March 8, 1998, we purchased all of the
outstanding capital stock of Guardian Security Systems, Inc., an Ohio
corporation ("Guardian"), from an unaffiliated party. Guardian was a third-party
alarm monitoring company that served approximately 3,270 subscriber accounts and
fifteen alarm dealers and 1,349 subscriber accounts owned by Guardian from a
central monitoring station located in Columbus, Ohio. In the first quarter of
1998, all of the assets and operations of Guardian were transferred to our
central station located in Euclid, Ohio.

Monitoring Business of Fire Protection Services Corporation d/b/a Mountain
Alarm. On May 8, 1998, we purchased the monitoring business of Fire Protection
Service Corporation, a Utah corporation, d/b/a Mountain Alarm ("Mountain") from
an unaffiliated party. Mountain was a third-party alarm monitoring company that
served approximately 7,800 alarm monitoring subscribers and approximately eight
independent alarm dealers from a central monitoring station located in Ogden,
Utah.

Reliance Protection Services, Ltd. On July 17, 1998, we purchased all of
the outstanding capital stock of Reliance Protection Services, Ltd., an Illinois
corporation ("Reliance"), from unaffiliated parties. Reliance was a third-party
alarm monitoring company that served approximately 12,000 alarm monitoring
subscribers and approximately 100 independent alarm dealers from a central
monitoring station located in Schaumburg, Illinois. All of the subscriber
accounts monitored by Reliance were moved into our Des Plaines central station.

World Security Services Corp. On October 13, 1998, we purchased all of the
assets of World Security Services Corp., an Oregon corporation ("World"), from
an unaffiliated party. World was a third-party alarm monitoring company that
served approximately 20,000 alarm monitoring subscribers and approximately 180
independent alarm dealers from a central monitoring station located in Portland,
Oregon.

Alarm Central Monitoring, Inc. On October 23, 1998, we purchased all of the
outstanding capital stock of Alarm Central Monitoring, Inc., a Texas corporation
("ACM"), from unaffiliated parties. ACM was a third-party alarm monitoring
company that served approximately 13,000 alarm monitoring subscribers and
approximately 50 independent alarm dealers from a central monitoring station
located in Dallas, Texas. All of the subscriber accounts monitored by ACM were
moved into the central station located in Dallas, Texas.

Total Electronic Alarm Monitoring, L.L.C. On November 5, 1999, we purchased
all of the assets of Total Electronic Alarm Monitoring, L.L.C., a California
limited liability company ("TEAM"), from an unaffiliated third party. TEAM is a
third-party alarm monitoring company serving approximately 5,000 alarm
monitoring subscribers and approximately ten independent alarm dealers from a
central monitoring station located in Chino, California.

Monark Central Dispatch, Inc. On December 8, 1999, we purchased all of the
assets of Monark Central Dispatch, Inc., a Louisiana corporation ("Monark"),
from an unaffiliated third party. Monark is a third-party alarm monitoring
company serving approximately 35,000 alarm monitoring subscribers and
approximately 400 independent alarm dealers from a central monitoring station
located in Metairie, Louisiana. The aggregate purchase price for all of these
smaller central station acquisitions was approximately $6,656,960 plus 218,741
shares of our common stock which was valued at $802,740 on the dates of the
acquisitions. All of the subscriber accounts monitored by Monark were moved into
the central station located in Houston, Texas.

RISK MANAGEMENT

The nature of the services we provide potentially exposes us to liability
for employee acts or omissions or system failures. Generally, our monitoring
agreements contain provisions limiting our liability to subscribers in an
attempt to reduce this risk.

We carry insurance of various types, including general liability and errors
and omissions insurance. We believe the amount of our insurance coverage is
adequate for a company of our type and size. Our loss

46
<PAGE> 50

experience, and that of other companies in the security industry, may affect the
cost and availability of such insurance. Certain of our insurance policies, and
the laws of some states, may limit or prohibit insurance coverage for punitive
or other types of damages, or for liability arising from gross negligence or
wanton behavior.

COMPETITION

The security alarm industry is highly competitive and highly fragmented.
While we do not compete directly with many of the large new entrants into the
industry, because we do not sell and install security systems, we are
nonetheless impacted by the competitive challenge these entrants present to
independent alarm dealers.

Our monitoring services compete with those offered by an estimated 250
companies which offer wholesale monitoring services from UL listed facilities.
Most of these companies are small, local operations; however, some are larger
and better financed than we are. In addition, we believe there are approximately
1,500 to 2,000 non-UL listed facilities.

Our competitive strategy has these basic components: provide the alarm
dealer community with high quality monitoring, provide access to financial
services at competitive prices and provide dealers with the support and access
to new business opportunities that will help them compete more effectively and
add recurring revenue. We plan to further develop our dealer network which, we
believe, will result in additional marketing opportunities for our dealers with
those companies that desire access to our dealers and their subscribers.

REGULATORY MATTERS

A number of local governmental authorities have adopted or are considering
various measures aimed at reducing the number of false alarms. Such measures
include:

- subjecting alarm monitoring companies and/or subscribers to fines or
penalties for transmitting false alarms,

- requiring permits for individual alarm systems and revoking such permits
following a specified number of false alarms,

- imposing fines on alarm subscribers for false alarms,

- imposing limitations on the number of times the police will respond to
alarms at a particular location after a specified number of false alarms,
and

- requiring further verification of an alarm signal before the police will
respond.

Our operations are subject to a variety of other laws, regulations and
licensing requirements of federal, state and local authorities. In certain
jurisdictions, we are required to obtain licenses or permits, to comply with
standards governing employee selection and training, and to meet certain
standards in the conduct of our business. Many jurisdictions also require
certain of our employees to obtain licenses or permits.

The alarm industry is also subject to requirements imposed by various
insurance, approval and standards organizations. Depending upon the type of
subscriber served, the type of service provided and the requirements of the
relevant local governmental jurisdiction, adherence to the requirements and
standards of such organizations is mandatory in some instances and voluntary in
others.

Our alarm monitoring business utilizes telephone lines and radio
frequencies to transmit alarm signals. The cost of telephone lines and the type
of equipment that may be utilized in telephone line transmissions are currently
regulated by both federal and state governments. The Federal Communications
Commission and state public utilities commissions regulate the operation and
utilization of radio frequencies.

47
<PAGE> 51

EMPLOYEES

At October 2, 2000, we employed 382 individuals. Currently, none of our
employees are represented by a labor union or covered by a collective bargaining
agreement. We believe that relationships with our employees are good.

PROPERTIES

Our executive offices are located at 2101 South Arlington Heights Road,
Arlington Heights, Illinois and our central monitoring stations are located at:

- 2116 South Wolf Road, Des Plaines, Illinois;

- 1471 S.W. 12th Avenue, Pompano Beach, Florida;

- 1514 East 191 Street, Euclid, Ohio;

- 9750 Brockbank, Dallas, Texas;

- 12610 Richmond Avenue, Houston, Texas;

- 4507 North Channel Avenue, Portland, Oregon;

- 1249 N.E. 145th, Seattle, WA;

- 2178 Washington Boulevard, Ogden, Utah.

All of our facilities are leased. The following is a summary of the term
for each of our leases:

- The Arlington Heights lease expires December 31, 2002, but can be renewed
by us at our option for one additional five year term;

- The Des Plaines lease expires December 31, 2000. This monitoring facility
will be moved to the home office location in the third quarter of 2000,
the lease is still in negotiation;

- The Pompano Beach lease expires December 31, 2003, but can be renewed by
us at our option for one additional five year term;

- The Euclid lease expires December 31, 2004, but can be renewed by us at
our option for one additional five year term;

- The Dallas lease expires June 16, 2003, but can be renewed by us at our
option for one additional five year term;

- The Houston lease expires June 16, 2003, but can be renewed by us at our
option for one additional five year term;

- The Portland lease expires May 31, 2003, but can be renewed by us at our
option for one additional three year term;

- The Seattle lease expires May 31, 2002, but can be renewed by us at our
option for two additional five year terms; and

- The Ogden lease expires May 8, 2003, with no option to renew.

LEGAL PROCEEDINGS

On September 10, 1999, a Writ of Summons was issued against SAI North
Central Command Center, Inc., our wholly owned subsidiary, and Blair
Communications, Inc. (First Evangelical Lutheran Church vs. Blair
Communications, Inc. et al, No. 1999-04689 (Blair County, Pennsylvania)). The
case involves damages resulting from a fire at the First Evangelical Lutheran
Church. In June 2000, a complaint was filed asserting that SAI North Central was
liable for the damage to the church based on the theory that

48
<PAGE> 52

the installing dealer was acting as SAI North Central's agent. Damages sought
exceed $4.0 million. SAI believes it has no liability in this matter and will
vigorously defend its position.

From time to time we experience routine litigation in the normal course of
our business. We do not believe that any pending litigation will have a material
adverse affect on our financial condition or results of operations.

STOCK INFORMATION

Our common stock has been traded on the American Stock Exchange under the
symbol "SAI" since January 25, 1999. Our common stock was previously traded on
the American Stock Exchange under the symbol "IDL" beginning on March 4, 1998.
Prior to that the common stock was traded on the OTC Bulletin Board. The
following table sets forth, for the periods indicated, the range of high and low
bid quotations for our common stock as reported on the OTC Bulletin Board and
the high and low sales prices as reported on the American Stock Exchange. The
OTC Bulletin Board quotations reflect inter-dealer quotations, without retail
mark-up, mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
HIGH BID LOW BID
-------- -------
<S> <C> <C> <C>
1998 First Quarter (through March 3, 1998)....................... $5.625 $4.50
</TABLE>

<TABLE>
<CAPTION>
LAST REPORTED SALE
-------------------
HIGH LOW
------- -------
<S> <C> <C> <C>
1998 First Quarter (March 4, 1998 to March 31, 1998)............. $8.50 $5.25
Second Quarter.............................................. $7.06 $5.25
Third Quarter............................................... $5.75 $4.44
Fourth Quarter.............................................. $4.50 $3.94
1999 First Quarter............................................... $5.00 $2.50
Second Quarter.............................................. $3.44 $2.50
Third Quarter............................................... $3.38 $2.50
Fourth Quarter.............................................. $3.94 $1.50
2000 First Quarter............................................... $4.00 $2.00
Second Quarter.............................................. $5.63 $3.38
Third Quarter............................................... $3.50 $2.38
Fourth Quarter (through October 2, 2000).................... $2.69 $2.00
</TABLE>

On October 2, 2000, the last reported sale price of our common stock was
$2.25 per share. At October 2, 2000, we had approximately 233 stockholders of
record, not including beneficial owners whose stock is held in street name.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition." Management does not believe the adoption of SAB 101
will have a material impact on our financial condition or results of operations.

49
<PAGE> 53

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION

SECURITY ASSOCIATES INTERNATIONAL
PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following unaudited Pro Forma Combined Balance Sheet as of June 30,
2000 was prepared to illustrate the estimated effects of Security Associates
International, Inc.'s (the Company) (SAI) merger with KC Acquisition Corp. (KC)
as if it had occurred on January 1, 2000. KC acquired Griptight Holdings, Inc.
(GHI) on May 11, 2000. The KC balance sheets are consolidated with Griptight
with all appropriate purchase adjustments at June 30, 2000. The Pro Forma
Combined Balance Sheet was prepared to illustrate the estimated effects of that
acquisition as if it also occurred on January 1, 2000. The Pro Forma Balance
Sheet does not purport to represent what the Company's financial position would
actually have been if the transaction had occurred on the dates indicated or to
predict the Company's financial position for any future period.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
KC(2) SAI(1) ADJUSTMENTS COMBINED
------ ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS

Cash.................................................... 1,451 366 1,817
Account Receivables, net................................ 1,244 2,323 3,567
Account Receivables, related party...................... 232 -- 232
Other assets, net....................................... 187 734 921
------ ------- ------- -------
Total current assets.......................... 3,114 3,423 6,537
------ ------- ------- -------
Fixed assets, net....................................... 2,528 3,670 6,198
Intangible assets, net.................................. 30,515 24,662 29,127(3) 84,304
Other long term assets.................................. 756 392 1,148
------ ------- ------- -------
Total long term assets........................ 31,271 25,054 29,127 85,452
------ ------- ------- -------
Total assets.................................. 36,913 32,147 29,127 98,187
====== ======= ======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts Payable........................................ 595 724 1,319
Current maturities of long-term notes payable........... 4,516 1,815 6,331
Accrued expenses and other liabilities.................. 1,294 3,274 1,000(7) 5,568
Unearned revenue........................................ 2,866 248 3,114
------ ------- ------- -------
Total current liabilities..................... 9,271 6,061 1,000 16,332
NOTES PAYABLE, net of current maturities................ 1,595 13,190 (1,500)(4) 13,285
NOTES PAYABLE, related party............................ 31,147 -- (1,000)(8) 30,147
------ ------- ------- -------
Total liabilities............................. 42,013 19,251 (1,500) 59,764

STOCKHOLDERS' EQUITY (DEFICIT)
Series B Convertible Preferred Stock.................... -- -- 450(5) 450
Series A Convertible preferred stock.................... -- 1,371 -- 1,371
Common stock............................................ 1,700 8 (1,698)(6) 10
Warrants, net........................................... -- 137 4,277(5) 4,414
Additional paid-in capital.............................. -- 36,228 20,798(5) 57,026
Retained earnings (deficit)............................. (6,800) (24,848) 6,800(6) (24,848)
------ ------- ------- -------
Total stockholders' equity (deficit).......... (5,100) 12,896 30,627 38,423
------ ------- ------- -------
Total liabilities and stockholders' equity.... 36,913 32,147 29,127 98,187
====== ======= ======= =======
</TABLE>

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

(1) Data for SAI is as of June 30, 2000.

(2) Data for KC is as of June 30, 2000.

(3) Includes $28.127 million allocated to value ascribed to KC's dealer
contracts and $1.0 million allocated to the covenant not to compete.

(4) Reflects debt from SecurityVillage on the KC balance sheet satisfied with
300,000 shares of SAI common stock.

(5) Reflects the issuance of 45,000 shares of Series B preferred stock
convertible into 4,500,000 shares of SAI common stock. Fair market value of
the common stock is estimated at $2.5 per share which is the market value on
August 29, 2000. Also included in additional paid in capital is the issuance
of 2,500,000 shares of SAI common stock of which 300,000 shares are
designated to reduce debt of $1,500,000 due to SecurityVillage, 1,200,000
shares of SAI common stock sold to SecurityVillage for $6,000,000 and
1,000,000 shares of stock plus 2,814,127 options paid to Security Village as
a fee. Each option is valued at $1.52 using the Black-Scholes valuation
method.

(6) Reflects the elimination of KC's equity plus $2,500 par value of 2,500,000
shares of SAI's common stock conveyed to Security Village.

(7) Estimated acquisition costs included in goodwill.

(8) Note payable to Palisades Partners, a related party, to be paid upon the
closing of the merger.

50
<PAGE> 54

SECURITY ASSOCIATES INTERNATIONAL

PRO FORMA COMBINED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following unaudited Pro Forma Combined Statement of Income for the six
month period ended June 30, 2000 was prepared to illustrate the estimated
effects of Security Associates International, Inc.'s (SAI) merger with KC
Acquisition Corp. (KC) as if it had occurred on January 1, 2000. KC acquired
Griptight Holdings, Inc. (GHI) on May 11, 2000. The Pro Forma Statement of
Income was prepared to illustrate the estimated effects of that acquisition as
if it also occurred on January 1, 2000. The Pro Forma Statement of Income does
not purport to represent what the Company's results of operations would actually
have been if the transaction had occurred on the dates indicated or to predict
the Company's results of operations for any future period.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
KC(2) GHI(3) ADJUSTMENTS COMBINED SAI(1) ADJUSTMENTS COMBINED
------- --------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue......................... 8,451 2,777 -- 11,228 11,267 -- 22,495
Direct Expenses................. 4,932 1,708 -- 6,640 8,345 -- 14,985
------- --------- ------ -------- ---------- --------- ----------
Direct Margin................... 3,519 1,069 -- 4,588 2,922 -- 7,510
------- --------- ------ -------- ---------- --------- ----------
General and administrative...... 886 835(10) -- 1,721 1,034 -- 2,755
Selling, marketing and business
development.................... 1,248 192 -- 1,440 1,293 -- 2,733
Amortization and depreciation... 1,293 229 340(4) 1,862 2,428 1,038(8) 5,328
------- --------- ------ -------- ---------- --------- ----------
Income (loss) from operations... 92 (187) (340)(4) (435) (1,833) (1,038) (3,306)
Loss on sale of retail accounts
to related party............... (1,908) -- -- (1,908) -- -- (1,908)
Interest expense, net........... (1,446) 13 (886)(5) (2,319) (743) -- (3,062)
------- --------- ------ -------- ---------- --------- ----------
Income (loss) From Continuing
Operations Before Income
Taxes.......................... (3,262) (174) (1,226) (4,662) (2,576) (1,038) (8,276)
Income tax expense.............. -- (134) (134)(6) -- -- -- --
------- --------- ------ -------- ---------- --------- ----------
Income (loss) from Continuing
Operations..................... (3,262) (308) (1,092) (4,662) (2,576) (1,038) (8,276)
Loss From Discontinued
Operations..................... -- (94) 94(7) -- -- -- --
------- --------- ------ -------- ---------- --------- ----------
Net income (loss)............... (3,262) (402) (998) (4,662) (2,576) (1,038) (8,276)
------- --------- ------ -------- ---------- --------- ----------
Net income (loss) per
share -- Basic................. (16,180) $(401,994) $(23,310) $ (.36) $ (.85)
Weighted average shares
outstanding -- Basic........... 200 1 (1) 200 7,223,473 2,499,800(9) 9,723,273
</TABLE>

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

(1) Data for SAI is for the six months ended June 30, 2000.

(2) Data for KC is for the six months ended June 30, 2000 and is consolidated
with GHI after May 11, 2000.

(3) Data for GHI is for the period from January 1, 2000 through May 11, 2000.

(4) Amortization is calculated based on intangibles of $10,200,000 amortized
over 15 years.

(5) Interest expense is based on $14,170,000 at 12.5% interest borrowed by KC
to purchase GHI.

(6) Income tax expense is eliminated in the pro forma adjustments to reflect
the tax loss caused by increased interest expense.

(7) As the parent has been dissolved and the only entity going forward is the
subsidiary, Monital Signal Corp., the loss from discontinued operations has
also been eliminated. There are no further obligations related to the
discontinued operation after March 31, 2000.

(8) Amortization is calculated based on estimated intangibles of $28.127
million amortized over 15 years and $1.0 million allocated to non-compete
amortized over 5 years.

(9) Reflects 1,000,000 common shares paid as a fee to a third party plus
1,200,000 shares issued for cash to effect the transaction less 200 shares
of KC eliminated. Also includes 300,000 common shares conveyed to a third
party to reduce debt by $1,500,000. Consideration of 45,000 shares of
Preferred B will be paid to the shareholders of KC. Diluted EPS is not
shown as the result will be anti-dilutive.

(10) Includes approximately $220,000 of expense related to professional fees and
bonuses paid in connection with the sale of GHI to KC.

51
<PAGE> 55

SECURITY ASSOCIATES INTERNATIONAL

PRO FORMA COMBINED STATEMENT OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following unaudited Pro Forma Combined Statement of Income for the year
ended December 31, 1999 was prepared to illustrate the estimated effects of
Security Associates International, Inc.'s (SAI) merger with KC Acquisition Corp.
(KC) as if it had occurred on January 1, 1999. KC acquired Griptight Holdings,
Inc. (GHI) in May 2000. The Pro Forma Statement of Income was prepared to
illustrate the estimated effects of that acquisition as if it also occurred on
January 1, 1999. The Pro Forma Statement of Income does not purport to represent
what the Company's results of operations would actually have been if the
transaction had occurred on the dates indicated or to predict the Company's
results of operations for any future period.

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
KC(2) GHI(3) ADJUSTMENTS COMBINED SAI (1) ADJUSTMENTS COMBINED
-------- -------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue............................ $ 12,868 $ 7,511 20,379 $ 22,689 43,068
Direct Expenses.................... 7,747 4,937 12,684 14,900 27,584
-------- -------- ------- ------- ---------- --------- ----------
Direct Margin...................... 5,121 2,574 7,695 7,789 15,484
-------- -------- ------- ------- ---------- --------- ----------
General and administrative......... 1,428 1,189 2,617 2,547 5,164
Selling, marketing and business
development...................... 2,040 494 2,534 2,460 4,994
Amortization and depreciation...... 2,074 533 680(4) 3,287 5,713 2,075(8) 11,075
-------- -------- ------- ------- ---------- --------- ----------
Income (loss) from operations...... (421) 358 (680)(4) (743) (2,931) (2,075) (5,749)
Gain on sale of owned accounts..... -- -- -- 1,899 1,899
Other (expense) income............. (62) 33 (29) -- (29)
Interest expense, net.............. (1,816) (71) (1,771)(5) (3,658) (2,565) (6,223)
-------- -------- ------- ------- ---------- --------- ----------
Income (loss) From Continuing
Operations Before Income Taxes... (2,299) 320 (2,451) (4,430) (3,597) (2,075) (10,102)
Income tax expense............... 9 214 (223)(6) -- -- --
-------- -------- ------- ------- ---------- --------- ----------
Income (loss) from Continuing
Operations....................... (2,308) 106 (2,228) (4,430) (3,597) (2,075) (10,102)
Loss From Discontinued
Operations....................... -- 109 (109)(7) -- -- --
-------- -------- ------- ------- ---------- --------- ----------
Net income (loss).................. (2,308) (3) (2,119) (4,430) (3,597) (2,075) (10,102)
Dividends accrued on preferred
stock............................ -- -- -- (450) (450)
Net income (loss) available to
common Stockholders.............. $ (2,308) $ (3) (2,119) (4,430) (4,047) (2,075) (10,552)
-------- -------- ------- ------- ---------- --------- ----------
Net income (loss) per
share -- Basic................... $(11,541) $220,640 (21,105) $ (.59) $ (1.12)
Weighted average shares
outstanding -- Basic............. 200 1 (1) 200 6,897,200 2,499,800(9) 9,397,000
</TABLE>

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

(1) Data for SAI is for the year ended December 31, 1999.

(2) Data for KC is for the year ended December 31, 1999.

(3) Data for GHI is for the year ended March 31, 2000.

(4) Amortization is calculated based on estimated goodwill of $10,200,000
amortized over 15 years.

(5) Interest expense is based on $14,170,000 at 12.5 % interest borrowed by KC
to purchase GHI.

(6) Income tax expense is eliminated in the pro forma adjustments to reflect the
tax loss caused by increased interest expense.

(8) Amortization is calculated based on estimated intangibles of $28.127 million
amortized over 15 years and $1.0 million allocated to non-compete amortized
over 5 years.

(9) Reflects 1,000,000 common shares paid as a fee to a third party plus
1,200,000 shares issued for cash to effect the transaction, less 200 shares
of KC eliminated. Also includes 300,000 common shares conveyed to a third
party to reduce debt by $1,500,000. Consideration of 45,000 shares of
Preferred B will be paid to the shareholders of KC. Diluted EPS is not shown
as the result will be anti-dilutive.

52
<PAGE> 56

KC ACQUISITION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Certain statements in this proxy statement that are not historical facts
constitute "forward-looking statements" within the meaning of the federal
securities laws. Discussions containing such forward-looking statements may be
found in the sections entitled, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Information Regarding KC
Acquisition," as well in this proxy statement generally. In addition, when used
in this document the words "anticipates," "intends," "seeks," "believes,"
"plans," "estimates," and "expects" and similar expressions as they relate to us
or our management are intended to identify such forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Our actual
results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. We undertake no
obligation to revise these forward-looking statements to reflect any future
events or circumstances.

OVERVIEW

KC Acquisition's revenues are derived from recurring payments for
monitoring services provided to subscribers and alarm dealers pursuant to
agreements. Monitoring contracts have initial terms typically ranging from one
to five years usually with provisions for automatic renewal for periods of one
year. Monitoring contracts entered into with alarm dealers generally permit
cancellation with notice of 30-60 days before the end of the original or any
renewal term.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, selected
statements of operations data:

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDING DECEMBER 31, JUNE 30,
---------------------------- ------------------
1997 1998 1999 2000 1999
------- ------- -------- -------- -------
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue......................... $ 9,728 $10,592 $ 12,868 $ 8,451 $ 5,837
Operating Unit Expense.............. 6,214 5,446 7,747 4,932 2,920
------- ------- -------- -------- -------
Operating Unit Margin............... 3,514 5,146 5,121 3,519 2,917
Operating Expenses:
Amortization & depreciation....... 608 1,810 2,074 1,293 975
General & administrative.......... 1,618 1,262 1,428 886 669
Selling, marketing & business
development.................... 996 1,544 2,040 1,248 940
------- ------- -------- -------- -------
Income (loss) From Operations....... 292 530 (421) 92 333
Loss on abandonment of fixed
assets............................ (111) (43) (62) -- --
Loss on sale of retail accounts..... -- -- -- (1,908) --
Interest Expense.................... (382) (1,706) (1,816) (1,446) (813)
------- ------- -------- -------- -------
Net Loss before state income
taxes............................. (201) (1,219) (2,299) (3,262) (480)
State income taxes.................. 15 10 9 -- 23
------- ------- -------- -------- -------
Net Loss To Common Stockholders..... $ (216) $(1,229) $ (2,308) $ (3,262) $ (503)
Net Loss Per Share.................. $(1,079) $(6,145) $(11,541) $(16,314) $(2,527)
Total Weighted Average Number Of
Common Shares Outstanding......... 200 200 200 200 200
</TABLE>

53
<PAGE> 57

The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDING ENDED
DECEMBER 31 JUNE 30,
-------------------- ------------
1997 1998 1999 2000 1999
---- ---- ---- ---- ----
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue............................................... 100% 100% 100% 100% 100%
Operating Unit Expense.................................... 64% 51% 60% 58% 50%
Operating Unit Margin..................................... 36% 49% 40% 42% 50%
Operating Expenses:
Amortization & depreciation............................. 6% 17% 16% 15% 17%
General & administrative................................ 17% 12% 11% 11% 11%
Selling, marketing & business development............... 9% 15% 16% 15% 16%
Income (Loss) From Operations............................. 4% 5% (3%) 1% 6%
Loss on abandonment of fixed assets....................... (1%) (1%) (1%) -- --
Loss on sale of retail accounts........................... -- -- -- (23%) --
Interest Expense.......................................... (4%) (16%) (14%) (17%) (14%)
Income (loss) before state income taxes................... (3%) (12%) (18%) (39%) (8%)
State Income taxes........................................ 0% 0% 0% -- 0%
Net Loss.................................................. (3%) (12%) (18%) (39%) (8%)
</TABLE>

54
<PAGE> 58

RESULTS OF OPERATIONS

Six Months Ended June 30, 1999 and 2000

For the six months ended June 30, 2000, revenues were $8,450,498 compared
to $5,836,738 for the same period in the prior year, an increase of 44.78%. The
change in revenue was due to an acquisition of a central station in June 1999
that has approximately 30,000 monitored accounts and an acquisition of a central
station in May 2000 that has approximately 95,000 accounts. Revenue from these
acquisitions in the second quarter were $1,881,242. The remaining increase in
revenue is attributable to growth in the existing business.

Operating unit expenses increased from $2,920,167 to $4,931,636 or 68.88%
during the six-month period ended June 30, 2000 primarily due to the
acquisitions and the overall growth in the Company. Direct expenses related to
the acquisitions were $1,360,131. Additional personnel required to manage
overall growth resulted in an increase in payroll and related expenses of
approximately $426,000. The remaining increase in direct costs is attributable
to an increase variable costs related to growth.

General and administrative expenses for the six months ended June 30, 2000,
increased by $216,976 or 32.42% over the same period in the prior year. The
increase is attributed to an increase in compensation expense of approximately
$130,000 and $85,000 related to acquisitions.

Business development expenses increased by $307,439 or 32.68% due to an
increase in royalties of $50,000 and $179,000 in expense related to expanding
the sales organization which includes expenses related to maintaining a new
sales office in Ohio. The remaining increase is attributable to the
acquisitions.

Amortization and depreciation expenses increased by 317,736 or 32.58% due
to the increase in the amortization of intangible assets related to the
acquisitions.

The loss on the sale of retail accounts relates to all of the retail
accounts being sold to a related party in May 2000.

Interest expense increased from $813,926 in the second quarter of 1999 to
$1,446,368 in the second quarter of 2000. Debt increased by approximately
$17,130,000 from June 30, 1999 to June 30, 2000. The increases were the result
of the acquisition in June 1999 and May 2000, capital expenditures and debt
borrowed for working capital.

1999 COMPARED TO 1998

Revenue. Revenue for fiscal 1999 increased by $2,275,629, or 21.5%, to
$12,868,002 from $10,592,373 for fiscal 1998. The change in revenue is
attributable to an acquisition done in June 1999 that contributed $900,000 in
revenue in 1999. The remaining increase in revenue is attributed to internal.
Approximately 17,300 accounts resulting in $1,375,000 of revenue was added in
1999.

Operating Unit Expense and Margin. Operating Unit Expense includes all
costs directly attributable to each operating unit rendering monitoring
services. These expenses increased from $5,446,202 in 1998 to $7,746,629 in 1999
or 42.2%. This increase is primarily attributable to direct costs related to the
acquisition of $756,000, an increase in payroll of $550,000 related to systems
conversions and increasing staff in the customer service areas, an increase in
bad debt expense of $283,000 and an increase in variable direct expenses of
$566,000 related to internal growth. Additionally, a refund of excessive
telephone charges and excise taxes of $428,000 was received in 1998 as a one
time credit.

Operating Expenses. Amortization and depreciation increased by $264,855, or
14.6%, from $1,809,915 to 2,074,770. The change in amortization and depreciation
is due to the goodwill recorded to account for the acquisition in June 1999.

General and administrative expenses increased by $165,394 or 13.1% from
$1,262,158 to $1,427,552 due to an increase in group health insurance of
$100,000 and additional administrative costs related to the acquisition.

55
<PAGE> 59

Selling, marketing and business development expenses increased by $496,208
or 32.1% from $1,543,943 to $2,040,151. The increase is due to an increase in
royalties of $300,000 and the expansion of the sales organization, notably a new
sales office opened in Ohio during the year.

Loss on abandonment of fixed assets. Fixed assets were disposed during the
year due to the replacement of computer equipment. The disposal of these assets
resulted in a loss of $62,493. In 1998, the loss on abandonment of $43,564 was
from assets written off due to the relocation of our headquarters.

Interest Expense. Interest expense increased by $110,259 or 6.5% from
$1,705,493 in 1998 to $1,815,752 in 1999. Total debt increased by $3,835,016
during 1999 primarily due to an acquisition in June 1999. The interest rate on
the debt was 8.9% at December 31, 1999.

1998 COMPARED TO 1997

Revenue. Revenue for fiscal 1998 increased by $863,531, or 8.88%, to
$10,592,373 from $9,728,842 for fiscal 1997. The increase in revenues is
primarily related to internal growth, as there were 18,000 more monitored
accounts at the end of 1998 compared to 1997.

Operating Unit Expense and Margin. Operating unit expense includes all
costs directly attributable to each operating unit rendering monitoring
services. These expenses decreased from $6,214,091 in 1997 to $5,446,202 in 1998
or 12.36%. This decrease is primarily attributable to a decrease in telephone
costs of $428,000 related to a one time credit received for excessive billing, a
decrease in bad debt expense of approximately $200,000 and a decrease in
expenses related to moving the monitoring facility in 1997. Equipment
maintenance and insurance costs also decreased during 1998 as a result of
replacing old equipment and negotiating better rates on insurance.

Operating Expenses. Amortization and depreciation increased by $1,201,129,
or 197.30%, from $608,786 to $1,809,915 due to an increase in the amortization
of goodwill related to acquisitions.

General and administrative expenses decreased from $1,618,045 in 1997 to
$1,262,158 in 1998 or 21.99% due to a decrease in officer's salaries of $337,000
and a reduction in officer's life insurance expenses of $61,000. These decreases
were related to the termination of the officers in 1998 related to the sale of
the business from King Central to KC Acquisition in early January 1998. The
remaining increases were related to growth.

Selling, marketing and business development expenses increased from
$996,365 in 1997 to $1,543,943 or 54.96% in 1998. The increase in these expenses
is related to an increase in royalties of $300,000 and an increase in selling
expenses of approximately $248,000. The increase in selling expenses reflects
the reorganization and expansion of the sales force in 1998 to focus on growth.

Loss on abandonment of fixed assets. Fixed assets were disposed during the
year due to the relocation of the New Jersey office to new facilities. The
disposal of these assets resulted in a loss of $43,564.

Interest Expense. Interest expense increased $1,324,342 from $381,151 in
1997 to $1,705,493 in 1998, an increase of 347.46%. This increase was caused
primarily by the debt incurred to acquire KC Acquisition in January 1998. KC
Acquisition had approximately $19,000,000 of debt outstanding at the end of
1998, compared to approximately $4,444,000 outstanding at the end of 1997.

CAPITAL EXPENDITURES

KC Acquisition made capital expenditures during 1999, 1998 and 1997
totaling $370,093, $87,102 and $357,192, respectively. The expenditures relate
primarily to central station and computer equipment.

LIQUIDITY AND CAPITAL RESOURCES

Since January 1998, all debt has been provided by M &S Partners, a related
party. KC Acquisition has incurred new debt since January 1998 from time to time
to finance capital projects and working capital at interest rates ranging from
23.0% to 24.6%. KC Acquisition is currently anticipating acquiring new sources
of

56
<PAGE> 60

capital to provide adequate cash to fund its debt service shortfall of
approximately $2.0 to $3.0 million annually.

Debt of $13,011,000 was added in the first six months of 2000 from M&S
Partners. Debt of $11,391,350 was used to acquire Griptight (Monital) in May
2000. The remaining debt of $1,619,650 was used to finance working capital.
Additional debt of $1.5 million was acquired from SecurityVillage.com. All of
these proceeds were used in the acquisition closed on May 12, 2000.

1999 Compared to 1998

On June 23, 1999, KC Acquisition acquired the California central station
business of Criticom International Corporation for a contract price of
$3,105,000. The acquisition was accounted for under the purchase method of
accounting. The acquisition was completely financed through M&S Partners, a
related party controlled by our minority stockholders.

Current liabilities increased during the year ended December 31, 1999
compared to 1998 from $4,245,147 to $5,275,835. Accrued expenses increased by
$435,555 due to an increase in accruals related to insurance of $100,000,
contingencies of $105,000 and royalties of $175,000. Current maturities
increased by $602,838 during the year due to increase in debt related to the
acquisition.

1998 Compared to 1997

On January 8, 1998, KC Acquisition acquired all of the assets and
liabilities of King Central, Inc. for $13,115,000 plus assumed liabilities of
$7,181,000. The acquisition was accounted for under the purchase method of
accounting. The acquisition was financed with debt of $16,200,000 through M&S
Partners, a related party controlled by our minority stockholders and $2,523,000
in debt from the majority stockholder. The interest rate on the debt was a fixed
rate of 7.7%.

Current liabilities increased during the year ended December 31, 1998
compared to 1997 from $3,596,828 to $4,245,147. Unearned revenue decreased by
$247,099. Accrued liabilities increased by $101,826 primarily due to an increase
in accrued interest and accrued insurance. Current maturities increased by
$782,625 during the year due to the increase in debt.

YEAR 2000 ISSUE

The Year 2000 date change had no adverse effect on our business or
operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

KC Acquisition currently does not invest excess funds in derivative
financial instruments or other market rate sensitive instruments for the purpose
of managing interest rate risk or for any other purpose.

KC Acquisition incurs debt primarily from M&S Partners, a related party.
The interest rate applicable to this debt ranges from 7.7 % to 24.5%. KC
Acquisition does not have exposure to foreign currency fluctuations and does not
use derivatives for trading purposes.

Interest Rate Risk -- The table below provides information about KC
Acquisition's debt obligations that are sensitive to changes in interest rates.
For these debt obligations, the table presents principal cash flows and related
average interest rates by expected maturity dates.

<TABLE>
<CAPTION>
MATURITY DATE
---------------------------------------------- FAIR
2000 2001 2002 2003 2004 2005 TOTAL VALUE
----- ----- ----- ------ ----- ----- ------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt.............. 2,169 4,330 3,774 14,395 5,302 7,165 37,135 37,135
Average Interest Rate........ 9.9% 9.9% 9.9% 9.9% 9.9% 9.9% 9.9%
</TABLE>

57
<PAGE> 61

INFORMATION REGARDING KC ACQUISITION

OVERVIEW

KC Acquisition Corp. provides security alarm monitoring services for both
residences and businesses as subcontractor for independent security alarm
dealers. Monitoring services are provided on a nationwide basis for subscribers
who have entered into monitoring agreements with the independent alarm dealers.
Independent alarm dealers are primarily owner operated companies that provide
sales, installation and servicing of alarm systems to their subscribers and
contract for the monitoring services through third parties such as KC
Acquisition.

KC Acquisition's ability to attract new monitoring business, both from
existing dealers and from new dealers, is enhanced and supported by a nationwide
network of 2,700 independent dealers to whom it also provides various industry
related dealer programs, financial services, management and administrative
services as well as marketing, sales, billing and collection services.

On January 8, 1998, KC Acquisition acquired all of the assets and assumed
all liabilities of King Central, Inc. ("KCI"). The purchase price was
$13,115,000 plus assumed liabilities of approximately $7,181,000. The initial
financing was provided by M&S Partners, a related party owned by the 20%
minority shareholders of KC Acquisition ($16.2 million) and by its majority
shareholder ($2,523,000). The majority shareholder, who owned 20% of KCI,
contributed his share of the sale proceeds to KC Acquisition: $1.7 million as
common stock and $823,000 as a non-interest bearing note payable. The
acquisition was accounted for using the purchase method.

On May 11, 2000, KC Acquisition indirectly acquired all of the capital
stock of Monital. The purchase price was $12,575,325 plus assumed liabilities of
approximately $3,441,872. The financing was provided by M&S Partners
($11,075,325), an affiliate of KC Acquisition, and by SecurityVillage.com
($1,500,000). The acquisition was accounted for using the purchase method.

KC Acquisition conducts its operations directly through three central
monitoring stations, which it owns, and through two central monitoring stations
that are owned and operated by Monital, a wholly owned subsidiary of KC
Acquisition.

- KC Acquisition directly owns and operates central monitoring stations in
Hackensack, New Jersey, Van Nuys, California, and Santa Fe Springs,
California.

- Monital owns and operates central station monitoring facilities in
Manasquan, New Jersey and Denver, Colorado.

- In addition to the central monitoring stations, KC Acquisition also owns
and operates branch Dealer Care offices in Livonia, Michigan; Marietta,
Georgia; and So. Euclid, Ohio.

These facilities provide customer service, sales and administrative
services to dealers in their respective regions.

KC Acquisition's revenues consist of recurring monthly revenue ("RMR")
payments under written contracts with independent alarm dealers to provide
monitoring services to their subscribers. Total revenues increased from
approximately $9,725,000.00 for the fiscal year ending December 31, 1997 to
$12,868,000 for the fiscal year ending December 31, 1999. Operating cash flow
increased from $1,340,878 for the fiscal year ending December 31, 1997 to
$2,052,211 for the fiscal year ending December 31, 1999. Operating cash flow is
defined as earnings before depreciation, amortization, interest expense, income
taxes and certain other expenses (losses incurred on abandonment of fixed assets
and bad debt).

As of June 30, 2000, KC Acquisition monitored over 346,000 residences and
businesses from its network of central monitoring stations. All of these
locations were monitored under contracts with independent alarm dealers. From
January 1, 1998 through June 30, 2000, the number of monitored accounts owned
either directly by KC Acquisition or through its subsidiary increased by
approximately 108,000 subscriber accounts.

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<PAGE> 62

KC Acquisition estimates that the existing central monitoring stations are
capable of monitoring at least 650,000 subscriber accounts.

KC Acquisition's Relationship with Independent Alarm Dealers. The success
that KC Acquisition has enjoyed over the years comes from a total dedication to
the support of its independent alarm dealers. Since KC Acquisition does not
provide any end user sales, alarm installations or security products, it is not
in competition with its dealers. This allows KC Acquisition to become a
strategic partner with its dealers, with both totally focused on producing new
sales and account retention, which in turn provides growth and stability to the
dealer as well as KC Acquisition.

It has been the mission of KC Acquisition from its inception to provide the
highest level of monitoring services to its dealers and their subscribers by
offering cutting edge technologies on a consistent basis.

The second, and equally important, mission of KC Acquisition is to provide
dealers with ongoing dealer support products and services designed to better
enable the dealers to compete in their respective marketplaces. This results in
their ability to sell more security systems and increase their recurring revenue
and building more value in their companies.

Some examples of the services offered by KC Acquisition include:

1. Smith & Wesson(R) Dealer Program. This program is offered by KC
Acquisition to its dealer base through an exclusive licensing arrangement with
Smith & Wesson(R). It enables dealers to market and sell security systems under
the name of Smith & Wesson(R) Security Systems. This program is designed to give
the dealer a competitive edge in his or her marketplace by capitalizing on a
powerful name brand that is recognized by consumers thereby increasing the
credibility of the dealers. As part of this program, the dealer is provided with
numerous professional marketing and sales support materials and products to
assist them in their success.

2. KC Acquisition offers another more generic dealer program to those of
its dealers who desire the marketing, sales and service support of a formal
dealer program, but want to market under their own name brand. The products and
services, as well as support, that KC Acquisition offers its dealers under this
program are very similar to those offered under the Smith & Wesson(R) program,
but in the name of the dealer.

3. Many financial programs are offered by KC Acquisition to its dealer base
under the name of King Capital Financial Services, a tradename of KC
Acquisition. These services will still be offered through King Capital Financial
Services, which will be spun off prior to the closing of the merger of SAI and
KC Acquisition.

These services are designed to make available to dealers the capital
necessary to assist the them in procuring more sales and in growing their
businesses. Such capital resources are typically not available to security alarm
dealers from conventional sources such as banks and other lending institutions.

The capital which KC Acquisition provides to its dealers includes, but is
not necessarily limited to:

- financing of new installations both of residential and commercial
applications, which gives dealers the ability to compete in their markets
with national companies who offer either free or low cost installations
to consumers in return for long term monitoring agreements;

- capital in the form of loans to finance acquisitions or other working
capital needs of the dealer; and

- an acquisition program that is designed to offer the dealer a way to
raise capital without incurring debt, by selling a portion of their
monitoring agreements or, in some cases, to provide a total exit strategy
for the time when the dealer decides to either retire or exit from the
business.

4. In addition to the above, KC Acquisition also offers to its dealers many
administrative and business services designed to free up the dealers from the
normal non-revenue producing aspects of their businesses, while giving him or
her the freedom to concentrate on growth and account retention. Some of the
services offered for these purposes include billing and collection services,
telephone answering service and customer service functions to name a few.

59
<PAGE> 63

As previously stated, all such programs and services are designed to
accomplish both growth and account retention for our dealers and by doing so
accomplish growth and account retention for KC Acquisition.

KC Acquisition's commitment is to continue to identify and make available
to its dealers the ongoing programs, services and products to further enhance
their mutual goals.

Increasing Monitoring Business on a Regional Basis. KC Acquisition's
objective is to continue to grow its business by a combination of growth through
its existing dealer base as outlined above, and through the addition of new
dealers throughout the country. Adding new dealers has always been a priority
for KC Acquisition and one which has met with much success over the years.

The approach to securing new dealer relationships has (and will continue to
be have) two components:

1. The primary new dealer relationship development functions are performed
by a national network of regional sales managers. They are presently located as
follows:

- Hackensack, New Jersey -- covering all dealers in the New England
and Mid Atlantic states.

- Atlanta, Georgia -- covering the South Eastern states.

- Livonia, Michigan -- covering the Western states.

- two managers work out of its Santa Fe Springs, California office and
collectively cover the thirteen Western states.

- South Euclid, Ohio -- covering all dealers throughout the country
who participate under the Smith & Wesson(R) program.

These Regional Sales Managers are responsible for both the acquisition of
new dealer business as well as the support and growth of existing dealers within
their regions.

The Regional Sales Managers are supported by a network of "dealer care
centers" located in Hackensack, New Jersey, Marietta, Georgia, Livonia,
Michigan, Santa Fe Springs, California and Van Nuys, California.

These centers are responsible for all customer service aspects to the
dealers in their respective regions.

It is of utmost importance to have a regional presence throughout the
country to support the dealer base, and these central stations -- the five
24-hour monitoring stations and the network of dealer care centers -- provide
that presence for the KC Acquisition dealer network.

2. The second path KC Acquisition takes in bringing new dealers is through
an ongoing program of acquisitions of third party monitoring companies that are
in the same business as KC Acquisition. Such acquisitions, once completed, are
usually merged into one of KC Acquisition's existing central station facilities
to gain the maximum in efficiencies and savings. Depending upon the individual
location of the acquired company and market conditions, KC Acquisition may
establish a dealer care center in the general location of the acquired company
to maintain the presence that the acquired dealers have been used to.
Establishing a dealer care center is relatively inexpensive compared to keeping
a 24-hour central station operating.

The following acquisitions were undertaken by KC Acquisition in recent
years as part of its growth program:

- West -- In July 1995, KC Acquisition acquired the assets of Western
Pacific Monitoring Services of Van Nuys, California. This facility was
left open as a 24-hour monitoring facility.

- Mid-West -- In July 1996, KC Acquisition acquired the assets of Sprint
Monitoring Services, a division of Sprint of Mansfield, Ohio. This
acquisition was merged into KC Acquisition's Hackensack, New Jersey
facility.

60
<PAGE> 64

- West -- In June 1999, KC Acquisition acquired the assets of Criticom,
California the western branch of a company operated under the name of
International Dispatch Center (IDC), located in Santa Fe Springs,
California.

This operation was left open as a 24-hour facility and because of future
growth capacity this facility affords KC Acquisition, will become the new
Western hub of KC Acquisition and the facility in Van Nuys, California will be
merged into Santa Fe Springs in the first quarter of 2001.

- East -- In May 2000, KC Acquisition acquired the stock of Monital Signal
Corp. Monital maintained two full operating facilities, one in Manasquan,
New Jersey and a smaller one in Denver, Colorado.

It is intended that Monital will continue to operate under its own brand
from the existing facility in New Jersey. The Denver operation will be merged
into the Monital New Jersey facility.

EMPLOYEES

As of July 26, 2000, KC Acquisition employed 260 individuals. Currently,
none of KC Acquisition's employees are represented by a labor union or covered
by a collective bargaining agreement. KC Acquisition believes that relationships
with its employees are good and is committed to the quality of those
relationships.

PROPERTIES

KC Acquisition's executive offices are located at 325 South River Street,
Hackensack, New Jersey and its central monitoring facilities and dealer care
centers are located at:

2150 Northwest Parkway 2210 Landmark Place
Suite O Manasquan, NJ 08736
Marietta, GA 30067
5290 East Yale Circle
33411 Schoolcraft Road Cadesco Bldg. Suite 107
Livonia, MI 48150 Denver, CO 80222
14101 Archwood Street 4320 Mayfield Road
Van Nuys, CA 91405 Suite 201
So. Euclid, OH 44121
11925 Los Nietos Road
Santa Fe Springs, CA 90067
</TABLE>

All of KC Acquisition's facilities are leased with the exception of the
Monital facility in Manasquan, New Jersey, which is owned by Monital.

LEGAL PROCEEDINGS

Four separate complaints have been filed against King Central (the
predecessor of KC Acquisition), Tom Few, Sr. and Tom Few, Jr. in the Superior
Court of California, County of Los Angeles, Central Judicial District. Claud's
Alarm Systems, Inc., a California corporation, filed a complaint on May 23,
2000; Eagle Protection Services, a California corporation, filed a complaint on
June 7, 2000; General Alarm Services, Inc., a California corporation, filed a
complaint on June 27, 2000; and Nick Hedlund d/b/a ACS -- American Commercial
Services, a California corporation, filed a complaint on June 27, 2000. Each of
these complaints alleges breach of contract, unfair trade practices, breach of
fiduciary duty, interference with contractual relationships, negligence, and
commercial extortion and seeks damages in the amount of $1,000,000 plus punitive
damages of an unspecified amount. Each of the above plaintiffs is an alarm
dealer that had entered into an alarm monitoring services contract with Criticom
International Corporation. In June 1999, King purchased the assets of Criticom,
including the telephone lines utilized for monitoring the accounts of these
plaintiffs. The basis for each of the above-listed complaints is the plaintiff's
position that such telephone lines were to be returned to them upon termination
of their alarm monitoring services contract. KC Acquisition believes that these
claims are without merit and is vigorously defending each of them.

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<PAGE> 65

From time to time, KC Acquisition experiences routine litigation in the
normal course of business. KC Acquisition does not believe that any pending
litigation will have a material adverse affect on its financial condition or
results of operations.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101), "Revenue Recognition." KC Acquisition's management does not believe the
adoption of SAB 101 will have a material impact on its financial condition or
results of operations.

MANAGEMENT AFTER THE MERGER AND RELATED TRANSACTIONS

Prior to the closing of our merger with KC Acquisition, SecurityVillage.com
and our company each will have the right to appoint a representative to observe
and be included in all discussions with the board of directors of the other
party. After the consummation of our merger with KC Acquisition, our company and
SecurityVillage.com each shall have the right to designate one member and one
observer to the board of directors of the other company.

Following the merger, James S. Brannen will remain President and Chief
Executive Officer of Security Associates; Thomas Few Sr. will remain president
of KC Acquisition and Raymond Sacks will remain president of Monital. All of our
other officers of our will remain the same as prior to the merger.

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<PAGE> 66

PRINCIPAL HOLDERS

The following table lists certain information regarding the beneficial
owners of our common stock as of October 2, 2000, which includes: (i) each
person known to us to beneficially own more than five percent of the outstanding
shares of our common stock; (ii) each of our company's directors; (iii) the
named executive officers; and (iv) all of our company's directors and executive
officers as a group. We believe that except as noted each person or entity named
below has sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by each holder, subject to community property
laws where applicable. Some of the listed holders of common stock who hold their
shares in street name may have already sold their shares as of the effective
date of this prospectus. The address for each of the persons listed below,
unless otherwise noted, is: c/o Security Associates International, Inc., 2101 S.
Arlington Heights Road, Suite 100, Arlington Heights, Illinois 60005.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------
NUMBER OF
NAME SHARES PERCENT(1)
---- ---------- ----------
<S> <C> <C>
TJS Partners, L.P.(2)....................................... 13,710,900 63.98%
115 East Putnam Avenue
Greenwich, CT 0683
Ronald I. Davis(3).......................................... 1,014,695 4.72%
James S. Brannen(4)......................................... 643,278 3.00%
Stephen Rubin(5)............................................ 501,198 2.33%
Daniel S. Zittnan(6)........................................ 138,349 *
Ronald J. Carr(7)........................................... 121,096 *
Thomas J. Salvatore(8)...................................... 13,985,900 65.27%
c/o TJS Partners, L.P.
155 E. Putnam Avenue
Greenwich, CT 06830
Douglas Oberlander(9)....................................... 144,474 *
10225 N. Knoxville Avenue
Peoria, Illinois 61615
Michael B. Jones(10)........................................ 91,000 *
c/o ProFinance Associates, Inc.
6540 Lusk Boulevard, Suite C-240
San Diego, CA 92121
All executive officers and directors as a group (12 16,746,823 77.03%
persons)(11)..............................................
</TABLE>

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

* = less than 1%.

(1) Applicable percentage of ownership as of October 2, 2000, is based upon
21,430,255 shares of common stock outstanding (including 13,710,900 shares
issuable upon conversion of outstanding shares of convertible preferred
stock). Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission, and unless otherwise noted includes
voting and investment power with respect to the shares shown as
beneficially owned.

(2) Consists of 137,109 shares of Series A convertible preferred stock. Each
share of Series A convertible preferred stock is convertible into and has
the voting rights of 100 shares of common stock. TJS is the only holder of
convertible preferred stock.

(3) Includes 944,695 shares owned by Mr. Davis and J, S & R Ltd., L.P. Also
includes 70,000 shares that may be acquired within sixty days upon exercise
of options. Excludes 5,337 shares owned by Beverly Davis, Mr. Davis' wife,
5,200 shares owned by Scott Davis, Mr. Davis' son, 5,000 shares owned by
Deborah Davis, Scott's wife, 10,000 shares owned by Ethan Davis, Mr. Davis'
grandson, 10,000 shares owned by Benjamin Davis, Mr. Davis' grandson, 2,500
shares owned by Emma Davis, Mr. Davis' granddaughter, and 16,801 shares
owned by Ann Davis, Mr. Davis' sister, as to which Mr. Davis disclaims
beneficial ownership.

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(4) Includes 595,500 shares owned by Mr. Brannen and a family limited
partnership, and 47,778 shares that may be acquired within sixty days upon
exercise of options Excludes 7,580 shares owned by Martha A. Brannen, Mr.
Brannen's wife, 10,000 shares owned by Craig Brannen, 10,000 shares owned
by Sarah B. Ozee and 10,000 shares owned by Peter Brannen, Mr. Brannen's
children, as to which Mr. Brannen disclaims beneficial ownership.

(5) Includes 431,198 shares owned by Mr. Rubin, and 70,000 shares that may be
acquired within sixty days upon exercise of options. Excludes 5,600 shares
owned by Jamie Rubin, Mr. Rubin's son, as to which Mr. Rubin disclaims
beneficial ownership.

(6) Includes 38,349 shares owned by Mr. Zittnan, and 100,000 shares that may be
acquired within sixty days upon exercise of options.

(7) Includes 21,096 shares owned by Mr. Carr, and 100,000 shares that may be
acquired within sixty days upon exercise of options. Excludes 5,000 shares
owned by Mr. Carr's wife.

(8) Consists of 275,000 shares of common stock owned by Mr. Salvatore and
137,109 shares of Series A convertible preferred stock owned by TJS (which
is convertible into 13,710,900). Mr. Salvatore controls voting and
disposition of the shares of Series A convertible preferred stock as the
Managing Partner of TJS.

(9) Includes 119,474 shares owned by Mr. Oberlander, and 25,000 shares that may
be acquired within sixty days upon exercise of options.

(10) Includes 6,000 shares owned by Mr. Jones; and 85,000 shares of common stock
that may be acquired within sixty days upon exercise of options. Of these
options, options to purchase 25,000 shares are held by a family trust.

(11) Includes 597,778 shares that may be acquired within sixty days upon the
exercise of options.

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DESCRIPTION OF CAPITAL STOCK

GENERAL

Our board of directors is authorized to issue up to 1,000,000 shares of
preferred stock without stockholder approval. The terms of any preferred stock,
such as dividend rights, conversion prices, voting rights, redemption prices and
terms, can also be set by the board of directors. We have designated 137,686
shares of preferred stock as Series A convertible preferred stock, of which
137,109 are currently outstanding, and 45,000 shares of Series B convertible
preferred stock, of which none are currently outstanding.

SERIES A CONVERTIBLE PREFERRED STOCK

The Series A convertible preferred stock has a $10.00 par value, a
liquidation preference of $350 per share and each share is convertible into 100
shares of our common stock. The Series A convertible preferred stock is also
entitled to receive dividends equal to those that would have been received if
the holder had converted into common stock.

The holder of Series A convertible preferred stock is entitled to vote on
all matters on which holders of common stock are entitled to vote, on an
as-converted basis. However, the total voting power of all securities owned by
the holder of Series A convertible preferred stock is limited to a maximum of
45% of the total number of votes eligible to vote on a matter submitted to our
stockholders.

The Series A convertible preferred stock is convertible into common stock
at the option of the holder at any time. The shares automatically convert upon
the first sale of our common stock to underwriters pursuant to a registration
statement, provided the offering results in the receipt by our company of
proceeds of not less than $30.0 million at not less than $10.00 per share.

SERIES B CONVERTIBLE PREFERRED STOCK

We intend to issue 45,000 shares of Series B convertible preferred stock,
par value $10.00 per share, in connection with the merger. The shares of Series
B convertible preferred stock will have a liquidation preference of $500 per
share. Upon the liquidation, dissolution and winding up of our company, the
shares of Series B convertible preferred stock will rank senior to the
outstanding Series A convertible preferred stock and senior to the common stock.
Initially, each share will be convertible into 100 shares of common stock.
Holders of the Series B convertible preferred stock will also be entitled to
receive dividends equal to those that would have been received if the holder had
converted into common stock.

The holders of Series B convertible preferred stock will be entitled to
vote on all matters on which holders of our common stock and Series A
convertible preferred stock are entitled to vote, and to have the number of
votes equal to the number of shares of common stock into which such shares of
Series B convertible preferred stock are then convertible.

The Series B convertible preferred stock is convertible into common stock
at the option of the holder at any time. The shares automatically convert if we
make a public offering of our common stock that results in the receipt by us of
not less than $30.0 million, at not less than $10.00 per share of common stock,
or the consummation of a "Qualifying IPO" will be defined in the agreement
currently being negotiated between our company and SecurityVillage.com.

The terms of the Series B convertible preferred stock may be amended only
with the affirmative vote or written consent of the holders of a majority of the
shares of Series B convertible preferred stock then outstanding, voting as a
class.

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PROPOSED POSTPONEMENT OR ADJOURNMENT OF THE SPECIAL MEETING

Your board of directors may determine that it will recommend that the
special meeting scheduled for November 17, 2000 be postponed or adjourned. One
reason for this action would be to allow additional time for management to
solicit proxies in support of the issuance of the securities in connection with
the merger. Approval of this action by our stockholders would require the
affirmative vote of 60% of the votes represented at the meeting in person or by
proxy. An abstention or failure to vote on this proposal will NOT count as votes
against this proposal. Your board of directors recommends a vote FOR adoption of
the proposal to postpone or adjourn the special meeting if requested by your
board of directors.

WHERE TO FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy our filed reports, statements or
other information at the SEC's public reference rooms in Washington, D.C., New
York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. Our public filings are also
available from commercial document retrieval services and at the World Wide Web
site maintained by the SEC at "http://www.sec.gov." Reports, proxy statements
and other information about us also may be inspected at the NASD's offices at
1735 K Street, Washington, D.C. 20006.

You should rely only on the information contained in this proxy statement
to vote your shares at the special meeting. We have not authorized anyone to
provide you with information that is different from that contained in this proxy
statement. This proxy statement is dated October 6, 2000. You should not assume
that the information contained in the proxy statement is accurate as of any
other date, and neither the mailing of this proxy statement to our stockholders
nor the issuance of our common stock or preferred stock in connection with the
merger shall create any contrary implication.

EXPENSES OF SOLICITATION

We will pay all expenses in connection with the solicitation of proxies. We
estimate that the total amount of such expenses will be approximately $600,000,
of which approximately $300,000 has been expended to date. Solicitation may be
made personally, or by telephone, telegraph or mail, by one or more of our
employees, who will receive no additional compensation for such activities. Cost
represented by salaries and wages of regular employees are not included in the
cost figures stated above. In addition, we may engage the services of a
professional proxy solicitation firm to assist in the solicitation of proxies
and will pay the fees and expenses charged them. We will reimburse brokerage
firms and other custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred in forwarding copies of solicitation materials
to beneficial owners of our common stock and convertible preferred stock held by
such persons on October 2, 2000.

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STOCKHOLDER PROPOSALS FOR THE 2001 ANNUAL MEETING

We will hold our 2001 Annual Meeting of stockholders in accordance with our
bylaws and Delaware General Corporation Law. Any proposals of stockholders to be
presented at the 2001 meeting must be received by our Secretary no later than
January 30, 2001, for inclusion in our annual proxy statement and form of proxy.

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING,
REGARDLESS OF THE NUMBER OF SHARES THAT YOU HOLD. YOU ARE, THEREFORE, URGED TO
EXECUTE AND RETURN, AT YOUR EARLIEST CONVENIENCE, THE ACCOMPANYING PROXY IN THE
ENVELOPE THAT HAS BEEN ENCLOSED.

The above Notice of Special Meeting and proxy statement are sent by order
of the board of directors.

/s/ JAMES S. BRANNEN
------------------------------------
James S. Brannen
President and Chief Executive
Officer

Arlington Heights, Illinois

October 6, 2000

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<PAGE> 71

EXHIBIT A
PLAN AND AGREEMENT OF MERGER

BETWEEN

SECURITY ASSOCIATES INTERNATIONAL, INC.,

KING ACQUISITION CORP.

KC ACQUISITION CORP.,

MR. THOMAS J. FEW SR.,

MR. DAVID L. SMITH

AND

MR. TIMOTHY M. MCGINN

DATED AS OF: MAY 11, 2000

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PLAN AND AGREEMENT OF MERGER

THIS PLAN AND AGREEMENT OF MERGER (the "Agreement"), dated and effective as
of 3:00 p.m., Central Daylight Savings Time, May 11, 2000, is entered into by
and among Security Associates International, Inc, a Delaware corporation
("SAI"), King Acquisition Corp., a Delaware corporation ("King Acquisition"), KC
Acquisition Corp., a New Jersey corporation (the "Company"), Mr. Thomas J. Few
Sr. ("Few"), Mr. David L. Smith ("Smith") and Mr. Timothy M. McGinn ("McGinn")
(Messrs. Few, Smith and McGinn are sometimes referred to herein individually as
a "Selling Shareholder" and collectively as the "Selling Shareholders").

RECITALS

WHEREAS, the board of directors of the Company, and the shareholders of the
Company (the "Shareholders"), have approved the transactions contemplated hereby
and have determined that it is advisable and in their respective best interests
to consummate the merger described in Article II (the "Merger") and the other
transactions contemplated herein; and

WHEREAS, the respective boards of directors of SAI and King Acquisition
have approved the transactions contemplated hereby, subject to the approval of
the shareholders of SAI, and have determined that it is advisable and in their
respective best interests to consummate the Merger and the other transactions
contemplated herein; and

WHEREAS, as a result of the Merger, King Acquisition will be merged with
and into the Company, all of the outstanding capital stock of the Company will
be converted into the right to receive a combination of cash and securities of
SAI, all of the outstanding capital stock of King Acquisition will be converted
into capital stock of the Company and the Company will be the surviving
corporation, all on the terms and subject to the conditions set forth in this
Agreement; and

WHEREAS, for Federal income tax purposes the Parties intend that the Merger
shall qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Code (as defined herein);

NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein and other good and valuable consideration, the parties hereto, on
the basis of, and in reliance upon, the representations, warranties, covenants,
obligations and agreements set forth in this Agreement, and upon the terms and
subject to the conditions contained herein, agree as follows:

ARTICLE 1

DEFINITIONS

The following terms shall have the meanings assigned below when used in
this Agreement:

1.1 "Account" shall mean a written monitoring agreement pursuant to which
the Company or its Subsidiaries provides Monitoring Services to Subscribers. All
Accounts are "Dealer Owned Accounts," as defined below;

1.2 "Affiliate" shall mean, with respect to any particular Person, any
Person controlling, controlled by or under common control with such Person,
whether by ownership or control of voting securities, by contract or otherwise;

1.3 "Agreement" shall mean this Plan and Agreement of Merger;

1.4 "AMEX" shall mean the American Stock Exchange;

1.5 "Antenna" shall mean a radio antenna and antenna site used by the
Company or its Subsidiaries pursuant to an antenna site license agreement to
which the Company or its Subsidiaries is a party ("Antenna Lease");

1.6 "Acquisition Common" shall mean the common stock, $0.01 par value, of
King Acquisition;
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1.7 "Assets" shall mean all of the assets (as defined under GAAP) of the
Company and its Subsidiaries, including, but not limited to, the assets listed
on Schedule 3.12(a);

1.8 "Audited Company Financial Statements" shall have the meaning assigned
in Section 3.7(a);

1.9 "Billed Accounts" shall mean Dealer Owned Accounts for which the
Company or its Subsidiaries bills Subscribers on behalf of the Dealers which own
the Accounts;

1.10 "Central Stations" shall mean the central monitoring stations owned
and operated by the Company, or its Subsidiaries, which are located at the
locations set forth on Schedule 3.4;

1.11 "Closing" shall mean the consummation of the Merger;

1.12 "Closing Date" shall mean the third business day following the date
upon which the conditions to closing referred to in Articles 7 and 8, as
applicable, of this Agreement have been satisfied or waived by the Party
authorized to do so as provided in this Agreement and the Escrow Agreement or
such other date as the Parties may agree in writing;

1.13 "Closing Date Balance Sheet" shall mean the balance sheet, prepared
as provided in Section 3.7, delivered at the Closing showing the assets and
liabilities of the Company and its Subsidiaries as of a date not more than five
days prior to the Closing Date;

1.14 "Code" shall mean the Internal Revenue Code of 1986, as amended, and
any successor statute thereto, and the rules and any successor statute thereto,
and the rules and regulations issued and promulgated thereunder, as in effect
from time to time;

1.15 "Company" shall mean KC Acquisition Corp., a New Jersey corporation;

1.16 "Company Common" shall mean the Common Stock, with no par value per
share, of the Company;

1.17 "Company Financial Statements" shall mean the Audited Company
Financial Statements, the Unaudited Company Financial Statements, the Escrow
Date Balance Sheet and the Closing Date Balance Sheet;

1.18 "Company Released Claims" shall have the meaning assigned in Section
5.15;

1.19 "Company Released Parties" shall have the meaning assigned in Section
5.15;

1.20 "Company Releasing Parties" shall have the meaning assigned in
Section 6.5;

1.21 "Confidential Information" shall mean any and all oral, written,
electronic or other information designated as confidential or which ought to be
considered as confidential from its nature or from the circumstances surrounding
its disclosure, regardless of whether such information was disclosed before, on
or after the date of this Agreement, other than such information that (i) is
generally available or known by the public immediately prior to the time of
disclosure (except through the actions or inactions of the Person to whom
disclosure has been made) or (ii) has been acquired or developed independent
from the Person making the disclosure thereof.

1.22 "Contracts" shall mean Accounts, Dealer Monitoring Agreements, and
all agreements, contracts and arrangements relating to the businesses conducted
by the Company and its Subsidiaries;

1.23 "Dealer" shall mean an individual or business entity that contracts
in writing to provide Monitoring Services to Subscribers, and who in turn
subcontracts the provision of the actual Monitoring Services from the Company or
its Subsidiaries;

1.24 "Dealer Monitoring Agreements" shall mean the written contracts (and
those oral contracts summarized on Schedule 1.24 attached hereto) pursuant to
which the Company or its Subsidiaries has contracted to provide Monitoring
Services to Dealer Owned Accounts;

1.25 "Dealer Owned Account" shall mean any Account owned by a Dealer;

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1.26 "Distributed Business Items" means the assets and liabilities of the
business lines of the Company historically operated under the names "King
Capital" and "Monitoring Services" (the "Transferred Business Units") that are
described on Schedule 1.26 attached hereto and that are being transferred by the
Company to Morlyn Financial Group, LLC ("Morlyn") prior to Closing.

1.27 "Effective Time" shall have the meaning assigned in Section 2.1;

1.28 "Employee Benefit Plan" shall mean any employee benefit plan within
the meaning of Section 3(3) of ERISA which is (i) maintained for employees of
the Company or any ERISA Affiliate or (ii) has at any time within the preceding
six years been maintained for the employees of the Company its Subsidiaries or
any other current or former ERISA Affiliate.

1.29 "Environmental Laws" shall mean any and all federal, state and local
laws, rules, regulations and ordinances that relate to or impose liability or
standards of conduct concerning public or occupational health and safety or
protection of the environment, as now or hereafter in effect and as have been or
hereafter may be amended or re-authorized, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Sec. 9601 et seq.), the Hazardous Materials Transportation Act (42 U.S.C. Sec.
1802 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Sec. 6901,
et seq.), the Federal Water Pollution Control Act (33 U.S.C. Sec. 1251 et seq.
), the Toxic Substances Control Act (15 U.S.C. Sec. 2601 et seq.), the Clean Air
Act (42 U.S.C. Sec. 7901 et seq.), the National Environmental Policy Act (42
U.S.C. Sec. 4231 et seq.), the Refuse Act (33 U.S.C. Sec. 407 et seq.), the Safe
Drinking Water Act (42 U.S.C. Sec. 300(f) et seq.), the Occupational Safety and
Health Act (29 U.S.C. Sec. 651 et seq.), and all rules, regulations, codes,
ordinances and guidance documents promulgated or published thereunder, and the
provisions of any licenses, permits, orders and decrees issued pursuant to any
of the foregoing.

1.30 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and any successor statute thereto, and the rules and
regulations issued and promulgated thereunder, as in effect from time to time.

1.31 "ERISA Affiliate" shall mean any Person who is a member of group
which is under common control with the Company, who together with the Company is
treated as a single employer within the meaning of Section 414(b), (c), and (m)
of the Code and, if not otherwise so included, any other Subsidiary.

1.32 "Equipment" shall mean the tangible assets used or useful in
connection with the Monitoring Business or any other business conducted by the
Company or its direct or indirect Subsidiaries, including, but not limited to
that listed on Schedule 3.12(a);

1.33 "Equipment Lease" shall mean a lease pertaining to Equipment and
shall also include the Antenna Lease.

1.34 "Escrow Agent" shall mean the Person acting as the escrow agent
pursuant to the Escrow Agreement;

1.35 "Escrow Agreement" shall mean the Escrow Agreement to be entered into
among the Parties and the Escrow Agent pursuant to Section 9.2 which provides,
among other things, for the closing into, and release from, escrow of the
transactions contemplated by this Agreement on the terms and subject to the
conditions contained therein;

1.36 "Escrow Closing" shall mean the closing in escrow pursuant to the
Escrow Agreement as contemplated in Section 9.2 and in the Escrow Agreement.

1.37 "Escrow Date Balance Sheet" shall mean the balance sheet, prepared as
provided in Section 3.7, delivered at the Escrow Closing, showing the assets and
liabilities of the Company and it Subsidiaries as of a date not more than five
days prior to the Escrow Closing Date.

1.38 "Escrow Closing Date" shall mean June 30, 2000 or such earlier date
which is three business days after the date upon which the conditions to
closing, other than SAI Stockholder Approval, referred to in

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Articles 7 and 8 of this Agreement have been satisfied or waived by the Party
authorized to do so as provided in this Agreement or such other date as the
Parties may agree upon in writing;

1.39 "Excluded Assets" shall have the meaning assigned in Section 3.12(b);

1.40 "Facilities" shall have the meaning assigned in Section 3.27(a);

1.41 "Form Contracts" shall have the meaning assigned in Section 3.13;

1.42 "GAAP" shall mean "Generally Accepted Accounting Principles" which
shall mean the accounting rules, principles and conventions adopted by the
American Institute of Certified Public Accountants and referred to by that name;

1.43 "Hazardous Materials" shall mean any hazardous, toxic, dangerous or
other waste, substance or material defined as such in, regulated by or for the
purposes of any Environmental Law.

1.44 "including" shall indicate examples of a foregoing general statement
and is not a limitation on that general statement.

1.45 "Indemnitee" shall have the meaning assigned in Section 10.2;

1.46 "Indemnitor" shall have the meaning assigned in Section 10.2;

1.47 "Intellectual Property" shall mean all of the patents, trademarks,
trade names (excluding, the names "King Capital" and Monitoring Services"),
service marks, trade secrets, designs, know-how, copyrights, computer programs
and software and all rights, licenses and contracts relating to any of the
foregoing, and all other proprietary rights and information of the Company and
its Subsidiaries;

1.48 "Knowledge" means actual knowledge and knowledge a reasonable person
would have after due investigation and includes such knowledge of such Party's
officers, directors, the Company's Central Regional Manager, the Company's
National Sales Manager, legal counsel, financial representatives and
subsidiaries.

1.49 "Lease" shall mean each Real Estate Lease, each Equipment Lease and
each other lease pursuant to with the Company or its Subsidiaries rent or lease
Property;

1.50 "Leasehold Property" shall mean any real estate which is the subject
of a Lease under which the Company or its Subsidiaries is or has been the
lessee.

1.51 "Liabilities" shall have the meaning assigned under GAAP.

1.52 "Letter of Intent" shall mean the letter of intent, dated as of April
21, 2000, among SecurityVillage.com, Inc. ("Security Village"), SAI, the Company
and TJS Partners, L.P. which provides, among other things for the Merger and the
other transactions contemplated in this Agreement;

1.53 "Lien" shall have the meaning assigned in Section 3.12;

1.54 "Material Adverse Effect" shall have the meaning assigned in Section
3.7;

1.55 "Material Contract" shall have the meaning assigned in Section 3.10;

1.56 "Merger" shall have the meaning assigned in the first Recital;

1.57 "Minimum RMR" shall mean RMR payable to the Company and its
Subsidiaries of not less than $1,100,000;

1.58 "Monital" shall mean Monital Signal Corporation, Griptight Holdings,
Inc. and their respective subsidiaries prior to the Monital Acquisition;

1.59 "Monital Acquisition" shall mean the merger of Griptight Holdings,
Inc. and Monital Signal Corporation into a Subsidiary of the Company (the
"Monital Acquisition Subsidiary") and the acquisition of a 20% equity interest
in Monital Signal Corporation, which transactions will result in the Company
owning 99.2% of the Monital Acquisition Subsidiary;

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1.60 "Monital Retail Account Transactions" shall mean the sale by Monital
of its retail accounts to Palisades Partners or its assignee for a purchase
price of $450,000, the application of the proceeds therefrom to indebtedness of
Monital to M&S Partners, the potential loan from Palisades Partners or its
assignee to Monital for the release of certain liens or encumbrances on such
retail accounts and the subsequent repayment of such loan by SAI upon the
closing of the Merger, all as contemplated in Section 2(d) of the Letter of
Intent;

1.61 "Monitoring Business" shall mean the business of providing Monitoring
Services as presently conducted;

1.62 "Monitoring Services" shall mean the provision of remote alarm
monitoring services to Subscribers, and all related security services, including
but not limited to, notification and dispatch of emergency personnel, supervised
openings and closings, closed circuit monitoring and any other security related
services;

1.63 "Multiemployer Plan" shall mean any multiemployer plan as defined
pursuant to Section 3(37) of ERISA to which the Company or any ERISA Affiliate
makes, or accrues an obligation to make, contributions, or has made, or has been
obligated to make, contributions within the preceding six (6) years;

1.64 "Pension Plan" shall mean any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to the provisions of Part 3 of Title I of
ERISA, or Section 412 of the Code and which (i) is maintained for employees of
the Company, its direct or indirect Subsidiaries or any ERISA Affiliate, or (ii)
has at any time within the preceding six years been maintained for the employees
of the Company or any of its current or former ERISA Affiliates;

1.65 "Permits" shall mean all governmental licenses, registrations,
permits, approvals and applications therefor;

1.66 "Person" shall mean any individual, trust, corporation, partnership,
limited partnership, limited liability company or other business association or
entity, court, governmental body or governmental agency;

1.67 "Prebilled RMR" shall mean RMR billed by the Company or its
Subsidiaries to Dealers in advance for monitoring services to be performed
subsequent to the Closing Date;

1.68 "Proxy Statement" shall mean the proxy statement distributed by SAI
to its stockholders in connection with the meeting of the stockholders of SAI
called for the purpose, among other things, of obtaining SAI Stockholder
Approval;

1.69 "Real Estate Leases" shall have the meaning assigned in Section
3.11(a);

1.70 "Required Consents" shall have the meaning assigned in Section 5.3;

1.71 "RMR" shall mean the total regular recurring monthly amounts payable
by Dealers, as appropriate, for Monitoring Services. RMR shall exclude any
amounts due under Dealer Monitoring Agreements listed on Schedule 1.72. RMR
includes all service charges, including leased equipment revenue. RMR does not
include any amounts derived from:

(a) reimbursement for or payment of telephone line or other utility
charges associated with the installation, monitoring, maintenance, or
furnishing of the alarm services;

(b) reimbursement or payments of false alarm assessments;

(c) reimbursement or payment of taxes, fees or other charges imposed by
any governmental authority or utility relating to the furnishing of alarm
services;

(d) reimbursement or payment for time and materials charges that are
receivable from any seller or installer of monitoring equipment for
services which are not provided on a regular or recurring basis; or

(e) charges incurred in connection with the maintenance of alarm systems
or the underlying equipment.

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1.72 "SAI" shall mean Security Associates International, Inc., a Delaware
corporation;

1.73 "King Acquisition" shall mean King Acquisition Corp., a Delaware
corporation;

1.74 "SAI Common" shall mean the common stock, $.001 par value, of SAI;

1.75 "SAI Financial Statements" shall have the meaning assigned in Section
4.5;

1.76 "SAI Indemnified Parties" shall have the meaning assigned in Section
10.1(a);

1.77 "SAI Preferred" shall mean the Series B Convertible Preferred Stock,
par value $0.01 per share of SAI, having substantially the terms, preferences
and provisions previously disclosed to the Selling Shareholders;

1.78 "SAI SEC Reports" shall have the meaning assigned in Section 4.5;

1.79 "SAI/King LOI" shall mean the letter of intent, dated April 5, 2000,
between SAI and the Selling Shareholders of the Company relating to the
acquisition of the Company by SAI and referred to in Section 3(c)(y) of the
Letter of Intent;

1.80 "SAI Stockholder Approval" shall have the meaning assigned in Section
7.21;

1.81 "SAI Stockholders Meeting" shall have the meaning assigned in Section
6.4;

1.82 "SEC" shall mean the Securities and Exchange Commission;

1.83 "Securities Act" shall mean the Securities Act of 1933, as amended;

1.84 "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended;

1.85 "SecurityVillage" shall mean SecurityVillage.com, Inc., a Delaware
corporation;

1.86 "Shareholder Indemnified Parties" shall have the meaning assigned in
Section 10.1(b);

1.87 "Shareholders" shall have the meaning assigned in the first Recital
of this Agreement;

1.88 "Shares" shall mean all of the issued and outstanding capital stock
of the Company;

1.89 "Selling Shareholder Released Claims" shall have the meaning assigned
in Section 6.5;

1.90 "Selling Shareholder Released Parties" shall have the meaning
assigned in Section 6.5;

1.91 "Selling Shareholder Releasing Parties" shall have the meaning
assigned in Section 5.15;

1.92 "Selling Shareholders" shall mean Messrs. Thomas J. Few Sr., David L.
Smith and Timothy M. McGinn;

1.93 "Subscriber" shall mean any individual or entity who has contracted
to obtain remote security system monitoring services for a security alarm system
installed on the premises of that individual or entity;

1.94 "Subsidiary" shall have the meaning assigned in Section 3.3;

1.95 "SV/SAI Agreement" shall have the meaning assigned in Section 3 of
the Letter of Intent;

1.96 "SV Option" means the option referred to in Section 1 of the Letter
of Intent pursuant to which SecurityVillage has the right to acquire up to 8% of
the equity of the Company (on a fully diluted basis after giving effect to the
Monital Acquisition) for $1.5 million (or in lieu thereof a call option for such
8% equity interest or another investment vehicle that provides equivalent
economic value to SecurityVillage);

1.97 "Taxes" shall have the meaning assigned in Section 3.23;

1.98 "Termination Event" shall mean (1) a "Reportable Event" described in
Section 4043 of ERISA and the regulations issued thereunder; or (ii) the
withdrawal of the Company or any ERISA Affiliate from a Pension Plan during a
plan year in which it was a "substantial employer" as defined in Section
4001(a)(2); or (iii) the termination of a Pension Plan, the filing of a notice
of intent to terminate a Pension Plan or the treatment of a Pension Plan
amendment as a termination under Section 4041 of ERISA; or (iv) the
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institution of proceedings to terminate, or the appointment of a trustee with
respect to, any Pension Plan by the PBGC; or (v) any other event or condition
which would constitute grounds under Section 4042(a) of ERISA for the
termination of, or the appointment of a trustee to administer, any Pension Plan,
or (vi) the partial or complete withdrawal of the Company or any ERISA Affiliate
from a Multiemployer Plan or (vii) the imposition of a lien pursuant to Section
412 of the Code or Section 302 of ERISA; or (viii) any event or condition which
results in the reorganization or insolvency of a Multiemployer Plan under
Sections 4241 or 4245 of ERISA; or (ix) any event or condition which results in
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by the PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.

1.99 "Third Party Claim" shall have the meaning assigned in Section
10.2(a); and

1.100 "Unaudited Company Financial Statements shall mean the reviewed
financial statements of the Company and its Subsidiaries for each of the two
years ended December 31, 1999 and the financial statements of the Company for
the three month period ended March 31, 2000, all as more fully described in
Section 3.7 of this Agreement.

ARTICLE 2

THE MERGER

In connection with the Merger, the respective boards of directors and
shareholders of King Acquisition and the Company have, by resolutions duly
adopted, approved the following provisions of this Article II as their "Plan of
Reorganization" within the meaning of applicable law:

2.1 Articles of Merger. Subject to the provisions of this Agreement,
Certificates of Merger executed on behalf of each of King Acquisition and the
Company and meeting the requirements of applicable law (the "Certificates of
Merger"), shall be duly prepared, executed and acknowledged by the Company, King
Acquisition and such other parties as may be appropriate, and thereafter the
Certificates of Merger shall be delivered to the Secretary of State of the
states of New Jersey and Delaware, as provided under applicable law, for filing
at or before the Closing. The Merger shall become effective on the date upon
which the Certificates of Merger are filed in accordance with applicable law
(the "Effective Time").

2.2 Closing. The Closing shall take place as provided in Article 9 and in
the Escrow Agreement.

2.3 Effects of the Merger.

(a) At the Effective Time, the separate corporate existence of King
Acquisition shall cease, King Acquisition shall be merged with and into the
Company and the Company, as the surviving corporation in the Merger (the
"Surviving Corporation"), shall continue its corporate existence under the
laws of the state of New Jersey under such name as SAI shall designate.

(b) At and after the Effective Time, the Merger will have the effects
set forth under applicable law.

2.4 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation of King Acquisition, as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation immediately after the Effective Time and shall thereafter continue
to be its Certificate of Incorporation until amended as provided therein and
under applicable law.

2.5 Directors and Officers. The directors of King Acquisition holding
office immediately prior to the Effective Time shall be the directors of the
Surviving Corporation immediately after the Effective Time. The officers of King
Acquisition holding office immediately prior to the Effective Time shall be the
officers of the Surviving Corporation immediately after the Effective Time.

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2.6 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of King Acquisition, the Company or
the holders of any of the following securities, the following securities will be
converted in the manner set forth below:

(a) Each share of Company Common which is issued and outstanding
immediately prior to the Effective Time (other than treasury shares) shall
be canceled and extinguished and converted into and become a right to
receive (x) 225 shares of SAI Preferred (having in the aggregate a $22.5
million liquidation value and convertible into 4.5 million shares of SAI
Common in the aggregate), and (y) and $25,000 ($5 million in the
aggregate); provided, however, that if as the result of the conversion of
any Shareholder's Company Common upon consummation of the Merger, a
fractional interest in a share of SAI Preferred would be deliverable under
this Section 2.6.(a), in lieu of a fractional share being delivered
therefor, such fractional interest shall automatically be converted into
the right to receive an amount in cash (without interest) equal to the
product of the average of the high and low sale prices of the SAI Common as
reported by the AMEX on the trading day immediately prior to the Effective
Time, multiplied by the number of shares of SAI Common into which such
fractional interest would be convertible. No such holder will be entitled
to dividends, voting rights or any other rights as a shareholder in respect
of any fractional share.

(b) The SV Option shall be canceled and extinguished and converted and
become a right to receive 300,000 shares of SAI Common in the aggregate.

(c) To the extent that actual RMR is less than the Minimum RMR, then the
number of shares of SAI Preferred, SAI Common, and cash to be exchanged
pursuant to this Section 2.6 shall be proportionately reduced.

(d) Each share of Acquisition Common issued and outstanding immediately
prior to the Effective Time shall be converted into one validly issued,
fully paid and nonassessable share of Company Common.

2.7 Closing of Company Transfer Books. Immediately prior to the Effective
Time the stock transfer books of the Company shall be closed and no transfer of
shares of Company stock shall thereafter be made or recognized. After the
Effective Time valid certificates previously representing shares of Company
Common which are presented in accordance with this Agreement to the Surviving
Corporation shall be exchanged as provided in Section 2.8.

2.8 Exchange of Common Certificates. Each holder of a certificate or
certificates representing shares of Company Common issued and outstanding
immediately prior to the Effective Time shall at or as soon as practicable
following the Closing, surrender to SAI for exchange a certificate or
certificates, duly endorsed in blank or accompanied by duly executed stock
powers, representing the number of shares of Company Common held by such holder.
In exchange therefor, SAI shall (x) issue to such holder of Company Common a
certificate or certificates representing the number of shares of SAI Preferred
to be issued to such holder pursuant to Section 2.6(a), and (y) the amount of
cash, if any, to be paid to be paid to such holder pursuant to Sections 2.6(a).
Surrendered certificates shall forthwith be canceled. At Closing,
SecurityVillage will surrender the original SV Option to SAI in exchange for the
SAI Common called for by Section 2.6(b). Until so surrendered and exchanged,
each such certificate (or the SV Option, as applicable) shall represent solely
the right to receive the consideration therefor provided in Sections 2.6(a) and
2.6(b), without interest, and SAI shall not be required to issue to such holder
the stock to which such holder otherwise would be entitled; provided, that
procedures allowing for payment against receipt of customary and appropriate
certifications and indemnities shall be provided with respect to lost or
destroyed certificates.

2.9 Rights of the Company Shareholders. From and after the Effective Time,
the holders of shares of Company Common issued and outstanding at the Effective
Time shall have no rights with respect to such shares other than to surrender
the certificate or certificates representing such shares pursuant to Section
2.8.

2.10 Taking of Necessary Action; Further Action. SAI and King Acquisition,
on the one hand, and the Company and the Selling Shareholders, on the other
hand, shall use reasonable efforts to take all such action

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(including action to cause the satisfaction of the conditions to the Merger) as
may be necessary or appropriate in order to effectuate the Merger as promptly as
possible. If, at any time after the Effective Time, any further action is
necessary or desirable to vest the Surviving Corporation with full possession of
all the rights, privileges, immunities and franchises of the Company and
Acquisition, the officers of the Surviving Corporation are fully authorized in
the name of either the Company or Acquisition or otherwise to take, and shall
take, all such action.

ARTICLE 3

REPRESENTATIONS WARRANTIES OF THE SELLING SHAREHOLDERS

The Selling Shareholders, jointly and severally, represent, warrant and
acknowledge to SAI, King Acquisition, and their respective successors and
assigns that on the date of execution of this Agreement, at the Escrow Closing
and at the Closing, except in each case as set forth on the applicable
Disclosure Schedules attached hereto and except as provided in Section 3.32:

3.1 Organization and Standing; Certificate of Incorporation and
By-laws. The Company and each Subsidiary of the Company is a corporation duly
organized and validly existing under and by virtue of, the laws of the state of
its incorporation and is in good standing under such laws. The Company and each
Subsidiary of the Company has the requisite corporate power and authority to own
and operate its properties and assets, and to carry on its business as presently
conducted and as proposed to be conducted. The Company and each Subsidiary of
the Company is duly qualified or licensed and in good standing as a foreign
corporation in each jurisdiction where the character of its properties or the
nature of the activities conducted by it makes such qualification or licensing
necessary, each of which is listed on Schedule 3.1. The Company and its
Subsidiaries do business under the names listed on Schedule 3.1 and do not
conduct any business, and are not commonly known by any other names, other than
as set forth on Schedule 3.1. The Company and each Subsidiary of the Company has
complied with all laws requiring the registration or other recording of such
names in each jurisdiction in which the Company or such direct or indirect
Subsidiary does business. The certified copies of the Certificate or Articles of
Incorporation and By-laws of the Company and each of its Subsidiaries attached
to Schedule 3.1, are true, correct and complete and contain all amendments
through the date hereof.

3.2 Power and Authority. The Company, each of its Subsidiaries and the
Selling Shareholders have, and will have at the Closing, all requisite legal
power and authority to execute and deliver this Agreement, to consummate the
Merger and to carry out and perform their obligations under this Agreement. None
of the Company's shareholders has dissented from the transactions contemplated
by this Agreement and no shareholder of the Company has or will have dissenter's
rights as a result thereof. This Agreement has been duly executed and delivered
by the Company and each Selling Shareholder, and constitutes a legal, valid and
binding obligation of the Company and each Selling Shareholder, enforceable
against each in accordance with its terms. Attached to Schedule 3.2 are
certified copies of the resolutions of the Company authorizing the transactions
contemplated hereby, which have not been amended or revoked.

3.3 Subsidiaries. Except as disclosed on Schedule 3.3, the Company has no
Subsidiaries or affiliated companies and does not otherwise own or control,
directly or indirectly, any equity interest in any corporation, association or
business entity. As used herein, a "Subsidiary" is any corporation, limited
liability company, partnership, or other business entity with respect to which
the Company owns, directly or indirectly, any equity interest, and includes any
Subsidiary of a Subsidiary.

3.4 Central Stations. The Company and its Subsidiaries own and operate the
Central Stations from which they monitor security systems pursuant to the
Accounts and the Dealer Monitoring Agreements. The Central Stations are located
at the locations described on Schedule 3.4.

3.5 Capitalization. The authorized capital stock of the Company consists,
and will consist at the Closing, of 2,500 shares of common stock, with no par
value per share, of which 200 shares are issued and outstanding, and all of
which are, and at the Closing will be, owned, beneficially and of record by Few,
Smith and McGinn, the Selling Shareholders, as follows: Few (160 shares), Smith
(20 shares) and McGinn (20 shares). All of such shares have been duly authorized
and validly issued and are fully paid and
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nonassessable. The authorized, issued and outstanding capital stock of each
Subsidiary of the Company is, and at the Closing will be, as set forth on
Schedule 3.5. Except for the 0.8% interest in Monital held by LWG Holdings
Limited, an English limited company, all shares of capital stock of each
Subsidiary of the Company are, and at the Closing will be, owned beneficially
and of record by the Company or a Subsidiary of the Company, free and clear of
all liens, encumbrances, restrictions and claims of every kind. Except for the
SV Option and except as described on Schedule 3.5, there are no pre-emptive
rights, options, warrants, conversion rights, rights of exchange or other
rights, plans or agreements of any nature whatsoever providing for the purchase,
issuance or sale of any capital stock of the Company or any Subsidiary of the
Company or of any securities convertible into or exchangeable for any shares of
the capital stock of the Company or any Subsidiary of the Company. Except for
the Letter of Intent, no shareholder of the Company or any Subsidiary of the
Company is party to any agreement or arrangement pursuant to which it is
obligated to dispose of any of the capital stock of the Company or any
Subsidiary of the Company to any party other than SAI in connection with the
Merger. Other than the Selling Stockholders, there are no other holders of
capital stock of the Company. All securities of the Company and each Subsidiary
of the Company were issued and transferred in compliance with all applicable
federal and state securities laws and regulations. The Merger and the exchange
of the shares of Company Common involved therein as contemplated by this
Agreement will be in compliance with all applicable federal and state securities
regulations.

3.6 Consents and Approvals. No approval or authorization of the
Shareholders or the directors of the Company or of any governmental authority or
agency or any other third party is required for the consummation by the Company
of the Merger or the other transactions contemplated by this Agreement, except
for those listed on Schedule 3.6, all of which have been obtained and copies of
which have been delivered to SAI. Except as contemplated by this Agreement, no
filing or registration with any court or governmental or regulatory agency or
board is required to be made on behalf of the Company or any Subsidiary of the
Company in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby.

3.7 Company Financial Statements; Closing Date Balance Sheet.

(a) The Company has delivered to SAI the Unaudited Company Financial
Statements; and, prior to the Escrow Closing , the Company will deliver to
SAI the Escrow Date Balance Sheet, and prior to the Closing, the Company
will deliver to SAI the Closing Date Balance Sheet. The Unaudited Company
Financial Statements are attached to Schedule 3.7. The Unaudited Company
Financial Statements are complete and correct in all material respects and
do not contain any information which is false or misleading. The Escrow
Date Balance Sheet and the Closing Date Balance Sheet will contain, among
other things, specific schedules setting forth the Company's RMR as of the
dates thereof, and will be true, accurate, complete and correct in all
material respects and will not contain any information which is false or
misleading as of their respective dates. The Unaudited Company Financial
Statements do, the Escrow Date Balance Sheet, and the Closing Date Balance
Sheet will, fairly present the financial condition and operating results of
the Company and its Subsidiaries as of the dates, and during the periods,
indicated therein. Prior to the Escrow Closing, the Company will provide
SAI with audited financial statements for periods covered by the Unaudited
Company Financial Statements (the "Audited Company Financial Statements").
The Audited Company Financial Statements will fairly present the financial
condition and operating results of the Company and its Subsidiaries as of
the dates, and during the periods, indicated therein, and will be prepared
in accordance with GAAP, consistently applied throughout the periods
indicated, except for the absence of footnotes and subject in the case of
interim financials, including the Escrow Date Balance Sheet and the Closing
Date Balance Sheet, to the effect of normal year-end adjustments (which
will not be material). The Audited Company Financial Statements will not
differ from the Unaudited Company Financial Statements in any material
respect. Since December 31, 1999, there has not been any material adverse
change, or any event or condition which could reasonably be expected to
result in any material adverse change, in the financial condition, results
or operations, business, prospects or properties of the Company or any of
its Subsidiaries, the Monitoring Business or any other business conducted
by the Company or any of its Subsidiaries (a "Material Adverse Effect").

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(b) The books and records of the Company and each of its Subsidiaries
are and have been properly prepared and maintained in form and substance
adequate for preparing audited financial statements in accordance with
GAAP, and fairly and accurately reflect all of the assets and liabilities
of the Company, its Subsidiaries and all contracts and transactions to
which the Company or its Subsidiaries is or was a party or by which the
Company, its Subsidiaries or any of their respective businesses or assets
is or was affected. The corporate minute books of the Company and each of
its Subsidiaries, copies of which have been made available to SAI,
correctly reflect all resolutions adopted and all other material corporate
actions taken at all meetings or through consents of the directors
(including committees thereof) and the shareholders of the Company and each
of its Subsidiaries. The stock transfer books and stock ledger of the
Company and each of its Subsidiaries are complete and correctly reflect all
issuances and transfers of the capital stock of the Company and each of
such Subsidiaries.

(c) At the Closing the Company will have a tax basis of at least (i) $18
million in depreciable and/or amortizable assets for Federal income tax
purposes, calculated in accordance with GAAP, less (ii) the amount by which
such assets have been depreciated and/or amortized for Federal income tax
purposes since January 1, 2000, calculated in accordance with GAAP.

3.8 Absence of Changes. Except for Monital Retail Account Transactions,
the transfer of the Distributed Business Items and the incurrence in the
ordinary course of indebtedness in the ordinary course of business for working
capital and/or under the Company's "8X" program, and except as otherwise set
forth in Schedule 3.8, since December 31, 1999:

(a) neither the Company nor any of its Subsidiaries has entered into any
material agreement or transaction which was not in the ordinary course of
business;

(b) there has been no material damage to, destruction of or loss of
physical property (whether or not covered by insurance) or any other
material adverse change in the Company, its Subsidiaries, or their Assets,
the Monitoring Business or any other business conducted by the Company or
any of its Subsidiaries;

(c) except as permitted pursuant to Section 5.11, neither the Company
nor any of its Subsidiaries has declared or paid any dividend or made any
distribution (in cash, securities or other property) on its capital stock,
or redeemed, purchased or otherwise acquired any of its capital stock;

(d) neither the Company nor any of its Subsidiaries has increased the
compensation of its officers, or the rate of pay of its employees as a
group; and there are no impending resignations or terminations of any
officers or employees of the Company or any of its Subsidiaries;

(e) there has been no labor dispute involving the Company or any of its
Subsidiaries;

(f) there has not been any material change in the contingent obligations
of the Company or any of its Subsidiaries by way of guaranty, endorsement,
indemnity, warranty or otherwise;

(g) there have not been any loans made by the Company or any of
Subsidiaries to any of their employees, officers or directors;

(h) neither the Company nor any of its Subsidiaries has borrowed any
amount or incurred or become subject to any liabilities (absolute or
contingent), except non-material expenses incurred in the ordinary course
of business;

(i) neither the Company nor any of its Subsidiaries has paid any
material obligations or liabilities, other than current liabilities paid in
the ordinary course of business;

(j) neither the Company nor any of its Subsidiaries has mortgaged,
pledged or subjected to any lien, charge or any other encumbrance, any of
its properties or assets;

(k) neither the Company nor any of its Subsidiaries has sold, assigned,
transferred or leased any of its assets other than in the ordinary course
of business;

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(l) neither the Company nor any of its Subsidiaries has made any
material capital expenditures or commitments therefor;

(m) neither the Company nor any of its Subsidiaries has changed its
accounting methods or practices;

(n) there has been no other event or condition of any character that has
or can reasonably be expected to result in a Material Adverse Effect to the
Company and its Subsidiaries;

(o) neither the Company nor any of it Subsidiaries has changed the
pricing for its services or indicated that reduced pricing for their
services could be expected; and

(p) neither the Company nor any of its Subsidiaries has, to the
Knowledge of the Company or the Selling Shareholders received, verbally or
in writing, any notice of intent to cancel or reduce use of its services by
any Dealer.

3.9 Liabilities and Indebtedness. Schedule 3.9 contains a true and
complete list of each and every Liability of the Company and each of its
Subsidiaries, including, but not limited to, all prebilled RMR and unearned
revenue and each and every agreement or other instrument under or pursuant to
which the Company or any of its Subsidiaries has outstanding indebtedness or
obligations of greater than $10,000 individually or $50,000 in the aggregate.
The Company has furnished SAI with true and correct copies of each such
agreement and instrument, including all amendments and copies of any guarantee
security agreements and/or financing statements executed by the Company or any
of its Subsidiaries relating to said agreements. Neither the Company nor any of
its Subsidiaries is in default in any material respect under any of its
agreements or evidences of indebtedness. Except as recorded on the face of the
Closing Balance Sheet or as disclosed on Schedule 3.9 attached hereto, neither
the Company nor any of its Subsidiaries has any material (individually or in the
aggregate) Liabilities or obligations, absolute or contingent.

3.10 Material Contracts. Schedule 3.10 contains a true, accurate and
complete list of each and every agreement, contract, arrangement or
understanding of the Company and each of its Subsidiaries pursuant to which the
Company or its Subsidiaries is obligated (or potentially obligated) to pay more
than $10,000 or pursuant to which the Company or any of its Subsidiaries is
obligated (or potentially obligated) to provide services with a value in excess
of $10,000 ("Material Contract"). No party (including the Company or any of its
Subsidiaries) to any Material Contract is in default in any material respect
thereunder. Except as set forth on Schedule 3.10, neither the Company nor any of
its Subsidiaries is a party to any Material Contract.

3.11 Leases.

(a) Schedule 3.11(a) contains a true and complete list of all real
estate leases of the Company and each of its Subsidiaries (the "Real Estate
Leases") and sets forth a brief summary of the principal terms thereof.
True and complete copies of all such Real Estate Leases have been supplied
to SAI, including all amendments thereto. The Company and its Subsidiaries
will be able to utilize all of the Central Stations under such Real Estate
Leases for those Facilities for the balance of the terms of their
respective leases, including any renewal terms. Neither the Company nor its
Subsidiaries or any Shareholder has any Knowledge of any intention on the
part of any lessor to terminate any Real Estate Lease or raise the rental
rate or take any other action that might make the continued use by the
Company or any of its Subsidiaries of any of the Facilities housing the
Central Stations more onerous.

(b) Schedule 3.11(b) contains a true, accurate and complete list of
every equipment lease of the Company and each of its Subsidiaries,
including the Antenna Lease ("Equipment Leases") and sets forth a brief
summary of the principal terms of each such lease. True, accurate and
complete copies of all such Equipment Leases have been supplied to SAI,
including all amendments thereto. The Company and its Subsidiaries will be
able to utilize all of the equipment leased under such Equipment Leases for
the balance of the terms of their respective leases, including any renewal
terms. Neither the Company, its Subsidiaries nor any Shareholder has any
Knowledge of any intention on the part of any lessor to terminate any
Equipment Lease or raise the rental rate or take any other action that
might make the

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continued use by the Company or any of its Subsidiaries of any of the
equipment leased thereunder more onerous.

(c) Schedule 3.11(c) contains a true, accurate and complete list of all
Leases not listed in Schedules 3.11(a) or 3.11(b). Neither the Company, its
Subsidiaries nor any other party is in default under the terms of any
Lease. None of the Leases requires the consent of the lessors thereunder to
the transactions contemplated by this Agreement. Consummation of the
transactions contemplated hereby will not result in the cancellation of any
of the Leases or the acceleration of the obligations thereunder. Prior to
the Escrow Closing, the Company shall have obtained and delivered to SAI
all necessary landlord and other lessor consents necessary for the Company
and its Subsidiaries to operate the Central Stations, and to assume the
rights of the Company or its Subsidiaries under the Leases.

3.12 Title to Properties and Assets; Liens, etc. The Company or one of its
Subsidiaries has good and marketable title to its properties and assets, and has
good title to all its leasehold interests, in each case subject to no mortgage,
pledge, lien, lease, claim, encumbrance, restriction or charge ("Lien"), except
for the Liens listed on Schedule 3.12. The Company or its Subsidiaries own or
lease all such equipment and properties as are necessary to the Monitoring
Business and each other business conducted by the Company or its Subsidiaries.
Schedule 3.12(a) contains a true, accurate and complete list of all (x) Leases
which require the consent of a party other than the Company or its Subsidiaries
in connection with the Merger, and (y) Assets of the Company and its
Subsidiaries which consist of:

(a) Cash and Securities;

(b) Bank Accounts;

(d) Real Estate;

(e) Equipment;

(f) Intellectual property;

(g) Leasehold interests in Real Estate Leases and Equipment Leases;

(h) The rights to the telephone lines used in the Monitoring Business,
all of which are listed on Schedule 3.12(a);

(i) Accounts receivable;

(j) Prepaid expenses and deposits;

(k) All books and records of the Company and each of its Subsidiaries,
including without limitation all financial, accounting and personnel
records, all original Contracts, monitoring and service records, lockout
codes, computer codes, up and download codes and information, and all other
documentation necessary or appropriate in order for the Company and its
Subsidiaries to operate the Monitoring Business and the other business
operated by the Company and its Subsidiaries;

(l) All other contracts and commitments by which the Company or any of
its Subsidiaries is bound;

(m) The goodwill of the Company;

(n) All contracts and policies of insurance; and

(o) All other assets and rights used in the operation of the Monitoring
Business, excepting only those listed on Schedule 3.12(b) as "Excluded
Assets".

All Equipment owned by the Company or any of its Subsidiaries is, and at
the Closing will be, in good operating condition and repair, ordinarily wear and
tear excepted. All of the Equipment is in compliance with all applicable
statutes, rules, regulations and ordinances.

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Except as disclosed on Schedule 3.12(a), all real property owned by the
Company or any of its Subsidiaries is free and clear of all Liens and is not
subject to any rights of way, building use restrictions, exceptions, variances,
reservations, or limitations of any nature, except (a) liens for current taxes
not yet due, and (b) (i) minor imperfections of title, if any, none of which is
substantial in amount, materially detracts from the value or impairs the use of
the property subject thereto, or impairs the operations of the Company or its
Subsidiaries, and (ii) zoning laws and other land use restrictions that do not
impair the present or anticipated use of the property subject thereto. Except as
disclosed on Schedule 3.12(a), all buildings, plants, and structures owned by
the Company and its Subsidiaries lie wholly within the boundaries of the real
property owned by the Company or its Subsidiaries and do not encroach upon the
property of, or otherwise conflict with the property rights of, any other
Person.

Schedule 3.12(b) is a true and complete list of those assets formerly owned
by the Company or any of its Subsidiaries which have been distributed to the
shareholders of the Company or any of its Subsidiaries or entities controlled by
such shareholders at or prior to the Closing. Assets listed on Schedule 3.12(b)
which are to be distributed to the Selling Shareholders immediately prior to the
Closing, if any, shall be referred to herein as "Excluded Assets." Except as
disclosed on Schedule 3.12 or referred to specifically in this Agreement, other
than the Excluded Assets, no Asset of the Company or any of its Subsidiaries has
been disposed of since December 31, 1999, other than in the ordinary course of
business.

3.13 Form Contracts. Attached to Schedule 3.13 are the forms of agreements
the Company and its Subsidiaries use with Dealers and Subscribers to document
its arrangements for monitoring Dealer Owned Accounts (collectively, the "Form
Contracts"). The Form Contracts include all contracts currently in use, and
earlier forms of contracts that were used for agreements that are still in
effect. Neither the Company nor any of its Subsidiaries has entered into any
oral agreements with any Subscriber or Dealer, except for those agreements
described in reasonable detail on Schedule 3.13. Except as disclosed on Schedule
3.13 there are no agreements with any Dealer or Subscriber materially varying
from the provisions of the Form Contracts. Neither the Company nor any of its
Subsidiaries provides monitoring to any Subscriber of a Dealer that has not
executed a written contract with that Dealer. The Company and each of its
Subsidiaries has delivered to SAI all of the Dealer Monitoring Agreements of the
Company and its Subsidiaries and copies of the form agreements used by the
respective Dealers for each Dealer Owned Account.

3.14 Telephone Lines. Schedule 3.14 contains a true, accurate and complete
list of (i) each telephone line being used in the operations of the Company and
its Subsidiaries; (ii) the name of the owner of the line if other than the
Company or one of its Subsidiaries, (iii) the name of the telephone service
supplier for each line; (iv) all charges associated with each line, including
without limitation, advertising and yellow pages charges, and (v) the specific
use to which each line is put. Where the use of a line is dedicated to a
particular Dealer or other entity, Schedule 3.14 also sets forth a brief
description of the agreement for dedication of that line. Except as disclosed on
Schedule 3.14, the Company and its Subsidiaries have the exclusive right to use
all the telephone lines. Except those disclosed on Schedule 3.14, there are no
charges associated with the telephone lines. Immediately following the Closing
the Company and its Subsidiaries will have all right, title, interest in and the
right to use as currently used all of said telephone lines. All of the contract
rights and outstanding obligations of the Company and its Subsidiaries with
respect to any and all Yellow Page listings and advertisements are set forth on
Schedule 3.14. The Company will provide SAI with the forms of any and all
telephone agency and supersession letters and will take such actions as are
necessary for the continuing right of the Company and its Subsidiaries to use of
all such telephone lines after the Closing.

3.15 Compliance with Other Instruments. Neither the Company nor any of its
Subsidiaries is in violation of any term of its respective Articles or
Certificate of Incorporation or By-laws, or of any term or provision of any
mortgage, indebtedness, indenture, contract, agreement, instrument, judgment or
decree applicable to the Company or such Subsidiary. The execution, delivery and
performance of and compliance with this Agreement (i) have not resulted and will
not result in any violation of, or conflict with, or constitute a default under,
the Articles or Certificate of Incorporation or By-laws of the Company or any of
its Subsidiaries or of the governing documents of any Selling Shareholder, (ii)
have not resulted, and will not result, in the creation of, any Lien upon any of
the properties or assets of the Company or its Subsidiaries or any Selling
Shareholder, (iii) have not resulted and will not result in the loss of any
license, permit,
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certificate, legal privilege or legal right enjoyed or possessed by the Company
or any of its Subsidiaries; (iv) do not and will not give any party to any
agreement to which the Company or any of its Subsidiaries is a party a right of
termination; and (v) do not and will not require the consent of any other person
or entity under any agreement, indenture, mortgage, lease or other instrument or
undertaking by which the Company, any of its Subsidiaries or any Selling
Shareholder is bound or to which any of their respective properties are subject.
No Selling Shareholder is a party to, subject to or bound by any agreement or
any judgment, order, writ, prohibition, injunction or decree of any court or
other governmental body which would prevent the execution or delivery of this
Agreement by such Selling Shareholder, such Selling Shareholder's approval of
the Merger or the conversion of such Shareholder's shares of Company Common
pursuant to the Merger.

3.16 Compliance with Laws.

(a) The Company and each of its Subsidiaries has complied, and is
currently in compliance, with all laws, rules, regulations, and orders
applicable to the operation of its remote alarm monitoring business or any
other business conducted by the Company or any such Subsidiary. Neither the
Company nor any of its Subsidiaries has taken any action which would, or
failed to take any action which failure would, in any way preclude or
prevent the Company or any such Subsidiary from continuing to operate the
Monitoring Business or any other business conducted by the Company or any
such Subsidiary following the Closing. The Company and its Subsidiaries,
and their respective employees, have, and following the Closing, the
Company, its Subsidiaries, and their respective employees will continue to
have, all Permits necessary for the conduct of the Monitoring Business
(including, if required separate licenses required for the monitoring of
burglar alarm systems, fire alarm systems and combined systems) and any
other business conducted by the Company or any such Subsidiary in all
jurisdictions in which the Company or any such Subsidiary does business,
and all such Permits are currently in effect. Schedule 3.16(a) contains a
true, accurate and complete list of all states in which the Company, its
Subsidiaries or individuals acting on their behalf are licensed, the
entities and individuals licensed in each of such state and the Accounts
with respect to which such entities and individuals are licensed.

(b) No violations are, or have been, recorded in respect of any such
Permits and no proceedings are pending, or to the Knowledge of the Company
and the Selling Shareholders, threatened concerning revocation or
limitation of any such Permit. No such Permit will be revoked as a result
of the transactions contemplated by this Agreement. Copies of all Permits
used in the conduct of the business of the Company and its Subsidiaries are
attached to Schedule 3.16.

(c) To the Knowledge of the Company and the Selling Shareholders, all of
the Dealers for which the Company and its Subsidiaries provide Monitoring
Services are licensed as installers of security systems by the appropriate
entities in the jurisdictions in which they conduct business, and neither
the Company, its Subsidiaries nor any of their respective shareholders are
aware of any fact which could lead to the revocation or suspension of any
of such Dealer's licenses.

3.17 Intellectual Property. The Company and each of its Subsidiaries owns
or has the right to use, and following the Closing the Company and each of its
Subsidiaries will continue to own and have the right to use, free and clear of
all Liens, all Intellectual Property used in the conduct of their respective
businesses without infringing upon or otherwise acting adversely to the right or
claimed right of any person. Schedule 3.17 contains a true and complete list of
the Intellectual Property of the Company, its Subsidiaries and the owner(s),
licensors, grantors and licensee(s) thereof. Except as disclosed on Schedule
3.17, neither the Company nor any of its Subsidiaries is, or following the
Closing will be, obligated or under any liability to make any payments for
royalties, fees or otherwise to any owner of, licensor of, or other claimant to,
any Intellectual Property, with respect to the use thereof or in connection with
the conduct of its business or otherwise. Neither the Company nor any of its
Subsidiaries has granted any licenses allowing third parties to use any of the
Intellectual Property of the Company or its Subsidiaries. The conduct of the
Monitoring Business or any other business conducted by the Company and its
Subsidiaries does not, and will not, violate the Intellectual Property or any
other proprietary interest of any other Person. The Company and its Subsidiaries
possess, and after the Closing will possess, ownership of or licenses to utilize
all proprietary technology necessary for the conduct of the Monitoring Business
and any other business conducted by the
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Company or its Subsidiaries. Neither the Company nor any of its Subsidiaries is
in default under any agreement governing its use of any Intellectual Property.

3.18 Schedule 3.18 consists of the following:

(a) Schedule 3.18(a) is a true, accurate and complete list of the Dealer
Monitoring Agreements of the Company, its Subsidiaries, and sets forth
completely and accurately, as of April 30, 2000 (i) the RMR due from each
Dealer under each such agreement; (ii) the agings of the accounts
receivable from each Dealer under each such agreement; and (iii) the method
of billing such Dealers.

(b) Except as disclosed on Schedule 3.18(a), all Accounts and Dealer
Monitoring Agreements or included in the RMR are evidenced by written
contracts, except those oral agreements described on Schedule 3.18. The
Accounts and Dealer Monitoring Agreements arose in bona-fide arms length
transactions in the normal course of business and such agreements are valid
and binding obligations of the Dealers and Subscribers that are parties
thereto without any counterclaims, set-offs or other defenses thereto, and
neither the Company, its Subsidiaries or any selling Shareholder has any
basis to believe that the amounts payable under such Accounts and Dealer
Monitoring Agreements are not collectible. Neither the Company nor any of
its Subsidiaries has any basis to believe that any Account or Dealer
Monitoring Agreement will not continue in existence after the Closing.

3.19 Litigation, etc. There are no actions, suits, proceedings or
investigations pending or threatened against the Company, its Subsidiaries or
their respective properties before any court, arbitration panel or governmental
agency (nor, to the Selling Shareholder's or the Company's Knowledge, is there
any reasonable basis therefor), nor is there any judgment, decree, injunction,
rule or order of any court, governmental department, commission, agency,
instrumentality or arbitrator outstanding against the Company, its Subsidiaries
or their respective assets or the Monitoring Business or any other business
conducted by the Company and its Subsidiaries, except as described on Schedule
3.19. Schedule 3.19 also contains a true and complete list of every incident for
the last five years in which a Subscriber or third party asserted that it
experienced a loss related to any failure or omission of the Company, its
Subsidiaries (other than Monital except to the extent disclosed in the Monital
Acquisition) or their provision of Monitoring Services, a short description of
the claim and its current status or resolution.

3.20 Related Party Transactions. Except as disclosed on Schedule 3.20,
neither the Company, its Subsidiaries nor any shareholder, officer, director,
employee of the Company, its Subsidiaries, or any member of their immediate
families, is, directly or indirectly, interested in any contract with the
Company or its Subsidiaries, including but not limited to any agreement, written
or unwritten, for employment or consulting, or any lease for real or personal
property. No officer or employee of the Company or its Subsidiaries is a party
to or bound by any agreement, contract or commitment, or subject to any
restrictions (including confidentiality or non-compete restrictions) in
connection with any previous or current employment of any such person, which
adversely affects, or in the future may adversely affect, the business of the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries is a guarantor or indemnitor of any indebtedness of any other
Person, except as disclosed on Schedule 3.20. All existing agreements between
each Shareholder and the Company or its Subsidiaries have been (or on or prior
to the Closing will be) terminated and, thereafter, except as contemplated
herein, such Shareholder will not be a party to, subject to or bound by any
agreement, commitment or understanding whatsoever between such Shareholder and
the Company.

3.21 Securities Law Compliance.

(a) Each of the Selling Shareholders understands and agrees that: (i)
the SAI Preferred to be issued pursuant to the Merger has not been, and as
of the Effective Time will not be, registered under the Securities Act or
under any state securities laws; (ii) the SAI Preferred is being offered
and issued in reliance upon Federal and state exemptions for transactions
not involving any public offering; (iii) a "stop transfer" order will be
placed against the certificates representing shares of SAI Preferred issued
pursuant to the Merger until such time as (A) such SAI Preferred is
registered under the Securities Act or (B) until SAI has received an
opinion of counsel satisfactory to it that a proposed transfer or sale does
not require registration or qualification under applicable law; and (iv)
until removed in accordance
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with Section 5.17, the certificates representing the shares of SAI
Preferred and SAI Common issued in the Merger will bear the legend set
forth below:

The shares evidenced by this certificate have not been registered under the
Securities Act of 1933, as amended (the "Act"), or any applicable state
securities laws, in reliance on exemptions under the Act and applicable
state securities laws. No transfer or sale of these shares or any interest
therein may be made without such registration and qualification unless the
issuer has received an opinion of counsel satisfactory to it that a
proposed transfer or sale does not require registration or qualification
under applicable law.

(b) The Selling Shareholders each further represent that: (i) he is
acquiring the SAI Preferred to be acquired him pursuant to the Merger
solely for his own account for investment purposes and not with a view to
the distribution thereof within the meaning of the Securities Act; (ii) he
is a sophisticated investor with knowledge and experience in business and
financial matters and is an "accredited investor" within the meaning of
Rule 501 under the Securities Act; (iii) he has had access to all SAI SEC
Reports filed by SAI during the current year and the year preceding the
current year, and has had the opportunity to obtain additional information
and ask questions and receive answers as desired in order to evaluate the
merits and risks inherent in holding the SAI Preferred; (iv) he has not
been offered the SAI Preferred by any form of general advertising or
general solicitation; and (v) he is able to bear the economic risk and lack
of liquidity inherent in holding the SAI Preferred.

3.22 Brokers or Finders. Neither the Company, its Subsidiaries nor any
Shareholder has dealt with any broker or finder, and have not incurred, and will
not incur, directly or indirectly, as a result of any action taken by the
Company, its Subsidiaries or any Selling Shareholder, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the transactions contemplated by this Agreement.

3.23 Tax Matters. The Company and each of its Subsidiaries: (i) has timely
filed all income, sales and employment tax returns that are required to have
been filed with all appropriate federal, state, county and local governmental
agencies that relate to the Company or its Subsidiaries or with respect to which
the Company or any of its Subsidiaries is liable or otherwise in any way
subject, including without limitation all tax returns due for the period ending
December 31, 1999, (and all such returns fairly reflect the operations of the
Company and its Subsidiaries for tax purposes), and all taxes, fees, assessments
and governmental charges of any nature ("Taxes") shown by such returns to be due
and payable have been paid, except for those amounts set forth on Schedule 3.23
as being contested in good faith and for which appropriate amounts have been
reserved and are reflected on the Company's Financial Statements, and will be
reflected on the Escrow Date Balance Sheet or the Closing Date Balance Sheet, as
the case may be, in accordance with GAAP; (ii) has timely paid all Taxes owed by
it or which it is obligated to withhold from amounts owing to any employee
(including without limitation social security taxes), creditor or third party
and (iii) has not waived any statute of limitations with respect to taxes or
agreed to any extension of time with respect to a tax assessment or deficiency.
The assessment of any additional Taxes for periods for which returns have been
filed will not exceed the liability therefor appearing on the Escrow Date
Balance Sheet or the Closing Date Balance Sheet, as the case may be, and there
are no material unresolved questions or claims concerning the tax liability of
the Company, its Subsidiaries. The tax returns of the Company and its
Subsidiaries have not been reviewed or audited by any federal, state, local or
county taxing authority. There is no pending dispute with any taxing authority
relating to any of said tax returns. The Company's Financial Statements do, and
the Escrow Date Balance Sheet and the Closing Date Balance Sheet will,
accurately reflect all of the tax liability of the Company and its Subsidiaries
for Taxes as of their respective dates. All of the income, sales and
employment-related tax returns of the Company and its Subsidiaries for the years
1997, 1998 and 1999 are attached to Schedule 3.23. The books of the Company and
its Subsidiaries will be closed as of the Closing Date in order to properly
determine the Taxes due for the period ending on the Closing Date. The Selling
Shareholders will fully cooperate with the Company and its Subsidiaries in
preparing their respective tax returns, including, but not limited to, those for
the stub period ending on the Closing Date (the "Stub Period"). Neither the
Company nor the Selling Shareholders have taken or failed to take, or prior to
the

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Closing will take or fail to take, any action which would result in the loss of
the Company's status as a Subchapter S corporation or which would otherwise
affect the Company's status as a Subchapter S Corporation prior to Closing.

3.24 Insurance. The Company and each of its Subsidiaries has valid
workers' compensation, fire, casualty, liability and errors and omissions
policies, in such amounts and with such coverage as is reasonably related to the
foreseeable risks of the Company and its Subsidiaries, in each case with
reputable insurers. The Company has provided to SAI true, accurate and complete
copies of all such policies. All of the fire, casualty, liability and errors and
omissions policies of the Company and its Subsidiaries are "occurrence" policies
not "claims made" policies. Neither the Company nor any of its Subsidiaries (a)
is in default with respect to any provision contained in any such policy, or (b)
has failed to give any notice or present any claim under any such policy in due
and timely fashion. Neither the Company nor any of its Subsidiaries will be
placed in default, nor will their coverage be canceled, as a result of the
transactions contemplated by this Agreement. There are no outstanding unpaid
claims under any such policy. Neither the Company nor any of its Subsidiaries
has received notice of, nor have they Knowledge of, any inaccuracy in any
application for such policies, any failure to pay premiums when due or any
similar state of facts that might form the basis for termination of any such
insurance or rejection of any claim. Within three years prior to the Closing
Date, neither the Company nor any of its Subsidiaries has canceled or terminated
any insurance policy, nor has any insurance company canceled or terminated any
insurance policy of the Company or its Subsidiaries or rejected any claim under
such policy. All such policies will remain in full force and effect following
the Closing. Following the Closing, the Company and its Subsidiaries will be
able to cancel all such policies upon no more than thirty (30) days written
notice without payment of any additional premium or any penalty.

3.25 Pension Plans. Neither the Company nor any of its Subsidiaries
maintains or contributes to, or has any obligation under, or on the Closing Date
will maintain, contribute to, or have any obligation under, any Employee Benefit
Plan other than those identified on Schedule 3.25. The Company has provided SAI
with true, accurate and complete copies of all contracts, agreements, and
documents described in Exhibit 3.25.

(a) ERISA and Code Compliance and Liability. The Company and each ERISA
Affiliate is in compliance with all applicable provisions of ERISA with
respect to all Employee Benefit Plans. Each Employee Benefit Plan that is
intended to be qualified under Section 401(a) of the Code has been
determined by the Internal Revenue Service to be so qualified, and each
trust related to such plan has been determined to be exempt under Section
501(a) of the Code. No material liability has been incurred by the Company
or any ERISA Affiliate that remains unsatisfied for any taxes or penalties
with respect to any Employee Benefit Plan or any Multiemployer Plan.

(b) Funding. No Pension Plan has been terminated, nor has any
accumulated funding deficiency (as defined in Section 412 of the Code)
occurred, nor has any funding waiver from the Internal Revenue Service been
received or requested with respect to any Pension Plan, nor has the Company
or any ERISA Affiliate failed to make any contributions or to pay and
amounts due and owing as required by Section 412 of the Code, Section 302
of ERISA or the terms of any Pension Plan prior to the due dates of such
contributions under Section 412 of the Code or Section 302 of ERISA, nor
has there been any event requiring any disclosure under Section
4041)(c)(3)(C), 4063(a) or 4068 of ERISA with respect to any Pension Plan.

(c) Prohibited Transactions and Payments. Neither the Company nor any
ERISA Affiliate has (i) engaged in a non-exempt "prohibited transaction" as
such term is defined in Section 406 of ERISA or Section 4975 of the Code;
(ii) incurred any liability to the PBGC which remains outstanding other
than the payment of premiums and there are no premium payments which are
due and unpaid; (iii) failed to make a required contribution or payment to
a Multiemployer Plan; or (iv) failed to make a required installment or
other required payment under Section 412 of the code.

(d) No Termination Event. No Termination Event has occurred or is
reasonably expected to occur.

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(e) ERISA Litigation. No material proceeding, claim, lawsuit and/or
investigation is existing or threatened concerning or involving any (i)
employee welfare benefit plan (as defined in Section 3(1) of ERISA)
currently maintained or contributed to by the Company or any of its
Subsidiaries, (ii) Pension Plan or (iii) Multiemployer Plan.

3.26 Directors, Officers and Employees.

(a) Directors, Officers and Employees. Schedule 3.26 sets forth the
names of each director, officer and employee of the Company and each of its
Subsidiaries and states the rate of compensation payable to each. Attached
to Schedule 3.26 are copies of each written employment agreement and
noncompetition agreement with any of such directors, officers and
employees. Except as set forth in Schedule 3.26, no such agreement shall
cause the Company or its Subsidiaries to make additional payments as a
result of the Merger.

(b) Labor Matters. Neither the Company nor any of its Subsidiaries has
been, or is, a party to any collective bargaining agreement with any union
representing any of its employees. The Company and each of its Subsidiaries
has been, and is, in compliance with all applicable laws, rules and
regulations relating to employment and employment practices, immigration
laws, terms and conditions of employment, wages and hours. None of the
employees of the Company or its Subsidiaries is represented by a labor
union. There has not been, and there are not presently, pending or
threatened any unfair labor practice or discrimination charges or
complaints against the Company or its Subsidiaries before the National
Labor Relations Board, the Equal Employment Opportunity Commission or any
similar national, state or local body.

(c) Continued Service by Certain Employees. Mr. Thomas J. Few Sr. has
agreed, without additional consideration, to remain employed by SAI, the
Company or its Subsidiaries at his current compensation level. The
individuals listed on Schedule 3.26(c) will continue to act as the
Company's qualifying license holders. The Selling Shareholders agree to
have each such employee execute a letter agreement with SAI providing for
the following:

(i) Continued employment by SAI, the Company or a Subsidiary of the
Company;

(ii) Continued compensation at current levels; and

(iii) Confidentiality and non-competition undertakings.

3.27 Environmental Matters.

Except as set forth in Schedule 3.27:

(a) The Company and its Subsidiaries are, and at all times have been, in
full compliance with, and have not been and are not in violation of or
liable under, any Environmental Law. None of the Selling Shareholders or
the Company or its Subsidiaries has any basis to expect, nor has any of
them or any other Person for whose conduct they are or may be held to be
responsible received, any order, notice, or other communication from (i)
any governmental body or private citizen acting in the public interest, or
(ii) the current or prior owner or operator of any owned or leased property
or facility ("Facilities"), of any actual or potential violation or failure
to comply with any Environmental Law, or of any obligation to undertake or
bear the cost of any environmental, health, and safety liabilities with
respect to any of the Facilities or any other properties or assets (whether
real, personal, or mixed) in which the Company or its Subsidiaries has had
an interest, or with respect to any property or Facility at or to which
hazardous materials were generated, manufactured, refined, transferred,
imported, used, or processed by the Company, or any other Person for whose
conduct they are or may be held responsible, or from which hazardous
materials have been transported, treated, stored, handled, transferred,
disposed, recycled, or received.

(b) There are no pending or, to the Knowledge of the Selling
Shareholders, the Company or its Subsidiaries, threatened claims, Liens, or
other restrictions of any nature, resulting from any

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environmental, health, and safety liabilities or arising under or pursuant
to any Environmental Law, with respect to or affecting any of the
Facilities or any other properties and assets (whether real, personal, or
mixed) in which Company has or had an interest.

(c) None of the Selling Shareholders or the Company or its Subsidiaries
has Knowledge of any basis to expect, nor has any of them or any other
Person for whose conduct they are or may be held responsible, received, any
citation, directive, inquiry, notice, Order, summons, warning, or other
communication that relates to hazardous activity, hazardous materials, or
any alleged, actual, or potential violation or failure to comply with any
Environmental Law, or of any alleged, actual, or potential obligation to
undertake or bear the cost of any environmental, health, and safety
liabilities with respect to any of the Facilities or any other properties
or assets (whether real, personal, or mixed) in which the Company or its
Subsidiaries had an interest, or with respect to any property or Facility
to which hazardous materials generated, manufactured, refined, transferred,
imported, used, or processed by the Company, or its Subsidiaries or any
other Person for whose conduct they are or may be held responsible, have
been transported, treated, stored, handled, transferred, disposed,
recycled, or received.

(d) There are no hazardous materials present on or in the environment at
the Facilities or at any geologically or hydrologically adjoining property,
including any hazardous materials contained in barrels, above or
underground storage tanks, landfills, land deposits, dumps, equipment
(whether moveable or fixed) or other containers, either temporary or
permanent, and deposited or located in land, water, sumps, or any other
part of the Facilities or such adjoining property, or incorporated into any
structure therein or thereon.

(e) There has been no release or, to the Knowledge of the Selling
Shareholders, the Company, or its Subsidiaries threat of a release, of any
hazardous materials at or from the Facilities or at any other locations
where any hazardous materials were generated, manufactured, refined,
transferred, produced, imported, used, or processed from or by the
Facilities, or from or by any other properties and assets (whether real,
personal, or mixed) in which the Company or its Subsidiaries has or had an
interest, or to the Knowledge of the Selling Shareholders, Company or its
Subsidiaries any geologically or hydrologically adjoining property, whether
by the Company, its Subsidiaries or any other Person.

The Selling Shareholders have delivered to SAI true and complete copies and
results of any reports, studies, analyses, tests, or monitoring possessed or
initiated by or on behalf of the Company pertaining to hazardous materials or
hazardous activities in, on, or under the Facilities, or concerning compliance
by the Company, or any other Person for whose conduct they are or may be held
responsible, with Environmental Laws.

3.28 UL Compliance and Compliance with Laws. The Central Stations are
certified by Underwriters Laboratories, Inc. ("U.L."). A copy of each U.L.
listing of the Central Stations is attached to schedule 3.28. The Selling
Shareholders are not aware of any reason why the Central Stations would lose
their U.L. certifications. No Accounts require inspections to be or remain in
compliance with any governmental regulation, law or code, and all Accounts are
in compliance with any applicable code or regulation.

3.29 Ownership of Stock. The Selling Shareholders are the lawful owners,
both beneficially and of record, of the Shares, have good and marketable title
to the Shares and, except for the King Option referred to in Section 3 of the
Letter of Intent, such ownership and title are free and clear of all liens,
encumbrances, preemptive rights, shareholders' agreements, voting trusts or
similar agreements, rights of first refusal, restrictions on transfer and other
restrictions and claims of every kind. The Shares are fully paid and non-
assessable and have the rights set forth in the Company's Articles or
Certificate of Incorporation and Bylaws. Schedule 3.29 sets forth the Shares
owned by each Shareholder; and each Selling Shareholder has good and marketable
title to the Shares owned by such Selling Shareholder.

3.30 Proxy Statement. The information supplied by the Company for
inclusion in the Proxy Statement shall not, at the time the Proxy Statement is
first mailed to the stockholders of SAI, at the time of the SAI Stockholders
Meeting or at the Effective Time, contain any statement which, at such time and
in light of the circumstances under which it was made, is false or misleading
with respect to any material fact, or omit to state any material fact necessary
in order to make the statements made in the Proxy Statement not false or
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misleading. If at any time prior to the Effective Time any event relating to the
Company, it Subsidiaries or any of their respective affiliates, officers or
directors should be discovered by the Company which should be set forth in a
supplement to the Proxy Statement, the Company shall promptly inform SAI.

3.31 Representations and Warranties True on Closing Date. The
representations and warranties made by the Selling Shareholders herein, and all
statements made in any exhibit, schedule or certificate or other document or
instrument furnished pursuant to this Agreement, do not contain, and as of the
Closing will not contain, any untrue statement of a material fact, or omit to
state any material fact required to be stated therein, or necessary in order to
make the statements made, in light of the circumstances under which they were
made, not misleading. The Selling Shareholders have clearly and fully disclosed
to SAI, in writing, all material facts concerning the Company and its
Subsidiaries necessary for SAI to accurately evaluate its investment in the
Company and its Subsidiaries, their Assets and the Monitoring Business and other
business conducted by the Company and its Subsidiaries.

3.32 Representations relating to Monital. Notwithstanding anything in this
Agreement to the contrary, the Selling Shareholders' representations and
warranties as they relate to Monital, are made to the Knowledge of the Selling
Shareholders, the Company, the Central Regional Manager of the Company, the
National Sales Manager of the Company, the Company's Subsidiaries (except
Monital) and the respective officers, directors, legal counsel and financial
advisors of the Company and its Subsidiaries (except Monital) for all facts,
circumstances and conditions occurring with respect to Monital prior to the
consummation by the Company of the Monital Acquisition. The Selling Shareholders
hereby represent and warrant that (i) they have disclosed and provided, or prior
to the Escrow Closing Date will have disclosed and provided, to SAI all
documents and information received by the Selling Shareholders and/or their
representatives during the course of their due diligence investigation of
Monital (including without limitation, their document review and management
interviews) and (ii) they have no Knowledge that any of the representations and
warranties made in the transaction documents for the Monital Acquisition are
untrue.

3.33 Selling Shareholder Released Claims. Neither the Company nor any
Subsidiary has any pending claim or cause of action of any kind whatsoever
against any Selling Shareholder, including, but not limited to, any claim
relating to such Selling Shareholder's performance of his duties as an officer,
director or employee of the Company or any of its Subsidiaries, or any facts or
circumstances which now or, with the passage of time, would give rise to any
such claim or cause of action. Neither the Company nor any Subsidiary has
assigned or otherwise transferred, or prior to the Closing will assign or
otherwise transfer, any right or interest in or to any such claim or cause of
action, including, but not limited to, Selling Shareholder Released Claims.

ARTICLE 4

REPRESENTATIONS, WARRANTIES, AND
ACKNOWLEDGEMENTS OF SAI AND KING ACQUISITION

SAI and King Acquisition, jointly and severally, represent, warrant, and
acknowledge to the Selling Shareholders that:

4.1 Incorporation. SAI is a validly existing corporation in good standing
under the laws of the State of Delaware. King Acquisition is a validly existing
corporation in good standing under the laws of the state of Delaware.

4.2 Power and Authority. SAI and King Acquisition each have the requisite
corporate power and authority to own and operate their respective properties and
assets, and to carry on their respective businesses as presently conducted and
as proposed to be conducted. Subject to approval of the Merger and other
transactions contemplated herein by the shareholders of SAI and its lenders, SAI
and King Acquisition each have all requisite corporate power and authority to
execute and deliver this Agreement; to consummate the Merger and to carry out
and perform its obligations under the terms of this Agreement.

4.3 Authorization. All action on the part of SAI and King Acquisition
necessary for the authorization, execution, delivery and performance of this
Agreement and the performance of all of the obligations of SAI

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and King Acquisition hereunder have been taken or will be taken prior to the
Closing. This Agreement has been duly executed and delivered by SAI and King
Acquisition, respectively, and constitutes their valid and binding obligations,
enforceable against each in accordance with its terms. Except as contemplated by
this Agreement, no filing or registration with any court or governmental or
regulatory agency or board is required to be made on behalf of SAI or King
Acquisition in connection with the execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby.

4.4 SAI Securities. SAI has taken, or prior to the Closing will take, all
actions necessary to authorize and approve the issuance of the SAI Preferred and
the SAI Common to be issued in connection with the Merger, and as of the
Effective Time the SAI Preferred and the SAI Common will, when issued in
accordance herewith, be duly authorized, validly issued, fully paid and
nonassessable. Except as contemplated in the Letter of Intent, there are no
statutory or contractual shareholders' preemptive rights or rights of refusal
with respect to the issuance of the SAI Preferred or the SAI Common upon
consummation of the Merger.

4.5 Commission Filings. SAI has filed and made available to the Company
and the Shareholders all forms, reports and documents required to be filed by
SAI with the SEC under the Securities Exchange Act, and the Securities Act
during the one year period ending on the date hereof (collectively, the "SAI SEC
Reports"). The SAI SEC Reports (i) at the time filed, complied in all material
respects with the applicable requirements of the Securities Exchange Act, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such SAI SEC Reports or necessary in order to make the
statements in such SAI SEC Reports, in the light of the circumstances under
which they were made, not misleading. As of their respective dates, the
financial statements of SAI included in the SAI SEC Reports (the "SAI Financial
Statements") complied when filed as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, and were, when filed, in accordance with the
books and records of SAI, complete and accurate in all material respects, and
presented fairly the consolidated financial position and the consolidated
results of operations, changes in Shareholders' equity and cash flows of SAI and
its Subsidiaries as of the dates and for the periods indicated, in accordance
with generally accepted accounting principles, consistently applied, subject in
the case of interim financial statements to normal year-end adjustments and the
absence of certain footnote information.

4.6 Litigation, etc. Except as previously disclosed to the Selling
Shareholders or included in the SAI SEC Reports, there are no actions, suits,
proceedings or investigations pending or, to SAI's Knowledge, threatened against
SAI before any court, arbitration panel or governmental agency (nor, to SAI's
Knowledge, is there any reasonable basis therefor) which were not incurred in
the ordinary course and would have a material adverse effect on SAI, nor is
there any judgment, decree, injunction, rule or order of any court, governmental
department, commission, agency, instrumentality or arbitrator outstanding, that
in any such case seeks to enjoin or challenge the transactions contemplated
hereby.

4.7 Disclosure. The representations and warranties made by SAI herein, and
all statements made in any exhibit, schedule or certificate furnished by SAI
pursuant to this Agreement, do not contain, and at the Closing Date will not
contain, any untrue statement of a material fact, or omit to state any material
fact required to be stated therein, or necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading.

ARTICLE 5

COVENANTS OF THE SELLING SHAREHOLDERS

5.1 Maintenance of Business. From the date hereof until the Closing, the
Selling Shareholders shall cause the Company and its Subsidiaries to carry on
and preserve the business, goodwill and the relationships of the Company, its
Subsidiaries and the Monitoring Business and any other business conducted by the
Company or its Subsidiaries with Dealers, Subscribers, suppliers, employees,
agents and others in substantially

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the same manner as they have been prior to the date hereof. The Company will
provide SAI with prior notice prior to making any changes to employee
compensation or benefits.

5.2 Absence of Certain Changes. From the date hereof until the Closing,
except for the Monital Retail Account Transactions, the transfer of the
Distributed Business Items or as otherwise expressly permitted or contemplated
hereby, the Selling Shareholders shall not cause or permit the Company and its
Subsidiaries to, and neither the Company nor any of its Subsidiaries shall,
without SAI's prior express written consent:

(a) incur any additional indebtedness for money borrowed, or guarantee
any indebtedness or obligation of any other party other than the incurrence
of working capital indebtedness and 8x program debt in the ordinary course
of business;

(b) pay any dividends or make any distributions to its shareholders
(other than distributions permitted pursuant to Section 5.11) with respect
to its capital stock;

(c) issue any capital stock or securities convertible into capital stock
or grant or issue any options, warrants or rights to subscribe for its
capital stock or securities convertible into its capital stock;

(d) enter into, amend or terminate any agreement or arrangement, other
than in the ordinary course of business and the Company shall notify SAI
prior to entering into, amending or terminating any material agreement or
arrangement even in the ordinary course of business;

(e) increase the compensation payable or to become payable to any of its
officers, employees or agents, or adopt or amend any employee benefit plan;

(f) acquire or dispose of any properties or assets used in its business
except in the ordinary course of business;

(g) permit any change in its business or the manner in which its books
and records are maintained;

(h) create or suffer to be imposed any lien, mortgage, security interest
or other charge on or against its business, properties or assets;

(i) acquire any new accounts other than pursuant to transactions
mutually consented to by SAI and the Company;

(j) engage in any activities or transactions outside the ordinary course
of its business as conducted at the date hereof; or

(k) agree or commit to any of the foregoing.

5.3 Necessary Consents. Prior to the Closing, the Selling Shareholders
will use their best efforts to obtain written consents and take such other
actions as may be necessary or appropriate to allow the consummation of the
transactions contemplated hereby and to allow the continuation of the business
and operations of the Company and its Subsidiaries after the Closing, including
but not limited to, any consents required with respect to any Real Estate Leases
or Equipment Leases for continued use of such Facilities and Equipment following
the Closing on the terms set forth in such Real Estate Leases and Equipment
Leases (collectively, "Required Consents").

5.4 Access to Information. From the date hereof until the Closing, the
Company and the Selling Shareholders shall give SAI and its accountants, legal
counsel and other representatives full access, during normal business hours, to
all of the properties, books, contracts, commitments and records relating to the
business, Assets and Liabilities of the Company and its Subsidiaries, and will
furnish SAI, its accountants, legal counsel and other representatives during
such period all such information concerning their affairs as SAI may reasonably
request; provided, that any furnishing of such information or any investigation
by SAI shall not affect SAI's right to rely on the representations, warranties
and covenants made by the Selling Shareholders in this Agreement. SAI shall, to
the extent that it has actual Knowledge, based on its review of materials
received from the Company, of any misstatements or omissions in the Company's
disclosure schedules, use its best efforts to inform the Company of such
misstatements or omissions.

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5.5 Certain Defaults; Litigation. The Selling Shareholders will give
prompt notice to SAI of:

(a) any default by the Company, its Subsidiaries or any other party,
subsequent to the date of this Agreement and prior to the Closing under any
instrument or agreement to which the Company or any of its Subsidiaries is
a party or by which it is bound, which default could, if not remedied,
result in any Material Adverse Effect on the Company, its Subsidiaries or
the Monitoring Business or other business conducted by the Company or its
Subsidiaries or which would render incorrect any representation or warranty
made herein, and

(b) any suit, action, proceeding or investigation instituted or
threatened against or affecting the Company, its Subsidiaries or the
Monitoring Business or other business conducted by the Company and its
Subsidiaries subsequent to the date of this Agreement and prior to the
Closing.

5.6 Assistance in Transition. From the date hereof until the Closing, the
Selling Shareholders shall provide, and cause the Company and it Subsidiaries to
provide, SAI all reasonable assistance in connection with the transition of
ownership and management of the Company and its Subsidiaries.

5.7 Other Negotiations. Except as expressly set forth in the Letter of
Intent, from the date hereof until the termination of this Agreement, the
Selling Shareholders and the Company will not, and will cause the Company's
officers and directors not to, initiate discussions or negotiate, or authorize
any Person to discuss or negotiate on behalf of the Selling Shareholders or the
Company, with any party other than SAI, or entertain or consider any inquiries
or proposals received from any party other than SAI, concerning the possible
disposition of all or any portion of the business, assets or capital stock of
the Company or its Subsidiaries.

5.8 Assistance in Compliance with Loan Covenants. The Company and the
Selling Shareholders will cooperate with in (i) SAI's negotiating of all of the
documentation to be entered into by the Company, the Shareholders, SAI, SAI's
lenders, and any other party in connection with obtaining financing for the
acquisition of the Shares, (ii) any actions required of SAI, the Company or the
Shareholders to comply with the covenants contained in any loan agreement with
SAI's lenders and (iii) closing the transactions contemplated thereby or by this
Agreement. Each Selling Shareholder agrees to enter into a Consent to Assignment
of Acquisition Instruments, in the form of Exhibit 5.8(a) hereto, pursuant to
which such Selling Shareholder will agree that SAI's lenders may enforce SAI's
remedies under this Agreement in the event of SAI's default under its loan
agreements with such lenders. In addition, the Selling Shareholders will use
their best efforts to cause each lessor under the Leases to enter into an
agreement, in the form of Exhibit 5.8(b), collaterally assigning the Company's
interests in each such lease to SAI's lenders.

5.9 Noncompetition and Nonsolicitation. The Selling Shareholders each
acknowledge that but for their agreement to be bound by the terms of this
Section 5.9, SAI would not consummate the transactions contemplated by this
Agreement. From the date hereof until the fifth (5th) anniversary of the Closing
Date (unless otherwise provided), each Selling Shareholder agrees that he will
refer all inquiries by current or former clients (as of the Closing) of the
Company and its Subsidiaries relating to the business of the Company and its
Subsidiaries to SAI, and that he will not, directly or indirectly:

(a) enter into competition with the Company or SAI, or their respective
Subsidiaries, by establishing a remote alarm system monitoring center
providing monitoring services to any location within twenty five (25) miles
of any location where the Company, SAI or their respective Subsidiaries
provide such services;

(b) provide, or solicit any Dealer or Subscriber for the purposes of
providing, any services similar to those provided by the Company, SAI or
their respective Subsidiaries, either directly or through any other Person.

(d) employ any employee of the Company, SAI or their respective
Subsidiaries or solicit or encourage any such employee to terminate his or
her employment with any of the foregoing (other than

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employees who have worked primarily for the Transferred Business Units and
who accept employment with Morlyn on or prior to Closing), at any time
within one year after such employee's termination of employment with the
Company or SAI; or

(e) for so long as the Company and its Subsidiaries are engaged in the
Monitoring Business and its other businesses, take any other action which
is intended to, or which would reasonably be expected to:

(i) adversely affect the Company's, SAI's or their respective
Subsidiaries' interest in any Contract;

(ii) adversely affect the Company's, SAI's or their respective
Subsidiaries' contractual relationship with any Dealer or Subscriber; or

(iii) discourage any Dealer, Subscriber or supplier from continuing
its business relationship with the Company, SAI or their respective
Subsidiaries after the Closing on the same terms as were maintained
prior to the Closing.

For purposes of this Section 5.9, the term "Selling Shareholder" shall also
include any corporation, partnership or other business entity in which a Selling
Shareholder now or in the future owns, directly or indirectly, a controlling
equity interest, and the parents, spouse, or children, of a Selling Shareholder,
or any entity in which any of them own, directly or indirectly, a controlling
interest. Notwithstanding any other provision of this Agreement, each Selling
Shareholder agrees that money damages would not be a sufficient remedy for
breach of this Section 5.9 and that SAI shall be entitled to specific
performance, injunctive relief or other equitable relief as a remedy for breach
of this Section 5.9; provided, however, that all such equitable remedies would
be in addition to all remedies available at law to SAI.

5.10 Confidentiality. From the date hereof until the Closing, the Selling
Shareholders will, and will cause the Company and its Subsidiaries and their
respective officers, directors and employees to, treat as strictly confidential
all Confidential Information concerning SAI, the Company and their respective
Subsidiaries that is not part of the public domain and shall not disclose any
such information to any third party. At all times after the Closing each of the
Selling Shareholders will treat and hold as confidential all Confidential
Information concerning SAI, the Company and their respective Subsidiaries,
refrain from using any of such Confidential Information (except, as applicable,
in direct furtherance of such Shareholder's duties on behalf of SAI, the Company
or their respective Subsidiaries (as directed by SAI)) and shall deliver
promptly to the SAI or the Company or destroy, at the request and option of SAI,
all tangible embodiments (and all copies) of Confidential Information concerning
SAI, the Company or their respective Subsidiaries which are in such
Shareholder's possession. In the event that any of the Selling Shareholders is
requested or required (by oral question or written request for information or
documents in any legal proceeding, interrogatory, subpoena, civil investigative
demand, or similar process) to disclose any Confidential Information concerning
SAI, the Company or their respective Subsidiaries, such Shareholder will notify
SAI promptly of the request or requirement so that SAI may seek an appropriate
protective order or waive compliance with the provisions of this Section 5.10.
If, in the absence of a protective order or the receipt of a waiver hereunder,
any of the Selling Shareholders is, on the advice of counsel, compelled to
disclose any of such Confidential Information to any tribunal or else stand
liable for contempt, such Selling Shareholder may disclose such Confidential
Information to the tribunal; provided, however, that the disclosing Selling
Shareholder shall, upon the request of SAI or the Company and at their expense,
exert all reasonable efforts to obtain an order or other assurance that
confidential treatment will be accorded to such portion of the Company
Confidential Information required to be disclosed as the Company or SAI shall
reasonably designate.

5.11 Tax Returns. The Selling Shareholders agree to cause the Company and
its Subsidiaries to file for all tax periods prior to the Closing Date, all
Federal, state, and local income, property, and payroll tax returns. The Selling
Shareholders hereby agree to indemnify SAI pursuant to Article 10 hereof for any
costs incurred for any unpaid tax liabilities related to the Company or its
Subsidiaries arising from any state of facts existing prior to the Closing Date,
including, but not limited to, Federal, state, and local income taxes. With
regard to the partial tax year ended on the Closing Date (the "Stub Period"),
the Selling Shareholders shall cause the
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Company's final Subchapter S return for such period to be prepared and filed.
The Company will cause its Subsidiaries to prepare and file in a timely manner
their final tax return(s) for the Stub Period consistent with the basis for
preparation previously disclosed by Weil Gotshal. The Company will make a
distribution to the Selling Shareholders in an amount equal to their Federal and
state tax liability arising from the inclusion of the Company's income on their
personal Federal and state tax returns for such period as reflected on such tax
returns or as certified to SAI by the accountant preparing such returns to the
extent not previously distributed by the Company. The Selling Shareholders will
indemnify the Company for any tax liability of the Company or its Subsidiaries
for the Stub Period in excess of the amount shown on the final tax returns of
the Company and its Subsidiaries for the Stub Period.

5.12 Financial Statement Audits. If at any time SAI deems it necessary or
advisable to have an independent audit performed on the financial statements of
the Company or its Subsidiaries, (including, without limitation, in connection
with the Proxy Statement), the Selling Shareholders will fully cooperate with
SAI and the independent auditors in the performance of the audit. In furtherance
and not in limitation of the foregoing, the Selling Shareholders will cooperate
and provide all assistance reasonably requested by SAI's independent accountants
and the Company's independent accountants (including without limitation,
executing any and all customary management representation letters with respect
to the Company's financial statements) in connection with the preparation and
delivery to SAI of audited financial statements and for the Company as of and
for each of the fiscal years ended December 31, 2003.

5.13 Disclosure to State Taxing Authorities. The Selling Shareholders
shall make all necessary disclosures related to the exchange of the Shares in
connection with the Merger as are required under the applicable state laws, and
no amounts are required to be withheld from consideration to be received by the
Selling Shareholders in connection with the Merger pursuant to such laws.

5.14 Update Disclosure; Breaches. From and after the date of this
Agreement until the Closing, the Selling Shareholders shall promptly notify SAI,
by written update to the attachments hereto, of (i) the occurrence or
non-occurrence of any event which would be likely to cause any condition to its
obligations to effect the Merger and the other transactions contemplated by this
Agreement not to be satisfied, (ii) any fact, condition or occurrence which
would be likely to result in any of the representations or warranties of the
Selling Shareholders not being true and correct as of the Closing, or (iii) the
failure of the Selling Shareholders to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by the Company, its
Subsidiaries or the Selling Shareholders pursuant to this Agreement which would
be likely to result in any condition to the obligations of any Party to effect
the Merger and the other transactions contemplated by this Agreement not to be
satisfied. The delivery of any notice pursuant to this Section 5.14 shall not
cure any breach of any representation or warranty requiring disclosure of such
matter prior to the date of this Agreement or otherwise limit or affect the
remedies available hereunder to SAI.

5.15 Waiver and Release. Subject to, and conditioned upon, the
consummation of the Merger, each Selling Shareholder, on behalf of himself and
his heirs, executors, administrators, successors and assigns (with respect to
each Selling Shareholder, the "Selling Shareholder Releasing Parties"),
irrevocably and unconditionally waives and releases any and all rights with
respect to, and releases, forever acquits and discharges each of the Company and
its Subsidiaries and their officers, employees, agents and other
representatives, and their respective heirs, executors, administrators,
successors and assigns (the "Company Released Parties"), with respect to, each
and all claims, demands, charges, complaints, obligations, causes of action,
suits, liabilities, indebtedness, sums of money, covenants, agreements,
instruments, contracts (written or oral, express or implied), controversies,
promises, fees, expenses (including attorneys' fees, costs and expenses),
damages and judgments, at law or in equity, in contract or tort, in federal,
state or other judicial, administrative, arbitration or other proceedings, of
any nature whatsoever, known or unknown, suspected or unsuspected, previously,
now or hereafter arising, in each case which arise out of, are based upon or are
connected with facts or events occurring or in existence on or prior to the
Effective Time (the "Company Released Claims"). Each Selling Shareholder further
represents and warrants that such Shareholder has not assigned or otherwise
transferred any right or interest in or to any of the Released Claims. This
Section 5.15 shall not apply to any of the following: (a) claims for salaries
and benefits accrued through the Closing

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under the express terms of the written benefit plans of the Company or its
Subsidiaries, or (b) claims for indemnification pursuant to Section 10.1(b)
herein.

5.16 Verbal Dealer Monitoring Arrangements. The Company and the Selling
Shareholders shall use their best efforts to replace all verbal Dealer or
Subscriber monitoring arrangements with written agreements reflecting such
arrangements prior to Closing.

5.17 Post-Closing Transfer of SAI Securities.

(a) The Selling Shareholders hereby acknowledge and agree that the SAI
Preferred or the SAI Common issued in connection with the Merger may not be
transferred except pursuant to (a) a registered offering under the
Securities Act (in which case all transfers shall be made in accordance
with all applicable provisions of the Registration Agreement), (b) Rule 144
promulgated pursuant to the Securities Act (or any similar rule or rules
then in force) if available, or (c) subject to the conditions specified in
subparagraph (b) below, any other legally available means of transfer.

(b) In connection with the transfer of any SAI Preferred or SAI Common
issued in connection with the Merger (other than a transfer pursuant to a
registered public offering), the holder thereof shall deliver written
notice to SAI describing in reasonable detail the transfer or proposed
transfer, together with an opinion of securities counsel (with such opinion
and such counsel being satisfactory to SAI) to the effect that such
transfer of SAI Preferred or SAI Common may be effected without
registration of such SAI Preferred or SAI Common under the Securities Act
or any applicable state securities law. In addition, if the holder of SAI
Preferred delivers to SAI such an opinion that concludes that no subsequent
transfer of such SAI Preferred or SAI Common will require registration
under the Securities Act or any applicable state securities law, SAI shall
promptly upon such contemplated transfer deliver new certificates for such
SAI Preferred or SAI Common which do not bear the restrictive legend set
forth in Section 3.21(a). If SAI is not required to deliver new
certificates for such SAI Preferred or SAI Common not bearing such legends,
the holder thereof shall not transfer the same until the prospective
transferee has confirmed to SAI in writing its agreement to be bound by the
conditions contained in this Section.

ARTICLE 6

COVENANTS OF SAI

6.1 Necessary Consents. Prior to the Closing, SAI will use its best
efforts obtain such consents and take such other actions as may be necessary or
appropriate to allow the consummation of the Merger and the other transactions
contemplated hereby, including the approval of its shareholders.

6.2 Offer of Employment. SAI agrees that SAI, the Company or its
Subsidiaries will offer employment to each of the individuals listed on Schedule
6.2 at the annual salary rates set forth on Schedule 6.2. Each such employee
that accepts such an offer will be an employee at will.

6.3 Confidentiality. SAI agrees to abide by the confidentiality provisions
of the Letter of Intent; provided, however, that SAI, as a reporting company
under the Securities Exchange Act and as an issuer of securities under the
Securities Act, may make all disclosures concerning this Agreement, the Selling
Shareholders and the Company and its Subsidiaries as are required by Federal and
state securities laws, as determined by SAI and its counsel.

6.4 SAI Stockholders Meeting. SAI shall call a meeting of its stockholders
(the "SAI Stockholders Meeting"), to be held as promptly as practicable for the
purpose of voting, among other things, upon the Merger and the issuance of the
shares of SAI Preferred and SAI Common contemplated hereunder, SAI will, through
its Board of Directors recommend to its stockholders, as applicable, approval of
such matters and will coordinate and cooperate with respect to the timing of
such meetings and shall use its best efforts to hold such meeting on the same
day and as soon as practicable after the date hereof. As promptly as practicable
after the execution of this Agreement, but in any event on or prior to September
1, 2000, SAI shall prepare and file with the SEC the Proxy Statement, shall use
its best efforts to cause the Proxy to become approved
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by the SEC as soon as after such filing as practicable, and shall promptly
furnish a copy of the Proxy Statement to each of SAI's Stockholders.

6.5 Subject to, and conditioned upon, the consummation of the Merger, the
Company, its Subsidiaries and their respective successors and assign (the
"Company Releasing Parties"), irrevocably and unconditionally waives and
releases any and all rights with respect to, and releases, forever acquits and
discharges each of the Selling Shareholders and their respective heirs,
executors, administrators, successors and assigns ("Selling Shareholder Released
Parties"), with respect to, each and all claims, demands, charges, complaints,
obligations, causes of action, suits, liabilities, indebtedness, sums of money,
covenants, agreements, instruments, contracts (written or oral, express or
implied), controversies, promises, fees, expenses (including attorneys' fees,
costs and expenses), damages and judgments, at law or in equity, in contract or
tort, in federal, state or other judicial, administrative, arbitration or other
proceedings, of any nature whatsoever, known or unknown, suspected or
unsuspected, previously, now or hereafter arising, in each case which arise out
of, are based upon or are connected with facts or events occurring or in
existence on or prior to the Effective Time ("Selling Shareholder Released
Claims"). This Section 6.5 shall not apply to limit or diminish in any way the
Selling Shareholders' joint and several obligations under Article 10.

ARTICLE 7

SAI'S CONDITIONS FOR CLOSING

The obligations of SAI and King Acquisition to consummate the Merger and
the other transactions contemplated by this Agreement are subject to the
fulfillment, at or before the Escrow Closing and the Closing, of all the
following conditions, unless waived in writing by SAI:

7.1 Representations True. The representations and warranties of the
Selling Shareholders in this Agreement shall be true and correct when made and
shall be true and correct at the Escrow Closing and at the Closing as those made
as of the Escrow Closing and the Closing, respectively.

7.2 Covenants Performed. The Company and the Selling Shareholders shall
have performed or complied with all of the terms, covenants and conditions of
this Agreement to be performed or complied with at or prior to the Closing.

7.3 No Violations; No Actions. As of the Escrow Closing and as of the
Closing, consummation of the transactions contemplated by this Agreement shall
not violate any order, decree or judgment of any court or governmental entity
and no action or proceeding shall have been instituted by any Person or
threatened by any governmental entity which, in either such case, in the
reasonable judgment of SAI, has a probability of resulting in an order judgment
or decree restraining, prohibiting or rendering unlawful the consummation of the
Merger or the other transactions contemplated by this Agreement.

7.4 Company RMR. As of the Escrow Closing and as of the Closing, the
Company's RMR shall not be less than $600,000.

7.5 Company Assets. As of the Escrow Closing and as of the Closing, the
Company will have a tax basis of at least (i) $18 million in depreciable and/or
amortizable assets for Federal income tax purposes, calculated in accordance
with GAAP, less (ii) the amount by which such assets have been depreciated
and/or amortized for Federal income tax purposes since January 1, 2000,
calculated in accordance with GAAP.

7.6 Closing Balance Sheet. The Company shall have delivered the Closing
Balance Sheet to SAI.

7.7 Monital Retail Account Transactions. In the event that the Monital
Acquisition is consummated prior to the Closing, the Monital Retail Account
Transactions shall have been consummated.

7.8 FCC Approvals. All required FCC approvals shall have been obtained.

7.9 Few Company Note. Mr. Few shall have forgiven the indebtedness
represented by the outstanding promissory note, dated January 9, 1998, from the
Company to him.

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7.10 No Material Adverse Change. During the period commencing on the date
of execution of this Agreement to the Closing, there shall not have been any
material adverse change in the condition (financial or otherwise), liabilities,
business or prospects of the Company or any of its Subsidiaries.

7.11 Closing Balance Sheets. The Company shall have delivered to SAI the
Escrow Date Balance Sheet prior to the Escrow Closing and the Closing Date
Balance Sheet prior to the Closing.

7.12 Opinion of Counsel for the Selling Shareholders. SAI shall have
received opinions from counsel for the Selling Shareholders, in form and
substance satisfactory to SAI, dated as of the Escrow Closing Date and to be
dated as of the Closing Date, respectively, covering the subject matter
contained in Sections 3.1, 3.2, 3.3, 3.5, 3.6, 3.12, 3.15, 3.16, 3.17, 3.19,
3.20, 3.21, 3.25, 3.27 and 3.29.

7.13 Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be in form and substance
satisfactory to SAI, and SAI shall have received all such originals or certified
or other copies of such documents as it may reasonably request.

7.14 Employment Agreement. SAI, the Company or its Subsidiaries shall have
entered into a written employment agreement with Mr. Few, in the form attached
as Exhibit 7.14.

7.15 Delivery of Documents. SAI shall have received all documents and
other items to be delivered by the Selling Shareholders under Section 9.3 and
9.4.

7.16 Exhibits. The Selling Shareholders shall have completed and attached
hereto all Exhibits and Schedules required by this Agreement, and all such
Schedules shall have been acceptable to SAI, in its sole discretion.

7.17 Required Consents. As of the Closing Date, all corporate, statutory,
regulatory and third party consents and approvals which are required under the
laws or regulations of the United States and any other authority shall have been
obtained; and all other necessary consents and approvals of third parties to the
transactions contemplated hereby and to the continued uninterrupted operation of
the business of the Company and its Subsidiaries shall have been obtained,
including, but not limited to, the Required Consents.

7.18 SV/SAI Transactions. In the event that the transactions contemplated
in the SV/SAI Agreement to be consummated at or prior to the consummation of the
transactions contemplated hereby shall not have been consummated, SAI's
obligation to close shall not be excused but may, at SAI's election, be delayed
for up to 120 days to the extent necessary to obtain financing to replace the
financial consideration to have been received by SAI as a result of the
consummation of the transactions contemplated in the SV/SAI Agreement.

7.19 Monital Acquisition Documents. If the Company and the other parties
thereto shall have executed the Monital Acquisition Documents prior to the
Escrow Closing Date, true, accurate and complete copies of the Monital
Acquisition Documents shall be attached hereto as Schedule 7.19.

7.20 Officer's and Other Certificates. The Selling Shareholders shall have
delivered to SAI the following:

(a) certificates of the each Selling Shareholder, dated as of the Escrow
Closing Date and to be dated as of the Closing Date, respectively, stating
that the conditions specified in Sections 7.1, 7.2, 7.3, 7.4, 7.5, 7.7,
7.8, 7.9, 7.10, 7.17 and 7.19 have been fulfilled at or prior to the Escrow
Closing and the Closing, respectively;

(b) certificates of the Company, executed on behalf of the Company by
its President, dated as of the Escrow Closing Date and to be dated as of
the Closing Date, respectively, stating that the conditions specified in
Sections 7.1, 7.2, 7.3, 7.4, 7.5, 7.7, 7.8, 7.9, 7.10, 7.17 and 7.19 have
been fulfilled at or prior to the Closing;

(c) certificates of the Company's Secretary, dated as of the Escrow
Closing Date and to be dated as of the Closing Date, respectively
certifying that: (x) that attached thereto are true, accurate and

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complete copies of the Articles or Certificate of Incorporation and By-laws
of the Company and each of its Subsidiaries, and all amendments thereto,
and copies of the resolutions adopted by the Board of Directors and
Shareholders approving the Merger and other transactions contemplated by
this Agreement; and that (y) there have been no amendments or modifications
to the attached Articles or Certificates of Incorporation since the date of
such certificate and that the attached resolutions are in full force and
effect on the date of such certificate and have not been superceded or
modified in any manner whatsoever; and

(d) incumbency certificates, in form and content, dated as of the
Closing Date, satisfactory in form and content to SAI and its counsel.

7.21 SAI Stockholder Approval. The stockholders of SAI shall have approved
the Merger and the issuance of the SAI Preferred and SAI Common required
pursuant to this Agreement ("SAI Stockholder Approval").

7.22 Disclosure Schedules. The Company and the Selling Shareholders shall
have delivered to SAI all of the Schedules called for to be delivered by the
Company and/or the Selling Shareholders pursuant to this Agreement (including
without limitation, information concerning Monital for the period after the
closing of the Monital Acquisition and for the Company and its other
Subsidiaries for all other periods); and no fact, event, circumstance, contract
or condition disclosed in such Disclosure Schedules shall have or result, or
reasonably be expected to have or result, in a material adverse effect on the
financial condition, results or operations, business prospects or properties of
the Company or its Subsidiaries.

7.23 Disposal of Distributed Business Items. The Company shall have
completed the transfer of the Distributed Business Items to and Morlyn shall
have assumed the related liabilities of the Company and its Subsidiaries.

ARTICLE 8

SELLING SHAREHOLDERS' CONDITIONS FOR CLOSING

The obligation of the Selling Shareholders to consummate the transactions
contemplated by this Agreement are subject to the fulfillment, at or before the
Closing, of all the following conditions, unless waived in writing by a majority
in interest of the Selling Shareholders:

8.1 Representations True. The representations and warranties of SAI set
forth in Article 4 shall be true and correct when made and true and correct as
of the Closing as though made as of the Closing.

8.2 Covenants Performed. SAI shall have performed or complied with all of
the terms, covenants and conditions of this Agreement to be performed or
complied with by SAI at or before the Closing.

8.3 No Violations; No Actions. As of the Closing, consummation of the
transactions contemplated by this Agreement shall not violate any order, decree
or judgment of any court or governmental body having competent jurisdiction and
no action or proceeding shall have been instituted by any person or entity or
threatened by any governmental agency which, in either such case, in the
reasonable judgment of the Selling Shareholders, has a probability of resulting
in an order judgment or decree restraining, prohibiting or rendering unlawful
the consummation of the transactions contemplated by this Agreement.

8.4 Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be in form and substance
satisfactory to the Selling Shareholders, and they shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.

8.5 Delivery of Documents. The Selling Shareholders shall have received
all documents and other items to be delivered by SAI under Section 9.3 and 9.5.

8.6 Required Consents. As of the Closing, all statutory and regulatory
consents and approvals which are required under the laws or regulations of the
United States and any other authority shall have been
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obtained; and all other necessary consents and approvals of third parties to the
transactions contemplated hereby shall have been obtained; provided, however,
that the consents of the shareholders of SAI and King Acquisition shall not have
been obtained prior to the meeting of shareholders of SAI contemplated herein.

ARTICLE 9

CLOSINGS

9.1 Time and Place. The Escrow Closing and the Closing, as the case may
be, shall each commence at the offices of SAI, or at any other place to which
the Parties shall mutually agree, at 10:00 a.m. on the Escrow Closing Date or
the Closing Date, as the case may be, or such other times, dates or places as
the Parties may mutually agree upon in writing. All actions to be taken, and all
documents and instruments to be delivered, at the Escrow Closing or the Closing,
as the case may be, shall be deemed to have been taken or delivered, as the case
may be, simultaneously. SAI shall file the Proxy Statement with the SEC by no
later than September 1, 2000, unless the delay shall have been the result of a
breach or delay on the part of the Company or SV or the Selling Shareholders.

9.2 Escrow Closing. At or prior to the Escrow Closing, the Parties and the
Escrow Agent shall enter into an escrow agreement (the "Escrow Agreement")
which, in form and substance, shall be reasonably (x) consistent with the terms
and of this Agreement, and (y) satisfactory to the Parties. Pursuant to the
terms and conditions of the Escrow Agreement, on the Escrow Closing Date, the
parties shall execute and deliver to the Escrow Agent all documents and
instruments required to be executed and delivered, and take such other actions
as may be required by this Agreement to be taken, in connection with the Escrow
Closing; and the transactions contemplated hereby shall be considered tendered
in escrow (the "Escrow Closing"). From and after the Escrow Closing until the
Closing, (i) the parties shall continue to comply with their respective
covenants under this Agreement, including without limitation, those in Articles
5 and 6, and (ii) the Closing shall take place on the Closing Date upon the
terms and conditions set forth herein and in the Escrow Agreement.

9.3 Actions to be taken in connection with the Closing. At the Closing, on
the Closing Date, upon the unanimous direction of the parties thereto to be
given upon satisfaction of the conditions to Closing set forth in Articles 7 and
8:

(a) SAI shall deliver to the Selling Shareholders a certificate, dated
the Closing Date, in form and substance satisfactory to the Selling
Shareholders and their counsel, confirming that the shareholders of SAI and
SAI, as the sole shareholder of King Acquisition, have approved Merger and
transactions contemplated hereby;

(b) the Selling Shareholders shall deliver to SAI the corporate records
of the Company and its Subsidiaries relating to the Monitoring Business and
other business conducted by the Company and its Subsidiaries; and

(c) the applicable Parties (or the Escrow Agent, as applicable) shall,:
(i) file or cause to be filed the appropriate Certificates of Merger with
the Secretary of State of the states of New Jersey and Delaware; (ii)
deliver to SAI the items called for by Section 9.4; and (iii) make the
payments to the Selling Shareholders referred to in Section 9.5(a) and
deliver to the Selling Shareholders the other items called for by Section
9.5.

9.4 Deliveries of the Selling Shareholders. At or prior to the Closing,
the Selling Shareholders will execute and deliver or cause to be executed and
delivered, simultaneously with the execution and delivery of the items referred
to in Section 9.5 below, the following:

(a) Stock Certificates. Certificates representing the Company Shares
endorsed in blank over to SAI or accompanied by duly executed stock powers
endorsed in blank;

(b) Corporate Documents. The Articles or Certificate of Incorporation of
the Company and each of its Subsidiaries, certified by the Secretary of
State of their respective state(s) of incorporation, as of a
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date not more than ten days prior to the Closing Date, and the By-Laws of
the Company and each of its Subsidiaries, certified by the Secretary of the
Company as in effect at the Closing;

(c) Certificate of Good Standing. A Long-form Certificate of Good
Standing, dated not more than ten days prior to the Closing Date, with
respect to the Company, issued by the Secretary of State of the state of
New Jersey and Certificates of Good Standing, dated not more than ten days
prior to the Closing Date, issued by the Secretary of State of each foreign
jurisdiction in which the Company or any of its Subsidiaries is qualified
to do business;

(d) Consents. Evidence that all consents, approvals, or authorizations
of or notifications to any third parties (including governmental agencies),
if any, required to exchange the Shares in connection with the Merger and
to consummate the Merger and the other transactions contemplated hereby and
to continue to operate the business of the Company and its Subsidiaries
without interruption have been obtained, including without limitation, any
revenue notices required by the state of New Jersey with any corresponding
taxes due paid by the Selling Shareholders, and the consent the lessors
under the Real Estate Leases and the Equipment Leases for the continued use
of any leased Equipment and the Facilities following the Closing on the
terms contained in the respective leases.

(e) Opinion of Counsel. The opinion of counsel referred to in Section
7.12 of this Agreement;

(f) Certificates. The certificates referred to in Section 7.20 of this
Agreement;

(g) Collateral Assignment of Leases. The Collateral Assignment of Leases
for each of the Company's Leases and Equipment Leases in form and content
reasonably satisfactory to SAI and the Selling Shareholders;

(h) Employment Agreement. Executed employment agreement(s) between the
SAI or the Company and the individual(s) referred to Section 7.14;

(i) Evidence of Release of Liens. Evidence, in form and substance
satisfactory to SAI, that all liens, charges and encumbrances on the
Shares, the Company and its properties (other than Liens on the property of
the Company or its Subsidiaries incurred in the ordinary course of their
respective businesses) have been fully released prior to the Closing, or
will be released concurrently with the Closing;

(j) Resignations. The written resignations of each director and officer
of the Company and each of its Subsidiaries, effective as of the Closing;

(k) Signature Cards. Substitute signature cards for all of the bank
accounts of the Company and each of its Subsidiaries naming persons
designated by SAI as the new signatories for said bank accounts;

(l) Credit Cards. All corporate credit cards of the Company and its
Subsidiaries; and

(m) Other Documents. Such other documents and instruments as SAI or its
counsel reasonably shall deem necessary to consummate the transactions
contemplated hereby.

9.5 Deliveries of SAI. At the Closing, SAI will execute and deliver or
cause to be executed and delivered, simultaneously with the delivery of the
items referred to in Section 9.4 above, the following:

(a) Payment of Cash Consideration. SAI shall pay the cash consideration
to be paid pursuant to Article 2 in connection with the Merger to the
Selling Shareholders at the Closing by bank wire transfer;

(b) Delivery of SAI Preferred and SAI Common. SAI shall deliver a
certificate or certificates representing the shares of SAI Preferred or SAI
Common to which each equity holder of the Company is entitled in connection
with the Merger for delivery pursuant to Article 2;

(c) Resolutions. A copy of the resolutions of the Board of Directors and
Stockholders of SAI and the Board of Directors and SAI, as the sole
shareholder of King Acquisition, certified by SAI's Secretary as having
been duly and validly adopted and being in full force and effect,
authorizing execution and

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delivery of this Agreement, the consummation of the Merger and the
performance of the transactions contemplated hereby by SAI and SAI,
respectively, subject to SAI Stockholder Approval;

(d) Corporate Documents. The Certificate of Incorporation of SAI and the
Certificate of Incorporation of King Acquisition, certified by the
Secretary of State of the state's of Delaware and New Jersey, respectively,
as of a date not more than ten days prior to the Closing Date, and the
By-Laws of SAI and King Acquisition, certified by the secretary of SAI as
in effect at the Closing;

(e) Certificate of Good Standing. Certificates of Good Standing, dated
not more than ten days prior to the Closing Date, with respect to SAI and
King Acquisition, issued by the Secretary of State of the states of
Delaware and New Jersey;

(f) Officer's Certificate. Certificates, dated as of the Escrow Closing
Date and the Closing Date, respectively, from an officer of SAI, confirming
the satisfaction of the conditions required pursuant to Sections 8.1 and
8.2 as of the Escrow Closing and the Closing, respectively; and

(g) Other Documents. Such other documents and instruments as the Selling
Shareholders or their counsel reasonably shall deem necessary to consummate
the transactions contemplated hereby.

All actions and proceedings hereunder and all documents and other papers
required to be delivered by SAI or King Acquisition hereunder or in connection
with the consummation of the Merger and the other transactions contemplated
hereby and all other related matters shall have been approved by, and, in the
case of such documents and papers, shall be in form and substance reasonably
satisfactory to, the Company, the Selling Shareholders and their respective
counsel.

ARTICLE 10

INDEMNIFICATION

10.1 Indemnification.

(a) Subject to Section 10.1(d), the Selling Shareholders, jointly and
severally, will indemnify and hold harmless SAI, its Subsidiaries and their
respective successors, affiliates and assignees and their respective
shareholders, officers, directors, employees and agents ("SAI Indemnified
Parties") against any losses, claims, damages or liabilities, including,
without limitation, reasonable attorneys' fees and other reasonable defense
costs, in each case, to the extent not covered by insurance (hereafter
"Losses"), to which any SAI Indemnified Party becomes subject in connection
with the following; provided, however, that, in the event that the Merger
is not consummated as provided herein, the Company and the Selling
Shareholders, jointly and severally, shall be responsible for the
indemnification obligations of the Selling Shareholders contained in
Section 10.1(a); and provided further, that in the event that the Merger is
not consummated as provided herein, the Selling Shareholders shall be
responsible for the indemnification obligations contained in Section
101.(a) only if such Selling Shareholders caused the Company to take, or to
fail to take, any action or failure to act giving rise to the claim for
indemnification thereunder:

(i) finders' fees or brokerage commissions incurred or alleged to
have been incurred by the Selling Shareholders with respect to the
transactions contemplated by this Agreement;

(ii) any liability of the Company or its Subsidiaries not disclosed
in writing prior to the Escrow Closing (other than liabilities of a
similar type as those disclosed which arise thereafter prior to the
Closing in the ordinary course of business to the extent expressly
permitted by the terms of this Agreement);

(iii) any misrepresentation of fact, or failure to disclose a
material fact, by the Selling Shareholders;

(iv) any breach of any representation or warranty by the Selling
Shareholders contained in this Agreement or in any document delivered
hereunder;
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(v) any claims which have been or may be in the future asserted
arising out of the provision of Monitoring Services (or failure to
adequately provide such services) or otherwise arising out of the
business conducted by the Company or its Subsidiaries which occurred
prior to the Closing;

(vi) any breach of any covenant or agreement by the Company or the
Selling Shareholders contained herein or in any document delivered
hereunder, to be performed prior to or after the Closing;

(vii) the failure to obtain any Required Consent; or

(viii) any other liability or expense resulting from a dispute or
cause of action relating to the business of the Company or its
Subsidiaries, arising from an event, act, or omission occurring before
the Closing or related to the enforcement of the indemnification
provisions of this Agreement.

(b) SAI will indemnify and hold harmless the Selling Shareholders, their
heirs, successors, affiliates, assigns ("Selling Shareholder Indemnified
Parties") against any Loss to which any Selling Shareholder Indemnified
Party becomes subject in connection with:

(i) finders' fees or brokerage commissions incurred or alleged to
have been incurred by SAI with respect to the purchase transaction;

(ii) any misrepresentation of fact, or failure to disclose a material
fact, by SAI;

(iii) any breach of any representation or warranty by SAI contained
herein or in any document delivered hereunder;

(iv) any breach of any covenant or agreement by SAI contained herein
or in any document delivered hereunder, to be performed prior to or
after the Closing Date; or

(v) any liability or expense resulting from a dispute or cause of
action relating to the Company or its Subsidiaries, arising from an
event, act or omission occurring after the Closing.

(c) Such indemnification shall include any and all actions, suits,
proceedings, demands, assessments or judgments, costs and expenses
incidental to any of the foregoing matters set forth in Section 10.1(a) and
10.1(b) or enforcement of the indemnification provisions of this Agreement.

(d) The obligation of the Selling Shareholders to indemnify SAI under
Section 10.1(a) shall be subject to the following:

(i) The Selling Shareholders will be obligated to indemnify SAI from
and against any Losses (other than Losses under Section 10.1(a)(vii))
only after SAI shall have suffered aggregate Losses in excess of
$50,000, at which point the Selling Shareholders will be obligated to
indemnify SAI from and against all Losses relating back to the first
dollar; and

(ii) The Selling Shareholders will be obligated to indemnify SAI from
and against any Losses under Section 10.1(a)(vii) only after SAI shall
have suffered aggregate Losses under such Section in excess of $50,000
(with respect to any particular Required Consent), or $150,000 (with
respect to all Required Consents in the aggregate), at which point the
Selling Shareholders will be obligated to indemnify SAI from and against
all such Losses in excess of such amounts; and

(iii) The Selling Shareholders shall be obligated to indemnify SAI
from and against any Losses arising out of the breach of any of the
representations and warranties made by the Selling Shareholders only to
the extent that SAI makes a written claim within the applicable survival
period (as specified in Section 12.1) with respect to the breach which
gives rise to such Losses.

10.2 Indemnification Procedures. For the purposes of this Section 10.2,
the term "Indemnitee" shall refer to the person or persons entitled, or claiming
to be entitled, to be indemnified, pursuant to the provisions

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of Section 10.1. The term "Indemnitor" shall refer to the person or persons
having the obligation to indemnify pursuant to such provisions.

(a) Notice. An Indemnitee shall promptly give the Indemnitor written
notice of any matter which an Indemnitee has determined has given or could
give rise to a right of indemnification under this Agreement, stating the
amount of the Loss, if known, and method of computation thereof, all with
reasonable particularity and containing a reference to the provisions of
this Agreement in respect of which such right of indemnification is claimed
or arises. If an Indemnitee shall receive notice of any claim by a third
party which is or may be subject to indemnification (a "Third Party
Claim"), the Indemnitee shall give the Indemnitor prompt written notice of
such Third Party Claim and shall permit the Indemnitor, at its option, to
participate in the defense of such Third Party Claim by counsel of its own
choice (subject to Indemnitee's approval, which shall not be unreasonably
withheld) and at the Indemnitor's expense. If, however, the Indemnitor
acknowledges in writing its obligation to indemnify the Indemnitee
hereunder against all Losses that may result from such Third Party Claim
(subject to the limitations set forth herein), then the Indemnitor shall be
entitled, at its option, to assume and control the defense of such Third
Party Claim at its expense and through counsel of its choice, provided
however, that Indemnitee shall have the right to approve in its sole
reasonable discretion the choice of counsel. In the event the Indemnitor
exercises its right to undertake the defense of any such Third Party Claim,
the Indemnitee shall co-operate with the Indemnitor in such defense and
make available to the Indemnitor, at the Indemnitor's expense, all
witnesses, pertinent records, materials and information in its possession
or under its control relating thereto as is reasonably required by the
Indemnitor. Similarly, in the event the Indemnitee is, directly or
indirectly, conducting the defense against any such Third Party Claim, the
Indemnitor shall co-operate with the Indemnitee in such defense and make
available to it all such witnesses, records, materials and information in
its possession or under its control relating thereto as is reasonably
required by the Indemnitee. In the event that the Indemnitor fails to agree
to undertake defense of the Third Party Claim within thirty (30) days of
receipt of notice of such claim from the Indemnitee, the Indemnitee shall
be entitled to undertake such defense with counsel of its own choice, and
the Indemnitor shall promptly reimburse the Indemnitee for all expenses
incurred. The Indemnitor without the written consent of the Indemnitee may
settle no Third Party Claim, unless the settlement involves only the
payment of money by the Indemnitor. Similarly, no Third Party Claim, which
is being defended in good faith by the Indemnitor, shall be settled by the
Indemnitee without the written consent of the Indemnitor.

(b) Calculation of Losses. Losses shall be determined after taking into
account any insurance proceeds received by an Indemnitee or its affiliates
from a non-affiliated insurance company on account of such Losses (after
taking into account any costs incurred in obtaining such proceeds and any
increase, determined in the reasonable judgment of the Indemnitee and
confirmed by the insurance company, in insurance premiums as a result of
the claim for which such proceeds were paid). The Indemnitor shall not be
liable for any increase in Losses sustained by the Indemnitee, resulting
from Indemnitee's failure to give Indemnitor timely written notice of any
matter likely to give rise to a right of Indemnification hereunder.

ARTICLE 11

TERMINATION

11.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, by written notice by the terminating Party to the other
Parties, whether before or after approval of the matters presented in connection
with the Merger by the Selling Shareholders of the Company, as follows:

(a) by mutual written consent of SAI and the Company; or

(b) by either SAI or the Company, if the Merger shall not have been
consummated by December 29, 2000 (provided, however, that the right to
terminate this Agreement under this Section 11.1(b) shall not be available
to any Party whose failure to fulfill any obligation under this

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Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date, and provided further, that this Agreement may
be extended up to 45 days by either Party by written notice to the other
Party if the Merger would have been consummated but for the absence of one
or more required Approvals or third-party consents, and such Approval(s) or
consent(s) can reasonably be expected to be obtained within such 45 day
period); or

(c) by either SAI or the Company if a court of competent jurisdiction or
other governmental entity shall have issued a final order, decree or
ruling, or taken any other action, having the effect of permanently
restraining, enjoining or otherwise prohibiting the Merger, and all appeals
with respect to such order or action have been exhausted or the time for
appeal of such order, decree, ruling or action shall have expired;

(d) by SAI, if a material breach of any representation, warranty,
covenant or agreement on the part of the Selling Shareholders set forth in
this Agreement shall have occurred which would cause the conditions set
forth in Article 7 not to be satisfied, and, that with respect to any
breach of a covenant or agreement hereunder, such covenant or agreement is
incapable of being cured or, if capable of being cured, shall not have been
cured within ten (10) business days following receipt by the Company of
written notice of such breach from SAI;

(e) by the Company, if a material breach of any representation,
warranty, covenant or agreement on the part of SAI set forth in this
Agreement shall have occurred which would cause the conditions set forth in
Article 8 not to be satisfied, and, with respect to any breach of a
covenant or agreement hereunder, such covenant or agreement is incapable of
being cured or, if capable of being cured, shall not have been cured within
ten (10) business days following receipt by SAI of written notice of such
breach from the Company; or

(f) by the Company, if the Proxy Statement has not been filed by SAI on
or prior to September 1, 2000.

11.2 Effect of Termination. In the event of termination of this Agreement
pursuant to Section 11.1, there shall be no Liability or obligation on the part
of SAI, the Company, or their respective officers, directors, shareholders or
affiliates, except as provided in Article 10, and further except for the
liability of any Party then in breach of any of its representations, warranties,
covenants or agreements in this Agreement; and provided, that the provisions of
Sections 5.9, 5.10 and 6.3, Article 10 and this Section 11.2 shall remain in
full force and effect and survive any termination of this Agreement.

ARTICLE 12

MISCELLANEOUS

12.1 Survival. The covenants and indemnification obligations of the
parties contained in this Agreement and their respective obligations to be
performed under the terms hereof at, prior to or after the Closing hereunder,
shall not expire with, or be terminated or extinguished by, such Closing, but
shall survive the Closing and any investigation made at any time by or on behalf
of a party. The representations and warranties set forth in this Agreement shall
survive the Closing until the fourth anniversary of the Closing, except for
representations and warranties relating to taxes, title to stock and
environmental matters and claims of the nature covered by the insurance carried
by the Company and its Subsidiaries, which shall survive until the expiration of
the applicable statute of limitation of the particular matter, and except claims
for fraudulent breach, which shall have no expiration period.

12.2 Further Assurances. At the request of a party to this Agreement, and
without further consideration, the other party agrees to execute such documents
and instruments and to do such further acts as may be necessary or desirable to
effectuate the transactions contemplated hereby.

12.3 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW

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JERSEY WITHOUT GIVING ANY EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. THE SELLING
SHAREHOLDERS AGREE THAT THEY WILL NOT ASSERT ANY CLAIM AGAINST ANY OFFICER,
DIRECTOR, EMPLOYEE OR AGENT OF SAI OR ANY OF ITS AFFILIATES, PURSUANT TO ANY
CLAIM THEY MAY HAVE UNDER THIS AGREEMENT BY REASON OF ANY FAILURE OR ALLEGED
FAILURE BY SAI TO MEET ITS OBLIGATIONS HEREUNDER. THE PARTIES HERETO AGREE AND
INTEND THAT THE PROPER AND EXCLUSIVE FORUM FOR THE LITIGATION OF ANY DISPUTES OR
CONTROVERSIES ARISING OUT OF, OR RELATED TO, THIS AGREEMENT SHALL BE THE COURTS
OF THE STATE OF ILLINOIS FOR THE COUNTY OF COOK. EACH PARTY AGREES THAT HE OR IT
WILL NOT COMMENCE OR MOVE TO TRANSFER ANY ACTION OR PROCEEDING, ARISING OUT OF
OR RELATING TO THIS AGREEMENT, IN OR TO ANY COURT OTHER THAN A STATE COURT
LOCATED IN THE COUNTY OF COOK IN THE STATE OF ILLINOIS. EACH PARTY IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFORESAID COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO THE SELLING SHAREHOLDERS AT THE ADDRESSES PROVIDED
HEREIN, SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING.
NOTHING CONTAINED IN THIS SECTION SHALL AFFECT THE RIGHT OF SAI TO SERVE PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW. IN THE EVENT THAT ANY PARTY SHOULD
COMMENCE OR MAINTAIN ANY ACTION ARISING OUT OF OR RELATED TO THIS AGREEMENT IN A
FORUM OTHER THAN THE STATE COURTS LOCATED IN THE STATE OF ILLINOIS, COUNTY OF
COOK, THE OTHER PARTY SHALL BE ENTITLED TO MOVE FOR THE DISMISSAL OF SUCH
ACTION, AND THE NON-MOVING PARTY STIPULATES THAT SUCH ACTION SHALL BE DISMISSED.
THE PARTIES AGREE THAT PRIOR TO INSTITUTING ANY SUIT, THEY WILL GIVE WRITTEN
NOTICE OF THEIR INTENT TO DO SO AND MAKE A REASONABLE ATTEMPT TO RESOLVE ANY
DISPUTE BY NEGOTIATING WITH EACH OTHER IN GOOD FAITH.

12.4 Successors and Assigns. This Agreement shall be binding on, and inure
to the benefit of, the parties to it and their respective heirs, legal
representatives, successors, and assigns.

12.5 Each Party to Bear Own Costs. The Selling Shareholders and SAI shall
each bear its own legal and other expenses incurred on its behalf with respect
to the preparation of this Agreement, any related documents and the transactions
contemplated hereby.

12.6 Entire Agreement; Amendment. This Agreement, its Schedules, the
Escrow Agreement and the other documents delivered to be delivered pursuant to
this Agreement constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof, and no party
shall be liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
Accordingly, this agreement supercedes, among other things, the SAI/King LOI and
all provisions of the Letter of Intent or the SV/SAI Agreement relating to the
consummation of the acquisition of the Company by SAI which are covered by the
terms of this Agreement. Except as expressly provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.

A-38
<PAGE> 109

12.7 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed:

<TABLE>
<S> <C>
To SAI or King Acquisition at: Security Associates International, Inc.
2101 South Arlington Heights Road
Arlington Heights, Illinois 60005-4142
ATTN: PRESIDENT

To KC ACQUISITION CORP. at: KC Acquisition Corp.
P.O. Box 1943
South Hackensack, NJ 07606-0543

To Mr. Thomas J. Few Sr. at: Mr. Thomas J. Few Sr.
c/o King Acquisition Corp.
325 South River Street
Hackensack, NJ 07601

To Mr. Timothy M. McGinn at: Mr. Timothy M. McGinn
c/o McGinn Smith
99 Pine Street
Albany, N.Y. 12207

To Mr. David L. Smith at: Mr. David L. Smith
c/o McGinn Smith
99 Pine Street
Albany, N.Y. 12207
</TABLE>

Any party may change its address for purposes of this Section by giving
notice of the new address to the other party in the manner set forth above.

Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or
seventy-two (72) hours after the same has been deposited in a regularly
maintained receptacle for the deposit of the United States mail, addressed and
mailed as aforesaid.

12.8 Delays or Omissions. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to any party to this
Agreement, upon any breach or default by the other party under this Agreement,
shall impair any such party, power or remedy of such party nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party
of any provisions or conditions of this agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies either under this Agreement or by law or otherwise afforded to any
party, shall be cumulative and not alternative.

12.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.

12.10 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.

12.11 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and shall not be considered in
construing or interpreting this Agreement.
A-39
<PAGE> 110

12.12 Incorporation by Reference. The Schedules, Exhibits, certificates
and other documents attached hereto or referred to herein are deemed to be a
part of this Agreement and are incorporated herein by this reference.

*****

The foregoing Agreement is hereby executed as of the date first above
written.

SECURITY ASSOCIATES
INTERNATIONAL, INC.

By: /s/ JAMES S. BRANNEN

----------------------------------
James S. Brannen, its President

KING ACQUISITION CORP.

By: /s/ JAMES S. BRANNEN

----------------------------------
James S. Brannen
Title:
----------------------------------

KC ACQUISITION CORP.

By: /s/ THOMAS J. FEW

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

Title: President

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

SELLING SHAREHOLDERS

/s/ THOMAS J. FEW

------------------------------------
Thomas J. Few, Sr.

/s/ TIMOTHY M. MCGINN

------------------------------------
Timothy M. McGinn

/s/ DAVID L. SMITH

------------------------------------
David L. Smith

A-40
<PAGE> 111

EXHIBIT B

RISK FACTORS

This proxy statement contains and incorporates by reference forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following "Risk
Factors" section and provided elsewhere or incorporated by reference in this
proxy statement. The following factors should be considered carefully by each
stockholder, in addition to the other information provided elsewhere or
incorporated by reference in the proxy statement, in evaluating whether to vote
for or against the issuance of the shares in connection with the merger.

WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO INCUR SIGNIFICANT ADDITIONAL
LOSSES IN THE FUTURE.

We sustained net losses from continuing operations of $4.0 million for the
year ended December 31, 1997, $6.8 million for the year ended December 31, 1998,
$4.0 million for the year ended December 31, 1999, and $2.6 million for the six
months ended June 30, 2000. On a pro forma basis after giving effect to the
merger with KC Acquisition, we would have incurred a loss from continuing
operations of $10.6 million for the year ended December 31, 1999 and $8.2
million for the six months ended June 30, 2000. These losses reflect, among
other factors, the substantial non-cash charges for amortization of purchased
subscriber accounts and goodwill associated with acquired central monitoring
station businesses and the interest on our indebtedness. We expect to incur
significant additional losses during the next several years. We cannot assure
you that we will achieve or sustain profitability.

WE WILL HAVE A SUBSTANTIAL AMOUNT OF CONSOLIDATED DEBT AFTER THE MERGER, WHICH
COULD MATERIALLY ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND BUSINESS PROSPECTS.

We will have a large amount of consolidated indebtedness. On a pro forma
basis adjusted for the completion of the merger with KC Acquisition, we would
have had approximately $49.8 million of consolidated indebtedness and
stockholders' equity of $30.6 million at June 30, 2000. Some of this debt bears
interest at a floating rate; therefore, our financial results might be affected
by changes in prevailing interest rates. The terms of these credit facilities
limit, but do not prohibit, the incurrence of additional indebtedness without
our lenders' consent. In addition, we may incur additional indebtedness in the
future primarily to fund acquisitions of central monitoring station businesses
as part of our business strategy. If we incur additional debt, the risks could
intensify. This large amount of indebtedness could for example:

- limit our ability to obtain additional financing for working capital,
capital expenditures, acquisitions and other general corporate
activities;

- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;

- detract from our ability to successfully withstand a downturn in our
business or the economy generally; and

- place us at a competitive disadvantage against other less leveraged
competitors.

The occurrence of any one of these events could have a material adverse effect
on our business, financial condition, results of operations and prospects. In
addition, we will be required to find financing for any future acquisitions.
There can be no assurance that additional funding can be secured on acceptable
terms, if at all.

WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE
OBLIGATIONS.

Our future cash flow may be insufficient to meet our debt payment
obligations. Our ability to obtain sufficient cash to make scheduled payments on
our debt obligations as they become due will depend on future cash flow from
operations and our financial performance, which will be affected by a range of
economic,

B-1
<PAGE> 112

competitive and business factors. We cannot control many of these factors, such
as general economic and financial conditions in the alarm monitoring industry
and the economy at large or initiatives of our competitors.

If we do not generate sufficient cash flow from operations to service this
debt, we may be required to undertake alternative financing plans, such as
refinancing or restructuring our debt, selling assets, reducing or delaying
capital investments or seeking to raise additional capital. We cannot assure you
that any refinancing would be possible, that any assets could be sold, or, if
sold, of the timing of the sales and the amount of proceeds realized from those
sales, or that additional financing could be obtained on acceptable terms, if at
all. Our inability to obtain sufficient cash to satisfy our debt obligations, or
to refinance our indebtedness on commercially reasonable terms, would have a
material adverse effect on our business, financial condition, results of
operations and prospects. Moreover, our failure to pay these obligations when
due could result in the acceleration of the debt, which could cause our other
debt to accelerate. The debt under our credit facilities is secured by liens on
all of our assets and, if that debt were accelerated, the lenders under the
facilities could seek to foreclose.

UNCERTAINTIES EXIST ABOUT ACHIEVING THE BENEFITS OF THE MERGER AND INTEGRATING
THE BUSINESSES.

We cannot assure you that we will realize any of the anticipated benefits
of the merger. Whether we achieve these benefits will depend in part upon our
ability to integrate our businesses in an efficient manner. To achieve the
expected merger benefits, we will incur significant costs, expend significant
capital and fund substantial anticipated operating losses. Our costs could be
higher than anticipated and we may have to expend additional capital and fund
higher-than-expected operating losses to achieve the anticipated benefits of the
merger. In addition, there can be no assurance that the merger of our combined
company with SecurityVillage.com will occur.

COMBINING THE COMPANIES COULD HAVE AN ADVERSE IMPACT.

The integration of our business and KC Acquisition's and Monital's
businesses will require substantial attention from management. The diversion of
management's attention and any difficulties encountered in the transition and
integration process could have a material adverse effect on the revenues, levels
of expenses and operating results of the combined company.

WE DID NOT OBTAIN A FAIRNESS OPINION IN CONNECTION WITH THE MERGER AND RELATED
TRANSACTIONS.

We did not obtain a fairness opinion from an investment bank or similar
company with respect to the fairness of the merger consideration. In addition,
changes in the operations and prospects of us or KC Acquisition, general market
and economic conditions and other factors may have altered the relative values
of the companies. Because our shares being issued in the merger and related
transactions are being issued at a fixed price or ratio, increases or decreases
in our stock price will benefit or harm our stockholders and the purchasers of
our shares.

WE MAY INCUR UNEXPECTED LIABILITIES WHEN WE MERGE WITH KC ACQUISITION.

During the acquisition process, we may fail or be unable to discover some
of the liabilities of KC Acquisition. These liabilities may result from
noncompliance with applicable federal, state or local laws. While we will try to
minimize our potential exposure by obtaining representations and warranties
contained in the merger agreement. We also required each stockholder of KC
Acquisition to indemnify us against undisclosed liabilities. However, we cannot
assure you that this indemnification will be adequate to fully offset the
possible liabilities associated with a merger with KC Acquisition.

THE COST OF THE MERGER MAY BE MORE THAN EXPECTED.

We estimate that the direct costs of the merger will be from $400,000 to
$600,000. We also estimate that we will have to expend capital equal to
approximately $1.0 million and fund estimated KC Acquisition and Monital cash
flow deficiencies of approximately $2.5 million during the twelve months
following the merger.
B-2
<PAGE> 113

If these costs, capital expenditures or operating losses are higher than
estimated, the merger benefits may be reduced or delayed.

OUR PRESENT STOCKHOLDERS' VOTING POWER WILL BE REDUCED AND NEW MAJOR
STOCKHOLDERS WILL BE PRESENT.

The issuance of shares of our convertible preferred stock and common stock
in the merger and the related transactions and upon exercise of assumed options
will substantially dilute the voting interest of our current stockholders. The
convertible preferred stock will entitle the holders to one hundred votes per
share on all matters submitted to holders of our common stock. These convertible
preferred stock voting rights and the new common shares to be issued will dilute
the voting power of our present common stockholders. As a result of the merger,
KC Acquisition stockholders will own approximately 16.0% and SecurityVillage.com
may own up to 8.8%, respectively of the voting power of our company after the
merger (including shares that may be issued upon conversion of our convertible
preferred stock and exercise of all assumed options).

IF KC ACQUISITION OR MONITAL LOSES KEY PERSONNEL OR ARE UNABLE TO HIRE
ADDITIONAL QUALIFIED PERSONNEL, THE COMBINED BUSINESSES MIGHT SUFFER.

The loss of the services of one or more of key personnel could seriously
harm KC Acquisition's or Monital's businesses. Both companies depend on the
continued services and performance of senior management and other key personnel,
particularly Raymond Sacks and Thomas Few, Sr. Although we will enter into
multi-year employment agreements with Messrs. Sacks and Few if we complete the
merger, the contractual relationships can be terminated under certain
circumstances, and some of these circumstances may not be within our control.

KC Acquisition's and Monital's future success also depend upon the
continued service of their other executive officers and their technical,
marketing, finance and support personnel and their ability to attract additional
personnel in each of these areas. Competition for qualified personnel in these
areas is intense, particularly at the senior level, and they might not be able
to hire the kind and number of employees they need. KC Acquisition's or
Monital's failure to attract and retain these key employees could have a
material adverse effect on their business, results of operations and financial
condition. In addition, employees may leave KC Acquisition or Monital and
subsequently seek to compete against our company.

Monital's event monitoring system is highly customized and loss of
personnel familiar with its features could cause significant operational
problems.

SECURITY ALARM MONITORING BUSINESSES FACE POSSIBLE ADVERSE EFFECTS OF FALSE
ALARM ORDINANCES.

Many municipalities have expressed concerns about the perceived high
incidence of false alarms and the cost of responding to them. This may lead to
reluctance on the part of police to respond to alarm signals or slower police
responses. If either of these were to occur the demand for new alarm systems or
monitoring services could decline.

A number of local governments have adopted, or are considering, measures
aimed at reducing the cost of responding to false alarms and, if enacted, could
adversely affect our financial performance. Such measures include:

- subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms,

- licensing individual alarm systems and the revocation of licenses
following an excessive number of false alarms,

- imposing fines on subscribers for false alarms,

- imposing limitations on the number of times the police will respond to
alarms after an excessive number of false alarms, and

- requiring further verification of an alarm signal before the police will
respond.

B-3
<PAGE> 114

SECURITY ALARM MONITORING BUSINESSES LOSE SOME SUBSCRIBERS OVER TIME.

All security alarm monitoring businesses experience the loss of accounts.
These losses occur as a result of, among other factors:

- relocation of subscribers;

- adverse financial and economic conditions; and

- competition from other alarm service companies.

In addition, security alarm monitoring businesses may experience the loss
of accounts to the extent they do not adequately service those accounts. An
increase in this rate of subscriber loss could have a material adverse effect on
our revenues and earnings.

SECURITY ALARM MONITORING BUSINESSES ARE EXPOSED TO RISKS OF LITIGATION.

Providing fire and burglary alarm monitoring services may expose us to
risks of liability for employee acts or omissions or system failure. Most of our
alarm monitoring agreements contain provisions limiting our potential liability
in an attempt to reduce this risk. However, in the event of litigation there can
be no assurance that these limitations will be enforced, and the costs and
results of such litigation could have an adverse effect on us.

We carry insurance of various types, including general liability and errors
and omissions insurance. Our loss experience specifically, and the loss
experience of other security service companies generally, may affect the
availability and cost of our insurance. Certain of our insurance policies and
the laws of some states may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence.

THE SECURITY ALARM MONITORING INDUSTRY IS HIGHLY COMPETITIVE.

The security alarm industry is highly competitive and highly fragmented.
While we do not compete directly with many of the large new entrants or
participants into the industry because we do not sell and install security
systems, we are nonetheless impacted by the competitive challenge these entrants
present to independent alarm dealers.

Our monitoring services compete with those offered by an estimated 1,800 to
2,300 companies. Of those companies an estimated 250 firms offer monitoring
services from Underwriters Laboratories listed facilities. Most of the companies
providing monitoring services are small, local operations.

Other companies have adopted a strategy similar to ours that includes the
acquisition of central monitoring station businesses. Some of these competitors
have greater financial resources than we do or may be willing to offer higher
prices than we are prepared to offer to acquire monitoring stations. The effect
of such competition may be to reduce our rate of growth or increase the price we
pay, which could have an adverse effect on our business. There can be no
assurance that we will be able to find acceptable acquisitions. The effect of
competition may be to reduce the purchase opportunities available to us, thus
reducing our rate of growth, or to increase the price we pay for monitoring
stations, which could have a material adverse effect on our return on our
business, and results of operations, financial condition, prospects and ability
to service debt.

WE DO NOT EXPECT TO PAY DIVIDENDS.

After the merger, we intend to retain any earnings to finance the expansion
of our businesses. Any future change in our dividend policy will be at the
discretion of the board of directors who will consider factors such as our
earnings, financial condition, cash flows from operations, current and
anticipated cash needs, expansion plans and any restrictions that may be imposed
under our credit facilities.

B-4
<PAGE> 115

EXHIBIT C

SECURITY ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES

FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999 AND
THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Public Accountants.................... C-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... C-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999....................... C-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999........... C-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999....................... C-6
Notes to Consolidated Financial Statements.................. C-7
</TABLE>

C-1
<PAGE> 116

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of

Security Associates International, Inc.:

We have audited the accompanying consolidated balance sheets of SECURITY
ASSOCIATES INTERNATIONAL, INC. (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1997, 1998 and 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Associates
International, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 1997, 1998 and 1999, in conformity with generally accepted accounting
principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) of this form 10-KSB/A is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

Arthur Andersen LLP

Chicago, Illinois

February 2, 2000

C-2
<PAGE> 117

SECURITY ASSOCIATES INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999 JUNE 30, 2000
------------ ------------ -------------
UNAUDITED
<S> <C> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents........................ $ 1,480,869 $ 631,521 $ 366,415
Accounts receivable, net......................... 3,633,352 1,828,895 2,323,040
Other current assets............................. 286,033 550,009 734,043
------------ ------------ ------------
Total current assets..................... 5,400,254 3,010,425 3,423,498
------------ ------------ ------------
FURNITURE AND EQUIPMENT, net....................... 2,974,346 4,045,524 3,669,359
------------ ------------ ------------
OTHER ASSETS:
Contract rights to monitor security systems,
net........................................... 15,252,814 -- --
Goodwill, net.................................... 23,123,820 25,911,332 24,661,486
Other assets, net................................ 774,516 373,369 392,208
------------ ------------ ------------
Total other assets....................... 39,151,150 26,284,701 25,053,694
------------ ------------ ------------
Total assets............................. $ 47,525,750 $ 33,340,650 $ 32,146,551
============ ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable................................. $ 514,877 $ 463,310 $ 620,523
Payable to related party......................... -- -- 104,093
Current maturities of long-term notes payable.... 2,174,038 1,973,352 1,814,631
Accrued expenses................................. 3,452,199 3,923,722 3,274,013
Unearned revenues................................ 3,709,328 499,407 247,867
------------ ------------ ------------
Total current liabilities................ 9,850,442 6,859,791 6,061,127
NOTES PAYABLE, net of current maturities........... 25,306,462 12,314,460 13,189,460
NOTES PAYABLE, related party....................... 8,500,000 -- --
------------ ------------ ------------
Total liabilities........................ 43,656,904 19,174,251 19,250,587
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Convertible preferred stock, $10 par value;
66,660 shares outstanding on December 31, 1998
(liquidation value of $16,665,000 at December
1998.......................................... 666,596 -- --
12% redeemable/convertible preferred stock, $10
par value; 500,000 shares outstanding on
December 31, 1998............................. 5,000,000 -- --
Series A convertible preferred stock, $10 par
value, 137,686 shares authorized, 136,359
shares outstanding on December 31, 1999,
liquidation preference $350 per share......... -- 1,363,590 1,371,090
Common stock, $.001 par value; 50,000,000 shares
authorized; 6,771,807 and 7,145,287 shares
outstanding on December 31, 1998 and 1999,
respectively.................................. 6,771 7,145 7,506
Warrants, net.................................... 60,748 111,689 137,159
Additional paid-in capital....................... 16,360,092 34,955,971 36,227,932
Accumulated deficit.............................. (18,225,361) (22,271,996) (24,847,723)
------------ ------------ ------------
Total stockholders' equity............... 3,868,846 14,166,399 12,895,964
------------ ------------ ------------
Total liabilities and stockholders'
equity................................. $ 47,525,750 $ 33,340,650 $ 32,146,551
============ ============ ============
</TABLE>

The accompanying notes to the consolidated financial statements

are an integral part of these balance sheets.

C-3
<PAGE> 118

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 2000 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue.................................. $10,814,087 $20,203,850 $22,689,132 $11,267,325 $12,630,568
Operating Unit Expense....................... 7,018,392 12,610,489 14,899,687 8,345,011 7,645,012
----------- ----------- ----------- ----------- -----------
Operating Unit Margin........................ 3,795,695 7,593,361 7,789,445 2,922,314 4,985,556
Operating Expenses:
Amortization and depreciation.............. 3,703,543 6,288,489 5,713,890 2,428,179 3,680,562
General and administrative................. 1,595,181 2,488,058 2,546,935 1,034,094 1,344,530
Selling, marketing and business
development.............................. 296,977 1,614,007 2,459,845 1,292,948 1,230,463
Deferred compensation expense.............. 862,034 609,103 -- -- --
----------- ----------- ----------- ----------- -----------
Total operating expenses............ 6,457,735 10,999,657 10,720,670 4,755,221 6,255,555
----------- ----------- ----------- ----------- -----------
Loss from Operations..................... (2,662,040) (3,406,296) (2,931,225) (1,832,907) (1,269,999)
Gain on Sale of Owned Subscriber Accounts.... -- -- 1,899,155 -- 2,649,184
Interest Expense............................. 1,899,155 (2,869,593) (2,564,565) (742,819) (1,797,024)
----------- ----------- ----------- ----------- -----------
Loss before income taxes............ (4,524,646) (6,275,889) (3,596,635) (2,575,726) (417,839)
Provision for Income Taxes................... -- -- -- -- --
Net loss............................ (4,524,646) (6,275,889) (3,596,635) (2,575,726) (417,839)
Dividends Accrued on Preferred Stock......... (412,997) (522,084) (450,000) -- (300,000)
----------- ----------- ----------- ----------- -----------
Net loss available to common
stockholders..................... $(4,937,643) $(6,797,973) (4,046,635) (2,575,726) (717,839)
=========== =========== =========== =========== ===========
Net Loss Per Share........................... $ (1.16) $ (1.06) $ (.59) $ (.36) $ (.11)
=========== =========== =========== =========== ===========
Weighted Average Number of Common Shares
Outstanding................................ 4,266,151 6,394,048 6,897,200 7,233,473 6,818,695
=========== =========== =========== =========== ===========
</TABLE>

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

C-4
<PAGE> 119

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CONVERTIBLE 12% REDEEMABLE
COMMON STOCK PREFERRED STOCK PREFERRED STOCK
------------------ ------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ ------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996......................... 3,699,375 $3,699 35,478 $ 354,780 344,165 $ 3,441,650
Issuance of preferred stock...................... -- -- 29,107 291,066 -- --
Issuance of common stock related to deferred
compensation plan.............................. 162,265 162 -- -- -- --
Issuance of common stock......................... 2,410,655 2,411 -- -- -- --
Accrued dividends................................ -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- ------ ------- --------- -------- -----------
Balance, December 31, 1997......................... 6,272,295 6,272 64,585 645,846 344,165 3,441,650
Issuance of preferred stock...................... -- -- 2,075 20,750 155,835 1,558,350
Issuance of common stock related to deferred
compensation plan.............................. 154,693 154 -- -- -- --
Issuance of common stock......................... 344,819 345 -- -- -- --
Warrants......................................... -- -- -- -- -- --
Accrued dividends................................ -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- ------ ------- --------- -------- -----------
Balance, December 31, 1998......................... 6,771,807 6,771 66,660 666,596 500,000 5,000,000
Issuance of Series A Convertible preferred
stock.......................................... -- -- (66,660) (666,596) (500,000) (5,000,000)
Issuance of common stock......................... 373,480 374 -- -- -- --
Warrants......................................... -- -- -- -- -- --
Accrued dividends................................ -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- ------ ------- --------- -------- -----------
Balance, December 31, 1999......................... 7,145,287 7,145 -- -- -- --
========= ====== ======= ========= ======== ===========
Issuance of common stock......................... 360,813 361 -- -- -- --
Warrants......................................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
--------- ------ ------- --------- -------- -----------
Balance, June 30, 2000 (unaudited)................. 7,506,100 $7,506 -- $ -- -- $ --
========= ====== ======= ========= ======== ===========
</TABLE>

<TABLE>
<CAPTION>
SERIES A CONVERTIBLE
PREFERRED STOCK ADDITIONAL TOTAL
-------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT WARRANTS CAPITAL DEFICIT EQUITY
------- ---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996...................... -- $ -- $ -- $ 3,958,080 $ (6,489,745) $ 1,268,464
Issuance of preferred stock................... -- -- -- 4,267,793 -- 4,558,859
Issuance of common stock related to deferred
compensation plan........................... -- -- -- 861,872 -- 862,034
162,265
Issuance of common stock...................... -- -- -- 5,476,566 -- 5,478,977
Accrued dividends............................. -- -- -- -- (412,997) (412,997)
Net loss...................................... -- -- -- -- (4,524,646) (4,524,646)
------- ---------- -------- ----------- ------------ -----------
Balance, December 31, 1997...................... -- -- -- 14,564,311 (11,427,388) 7,230,691
Issuance of preferred stock................... -- -- -- 224,250 -- 1,803,350
Issuance of common stock related to
compensation plan........................... -- -- -- 608,949 -- 609,103
154,693
Issuance of common stock...................... -- -- -- 962,582 962,927
Warrants...................................... -- -- 60,748 -- -- 60,748
Accrued dividends............................. -- -- -- -- (522,084) (522,084)
Net loss...................................... -- -- -- -- (6,275,889) (6,275,889)
------- ---------- -------- ----------- ------------ -----------
Balance, December 31, 1998...................... -- -- 60,748 16,360,092 (18,225,361) 3,868,846
Issuance of Series A Convertible preferred
stock....................................... 136,359 1,363,590 -- 17,972,922 -- 13,669,916
Issuance of common stock...................... -- -- -- 622,957 -- 623,331
Warrants...................................... -- -- 50,941 -- -- 50,941
Accrued dividends............................. -- -- -- -- (450,000) (450,000)
Net loss...................................... -- -- -- -- (3,596,635) (3,596,635)
------- ---------- -------- ----------- ------------ -----------
Balance, December 31, 1999...................... 136,359 1,363,590 111,689 34,955,971 (22,271,996) 14,166,399
======= ========== ======== =========== ============ ===========
Issuance of common stock...................... 750 7,500 -- 1,271,961 -- 1,279,822
Warrants...................................... -- -- 25,470 -- -- 25,470
Net loss...................................... -- -- -- -- (2,575,727) (2,575,727)
------- ---------- -------- ----------- ------------ -----------
Balance, June 30, 2000 (unaudited).............. 137,109 $1,371,090 $137,159 $36,227,932 $(24,847,723) $12,895,964
======= ========== ======== =========== ============ ===========
</TABLE>

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

C-5
<PAGE> 120

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1997 1998 1999 2000 1999
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................... $ (4,524,646) $ (6,275,889) $ (3,596,635) $(2,575,726) $ (417,839)
Adjustments to reconcile net loss to net
cash (used for) provided by operating
activities --
Gain on sale of owned subscriber
accounts............................... -- -- (1,899,155) -- (2,649,184)
Issuance of common stock for services.... -- 16,502 67,226 59,169 12,041
Amortization and depreciation............ 3,703,543 6,288,489 5,713,890 2,231,214 3,680,562
Deferred compensation expense............ 862,034 609,103 -- -- --
Warrants and stock issued under dealer
stock incentive plan................... -- 70,402 255,282 110,414 112,072
Changes in assets and liabilities --
Accounts receivable, net............... (1,047,691) (304,071) 2,156,519 (494,145) 1,239,979
Other current assets................... 46,147 97,990 (209,187) (184,034) (107,005)
Other long-term assets................. (63,598) (22,952) 92,322 (58,139) 92,322
Accounts payable....................... (36,503) (235,706) (176,567) 261,306 22,098
Accrued expenses....................... 1,481,086 174,850 424,136 (649,711) 1,204,630
Unearned revenue....................... 279,937 (55,703) (3,139,285) (251,540) (1,398,145)
------------ ------------ ------------ ----------- ------------
Net cash provided by (used for)
operating activities.............. 700,309 363,015 (311,454) (1,551,192) 1,793,531
------------ ------------ ------------ ----------- ------------
Cash Flows From Investing Activities:
Purchase of contract rights to monitor
security systems, net.................... (8,056,738) (3,897,659) (1,517,537) -- (1,528,800)
Proceeds from sale of owned subscriber
accounts................................. -- -- 22,195,906 -- 22,195,906
Purchase of fixed assets................... (311,612) (1,752,860) (1,629,484) (428,249) (822,060)
Cash paid for acquisition, net............. (5,818,484) (12,431,112) (5,232,197) (39,194) --
------------ ------------ ------------ ----------- ------------
Net cash provided by (used for)
investing activities.............. (14,186,834) (18,081,631) 13,816,688 (467,443) 19,845,046
------------ ------------ ------------ ----------- ------------
Cash Flows From Financing Activities:
Proceeds from issuance of capital stock.... 9,987,836 2,048,351 192,500 1,037,250 25,000
Dividends accrued on preferred stock....... (412,997) (522,084) (450,000) -- (300,000)
Deferred financing costs................... (385,400) -- (393,020) -- --
Proceeds from stockholders receivable...... 25,180 50,000 -- -- --
Repayment of notes payable to related
parties.................................. (136,000) -- -- -- --
Proceeds from notes payable to related
parties.................................. 5,000,000 3,000,000 1,500,000 -- --
Repayment of notes payable................. (4,358,280) (578,588) (20,856,438) (158,721) (20,476,485)
Proceeds from notes payable................ 8,655,464 9,680,173 5,652,376 875,000 1,500,000
------------ ------------ ------------ ----------- ------------
Net cash provided by (used for)
financing activities.............. 18,375,803 13,677,852 (14,354,582) 1,753,529 (19,251,485)
------------ ------------ ------------ ----------- ------------
Increase (Decrease) in Cash.................. 4,889,278 (4,040,764) (849,348) (265,106) 2,387,092
Cash and Cash Equivalents, beginning of
year....................................... 632,355 5,521,633 1,480,869 631,521 1,480,869
------------ ------------ ------------ ----------- ------------
Cash and Cash Equivalents, end of year....... $ 5,521,633 $ 1,480,869 $ 631,521 $ 366,415 $ 3,867,961
============ ============ ============ =========== ============
</TABLE>

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

C-6
<PAGE> 121

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 AND JUNE 30, 2000 (UNAUDITED)

1. DESCRIPTION OF THE BUSINESS

Company Background

Security Associates International, Inc. ("SAI" or "the Company") provides
monitoring services to independent alarm dealers on a subcontract basis.
Revenues are composed primarily of fees for monitoring services.

2. SUMMARY OF MAJOR ACCOUNTING POLICIES

Principles of Consolidation

The financial statements consolidate the accounts of SAI, and its wholly
owned subsidiaries. All intercompany items and transactions have been
eliminated.

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.

Revenue Recognition

Monitoring fee revenue is recognized as earned over the related contract
period. Services may be billed in advance on a monthly, quarterly or annual
basis and amounts not earned are included as unearned revenues.

Accounts Receivable

The Company grants unsecured trade credit to customers in the normal course
of business. Receivables in the accompanying consolidated balance sheets are net
of reserves for doubtful accounts of approximately $737,000, $499,000 and
$390,200 as of December 31, 1998 and 1999, and June 30, 2000, respectively.

Other Current Assets

Other current assets include prepaid expenses of $280,558 and $456,117 at
December 31, 1998 and 1999 and $436,030 at June 30, 2000. The remaining balance
for each of the periods presented is comprised primarily of deposits, except for
June 30, 2000 which also includes $217,023 in deferred acquisition costs that
will be capitalized as part of the purchase price in the KC Acquisition
purchase.

Goodwill

Goodwill is recorded as the intangible value assigned to dealer contracts
to perform monitoring services and is amortized on a straight-line basis over a
period of three to fifteen years. The Company regularly reviews the performance
of acquired businesses to evaluate the realizability of the underlying goodwill.
Goodwill in the accompanying consolidated balance sheets is net of accumulated
amortization of approximately $2,724,000, and $4,861,000 as of December 31, 1998
and 1999, respectively and approximately $6,600,000 as of June 30, 2000.

Other Long-Term Assets

Other long-term assets consist primarily of deferred financing costs. The
deferred financing costs are being amortized over the life of the related loan.
Other long-term assets in the accompanying consolidated

C-7
<PAGE> 122
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

balance sheets are net of accumulated amortization of approximately $301,000 and
$20,000 as of December 31, 1998 and 1999, respectively and $60,697 as of June
30, 2000.

Furniture and Equipment

Furniture and equipment are stated at cost. Depreciation is calculated
using straight-line methods for both financial statement and income tax purposes
over an estimated useful life of three to seven years. Depreciation expense for
1998 and 1999 was approximately $349,000 and $1,028,000 and for the six months
ended June 30, 2000 was approximately $828,200.

The following is a summary of furniture and equipment by major class of
assets:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment........................................ $3,388,570 $5,310,710 $5,692,177
Automobiles/trucks............................... 20,188 20,188 20,188
Leasehold improvements........................... 121,054 282,365 283,026
Work in process.................................. 113,202 -- 65,364
---------- ---------- ----------
3,643,014 5,613,263 6,060,755
Less -- Accumulated depreciation................. 668,668 1,567,739 2,391,396
---------- ---------- ----------
$2,974,346 $4,045,524 $3,669,359
========== ========== ==========
</TABLE>

Rent Expense

The Company leases its office building and the facilities from which their
central stations operate for various periods and amounts through the year 2004.
Rent expense was approximately $511,000, $830,000 and $920,000 for the years
ended December 31, 1997, 1998 and 1999, respectively and $648,250 for the six
months ended June 30, 2000.

Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
As of December 31
<S> <C>
2000................................................. $974,225
2001................................................. 827,000
2002................................................. 789,000
2003................................................. 497,000
2004 and thereafter.................................. 374,400
========
</TABLE>

C-8
<PAGE> 123
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accrued Expenses

Accrued expenses are composed of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1998 1999 2000
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued interest................................. $1,569,920 $ 188,741 $ 277,105
Accrued dividends................................ 935,081 -- --
Accrued payroll and vacation..................... 377,840 775,558 774,552
Accruals related to sale of owned subscriber
accounts....................................... -- 2,260,289 1,718,224
Accrued telephone................................ 104,900 148,675 172,807
Other............................................ 464,458 550,459 331,325
---------- ---------- ----------
$3,452,199 $3,923,722 $3,274,013
========== ========== ==========
</TABLE>

Income Taxes

SAI accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109").
As of December 31, 1998 and 1999, SAI had net operating loss carryforwards of
approximately $16.0 million and $16.9 million, respectively. The net operating
loss carryforward as of June 30, 2000 was $20.6 million. The tax net operating
losses begin to expire in 2005. As of December 31, 1998 and 1999 and June 30,
2000 no tax benefit has been recognized for these loss carryforwards.

The components of the Company's deferred tax assets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforwards.............. $ 6,181,000 $ 6,491,000 $ 7,482,000
Temporary timing differences.................. 606,000 1,324,000 1,209,000
----------- ----------- -----------
Total deferred tax assets........... 6,787,000 7,815,000 8,691,000
Valuation allowance........................... (6,787,000) (7,815,000) (8,691,000)
----------- ----------- -----------
Net deferred tax assets............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>

Net Loss Per Share

Net loss per share is computed based upon the weighted number of common
shares outstanding during the periods presented. Stock options and Series A
Convertible Preferred Stock have not been included in the calculation of net
loss per share as their effect would be antidilutive.

C-9
<PAGE> 124
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Statement of Cash Flows

SAI considers investments purchased with an original maturity of three
months or less to be cash equivalents. Supplemental cash flow information
includes the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1997 1998 1999 2000 1999
---------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental schedule of cash
flow information --
Cash paid during the year for
interest.................. $1,141,493 $2,177,909 $1,861,887 $691,035 $1,318,104
Supplemental schedule of
noncash activities --
Issuance of stock for
subscription receivable... 50,000 -- -- -- --
Issuance of stock for central
station and contract
rights acquisitions....... -- 691,770 337,478 98,460 33,273
Accrued expenses incurred in
the sale of owned
subscriber accounts....... -- -- 3,097,278 -- 2,347,728
Purchase of contract rights
reduced by unearned
revenue acquired.......... 580,616 397,544 149,710 -- 149,710
Note payable from sale of
owned subscriber
accounts.................. -- -- 1,800,000 -- 1,800,000
Subordinated debt paid for
with Series A Convertible
Preferred Stock........... -- -- 10,000,000 -- --
Accrued interest and
dividends paid for with
Series A Convertible
Preferred Stock........... -- -- 3,576,166 -- --
Holdback notes reduced due to
account attrition......... 476,492 505,518 279,629 -- --
Purchase of contract rights
with notes................ 1,021,813 863,921 245,850 -- 211,374
</TABLE>

Fair Value of Financial Instruments

The fair value of the Company's long-term debt, which approximates the
carrying value, is estimated based on the current rates offered to SAI for debt
of the same remaining maturities.

Reclassifications

The presentation of the statement of operations has been changed to more
clearly depict SAI's activities. Therefore, prior period results have been
reclassified to conform to the new presentation.

C-10
<PAGE> 125
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. ACQUISITIONS

In November and December 1999, SAI acquired four central monitoring
stations located in the U.S. All of these acquisitions were accounted for under
the purchase method of accounting. SAI acquired these central monitoring
stations with $5,232,197 in cash plus 100,000 shares of the SAI's common stock
with a fair market value of $200,000 at the time of acquisition. Total goodwill
of $5,401,181 was recorded and is being amortized over a 3-15 year period. The
consolidated financial statements include the results of these acquired
companies since the date of acquisition.

In 1998, the Company acquired seven central monitoring stations located in
the U.S. All of these acquisitions were accounted for under the purchase method
of accounting. The Company acquired these companies with $12,431,113 in cash
plus 89,000 shares of the Company's common stock with a fair market value of
$510,062 at the time of the acquisition. Total goodwill of $12,567,650 was
recorded and is being amortized over a 3-15 year period. The consolidated
financial statements include the results of these acquired companies since the
date of acquisition.

On November 24, 1997, SAI purchased the stock of a central station. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was $5,000,000 in cash. Goodwill of approximately $5,088,000 was
recorded as a result of this transaction and is being amortized over 15 years.

The following pro forma consolidated results of operations have been
prepared as if the acquisitions of central monitoring stations occurred at the
beginning of the year of acquisition and in the year immediately preceding the
acquisition. The sale of the owned subscriber accounts discussed in Note 5 is
shown as if the transaction occurred at the beginning of 1998 and 1999. The pro
forma results of operations includes adjustments for amortization of intangible
assets and changes in interest expense corresponding to changes in debt (dollars
in 000's):

<TABLE>
<CAPTION>
1997 1998 1998
---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Monitoring fees and other revenues............... $ 21,130 $ 17,146 $ 18,969
Selling and administrative expenses.............. 18,017 15,589 18,166
Payroll expense paid to terminated employees..... 578 1,219 --
Amortization and depreciation.................... 5,419 2,468 3,395
---------- ---------- ----------
Loss from operations........................... (2,884) (2,130) (2,592)
Interest expense................................. 2,955 1,252 1,589
---------- ---------- ----------
Loss before income taxes....................... (5,839) (3,382) (4,181)
Income tax expense............................... -- -- --
---------- ---------- ----------
Net loss............................... (5,839) (3,382) (4,181)
Dividends accrued on preferred stock............. 413 522 450
---------- ---------- ----------
Net loss available to common stockholders........ $ (6,252) $ (3,904) (4,631)
========== ========== ==========
Net loss per share............................... $ (1.45) $ (.61) $ (.66)
Weighted average shares outstanding.............. 4,301,151 6,429,048 6,980,533
========== ========== ==========
</TABLE>

The pro forma statement of income does not purport to represent what the
Company's results of operations would actually have been had the acquisition or
disposition been effected for the periods presented, or to predict the Company's
results of operations for any future period.

C-11
<PAGE> 126
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. PREFERRED STOCK

On September 30, 1999, SAI entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS Partners, L.P., SAI's principal stockholder. Pursuant to this
agreement: (i) $10,000,000 of subordinated debt and accrued interest owed by SAI
to TJS Partners, L.P.; (ii) 66,910 shares of Convertible Preferred Stock; and,
(iii) 500,000 shares of 12% Redeemable Preferred Stock, together with all
accrued dividends were exchanged for 135,709 shares of newly designated Series A
Convertible Preferred Stock.

The Series A Convertible Preferred Stock has a $10 par value, a liquidation
preference of $350 per share and is convertible into 13,570,900 shares of SAI's
common stock. The Series A Convertible Preferred Stock is also entitled to
receive dividends equal to those that would have been received if the holder had
converted into common stock.

The holder of Series A Convertible Preferred Stock is entitled to vote on
all matters on which holders of SAI's common stock are entitled to vote, on an
as-converted basis. However, the total voting power of all securities owned by
the holder of Series A Convertible Preferred Stock is limited to a maximum of
45% of the total number of votes eligible to vote on a matter submitted to our
stockholders.

In connection with the restructuring, SAI's By-laws were amended to
increase the percentage of votes required to approve matters presented to the
stockholders from a simple majority to requiring approval by greater than sixty
percent (60%). This super-majority provision will be in effect for as long as
TJS Partners, L.P. owns thirty percent (30%) of SAI's common stock on an
as-converted basis. Additionally, for so long as TJS Partners, L.P. owns at
least fifteen percent (15%) of SAI's common stock on an as-converted basis,
SAI's Board of Directors will consist of five directors.

5. SALE OF OWNED SUBSCRIBER ACCOUNTS

On June 30, 1999 SAI sold its portfolio of approximately 27,000 owned
subscriber accounts to an unaffiliated third party. SAI will continue to monitor
these accounts.

The total transaction value was $22,800,000 of which $1,800,000 was a loan
extended by the purchaser. The loan is due on June 30, 2000 and bears interest
at the rate of 8% per annum. The loan and interest will be considered paid in
full with no cash paid by SAI, if during the term of the loan SAI meets certain
minimum new business referral targets.

SAI also agreed to guarantee attrition between 8% and 13% on a substantial
majority of the portfolio sold for a one year period. The remaining small
portion of the portfolio has a substantially higher attrition guarantee
percentage. An accrual for $1,700,000 was recorded to recognize this guarantee.
Additionally, SAI recorded an accrual of $547,000 for severance and related
expenses and an accrual for $850,000 to provide for moving the accounts sold to
phone lines owned by the purchaser.

6. LONG-TERM NOTES PAYABLE

On September 30, 1999, SAI refinanced its previous $30,000,000 line of
credit with FINOVA Capital Corporation. This previous line of credit had a
principal balance outstanding of approximately $6,600,000 on the closing date.
The refinancing with FINOVA and Citizens Bank consists of a term loan and an
acquisition line of credit. The term loan was in the principal amount of
$7,000,000, which covered SAI's existing indebtedness to FINOVA and working
capital. The acquisition line of credit of up to $38,000,000 is solely for
acquisitions of central monitoring stations. SAI may draw on this line of credit
through March 31, 2001. The Company is currently negotiating with its financing
sources to modify its financing arrangements. Management believes that these
arrangements will provide adequate resources to fund current needs. Both the

C-12
<PAGE> 127
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

term loan and the acquisition line of credit bear initial interest at a variable
rate of prime plus 0.75% (9.25% at year end, 10.25% at June 30, 2000). The
interest rate is, however subject to an upward adjustment depending on the loan
to recurring monthly revenue ratio. The loans mature as follows:

2.75% per quarter, beginning July, 2001
3.0% per quarter, beginning April, 2002
4.25% per quarter, beginning April, 2003
5.75% per quarter, beginning April, 2004,
balance due December 31, 2004

Long-term debt consists of the following notes payable:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to Finova........................ $26,609,730 $12,314,460 $13,189,460
Note payable in connection with sale of owned
subscriber accounts......................... -- 1,800,000 1,800,000
Notes payable to Alarm Dealers................ 786,806 162,998 14,631
Other......................................... 83,964 10,354 --
----------- ----------- -----------
Total long-term debt................ 27,480,500 14,287,812 15,004,091
Current maturities............................ (2,174,038) (1,973,352) (1,814,631)
----------- ----------- -----------
$25,306,462 $12,314,460 $13,189,460
=========== =========== ===========
Notes payable to stockholder.................. $ 8,500,000 -- --
=========== =========== ===========
</TABLE>

Future maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
As of December 31
<S> <C>
2001........................................................ 725,000
2002........................................................ 1,550,000
2003........................................................ 2,077,000
2004........................................................ 8,837,460
----------
13,189,460
==========
</TABLE>

7. EMPLOYEE BENEFIT PLAN

In April 1997, the Company adopted a 401(k) plan. Effective June 1, 1997,
employees were enrolled subject to the eligibility requirements of the plan. The
Company matches participant contributions up to 50% of the first 4% of each
participant's compensation that is contributed to the plan. Company
contributions to the plan in 1999, 1998 and 1997 were approximately $85,000,
$24,200 and $6,000, respectively. Company contributions to the plan during the
first quarter of 2000 were approximately $51,500.

On April 1, 1999 SAI adopted an employee stock purchase plan to provide
employees an opportunity to purchase shares of its common stock through payroll
deductions. Under this Plan, eligible employees may purchase shares of SAI
common stock at 85% of their market value on April 1, 1999. Individual purchases
of stock may not exceed $25,000 in fair market value annually (determined at the
time of grant). Employees in the plan as of April 1, 1999 will be entitled to
receive their shares on July 1, 2001. Total shares committed, based on employees
currently in the plan, are approximately 100,000.

C-13
<PAGE> 128
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LEGAL PROCEEDINGS

From time to time SAI experiences routine litigation in the normal course
of its business. As these claims fall primarily under available insurance
coverage, management does not believe that any pending litigation will have a
material adverse effect on the Company's financial condition or results of
operations.

In June, 2000 a complaint was filed naming a subsidiary of SAI among other
parties seeking damages in excess of $4.0 million. SAI believes it has no
liability in this matter and will vigorously defend its position.

9. STOCK OPTIONS AND WARRANTS

At the discretion of management and approval by the Board of Directors, the
Company may grant options and warrants to purchase shares of the Company's
common stock and convertible preferred stock to certain individuals. The
exercise price may not be less than fair market value of the common stock at the
date of grant. Management and the Board of Directors determine vesting periods
and expiration dates at the time of grant.

The Company applies APB Opinion No. 25 in accounting for options and
warrants issued to employees and directors. Accordingly, no compensation cost
has been recognized for stock options and warrants granted to those individuals.

In January 2000 SAI issued options to purchase 815,000 shares of common
stock to its officers and directors under a stock option plan pending approval
by our stockholders. Options to purchase these shares have an exercise price of
$2.75 per share, vest over a two year period and expire 6 years from the date of
the grant. Additional options to purchase 100,000 shares at an exercise price of
$2.88 per share were issued to new officers of SAI and 123,000 options to
purchase shares at an exercise price of $3.13 per share were issued to key
employees. These options expire 6 years from the date of grant and vest over a
three year period. The options are valued at $1.62, $1.71 and $1.85, per share
respectively under the Black-Scholes option pricing model.

On July 8,1999 the Company issued options to purchase 1,580,000 shares of
common stock to its officers and directors under a stock option plan approved by
the shareholders. Options to purchase 790,000 of these shares have an exercise
price of $4.50 per share and the remaining options have an exercise price of
$6.00 per share. All options expire 6 years from the date of grant and vest over
a three year period. Had compensation costs for the stock options and warrants
issued to directors and employees been determined based on the fair value at
their grant date, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:

C-14
<PAGE> 129
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In May 2000, SAI issued options to purchase 150,000 shares of common stock
at a strike price of $3.625 per share to a director in return for his services
as a broker. These options vest immediately and expire 60 days from the date of
the grant. The options are valued at .32 each under the Black-Scholes option
pricing model. The aggregate value of the options ($56,000) will be capitalized
as part of the purchase price in SAI's merger with KC Acquisition. The options
were exercised in June 2000.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------- JUNE 30,
1997 1998 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss --
As reported............................ $(4,524,646) $(6,275,889) $(4,046,635) $(2,575,726)
Pro forma.............................. (4,670,146) (6,363,889) (5,887,335) (4,294,576)
Primary loss per share --
As reported............................ (1.16) (1.06) (.59) (.36)
Pro forma.............................. (1.19) (1.07) (.85) (.59)
</TABLE>

The Company also issues warrants and stock to dealers under its dealer
incentive program. The stock and warrants issued under this program vest 25%
upon issuance and 25% on each of the first three anniversary dates after
issuance. The number of shares and warrants issued under this program at
December 31, 1998 and 1999 were 254,912 and 548,802 respectively. The amount
charged to expense related to stock and warrants issued under this program was
$255,282 and $70,402 during 1999 and 1998, respectively. The share value was
determined based on the market price of the Company's stock on the date of
issuance. The fair value of each option and warrant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions; risk-free interest rates between 4.53% and 6.17%; zero dividend
yield; expected lives through the expiration dates; and volatility between
42.30% and 135.46%.

The following summarizes the stock options and warrants for common stock as
of December 31, 1997, 1998 and 1999, and March 31, 2000 and the changes during
the periods then ending:

<TABLE>
<CAPTION>
1997 1998 1999 JUNE 30, 2000
-------------------- ------------------ -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of period..... 1,840,878 $ .74 480,223 $1.76 418,827 $3.53 1,908,827 $5.18
Granted............... 50,000 6.00 181,104 6.00 1,580,000 5.25 1,188,000 2.91
Exercised............. 1,410,655 .55 207,500 1.18 90,000 1.07 297,222 2.96
Canceled.............. -- -- 35,000 6.00 -- -- 25,000 3.00
--------- ----- ------- ----- --------- ----- --------- -----
End of period........... 480,223 $1.76 418,827 $3.53 1,908,827 $5.18 2,774,605 $4.45
========= ===== ======= ===== ========= ===== ========= =====
Exercisable as of end of
period................ 405,223 252,999 268,275 672,720
========= ======= ========= =========
</TABLE>

C-15
<PAGE> 130
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The future expiration of the common stock options is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------- --------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
As of December 31 --
2000....................................
2002.................................... 156,104 6.00 95,552 6.00
2003.................................... 22,723 4.14 22,723 4.14
2004.................................... 25,000 6.00 25,000 6.00
2005.................................... 2,570,778 5.25 529,445 4.50
June 30, 2006........................... -- -- -- --
--------- ----- ------- -----
2,774,605 $5.29 672,720 $4.76
========= ===== ======= =====
</TABLE>

The Company has granted stock options and warrants to purchase shares of
convertible preferred stock which mirror certain of the Common Stock options and
warrants listed above and are only exercisable upon exercise of the respective
Common Stock options and warrants.

The following summarizes the stock options and warrants for convertible
preferred stock as of December 31, 1997, 1998 and 1999, and the changes during
the years then ended:

<TABLE>
<CAPTION>
1997 1998 1999 JUNE 30, 2000
----------------- ----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------ --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of year........ 33,409 $153.65 4,302 $130.46 2,227 $137.79 1,327 $153.80
Granted.............. -- -- -- -- -- -- 250 300.00
Exercised............ 29,107 156.62 2,075 118.07 900 106.94 750 133.33
Canceled............. -- -- -- -- -- -- -- --
------ ------- ----- ------- ----- ------- ----- -------
End of year/period....... 4,302 $130.46 2,227 $137.79 1,327 $153.80 327 $ 88.97
====== ======= ===== ======= ===== ======= ===== =======
</TABLE>

10. SEGMENT INFORMATION

Effective January 1, 1998, the Company adopted FASB No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
requires that public business enterprises report certain financial information
in a similar manner as reported to the chief operating decision makers of the
Company for the purposes of evaluating performance and allocating resources to
the various operating segments. For the purposes of this disclosure, the Company
has identified two operating segments, based upon the types of customers served.
The Company owns accounts to which it invoices subscribers directly for
monitoring services. The Company also provides monitoring to dealers in its
central station operation.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating income or loss before interest and income taxes
and operating cash flows as defined by operating income or loss plus
depreciation and amortization. The Company does not separately identify interest
expense, for its operating segments. Intersegment sales and transfers are
immaterial and therefore not disclosed below. The Company also does not allocate
corporate, general and administrative and payroll expense to its operating
segments.

C-16
<PAGE> 131
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On June 30, 1999 SAI sold its owned accounts. See Note 5.

Financial data by operating segment together with the items necessary to
reconcile these amounts to the consolidated financial statements are shown below
for the years ended December 31, 1997, 1998 and 1999:

<TABLE>
<CAPTION>
CORPORATE
OWNED CENTRAL AND
ACCOUNTS STATION INTERCOMPANY CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997 --
Revenues............................... $ 5,018,234 $ 6,680,882 $ (885,029) $10,814,087
Selling, marketing and business
Development expenses................ -- -- 296,977 296,977
Depreciation and amortization.......... 2,941,458 762,085 -- 3,703,543
Operating income (loss)................ (724,526) 816,678 (2,754,192) (2,662,040)
Total assets........................... 20,531,034 15,477,669 -- 36,008,703
Capital expenditures................... 141,419 170,193 -- 311,612
----------- ----------- ----------- -----------
Year Ended December 31, 1998 --
Revenues............................... $ 6,942,036 $14,667,212 $(1,405,398) $20,203,850
Selling, marketing and business
development expenses................ -- -- 1,614,007 1,614,007
Depreciation and amortization.......... 4,292,171 1,996,318 -- 6,288,489
Operating income (loss)................ (1,074,121) 1,684,500 (4,016,675) (3,406,296)
Total assets........................... 20,174,732 27,351,018 -- 47,525,750
Capital expenditures................... 281,360 1,358,298 113,202 1,752,860
----------- ----------- ----------- -----------
Year Ended December 31, 1999 --
Revenues............................... $ 3,720,169 $19,768,281 $ (799,318) $22,689,132
Selling, marketing and business
development expenses................ -- 851,125 1,608,720 2,459,845
Depreciation and amortization.......... 2,319,183 3,331,253 63,454 5,713,890
Operating income (loss)................ (338,779) 1,063,340 (3,655,786) (2,931,225)
Total assets........................... -- 31,688,384 1,652,266 33,340,650
Capital expenditures................... -- 1,527,455 102,029 1,629,484
----------- ----------- ----------- -----------
Six months ended June 30, 2000
(unaudited)
Revenues............................... 3,720,169 9,702,368 (791,969) 12,630,568
Depreciation and amortization.......... 2,319,183 1,361,379 -- 3,680,562
Operating income (loss)................ (338,779) 706,681 (1,637,901) (1,269,999)
</TABLE>

The Company is currently providing services to customers only within the
United States and all long-lived assets are located in the United States. No
single customer accounted for more than 10% of the Company's revenues.

C-17
<PAGE> 132

EXHIBIT D

KC ACQUISITION CORP.

FINANCIAL STATEMENTS

INCLUDED ARE THE FINANCIAL STATEMENTS OF: (1) KC ACQUISITION CORP. FOR THE
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2000 (UNAUDITED); (2) KING CENTRAL, INC. (KC ACQUISITION CORP.'S
PREDECESSOR) FOR THE YEAR ENDED DECEMBER 31, 1997; AND (3) GRIPTIGHT HOLDINGS,
INC. AND SUBSIDIARY (MONITAL SIGNAL CORPORATION) FOR THE YEARS ENDED MARCH 31,
1999 AND MARCH 31, 2000.

KC ACQUISITION CORPORATION
AND SUBSIDIARY

FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 1999 AND 1998

AND THE SIX MONTHS ENDED

JUNE 30, 2000 (UNAUDITED)

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ D-2
Consolidated Financial Statements
Consolidated Balance Sheets............................... D-3
Consolidated Statements of Operations..................... D-4
Consolidated Statements of Shareholders' Equity
(Deficiency)........................................... D-5
Consolidated Statements of Cash Flows..................... D-6
Notes to Consolidated Financial Statements................ D-8
</TABLE>

D-1
<PAGE> 133

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of
KC Acquisition Corporation
Hackensack, New Jersey

We have audited the accompanying consolidated balance sheets of KC
Acquisition Corporation and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity (deficiency)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KC Acquisition Corporation
and Subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.

LIPMAN, SELZNICK & WITKOWSKI

A Professional Corporation

June 1, 2000
Edison, New Jersey

D-2
<PAGE> 134

KC ACQUISITION CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets
Cash and cash equivalents............................. $ 1,195,148 $ 728,886 $ 1,451,143
Accounts receivable, net.............................. 465,430 568,347 1,243,852
Accounts receivable, related party.................... 232,395 130,414 231,961
Prepaid expenses...................................... 64,545 59,208 186,781
----------- ----------- -----------
Total current assets.......................... 1,957,518 1,486,855 3,113,737
----------- ----------- -----------
Furniture, equipment and improvements, net.............. 983,372 1,517,977 2,527,602
----------- ----------- -----------
Intangible assets
Contract rights to monitor security systems, net...... 16,882,864 18,459,545 28,109,953
Debt issuance costs, net.............................. 2,142,661 2,405,601 2,384,104
Other................................................. 126,500 54,667 21,420
----------- ----------- -----------
19,152,025 20,919,813 30,515,477
----------- ----------- -----------
Other assets............................................ 260,689 383,685 755,964
----------- ----------- -----------
Total assets.................................. $22,353,604 $24,308,330 $36,912,780
=========== =========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

Current liabilities
Current portion of related party debt................. $ 1,177,300 $ 1,815,054 $ 3,189,063
Current portion of long-term debt..................... 190,222 155,306 156,133
Accounts payable...................................... 484,839 512,225 594,656
Accrued expenses and other............................ 418,739 854,294 1,165,723
Customer deposits..................................... 136,675 157,371 128,358
Deferred revenue...................................... 1,837,372 1,781,585 2,865,736
----------- ----------- -----------
Total current liabilities..................... 4,245,147 5,275,835 8,099,669
----------- ----------- -----------
Long-term liabilities
Related party debt, net of current portion............ 16,599,388 20,511,385 32,195,099
Long-term debt, net of current portion................ 322,308 166,596 1,594,967
Due to officer........................................ 715,663 191,556 122,859
----------- ----------- -----------
Total long-term liabilities................... 17,637,359 20,869,537 33,912,925
----------- ----------- -----------
Commitment and contingencies
Shareholders' equity (deficiency)
Common stock, no par value; authorized, issued and
outstanding 200 shares............................. 1,700,000 1,700,000 1,700,000
Deficit............................................... (1,228,902) (3,537,042) (6,799,814)
----------- ----------- -----------
Total shareholders' equity (deficiency)....... 471,098 (1,837,042) (5,099,814)
----------- ----------- -----------
Total liabilities and shareholders' equity
(deficiency)................................ $22,353,604 $24,308,330 $36,912,780
=========== =========== ===========
</TABLE>

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

D-3
<PAGE> 135

KC ACQUISITION CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- ------------------------
1998 1999 2000 1999
----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue............................... $10,592,373 $12,868,002 $ 8,450,498 $5,836,738
Operating unit expense.................... 5,446,202 7,746,629 4,931,636 2,920,167
----------- ----------- ----------- ----------
Operating unit margin..................... 5,146,171 5,121,373 3,518,862 2,916,571
----------- ----------- ----------- ----------
Operating expenses
Amortization and depreciation........... 1,809,915 2,074,770 1,292,856 975,120
General and administrative.............. 1,262,158 1,427,552 886,252 669,276
Selling, marketing and business
development.......................... 1,543,943 2,040,151 1,248,085 940,646
----------- ----------- ----------- ----------
Total operating expenses........ 4,616,016 5,542,473 3,427,193 2,585,042
----------- ----------- ----------- ----------
Income (loss) from operations............. 530,155 (421,100) 91,669 331,529
----------- ----------- ----------- ----------
Other expenses
Interest expense........................ 1,705,493 1,815,752 1,446,368 813,925
Loss on sale of retail accounts......... -- -- 1,908,073 --
Loss on abandonment of fixed assets..... 43,564 62,493 -- --
----------- ----------- ----------- ----------
1,749,057 1,878,245 3,354,441 813,925
----------- ----------- ----------- ----------
Loss before state income taxes............ (1,218,902) (2,299,345) (3,262,772) (482,396)
Provision for state income taxes.......... 10,000 8,795 -- 23,000
----------- ----------- ----------- ----------
Net loss.................................. $(1,228,902) $(2,308,140) $(3,262,772) $ (505,396)
=========== =========== =========== ==========
Net loss per share........................ $ (6,145) $ (11,541) $ (16,314) $ (2,527)
=========== =========== =========== ==========
Weighted average number of common shares
outstanding............................. 200 200 200 200
=========== =========== =========== ==========
</TABLE>

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

D-4
<PAGE> 136

KC ACQUISITION CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)

<TABLE>
<CAPTION>
TOTAL
COMMON STOCK SHAREHOLDERS'
------------------- EQUITY
SHARES AMOUNT DEFICIT (DEFICIENCY)
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock....................... 200 $1,700,000 $ -- $ 1,700,000
Net loss....................................... -- -- (1,228,902) (1,228,902)
--- ---------- ----------- -----------
Balance, December 31, 1998..................... 200 1,700,000 (1,228,902) 471,098
Net loss....................................... -- -- (2,308,140) (2,308,140)
--- ---------- ----------- -----------
Balance, December 31, 1999..................... 200 1,700,000 (3,537,042) (1,837,042)
Net loss (unaudited)........................... -- -- (3,262,772) (3,262,772)
--- ---------- ----------- -----------
Balance, June 30, 2000......................... 200 $1,700,000 $(6,799,814) $(5,099,814)
=== ========== =========== ===========
</TABLE>

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

D-5
<PAGE> 137

KC ACQUISITION CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- --------------------------
1998 1999 2000 1999
----------- ----------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $(1,228,902) $(2,308,140) $(3,262,772) $ (505,396)
Adjustments to reconcile net loss to net cash
provided by operating activities
Amortization and depreciation.................. 1,809,915 2,074,770 1,292,856 975,120
Bad debts...................................... 239,925 398,541 7,957 --
Loss on abandonment of fixed assets............ 43,564 62,493 -- --
Loss on sale of retail contract rights......... -- -- 1,908,073 --
Changes in assets and liabilities
Accounts receivable, net....................... (225,377) (353,629) 85,003 (603,595)
Accounts receivable, related party............. (232,395) 101,981 (101,547) 91,215
Prepaid expenses............................... 8,073 5,337 51,483 41,137
Accounts payable............................... 33,236 27,386 34,041 (115,904)
Accrued expenses and other..................... 128,569 397,800 87,702 149,889
Customer deposits.............................. 41,355 20,696 (29,013) (6,675)
Deferred revenue............................... (247,109) (55,787) (463,241) (61,228)
----------- ----------- ----------- ----------
Net cash provided by (used in) operating
activities.............................. 370,854 371,448 (389,458) (35,437)
----------- ----------- ----------- ----------
Cash Flows from Investing Activities:
Purchase of fixed assets......................... (87,102) (370,093) (13,734) (20,681)
Costs of contract rights acquisition............. -- -- (180,000) --
Proceeds from sale of marketable securities...... -- -- 287,126 --
Cash in acquired subsidiary...................... -- -- 542,440 --
Proceeds from sale of retail accounts............ -- -- 450,000 --
(Increase) decrease in other assets.............. 105,777 (122,996) (47,279) (12,405)
----------- ----------- ----------- ----------
Net cash provided by (used in) investing
activities.............................. 18,675 (493,089) 1,038,553 (33,086)
----------- ----------- ----------- ----------
Cash Flows from Financing Activities:
Repayment of officer loan........................ (107,337) (524,107) (68,697) (426,000)
Proceeds of notes payable to related parties..... 1,657,028 1,832,938 2,553,049 326,050
Repayment of notes payable to related parties.... (863,680) (1,308,470) (886,646) (530,194)
Repayment of long-term debt...................... (206,344) (190,629) (1,524,544) (122,441)
Debt issuance costs.............................. -- (154,353) -- --
----------- ----------- ----------- ----------
Net cash provided by (used in) financing
activities.............................. 479,667 (344,621) 73,162 (752,585)
----------- ----------- ----------- ----------
Increase (decrease) in cash........................ 869,196 (466,262) 722,257 (821,108)
Cash and cash equivalents, beginning of period..... 325,952 1,195,148 728,886 1,195,148
----------- ----------- ----------- ----------
Cash and cash equivalents, end of period........... $ 1,195,148 $ 728,886 $ 1,451,143 $ 374,040
=========== =========== =========== ==========
Cash Paid During the Period for:
Interest......................................... $ 1,554,643 $ 1,861,868 $ 1,279,388 $ 831,298
=========== =========== =========== ==========
Taxes............................................ $ 5,876 $ 19,966 $ 0 $ 23,000
=========== =========== =========== ==========
</TABLE>

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

D-6
<PAGE> 138

Supplemental schedule of noncash investing and financing activities:

In January 1998, the Company acquired all the assets of King Central,
Inc. and assumed all the liabilities through financing as follows:

<TABLE>
<S> <C>
Fair value of assets acquired......................... $ 20,578,000
Debt acquisition costs................................ 1,870,000
Liabilities assumed (net of refinanced debt of
$3,456,000)......................................... (3,725,000)
Related party debt incurred........................... (16,200,000)
Officer loan.......................................... (823,000)
Common stock issued................................... (1,700,000)
</TABLE>

On December 28, 1998, the Company borrowed an additional $1,450,000 from
a related party and recast the debt. The $646,661 cost of refinancing was
financed as part of the additional loan.

During June 1999, the assets of a central station (Note 8) were acquired
through financing as follows:

<TABLE>
<S> <C>
Fair value of assets acquired.......................... $ 3,252,829
Debt acquisition costs................................. 625,209
Liabilities assumed.................................... (37,755)
Related party debt incurred............................ (4,166,334)
Cash................................................... 326,051
</TABLE>

During 1999, the Company also purchased other contract rights for
$185,000 that were financed through a related party.

(unaudited)

On May 11, 2000, the Company acquired the stock of Monital Signal
Corporation through financing as follows:

<TABLE>
<S> <C>
Fair value of assets acquired......................... $ 15,474,757
Cash in acquired subsidiary........................... 542,440
Debt acquisition cost................................. 316,025
Cash received......................................... 1,249,650
Liabilities assumed................................... (3,441,872)
Related party debt incurred........................... (12,641,000)
Note from Security Village.com........................ (1,500,000)
</TABLE>

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

D-7
<PAGE> 139

KC ACQUISITION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
AND THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include
the accounts of KC Acquisition Corporation (KCA) and its wholly owned subsidiary
KC Funding Corporation (KCF). KCA operates the business under the names King
Central, King Capital and Monitoring Services. KCF owns certain accounts subject
to bank financing. Both are referred to in the Notes to Consolidated Financial
Statements as the Company. All intercompany transactions and balances have been
eliminated.

Business Acquisition. On January 9, 1998, the Company acquired all of the
assets and assumed all liabilities of King Central, Inc. (KCI). The purchase
price was $13,115,000 plus assumed liabilities of approximately $7,181,000. The
initial financing was provided by M&S Partners, a related party owned by the 20%
minority shareholders, ($16.2 million) and the majority shareholder
($2,523,000). The majority shareholder, who owned 20% of KCI, contributed his
share of the sale proceeds to the Company; $1.7 million as common stock and
$823,000 as a non-interest bearing note payable. The acquisition was accounted
for using the purchase method.

Nature of Business. The Company provides alarm monitoring services
nationwide primarily to the subscribers of security dealer/installers through
offices located in New Jersey, California, Georgia, Michigan and Ohio.

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

Cash Equivalents. The Company's policy is to treat all obligations with
maturity of 90 days or less at the time of purchase as cash equivalents.

Accounts Receivable. The Company grants unsecured trade credit to customers
in the normal course of business. Receivables in the accompanying balance sheet
are net of allowances for doubtful accounts of $200,000 as of December 31, 1998
and $100,000 as of December 31, 1999 and $123,800 as of June 30, 2000.

Furniture, Equipment and Improvements and Depreciation and
Amortization. Furniture, equipment and improvements are stated at cost.
Depreciation and amortization are being provided by the straight-line method
over the estimated useful lives of the related assets.

Intangible Assets. Intangible assets are being amortized on a straight-line
basis over their estimated useful lives as follows:

<TABLE>
<S> <C>
Contract rights.......................................... 15 Years
Covenant not to compete.................................. 2.5 Years
Debt issuance costs...................................... 5 Years
</TABLE>

Accumulated amortization was $1,664,715 at December 31, 1998, $3,566,490 at
December 31, 1999 and $4,725,000 at June 30, 2000.

Income Taxes. The shareholders of the Company elected under Subchapter S of
the Internal Revenue Code and for state income tax purposes not to be taxed as a
corporation and have consented to include their prorata share of the Company's
income in their individual returns. The Company remains subject to state
corporate income taxes at a reduced rate.

D-8
<PAGE> 140
KC ACQUISITION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Advertising Costs. The Company's policy is to expense advertising costs in
the period in which the expense is incurred. Advertising expense, was $53,241 in
1998, $41,473 in 1999 and $67,700 in 2000.

Deferred Revenue. Deferred revenue represents subscriber billings for
services not yet rendered. Annual service charges are deferred and taken into
income as earned. Agreements to provide services stipulate that prepayments
received are nonrefundable.

Recent Pronouncements. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"),
Accounting for Derivative Instruments and Hedging Activities. FAS 133, as
amended, is effective for all fiscal years beginning after June 15, 2000. FAS
133 requires that all derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedged transaction and the type of hedge
transaction. The ineffective portion of all hedges will be recognized in
earnings. The Company believes that such adoption will not have a material
effect on its consolidated results of operations or financial position.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
believes that such adoption will not have a material effect on its consolidated
results of operations or financial position.

2. FURNITURE, EQUIPMENT AND IMPROVEMENTS

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL ----------------------- JUNE 30,
LIVES 1998 1999 2000
----------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture and equipment.................... 5-10 Years $ 945,404 $1,626,815 $2,077,302
Building and leasehold improvements........ 10-39 Years 183,168 184,368 742,795
Land....................................... 124,418
---------- ---------- ----------
1,128,572 1,811,183 2,944,515
Less accumulated Depreciation.............. 145,200 293,206 416,913
---------- ---------- ----------
$ 983,372 $1,517,977 $2,527,602
========== ========== ==========
</TABLE>

3. LONG-TERM DEBT

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable, related party(a)....................... $17,776,688 $22,326,439 $35,384,162
Capital leases(b)..................................... 380,204 258,021 202,882
Note payable, Security Village........................ 1,500,000
Notes payable, other(d)............................... 132,276 63,880 48,218
----------- ----------- -----------
18,289,168 22,648,340 37,135,262
Less current portion.................................. 1,367,522 1,970,360 3,345,196
----------- ----------- -----------
$16,921,646 $20,677,980 $33,790,066
=========== =========== ===========
</TABLE>

(a) The Company has eleven notes with M&S Partners, a company whose
majority owners own 20% of the Company. The monthly installments total
approximately $461,000 including interest at rates from 7.7% to

D-9
<PAGE> 141
KC ACQUISITION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

24.6%. Balloon payments are due at certain intervals and the notes are secured
by specific monitoring contracts. The Company is required to maintain an end of
month balance of $430,000 in a lockbox, which is included in cash on the balance
sheet, and $650,000 in a reserve fund, which is included in other assets.

Debt issuance costs paid to M&S Partners in conjunction with the borrowings
were $1,870,000 in 1998, $1,426,223 in 1999 and $316,025 in 2000. Interest
incurred was $1,565,726 in 1998 and $1,783,557 in 1999 and $1,106,051 in 2000.

In February 2000, the Company borrowed an additional $370,000 from the same
related party. In May, the Company borrowed $12,641,000 from the same related
party of $11,391,350 was used to purchase Monital and $1,249,650 to finance
working capital.

(b) Capital leases are secured by computer and telephone equipment included
in fixed assets (cost of $435,252 and accumulated amortization of $124,350 at
December 31, 1999). Capitalized lease obligations represent the present value of
lease payments due over the remaining lease terms.

Minimum annual capital lease payments at December 31, 1999 are:

<TABLE>
<S> <C>
2000..................................................... $130,001
2001..................................................... 125,648
2002..................................................... 30,190
--------
285,839
Less amount representing interest at 7.25%............... 27,818
--------
$258,021
========
</TABLE>

(c) The note to Security Village of $1,500,000 was received primarily as
funds to purchase Monital. The note is due December 31, 2001. The note bears a
premium of $225,000 which will be accreted over the life of the loan.

(d) The note is payable in monthly installments of $3,024 including
interest at 8.6%.

Maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999
CAPITAL LEASES JUNE 30, 2000
RELATED PARTY AND OTHER TOTAL TOTAL
------------- ----------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
2000.......................... $ 1,815,054 $155,306 $ 1,970,360 2,180,918
2001.......................... 2,047,433 135,287 2,182,720 4,331,419
2002.......................... 2,610,524 31,308 2,641,832 3,799,998
2003.......................... 12,736,393 -- 12,736,393 14,428,343
2004.......................... 3,117,035 -- 3,117,035 5,360,625
2005.......................... -- -- -- 7,033,959
----------- -------- ----------- ----------
$22,326,439 $321,901 $22,648,340 37,135,262
=========== ======== =========== ==========
</TABLE>

D-10
<PAGE> 142
KC ACQUISITION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCRUED EXPENSES

Accrued expenses are composed of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued interest.................................... $151,850 $105,734 $ 272,714
Accrued payroll and vacation........................ 89,109 193,808 249,564
Lawsuits............................................ -- 105,000 105,000
Royalties........................................... -- 150,000 175,000
Health insurance.................................... 109,434 161,936 172,091
Other............................................... 68,346 137,816 191,354
-------- -------- ----------
$418,739 $854,294 $1,165,723
======== ======== ==========
</TABLE>

5. COMMITMENTS AND CONTINGENCIES

a. Leases. The Company is obligated under operating leases for property and
equipment expiring at various dates through 2003. Rent expense amounted to
$344,851 in 1998, $472,409 in 1999 and $252,455 in 2000. Minimum future annual
rental commitments under all noncancelable operating leases at December 31, 1999
are as follows:

<TABLE>
<CAPTION>
REAL
TOTAL EQUIPMENT ESTATE
---------- --------- --------
<S> <C> <C> <C>
2000................................................ $ 656,195 $323,828 $332,367
2001................................................ 415,285 107,006 308,279
2002................................................ 172,969 25,570 147,399
2003................................................ 34,445 10,712 23,733
---------- -------- --------
$1,278,894 $467,116 $811,778
========== ======== ========
</TABLE>

b. Royalty Agreement. The Company has a trademark and sub-license agreement
for the use of the Smith & Wesson name in marketing alarm systems and monitoring
services. The agreement has a term of nine years and ten months that commenced
on March 1, 1998 and expires on December 31, 2008. The agreement required
minimum royalties of $300,000 for 1998, $600,000 for 1999 and $700,000 per year
for each year thereafter payable in quarterly installments of $175,000 beginning
in the first quarter of 2000. The agreement can be terminated every two years at
the Company's option beginning in August 31, 2000.

c. Uninsured Cash. Approximately $693,000 of cash is uninsured as of
December 31, 1999. At June 30, 2000 approximately $888,000 (unaudited) of cash
was uninsured.

d. Litigation. The Company is involved in litigation and various legal
matters which have arisen in the ordinary course of business. Management has
accrued $105,000 to cover potential losses. The Company does not believe that
the outcome of these issues will have a material effect on the Company's
financial position or results of operations.

e. Related Party Transactions. The Company provides monitoring services to
a company owned by the shareholders of the Company. The Company sold retail
accounts to this related party for $450,000 which resulted in a loss of
$1,908,073. Revenue from this related company was approximately $232,000 in
1998, $621,000 in 1999 and $472,000 in 2000.

f. Self-Funded Health Plan. The Company has an employee benefit plan that
began in August 1998, which provides heath benefits to all eligible employees.
The plan is partially self-insured by the Company

D-11
<PAGE> 143
KC ACQUISITION CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which has an excess loss insurance agreement with New England Financial.
Insurance expense under the plan was $119,962 in 1998, $317,255 in 1999 and
$229,502 in 2000.

6. STATE INCOME TAXES

As of December 31, 1998 and 1999, the Company had net operating loss
carryforwards of approximately $780,000 and $1,300,000, respectively, for state
purposes. Due to the S corporation elections, the effect of these losses on
deferred taxes is not material.

7. NET LOSS PER SHARE

Net loss per share is computed based upon the weighted number of common
shares outstanding during the periods presented. The Company has no other common
stock equivalents.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts reflected in the financial statements for cash and
accounts receivable approximate their respective fair values due to the short
maturities of these instruments. It is not practicable to estimate the fair
value of long-term debt because of the inability to estimate fair value without
incurring excessive costs.

9. ACQUISITIONS

On June 23, 1999, the Company acquired the California central station of
Criticom International Corporation for a contract price of $3,105,000. The
acquisition was accounted for under the purchase method of accounting. The
acquisition was completely financed through M&S Partners, a related party
controlled by minority shareholders of the Company. $2,705,000 was allocated to
contract rights, which are being amortized over 15 years, and $400,000 was
allocated to furniture and equipment. M&S Partners received a fee of $622,709 in
conjunction with the financing.

On March 29, 1999, the Company acquired certain contract rights for
$185,000, which were financed by M&S Partners.

10. ACQUISITION OF MONITAL SIGNAL CORPORATION (UNAUDITED)

Acquisition of Monital Signal Corporation. On May 11, 2000, the Company,
through a newly formed wholly owned subsidiary, acquired 99% of the common stock
of Griptight Holdings, Inc., a corporation whose sole asset was 80% of the stock
of Monital Signal Corporation (Monital). At the same time, the Company also
acquired 20% of the stock in Monital from the Estate of Eric Hurst. The purchase
price of $11,110,400, financing costs of $316,025 and all other closing costs
were financed by a loan of $12,641,000 from M&S Partners, a related party, and a
loan of $1.5 million from Security Village.com, Inc.

In connection with the above transaction, the Company entered into an
agreement to merge with and into Security Associates International, Inc. The
closing is expected to occur in October 2000.

The consolidated financial statements include the results of these
acquisitions since the dates acquired.

D-12
<PAGE> 144

KING CENTRAL, INC.

FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997

CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ D-14
Financial Statements
Balance Sheet............................................. D-15
Statement of Operations................................... D-16
Statement of Deficit...................................... D-17
Statement of Cash Flows................................... D-18
Notes to Financial Statements............................. D-19
</TABLE>

D-13
<PAGE> 145

REPORT OF INDEPENDENT AUDITORS

To the Stockholders of
King Central, Inc.
Hackensack, New Jersey

We have audited the accompanying balance sheet of King Central, Inc. as of
December 31, 1997, and the related statements of operations, deficit and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of King Central, Inc. as of
December 31, 1997, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.

LIPMAN, SELZNICK & WITKOWSKI

A Professional Corporation

May 25, 2000
Edison, New Jersey

D-14
<PAGE> 146

KING CENTRAL, INC.

BALANCE SHEET
DECEMBER 31, 1997

<TABLE>
<S> <C>
ASSETS

Current assets
Cash...................................................... $ 474,393
Accounts receivable, net.................................. 757,404
Prepaid expenses.......................................... 60,750
-----------
Total current assets.............................. 1,292,547
-----------
Furniture, equipment and improvements, net.................. 1,605,262
-----------
Intangible assets
Contract rights to monitor security systems, net.......... 2,701,746
Covenant not to compete, net.............................. 100,000
-----------
2,801,746
-----------
Other assets................................................ 128,334
-----------
Total assets...................................... $ 5,827,889
===========

LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIENCY

Current liabilities
Current portion of long-term debt......................... $ 584,897
Accounts payable.......................................... 401,607
Accrued expenses and other................................ 316,913
Customer deposits......................................... 95,320
Due to related party...................................... 113,620
Deferred revenue.......................................... 2,084,471
-----------
Total current liabilities......................... 3,596,828
-----------
Long-term liabilities
Long-term debt, net of current portion.................... 3,341,924
Due to related party, net of current portion.............. 172,997
Due to officers........................................... 230,870
-----------
Total long-term liabilities....................... 3,745,791
-----------
Commitments and contingencies
Shareholders' equity deficiency
Common stock, no par value; authorized 2,500 shares;
issued and outstanding
200 shares............................................. 10,000
Deficit................................................... (1,524,730)
-----------
Total shareholders equity deficiency.............. (1,514,730)
-----------
Total liabilities and shareholders' equity
deficiency........................................ $ 5,827,889
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

D-15
<PAGE> 147

KING CENTRAL, INC.

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Net revenue................................................. $ 9,728,842
Operating unit expense...................................... 6,214,091
-----------
Operating unit margin....................................... 3,514,751
-----------
Operating expenses
Amortization and depreciation............................. 608,786
General and administrative................................ 1,618,045
Selling, marketing and business development............... 996,365
-----------
3,223,196
-----------
Income from operations...................................... 291,555
-----------
Other expense
Interest expense.......................................... 381,151
Loss on abandonment of fixed assets....................... 111,469
-----------
492,620
-----------
Loss before state income taxes.............................. (201,065)
State income taxes.......................................... 14,786
-----------
Net loss.................................................... (215,851)
===========
Net loss per share.......................................... $ (1,079.25)
===========
Weighted average number of common shares outstanding........ 200
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

D-16
<PAGE> 148

KING CENTRAL, INC.

STATEMENT OF DEFICIT
YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Balance, beginning of year.................................. $(1,308,879)
Net loss.................................................... (215,851)
-----------
Balance, end of year........................................ $(1,524,730)
===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

D-17
<PAGE> 149

KING CENTRAL, INC.

STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Cash flows from operating activities
Net loss.................................................. $(215,851)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 608,786
Provision for bad debts................................ 440,537
Loss on abandonment of fixed assets.................... 111,469
Changes in current assets and liabilities that provided
(used cash)
Accounts receivable.................................. (474,500)
Prepaid expenses..................................... 4,780
Accounts payable..................................... 96,556
Accrued expenses and other........................... 36,840
Due to related party................................. (36,591)
Customer deposits.................................... (10,051)
Deferred revenue..................................... 61,001
---------
Net cash provided by operating activities......... 622,976
---------
Cash flows from investing activities
Capital expenditures...................................... (357,192)
Increase in other assets.................................. (18,202)
Purchase of contract rights............................... (95,157)
Decrease in restricted cash............................... 125,000
---------
Net cash used in investing activities............. (345,551)
---------
Cash flows from financing activities
Repayment of long-term debt............................... (480,994)
---------
Net decrease in cash........................................ (203,569)
Cash, beginning of year..................................... 677,962
---------
Cash, end of year........................................... $ 474,393
=========
Cash paid during the year for:
Interest.................................................. $ 394,465
=========
Taxes..................................................... $ 3,111
=========
</TABLE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

During 1997, the Company financed the purchase of telephone equipment under
capital leases in the amount of $515,579.

The Company reduced contract rights to monitor security systems for a
holdback of $161,581 that would not be paid to the seller of certain contracts.

Also, accounts receivable of $101,160 was classified to contract rights
when the contracts were acquired for non-payment of the receivable.

The accompanying notes are an integral part of the financial statements.

D-18
<PAGE> 150

KING CENTRAL, INC.

NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents. The Company's policy is to treat all obligations with a
maturity of 90 days or less at the time of purchase as cash equivalents.

Accounts Receivable. The Company grants unsecured trade credit to customers
in the normal course of business. Receivables in the accompanying balance sheet
are net of reserves for doubtful accounts of approximately $186,000 as of
December 31, 1997.

Intangible Assets. Intangible assets are being amortized on a straight-line
basis over their estimated useful lives as follows:

<TABLE>
<S> <C>
Contract rights to monitor security systems.............. 15 Years
Covenant not to compete.................................. 5 Years
</TABLE>

Accumulated amortization amounted to $540,139 as of December 31, 1997.

Income Taxes. The shareholders of the Company elected under Subchapter S of
the Internal Revenue Code not to be taxed as a corporation and have consented to
include their prorata share of the Company's income in their individual returns.
The Company is taxed as a regular corporation for state tax purposes. Deferred
taxes relating to state taxes are not a material amount.

Revenue Recognition and Deferred Revenue. Deferred revenue represents
billings for services not yet rendered. Annual service charges are deferred and
taken into income as earned. Agreements to provide services stipulate that
prepayments received are nonrefundable.

Advertising Costs. The Company's policy is to expense advertising costs in
the period in which the expense is incurred. Advertising expense, which included
related party advertising (see Note 5), for the year ended December 31, 1997 was
$314,274.

D-19
<PAGE> 151
KING CENTRAL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. FURNITURE, EQUIPMENT AND IMPROVEMENTS

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Computer equipment.......................................... 7 years $1,497,723
Furniture and equipment..................................... 10 years 992,030
Leasehold improvements...................................... 10 years 240,668
Transportation equipment.................................... 3 years 10,288
----------
2,740,709
Less accumulated depreciation and amortization.............. 1,135,447
----------
$1,605,262
==========
</TABLE>

3. LONG-TERM DEBT

<TABLE>
<S> <C>
Notes payable, bank(a)...................................... $2,060,000
Installment note, due December 31, 2001(b).................. 1,235,000
Installment note, due January 15, 1999(c)................... 52,667
Capital leases (note 4)..................................... 579,154
----------
3,926,821
Less current portion........................................ 584,897
----------
Long-term portion........................................... $3,341,924
==========
</TABLE>

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

(a) The notes were payable in monthly installments of $33,300 including interest
at prime (8.5% at December 31, 1997) plus 3/4%. On January 9, 1998, the
notes were repaid in conjunction with the sale of the Company (see Note 8).

(b) The note was payable in quarterly installments of $65,000 plus interest at
8% and was secured by a bank letter of credit for the outstanding balance of
the note. The note was repaid in conjunction with the sale of the Company.

(c) The note was payable in two principal payments of $37,333 due on January 15,
1998 and $15,334 due on January 15, 1999. Interest payments were made
quarterly at 8% of the remaining principal balance. The note was assumed in
conjunction with the sale of the Company.

Annual maturities of long-term debt are as follows:

<TABLE>
<S> <C>
1998.................................................... $ 584,897
1999.................................................... 510,488
2000.................................................... 507,705
2001.................................................... 535,277
2002.................................................... 400,007
Thereafter.............................................. 803,550
----------
$3,314,924
==========
</TABLE>

D-20
<PAGE> 152
KING CENTRAL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. ACCRUED EXPENSES

Accrued expenses are composed of the following:

<TABLE>
<S> <C>
Accrued interest......................................... $ 40,456
Accrued payroll and vacation............................. 81,078
Accrued service contracts................................ 98,209
Accrued telephone........................................ 43,123
Other.................................................... 54,047
--------
$316,913
========
</TABLE>

5. STATE INCOME TAXES

<TABLE>
<S> <C>
Current................................................... $17,486
Tax effect of net operating loss carryforward............. (2,700)
-------
$14,786
=======
</TABLE>

The Company has a net operating loss carryforward for state tax purposes of
approximately $17,000 expiring through the year 2003.

6. COMMITMENTS AND CONTINGENCIES

a. Related Party Transactions. The Company participates in advertising and
promotion programs with a related party, KingAlarm Distributors (KAD), in which
two of the Company's shareholders have a controlling interest. Advertising and
promotion expense paid to KAD was approximately $116,000 in 1997. Approximately
75% of the Company's customers are dealers to whom KAD sells its products. Due
to related party in current liabilities includes $49,996 of advertising and
promotion programs cost, a $5,000 loan due in monthly installments of $2,500 and
$58,624 as the current portion of the note due to KAD.

The note to KAD is payable in monthly installments of $6,250, including
interest at 8.5% per annum. The note was assumed in conjunction with the sale of
the Company.

Annual maturities of the KAD note are as follows:

The Company also subleases office under noncancelable leases. Rent expense
includes $68,412 paid to KAD in 1997.

The Company pays 7% interest to the officers. Interest expense paid to the
officers was $16,161 in 1997.

Other assets include $50,000 due from an officer.

b. Leases. The Company has entered into a lease for its headquarters that
commenced in April 1997. The lease requires monthly payments of $16,667 for
sixty months and gives the Company the option to lease the premises for five
additional years. In addition, the Company is obligated under operating leases
for

D-21
<PAGE> 153
KING CENTRAL, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

property and equipment expiring at various dates through 2002. Rent expense
amounted to $292,104 in 1997. Minimum future annual rental commitments under all
noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
REAL KAD
TOTAL EQUIPMENT ESTATE SUBLEASE
-------- --------- -------- --------
<S> <C> <C> <C> <C>
1998........................................ $282,201 $7,098 $243,204 $31,899
1999........................................ 244,387 1,183 243,204 --
2000........................................ 221,604 -- 221,604 --
2001........................................ 200,004 -- 200,004 --
2002........................................ 50,001 -- 50,001 --
-------- ------ -------- -------
$998,197 $8,281 $958,017 $31,899
======== ====== ======== =======
</TABLE>

c. Capital Leases. Assets under capital leases relate to computer and
telephone equipment included in furniture, equipment and improvements (cost of
$947,660 and accumulated amortization of $312,982 at December 31, 1997).
Capitalized lease obligations outstanding at December 31, 1997 ($579,154)
represent the present value of the lease payments due over the remaining lease
terms and is included in long-term debt.

Minimum annual payments are:

<TABLE>
<S> <C>
1998..................................................... $256,852
1999..................................................... 148,338
2000..................................................... 129,719
2001..................................................... 125,648
2002..................................................... 28,247
--------
688,804
Less amount representing interest (approximately 8.9%)... 109,650
--------
Present value of net minimum payments under capital
lease.................................................. 579,154
Less current portion..................................... 207,224
--------
$371,930
========
</TABLE>

d. Repurchase of Company Stock. The Company and its shareholders have
agreed that the Company will repurchase on demand all shares of any shareholder
upon death. The value of the shares will be determined under the provisions of
the shareholders' agreement.

e. Uninsured Cash. Approximately $475,000 of cash is uninsured as of
December 31, 1997.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

8. LITIGATION

The Company is involved in litigation and various legal matters, which have
arisen in the ordinary course of business. Management believes that the ultimate
resolution of any existing matter will not have a material effect on the
Company's financial position.

9. SUBSEQUENT EVENT

On January 9, 1998, all assets net of liabilities of the Company were sold
to KC Acquisition Corp., a newly formed corporation owned eighty percent by the
twenty percent shareholder of the Company.

D-22
<PAGE> 154

GRIPTIGHT HOLDINGS, INC.
AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MARCH 31, 1999 AND 2000

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ D-24
Consolidated Balance Sheets March 31, 1998, 1999 and 2000... D-25
Consolidated Statements of Operations For the Years Ended
March 31, 1998, 1999 and 2000............................. D-26
Consolidated Statements of Changes in Stockholder's Equity
For the Years Ended March 31, 1998, 1999 and 2000......... D-27
Consolidated Statements of Cash Flows For the Years Ended
March 31, 1998, 1999 and 2000............................. D-28
Notes to Consolidated Financial Statements.................. D-29
</TABLE>

D-23
<PAGE> 155

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholder of
Griptight Holdings, Inc. and Subsidiary:

We have audited the accompanying consolidated balance sheets of Griptight
Holdings, Inc., and Subsidiary as of March 31, 1998, 1999 and 2000, and the
related consolidated statements of operations, changes in stockholder's equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Griptight
Holdings, Inc. and Subsidiary as of March 31, 1998, 1999 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

As discussed in Note 14 to the consolidated financial statements, an error
resulting from the omission of a deferred compensation payable, was discovered
by management of the Company during the current year. Accordingly, an adjustment
has been made to retained earnings as of April 1, 1997, to correct the error.

WITHUM, SMITH & BROWN

Red Bank, New Jersey
June 5, 2000

D-24
<PAGE> 156

GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents................................. $ 650,551 $ 526,072 $ 588,083
Marketable securities..................................... 99,663 221,714 153,654
Trade accounts receivable, less allowance for doubtful
accounts of $9,301, $28,865 and $29,652 in 1998, 1999
and 2000, respectively.................................. 537,995 452,044 354,834
Inventories............................................... 453,283 162,917 65,301
Prepaid expenses.......................................... 75,387 85,106 111,553
Other current assets...................................... -- 17,781 11,980
---------- ---------- ----------
Total Current Assets............................... 1,816,879 1,465,634 1,285,405
Property, Plant and Equipment -- Net........................ 1,085,200 1,067,320 1,114,740
Other Assets:
Deposits.................................................. 3,255 2,670 2,670
Intangible assets -- net.................................. 730,067 1,603,364 2,578,554
Deferred tax assets....................................... 220,000 147,200 --
---------- ---------- ----------
Total Other Assets................................. 953,322 1,753,234 2,581,224
---------- ---------- ----------
Total Assets....................................... $3,855,401 $4,286,188 $4,981,369
========== ========== ==========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current Liabilities:
Accounts payable.......................................... $ 158,895 $ 60,526 $ 32,026
Accrued expenses.......................................... 261,792 270,744 234,874
Current maturities of long-term debt...................... 120,861 265,317 603,990
Deferred compensation payable............................. -- -- 590,651
Deferred revenue.......................................... 986,623 1,110,610 1,169,964
Dividends payable......................................... -- 71,250 --
Due to parent............................................. 763 68,765 68,765
Corporate income taxes payable............................ 6,373 14,503 31,335
Current portion of other liabilities...................... 36,813 87,211 119,211
---------- ---------- ----------
Total Current Liabilities.......................... 1,572,120 1,948,926 2,850,816
Long-Term Debt, Net of Current Maturities................... 386,528 519,304 739,612
Deferred Compensation Payable............................... 253,100 275,900 --
Net Liabilities of Discontinued Operations.................. 255,000 50,000 --
Other Liabilities, Net of Current Portion................... 47,913 70,700 125,449
Minority Interest........................................... 269,034 268,440 217,834
Stockholder's Equity:
Common stock, no par value, authorized 2,500 shares; 1
share issued and outstanding............................ 300,000 300,000 300,000
Additional paid-in capital................................ 327,783 327,783 327,783
Retained earnings......................................... 443,923 532,868 469,507
Accumulated other comprehensive income (loss)............. -- (7,733) (49,632)
---------- ---------- ----------
Total Stockholder's Equity......................... 1,071,706 1,152,918 1,047,658
---------- ---------- ----------
Total Liabilities And Stockholder's Equity......... $3,855,401 $4,286,188 $4,981,369
========== ========== ==========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

D-25
<PAGE> 157

GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------------
1998 1999 2000
----------- ---------- ----------
<S> <C> <C> <C>
Net Revenue:
Wholesale monitoring.................................. $ 5,351,408 $5,648,614 $6,161,820
Retail monitoring..................................... 106,412 513,944 861,826
Sale of security system parts......................... 1,712,167 1,446,404 487,470
----------- ---------- ----------
Total Net Revenue............................. 7,169,987 7,608,962 7,511,116
----------- ---------- ----------
Operating Unit Expenses:
Monitoring expenses................................... 3,885,328 4,048,814 4,462,556
Costs of security system parts sold................... 1,487,152 1,389,695 475,269
----------- ---------- ----------
Total Operating Unit Expenses................. 5,372,480 5,438,509 4,937,825
----------- ---------- ----------
Operating Unit Margin................................... 1,797,507 2,170,453 2,573,291
Operating Expenses:
Depreciation and amortization......................... 219,837 365,237 533,105
General and administrative............................ 748,806 833,376 1,189,386
Selling and marketing................................. 513,356 606,071 493,490
----------- ---------- ----------
Total Operating Expenses...................... 1,481,999 1,804,684 2,215,981
----------- ---------- ----------
Operating Income........................................ 315,508 365,769 357,310
Other Income (Expense):
Interest income....................................... 25,141 17,931 11,704
Interest expense...................................... (9,503) (62,261) (82,972)
Loss on sale of equipment............................. (14,252) -- --
Loss on sale of marketable securities................. -- -- (2,246)
Minority interest in subsidiary's (earnings) losses... (84,658) (14,406) 35,606
----------- ---------- ----------
Total Other Income (Expense) -- Net........... (83,272) (58,736) (37,908)
----------- ---------- ----------
Income From Continuing Operations Before Income Taxes... 232,236 307,033 319,402
Provision For (Benefit From) Income Taxes............... (193,771) 113,865 213,964
----------- ---------- ----------
Income From Continuing Operations....................... 426,007 193,168 105,438
Discontinued Operations:
Loss from discontinued operations, net of income tax
benefit of $-0- in 1998, 1999 and 2000............. (1,337,595) (44,223) (108,799)
Gain on sale of discontinued operations, net of income
tax of $-0- in 1998................................ 881,553 -- --
----------- ---------- ----------
Net Income (Loss)....................................... $ (30,035) $ 148,945 $ (3,361)
=========== ========== ==========
Weighted Average Number of Shares Outstanding........... 1 1 1
=========== ========== ==========
Income From Continuing Operations Per Share............. $ 426,007 $ 193,168 $ 105,438
=========== ========== ==========
Net Income (Loss) Per Share............................. $ (30,035) $ 148,945 $ (3,361)
=========== ========== ==========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

D-26
<PAGE> 158

GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000

<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
---------------- ADDITIONAL RETAINED COMPREHENSIVE
SHARE AMOUNT PAID-IN-CAPITAL EARNINGS INCOME (LOSS) TOTAL
----- -------- --------------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1997, as
previously reported.......... 1 $300,000 $327,783 $ 672,518 $ -- $1,300,301
Prior-period adjustment........ -- -- -- (198,560) -- (198,560)
-- -------- -------- --------- -------- ----------
Balance, April 1, 1997, as
restated..................... 1 300,000 327,783 473,958 -- 1,101,741
Components of Comprehensive
Income (Loss):
Net loss..................... -- -- -- (30,035) -- (30,035)
Change in unrealized loss on
available-for-sale
securities................ -- -- -- -- -- --
-- -------- -------- --------- -------- ----------
Total Comprehensive
Income (Loss)...... (30,035)
-- -------- -------- --------- -------- ----------
Balance, March 31, 1998........ 1 300,000 327,783 443,923 -- 1,071,706
Components of Comprehensive
Income (Loss):
Net income................... -- -- -- 148,945 -- 148,945
Change in unrealized loss on
available-for-sale
securities................ -- -- -- -- (7,733) (7,733)
-- -------- -------- --------- -------- ----------
Total Comprehensive
Income (Loss)...... 141,212
-- -------- -------- --------- -------- ----------
Cash Dividends -- Common
Stock........................ -- -- -- (60,000) -- (60,000)
-- -------- -------- --------- -------- ----------
Balance, March 31, 1999........ 1 300,000 327,783 532,868 (7,733) 1,152,918
Components of Comprehensive
Income (Loss):
Net loss..................... -- -- -- (3,361) -- (3,361)
Change in unrealized loss on
available-for-sale
securities................ -- -- -- -- (41,899) (41,899)
-- -------- -------- --------- -------- ----------
Total Comprehensive
Income (Loss)...... -- -- -- -- -- (45,260)
-- -------- -------- --------- -------- ----------
Cash Dividends -- Common
Stock........................ -- -- -- (60,000) -- (60,000)
-- -------- -------- --------- -------- ----------
Balance, March 31, 2000........ 1 $300,000 $327,783 $ 469,507 $(49,632) $1,047,658
== ======== ======== ========= ======== ==========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

D-27
<PAGE> 159

GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31,
-------------------------------------
1998 1999 2000
--------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings from continuing operations.............. $ 426,007 $ 193,168 $ 105,438
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization..................... 219,837 365,237 533,105
Deferred compensation............................. 4,900 22,800 314,751
Deferred income taxes............................. (220,000) 72,800 147,200
Loss on sale of marketable securities............. -- -- 2,246
Minority interest in earnings (losses) of
subsidiary...................................... 84,658 14,406 (35,606)
Loss on sale of equipment......................... 14,252 -- --
(Increase) decrease in operating assets:
Trade accounts receivable....................... (31,688) 85,951 97,210
Inventories..................................... (44,365) 290,366 97,616
Prepaid expenses................................ (46,578) (9,719) (26,447)
Other current assets............................ 19,681 (17,781) 5,801
Corporate income taxes receivable............... 47,066 -- --
Increase (decrease) in operating liabilities:
Accounts payable................................ 43,819 (98,369) (28,500)
Accrued expenses................................ (172,072) 5,202 (32,120)
Due to parent................................... 763 68,002 --
Deferred revenue................................ 46,428 123,987 59,354
Corporate income taxes payable.................. 6,373 8,130 16,832
Other liabilities............................... 84,726 73,185 86,749
--------- ----------- -----------
Net Cash Provided By Continuing Operating
Activities................................. 483,807 1,197,365 1,343,629
--------- ----------- -----------
Net Cash Provided By (Used In) Discontinued
Operating Activities....................... 75,416 (249,223) (158,799)
--------- ----------- -----------
Net Cash Provided By Operating Activities.... 559,223 948,142 1,184,830
--------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of equipment...................... 14,250 -- --
Purchases of property and equipment.................. (268,571) (143,449) (205,798)
Purchases of intangible assets....................... (512,941) (980,173) (1,202,258)
Purchases of marketable securities................... (99,663) (129,784) --
Decrease in deposits................................. -- 585 --
Proceeds from sales of marketable securities......... 20,500 -- 23,915
--------- ----------- -----------
Net Cash Used In Investing Activities........ (846,425) (1,252,821) (1,384,141)
--------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from the issuance of long-term debt......... 275,889 404,835 774,499
Principal payments of long-term debt................. (27,345) (224,635) (363,177)
Cash distributions to minority stockholder of
subsidiary........................................ -- -- (30,000)
Cash distributions to majority stockholder........... -- -- (120,000)
--------- ----------- -----------
Net Cash Provided By Financing Activities.... 248,544 180,200 261,322
--------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents... (38,658) (124,479) 62,011
Cash and Cash Equivalents, at Beginning of Year........ 689,209 650,551 526,072
--------- ----------- -----------
Cash and Cash Equivalents, at End of Year.............. $ 650,551 $ 526,072 $ 588,083
========= =========== ===========
</TABLE>

The Notes to Financial Statements are an integral part of these statements.

D-28
<PAGE> 160

GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of Griptight
Holdings, Inc., and its subsidiary, collectively referred to as the Company.
Griptight Holdings, Inc. owns 80% of the outstanding common stock of Monital
Signal Corporation. All significant intercompany accounts and transactions have
been eliminated.

Griptight Holdings, Inc. is a wholly owned subsidiary of L.W.G. Holdings
Limited (a United Kingdom Corporation). L.W.G. Holdings Limited is referred to
as the parent company.

Nature of Business

Griptight Holdings, Inc. is a non operating holding company. Monital Signal
Corporation was established in 1982 and is located in Manasquan, New Jersey, and
provides commercial and residential security system monitoring services to alarm
installers and their customers and also retails security system parts. Monital
Signal Corporation maintains customer service centers in New Jersey and
Colorado. Monital Signal Corporation services customers throughout the United
States. Monital Signal Corporation also sells security system parts.

Minority Interest

Minority interest represents the minority stockholder's proportionate share
of the stockholder's equity and net income in the subsidiary.

Use of Estimates

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

Concentration of Credit Risk

The Company maintains cash balances at various financial institutions.
Accounts at these financial institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000. At March 31, 1998, 1999 and 2000, the
Company maintained balances in these institutions in excess of the insured
limits.

Other financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of these customers and their dispersion across different
businesses and geographic regions. As of March 31, 1998, 1999 and 2000, the
Company had no significant concentrations of credit risk with respect to the
accounts receivable.

Revenue Recognition

Monital Signal Corporation recognizes revenues from monitoring alarm
systems when the service is performed. In many instances, the Company's
customers prepay for the monitoring services. The monitoring fee revenue is
recognized ratably over the life of the contracts. Hence, the Company has
recorded deferred revenue as of March 31, 1998, 1999 and 2000.

D-29
<PAGE> 161
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Marketable Securities

The Company has adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Debt and Equity Securities" (SFAS 115). The provisions
of this accounting standard require that securities are classified into three
categories: held-to-maturity, available-for-sale, and trading.

Securities classified as held-to-maturity, which are those the Company has
the positive intent and ability to hold to maturity, are reported at amortized
cost. Securities classified as available-for-sale may be sold in response to
changes in interest rates, liquidity needs, and for other purposes.
Available-for-sale securities are reported at fair value and include securities
not classified as held-to-maturity or trading. Trading securities are those held
principally for the purpose of selling in the near future and are carried at
fair value. As of March 31, 1998, 1999 and 2000, the Company has only
available-for-sale securities.

Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported, net of any income tax effect, as
accumulated other comprehensive income (loss). Realized gains and losses are
reported in earnings based on the adjusted cost of the specific security sold.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and in the bank as well as
all short term securities held for the primary purpose of general liquidity.
Such securities normally mature within three months from the date of
acquisition.

Accounts Receivable

Provision for losses on trade accounts receivable is made in amounts
required to maintain an adequate allowance to cover anticipated bad debts.
Accounts receivable are charged against the allowance when it is determined by
the Company that payment will not be received. Any subsequent receipts are
credited to the allowance. At year end, the allowance is adjusted by management
based upon a review of the accounts receivable.

Inventories

Inventories consist of security system parts and are stated at the lower of
cost (first-in, first-out) or market.

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciation charges with
respect to property, plant and equipment have been made by Monital using both
straight-line and accelerated methods and are based on the following estimated
useful lives:

<TABLE>
<CAPTION>
CLASSIFICATION ESTIMATED LIFE (YEARS)
-------------- ----------------------
<S> <C>
Building and Improvements...................... 39 years
Computer and Telephone Equipment............... 5 years
Furniture and Fixtures......................... 5 - 7 years
Autos and Trucks............................... 5 years
Leasehold Improvements......................... Estimated useful life
of the asset or term
of the lease, which-
ever is shorter
</TABLE>

D-30
<PAGE> 162
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Expenditures for maintenance and repairs are charged to operations as
incurred. Expenditures for betterments and major renewals are capitalized and,
therefore, are included in property, plant and equipment.

For physical properties not fully depreciated, the cost of the assets
retired or sold is credited to the asset accounts, and the related accumulated
depreciation is charged to the accumulated depreciation accounts. The gain or
loss from sale or retirement of property, plant and equipment, is reflected in
the results of operations.

Intangible Assets

Intangible assets are being amortized over their useful lives using the
straight-line method as follows:

<TABLE>
<S> <C>
Non-competition covenant................................... 5 years
Customer lists............................................. 7 years
</TABLE>

Income Taxes

The provision for (benefit from) income taxes is computed based on the
pretax income (loss) included in the consolidated statements of operations. The
asset and liability approach is used to recognize deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.

Advertising

Advertising costs are expensed as incurred. Advertising and promotion
expense for the years ended March 31, 1998, 1999 and 2000 was $192,290, $142,851
and $163,258, respectively.

Recent Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative
Instruments and Hedging Activities. FAS 133, as amended, is effective for all
fiscal years beginning after June 15, 2000. FAS 133 requires that all
derivatives be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedged transaction and the type of hedge transaction. The ineffective portion
of all hedges will be recognized in earnings. The Company believes that such
adoption will not have a material effect on its consolidated results of
operations or financial position.

Financial Instruments

The carrying values of the Company's accounts receivable, accounts payable
and accrued expenses approximate their fair values. The fair value of the
Company's long-term debt is assumed to approximate its book value.

Net Income (Loss) per Share

The Company has adopted SFAS No. 128, "Earnings per Share" ("FAS 128"),
which requires presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS") by all entities that have publicly
traded common stock or potential common stock (options, warrants, convertible
D-31
<PAGE> 163
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

securities or contingent stock arrangements). FAS 128 also requires presentation
of earnings per share by an entity that has made a filing or is in the process
of filing with a regulatory agency in preparation for the sale of securities in
a public market.

Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted EPS gives effect to all dilutive potential common shares
outstanding during the period. The computation of Diluted EPS does not assume
conversion, exercise or contingent exercise of securities that would have an
antidilutive effect on earnings. Refer to Note 13 for the Company's methodology
for determining net income (loss) per share.

NOTE 2 -- DISCONTINUED OPERATIONS:

On January 26, 1998, the Company sold the assets of its New Jersey based
baby care products business for approximately $1,496,000 to Playtex Products,
Inc. The results of the baby products business have been classified as
discontinued operations for all periods presented in the Consolidated Statements
of Operations and Cash Flows.

During the fiscal year ended March 31, 1998, the Consumer Products Safety
Commission settled it's fines to the Company for $150,000 payable over a three
year period. Included in net liabilities of discontinued operations is $100,000,
$50,000 and $-0- of amounts due under this settlement at March 31, 1998, 1999
and 2000, respectively.

NOTE 3 -- MARKETABLE SECURITIES:

Marketable securities available for sale at March 31, are summarized as
follows:

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
March 31, 1998
Fixed Income -- Mutual Funds............. $ 99,663 $ -- $ -- $ 99,663
======== ==== ======= ========
March 31, 1999
Fixed Income -- Mutual Funds............. $229,447 $ -- $ 7,733 $221,714
======== ==== ======= ========
March 31, 2000
Fixed Income -- Mutual Funds............. $203,286 $ -- $49,632 $153,654
======== ==== ======= ========
</TABLE>

During the year ended March 31, 2000, the Company received proceeds of
$23,915 from the sale of marketable securities. The change in the net unrealized
loss, which has been included as part of accumulated other comprehensive income
(loss), amounted to $-0-, $7,733 and $41,899 for the years ended March 31, 1998,
1999 and 2000, respectively.

D-32
<PAGE> 164
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are as follows at March 31:

<TABLE>
<CAPTION>
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Land............................................. $ 124,418 $ 124,418 $ 124,418
Building and Improvements........................ 636,445 638,687 638,687
Computer and Telephone Equipment................. 1,107,296 1,238,436 1,388,684
Leasehold Improvements........................... 21,728 21,728 48,843
Furniture and Fixtures........................... 281,009 291,076 307,111
Autos and Trucks................................. 37,128 37,128 49,528
---------- ---------- ----------
Total Cost............................. 2,208,024 2,351,473 2,557,271
Less accumulated depreciation and amortization... 1,122,824 1,284,153 1,442,531
---------- ---------- ----------
Property, Plant and Equipment -- Net............. $1,085,200 $1,067,320 $1,114,740
========== ========== ==========
</TABLE>

Depreciation and amortization included as a charge to operations was
$178,118, $161,329 and $158,378 for the years ended March 31, 1998, 1999 and
2000, respectively.

NOTE 5 -- INTANGIBLE ASSETS:

Intangible assets are as follows at March 31:

<TABLE>
<CAPTION>
1998 1999 2000
-------- ---------- ----------
<S> <C> <C> <C>
Non-competition covenant.......................... $ 76,715 $ 76,715 $ 76,715
Customer lists.................................... 771,786 1,848,991 3,198,908
-------- ---------- ----------
Total................................... 848,501 1,925,706 3,275,623
Less accumulated amortization..................... 118,434 322,342 697,069
-------- ---------- ----------
Intangible Assets -- Net.......................... $730,067 $1,603,364 $2,578,554
======== ========== ==========
</TABLE>

Amortization included as a charge to operations was $41,719, $203,908 and
$374,727 for the years ended March 31, 1998, 1999 and 2000, respectively.

NOTE 6 -- OTHER LIABILITIES:

Other liabilities consists of the holdback portion of the purchase price on
new customer monitoring contracts which are typically held for a period not less
than one year from the date of purchase. The payment of these holdback
liabilities is contingent upon whether any individual monitoring contracts are
cancelled, terminated or not renewed by the subscriber, and/or non-payment of
monitoring charges. Other liabilities, net of current portion, were classified
as non-current since repayment is not expected within the next year.

Also included in cash and cash equivalents is $26,576, $30,871 and $4,295
of restricted cash held for the repayment of holdback liabilities at March 31,
1998, 1999 and 2000, respectively.

D-33
<PAGE> 165
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 7 -- LONG-TERM DEBT:

Long-term debt consisted of the following at March 31:

<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Notes Payable -- Shrewsbury State Bank -- payable in
monthly installments ranging from $1,196 to $6,757,
including interest at rates ranging from 7.38 to
8.58 percent, per annum, maturing May 2001 through
January 2004, and are all secured by a mortgage on
Company property and substantially all assets of the
Company............................................. $507,389 $784,621 $1,195,943
Note Payable -- payable in one lump sum including
simple interest at the rate of 10.5 percent, per
annum, maturing January 2001........................ -- -- 147,659
-------- -------- ----------
Total..................................... 507,389 784,621 1,343,602
Less Current Maturities................... 120,861 265,317 603,990
-------- -------- ----------
Long-Term Debt,
Net of Current Maturities................. $386,528 $519,304 $ 739,612
======== ======== ==========
</TABLE>

Aggregate maturities of long-term debt for the next five years ended March
31 are as follows:

<TABLE>
<S> <C>
2001.................................................... $ 603,990
2002.................................................... 401,654
2003.................................................... 230,423
2004.................................................... 107,535
2005.................................................... --
----------
Total......................................... $1,343,602
==========
</TABLE>

NOTE 8 -- PROVISION FOR (BENEFIT FROM) INCOME TAXES:

The provision for (benefit from) income taxes charged to operations were as
follows for the years ended March 31:

<TABLE>
<CAPTION>
1998 1999 2000
--------- -------- --------
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. federal...................................... $ -- $ -- $ --
U.S. state and local.............................. 26,229 41,065 66,764
--------- -------- --------
Total Current............................. 26,229 41,065 66,764
--------- -------- --------
Deferred tax expense (benefit):
U.S. federal...................................... (220,000) 81,000 139,000
U.S. state and local.............................. -- (8,200) 8,200
--------- -------- --------
Total Deferred............................ (220,000) 72,800 147,200
--------- -------- --------
Total Provision (benefit)................. $(193,771) $113,865 $213,964
========= ======== ========
</TABLE>

Current tax expense (benefit) is the amount of income taxes reported or
expected to be reported on the Company's tax returns.

D-34
<PAGE> 166
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Differences between accounting rules and tax laws cause differences between
the bases of certain assets and liabilities for financial reporting purposes and
tax purposes. The tax effects of these differences, to the extent they are
temporary, are recorded as deferred tax assets and liabilities under SFAS 109,
and consisted of the following components at March 31:

<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
U.S. federal and U.S. state and local taxes:
Deferred tax assets:
Excess of financial accounting over tax
depreciation............................... $ -- $ 20,000 $ 84,500
Inventory reserve............................ -- 900 1,300
Receivable allowances........................ -- 11,900 12,000
Accrued vacation............................. -- 3,400 7,200
Deferred compensation........................ 101,200 110,400 236,300
Net operating loss carryforwards............. 761,000 655,000 473,000
--------- --------- ---------
862,200 801,600 814,300
--------- --------- ---------
Deferred tax liabilities........................ -- -- --
--------- --------- ---------
Valuation allowance for deferred tax assets..... (642,200) (654,400) (814,300)
--------- --------- ---------
Deferred taxes -- net............................. $ 220,000 $ 147,200 $ --
========= ========= =========
</TABLE>

The reasons for the differences between income tax expense and amounts
calculated using the U.S. statutory rate of 34 percent were as follows:

<TABLE>
<CAPTION>
1998 1999 2000
------ ----- -----
<S> <C> <C> <C>
Taxes computed at U.S. statutory rates:.................... 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
State income taxes -- net of federal taxes............ 7.5 7.1 15.5
Non-deductible expenses............................... 14.8 4.0 (0.9)
Benefit of net operating loss carryforwards........... (132.5) (17.8) (34.1)
Valuation allowance adjustment........................ (6.1) 9.9 51.6
Surtax exemption...................................... (2.2) (0.5) (0.2)
Other -- net.......................................... 1.1 0.4 1.1
------ ----- -----
Provision for (benefit from) income taxes.................. (83.4)% 37.1% 67.0%
====== ===== =====
</TABLE>

Non-deductible expenses consist primarily of limitations regarding the tax
deductibility of meals and entertainment costs, lease inclusion amounts and
minority interest in subsidiary's earnings and losses.

As of March 31, 2000, the Company has U.S. federal and U.S. state and local
net operating loss carryforwards of approximately $457,000 and $3,679,000,
respectively, for tax purposes which will be available to offset future taxable
income. If not used, these carryforwards will generally expire between 2001 and
2013.

NOTE 9 -- EMPLOYEE BENEFIT PLANS:

The Company has a qualified profit sharing plan and 401(K) savings plan.
The profit sharing plan covers substantially all full time employees with at
least one year of service. In any year that the Company has net income, at the
discretion of the Board of Directors, the Company may contribute to the plan
based on a percentage of participants' eligible compensation. For the years
ended March 31, 1998, 1999 and 2000, the Company has elected to make a
contribution of $25,000, $40,585 and $58,145, respectively.

D-35
<PAGE> 167
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The employees may participate in the 401(K) savings plan. The employees may
elect to make contributions pursuant to a salary reduction agreement upon
meeting age and length-of-service requirements. The Company is currently under
no obligation to make any form of matching contribution.

NOTE 10 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

The statements of cash flows for the years ended March 31, 1998, 1999 and
2000 contain cash paid during the year for:

<TABLE>
<CAPTION>
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
Interest................................................. $9,503 $62,261 $76,512
====== ======= =======
Income Taxes............................................. $1,072 $32,609 $49,732
====== ======= =======
</TABLE>

Noncash financing and investing activities during 1998, 1999 and 2000
amounted to $258,845, $97,032 and $147,659, respectively, as a result of
customer list acquisitions financed by long-term debt.

In addition, during 1999, the Company declared a dividend in the amount of
$75,000 of which $3,750 has been withheld for taxes.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES:

Lease Commitments

The Company leases office space in Denver, Colorado under an operating
lease which expires in August 2001. The most significant obligations assumed
under the lease are insurance and improvements necessary to make the space
usable for security monitoring activities such as the installation of electrical
conduits and backup generators and the removal of said generators upon
termination of the lease. In addition, the Company leases various vehicles and
equipment under operating leases.

The approximate annual rental commitment of the Company under these
non-cancelable leases are as follows for the next three years ending March 31:

<TABLE>
<S> <C>
2001..................................................... $139,435
2002..................................................... 113,297
2003..................................................... 25,953
--------
Total.......................................... $278,685
========
</TABLE>

The preceding data reflects existing leases and does not include future
replacements upon their expiration. Rent expense for the building, vehicles and
equipment for the years ended March 31, 1998, 1999 and 2000 was $102,484,
$107,094 and $114,051, respectively.

Deferred Compensation Commitment

During September 1995, the Company entered into an employment and deferred
compensation agreement with an officer of the Company. Either upon completion of
a five-year period ending in September 2000, sale of the Company's business,
dissolution/liquidation of the Company, or termination of employment, the
Company would begin paying five percent of the net proceeds of the sale or
liquidation, or five percent of the value of the Company in quarterly
installments, without interest, for a period of five years as deferred
compensation.

D-36
<PAGE> 168
GRIPTIGHT HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of March 31, 1998, 1999 and 2000, the Company has accrued $253,100,
$275,900 and $590,651, respectively, in deferred compensation payable which is
based upon the estimated fair market value of the subsidiary.

The Company has employment agreements with key employees of the Company. In
the event of termination of employment of these key employees, the Company has
agreed to pay severance equal to six months of the employee's base salary.

Litigation Contingencies

The Company is subject to certain lawsuits and claims with respect to
matters arising out of the normal course of business. While the affect on future
results of those items is not subject of reasonable estimation, in the opinion
of management, after consultation with legal counsel, the liabilities resulting,
if any, from these claims will not materially affect the financial condition,
results of operations or cash flows of the Company.

NOTE 12 -- RELATED PARTY TRANSACTIONS:

The Company is charged with an administrative assessment from its parent
company. This charge covers various administrative overhead applicable to the
Company. This charge to operations for the years ended March 31, 1998, 1999 and
2000 was $246,289, $249,544 and $257,016, respectively, and is included in
general and administrative expenses.

The Company has loans from its parent company. These loans are non interest
bearing.

NOTE 13 -- NET INCOME (LOSS) PER SHARE:

Basic EPS and Diluted EPS for the years ended March 31, 1998, 1999 and 2000
have been computed by dividing the net income (loss) for each respective period
by the weighted average shares outstanding during that period. During all such
periods, there were no potentially diluted securities outstanding, or the effect
of such securities would be antidilutive. Hence, Basic EPS and Diluted EPS are
the same.

NOTE 14 -- PRIOR PERIOD ADJUSTMENT:

Retained earnings as of April 1, 1997 has been adjusted for the correction
of an error resulting from the omission of a deferred compensation payable. The
adjustment was $248,200, net of income taxes of $-0- and before a minority
interest adjustment of $(49,640), which resulted in a net adjustment of
$198,560.

NOTE 16 -- SUBSEQUENT EVENT:

On May 11, 2000, the parent company sold 100 percent of their holdings in
Monital Signal Corporation to an unrelated company. In May 2000, all of the
Company's long-term debt was paid off. Additionally, Monital Acquisition
Corporation, created to effect the purchase, borrowed approximately $12,500,000
from a bank to fund the purchase. Monital Signal Corporation was then merged
into Monital Acquisition Corporation.

Upon the sale, pursuant to an employment contract dated September 29, 1995,
the president of Monital Signal Corporation received deferred compensation
amounting to $590,651 (See Note 11).

Also, upon the sale, Monital Signal Corporation awarded loyalty bonuses to
its president and certain select employees amounting to $375,000 and $55,000,
respectively.

D-37