SECURITY ASSOCIATES INTERNATIONAL INC, 10KSB/A, 2000-03-27

SECURITY ASSOCIATES INTERNATIONAL INC
10KSB/A, 2000-03-27
DETECTIVE, GUARD & ARMORED CAR SERVICES

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As Filed with the Securities and Exchange Commission on March 27, 2000
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB/A

(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-20870

SECURITY ASSOCIATES INTERNATIONAL, INC.
(Name of Small Business Issuer in its charter)

DELAWARE 87-0467198
(State or other Jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

2101 SOUTH ARLINGTON HEIGHTS ROAD, 60005-4142
SUITE 100 (Zip Code)
ARLINGTON HEIGHTS, ILLINOIS
(Address of Principal Executive Offices)

Issuer's telephone number including area code: (847) 956-8650

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

Warrants to purchase Common Stock, par value $0.001 per share

(Title of Class)

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

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter

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period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---

Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
---

Issuer's revenues for the most recent fiscal year: $22,689,132

The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant based upon the closing sale price of the stock
as reported on the American Stock Exchange on March 24, 2000 was $28,792,968.

As of March 24, 2000 the registrant had outstanding 7,198,242 shares of our
$.001 par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Our definitive proxy statement which is expected to be filed with the
Commission not later than April 28, 2000, for our annual meeting of
stockholders, expected to be held on or about May 23, 2000, is incorporated by
reference into Part III of this Form 10-KSB/A.

Certain statements in this Annual Report 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 "Business," as well in this
Annual Report generally. In addition, when used in this Annual Report the words
"anticipates," "intends," "seeks," "believes," "plan," "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.

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PART I

ITEM 1. BUSINESS

OVERVIEW

We provide security alarm monitoring services for both residences and
businesses through contracts with 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 customers. Our
ability to attract new monitoring business is enhanced and supported by a
network of over 3,000 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).

[MAP OF USA WITH SAI OWNED CENTRAL STATIONS INDICATED]

o SAI directly owns and operates central monitoring stations located in
Pompano Beach, Florida (SAI Southeast Command Center); Des Plaines,
Illinois (SAI Midwest Command Center); Ogden, Utah (SAI Mountain
Command Center); Portland, Oregon (SAI Northwest Command Centers -
Portland); and Chino, California (SAI West Command Center).

o SAI Command Centers Northwest-Seattle, Inc., a wholly owned
subsidiary, owns and operates a central monitoring station located in
Seattle, Washington.

o SAI Southwest Command Centers, Inc., a wholly owned subsidiary, owns
and operates central monitoring stations located in Dallas, Texas,
Houston, Texas and Metairie, Louisiana (Monark Central Dispatch).

o SAI North Central Command Center, Inc., a wholly owned subsidiary,
owns and operates a central monitoring station located in Euclid,
Ohio.

We intend to continue to merge our wholly owned subsidiaries into SAI in an
effort to reduce costs and realize economies of scale.

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). SAI continues to monitor

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these accounts under contract with SAFE and is SAFE's preferred provider of
alarm monitoring services.

The sale of our retail 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 retail accounts went to pay down
our line of credit with FINOVA Capital Corporation. Following the retail 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.

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
retail 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

As of December 31, 1999, we monitored over 400,000 residences and
businesses from our national network of regional central monitoring stations.
All of these locations were monitored under contracts with approximately 2,500
alarm dealers for subscriber accounts owned by them. From January 1, 1995
through December 31, 1999, the number of subscriber accounts we monitored
increased from approximately 51,471 to 401,000. On December 31, 1999, we
provided monitoring services to 84,768 more subscriber accounts than at year-end
1998.

We estimate that our central monitoring stations are currently capable of
monitoring at least 750,000 subscriber accounts. We gained additional capacity
when we acquired our Chino, California and Seattle, Washington facilities. We
expect to be able to monitor 1,000,000 subscriber accounts by the end of 2000,
before taking into account any future acquisitions.

Our network of independent alarm dealers consists of over 3,000 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 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

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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 through new dealers that join our Dealer Partner Program. Through this
program, we offer selected alarm dealers the opportunity to own equity in our
company as part of their ongoing relationship with us. See "Business - Dealer
Partner Program."

In the future, we believe that we can develop future business opportunities
based on our network of over 3,000 independent alarm dealers representing over
15,000 trained installation and service personnel, expert in low voltage
technology. We have also created through our dealers a network of over 400,000
consumers electronically connected to our regional, secure, redundant, UL listed
central monitoring stations. We believe that these networks uniquely position us
to become key participants 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 sharing 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 that 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, in the summer of 1998 issue of Dispatch, reported 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 that
install alarm systems.

Several large well-capitalized companies are active in the security alarm
industry directly or through subsidiaries, including Western Resources, Inc. and
Tyco International, Inc. 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

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and one year automatic renewals, if 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 Customer 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
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 customer 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 our dealers and we already provide. We believe that
potential partners that embrace this vision will desire to offer a broad range
of related services without incurring

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the expense or experiencing the uncertainties of entering unfamiliar product
markets or developing a nationwide network of servicing and installing dealers.
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 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. (SAFE), with whom we have formed
an alliance. This alliance involves SAFE using our central stations to monitor
accounts we refer to them which they purchase, 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 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:

o alarm system maintenance and servicing;

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

o 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 Underwriters Laboratory
(UL) listed. 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 additional 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.

Increase Monitoring Capacity on a Regional Basis

Our strategy is to complete a network of central stations, with at least one
central station located in each of the major geographic regions of the United
States. Our recent central station acquisitions were undertaken to increase our
monitoring capacity, to expand our monitored subscriber account base and to
build our regional network.

The following acquisitions were undertaken primarily to build our regional
network:

o Southeast: In December 1996, we purchased the assets of AMJ Central
Station Corporation which owned and operated a central station located
in the Fort Lauderdale/Pompano Beach, Florida area.

o Midwest: In July 1995, we purchased All Security Monitoring Services
L.L.C. which owned and operated a central monitoring station located in
Des Plaines, Illinois, a suburb of Chicago. In November 1997, we
purchased Telecommunication Associates Group, Inc. which owned and
operated central monitoring stations located in Euclid, Ohio, a suburb
of Cleveland and Austin, Texas. The Austin central station has been
consolidated into our Houston central station.

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o Southwest: In June 1998, we purchased Texas Security Central, Inc.
which owned and operated central monitoring stations located in Dallas,
Texas; San Antonio, Texas and Houston, Texas. The San Antonio central
station has been consolidated into our Houston central station. In
December 1999, we purchased the assets of Monark Central Dispatch, Inc.
which owned and operated a central station located in Metairie,
Louisiana (which is in the New Orleans area).

o West: In May 1998, we purchased the third party monitoring business of
Fire Protection Service Corporation which owned and operated a central
monitoring station located in Ogden, Utah (which is in the Salt Lake
City area). In November 1999, we purchased the assets of Total
Electronic Alarm Monitoring, L.L.C. that owned and operated a central
station located in Chino, California (which is in the Los Angeles
area).

o Pacific Northwest: In October 1998, we purchased the assets of World
Security Services Corporation which owned and operated a central
monitoring station located in Portland, Oregon. In November 1999, we
purchased Alarm Monitoring Service, Inc. which owned and operated a
central monitoring station located in Seattle, Washington.

In order to emphasize both our nationwide identity and our regional
presence, we have renamed our central stations: SAI Midwest Command Center (Des
Plaines, Illinois), SAI Mountain Command Center (Ogden, Utah), SAI North Central
Command Center, Inc. (Euclid, Ohio), SAI Northwest Command Centers - Portland
(Portland, Oregon), SAI Northwest Command Centers - Seattle, Inc. (Seattle,
Washington), SAI Southeast Command Center (Pompano Beach, Florida), SAI
Southwest Command Centers, Inc. (Dallas, Texas, Houston, Texas and Metairie,
Louisiana) and SAI West Command Center (Chino, California).

We have substantially completed our capital investment project that
expanded the capacity of our central monitoring stations to 750,000 monitored
alarm systems. We intend to continue our program of expansion. This expansion
will principally involve hiring additional personnel, purchasing additional
computers and monitoring equipment and leasing additional phone lines. We will
then have the opportunity, and challenge, of bringing in additional subscriber
accounts to absorb the increased monitoring capacity.

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

o We have implemented a single centralized accounting system.

o We have created a centralized billing, customer service and collections
department to service all of our central monitoring stations.

o We will continue the consolidation of monitoring operations into
regional central monitoring stations.

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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.

We have also realized economies of scale through the consolidation of the
subscriber account bases of the following central monitoring stations:

o Security Associates Command Center II, L.L.C. (located in Grand Rapids,
Michigan) and Guardian Security, Inc. (located in Columbus, Ohio) into
the Euclid, Ohio central monitoring station.

o Northern Central Station, Inc. (located in Little Falls, New Jersey)
into the Des Plaines, Illinois central monitoring station.

o Telecommunication Associates Group, Inc.'s central station in Austin,
Texas, and Alarm Central Monitoring, Inc. (located in Dallas, Texas)
into SAI Southwest Command Centers, Inc. central monitoring stations
located in Houston and Dallas, Texas, respectively. The San Antonio
facility of SAI Southwest Command Centers, Inc. was also consolidated
into the Houston central station.

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, except for
our Louisiana central station, which we are in the process of changing. We
expect this process to be completed in the second quarter of 2000. The
system-wide upgrade is designed to:

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

o Allow more efficient information exchange between the central stations
and the home office.

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

o 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 Central Station Based 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 central monitoring
station businesses. The design of our marketing programs has remained a home
office function.

The salespeople in each of our central stations are responsible for selling
our services in the region where the station is located. It is our belief that
we will be more successful in selling monitoring services to alarm dealers if
our facilities, salespeople and operations managers are geographically close to
the dealers. We intend to control the growth of each central station so that no
station becomes too large for its management and salespeople to maintain
personal relationships with, and responsiveness to the needs of, each of our
dealers.

As part of our relationship oriented strategy, we have implemented a
program (the "Dealer Partner Program", formerly known as the Strategic Partner
Program) that allows dealers to become equity owners of our company. See
"Business-Dealer Partner Program."

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 customers 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

<PAGE> 12

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 of 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
customer 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
customers, which is repaid in 36 to 60 months. From the customer'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 first year of the program, the dealer is required to
provide another account

<PAGE> 13

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.

As an additional incentive for participating in the ValueBuilder program,
we issue shares of common stock to participants based on the number of
ValueBuilder accounts monitored at our central monitoring stations.

Dealers participating in ValueBuilder build equity in two ways. They retain
the equity represented by their ownership of the subscriber monitoring accounts
and they gain an ownership interest in our company as well.

All dealers participating in the ValueBuilder program must agree that any
new subscriber account that uses the program must be monitored at one of our
central monitoring stations for a negotiated period, usually three to five
years.

DEALER PARTNER PROGRAM

Under the Dealer Partner Program, dealers enter into contractual
relationships with us whereby they agree to transfer or retain some or all of
their subscriber accounts at one of our central stations. The dealer must agree
that during the term of the contractual relationship with us it will not
transfer the subscriber accounts monitored by us to a competitor's central
monitoring station. In return, we issue the dealer a negotiated amount of common
stock. This stock is issued solely for entering into the contractual
relationship with us and without any cash payment by the dealer.

The stock may be issued alone, or together with other inducements that we
may offer from time to time. We believe that this program is attractive to many
alarm dealers, especially in light of the fact that we will also be providing
them with high quality monitoring services at competitive rates.

Generally, 25% of the stock issued to a dealer under the Dealer Partner
Program will be freely tradable upon issuance. The remaining 75% will have
restrictions on transfer that will be removed in three equal annual increments.
If the dealer defaults on its obligations under the Dealer Partner Program, the
dealer will forfeit all of the stock as to which the restrictions have not yet
been removed, but will retain the balance of the stock.

A dealer will be deemed to be in default on its obligations under the
Dealer Partner Program if the dealer (or any party he sells his subscriber
accounts to) transfers the covered subscriber accounts to a competitor's central
station or fails to comply with our rights of first refusal, unless waived by
us, during the term of the contractual relationship. The right of first refusal
is the right we retain to meet or beat the terms of any offer by another company
to purchase, or make loans secured by, the dealer's subscriber accounts. Since
we no longer purchase subscriber accounts or make loans to dealers, we refer
purchase and loan opportunities to Security Alarm Financing Enterprises, Inc. or
other lenders.

The Dealer Partner Program is a central component of our business plan.

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

<PAGE> 14

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 customer base as a marketing tool. The Audio
Insight cassette and the consumer newsletter program are only available to
members of our dealer network.

Assist Dealers in Exploiting Future Opportunities

We anticipate that new business opportunities for alarm dealers will
continue to develop as a result of "bundling". Bundling involves providing a
range of complementary or similar services, such as local and long distance
telephone services, cable television programming and alarm monitoring all billed
monthly on a single invoice. We anticipate that at least some bundlers will
include alarm monitoring in the services they provide and may wish to
"outsource" much of the installation, service and monitoring functions. We
expect the technologies by which such services as telecommunications,
entertainment and security are delivered to converge with the Internet. Because
of the size and geographic diversity of our dealer network, we intend to present
our company to the bundlers and service providers as an easy and cost-effective
way of approaching independent installers and their customers. We believe that
the collective strength of our independent dealer network enables us to more
effectively exploit these and other emerging market opportunities.

Build 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 based in
each of our central stations. 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

<PAGE> 15

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 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 outsiders who may wish to use the services of, or
sell products to, or through, our network of alarm dealers and their customers.

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. As of March 23, 2000, SAFE has
closed on transactions representing a total of $41,518 in RMR.

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.

FINANCIAL RESTRUCTURING

New 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. 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 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 is in the principal amount of
$7,000,000, which covered our existing indebtedness to FINOVA (approximately
$6,600,000) as well as transaction costs for the refinancing (approximately
$390,000) and working capital. The acquisition line of credit of up to
$38,000,000 is solely for acquisitions of central monitoring station businesses.
We may draw on this

<PAGE> 16

line of credit through March 31, 2001. On March 10, 2000, we entered into a
second amendment to loan instruments which created a $1,000,000 capital
expenditure line and a line of credit up to $2,000,000 to cover contingent
obligations related to the SAFE attrition guarantee and referral obligation.
This combined $3,000,000 was taken out of, and thereby reduced, the acquisition
portion of the $45,000,000 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% or the LIBOR rate plus 3.5%, at SAI's
discretion. 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.

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 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 sixty percent
(60%). This super-majority provision will be in effect for as long as TJS
Partners, L.P. owns at least thirty percent (30%) of our common stock on an
as-converted basis. Additionally, for so long as TJS Partners, L.P. owns at
least fifteen percent (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.

RECENT 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

<PAGE> 17

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 the balance was 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. 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

o 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.

<PAGE> 18

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 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.

o 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.

o 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.

o 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.

o 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

<PAGE> 19

o 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.

o 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.

o 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.

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 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.

<PAGE> 20

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, several 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 customers.

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:

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

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

o imposing fines on alarm subscribers for false alarms,

o 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

o 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.

LEGAL PROCEEDINGS

See Item 3- Legal Proceedings.

<PAGE> 21

EMPLOYEES

At March 17, 2000, we employed 412 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.

ITEM 2. PROPERTIES

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

o 2116 South Wolf Road, Des Plaines, Illinois;

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

o 1514 East 191 Street, Euclid, Ohio;

o 9750 Brockbank, Dallas, Texas;

o 12610 Richmond Avenue, Houston, Texas;

o 3320 North Woodlawn Avenue, Metairie, LA;

o 4507 North Channel Avenue, Portland, Oregon;

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

o 2178 Washington Boulevard, Ogden, Utah; and

o 13937 Magnolia Ave., Chino, California.

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

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

o The Des Plaines lease expires December 31, 2000;

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

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

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

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

<PAGE> 22

o The Metairie lease is a month-to-month lease;

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

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

o The Ogden lease expires May 8, 2003, with no option to renew; and

o The Chino lease expires November 30, 2003, with no option to renew.

ITEM 3. LEGAL PROCEEDINGS

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.

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

No matters were submitted for a vote to our security holders during the
fourth quarter of fiscal 1999.

<PAGE> 23

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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>
1998
First Quarter (through March 3, 1998) $ 5.625 $ 4.50
</TABLE>

<TABLE>
<CAPTION>
LAST REPORTED SALES
-----------------------
HIGH LOW
--------- ---------
<S> <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 (through March 24, 2000) $ 4.00 $ 2.00
</TABLE>

On March 24, 2000, the last reported sale price of our common stock was
$4.00 per share. At March 24, we had approximately 237 stockholders of record,
not including beneficial owners whose stock is held in street name.

Dividend Policy

We have not paid dividends on our common stock in the past. We currently
anticipate that we will retain all of our earnings for development of our
business, and do not anticipate paying any cash dividends on our common stock in
the foreseeable future. Future cash dividends, if any, on our common stock will
be at the discretion of the Board of Directors and will depend upon, among other

<PAGE> 24

things, our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions, loan covenants and such
other factors as the Board of Directors may deem relevant. Payment of dividends
is subject to satisfaction of covenants contained in our loan agreement with
FINOVA and Citizens Bank of Massachusetts.

RECENT SALES OF UNREGISTERED SECURITIES

Since January 1, 1997, we have issued the following securities that were
not registered under the Securities Act of 1933, as amended (the "Securities
Act"):

Issuances for Services

On November 25, 1997, James W. Osborne was issued options to purchase
50,000 shares of common stock at a price of $6.00 per share. These options
expire November 25, 2003, and were issued in consideration of his employment
agreement with us. This option vests at a rate of 20% (10,000 shares) per year,
and terminates upon any material breach of his employment agreement. Mr. Osborne
left our employment before the expiration of the term of his employment
agreement with us. As a result, options to purchase only 15,000 shares vested,
and the options to purchase the other 35,000 shares were cancelled.

On January 6, 1998, when he joined the Board of Directors, Mr. Jones was
awarded options to purchase 10,000 shares of our common stock, at an exercise
price of $6.00 per share. These options were to expire on December 31, 2002. On
July 8, 1999, the Board extended the expiration date of Mr. Jones' options to
July 8, 2005.

On January 6, 1998, ProFinance Associates, Inc. was issued options to
purchase 25,000 shares of common stock at a price of $6.00 per share. These
options were to expire on December 31, 2002, and were issued in partial
consideration of brokerage services rendered to us. Michael B. Jones, currently
one of our directors, is a principal of ProFinance Associates, Inc. On July 8,
1999, the Board extended the expiration date of these options to July 8, 2005.
These options were subsequently transferred into a family trust.

On January 15, 1998, Timothy Newman was awarded 800 shares of common stock
as a bonus for his performance as an employee.

On June 2, 1998, Gregory A. Hunigan was awarded 1,000 shares of common
stock as a bonus for his performance as an employee.

On November 4, 1998, we issued 623 shares of common stock to Kismet Group,
Ltd. in payment for services.

On December 31, 1998, we issued 1,088 shares of common stock to Kismet
Group, Ltd. in payment for services.

On March 31, 1999, we issued 35,160 shares of common stock to a former
employee as a distribution from our Supplemental Employees' Retirement Plan upon
his termination as an employee. These shares were registered on Form S-8 on May
6, 1999.

On March 31, 1999, we issued 1,088 shares of common stock to Kismet Group,
Ltd. in payment for services.

<PAGE> 25

On March 31, 1999, we issued 12,931 shares of common stock to employees, as
stock bonuses for their performance. These shares were later registered on Form
S-8 on May 6, 1999.

On June 30, 1999, we issued 1,343 shares of common stock to Kismet Group,
Ltd. in payment for services.

On September 30, 1999, we issued 1,653 shares of common stock to Kismet
Group, Ltd. in payment for services.

On December 30, 1999, we issued 1,846 shares of common stock to Kismet
Group, Ltd. in payment for services.

On January 19, 2000 we extended the expiration date on options to purchase
50,000 shares of common stock (25,000 shares at $2.00 per share and 25,000
shares at $3.00 per share) held by Buttonwood Advisory Group, Inc., to June 15,
2000.

On March 13, 2000, we issued option to purchase 123,000 shares of common
stock to certain key employees pursuant to our Stock Option Plan. The underlying
shares of common stock are registered on Form S-8; the options to purchase the
shares are not registered.

No underwriters were engaged in connection with the foregoing sales of
securities. These sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act. Sales were made to
a very limited number of purchasers. We received no cash consideration.

TJS Partners, L.P.'s Investments

During 1997, TJS, our principal stockholder, exercised options to purchase
14,106.55 shares of Convertible Preferred Stock, each of which was convertible
into 100 shares of our common stock, for an aggregate purchase price of
$821,290, and a warrant to purchase 15,000 shares of Convertible Preferred Stock
for an aggregate purchase price of $3,750,000. Each option and warrant exercise
is detailed below under "Exercise of Options and Warrants."

During 1998, TJS exercised options to purchase 2,075 shares of Convertible
Preferred Stock for an aggregate purchase price of $245,000. Each option
exercise is detailed below under "Exercise of Options and Warrants." TJS also
purchased 155,835 shares of Redeemable Preferred Stock, which accrued dividends
at the rate of 12% a year, on June 1, 1998, for a purchase price of $1,558,350.

During 1999, TJS exercised options to purchase 250 shares of Convertible
Preferred Stock for an aggregate purchase price of $25,000.

On September 30, 1999, we entered into the Second Amendment to Security
Associates International, Inc. Common Stock Subscription and Purchase Agreement
with TJS. Pursuant to this agreement: (i) $10,000,000 of subordinated debt and
accrued interest owed by us to TJS, (ii) 66,910 shares of Convertible Preferred
Stock; and, (iii) 500,000 shares of 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 our
common stock. The Series A

<PAGE> 26

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 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 sixty (60)
percent. This super-majority provision will be in effect for as long as TJS owns
30% of our common stock on an as-converted basis. Additionally, for so long as
TJS owns at least fifteen percent (15%) of our common stock on an as-converted
basis, our Board of Directors will consist of five directors.

During 1999, TJS exercised options to purchase 650 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $71,250.

Exercise of Options and Warrants

On March 18, 1997, Robert Brown exercised options to purchase 25,000 shares
of common stock for a total consideration of $11,050.

On March 18, 1997, Bobbie Conrad exercised options to purchase 20,000
shares of common stock for a total consideration of $8,840.

On March 18, 1997, Anita M. Delmar exercised options to purchase 20,000
shares of common stock for a total consideration of $8,840.

On March 18, 1997, Robert H. Dilworth exercised options to purchase 50,000
shares of common stock for a total consideration of $22,100.

On March 18, 1997, Dianne G. Freeman exercised options to purchase 25,000
shares of common stock for a total consideration of $11,050.

On March 31, 1997, Phyllis Greinwald exercised options to purchase 77,000
shares of common stock for a total consideration of $34,034.

On March 31, 1997, Inversiones Alanje, C.A. exercised options to purchase
62,500 shares of common stock for a total consideration of $27,625.

On March 31, 1997, Inversiones Aparicio, C.A. exercised options to purchase
120,000 shares of common stock for a total consideration of $53,040.

On March 31, 1997, Inversiones Erlanger, C.A. exercised options to purchase
100,000 shares of common stock for a total consideration of $44,200.

<PAGE> 27

On April 22, 1997, TJS exercised options to purchase 5,215.88 shares of
Convertible Preferred Stock for a total consideration of $233,369.

On August 21, 1997, Cheryl L. Grolle exercised options to purchase 250
shares of common stock for a total consideration of $110.

On August 25, 1997, Lorraine Small exercised options to purchase 250 shares
of common stock for a total consideration of $110.

On October 22, 1997, the Sidney Dechter I.R.A. exercised options to
purchase 25,000 shares of common stock for a total consideration of $50,000.

On October 27, 1997, Fred Figge exercised options to purchase 86,000 shares
of common stock for a total consideration of $45,580.

On October 27, 1997, Brady E. Turner exercised options to purchase 12,500
shares of common stock for a total consideration of $25,000.

On October 30, 1997, Infinity Partnership II, by its General Partner James
Greco, exercised options to purchase 10,000 shares of common stock for a total
consideration of $20,000.

On October 30, 1997, Ronald I. Davis exercised options to purchase 278,308
shares of common stock for a total consideration of $158,635.

On October 30, 1997, James S. Brannen exercised options to purchase 278,308
shares of common stock for a total consideration of $158,635.

On October 30, 1997, Stephen Rubin exercised options to purchase 185,539
shares of common stock for a total consideration of $105,757.

On November 5, 1997, TJS exercised a warrant to purchase 15,000 shares of
Convertible Preferred Stock (which is convertible to common stock, at a ratio of
1 to 100), for a total consideration of $3,750,000.

On November 6, 1997, Irwin Jacobson exercised options to purchase 12,500
shares of common stock for a total consideration of $7,125.

On November 6, 1997, Mark Scharmann exercised options to purchase 12,500
shares of common stock for a total consideration of $7,125.

On November 12, 1997, TJS exercised options to purchase 8,761.55 shares of
Convertible Preferred Stock for a total consideration of $563,671.

On December 6, 1997, TJS exercised options to purchase 250 shares of
Convertible Preferred Stock for a total consideration of $14,250.

On December 7, 1997, Mark Scharmann exercised options to purchase 10,000
shares of common stock for a total consideration of $10,000.

<PAGE> 28

On December 23, 1997, TJS exercised options to purchase 100 shares of
Convertible Preferred Stock for a total consideration of $10,000.

On May 5, 1998, Mark Scharmann exercised options to purchase 10,000 shares
of common stock for a total consideration of $10,000.

On June 1, 1998, Fred Figge exercised options to purchase 12,500 shares of
common stock for a total consideration of $25,000.

On June 5, 1998. TJS exercised options to purchase 225 shares of
Convertible Preferred Stock for a total consideration of $35,000.

On August 12, 1998, Stephen Rubin exercised options to purchase 40,000
shares of common stock for a total consideration of $40,000.

On August 14, 1998, J, S & R Ltd., L.P., an Illinois limited partnership,
exercised options to purchase 120,000 shares of common stock for a total
consideration of $120,000. The sole general partner of J, S & R Ltd., L.P. is
SAI Partners, Inc., an Illinois corporation, of which our Chairman, Ronald I.
Davis, is the sole officer, director, and shareholder. James Brannen and Stephen
Rubin are the limited partners of J, S & R Ltd., L.P. SAI Partners, Inc.
transferred the options to J, S & R Ltd., L.P. on June 1, 1998, as a capital
contribution pursuant to an Agreement of Limited Partnership.

On August 18, 1998, TJS Partners, L.P. exercised options to purchase 1,600
shares of Convertible Preferred Stock for a total consideration of $160,000.

On November 18, 1998, Bernard R. Sered exercised options of Metro Suburban
Pediatrics, S.C. to purchase 12,500 shares of common stock for a total
consideration of $25,000. The stock was issued to Bernard R. Sered as successor
in interest to Metro Suburban Pediatrics, S.C.

On November 18, 1998, Samuel S. Sered exercised options to purchase 12,500
shares of common stock for a total consideration of $25,000.

On November 23, 1998, TJS Partners, L.P. exercised options to purchase 250
shares of Convertible Preferred Stock for a total consideration of $50,000.

On June 21, 1999, Tom Hagedal exercised options to purchase 10,000 shares
of common stock for an aggregate exercise price of $10,000.

On June 21, 1999, Harold Burgwald exercised options to purchase 10,000
shares of common stock for an aggregate exercise price of $10,000.

On June 21, 1999, Beverly Davis exercised options to purchase 5,000 shares
of common stock for an aggregate exercise price of $5,000.

On October 10, 1999, Raymond Hoven exercised options to purchase 40,000
shares of common stock for an aggregate exercise price of $40,000.

On October 10, 1999, Buttonwood Advisory Group, Inc. exercised options to
purchase 25,000 shares of common stock for an aggregate exercise price of
$31,250.

<PAGE> 29

No underwriters or placement agents were engaged in connection with the
foregoing sales of securities, except as disclosed under the section entitled
"TJS Partners' Investments." Such sales were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act. Sales were
made to a very limited number of purchasers.

Private Placement

On December 31, 1997, we completed the sale of 1,000,000 shares of our
common stock. The shares were privately placed with a group of accredited
investors. No underwriter or placement agent was used. We received $5,000,000 in
consideration for the shares, of which we realized approximately $4,980,000
after estimated offering expenses of $20,000. A registration statement to
register the shares for resale was declared effective on April 22, 1998.

USE OF PROCEEDS OF SECURITIES SOLD PURSUANT TO OUR REGISTRATION STATEMENT

On October 20, 1997, our first Registration Statement on Form S-1
(Registration No. 333-31775 under the Securities Act was declared effective. A
subsequent Registration Statement on Form S-1 (Registration No. 33-49897)
pursuant to Rule 429 of the Securities Act was declared effective on April 22,
1998. The Registration Statements cover 2,000,000 shares of our common stock and
warrants to purchase up to 2,000,000 shares of such common stock, to be issued
by us: (i) in connection with offerings to alarm dealers under Rule
415(a)(1)(ix) of Regulation C promulgated under the Securities Act; (ii) in
connection with the acquisition of other business, real or personal properties,
or securities in business combination transactions in accordance with Rule
415(a)(1)(viii); and (iii) otherwise under Rule 415. The Registration Statements
also cover 1,778,088 shares of common stock that may be offered for sale by
certain selling stockholders under Rule 415(a)(1)(i) and 415(a)(1)(iii). This
prospectus also covers 3,918,600 shares of common stock that may be offered for
sale by certain selling stockholders under Rule 415(a)(1)(i) and 415(a)(1)(iii).
The offering by us commenced on October 20, 1997 and is continuing. We will not
receive any proceeds from the securities issued by us pursuant to the Dealer
Partner Program. However, the exercise of the warrants will require the
exercising warrantholder to pay us $6.00 per share of common stock purchased
upon exercise which will be used for general corporate purposes.

No underwriter has been engaged in connection with the offering. The
aggregate offering price of the common stock and warrants registered on our
behalf was $12,000,000 and the aggregate offering price of the common stock
registered on behalf of the selling stockholders was $24,381,348. No separate
offering price was assigned to the warrants.

1999 sales of registered securities were as follows:

On March 5, 1999, we issued an aggregate of 22,048 shares of common stock
to alarm dealers in connection with our Dealer Partner Program.

On March 12, 1999, we issued 4,052 shares of common stock to an alarm
dealer as partial payment for substantially all of its alarm monitoring assets.

On March 31, 1999, we issued an aggregate of 42,720 shares of common stock
to alarm dealers in connection with our Dealer Partner Program.

On June 25, 1999, we issued 1,343 shares of common stock to an alarm dealer
as partial payment for substantially all of its alarm monitoring assets.

<PAGE> 30

On June 25, 1999, we issued 4,880 shares of common stock to an alarm dealer
as partial payment for substantially all of its alarm monitoring assets.

On July 21, 1999, we issued an aggregate of 22,900 shares of common stock
to alarm dealers in connection with our Dealer Partner Program.

On August 18, 1999, we issued 29,741 shares of common stock to an alarm
monitoring company as partial payment for substantially all of its alarm
monitoring assets.

On October 21, 1999, we issued 7,410 shares of common stock to an alarm
dealer in connection with our Dealer Partner Program.

On October 27, 1999, we issued 100,000 shares of common stock to an alarm
monitoring company as partial payment for substantially all of its alarm
monitoring assets.

On December 30, 1999, we issued an aggregate of 58,796 shares of common
stock to alarm dealers in connection with our Dealer Partner Program.

If any shares were sold by the Selling stockholders they were sold in
independent transactions arranged by those Stockholders individually, and we are
unable to determine the number of shares sold or the amounts realized in those
sales.

We estimate that from October 20, 1997 through March 27, 2000, we incurred
a total of $290,425 in expenses in connection with the offering. Those expenses
are estimated to be as follows: legal $140,000; accounting $65,500; printing
$74,225 and registration fees $10,700. All of these expenses represent payments
to unrelated third parties and there were no direct or indirect payments to our
directors or officers or their associates, or to any party owning ten percent or
more of any class of our equity securities or any of our members. To date we
have issued 427,698 shares of common stock and warrants to purchase 121,104
shares of common stock in connection with the offering.

SELECTED FINANCIAL DATA

The following selected financial data for the fiscal years ended 1997
through 1999 is derived from our consolidated financial statements which have
been audited by Arthur Andersen LLP, independent public accountants. The
following selected financial data for the fiscal years ended 1995 and 1996 are
derived from audited financial statements. The selected financial data set forth
below should be read in conjunction with our consolidated financial statements
and related notes and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

<PAGE> 31

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
Years Ended December 31,
Pro Forma
1995 1996 1997 1998 1998(1)
----------- ----------- ----------- ----------- -----------

<S> <C> <C> <C> <C> <C>
Statement of Operations Data:

Revenues ........................ $ 2,733 $ 3,782 $ 10,814 $ 20,203 $ 17,146
Operating (loss) ................ $ (389) $ (591) $ (2,662) $ (3,406) $ (2,130)
Net (loss) available to
common stockholders ........... $ (947) $ (1,718) $ (4,938) $ (6,798) $ (3,904)
Net loss per share .............. $ (.26) $ (.47) $ (1.16) $ (1.06) $ (.61)
Shares used in computing net
loss per share ................ 3,665,642 3,669,343 4,266,151 6,394,048 6,429,048

<CAPTION>
Years Ended December 31,
Pro Forma
1999 1999(2)
----------- -----------

<S> <C> <C>
Statement of Operations Data:

Revenues ........................ $ 22,689 $ 18,969
Operating (loss) ................ $ (2,931) $ (2,592)
Net (loss) available to
common stockholders ........... $ (4,047) $ (4,631)
Net loss per share .............. $ (.59) $ (.66)
Shares used in computing net
loss per share ................ 6,897,200 6,980,533
</TABLE>

- ---------------------
(1) The pro forma data for the year ended December 31, 1998, gives effect to
all acquisitions made during fiscal year 1998 and the sale of our owned
subscriber accounts as if they had occurred January 1, 1998.

(2) The pro forma data for the year ended December 31, 1999, gives effect to
the sale of our owned subscriber accounts as if it had occurred on January
1, 1999.

<TABLE>
<CAPTION>
Years Ended December 31,

1995 1996 1997 1998 1999
-------- -------- -------- -------- --------

<S> <C> <C> <C> <C> <C>
Balance Sheet Data:

Cash and cash equivalents ..... $ 54 $ 632 $ 5,522 $ 1,481 $ 631
Working capital (deficit) ..... $ (2,699) $ (4,518) $ 1,625 $ (4,450) $ (3,849)
Total assets .................. $ 6,030 $ 16,533 $ 36,009 $ 47,526 $ 33,341
Total debt .................... $ 6,862 $ 12,790 $ 22,919 $ 35,981 $ 14,287
Total stockholders' equity
(deficit) ................... $ (2,043) $ 1,269 $ 7,231 $ 3,869 $ 14,166
</TABLE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain statements in this Annual Report 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 "Business", as well in this
Annual Report generally. In addition, when used in this Annual Report the words
"anticipates," "intends," "seeks," "believes," "plan," "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 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.

<PAGE> 32

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
Years Ending December 31,

(In thousands, except per share data)

1997 1998 1999
----------- ----------- -----------

<S> <C> <C> <C>
Net Revenue $ 10,814 $ 20,203 $ 22,689

Operating Unit Expense 7,018 12,610 14,900
----------- ----------- -----------

Operating Unit Margin 3,796 7,593 7,789

Operating Expenses:

Amortization & depreciation 3,704 6,288 5,714

General & administrative 1,595 2,488 2,546

Selling, marketing & business development 297 1,614 2,460

Deferred compensation expense 862 609 --
----------- ----------- -----------

Loss From Operations (2,662) (3,406) (2,931)

Gain On Sale Of Owned Subscriber Accounts -- -- 1,899

Interest Expense (1,863) (2,870) (2,565)
----------- ----------- -----------

Net Loss (4,525) (6,276) (3,597)

Dividends Accrued On Preferred Stock 413 522 450
----------- ----------- -----------

Net Loss To Common Stockholders $ (4,938) $ (6,798) $ (4,047)

Net Loss Per Share $ (1.16) $ (1.06) $ (.59)

Total Weighted Average Number Of Common Shares
Outstanding 4,266,151 6,394,048 6,897,200
</TABLE>

<PAGE> 33

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

<TABLE>
<CAPTION>
Years Ending December 31,

1997 1998 1999
---- ---- ----

<S> <C> <C> <C>
Net Revenue 100% 100% 100%

Operating Unit Expense 65% 63% 66%

Operating Unit Margin 35% 37% 34%

Operating Expenses:

Amortization & depreciation 34% 31% 25%
General & administrative 14% 12% 11%
Selling, marketing & business development 3% 8% 11%
Deferred compensation expense 8% 3% --

Loss From Operations (24%) (17%) (13%)

Gain On Sale Of Owned Subscriber Accounts -- -- 8%

Interest Expense (17%) (14%) (11%)

Net Loss (41%) (31%) (16%)
</TABLE>

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 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 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 accounts, $477,000; monitored accounts added
to our existing central stations, $807,000. The decrease in revenue related to
our owned account portfolio is attributable to the sale of the owned 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 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 additional personnel
devoted to quality assurance and training. The margin attributable

<PAGE> 34

to the central station operations decreased from 29.8% in 1998 to 29.4% in 1999.
Expenses related to our owned account portfolio decreased from $3,723,986 in
1998 to $1,746,967 in 1999 due to the sale of our owned account portfolio on
June 30,1999. The margin attributable to our owned account portfolio was 46.4%
in 1998 and 53.2% in 1999. The increase is due to the greater number of owned
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 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 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 accounts, 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 account portfolio to SAFE, which occurred 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 accounts.
Additionally, the note payable to SAFE of $1,800,000 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 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 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.

<PAGE> 35

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, 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 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 is
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, of approximately $1,902,000, is 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 include direct expenses related to the
central station operations and the customer service function related to the
owned 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 increase in margin is related to an

<PAGE> 36

increase in the number of accounts monitored and the consolidation of the
Michigan central station to Ohio. Expenses related to the owned account
portfolio increased from $2,801,302 in 1997 to $3,723,986 in 1998. The margin
attributable to the owned 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 an
increase in the number owned 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 or 443.48% in 1998. 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

<PAGE> 37

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.

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 can not 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.

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 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 SAI 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

<PAGE> 38

purchased contracts with $34,263 of recurring monthly revenue. Additionally, as
of December 31, 1999, dealers we have referred have signed letters of intent
with SAFE for the sale of contracts with $53,024 of recurring monthly revenue
and there are dealers with contracts with recurring monthly revenue totaling
over $71,858 that have not yet responded to the letters of intent sent to them.
There can be no assurance that the 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 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 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 $38,000,000
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, 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 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.

<PAGE> 39

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 account portfolio and a concerted effort
to convert our customers 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 are 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 borrowings 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 to us
$125,000 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.

<PAGE> 40

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 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 .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 .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) the ratio of total debt to operating cash
flow (as defined) may not exceed 3.50; (xviii) the total debt may not 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. We are in compliance with the covenants stated above.

YEAR 2000 ISSUE

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

QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 risk or for any other purpose.

<PAGE> 41

We incur debt from three sources: dealers from whom we acquire subscriber
accounts, senior debt from FINOVA and a note payable to SAFE related to the sale
of our owned account portfolio. Debt owed to dealers is in the form of a
"holdback note" which guarantees 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 1.5% of our total debt. As of March
22, 2000 we had approximately $12.8 million in senior debt due to FINOVA and
Citizens Bank Of Massachusetts at an interest rate of prime plus .75% and a note
due June 30, 2000 at an 8% annual rate related to the owned account portfolio.
The prime rate applicable to this debt was 8.50% at December 31, 1999. 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>
(dollars in millions) Maturity Date
2000 2001 2002 2003 2004 Total Fair Value
---- ---- ---- ---- ---- ----- ----------

<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt $ 1.800 $ 1.800 $ 1.800
Average Interest Rate 8.0% 8.0%

Variable Rate Debt $ .677 $ 1.447 1.939 8.251 $12.314 $12.314
Average Interest Rate 9.50% 9.50% 9.50% 9.50% 9.50%
</TABLE>

42
<PAGE> 42

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2

CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1998 and
1999 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999 F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8

F-1
<PAGE> 43

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-K 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

F-2

<PAGE> 44

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
ASSETS 1998 1999
- -------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,480,869 $ 631,521
Accounts receivable, net 3,633,352 1,828,895
Other current assets 286,033 550,009
----------- ----------
Total current assets 5,400,254 3,010,425
----------- ----------
FURNITURE AND EQUIPMENT, net 2,974,346 4,045,524
----------- ----------
OTHER ASSETS:
Contract rights to monitor security systems, net 15,252,814 -
Goodwill, net 23,123,820 25,911,332
Other assets, net 774,516 373,369
----------- ----------
Total other assets 39,151,150 26,284,701
----------- ----------
Total assets $47,525,750 33,340,650
=========== ==========
</TABLE>

F-3
<PAGE> 45

<TABLE>
<CAPTION>
DECEMBER 31
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999
- -------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 514,877 $ 463,310

Current maturities of long-term notes payable 2,174,038 1,973,352
Accrued expenses 3,452,199 3,923,722
Unearned revenues 3,709,328 499,407
----------- ------------
Total current liabilities 9,850,442 6,859,791

NOTES PAYABLE, net of current maturities 25,306,462 12,314,460

NOTES PAYABLE, related party 8,500,000 -
----------- ------------
Total liabilities 43,656,904 19,174,251
----------- ------------
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
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
Warrants, net 60,748 111,689
Additional paid-in capital 16,360,092 34,955,971
Accumulated deficit (18,225,361) (22,271,996)
----------- ------------
Total stockholders' equity 3,868,846 14,166,399
----------- ------------
Total liabilities and stockholders' equity $47,525,750 33,340,650
=========== ============
</TABLE>

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

F-4

<PAGE> 46

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------
1997 1998 1999
------------- --------------- --------------
<S> <C> <C> <C>
NET REVENUE $10,814,087 $20,203,850 $22,689,132

OPERATING UNIT EXPENSE 7,018,392 12,610,489 14,899,687
----------- ----------- -----------
OPERATING UNIT MARGIN 3,795,695 7,593,361 7,789,445

OPERATING EXPENSES:
Amortization and depreciation 3,703,543 6,288,489 5,713,890
General and administrative 1,595,181 2,488,058 2,546,935
Selling, marketing and business development 296,977 1,614,007 2,459,845
Deferred compensation expense 862,034 609,103 -
----------- ----------- -----------
Total operating expenses 6,457,735 10,999,657 10,720,670
----------- ----------- -----------
Loss from operations (2,662,040) (3,406,296) (2,931,225)

GAIN ON SALE OF OWNED SUBSCRIBER
ACCOUNTS - - 1,899,155

INTEREST EXPENSE (1,862,606) (2,869,593) (2,564,565)
----------- ----------- -----------
Loss before income taxes (4,524,646) (6,275,889) (3,596,635)

PROVISION FOR INCOME TAXES - - -
----------- ----------- -----------
Net loss (4,524,646) (6,275,889) (3,596,635)
DIVIDENDS ACCRUED ON PREFERRED
STOCK (412,997) (522,084) (450,000)
----------- ----------- -----------
Net loss available to
common stockholders $(4,937,643) $(6,797,973) (4,046,635)
=========== =========== ===========
NET LOSS PER SHARE $ (1.16) $ (1.06) $ (.59)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 4,266,151 6,394,048 6,897,200
=========== =========== ===========
</TABLE>

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

F-5
<PAGE> 47

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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 -- -- -- --
=========== ========== ======= ========= ========= ==========

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

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
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
deferred compensation plan -- -- -- 608,949 -- 609,103
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
======== ========= ======== =========== ============ ============
</TABLE>

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

F-6
<PAGE> 48

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------
1997 1998 1999
-------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,524,646) $ (6,275,889) $ (3,596,635)

Adjustments to reconcile net loss to net cash (used for)
provided by operating activities-
Gain on sale of owned subscriber accounts -- -- (1,899,155)
Issuance of common stock for services -- 16,502 67,226
Amortization and depreciation 3,703,543 6,288,489 5,713,890
Deferred compensation expense 862,034 609,103 --
Warrants and stock issued under dealer stock incentive
plan -- 70,402 255,282
Changes in assets and liabilities-
Accounts receivable, net (1,047,691) (304,071) 2,156,519
Other current assets 46,147 97,990 (209,187)
Other long-term assets (63,598) (22,952) 92,322
Accounts payable (36,503) (235,706) (176,567)
Accrued expenses 1,481,086 174,850 424,136
Unearned revenue 279,937 (55,703) (3,139,285)
------------- ------------ -------------
Net cash provided by (used for) operating
activities 700,309 363,015 (311,454)
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contract rights to monitor security systems, net (8,056,738) (3,897,659) (1,517,537)
Proceeds from sale of owned subscriber accounts -- -- 22,195,906
Purchase of fixed assets (311,612) (1,752,860) (1,629,484)
Cash paid for acquisition, net (5,818,484) (12,431,112) (5,232,197)
------------- ------------ -------------
Net cash provided by (used for) investing
activities (14,186,834) (18,081,631) 13,816,688
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock 9,987,836 2,048,351 192,500
Dividends accrued on preferred stock (412,997) (522,084) (450,000)
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)

Proceeds from notes payable 8,655,464 9,680,173 5,652,376
------------- ------------ -------------
Net cash provided by (used for) financing
activities 18,375,803 13,677,852 (14,354,582)
------------- ------------ -------------
INCREASE (DECREASE) IN CASH 4,889,278 (4,040,764) (849,348)
CASH AND CASH EQUIVALENTS, beginning of year 632,355 5,521,633 1,480,869
------------- ------------ -------------
CASH AND CASH EQUIVALENTS, end of year $ 5,521,633 $ 1,480,869 631,521
============= ============ =============
</TABLE>

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

F-7

<PAGE> 49
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997, 1998 AND 1999

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
and $499,000 as of December 31, 1998 and 1999, respectively.

GOODWILL

Goodwill is recorded as the cost of purchased businesses in excess of the
fair value of the net assets acquired and is amortized on a straight-line
basis over a period of

F-8

<PAGE> 50

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.

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 balance
sheets are net of accumulated amortization of approximately $301,000 and
$20,000 as of December 31, 1998 and 1999, respectively.

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 1999 was $1,028,000.

The following is a summary of furniture and equipment by major class of
assets:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1999
---------- ---------
<S> <C> <C>
Equipment $3,388,570 5,310,710
Automobiles/trucks 20,188 20,188
Leasehold improvements 121,054 282,365
Work in process 113,202 -
---------- ---------
3,643,014 5,613,263

Less- Accumulated depreciation 668,668 1,567,739
---------- ---------
$2,974,346 4,045,524
========== =========
</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.

F-9

<PAGE> 51

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>

ACCRUED EXPENSES

Accrued expenses are composed of the following:
<TABLE>
<CAPTION>

DECEMBER 31
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued interest $1,569,920 188,741
Accrued dividends 935,081 -
Accrued payroll and vacation 377,840 775,558
Accruals related to sale of owned
subscriber accounts - 2,260,289
Accrued telephone 104,900 148,675
Other 464,458 550,459
---------- ----------
$3,452,199 $3,923,722
========== ==========
</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 tax net operating losses begin to expire in 2005. As of
December 31, 1998 and 1999, no tax benefit has been recognized for these
loss carryforwards.

F-10

<PAGE> 52

The components of the Company's deferred tax assets at December 31 are as
follows:

<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Net operating loss carryforwards $6,181,000 6,491,000
Temporary timing differences 606,000 1,324,000
---------- ----------
Total deferred tax assets 6,787,000 7,815,000
Valuation allowance (6,787,000) (7,815,000)
---------- ----------
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.

F-11
<PAGE> 53

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
-------------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <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
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
Accrued expenses incurred in the sale of owned
subscriber accounts - - 3,097,278
Purchase of contract rights reduced by
unearned revenue acquired 580,616 397,544 149,710
Note payable from sale of owned subscriber
accounts - - 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
========== ========== ==========
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the SAI'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.

F-12
<PAGE> 54

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.

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.

F-13

<PAGE> 55

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 (in 000's):

<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
1997 1998 1999
<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.

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

F-14

<PAGE> 56

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 (60) percent. This super-majority provision will be in effect
for as long as TJS Partners, L.P. owns 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.

F-15

<PAGE> 57

Management believes that these arrangements will provide adequate
resources to fund current needs. Both the 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). 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
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Note payable to Finova $26,609,730 $12,314,460
Note payable in connection with sale of owned
subscriber accounts - 1,800,000

Notes payable to Alarm Dealers 786,806 162,998
Other 83,964 10,354
----------- -----------
Total long-term debt 27,480,500 14,287,812

Current maturities (2,174,038) (1,973,352)
----------- -----------

$25,306,462 $12,314,460
=========== ===========

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 677,285
2002 1,446,949
2003 1,939,528
2004 8,250,688
----------
12,314,460
==========
</TABLE>

F-16

<PAGE> 58

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.

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.

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.

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.

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,

F-17

<PAGE> 59

the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below:

<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net loss-
As reported $(4,524,646) $(6,275,889) $(4,046,635)
Pro forma (4,670,146) (6,363,889) (5,887,335)
Primary loss per share-
As reported (1.16) (1.06) (.59)
Pro forma (1.19) (1.07) (.85)
=========== =========== ===========
</TABLE>

Because the method of accounting prescribed in SFAS 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro
forma compensation cost may not be representative of that to be expected
in future years.

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 the changes during the years
then ending:

<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- -------- -------- --------- --------

<S> <C> <C> <C> <C> <C> <C>
Beginning of year 1,840,878 $ .74 480,223 $1.76 418,827 $3.53

Granted 50,000 6.00 181,104 6.00 1,580,000 5.25
Exercised 1,410,655 .55 207,500 1.18 90,000 1.07
Canceled - - 35,000 6.00
--------- ------ -------- -------- --------- --------
End of year 480,223 $ 1.76 418,827 $3.53 1,908,827 $5.18
========= ====== ======== ======== ========= ========

Exercisable as of end of
year 405,223 252,999 268,275
========= ======== =========
</TABLE>

F-18

<PAGE> 60

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
--------- -------- -------- --------
As of December 31-
<S> <C> <C> <C> <C>
2000 125,000 $1.60 125,000 $1.60
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 1,580,000 5.25 - -
--------- ------- ------- --------
1,908,827 $5.18 268,275 $3.79
========= ======= ======= ========
</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
---------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 33,409 $153.65 4,302 $130.46 2,227 $137.79

Granted - - - -
Exercised 29,107 156.62 2,075 118.07 900 106.94
Canceled - - - -
------- -------- ------- -------- ------ --------

End of year/period 4,302 $130.46 2,227 $137.79 1,327 $153.80
======= ======== ======= ======== ====== ========
</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.

F-19

<PAGE> 61

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.

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
============== =========== =========== ==============
</TABLE>

F-20

<PAGE> 62

<S> <C> <C> <C> <C>
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
========= =========== ========== ==========
</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.

F-21
<PAGE> 63

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
NAME AGE POSITION

<S> <C> <C>
Ronald I. Davis 61 Chairman of the Board and Director

James S. Brannen 61 President, Chief Executive Officer and Director

Thomas J. Salvatore 32 Director

Michael B. Jones 48 Director

Douglas Oberlander 50 Director

Ronald J. Carr 48 Senior Vice President

Stephen Rubin 53 Senior Vice President

Howard Schickler 52 General Counsel, Senior Vice President, Secretary

Daniel S. Zittnan 45 Senior Vice President, Treasurer, Chief Financial
Officer

Karen Daniels 44 Vice President

James N. Jennings 32 Vice President, Corporate Counsel and Assistant
Secretary

Glenn D. Seaburg 40 Vice President
</TABLE>

RONALD I. DAVIS is one of our founders and has been our Chairman of the
Board since October 1990. Prior to our incorporation, he had many years of
experience in the security alarm industry. He was the founder, and from 1987 to
1990, the chairman and principal stockholder of SAI Partners, Inc., an alarm
dealer buying group. SAI Partners, Inc. also provided alarm dealers with other
support services such as training and educational programs, consulting, group
insurance programs and certain proprietary alarm products manufactured by
others. From 1982 to 1987, Mr. Davis was president of Security Alliance
Corporation, a franchise company in the alarm industry and a joint venture with
Pittway Corporation. Prior to 1982, Mr. Davis was a full time consultant to many
of the alarm companies that now make up our dealer network. Mr. Davis earned a
B.A. from Roosevelt University.

JAMES S. BRANNEN is one of our founders and has been a director and our
President since October 1990, and our Chief Executive Officer since 1993. He was
a self-employed consultant in the alarm industry from February 1988 to October
1990. From 1962 until 1987, Mr. Brannen was employed by the First National Bank
of Chicago where he served as a senior vice president in the commercial banking
department. In that capacity, he managed, among others, the commercial areas of
the bank responsible for lending to the cable television and paging industries.
In addition, he managed the secured lending activity and was responsible for
organizing and managing the bank's first workout lending activity. Mr. Brannen
earned a A.B. degree from Dartmouth College and a MBA degree from Northwestern
University.

THOMAS J. SALVATORE was elected as one of our directors in December 1996.
Since 1991, Mr. Salvatore has been the Managing General Partner of TJS
Management, L.P. which is the General Partner of TJS Partners, L.P. ("TJS"), our
principal stockholder. TJS has a contractual right to designate two directors to
our Board of Directors and Mr. Salvatore is one of the designees. The other
director has not been designated as of the date of this prospectus. Mr.
Salvatore earned a Bachelors Degree in Business Administration from Fordham
University.

MICHAEL B. JONES was elected as one of our directors in January 1998. He
has been president of ProFinance Associates, Inc. since he co-founded it in
1985. ProFinance has been a Broker-Dealer firm since 1990. Mr. Jones was with
Marine Midland Bank from 1977 until 1985. He was responsible for starting a
communications/electronics lending group in 1991 and, in his last position as
group executive, for leading that group. That group was one of the first
institutional lenders to the alarm industry. Mr. Jones earned a Bachelors Degree
in Liberal Arts from the University of Arizona and a Masters Degree in
International Relations from the Johns Hopkins University School of Advanced
International Studies.

<PAGE> 64

DOUGLAS OBERLANDER was elected as one of our directors in January 1994.
Since 1989, Mr. Oberlander has been president of Lease I, Inc. a commercial
lease and finance company. From 1965 to 1988, Mr. Oberlander was employed by
Oberlander Security, a security alarm dealer. Since 1991, Mr. Oberlander has
served as a director of Oberlander Alarms, a security alarm dealer.

RONALD J. CARR has been one of our Vice Presidents since March 1997, and a
Senior Vice President and Chief Operating Officer for the Central Station
Division since August 12, 1998. Mr. Carr is also the President of
Telecommunications Associates Group, Inc., Texas Security Central, Inc., Alarm
Central Monitoring, Inc., Guardian Protection Services, Ltd., and AMJ Central
Station Corporation, Inc., all wholly owned subsidiaries of Security Associates
International, Inc., and he is a member of the board of directors of the Central
Station Alarm Association. From March 1996 to March 1997, Mr. Carr was director
of Telecommunications and Central Station Operations for Ameritech's
SecurityLink subsidiary. From 1991 to 1996 he was director of Telecommunications
for ADT, Inc. Mr. Carr earned a Bachelors Degree in Business Administration from
Brookdale College.

STEPHEN RUBIN is one of our founders, has been a Senior Vice President
since October 1990. From 1987 to 1990, he was a senior vice president of SAI
Partners, Inc. From 1978 to 1986, Mr. Rubin was an officer of Davis Marketing
Group and Security Alliance Corporation. Mr. Rubin earned a B.S. degree from
Northern Michigan University and MBA degree from Loyola University. Mr. Rubin
has the principal responsibility for the design and implementation of our
marketing program.

HOWARD SCHICKLER has served as General Counsel of our company since January
3, 1997, was appointed Secretary on October 7, 1997, Vice President on April 13,
1998 and Senior Vice President on July 8, 1999. Before joining us, Mr. Schickler
spent eight years with Sachnoff & Weaver, Ltd., a Chicago law firm. He became a
member of that firm in 1994. Before embarking on his legal career, Mr. Schickler
was employed in the investment field as an institutional fixed income sales
representative for The First Boston Corporation, Morgan Stanley & Co., Blunt,
Ellis and Loewi and E. F. Hutton & Co. and as a portfolio manager at MGIC
Investment Corporation. Mr. Schickler earned a B.A. degree from Brooklyn
College, M.A., M.B.A. degrees from The University of Wisconsin at Milwaukee and
a J.D. degree from Northwestern University.

DANIEL S. ZITTNAN was named our Senior Vice President for Finance on August
12, 1998, and has served as our Chief Financial Officer and Treasurer since
October 7, 1997. Mr. Zittnan spent over thirteen years with Arthur Andersen LLP,
most recently as a senior manager. Mr. Zittnan earned a BA in accounting from
DePaul University and is a member of the AICPA and ICPA societies.

KAREN B. DANIELS has served as a Vice President since October 7, 1997.
Prior to becoming a Vice President, Ms. Daniels acted as a consultant for the
Company starting in March 1997, and prior to that for Ameritech AIIS, since
1995. From March 1990 to June 1995, Ms. Daniels was vice president/controller
for Editel-Chicago, a division of Unitel Video, Inc., a video post-production
company. Ms. Daniels earned a Bachelor's Degree in Industrial
Administration-Finance from Iowa State University. Ms. Daniels is also a
Certified Public Accountant.

JAMES N. JENNINGS has served as Corporate Counsel of our company since
January 1998, was appointed Assistant Secretary in February 1998 and Vice
President in February 2000. Prior to joining us, Mr. Jennings spent a combined
three years with Shefsky & Froelich, Ltd. and McCarthy Duffy Neidhart & Snakard,
both Chicago law firms. Prior to entering private practice, Mr. Jennings was an
independent investment banker for three years. Mr. Jennings earned a Bachelors
Degree from the University of Texas at Austin and a J.D. from California Western
School of Law.

<PAGE> 65

GLENN D. SEABURG has served as Director of Information Technology since
September of 1998 and was appointed Vice President in February 2000. Prior to
joining us, Mr. Seaburg was the Director of I.S./Telecommunications for the
Signature Security Group from October 1998 to October 1999. From November 1987
to September 1998, Mr. Seaburg was employed by SecurityLink by Ameritech as its
Manager System Development Project Manager. Prior to Ameritech's purchase of
SecurityLink, Mr. Seaburg was Director of Information Systems for SecurityLink
for three years.

Our executive officers are appointed annually by, and serve at the discretion
of, the board of directors. Each executive officer is a full-time employee. All
directors hold office until the next annual meeting of stockholders or until
their successors are duly elected and qualified. The board of directors
currently consists of five members. Ronald I. Davis and Stephen Rubin are
brothers-in-law. There are no other family relationships between any of our
directors or executive officers.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from our
definitive proxy statement, expected to be filed with the Commission prior to
April 28, 2000.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from our
definitive proxy statement, expected to be filed with the Commission prior to
April 28, 2000.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from our
definitive proxy statement, expected to be filed with the Commission prior to
April 28, 2000.

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Exhibits and Financial Statements and Schedules

(1) Financial Statements. Our financial statements, together with the Report
of Independent Accountants, are set forth in Part II, Item 7 on pages
F-1 through F-18 of this report.

(2) Financial Statement Schedules. The Schedule II - Valuation and
Qualifying Accounts is set forth on page A-1 of this report. All other
schedules are not submitted because they are not applicable or because
the required information is included in the financial statements or
notes to the financial statements.

(3) Exhibits. The exhibits filed as part of this report are listed in the
accompanying Index to Exhibits. We will furnish a copy of any exhibit
listed to requesting stockholders upon the payment of our reasonable
expenses in furnishing those materials.

(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.

<PAGE> 66

We filed a Current Report on Form 8-K on October 15, 1999, dated September
30, 1999, which reported that TJS had restructured its investment in our
company. The restructuring involved the redemption of all of TJS' Preferred
Stock, subordinated debt and accrued dividends and interest in exchange for a
new Series A Convertible Preferred Stock. This Convertible Preferred Stock
limits TJS' voting rights to 45%. Our bylaws were also amended to reflect
certain supermajority provisions.

We filed a Current Report on Form 8-K on November 18, 1999, dated November
5, 1999, which reported the acquisition of Alarm Monitoring Services, Inc. AMS
is a third party alarm monitoring company serving 20,000 alarm subscribers.

<PAGE> 67

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

SECURITY ASSOCIATES INTERNATIONAL, INC.

March 20, 2000 By: /s/ James S. Brannen
-------------------------------------

James S. Brannen,
President and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE

<S> <C> <C>
/s/ James S. Brannen President (Principal Executive Officer) and
- ------------------------------------ Director March 20, 2000
James S. Brannen

/s/ Ronald I. Davis Director March 20, 2000
- ------------------------------------
Ronald I. Davis

/s/ Thomas J. Salvatore Director March 20, 2000
- ------------------------------------
Thomas J. Salvatore

/s/ Douglas Oberlander Director March 20, 2000
- ------------------------------------
Douglas Oberlander

/s/ Michael B. Jones Director March 20, 2000
- ------------------------------------
Michael B. Jones

/s/ Daniel S. Zittnan Senior Vice President, Treasurer and Chief
- ------------------------------------ Financial Officer (Principal March 20, 2000
Daniel S. Zittnan Financial and Accounting Officer)
</TABLE>

<PAGE> 68

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------

<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company(1)

3.1a Certificate of Amendment of Certificate of Incorporation, As
Amended.(8)

3.2 By-Laws of the Company.(1)

3.2b Amended and Restated By-laws of Security Associates
International, Inc. as of 9/27/99.(10)

3.3 Certificate of Designations, Rights, Preferences and Limitations
of 12% Redeemable Preferred Stock, $10.00 par value per share, of
Security Associates International, Inc.(1)

3.4 Certificate of Designations, Rights, Preferences and Limitations
of Convertible Preferred Stock, $10.00 par value per share, of
Security Associates International, Inc.(1)

3.5 Amendment to Certificate of Designations, Rights, Preferences and
Limitations of 12% Redeemable Preferred Stock, $10.00 par value
per share, of Security Associates International, Inc.(6)

3.6 Certificate of Designations, Rights, Preferences and Limitations
of Series A Convertible Preferred Stock, $10.00 par value per
share, of Security Associates International, Inc.(9)

4.1 Specimen Common Stock certificate.(1)

10.1 Employment Agreement between Registrant and James S. Brannen
dated August 29, 1996.(1)

10.2 Employment Agreement between Registrant and Ronald I. Davis dated
August 29, 1996.(1)

10.3 Employment Agreement between Registrant and Stephen Rubin dated
August 30, 1996.(1)

10.4 Adoption Agreement for the Datair Mass-Submitter Prototype
Standardized Cash or Deferred Profit Sharing Plan & Trust.(1)

10.5 Supplemental Employees' Retirement Plan.(1)

10.6 Purchase of Stock of Winnetka Investors, Inc. by Registrant dated
September 5, 1996.(1)

10.7 Purchase of Stock of MCAP Investors, Inc. by Registrant dated
September 5, 1996.(1)

10.8 Common Stock Subscription and Purchase Agreement between
Registrant and TJS Partners, L.P., dated September 5, 1996.(1)

10.9 Amendment to Common Stock Subscription and Purchase Agreement
between Registrant and TJS Partners, L.P., dated December 31,
1996.(1)

10.10 Purchase of Membership Interests of Limited Liability Agreements
between Registrant and Intec Company, Inc. dated September 5,
1996.(1)

10.11 Asset Purchase Agreement between Registrant and AMJ Central
Station Corporation dated December 19, 1996.(1)

10.12 Asset Purchase Agreement between All-Security Monitoring
Services, L.L.C. and Northern Central Station, Inc. dated
February 25, 1997.(1)

10.13 Loan Agreement among Registrant, Security Associates Command
Center II, L.L.C., Monitor Service Group, L.L.C., All-Security
Monitoring Services, L.L.C. and FINOVA Capital Corporation dated
December 31, 1996.(1)

10.14 Amendment to Loan Instruments among Registrant, Security
Associates Command Center II, L.L.C., Monitor Service Group,
L.L.C., All-Security Monitoring Services, L.L.C. and FINOVA
Capital Corporation dated February 28, 1997.(1)

10.15 Lease Agreement between American National Bank and Trust Company
of Chicago as Trustee under Trust No. 59948 and Registrant dated
November 21, 1995.(1)

10.16 Amendment to Lease Agreement between American National Bank and
Trust Company of Chicago as Trustee under Trust No. 59948 and
Registrant dated December 9, 1996.(1)

10.17 Lease between Intec Company, Inc. and Security Associates Command
Center II, L.L.C. dated September 4, 1996.(1)

10.18 Sublease Agreement between William Jackson and Elizabeth Jackson
and Registrant dated December 29, 1996.(1)

10.19 First Amendment to Lease between William Jackson and Elizabeth
Jackson and Registrant dated February 7, 1997.(1)

10.20 Subordinated Loan Agreement between Registrant and TJS Partners,
L.P.(1)
</TABLE>

<PAGE> 69

<TABLE>
<S> <C>
10.21 Standby Option and Warrant Agreement between Registrant and TJS
Partners, Ltd. dated September 5, 1996.(1)

10.22 Amended Standby Option and Warrant Agreement between Registrant
and TJS Partners, Ltd. dated December 31, 1996.(1)

10.23 Warrant dated December 31, 1996 issued to TJS Partners, Ltd.(1)

10.24 Form of Warrant.(1)

10.25 Echo Star Joint Venture Agreement.(2)

10.26 Amended and Restated Loan Agreement among Security Associates
International, Inc., Security Associates Command Center II,
L.L.C., Monitor Service Group, L.L.C., All-Security Monitoring
Services, L.L.C., AMJ Central Station Corporation, Inc.,
Telecommunications Associates Group, Inc. and FINOVA Capital
Corporation dated December 2, 1997.(4)

10.27 Second Amendment to Lease between American National Bank and
Trust Company of Chicago as Trustee under Trust No. 59948 and
Registrant dated December 10, 1997. (4)

10.28 Koll Business Center Lease dated May 16, 1996 between
Telecommunications Associates Group, Inc. and TR Brell Austin
Corp. (4)

10.29 Lease between Indian Hill Properties, Inc. and Telecommunications
Associates Group, Inc. dated November 24, 1997.(4)

10.30 Stock Purchase Agreement between Security Associates
International, Inc. as purchaser and Robert Ambros as seller
dated November 21, 1997.(3)

10.31 $500,000 Promissory Note dated December 8, 1997 from Alarm
Funding Corporation to TJS Partners, L.P.(4)

10.32 Subordinated Loan Agreement dated November 14, 1997 between Alarm
Funding Corporation and TJS Partners, L.P.(4)

10.33 Amended Subordinated Loan Agreement dated January 30, 1998
between Security Associates International, Inc. and TJS Partners,
L.P.(4)

10.34 $5,000,000 Promissory Note dated December 31, 1996 from Security
Associates International, Inc. to TJS Partners, L.P.(4)

10.35 Standard Hardware Purchase and Software License Agreement,
between Monitoring Automation Systems and Security Associates
International, Inc. dated September 21, 1998.(6)

10.36 Form of Association Agreement.(6)

10.37 Security Associates International, Inc. Stock Option Plan.(6)

10.38 Security Associates International, Inc. Employee Stock Purchase
Plan.(6)

10.39 Allonge.(6)

10.40 Third amendment to Loan Instruments between Security Associates
International, Inc., All-Security Monitoring Services, L.L.C.,
AMJ Central Station Corporation, Telecommunications Associates
Group, Inc., Texas Security Central, Inc. and Reliance Protection
Services, Ltd. And FINOVA Capital Corporation.(6)

10.41 Stock Purchase Agreement between Security Associates
International, Inc. and the Willis Tate, Jr. Charitable Remainder
Unitrust for Southern Methodist University, Ray Hooker and Willis
Tate, Jr. dated June 17, 1998.(5)

10.42 Asset Purchase Agreement between Security Associates
International, Inc., as Seller and Security Alarm Financing
Enterprises, Inc, as Purchaser, dated June 30, 1999.(9)

10.43 Second Amendment to Security Associates International, Inc.
Common Stock Subscription and Purchase Agreement Dated as of
September 5, 1996 between TJS Partners, L.P. and Security
Associates International, Inc. dated September 30, 1999.(10)

10.44 Second Amended and Restated Loan Agreement among Security
Associates International, Inc., FINOVA Capital Corporation and
State Street Bank and Trust Company dated September 30, 1999.(10)

10.45 Stock Purchase Agreement among Security Associates International,
Inc. and Herbert Warrick, Ramona Warrick and Russell VanDevanter
dated November 5, 1999.(11)

10.46 Second Amendment to Loan Instruments among Security Associates
International, Inc., FINOVA Capital Corporation and Citizens'
Bank of Massachusetts dated March 10, 2000.(12)

21.1 Subsidiaries of Registrant.(12)

27.1 Financial Data Schedule
</TABLE>

<PAGE> 70

(1) Previously filed with the Registrant's Registration Statement on Form S-1
filed July 22, 1997.

(2) Previously filed September 8, 1997 in pre-effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-1.

(3) Previously filed with the Registrant's Current Report on Form 8-K filed
December 10, 1997 and dated November 25, 1997.

(4) Previously filed with the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1997.

(5) Previously filed with the Registrant's Current Report on Form 8-K filed
July 2, 1998, dated May 8, 1998.

(6) Previously filed with the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1998.

(7) Previously filed with the Registrant's Registration Statement on Form S-1
filed April 9, 1998.

(8) Previously filed with the registrants Definitive Proxy Statement filed May
19, 1998.

(9) Previously filed with the Registrant's Current Report on Form 8-K filed
July 8, 1999, dated June 30, 1999.

(10) Previously filed with the Registrant's Current Report on Form 8-K filed
October 15, 1999, dated September 30, 1999.

(11) Previously filed with the Registrant's Current Report on Form 8-K filed
November 18, 1999, dated November 5, 1999.

(12) Previously filed with the Registrant's Form 10-KSB Annual Report for the
fiscal year ended December 31, 1999.

<PAGE> 71

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
(FOR EACH INCOME STATEMENT PRESENTED)

<TABLE>
<CAPTION>
Additions
-------------------------------------------------
Balance at Charged to Balance at
Beginning of Charged to Other End of
Description Period Expense Accounts Deductions Period
------------ ---------- ---------- ---------- ----------

<S> <C> <C> <C> <C> <C>
Allowances deducted from
related accounts receivable
balance sheet accounts of
Security Associates
International, Inc.
Year ended December 31, 1997 206,000 687,000 100,000 (498,000) 495,000
Year ended December 31, 1998 495,000 248,000 340,000 (346,000) 737,000
Year ended December 31, 1999 737,000 190,000 220,000 (648,000) 499,000
------- ------- ------- -------- -------
</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 631,521
<SECURITIES> 0
<RECEIVABLES> 2,327,895
<ALLOWANCES> (499,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,010,425
<PP&E> 5,613,263
<DEPRECIATION> (1,567,739)
<TOTAL-ASSETS> 33,340,650
<CURRENT-LIABILITIES> 6,859,791
<BONDS> 0
0
1,363,590
<COMMON> 7,145
<OTHER-SE> 12,795,664
<TOTAL-LIABILITY-AND-EQUITY> 33,340,650
<SALES> 0
<TOTAL-REVENUES> 22,689,132
<CGS> 0
<TOTAL-COSTS> 25,620,357
<OTHER-EXPENSES> 1,899,155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,564,565
<INCOME-PRETAX> (3,596,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,596,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,596,635)
<EPS-BASIC> (.59)
<EPS-DILUTED> 0

</TABLE>