<PAGE>
     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 16, 2002


================================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

(MARK ONE)

    X                ANNUAL REPORT UNDER SECTION 13 OR 15(d)
  -----              OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       OR

                   TRANSITION REPORT UNDER 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 150                                       (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 Exchange Act: None

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

                                 Title of Class:

                    Common Stock, par value $0.001 per share

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

      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 past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes   X    No
    -----     -----

      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.   X
                                      -----

      Issuer's revenues for the most recent fiscal year: $20,962,000.

      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 April 12, 2002 was $8,817,000.

      As of April 12, 2002 the registrant had outstanding 9,166,385 shares of
$0.001 par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

      Our definitive proxy statement which is expected to be filed with the
Commission not later than May 15, 2002 for our annual meeting of stockholders,
expected to be held on or about June 19, 2002, is incorporated by reference
into Part III of this Form 10-KSB.

      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," "plans," "estimates," and
"expects" and similar expressions 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. DESCRIPTION OF BUSINESS

                               BUSINESS OVERVIEW

      We provide intrusion, fire and critical condition alarm monitoring
services for both residences and businesses. In this capacity we act as
subcontractor for independent alarm dealers who have contracted with us to
provide alarm monitoring services for their subscribers. Independent alarm
dealers are primarily owner-operated companies with less than 10,000
subscribers. Our ability to attract new monitoring business is enhanced and
supported by a network of approximately 2,500 independent alarm dealers, to whom
we also provide various other support services including but not limited to
educational programs, financing referral services and discounts on equipment and
related services.

      Recently we have entered into relationships with various third parties
interested in offering and referring electronic security services to their
respective customers. New business resulting from these relationships is
expected to generate new incremental revenue for SAI and its dealer network.
These relationships represent a cornerstone of our new growth strategy.

      We were incorporated in 1990 as an Illinois corporation and, through a
merger in 1992, we became a Delaware corporation. In addition to our four
founders, most of our original stockholders were independent alarm dealers. We
conduct our operations directly through central monitoring stations (locations
where actual monitoring of the subscriber's system is conducted) that we own.

      Starting in 1997, we embarked on a program of expansion designed to allow
us to provide services to independent alarm dealers located throughout the
United States. Between 1997 and 2000 we acquired eleven central monitoring
stations.

      Prior to June 30, 1999, in addition to our sub-contract (wholesale)
monitoring services, 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).

      The sale of our subscriber accounts to SAFE represented a shift in the
strategy of our business. As a result of that transaction, we were able to focus
efforts on our core wholesale monitoring business and dealer network to improve
quality and offer additional services. Most of the proceeds of the sale of the
subscriber accounts went to pay down debt.

      Our revenues consist of recurring monthly revenue ("RMR") earned under
written contracts with independent alarm dealers to provide monitoring services
for their subscribers. Total revenues increased from $3,782,000 for the fiscal
year ended December 31, 1996 to


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$20,962,000 for the fiscal year ended December 31, 2001. Our loss per common
share for the fiscal year ended December 31, 2001 was $1.71 per share. As a
result of the sale of our subscriber account portfolio on June 30, 1999 and our
focus on the wholesale monitoring business, our results for the current fiscal
year are not completely comparable to our results for all prior periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

      As of April 12, 2002, we provide wholesale monitoring services for
approximately 330,000 systems which have been installed in residences and
businesses. All of these systems are monitored under contracts with
approximately 2,500 alarm dealers for subscriber accounts owned by them.

      From January 1, 1996 through April 12, 2002, the number of subscriber
accounts we monitored increased from approximately 51,471 to approximately
330,000 We estimate that our central monitoring stations are currently capable
of monitoring at least 750,000 subscriber accounts and will be able to monitor
in excess of 1 million subscriber accounts by June 2002, without any major new
investment.

      In November 2001 our company announced a new strategic direction. This new
direction is targeted at strengthening the infrastructure of the "core"
operations of the business, as well as positioning our company to offer new
growth opportunities for our current and new dealers.

      We have begun a plan to migrate all monitored subscriber accounts, except
those in our Ogden, Utah central station, which currently will remain open, to
two large monitoring centers. The centers are located in Arlington Heights,
Illinois and Pompano Beach, Florida. While these are current center locations,
we will significantly upgrade the facilities to be two of the most
technologically advanced in the security industry. State-of-the-art equipment
will be utilized to offer the most efficient and advanced monitoring services.
As of April 12, 2002, we have completed approximately 95% of the migration and
expect to fully complete this project by May 31, 2002. We believe that in
addition to making our central monitoring stations amongst the most advanced
stations in the industry, that this consolidation will significantly improve
the cash flow from operations of our company.

      In addition, we introduced a new "web" application that gives our dealers
access to mission critical information on their respective customers
(subscribers). The access to this information eliminates the need to have a
local central monitoring center, and significantly enhances the security and
reliability of all monitoring events.

      We have completed all phases of testing and are currently training dealers
on the proper use of this new application. We expect the Web product to not only
give dealers better control of their data, but that it will significantly reduce
the operator activity levels in our central stations, thus resulting in improved
efficiencies.

      Another shift in the company's strategy is one that involves an objective
to develop relationships with large national firms that will result in new
growth opportunities for our


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dealers. We believe that by leveraging the combined strength of 2,500 dealers,
all dealers will have the opportunity to enjoy the benefits that normally only
accrue to larger national competitors.

      To fulfill this mission, we targeted certain national companies and other
related firms for initial discussions leading to potential relationships.

      An initial result of this effort was the execution of an agreement with
Consumer Information Services Inc., ("CIS") in March 2002 whereby John Walsh,
host of the TV program America's Most Wanted, will endorse and promote security
services "exclusively" through the SAI dealer network.

      Additionally, we announced a joint marketing relationship with a firm that
developed a new innovative security device. TattleTale Portable Alarms has
developed a product that incorporates all of the standard components of a basic
alarm system with a cellular transceiver, which is used to transmit and receive
signals to monitoring centers. We believe this combination provides one of the
best lines of electronic security in the industry and is installed by simply
plugging it into any standard electrical outlet.

      We will continue to actively seek new opportunities with large national
firms.

      This new strategy has shown early signs of success and we believe that we
will be better able to retain existing dealers and add new dealers to our
national network, as well as add incremental high-margin revenue.

                        OUR RELATIONSHIP WITH OUR DEALERS

      Our relationship strategy is currently unlike any other in the security
alarm industry. We utilize and support the local image of the independent alarm
dealer, while applying SAI's "strength in numbers" of dealers to attract large
national firms that provide opportunities for new high margin growth for SAI and
its dealers.

      SAI's relationship with its dealers is also significantly influenced by
its management team.

      The senior management team is now a blend of individuals with more than 20
years of experience in developing relationships with many of the current
dealers, and new leadership from large growth oriented businesses.

      Raymond Gross, Chief Executive Officer (CEO) and Paul Lucking, Chief
Operating Officer (COO), joined SAI in August 2001 to guide the company in the
execution of its new strategy.



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      Mr. Gross has extensive experience in successfully engineering major
growth initiatives in the telecommunications and computer services industries,
as well as turnaround and growth expertise in the security alarm industry.

      As COO, Mr. Lucking adds the technological and operational expertise with
over thirty years of executive level experience with Federal Express, CitiGroup,
a division of CitiCorp. and ADT Security Services, Inc.

      Steve Rubin, Senior Vice President was a principal of Davis Marketing
Group, a company that specialized in providing consulting services to alarm
dealers dating back to the mid 1970s. His experience provides the history and
foundation for the current relationships.

      It is this combination of history, reliability, solid growth and
operational expertise that uniquely qualifies this management team to develop
long-lasting and effective dealer relationships resulting in enhanced
shareholder value.

      One of the unique aspects of our positioning in the security alarm
industry is what we do not do: we do not install or repair security systems. As
a result, we are not viewed as a competitor in the alarm dealer community. Most
of our competitors in the monitoring business also sell, install, and repair
security systems, and by doing so create a natural conflict with most local
alarm dealers.

      Additionally, we have redirected the focus of our sales force. In the past
we relied on the "natural increase" in subscriber accounts that occurs as alarm
dealers install additional alarm systems for our growth. Therefore, our sales
force was centrally located and approached alarm dealers from our home office in
Arlington Heights, Illinois. We have redirected our sales effort by organizing a
decentralized sales force in strategic regional locations. The design of our
marketing programs, however, has remained a centralized function and is aligned
to support the field sales effort.

                                INDUSTRY OVERVIEW

      General. The electronic security alarm industry is characterized by a
large number of small individually owned companies involved in security alarm
system sales, installation, repair and monitoring services. According to Barnes
Associates, an investment banking and consulting firm well known in the
industry, the top five companies account for approximately 43% of the market,
with an estimated 10,000 to 12,000 dealers constituting the remainder of the
market. Taken together, however, these 10,000 to 12,000 alarm dealers represent
a nationwide presence with expertise in the sale, installation and servicing of
low voltage electronic systems. It is the needs of this nationwide market of
alarm dealers, and the opportunities they represent, that we seek to target.

      Another characteristic of the security alarm industry is its continuing
growth. Industry statistics published by SDM Magazine, an industry publication,
indicate that revenues for the electronic security alarm segment of the security
industry grew from $9.7 billion in 1990 to $18.1 billion in 2000. The Central
Station Alarm Association reported in the summer 1998


                                       4
<PAGE>
issue of Dispatch magazine 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. Additionally, the events of September 11, 2001 have heightened the level
of awareness for all types of security. Security Sales, an industry publication,
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
offer discounts to home and business owners who install alarm systems.

      Several large companies, including Tyco International, Ltd. (the parent of
ADT Security Services, Inc.), Brinks Incorporated and Protection One, Inc., are
active in the security alarm industry directly or through subsidiaries. We
believe that these companies are attracted by the fragmented nature of the
industry and its growth potential.

      Several companies have introduced mass-marketing techniques, which have
included heavy advertising and low-cost system installations tied to multi-year
monitoring contracts. These long-term contracts typically have one-to-five-year
initial terms and one-year automatic renewals if they are not canceled. The
monthly cash flow generated by the monitoring contracts subsidizes the cost of
installations. Large, well-capitalized companies can afford to initially
subsidize the costs of installing alarm systems, while 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

      By effectively meeting the needs of the independent dealer community we
are able to continue to attract new dealers as well as retain dealers that are
already part of our nationwide network. This ability provides tremendous
potential for the future growth of SAI.

      Among the major issues confronting independent alarm dealers are:

      Retaining Subscriber Accounts. Independent dealers sell and install alarm
systems in homes and businesses and, as part of the same transaction, enter into
contracts to provide monitoring services. The monitoring contracts typically
have 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 the dealer's 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 these recurring monitoring and service fees.



                                       5
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      Financing. For most independent dealers, their subscriber accounts
represent their most substantial asset. Banks and other commercial lenders,
which are a very important source of financing for most small businesses, have
historically been unwilling to lend against subscriber accounts as collateral or
to provide financing for subscriber purchases of alarm systems. Because of their
limited access to financing sources, 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 inability to turn subscriber
accounts into the cash needed to support their businesses and the difficulty
they experience in finding financing sources for purchasers of alarm systems are
critical concerns of independent dealers.

      Training. Dealers must not only be technically sophisticated; they must
also be able to run their businesses economically 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 to
acquire the tools that will allow them to identify and exploit new opportunities
both within the alarm industry and in related fields. They must also learn of
regulatory changes and how to effectively deal with them. There are limited
resources available to help the independent dealer meet these needs.

      Improving Profitability. The advent of mass marketing programs offering
low or no-money down alarm system installations has had the effect of eroding
the end user's perception of what an alarm system should cost. In part due to
these pressures, the margins dealers had once enjoyed on the alarm equipment
they install has gone down. The end result is a reduction in one of the dealer's
traditional key sources of income. This puts great pressure on dealers to find
ways to reduce the cost of the equipment they purchase. Equipment margins in
other low-voltage product areas such as home entertainment systems remain much
higher than those on alarm equipment, encouraging many dealers to enhance their
revenues through participating in additional service areas. Even with the
downward price pressure, the sales cost of the independent dealer remain high.

      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. These are all products and services that can be
offered to the same customers that buy security systems. We believe that new
business opportunities can be developed, but not by independent alarm dealers
acting alone. We are continuously seeking new opportunities for ourselves and
our dealers through alliances with providers of products and services that are
complementary with those that we and our dealers already provide. We have seen
that potential partners will embrace this vision and will use our company and
our dealer network to offer a broad range of related services without incurring
the expense or experiencing the uncertainties of entering unfamiliar product
markets or developing a nationwide network of servicing and installing dealers.



                                       6
<PAGE>
FORGING LONG LASTING CUSTOMER RELATIONSHIPS

      Providing 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.
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. Our central stations are listed with Underwriters
Laboratory (UL). To obtain and maintain a UL listing, a central station must be
located in a building meeting UL's structural requirements, have a backup and
uninterruptible power supply and have secure telephone lines and redundant
computer systems that meet UL criteria. Access to the facility must also be
strictly controlled. In addition to meeting all of the standard UL requirements,
our central stations are capable of supporting a full range of add-on services
such as two-way voice communications, cellular transmission, GPS capabilities
and long-range radio access.

      Another of our objectives is to substantially increase the number of
subscriber accounts to which we provide monitoring services and to increase the
profitability of the services we provide. We are adding monitoring capacity and
finalizing the consolidation of our monitoring operations to realize additional
economies of scale.

      We have also created "SAI University," a comprehensive continuing
education program designed to provide our staff with the skills necessary to
improve customer service and the quality of the services we provide.

      We have conformed and upgraded the computer systems used in all of our
central stations. The system-wide upgrade was designed to:

      -  provide a single platform to implement standard operational disciplines
         across all the monitoring station;

      -  implement standard data structures for better efficiencies in each
         monitoring station;

      -  provide a fully redundant system to reduce the risk caused by a
         potential system failure, adverse weather conditions and to distribute
         traffic in order to maintain a high alarm response service level; and

      -  provide a "web" based platform for common dealer access products,
         giving the dealer automated testing features, a view of accounts
         history, and the ability to alter subscriber information.



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      We believe that these improvements will allow us to conduct our operations
in a more efficient and cost effective manner.

OFFERING FINANCING PROGRAMS TO ALARM DEALERS

      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 managing cash
shortfalls, financing expansion or inventory and subsidizing the costs of system
installations. In addition, many dealers would like to be able to offer
financing to 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 dealers and for subscribers who may wish to finance the
purchase of an alarm system.

      For many dealers, the most significant assets they own are the contracts
for monitoring their subscriber accounts. Unfortunately, such contracts are
generally not included as assets against which banks, or finance companies, will
lend on a secured basis. This situation creates a dilemma for dealers, and an
opportunity for us to strengthen our relationship with our alarm dealers. We
have identified certain financing sources that will recognize the value of these
assets and thereby enable us to assist dealers in obtaining financing.

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

      Offering Dealers Funding Solutions. Among the funding companies serving
the alarm industry today, there is no single company that offers a wide enough
array of funding options to qualify as a one-stop resource for dealers seeking
funding. By forming funding partnerships with many industry funding sources, we
offer the broadest array of account acquisition and loan programs and have
achieved as close to a single source funding solution as exists in the industry.
This arrangement provides our dealers with a single financing source that can
"do their shopping" in an effort to match their needs with an appropriate vendor
and then help them through the often complicated funding process.

      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. In a typical transaction, the alarm dealer will sell subscriber
contracts for a price that is determined by applying a multiple to the current
recurring monthly revenue generated by that subscriber account. This recurring
monthly revenue amount is commonly called RMR in the industry. 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 rather than sell the accounts. As


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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.

      All of our funding partners have agreed that all accounts that are funded
as a result of a referral from SAI will be monitored in one of our monitoring
facilities. This provides for new monitoring revenues and protects our existing
business.

PROVIDING TRAINING TO DEALERS

      Offering  High-Quality Training 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.
We believe our ongoing educational and management development programs are
valuable to our network of alarm dealers and add depth and permanence to our
relationships with independent dealers. Through these efforts we bring together
many of the best trainers and industry experts to deliver programs that
independent alarm dealers could not assemble alone. We combine internal staff
experience with that of experts from within and outside the industry.

      We have created "SAI University" which is a comprehensive suite of
continuing education courses for both our own personnel and alarm dealers.
Course offerings will cover technical training, managerial skills and personal
professional development related to the security alarm industry. Additionally,
we conduct numerous meetings each year at locations around the country where we
address issues and opportunities facing the industry. We also host an annual
three-day educational conference attended by alarm dealers, where presentations
are made by our personnel and other professionals from in and outside the
industry, as well as specialists in such fields as finance and marketing as well
as 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 Ron Davis, Chairman Emeritus of our Board of Directors, is a cassette
of about ninety minutes in length, which contains ideas, interviews and insights
relating to the alarm industry. We also distribute camera-ready customer
newsletters that can be individualized by alarm dealers for mailing to their own
subscriber base as a marketing tool. The Audio Insight cassette and the customer
newsletter program are only available to members of our dealer network.

HELPING DEALERS IMPROVE THEIR PROFITABILITY

      Providing Product and Service Discount Programs. Our extensive list of
exclusive support services, products and alliances for dealers is published in a
brochure entitled "Added-Values". The brochure provides affiliated dealers with
the details and contact information for a broad array of programs, products and
services. Affiliated dealers can take advantage of: national pricing on alarm
equipment from major manufacturers; discounts on a


                                       9
<PAGE>
wide range of promotional products and services, some specific to alarm dealers;
discounts on office and business supplies and services; educational forums and
materials developed by SAI and industry specific vendors. We believe our
"Added-Values" programs comprise the most extensive collection of "free" support
services available from any wholesale monitoring provider.

      Providing Revenue Enhancing Opportunities. Our dealers can also increase
the value of subscriber accounts by selling add-on services, such as:

      -  security, GPS and Internet-related products and services;

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

      -  cellular telephone or long-range radio backup to the standard landline
         telephone links to the central monitoring station; and

      -  new products that combine standard security products with cellular
         services.

We are continually exploring other revenue enhancing opportunities for our
dealers.

NEW BUSINESS OPPORTUNITIES

      Assisting Dealers in Exploiting Future Opportunities. Because of the size
and geographic coverage of our dealer network and their subscribers, we intend
to present our company to service and equipment providers as an easy and
cost-effective way of approaching independent installers and their subscribers.
We believe that the collective strength of our independent dealer network
enables us to more effectively exploit these and other emerging market
opportunities, thereby creating future profit opportunities for both us and our
dealers.

                    RECENT CHANGES IN OUR OPERATING STRUCTURE

SALE OF OUR 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. 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.



                                       10
<PAGE>
CONSOLIDATION OF OUR CENTRAL STATIONS

      In order to improve efficiency, better manage quality and increase
profitability, we have consolidated all of our central monitoring stations,
except our monitoring station located in Ogden, Utah, which currently will
remain open, into two large central stations, one in Arlington Heights, Illinois
and the other in Pompano Beach, Florida. In addition to consolidation, these two
large central stations have undergone technical updates to their monitoring
system and have expanded capability to include services such as location
identification which utilizes Global Positioning Satellite ("GPS") technology.
The following lists the central stations we have acquired in the past.

Larger Central Station Acquisitions

      Acquisition of Telecommunications Associates Group, Inc. (TAG) On November
24, 1997, we purchased all of the outstanding capital stock of
Telecommunications Associates Group, Inc., an Ohio corporation. 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.

      Acquisition of Texas Security Central, Inc. (TSC) On June 17, 1998, we
purchased all of the outstanding capital stock of Texas Security Central, Inc.,
a Texas corporation. 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.

      Acquisition of Alarm Monitoring Services, Inc. (AMS) On November 5, 1999,
we purchased all of the outstanding capital stock of Alarm Monitoring Services,
Inc., a Washington corporation. 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.

      There were no material acquisitions of central stations in fiscal year
2000 or 2001.

Other Acquisitions

      Alert Answering Service. (ALERT) 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 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.

      Guardian Security Systems, Inc. (GUARDIAN) On March 8, 1998, we purchased
all of the outstanding capital stock of Guardian Security Systems, Inc., an Ohio
corporation. Guardian was a third-party alarm monitoring company that served
approximately 3,270


                                       11
<PAGE>
subscriber accounts and fifteen alarm dealers and 1,349 subscriber accounts
owned by Guardian from a central monitoring station located in Columbus, Ohio.

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

      Reliance Protection Services, Ltd. (RELIANCE) On July 17, 1998, we
purchased all of the outstanding capital stock of Reliance Protection Services,
Ltd., an Illinois corporation. 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.

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

      Alarm Central Monitoring, Inc. (ACM) On October 23, 1998, we purchased all
of the outstanding capital stock of Alarm Central Monitoring, Inc., a Texas
corporation. 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.

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

      Monark Central Dispatch, Inc. (MONARK) On December 8, 1999, we purchased
all of the assets of Monark Central Dispatch, Inc., a Louisiana corporation.
Monark was 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.

INTEGRATING OUR OPERATIONS AND REALIZING ECONOMIES OF SCALE

      Historically, our central monitoring stations were separately owned and
operated by their original owners. Our acquisition and consolidation of the
formerly independent monitoring companies has presented us with opportunities to
increase the profitability of


                                       12
<PAGE>
each of these operations. We seek to exploit these opportunities by eliminating
duplicative efforts. In pursuit of this goal we have:

      -  implemented a single centralized accounting system;

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

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

      More efficiently utilizing the available monitoring capacity in our
central stations should allow us to reduce the incremental cost of servicing
additional subscriber accounts.

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 participants in the
industry because we do not install or repair security systems, we are
nonetheless impacted by the competitive challenge these participants present to
independent alarm dealers.

      Our monitoring services compete with those offered by an estimated 250
companies which offer wholesale monitoring services from UL listed facilities.
Most of these companies are small, local operations; however, some are larger
and better financed than we are. In addition, we believe there are approximately
1,800 to 2,300 non-UL listed facilities.

      Our competitive strategy has the following basic components: provide the
alarm dealer community with high quality monitoring, provide access to financial
services at competitive prices and provide dealers with the training, 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 lead to additional


                                       13
<PAGE>
marketing opportunities for our dealers from companies that desire access to our
dealer network and their subscribers.

REGULATORY MATTERS

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

      -  subjecting alarm monitoring companies to fines or penalties for
         transmitting false alarms;

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

      -  imposing fines or penalties on alarm subscribers for false alarms;

      -  imposing limitations on the number of times the police will respond to
         alarms after a specified number of false alarms; and

      -  requiring 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 insurance,
approval and standards organizations. Adherence to the requirements and
standards of such organizations is mandatory in some instances and voluntary in
others.

      We use telephone lines and radio frequencies to transmit alarm signals.
Both federal and state governments currently regulate the cost of telephone
lines and the type of equipment that may be utilized. The Federal Communications
Commission and state public utilities commissions regulate the utilization of
radio frequencies.

LEGAL PROCEEDINGS

See Item 3 - Legal Proceedings.

EMPLOYEES

      At April 14, 2002, we employed 230 full time 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.



                                       14
<PAGE>
                                  RISK FACTORS

      You should carefully consider the following factors and the other
information contained in this Annual Report before deciding to invest in our
company's securities.

WE CURRENTLY HAVE A SHORTAGE OF AVAILABLE CASH WITH WHICH TO SATISFY NEAR FUTURE
OBLIGATIONS

      As of April 14, 2002, we have approximately $2,100,000 of cash available
to implement our new business programs and to meet obligations that will come
due in the near future. If we are unable to meet our near term needs, some of
the new initiative may need to be postponed or cancelled altogether.
Additionally, we may not be able to meet our short-term obligations as they
become due. We are currently seeking additional capital to meet these needs, but
there can be no assurance that such capital will be available and if so on terms
which would be acceptable to us. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

WE HAVE A HISTORY OF NET LOSSES, AND WE EXPECT TO INCUR SIGNIFICANT ADDITIONAL
LOSSES IN THE FUTURE

      We sustained net losses from continuing operations of $6.8 million for the
year ended December 31, 1998, $4.0 million for the year ended December 31, 1999,
$5.8 million for the year ended December 31, 2000 and $14.2 million for the year
ended December 31, 2001. These losses reflect, among other factors, the
substantial non-cash charges for amortization of goodwill associated with
acquired central monitoring station businesses and the interest on our
indebtedness. We expect the new FASB treatment of goodwill and efficiency
initiatives including, but not limited to our consolidation program, to have a
positive effect on operating results, however there is no assurance that this
impact will be significant enough to offset losses in the next few years.

WE HAVE A SUBSTANTIAL AMOUNT OF CONSOLIDATED DEBT, WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS
PROSPECTS

      We have approximately $23,847,000 of consolidated indebtedness and
stockholders' equity of approximately $4,138,000 at December 31, 2001. In
addition, we may incur additional indebtedness in the future as part of our
business strategy. If we incur additional debt, the risks could intensify.

      This large amount of indebtedness could, for example:

      -  limit our ability to obtain additional financing for working capital,
         capital expenditures, acquisitions and other general corporate
         activities;

      -  limit our flexibility in planning for, or reacting to, changes in our
         business and the industry in which we operate;



                                       15
<PAGE>
      -  detract from our ability to successfully withstand a downturn in our
         business or the economy generally; and

      -  place us at a competitive disadvantage against other less leveraged
         competitors.

      The occurrence of any one of these events could have a material adverse
effect on our business, financial condition, results of operations and
prospects. There can be no assurance that additional funding can be secured on
acceptable terms, if at all.

WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR OBLIGATIONS

      Our ability to obtain sufficient cash to make payments on our scheduled
and contingent obligations as they come due will depend on future cash flow from
operations and our financial performance, which will be affected by a range of
economic, competitive and business factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." We cannot control many of these factors, such as general
economic and financial conditions in the alarm monitoring industry and the
economy at large or initiatives of our competitors. If we do not generate
sufficient cash flow from operations to service our debt, we may be required to
undertake alternative financing plans, such as refinancing or restructuring our
debt, selling assets, reducing or delaying capital investments or seeking to
raise additional capital.

      We cannot assure you that any refinancing would be possible, that any
assets could be sold, or, if sold, of the timing of the sales and the amount of
proceeds realized from those sales, or that additional financing could be
obtained on acceptable terms, if at all. Our inability to obtain sufficient cash
to satisfy our obligations, or to refinance our indebtedness on commercially
reasonable terms, would have a material adverse effect on our business,
financial condition, results of operations and prospects. Moreover, our failure
to pay certain obligations when due could result in the acceleration of our
debt. The debt under our credit facilities is secured by liens on substantially
all of our assets and, if that debt were accelerated, the lenders could seek to
foreclose.

ACQUIRING CENTRAL MONITORING STATIONS EXPOSES US TO CERTAIN UNCERTAINTIES

      Acquisitions of central monitoring stations and other businesses involve a
number of uncertainties. Sellers often do not have audited historical financial
information with respect to the acquired business. Therefore, in making
acquisition decisions, we have generally relied on our management's knowledge of
the industry, due diligence procedures and representations and warranties of the
sellers. There can be no assurance that such representations and warranties are
or will be true and complete or, if such representations and warranties are
inaccurate, that we will be able to uncover such inaccuracies in the course of
our due diligence or recover damages from the sellers in an amount sufficient to
fully compensate us for any resulting losses.



                                       16
<PAGE>
      Risks associated with these acquisitions include, but are not limited to,
the following:

      -  the possibility of unanticipated problems not discovered prior to the
         acquisition;

      -  possible loss of customers or possible dealer cancellations; and

      -  for acquisitions that are structured as stock purchases of other
         companies, the assumption of unexpected liabilities and the cost of
         disposing of unnecessary or undesirable assets of the acquired
         companies.

BECAUSE OUR CONTRACTS WITH OUR DEALERS ARE TYPICALLY SHORT-TERM, WE ARE EXPOSED
TO DEALER CANCELLATIONS

       Our contracts to provide monitoring services for our dealers typically
have a term of two years or less. The dealers for which we provide monitoring
services may cancel or terminate their contracts with us for many reasons,
including adverse financial and economic conditions generally, competition from
other alarm monitoring companies or failure to provide satisfactory monitoring
and customer service. As a result of our rapid growth through acquisitions, we
must successfully assimilate large numbers of subscriber accounts and develop
good working relationships with new dealers. We are also consolidating some of
our operations. During these consolidations dealers may experience temporary
disruptions in their service. A significant increase in account cancellation
could have a material adverse effect on our financial performance.

FALSE ALARM ORDINANCES MAY ADVERSELY AFFECT US

      Many municipalities have expressed concerns about the perceived high
incidence of false alarms and the cost of responding to them. This may lead to
reluctance on the part of police to respond to alarm signals or slower police
responses. If either of these were to occur the demand for new alarm systems or
monitoring services could decline. A number of local governments have adopted,
or are considering, measures aimed at reducing the cost of responding to false
alarms, which could adversely affect our performance. Such measures include:

      -  subjecting alarm monitoring companies to fines or penalties for
         transmitting false alarms;

      -  licensing individual alarm systems and the revocation of licenses
         following an excessive number of false alarms;

      -  imposing fines or penalties on subscribers for false alarms;

      -  imposing limitations on the number of times the police will respond to
         alarms after an excessive number of false alarms; and



                                       17
<PAGE>
      -  requiring further verification of an alarm signal before the police
         will respond.

THE NATURE OF OUR BUSINESS EXPOSES US TO POTENTIAL LITIGATION

      Providing fire and burglary alarm monitoring services may expose us to
risks of liability for employee acts or omissions and system failure. Most of
our alarm monitoring agreements contain provisions limiting our potential
liability in an attempt to reduce this risk. However, in the event of litigation
there can be no assurance that these limitations will be enforced, and the costs
and results of such litigation could have an adverse effect on us. We carry
insurance of various types, including general liability and errors and omissions
insurance. Our loss experience specifically, and the loss experience of other
security service companies generally, may affect the availability and cost of
our insurance. Certain of our insurance policies and the laws of some states may
limit or prohibit insurance coverage for punitive or certain other types of
damages, or liability arising from gross negligence.

OUR INDUSTRY IS HIGHLY COMPETITIVE

      The security alarm industry is highly competitive and highly fragmented.
While we do not compete directly with many of the large new entrants or
participants into the industry because we do not install and repair security
systems, we are nonetheless impacted by the competitive challenge these entrants
present to independent alarm dealers. Our monitoring services compete with those
offered by an estimated 1,800 to 2,300 companies. Of those companies an
estimated 250 firms offer monitoring services from Underwriters Laboratories
listed facilities. Most of the companies providing monitoring services are
small, local operations.

OWNERSHIP OF OUR STOCK IS HIGHLY CONCENTRATED

      Our largest stockholder owns approximately 53% of our issued and
outstanding voting stock, however its voting rights are limited to 45% of the
shares eligible to vote on any matter, as well as the right to designate two
members of our board of directors. As a result, this investor currently has the
ability to significantly influence the outcome of matters submitted for approval
to our stockholders and directors (including the election of directors and any
merger, consolidation or sale of all or substantially all of our assets) and our
affairs generally. Additionally, our directors and management own or control
approximately 1,625,560 additional shares of common stock on a fully diluted
basis, the substantial majority of which are currently subject to restrictions
on resale under Rule 144, but which may become available for sale and could
result in downward pressure on our stock price. Additionally, our directors and
management currently hold options to purchase approximately 1,122,000 shares of
common stock and will, subject to stockholder approval, have options to purchase
an additional 4,200,000 shares of common stock.

ITEM 2. DESCRIPTION OF PROPERTIES

      Our executive offices are located at 2101 South Arlington Heights Road,
Arlington


                                       18
<PAGE>
Heights, Illinois. Our central monitoring stations and Dealer Support Centers
are located at:

      -  2101 South Arlington Heights Road, Arlington Heights, Illinois;

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

      -  2178 Washington Boulevard, Ogden, Utah;

      We currently hold leases on the following properties, which have subleased
where indicated and will seek subleases on the remainder:

      -  1514 East 191 Street, Euclid, Ohio;

      -  9750 Brockbank, Dallas, Texas;

      -  12610 Richmond Avenue, Houston, Texas; This property has been
         subleased;

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

      -  19334 63rd Place, Kenmore, WA; and

      -  13937 Magnolia Avenue, Chino, CA. This property has been subleased.

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

      -  The Arlington Heights lease expires December 31, 2010, but can be
         renewed by us at our option for one additional five year term;

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

      -  The Euclid lease expires December 31, 2006, but can be renewed by us at
         our option for one additional three year term;

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

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

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

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



                                       19
<PAGE>

      -  The Ogden lease expires April 30, 2003, with no option to renew; and

      -  The Chino lease expires November 30, 2003.

ITEM 3. LEGAL PROCEEDINGS

      On September 10, 1999, a Writ of Summons was issued against SAI North
Central Command Center, Inc., our wholly owned subsidiary, and Blair
Communications, Inc. (First Evangelical Lutheran Church vs. Blair
Communications, Inc. et al, No. 1999-04689 (Blair County, Pennsylvania)). The
case involves damages resulting from a fire at the First Evangelical Lutheran
Church. In June 2000, a complaint was filed asserting that SAI North Central was
liable for the damage to the church based on the theory that the installing
dealer was acting as SAI North Central's agent. Damages sought exceed $4.0
million. SAI believes it has no liability in this matter and will vigorously
defend its position.

      On March 1, 2001, an amended Complaint against United Security Systems,
Inc., National Security Monitoring, United Video Security, Inc., Emergency
Response Center and Vector Security, was filed in the United States District
Court for the Eastern District of New York (CV 007487). Emergency Response
Center is an assumed name of one of our subsidiaries. The case involves damages
resulting from a fire at the Flushing Jewish Center which occurred on December
5, 1996. The claim alleges breach of contract and breach of warranty by the
defendants in installing an alarm system that was inadequate and failing to
monitor or service the system. Damages sought are approximately $1.0 million
which management believes will be fully covered by our insurance should
liability be found on our part. SAI will vigorously defend its position.

      On July 3, 2001, Security Alarm Financing Enterprises, L.P. ("SAFE") filed
a claim with the American Arbitration Association asserting that we owed them
approximately $5.5 million. SAI has denied their claims and has counterclaimed
for an amount in excess of $2.0 million. See "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources."

       In January 2002, KC Acquisition Corp filed a complaint alleging certain
claims relating to the termination of the proposed merger between SAI and KC
Acquisition Corp including some that KC Acquisition believes nullifies the note
receivable. SAI filed a counter-claim. Subsequently both parties agreed to
settle all claims against each other. See "Management's Discussion and Analysis
or Plan of Operation - Liquidity and Capital Resources."

      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

      There were no matters submitted to our stockholders for a vote during the
fourth quarter of 2001.



                                       20
<PAGE>
                                     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.
The following table sets forth, for the periods indicated, the range of the high
and low sales prices as reported on the American Stock Exchange.

<TABLE>
<CAPTION>
                                                    LAST REPORTED SALE
                                                      HIGH       LOW

<S>      <C>                                        <C>         <C>
2000     First Quarter...........................    $4.00      $2.00
         Second Quarter..........................    $5.63      $3.38
         Third Quarter...........................    $3.50      $2.38
         Fourth Quarter..........................    $2.88      $0.81
2001     First Quarter...........................    $3.24      $0.75
         Second Quarter..........................    $2.50      $1.50
         Third Quarter...........................    $2.49      $2.00
         Fourth Quarter..........................    $2.33      $1.71
2002     First Quarter...........................    $2.00      $1.07
         Second Quarter  (Through April 12, 2002)    $1.42      $1.00
</TABLE>

      On April 12, 2002, the last reported sale price of our common stock was
$1.22 per share. At April 12, 2002, we had approximately 241 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 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 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.

RECENT SALES OF UNREGISTERED SECURITIES

      Since January 1, 1999, 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 March 31, 1999, we issued: 35,160 shares of common stock to a former


                                       21
<PAGE>
employee as a distribution from our Supplemental Employees' Retirement Plan upon
his termination as an employee; 1,405 shares of common stock to a consultant in
payment for services; and 12,931 shares of common stock to employees, as stock
bonuses for their performance.

      On June 30, 1999, we issued 1,497 shares of common stock to a consultant
in payment for services.

      On September 30, 1999, we issued 1,652 shares of common stock to a
consultant in payment for services.

      On December 30, 1999, we issued 1,846 shares of common stock to a
consultant 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 31, 2000, we issued 1,500 shares of common stock to a consultant
in payment of services.

      On June 30, 2000, we issued 1,200 shares of common stock to a consultant
in payment for services.

      On September 23, 2000, we issued 3,000 shares of common stock to correct
an entry error on our list of stockholders.

      On September 29, 2000, we issued 1,335 shares of common stock to a
consultant in payment for services.

      On December 29, 2000, we issued 2,001 shares of common stock to a
consultant in payment for services.

      On July 9, 2001, we issued 40,000 shares of common stock to Douglas J.
Oberlander, one of our directors, as compensation for past services as a
director.

      On August 6, 2001, we issued 149,270 shares of common stock to three
employees of SecurityVillage.com as partial settlement of certain liabilities
assumed by us in connection with the purchase of certain assets of
SecurityVillage.com.

      On April 25, 2001, our Board of Directors authorized the issuance of
525,000 shares of common stock to Thomas J. Salvatore, one of our directors, as
compensation for past services.


                                       22
<PAGE>
This issuance is subject to shareholder approval and will be presented to our
shareholders at our next annual meeting.

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

TJS Partners, L.P.'s Investments

      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.

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

      During 2000, TJS exercised options to purchase 1,000 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $125,000.

      On August 9, 2000, we issued 100,000 shares of common stock to Thomas J.
Salvatore, the sole Managing General Partner of TJS Partners, L.P., and one of
the company's directors, upon exercise of options, for an aggregate purchase
price of $250,000.

      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.

Sale of Securities to Foamart Limited

      On August 6, 2001 we issued to Foamart Limited, 12,100 shares of Series A
Preferred Stock (convertible into 1,210,000 shares of common stock), 710,000
shares of common stock, and warrants to purchase 1,815,000 shares of common
stock (at an exercise price, $3.50 per share, expiration date, August 5, 2011)
in exchange for $ 4.0 million.

      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.



                                       23
<PAGE>
SecurityVillage.com Transactions

      On August 6, 2001, in two separate transactions, we issued a total of
500,000 shares of common stock to SecurityVillage.com and its designees in
exchange for the assumption of certain liabilities with a stated value of $1.1
million and a promissory note in the principal amount of $1,500,000 issued by
Monitoring Acquisition Corp. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".

      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.

Sale of Securities to EGI - Fund (01) Investors, L.L.C.

      On October 3, 2001 we issued to EGI - Fund (01) Investors, L.L.C., 20,000
shares of Series B Preferred Stock (convertible into 2,000,000 shares of common
stock) and warrants to purchase 2,000,000 shares of common stock (at an exercise
price of $2.50 per share which expire on October 31, 2005) in exchange for $ 5.0
million.

      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.

Exercise of Options and Warrants

      On June 21, 1999, 25,000 shares of common stock were issued upon exercise
of options for an aggregate exercise price of $ 25,000.

      On July 7, 1999, TJS Partners, L.P. exercised options to purchase 250
shares of Convertible Preferred Stock for a total consideration of $25,000.

      On October 10, 1999, 65,000 shares of common stock were issued upon the
exercise of options for an aggregate exercise price of $71,250.

      On November 17, 1999, TJS Partners, L.P. exercised options to purchase 650
shares of Series A Convertible Preferred Stock for an aggregate exercise price
of $71,250.

      On April 14, 2000, 25,000 shares were issued upon the exercise of options
for an aggregate exercise price of $25,000.

      On April 26, 2000, TJS Partners, L.P. exercised options to purchase 250
shares of Series A Convertible Preferred Stock for a total consideration of
$25,000.



                                       24
<PAGE>
      On May 10, 2000, 25,000 shares of common stock were issued upon the
exercise of options for an aggregate exercise price of $50,000.

      On May 23, 2000, TJS Partners, L.P. exercised options to purchase 250
shares of Series A Convertible Preferred Stock for an aggregate exercise price
of $50,000.

      On May 23, 2000, Thomas J. Salvatore, one of the company's directors,
exercised options to purchase 90,000 shares of common stock for an aggregate
exercise price of $326,250.

      On May 25, 2000, 25,000 shares of common stock were issued upon the
exercise of options for an aggregate exercise price of $25,000.

      On June 12, 2000, TJS Partners, L.P. exercised options to purchase 250
shares of Series A Convertible Preferred Stock for an aggregate exercise price
of $25,000.

      On June 12, 2000, Thomas J. Salvatore and Douglas J. Oberlander two of the
company's directors, purchased 85,000 and 25,000 shares of common stock,
respectively for aggregate exercise prices of $285,250 and $68,750,
respectively.

      On June 15, 2000, James S. Brannen, the company's then President and Chief
Executive Officer and one of the company's directors, exercised options to
purchase 22,222 shares of common stock for an aggregate exercise price of
$99,999.

      On September 29, 2000, 25,000 shares of common stock were issued upon the
exercise of options for an aggregate exercise price of $25,000.

      On October 3, 2000, TJS Partners, L.P. exercised options to purchase 250
shares of Series A Convertible Preferred Stock for an aggregate exercise price
of $25,000.

      No underwriters or placement agents were engaged in connection with the
foregoing sales of securities. 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.

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 and
we commenced our offering which was discontinued on June 6, 2001. The prospectus
also covered 777,088 shares of common stock which may have been offered for sale
by certain selling stockholders. We did 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.



                                       25
<PAGE>
      No underwriter was 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 $4,668,528. No separate offering price
was assigned to the warrants.

      We estimate that we incurred a total of $282,119 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 $2,394. 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. We issued 500,110 shares of common stock and warrants to
purchase 121,104 shares of common stock in connection with the offering.





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                                       26
<PAGE>
                             SELECTED FINANCIAL DATA

      The following selected financial data for the fiscal years ended 1997
through 2001 is derived from our consolidated financial statements which have
been audited by Arthur Andersen LLP, independent public accountants. 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".

                            Years Ended December 31,
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                              Pro Forma                   Pro Forma
                                     1997          1998         1998(1)        1999         1999(2)        2000          2001
                                  ----------------------------------------------------------------------------------------------
<S>                               <C>           <C>           <C>           <C>           <C>           <C>           <C>
Statement of Operations Data:

Revenues ....................     $   10,814    $   20,203    $   17,146    $   22,689    $   18,969    $   22,215    $   20,962
Operating (loss) ............     $   (2,662)   $   (3,406)   $   (2,130)   $   (2,931)   $   (2,592)   $   (4,169)   $  (10,642)
Net (loss) available to
  common stockholders .......     $   (4,938)   $   (6,798)   $   (3,904)   $   (4,047)   $   (4,631)   $   (5,752)   $  (14,245)
Net loss per share ..........     $    (1.16)   $    (1.06)   $    (0.61)   $    (0.59)   $    (0.66)   $    (0.77)   $    (1.71)
Shares used in computing net
  loss per share ............      4,266,151     6,394,048     6,429,048     6,897,200     6,980,533     7,444,161     8,344,609
</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.

                            Years Ended December 31,
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                1997       1998        1999        2000        2001
                              -------------------------------------------------------
<S>                           <C>        <C>         <C>         <C>
Balance Sheet Data:

Cash and restricted cash      $  5,522   $  1,481    $    631    $     53    $  5,814
Working capital (deficit)     $  1,625   $ (4,450)   $ (3,849)   $ (2,795)   $ (1,042)
Total assets ............     $ 36,009   $ 47,526    $ 33,341    $ 32,505    $ 34,201
Total debt ..............     $ 22,919   $ 35,981    $ 14,287    $ 18,152    $ 23,847
Total stockholders'
equity ..................     $  7,231   $  3,869    $ 14,166    $ 10,268    $  4,138
</TABLE>



                                       27
<PAGE>
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," "plans," "estimates," and
"expects" and similar expressions as they relate to us or our management are
intended to identify such forward-looking statements. Such statements are
subject to a number of risks and uncertainties. Our actual results, performance
or achievements could differ materially from the results expressed in, or
implied by, these forward-looking statements. We undertake no obligation to
revise these forward-looking statements to reflect any future events or
circumstances.

      OVERVIEW

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




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                                       28
<PAGE>
                              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)

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

<S>                                               <C>            <C>            <C>
Net Revenue                                       $   22,689     $   22,215     $   20,962

Operating Unit Expense                                14,900         17,182         16,059
                                                  ----------     ----------     ----------

Operating Unit Margin                                  7,789          5,033          4,903

Operating Expenses:

    Amortization & depreciation                        5,714          4,710          4,202

    General & administrative                           2,931          2,556          4,876

    Selling & marketing                                2,075          1,937          1,880

    Deferred compensation expense                       --             --             --

    Acquisition related expenses                        --             --            1,022

    Restructuring expenses                              --             --            1,400

    Other expenses                                      --             --            2,165
                                                  ----------     ----------     ----------

Loss From Operations                                  (2,931)        (4,170)       (10,642)

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

Interest Expense                                      (2,565)        (1,583)        (3,603)
                                                  ----------     ----------     ----------

Net Loss                                              (3,597)        (5,753)       (14,245)

Dividends Accrued On Preferred Stock                     450           --             --
                                                  ----------     ----------     ----------

Net Loss To Common Stockholders                   $   (4,047)    $   (5,753)    $  (14,245)

Net Loss Per Share                                $     (.59)    $     (.77)    $    (1.71)

Total Weighted Average Number Of Common Shares
  Outstanding                                      6,897,200      7,444,161      8,344,609
</TABLE>



                                       29
<PAGE>
      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,

                                              1999      2000      2001
                                              ------------------------
<S>                                           <C>       <C>       <C>
Net Revenue                                   100%      100%      100%

Operating Unit Expense                         66%       77%       77%

Operating Unit Margin                          34%       23%       23%

Operating Expenses:

     Amortization & depreciation               25%       21%       20%
     General & administrative                  13%       12%       23%
     Selling & marketing                        9%        9%        9%
     Deferred compensation expense             --        --        --
     Acquisition related expenses              --        --         5%
     Restructuring expenses                    --        --         7%
     Other expenses                            --        --        10%

Loss From Operations                          (13)%     (19)%     (51)%

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

Interest Expense                              (11)%      (7)%     (17)%

Net Loss                                      (16)%     (26)%     (68)%
</TABLE>


                              RESULTS OF OPERATIONS

2001 COMPARED TO 2000

      Net Revenue. Net revenues for the year ended December 31, 2001 decreased
5.6% to $20,961,815 from $22,215,282 for the year ended December 31, 2000. The
decline in net revenue was primarily due to a decrease in the number of dealer
accounts monitored in SAI's central stations, offset by increases in the average
monthly recurring revenue per account monitored. The decline in the number of
accounts monitored reduced revenue by $1,653,200 for the year ended December 21,
2001. The increase in the average monthly revenue per account monitored offset
these decreases by increasing revenue $399,733 for the year ended December 31,
2001. For the year ended December 31, 2001, SAI experienced approximately


                                       30
<PAGE>
an 8.3% attrition rate in the number of accounts monitored in central stations
versus a 6.9% attrition rate in 2000. The increase in the attrition rate is
principally due to: i) cancellations which occur during a consolidation, ii)
general economic conditions turning less favorable in 2001 and iii) full service
providers who continue to consolidate the alarm industry. SAI expects that
attrition will continue at a higher than normal rate during any period in which
it consolidates central stations.

Operating Unit Expenses and Operating Unit Margin. Operating unit expenses for
the year ended December 31, 2001 decreased by 6.5% to $16,058,464 from
17,181,602 for the year ended December 31, 2000. The benefits of SAI's central
station consolidation effort, which is designed to increase operating margins by
increasing the average number of accounts monitored by each central station
operator are continuing to be realized. The $1,123,138 in reduced operating unit
expenses between the year ended December 31, 2001 and the year ended December
31, 2000 is directly attributable to that effort. A reduction of direct wages
and facility expenses of $944,644 account for the majority of the decrease.

      The operating unit margin attributable to the central station operations
increased from 22.7% in 2000 to 23.4% in 2001. The increase in margin is
primarily attributed to the benefits of SAI's central station consolidation
effort, which is designed to increase operating margins.

Operating Expenses. Amortization and depreciation expense decreased by $507,999
from $4,709,689 in 2000 to $4,201,690 in 2001 or 10.8%. The decrease in
amortization and depreciation expenses was a result of a central station
acquisition being fully amortized offset by additional depreciation expense for
the central station upgrades.

      General and administrative expenses for the year ended December 31, 2001
amounted to $4,876,236 compared to $2,555,749 for the year ended December 31,
2000, an increase of $2,320,487. Increases in professional fees, relating to the
consolidation project, consulting fees, accounting fees and directors fees were
accounted for approximately $892,000 of the increase. Payroll and related
expenses contributed an additional $659,000 to the twelve month increase with
approximately $474,000 of this attributable to severance for SecurityVillage.com
employees. Additional expenses of approximately $440,000 were incurred during
2001 to complete the SAFE reprogramming project through 2002. The remaining
increase is other expenses incurred for additional rent expense as a result of
new office space for SAI's home office, which moved in early 2001 and additional
travel expenses incurred by the new management team.

      Selling and marketing expenses decreased by $57,146 from $1,937,322 to
$1,880,176 or 2.9%. The decrease is primarily attributed to non-cash expenses
related to the dealer stock incentive program, which was $233,858 in 2001 and
$302,352 in 2000.

Acquisition Related Expenses. Acquisition related expenses of $1,022,290 are
comprised of a $500,000 break-up fee and the write-off of $522,290 of
capitalized expenses related to the aborted KC Acquisition Corp. transaction.



                                       31
<PAGE>
      Restructuring Expenses. In November 2001, the Company announced a new
strategic direction and initiated certain activities designed to restructure its
core operating platform resulting in a charge to operations of approximately
$1,400,000. The new direction is targeted at strengthening the infrastructure of
the "core" operations of the business, as well as positioning the Company to
offer new growth opportunities for our current and new dealers. The primary
initiative was to consolidate the central monitoring centers from six regional
centers to three centers. Actions began in November to close the centers in
Cleveland, OH; Dallas, TX; and Seattle, WA. Dealer accounts from these centers
were reassigned to either the center in Arlington Heights, IL or Pompano Beach,
FL. The facility in Ogden, Utah will remain operating as a small regional
central station. These actions resulted in the termination of approximately 131
employees. The components of the restructuring charges are set out below:

<TABLE>
<S>                                                                  <C>
    Severance for operators and administrative staff                 $     466,522
    Consulting fees and broadband expenses                                 124,200
    Travel expenses                                                        190,000
    Facility & equipment leases, net of anticipated lease amounts          592,000
    Other                                                                   27,000
          Total restructuring expense                                   $1,399,722
          Less: Payments made during 2001                                 (155,920)
                Restructuring reserve, December 31, 2001                $1,243,802
</TABLE>

      OTHER EXPENSES. Other expenses of $2,164,891 are principally comprised of
(i) legal fees of $450,000 for litigation related to prior transactions with
SAFE and KC Acquisition (ii) write-off of $396,000 for assets relating to
out-dated GPS technology which have been abandoned and (iii) approximately
$184,000 in other one-time expenses. In conjunction with the Company taking a
new strategic direction in fourth quarter of 2001, the Company agreed to a
settlement of $1,136,000 for existing employment agreements with two directors
of the Company. In 2001, $250,000 has been paid, $532,436 will be paid in 2002
and $353,281 will be paid in 2003 and beyond. The legal fees discussed above are
not considered normal operating expenses, but relate to the SAFE and King
litigation as discussed in liquidity.

      Interest Expense. Interest expense increased from $1,583,344 in 2000 to
$3,603,218 in 2001, an increase of $2,019,874 or 127.6%. The increase in
interest expense is due to an increase in debt of $7,594,048, the write-off of
the FINOVA loan origination fees of $456,257, amortization of the original issue
discount of $410,933 and an increase of $209,000 interest expense accrued on the
$1.8 million SAFE note payable.

2000 COMPARED TO 1999

      Net Revenue. Net revenues for 2000 were $22,215,282 compared to
$22,689,132 for the same period in the prior year, a decrease of 2.1%. The
change in revenue was due to an increase in revenues from central station
operations of $3,246,319, or 17.1%, and a decrease in revenue from the retail
operation of $3,720,169. Monthly billed revenue decreased


                                       32
<PAGE>
$85,000 during the year. This decrease is the result of our canceling dealers
for non-payment and dealers either selling their businesses or moving accounts
to other central stations. The decrease also reflects a reduction of $.12 per
account in the average price charged for services. The total number of accounts
monitored at December 31, 2000 was approximately 382,000, a decrease of just
over 20,000 accounts during the year. The increase in central station revenues
is due to acquisitions completed in 1999. The decrease in revenue from the
retail operation is due to the sale of the owned accounts that occurred on June
30, 1999.

      Operating Unit Expense and Operating Unit Margin. Operating unit expense
increased by $2,281,915 from $14,899,687 to $17,181,602, or 15.3%. The increase
in operating unit cost attributable to central station operations was
$3,229,712, or 21.7%. The decrease in operating unit cost attributable to retail
operations was $947,797. The increase in central station costs is due to
acquisitions completed in 1999. The decrease in retail costs is due to the sale
of the owned accounts that occurred on June 30, 1999.

      The margin attributable to the central station operations decreased from
29.4% in 1999 to 22.8% in 2000. The margin attributable to our owned subscriber
account portfolio was 53.2% in 1999. The total margin decreased from 34.3% in
1999 to 22.7% in 2000 due to the sale of the owned accounts. The reason for the
decrease in margin attributable to the central station operations is due to the
startup operation in California which lost approximately $434,000 and the New
Orleans acquisition which lost approximately $32,000 before its operations were
consolidated into our Houston facility. Other factors contributing to the
decrease in margin include an increase in infrastructure costs, primarily IT
support personnel, and an increase in bad debt expense. These two factors
represent an increase in costs of approximately $500,000. Sales allowances and
credits given to dealers increased by approximately $450,000.

      Operating Expenses. The decrease of amortization and depreciation expense
by $1,004,201 from $5,713,890 to $4,709,689 in expenses is related to the
increased amortization of goodwill of $456,065, due to acquisitions of central
stations completed over the previous twelve months, combined with a decrease in
amortization related to the retail operation of $2,319,183. Depreciation expense
increased by $858,917 due to a full year's depreciation on computer hardware and
software upgrades installed during 1999.

      General and administrative expenses decreased by $375,671 from $2,931,420
to $2,555,749, or 12.8%, due to the sale of the owned accounts and a realignment
of management responsibilities in the central stations.

      Selling and marketing expenses decreased by $138,038 from $2,075,360 to
$1,937,322, or 6.7%. Included in these expenses were non-cash expenses related
to the dealer stock incentive program of $302,352 in 2000 and $255,282 in 1999.

      Gain on Sale of Owned Subscriber Accounts. The gain from the sale of the
owned accounts of $2,649,184, reported for 1999 is the result of the sale of the
owned account portfolio, which occurred on June 30, 1999. The gain reflects the
total cash proceeds of $22,800,000 less the net book value of the account
portfolio and the net book value of


                                       33
<PAGE>
goodwill related to the purchase of the owned accounts. Subsequently, in
December 1999, approximately $750,000 in additional accruals were booked related
to the sale of retail accounts, thus reducing the gain to $1,899,155.

      Interest Expense. Interest expense decreased by $981,221, or 38.3%, from
$2,564,565 to $1,583,344. This was primarily due to the reduction in the FINOVA
debt by $20,000,000 and the conversion of $10,000,000 of subordinated debt to
preferred stock on September 30, 1999.

      1999 COMPARED TO 1998

      Net Revenue. Net 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
was attributable to an increase in revenue in our central station operations of
$5,707,149 and a decrease in revenue from our owned subscriber account portfolio
of $3,221,867. The increase in revenue related to central station operations was
due to acquisitions completed during 1998 and 1999, from revenue related to the
monitoring of the subscriber accounts sold to SAFE and from an increase of
approximately 33,000 monitored accounts in our existing central stations. The
increase in revenue consisted of the following approximate amounts:
acquisitions, $4,423,150; monitoring of our previously owned subscriber
accounts, $477,000; monitored accounts added to our existing central stations,
$807,000. The decrease in revenue related to our owned subscriber account
portfolio was attributable to the sale of the owned subscriber accounts on June
30, 1999.

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

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


                                       34
<PAGE>
to the sale of the owned subscriber accounts, and the increase is related to
central station acquisitions in 1998 and 1999.

      General and administrative expenses increased by $384,485, or 15.5%, from
$2,488,058 to $2,546,935 due to central station acquisitions.

      Selling, marketing and business development expenses increased by
$461,353, or 28.6%, from $1,614,007 to $2,075,360. 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
was no expense to record. Deferred compensation expense in 1998 was $609,103.

      Gain on Sale of Owned Subscriber Accounts. As a result of the sale of our
owned subscriber account portfolio to SAFE on June 30, 1999, we recorded a gain
of $2,649,184. The gain reflects the total cash proceeds of $22,800,000 less the
net book value of the account portfolio and the net book value of goodwill
related to acquisitions made in connection with the owned subscriber accounts.
Additionally, the $1,800,000 note payable to SAFE and accrued expenses related
to the attrition guarantee, account reprogramming and severance expenses of
$3,097,278 were charged against the gain on the sale. Included in the $3,097,278
are additional accruals of approximately $750,000, which were recorded in the
fourth quarter based on our projected obligations under the attrition guarantee
and the additional expenses we expected to incur to reprogram a portion of the
accounts sold to phone lines owned by SAFE. This additional accrual of
approximately $750,000 reduced the gain to $1,899,155.

      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.

      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.



                                       35
<PAGE>
      Central Station Operations. Operating income from our central station
segment decreased from $1,684,500 to $1,063,340, or a decrease of 36.9%. Revenue
related to this segment increased from $14,667,212 to $19,768,281, or an
increase of 34.8%. The decrease in operating income was caused by an increase in
sales and marketing expenses of $851,125 related to the decentralization of our
sales force and new marketing initiatives, including an increase in non-cash
expenses related to our stock-based dealer incentive plan of $184,880.
Amortization and depreciation increased by $1,334,935, or 66.9%, related to
acquisitions. Cash flow, defined as operating income plus depreciation and
amortization and stock-based dealer incentive expense, related to central
station operations increased from $3,680,818 to $4,649,875, or 26.3%.

      CAPITAL EXPENDITURES

      We made capital expenditures during 2001 and 2000 totaling $1,448,340 and
$2,750,983, respectively. Of these capital expenditures in 2000, approximately
$950,000 related to the installation of new financial and operating systems. In
2000 and 2001, approximately $1,800,000 and $523,000 respectively, was spent on
a new facility for the central station located in Illinois. Capital expenditures
in 2001 included $725,000 for Webnet and GPS. SAI's Webnet application is
designed to provide dealers with up-to-minute control of data for their
customers. The company believes that this program is an essential dealer benefit
and will help eliminate the need for local monitoring from a dealer's
perspective. The Global Positioning Satellite ("GPS") application is in line
with the company's strategy to provide new technology for its dealers and their
customers. GPS services allow customers to use a hand-held cellular phone as a
personal security device that communicates with an SAI central monitoring
center. 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

     During 2001, we experienced a $5.8 million increase in our cash balance.
The increase was the result of the completion of a new long-term debt financing
agreement that after repayments and other related items provided $5.2 million,
the issuance of Capital Stock that provided $7.8 million, offset by cash used in
operating activities in the amount of $5,808,921 and the purchase of fixed
assets in the amount of $1.4 million.

      On June 30, 1999, SAI sold its portfolio of 27,000 retail subscriber
accounts to Security Alarm Financing Enterprises (SAFE) for $22.8 million. At
that time, SAI also entered into an agreement to refer additional purchase and
loan transactions during a specified period following the sale. If certain
minimum performance criteria were satisfied, a note to SAFE in the amount of
$1.8 million bearing 8% interest was to have been deemed paid in full. A dispute
has arisen as to: (1) whether SAI has fulfilled its obligations under the
agreement, and (2) whether SAFE met all of its contractual commitments. SAI and
SAFE have entered in to a binding arbitration process before the American
Arbitration Association in regard to these matters. SAFE filed its claim on July
3, 2001, and SAI has filed its


                                       36
<PAGE>
response on August 1, 2001. SAFE is claiming approximately $2.5 million dollars
as principal and interest on the note (through April 15, 2002) plus
approximately $3.0 million in additional damages based on various other breaches
of the asset purchase agreement, relating to reprogramming expenses and the
adequacy of SAI's disclosures in addition to unspecified consequential damages.
The note calls for default interest at the rate of 14% per annum after fourteen
months from the date of issuance. SAI has asserted that no amount is due under
the note and that SAI did not breach any of the provisions of the asset purchase
agreement as to which SAFE has made claims. SAI has counterclaimed and is
seeking approximately $2.0 million in damages based on SAFE's breaches of its
obligations under the asset purchase agreement in failing to use SAI's central
stations as SAFE's preferred provider of monitoring services, failure to abide
by certain conditions related to SAI's monitoring agreement and failure to pay
monitoring and other fees. SAI believes that it will prevail on the merits of
its arguments. In the event that SAFE prevails for amounts in excess of the $2.3
million accrued for on SAI's balance sheet as of December 31, 2001, SAI may need
to seek additional resources to satisfy any amounts ultimately found to be due.

      During the first quarter of 2001, we entered into a new financing
agreement with McGinn, Smith Acceptance Corp. ("McGinn"). Net proceeds under the
agreement totaled approximately $22 million, which is net of a $2.3 million
original issue discount and a $.5 million mandatory debt service reserve. The
proceeds $16.4 million was used to settle all outstanding notes payable to
FINOVA Capital Corporation ("FINOVA"). In conjunction with the retirement of the
FINOVA debt, SAI wrote-off the remaining loan origination fees of $.456 million.
Principal payments to McGinn during fiscal 2001 were approximately $.894 million
and approximately $2.3 million is due during fiscal 2002. With completion of the
McGinn financing, SAI's total debt at December 31, 2001 has increased by
approximately $.569 million when compared to total debt at December 31, 2000.
The agreement contains certain covenants, including required amounts of
recurring monthly revenue ("RMR") and cash collections. In the event of default
McGinn, may replace SAI as collection agent and remove SAI as the central
monitoring station, resulting in a loss of monitoring fees and all associated
net revenue after fees.

      During the third quarter of 2001 and the first quarter of 2002, we were
out of compliance with two covenants contained in the McGinn financing
agreement. The agreement required that the monitoring contracts used to
collateralize the financing must yield a defined level of RMR and a defined
level of cash collections. SAI obtained amendments for the covenants described
above which set out new minimum requirements or waived the event of default.
Under the amendments we must maintain a minimum of $1.6 million in RMR through
out of the agreement. Currently, these alarm contracts yield approximately $1.7
million. We anticipate the recurring monthly revenue will decrease to some
extent as a result of the consolidation effort and the elimination of
non-profitable accounts. In management's opinion, there should be adequate RMR
and cash collections to satisfy the awarded loan covenants during 2002.

      On August 6, 2001, in a series of transactions with Foamart Limited and
SecurityVillage.com, accounted for as the issuance of various equity instruments
for cash and a note, SAI issued (a) 12,100 shares of Series A Preferred Stock
(convertible into 1,210,000 shares of SAI's common stock), (b) 1,210,000 shares
of SAI common stock, (c) warrants to


                                       37
<PAGE>
     purchase 1,815,000 shares of common stock (at an exercise price of $3.50
per share), with lives of ten years and (d) assumed $1,100,000 of liabilities
which included 149,270 shares of common stock issued to SecurityVillage.com
employees for past services in exchange for $4,000,000 in cash and a note
receivable in the principal amount of $1,500,000 plus interest of $225,000. This
note has matured and was payable to SAI on December 31, 2001. In January 2002,
this note was declared in default and KC Acquisition Corp has made claims
relating to the termination of the proposed merger between SAI and KC
Acquisition Corp that KC Acquisition believes nullifies the note receivable. SAI
filed a counter-claim. Subsequently both parties have agreed to settle all
claims against each other. KC Acquisition will pay to SAI $900,000 in
installments of $20,000 per month beginning April 15, 2002 through December 15,
2002 and will pay the balance of $720,000 on December 31, 2002.

      On October 3, 2001, SAI issued to EGI-Fund (01) Investors, L.L.C., 20,000
shares of Series B Preferred Stock (convertible into 2.0 million shares of
common stock) in exchange for $5.0 million in cash and a four year warrant to
purchase 2.5 million shares of common stock at $2.50 per share in exchange for
$1,000.

      Expenses relating to the issue of the Series A and B Stock described above
amounted to $.495 million.

     SAI's loss from operations for the twelve months ended December 31, 2001
increased to $10,641,654 from $4,169,080 for the twelve months ended December
31, 2000. Included in this loss from operations in 2001 are costs related to the
aborted acquisition of KC Acquisition Corp as well as restructuring and other
expenses amounting to $4,586,903 During the third quarter of 2001 management of
SAI commenced a strategic review of the SAI's business operations and its
corporate organizational structure with a view to developing a business strategy
that would place SAI in a stronger position to deal with the changing business
environment and challenges facing our core operation. The objectives of the
review were to set out a plan to improve the entire structure of the business
operations in order to create a more profitable, efficient organization with
significantly improved marketing, selling, and servicing capabilities supported
by upgraded management information systems. This review was completed during the
fourth quarter of 2001 and implementation of a plan to consolidate our
monitoring centers to three from six commenced. It is currently anticipated that
the consolidation should be substantially complete by the end of the second
quarter of 2002. Once complete management believes that based upon the
efficiencies to be achieved derived SAI should be able to provide positive cash
from operations no later than the second quarter of 2002. Notwithstanding the
projected effects from the consolidation we currently anticipate that we will
utilize $5 million in cash during 2002 which includes approximately $2.3 million
in principal repayments, anticipates capital expenditures of approximately $.8
million and payments relating to restructuring, severance and other related
items should range between $1.4 million and $1.5 million.



                                       38
<PAGE>
      In August 2001, the Company's Board of Directors accepted and approved the
assignment of an agreement between Mr. Raymond Gross, Mr. Stephen Ruzika,
Mr. Paul Lucking and, Mr. Thomas Salvatore. The agreement sets out that these
individuals would join SAI and hold the positions of Chief Executive Officer,
Vice Chairman of the Board and Chief Operating Officer, respectively. In
addition, the agreement also states that Mr. Salvatore would hold the position
of Chairman of the board. These individuals, including Mr. Salvatore, are
charged with the responsibility of developing and executing a business strategy
designed to significantly improve SAI's overall financial condition, strategic
direction and growth objectives. In order to directly incentivize these four
individuals, SAI agreed to pay them collectively, in addition to their base
compensation and consulting fees, one hundred percent of the first year's
improvement in annualized Earnings Before Interest, Taxes, Depreciation, and
Amortization ("EBITDA") as measured for the quarter ended June 30, 2002, versus
the quarter ended June 30, 2001, with a "true-up" at December 31, 2002. During
the first quarter of fiscal 2002, SAI has executed agreements with each of the
aforementioned individuals with respect to this incentive and their terms and
conditions of employment or consultancy.

      As of April 14, 2002, SAI has an unrestricted cash balance of
approximately $2.1 million as a result of the transactions and events described
above. SAI believes that it will have the funds necessary to complete
operational obligations such as the completion of the consolidation plan as well
as normal course of business expenditures through the end of 2002, but this may
come in to question if certain assumptions are not met. These assumptions
include: certain levels of revenue, which include new and cancelled business as
well as expenses and headcount reductions through efficiencies in the three
remaining facilities. However, without additional capital injections or
restructuring of existing debt payments including deferring existing principal
payments on our loans, we will not have the ability to pay the EBITDA
obligations to the management team or pay any liability incurred as a result of
the SAFE litigation. If we are unable to meet these obligations, SAI may become
a party to litigation. In such an instance, should judgement be entered against
SAI, the prevailing parties would be treated as unsecured creditors of SAI. In
an effort to address the ongoing liquidity needs described above we are in
current discussions with TJS Partners, L.P. (SAI's largest shareholder), our
debt providers, certain key officers and consultants as well as other third
parties regarding providing additional capital resources or agreeing to defer
payments which are due or may become due during 2002. Based upon discussions to
date we are optimistic that new capital may be made available and payments may
be restructured in such a manner that will satisfy SAI's cash requirements for
2002. However, management cannot give any assurance that these discussions will
be successful.

      LOAN AGREEMENTS

      On September 30, 1999, we refinanced our previous $30,000,000 line of
credit with FINOVA Capital Corporation. The refinancing with FINOVA and Citizens
Bank of Massachusetts consisted of a $7,000,000 term loan and a $38,000,000
acquisition line of credit. In August 2000, we amended our loan with FINOVA.
FINOVA bought out the portion of the loan extended by Citizens Bank of
Massachusetts and the loan facility was decreased from $45 million to $17.5
million.

      On January 17, 2001, we refinanced all of our existing indebtedness with
FINOVA with the proceeds of a loan from McGinn, Smith Acceptance Corporation.
This loan consists of a senior tranche of $19.0 million gross and a junior
tranche in an amount of $5.840 million.



                                       39
<PAGE>
      The senior tranche bears interest at 10.5% and matures in five years and
the junior tranche bears interest at 12.5% and matures in five years. In
addition, an original issue discount of $2.3 million was paid from the net
proceeds of the loan.

      Our loan with McGinn, Smith Acceptance Corporation is secured by all of
our accounts receivable and the related monitoring contracts. Among other
covenants, we are required to maintain three financial ratios: i) collateral
coverage ratio of not less than 180%; ii) collections of at least $1,500,000 per
month on our receivables; iii) average recurring monthly revenue under our
monitoring contracts of a minimum of $1.6 million.

      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 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.

      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.

      INFLATION

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



                                       40
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

      We incur debt from two sources: senior debt from financial institutions
and a note related to the sale of our retail account portfolio. At December 31,
2001, we had $18.1 million in senior debt due to McGinn at an interest rate of
10.5% and $5.84 million in junior debt due to McGinn at an interest rate of
12.5%. The total credit, senior and junior, included an original issue discount
of $2.3 million. We also have a note due currently of $1.8 million at an 8%
annual rate for the first fourteen months (September 2000) and 14% until paid.
There is a dispute concerning our obligations under the note. It cannot be
determined when or if we will have to pay all or part of the note. We do not
have exposure to foreign currency fluctuations and do not use derivatives for
trading purposes.





                                       41
<PAGE>
      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

                                2002       2003       2004       2005       2006      Total     Fair Value
                              -------    -------    -------    -------    -------    -------    ----------
<S>                     <C>   <C>        <C>        <C>        <C>        <C>        <C>        <C>
Fixed Rate Debt               $ 1.800                                                $ 1.800      $ 1.800
Average Interest Rate    *         14%                                                  14.0%

Fixed Rate Debt-Senior        $ 2.266    $ 3.545    $ 4.924    $ 6.467    $  .904    $18.106      $18.106
Average Interest Rate           12.36%     12.36%     12.36%     12.36%     12.36%     12.36%

Fixed Rate Debt-Junior                                                    $ 5.840    $ 5.840      $ 5.840
Average Interest Rate                                                       14.36%     14.36%
</TABLE>

* Interest rate increased from 8% to 14% On September 1, 2000.






                  (REMAINDER OF PAGE LEFT INTENTIONALLY BLANK)


                                       42
<PAGE>
ITEM 7. FINANCIAL STATEMENTS

SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Financial Statements
As of December 31, 2000 and 2001
Together With Auditors' Report






                                       43
<PAGE>
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          63     Chairman Emeritus of the Board

     Raymond A. Gross         52     President, Chief Executive Officer, Chief
                                     Financial Officer and Director

     Thomas J. Salvatore      34     Chairman of the Board of Directors

     Michael B. Jones         50     Director

     Douglas Oberlander       52     Director

     Mark Radzik              37     Director

     Stephen J. Ruzika        46     Vice Chairman of the Board of Directors

     Paul Lucking             55     Chief Operating Officer

     Stephen Rubin            55     Senior Vice President

     Karen B. Daniels         47     Senior Vice President

     James N. Jennings        34     General Counsel, Senior Vice President,
                                     Secretary

     Tracy Jones              43     Vice President

     Glenn D. Seaburg         42     Vice President
</TABLE>

      RONALD I. DAVIS is one of our founders and has been a director 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.

      RAYMOND A. GROSS is the Chief Executive Officer and a director of Security
Associate International, Inc. From March 2000 to June of 2001 Mr. Gross was
Chief


                                       44
<PAGE>
Executive Officer and a director of Davel Communications, Inc. Prior to that
time Mr. Gross was President of OneSource, a subsidiary of Carlisle Holdings,
Inc. In 1993 Mr. Gross became President, Chief Executive Officer and director of
Alert Centre, Inc., which was subsequently sold to ADT where he remained as the
Company's Senior Vice President. From 1984 to 1993, Mr. Gross held executive
positions with national firms in the telecommunications and computer services
industries. He holds a B.S. in Accounting from Rider University in
Lawrenceville, New Jersey.

      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.

      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.

      STEPHEN J. RUZIKA was elected as one of our directors in September 2001.
Mr. Ruzika currently serves as Chairman and Chief Executive Officer of Congress
Security Services, Inc. ("Congress"). Congress through its subsidiaries provides
pre-employment screening services and electronic security services. Prior to
forming Congress, Mr. Ruzika served as Chief Executive Officer of Carlisle
Holdings Limited (formerly BHI Incorporated) a NASDAQ listed company until
August 1998. Until July 1997, Mr. Ruzika served as a Director and Executive Vice
President (1987-1997), and Chief Financial Officer (1989-1997) of ADT Limited
("ADT") a NYSE listed company. Mr. Ruzika also served as President and Chief
Executive Officer of ADT Security Services Inc. (1995-1997) a wholly owned
subsidiary of ADT. Mr. Ruzika joined ADT in 1982. Mr. Ruzika earned a Bachelors
Degree from the University of Miami and is a Certified Public Accountant.

      PAUL M. LUCKING is the Chief Operating Officer of Security Associates
International, Inc. From August 2000 to August 2001 Mr. Lucking was Chief
Operating Officer of Davel Communications, Inc. Prior to his employment at
Davel, Mr. Lucking was Senior Vice President Customer Care and Chief Technology
Officer of ADT, Inc. Additionally, Mr. Lucking has performed consulting
services via privately held Interface Solutions, Inc. From 1983 to 1994, Mr.
Lucking held executive positions with regional and national firms in the
Pharmacy Benefits Management and Consumer Credit Card and Merchant Banking
Industries. From 1977 to 1984 Mr. Lucking held several managerial and executive
positions with Federal Express. He holds a B.S. in Mechanical and Industrial
Engineering from the University of Minnesota in Minneapolis, Minnesota.


                                       45
<PAGE>
      MARK RADZIK was elected as one of our directors in October 2001. Mr.
Radzik joined Equity Group Investments in 1998. Before joining Equity, he was a
vice president of the Merchant Banking Group of Banque Paribas in Chicago. At
Paribas he originated, structured and executed leveraged cash flow senior
financings and equity investments. Prior to joining Paribas, Mr. Radzik was a
manager at Arthur Andersen where he directed teams responsible for restructuring
distressed companies, and performing due diligence on potential acquisitions for
equity and debt investors. Mr. Radzik received a B.S. in accounting and a M.B.A.
with a major in finance from Indiana University.

      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 of Chicago.
Mr. Rubin has the principal responsibility for the design and implementation of
our marketing program.

      KAREN B. DANIELS has served as Senior Vice President since November 2001,
and 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 General Counsel, Senior Vice President and
Secretary of our company since November 2001, Corporate Counsel 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.

      TRACY JONES is the Vice President of Operations in which he is responsible
for overall directions and development of the monitoring centers operations.
Prior to joining Security Associates International, Mr. Jones was Practice
Manager -- CRM Consulting for ManagodOps.com, Inc. the leading mid-market ASP
within the Microsoft/Great Plains partner channel. Mr. Jones' background
includes 16 years in the electronic security industry working with ADT Security
Services, Entergy Security, Dice Corporation and outside the industry with
Accenture (formerly Anderson Consulting) and Marriott. Mr. Jones has over 20
years of responsibility at the corporate, divisional, and regional levels in
multi-location environments and holds his Bachelors of Business Administration
(BBA) from the University of Wisconsin.

      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
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. 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.



                                       46
<PAGE>
      Based solely upon a review of the Forms 3 and 4 and amendments thereto
furnished to us pursuant to 16a-3(e), during our most recent fiscal year and
Forms 5 and amendments thereto furnished to us with respect to our most recent
fiscal year, there are no directors, officers or beneficial owners of more than
10% of any class of equity securities that failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year or prior fiscal years.

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 May 15, 2002.

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 May 15, 2002.

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 May 15, 2002.

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
         beginning on page F-1 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.

(b) (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. Reports on Form 8-K filed during the quarter ended
December 31, 2001.

      On October 4, 2001, SAI filed a Current Report on Form 8-K, dated October
3, 2001, that reported a $5.0 million private placement with EGI-Fund (01)
Investors, L.L.C., for Series B Preferred Stock and warrants. As part of the
transaction Mark Radzik was appointed to the Board of Directors.



                                       47
<PAGE>
SECURITY ASSOCIATES INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Financial Statements
As of December 31, 2000 and 2001
Together With Auditors' Report




<PAGE>


                     SECURITY ASSOCIATES INTERNATIONAL, INC.
                                AND SUBSIDIARIES


                          INDEX TO FINANCIAL STATEMENTS



<Table>
<Caption>
                                                                                             PAGE
                                                                                            ------
<S>                                                                                         <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                      F-2

CONSOLIDATED FINANCIAL STATEMENTS:
    Consolidated Balance Sheets as of December 31, 2000 and 2001                              F-3
    Consolidated Statements of Operations for the Years Ended December 31, 1999,
       2000 and 2001                                                                          F-5
    Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
       1999, 2000 and 2001                                                                    F-6
    Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
       2000 and 2001                                                                          F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                    F-8
</Table>


<PAGE>


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, 2000 and 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1999, 2000 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the 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, 2000 and 2001, and the
results of their operations and their cash flows for the years ended December
31, 1999, 2000 and 2001, in conformity with accounting principles generally
accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that may result from the outcome of this uncertainty.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) of this Form 10-KSB 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.





Chicago, Illinois
April 15, 2002



                                      F-2
<PAGE>


                     SECURITY ASSOCIATES INTERNATIONAL, INC.
                                AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS



<Table>
<Caption>
                                                              DECEMBER 31,
                                                      -----------------------------
                        ASSETS                            2000             2001
                                                      ------------     ------------
<S>                                                   <C>              <C>
CURRENT ASSETS:
    Cash                                              $     53,115     $  5,459,055
    Restricted cash                                             --          355,000
    Accounts receivable, net                             2,629,203        2,254,491
    Other current assets                                   857,632          356,539
                                                      ------------     ------------
                     Total current assets                3,539,950        8,425,085
                                                      ------------     ------------

FURNITURE AND EQUIPMENT, net                             5,063,483        4,557,801
                                                      ------------     ------------

OTHER LONG-TERM ASSETS:
    Goodwill, net                                       23,420,768       20,717,698
    Other long-term assets, net                            481,257          500,000
                                                      ------------     ------------
                     Total other long-term assets       23,902,025       21,217,698
                                                      ------------     ------------
                     Total assets                     $ 32,505,458     $ 34,200,584
                                                      ============     ============
</Table>


                                      F-3
<PAGE>


<Table>
<Caption>
                                                                                         DECEMBER 31,
                                                                               ------------------------------
                 LIABILITIES AND STOCKHOLDERS' EQUITY                              2000              2001
                                                                               ------------      ------------
<S>                                                                            <C>               <C>
CURRENT LIABILITIES:
    Accounts payable                                                           $  2,387,919      $  1,139,179
    Current maturities of long-term debt                                          2,249,679         3,604,231
    Accrued interest                                                                225,312           788,602
    Accrued expenses                                                              1,216,441         3,735,528
    Unearned revenue                                                                255,868           199,443
                                                                               ------------      ------------
                     Total current liabilities                                    6,335,219         9,466,983

LONG-TERM LIABILITIES:
Long-term debt, net of current maturities                                        15,902,281        20,242,710
Other long-term liabilities                                                              --           353,281
                                                                               ------------      ------------
                     Total long-term liabilities                                 15,902,281        20,595,991
                                                                               ------------      ------------
                     Total liabilities                                           22,237,500        30,062,974
                                                                               ------------      ------------

COMMITMENTS AND CONTINGENCIES                                                            --                --

STOCKHOLDERS' EQUITY (DEFICIT):
    Series A convertible preferred stock, $10 par value, 149,786 shares
       authorized; 137,359 and 149,459 shares outstanding on December 31,
       2000 and 2001 respectively, liquidation preference $350 per share          1,373,590         1,494,590
    Series B convertible preferred stock, $10 par value, 20,000 shares
       authorized; 20,000 outstanding on December 31, 2001, liquidation
       preference $250 per share                                                         --           200,000
    Common stock, $.001 par value; 50,000,000 shares authorized; 7,744,467
       and 9,161,684 shares outstanding on December 31, 2000 and 2001,
       respectively                                                                   7,744             9,162
    Warrants, net                                                                   162,630         3,711,137
    Additional paid-in capital                                                   36,748,414        41,892,013
    Note receivable from issuance of common stock                                        --          (900,000)
    Accumulated deficit                                                         (28,024,420)      (42,269,292)
                                                                               ------------      ------------
                     Total stockholders' equity                                  10,267,958         4,137,610
                                                                               ------------      ------------
                     Total liabilities and stockholders' equity                $ 32,505,458      $ 34,200,584
                                                                               ============      ============
</Table>


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


                                      F-4
<PAGE>


                     SECURITY ASSOCIATES INTERNATIONAL, INC.
                                AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF OPERATIONS



<Table>
<Caption>
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                                         ------------------------------------------------
                                                             1999              2000              2001
                                                         ------------      ------------      ------------
<S>                                                      <C>               <C>               <C>
NET REVENUE                                              $ 22,689,132      $ 22,215,282      $ 20,961,815

OPERATING UNIT EXPENSE                                     14,899,687        17,181,602        16,058,464
                                                         ------------      ------------      ------------

OPERATING UNIT MARGIN                                       7,789,445         5,033,680         4,903,351
                                                         ------------      ------------      ------------

OPERATING EXPENSES:
    Amortization and depreciation                           5,713,890         4,709,689         4,201,690
    General and administrative                              2,931,420         2,555,749         4,876,236
    Selling and marketing                                   2,075,360         1,937,322         1,880,176
    Acquisition related expenses                                   --                --         1,022,290
    Restructuring expenses                                         --                --         1,399,722
    Other expenses                                                 --                --         2,164,891
                                                         ------------      ------------      ------------
                     Total operating expenses              10,720,670         9,202,760        15,545,005
                                                         ------------      ------------      ------------
                     Loss from operations                  (2,931,225)       (4,169,080)      (10,641,654)

GAIN ON SALE OF OWNED SUBSCRIBER ACCOUNTS                   1,899,155                --                --
INTEREST EXPENSE                                           (2,564,565)       (1,583,344)       (3,603,218)
                                                         ------------      ------------      ------------
                     Net loss                              (3,596,635)       (5,752,424)      (14,244,872)

DIVIDENDS ACCRUED ON PREFERRED STOCK                         (450,000)               --                --
                                                         ------------      ------------      ------------
                     Net loss available to common
                        stockholders                     $ (4,046,635)     $ (5,752,424)     $(14,244,872)
                                                         ============      ============      ============
NET LOSS PER SHARE, basic and diluted                    $       (.59)     $       (.77)     $      (1.71)
                                                         ============      ============      ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING        6,897,200         7,444,161         8,344,609
                                                         ============      ============      ============
</Table>


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


                                      F-5
<PAGE>


                     SECURITY ASSOCIATES INTERNATIONAL, INC.
                                AND SUBSIDIARIES


                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



<Table>
<Caption>
                                                                    CONVERTIBLE             12% REDEEMABLE
                                              COMMON STOCK        PREFERRED STOCK          PREFERRED STOCK
                                         ---------------------  -------------------    ------------------------
                                           SHARES      AMOUNT   SHARES     AMOUNT        SHARES       AMOUNT
                                         ----------   --------  -------  ----------    ---------   ------------
<S>                                      <C>          <C>       <C>      <C>           <C>         <C>
BALANCE, December 31, 1998                6,771,807   $  6,771   66,660  $  666,596      500,000   $  5,000,000

    Issuance of Series A convertible
       preferred stock                           --         --  (66,660)   (666,596)    (500,000)    (5,000,000)
    Issuance of common stock                373,480        374       --          --           --             --
    Warrants                                     --         --       --          --           --             --
    Accrued dividends                            --         --       --          --           --             --
    Net loss                                     --         --       --          --           --             --
                                         ----------   --------  -------  ----------    ---------   ------------
BALANCE, December 31, 1999                7,145,287      7,145       --          --           --             --

    Issuance of Series A convertible
       preferred stock                           --         --       --          --           --             --
    Issuance of common stock                599,180        599       --          --           --             --
    Warrants                                     --         --       --          --           --             --
    Net loss                                     --         --       --          --           --             --
                                         ----------   --------  -------  ----------    ---------   ------------
BALANCE, December 31, 2000                7,744,467      7,744       --          --           --             --

    Issuance of Series A convertible
       preferred stock                           --         --       --          --           --             --
    Issuance of Series B convertible
       preferred stock                           --         --       --          --           --             --
    Issuance of common stock              1,417,217      1,418       --          --           --             --
    Warrants                                     --         --       --          --           --             --
    Note receivable from issuance of
       common stock                              --         --       --          --           --             --
    Net loss                                     --         --       --          --           --             --
                                         ----------   --------  -------  ----------    ---------   ------------
BALANCE, December 31, 2001                9,161,684   $  9,162       --  $       --           --   $         --
                                         ==========   ========  =======  ==========    =========   ============

<Caption>
                                                  CONVERTIBLE PREFERRED STOCK
                                         ---------------------------------------------
                                                 SERIES A               SERIES B                      ADDITIONAL
                                         -----------------------  --------------------                 PAID-IN
                                           SHARES      AMOUNT      SHARES     AMOUNT      WARRANTS     CAPITAL
                                         ---------  ------------  --------   ---------  -----------  ------------
<S>                                      <C>        <C>           <C>        <C>        <C>          <C>
BALANCE, December 31, 1998                      --  $         --        --   $      --       60,748  $ 16,360,092

    Issuance of Series A convertible
       preferred stock                     136,359     1,363,590        --          --           --    17,972,922
    Issuance of common stock                    --            --        --          --           --       622,957
    Warrants                                    --            --        --          --       50,941            --
    Accrued dividends                           --            --        --          --           --            --
    Net loss                                    --            --        --          --           --            --
                                         ---------  ------------  --------   ---------  -----------  ------------
BALANCE, December 31, 1999                 136,359     1,363,590        --          --      111,689    34,955,971

    Issuance of Series A convertible
       preferred stock                       1,000        10,000        --          --           --       115,000
    Issuance of common stock                    --            --        --          --           --     1,677,443
    Warrants                                    --            --        --          --       50,941            --
    Net loss                                    --            --        --          --           --            --
                                         ---------  ------------  --------   ---------  -----------  ------------
BALANCE, December 31, 2000                 137,359     1,373,590        --          --      162,630    36,748,414

    Issuance of Series A convertible
       preferred stock                      12,100       121,000        --          --           --     1,234,756
    Issuance of Series B convertible
       preferred stock                          --            --    20,000     200,000           --     2,549,030
    Issuance of common stock                    --            --        --          --           --     1,359,813
    Warrants                                    --            --        --          --    3,548,507            --
    Note receivable from issuance of
       common stock                             --            --        --          --           --            --
    Net loss                                    --            --        --          --           --            --
                                         ---------  ------------  --------   ---------  -----------  ------------
BALANCE, December 31, 2001                 149,459  $  1,494,590    20,000   $ 200,000    3,711,137  $ 41,892,013
                                         =========  ============  ========   =========  ===========  ============

<Caption>
                                         ISSUANCE OF                     TOTAL
                                           COMMON      ACCUMULATED    STOCKHOLDERS'
                                            STOCK        DEFICIT         EQUITY
                                         ------------  ------------   -------------
<S>                                      <C>           <C>            <C>
BALANCE, December 31, 1998               $         --  $(18,225,361)  $  3,868,846

    Issuance of Series A convertible
       preferred stock                             --            --     13,669,916
    Issuance of common stock                       --            --        623,331
    Warrants                                       --            --         50,941
    Accrued dividends                              --      (450,000)      (450,000)
    Net loss                                       --    (3,596,635)    (3,596,635)
                                         ------------  ------------   ------------
BALANCE, December 31, 1999                         --   (22,271,996)    14,166,399

    Issuance of Series A convertible
       preferred stock                             --            --        125,000
    Issuance of common stock                       --            --      1,678,042
    Warrants                                       --            --         50,941
    Net loss                                       --    (5,752,424)    (5,752,424)
                                         ------------  ------------   ------------
BALANCE, December 31, 2000                         --   (28,024,420)    10,267,958

    Issuance of Series A convertible
       preferred stock                             --            --      1,355,756
    Issuance of Series B convertible
       preferred stock                             --            --      2,749,030
    Issuance of common stock                       --            --      1,361,231
    Warrants                                       --            --      3,548,507
    Note receivable from issuance of
       common stock                          (900,000)           --       (900,000)
    Net loss                                       --   (14,244,872)   (14,244,872)
                                         ------------  ------------   ------------
BALANCE, December 31, 2001               $   (900,000) $(42,269,292)  $  4,137,610
                                         ============  ============   ============
</Table>


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


                                      F-6
<PAGE>


                     SECURITY ASSOCIATES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                               FOR THE YEARS ENDED DECEMBER 31,
                                                                      ------------------------------------------------
                                                                          1999              2000              2001
                                                                      ------------      ------------      ------------
<S>                                                                   <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                          $ (3,596,635)     $ (5,752,424)     $(14,244,872)
    Adjustments to reconcile net loss to net cash used for
       operating activities-
           Gain on sale of owned subscriber accounts                    (1,899,155)               --                --
           Amortization and depreciation                                 5,713,890         4,709,689         4,201,690
           Original issue discount amortization                                 --                --           410,933
           Net issuance of common stock for dealers and employees
                                                                            67,226            68,173           102,768
           Amortization of warrants and stock issued under dealer
              stock incentive plan                                         255,282           302,352           233,859
           Impairment and loss on sale of fixed assets                          --                --           455,403
           Changes in assets and liabilities-
              Accounts receivable, net                                   2,156,519          (800,308)          374,712
              Other current assets                                        (209,187)         (307,623)          501,093
              Other long-term assets                                        92,322          (207,446)           25,000
              Accounts payable                                            (176,567)        1,924,609        (1,248,740)
              Accrued expenses                                           1,805,315        (2,518,540)        2,519,087
              Other long-term liabilities                                       --                --           353,281
              Accrued interest                                          (1,381,179)           36,571           563,290
              Unearned revenue                                          (3,139,285)         (243,539)          (56,425)
                                                                      ------------      ------------      ------------
                     Net cash used for operating activities               (311,454)       (2,788,486)       (5,808,921)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of contract rights to monitor security systems, net
                                                                        (1,517,537)               --                --
    Proceeds from sale of owned subscriber accounts                     22,195,906                --                --
    Purchase of fixed assets                                            (1,629,484)       (2,750,983)       (1,448,340)
    Cash paid for acquisition, net                                      (5,232,197)         (240,332)               --
                     Net cash provided by (used for) investing
                        activities                                      13,816,688        (2,991,315)       (1,448,340)
                                                                      ------------      ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of capital stock                                192,500         1,337,247         7,777,896
    Dividends accrued on preferred stock                                  (450,000)               --                --
    Deferred financing costs                                              (393,020)               --                --
    Write-off of FINOVA financing expenses                                      --                --           456,257
    Debt issuance deposit                                                       --                --          (500,000)
    Original issue discount paid                                                --                --        (2,310,000)
    Proceeds from notes payable to related parties                       1,500,000                --                --
    Repayment of notes payable                                         (20,856,438)         (182,410)      (17,245,952)
    Proceeds from notes payable                                          5,652,376         4,046,558        24,840,000
                                                                      ------------      ------------      ------------
                     Net cash (used for) provided by financing
                        activities                                     (14,354,582)        5,201,395        13,018,201
                                                                      ------------      ------------      ------------
(DECREASE) INCREASE IN CASH                                               (849,348)         (578,406)        5,760,940

CASH, beginning of year                                                  1,480,869           631,521            53,115
                                                                      ------------      ------------      ------------
CASH AND RESTRICTED CASH, end of year                                 $    631,521      $     53,115      $  5,814,055
                                                                      ============      ============      ============
</Table>

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


                                      F-7
<PAGE>


                     SECURITY ASSOCIATES INTERNATIONAL, INC.
                                AND SUBSIDIARIES


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1999, 2000 AND 2001




1.    DESCRIPTION OF THE BUSINESS

      COMPANY BACKGROUND

      Security Associates International, Inc. ("SAI" or "the Company") is
      incorporated as a Delaware Corporation that provides monitoring services
      to independent alarm dealers on a subcontract basis. Revenues are composed
      primarily of fees for monitoring services.

2.    LIQUIDITY

      During 2001, the Company experienced a $5,760,940 increase in its cash
      balance. The increase was the result of the completion of a new long-term
      debt financing agreement that after repayments and other related items
      provided $5,240,305, the issuance of capital stock that provided
      $7,777,896, offset by cash used in operating activities in the amount of
      $5,808,921 and the purchase of fixed assets in the amount of $1,448,340.

      On June 30, 1999, SAI sold its portfolio of 27,000 retail subscriber
      accounts to Security Alarm Financing Enterprises ("SAFE") for $22,800,000.
      At that time, SAI also entered into an agreement to refer additional
      purchase and loan transactions during a specified period following the
      sale. If certain minimum performance criteria were satisfied, a note to
      SAFE in the amount of $1,800,000 bearing 8% interest was to have been
      deemed paid in full. A dispute has arisen as to: (1) whether SAI has
      fulfilled its obligations under the agreement, and (2) whether SAFE met
      all of its contractual commitments. SAI and SAFE have entered into a
      binding arbitration process before the American Arbitration Association in
      regard to these matters. SAFE filed its claim on July 3, 2001, and SAI
      filed its response on August 1, 2001. SAFE is claiming $2,500,000 as
      principal and interest on the note (through April 15, 2002) plus
      $3,000,000 in additional damages based on various other breaches of the
      asset purchase agreement, relating to reprogramming expenses and the
      adequacy of SAI's disclosures in addition to unspecified consequential
      damages. The note calls for default interest at the rate of 14% per annum
      after fourteen months from the date of issuance. SAI has asserted that no
      amount is due under the note and that SAI did not breach any of the
      provisions of the asset purchase agreement as to which SAFE has made
      claims. SAI has counterclaimed and is seeking in excess of $2,000,000 in
      damages based on SAFE's breaches of its obligations under the asset
      purchase agreement in failing to use SAI's central stations as SAFE's
      preferred provider of monitoring services, failure to abide by certain
      conditions related to SAI's monitoring agreement and failure to pay
      monitoring and other fees. SAI believes that it will prevail on the merits
      of its arguments. In the event that SAFE prevails for amounts in excess of
      the $2,370,000 accrued on SAI's balance sheet as of December 31, 2001, SAI
      may need to seek additional resources to satisfy any amounts ultimately
      found to be due.


                                      F-8
<PAGE>


      During the first quarter of 2001, SAI entered into a new financing
      agreement with McGinn, Smith Acceptance Corp ("McGinn"). Net proceeds
      under the agreement totaled approximately $22,000,000, which is net of a
      $2,310,000 original issue discount and a $500,000 mandatory debt service
      reserve. $16,351,960 of the proceeds was used to settle all outstanding
      debt to FINOVA Capital Corporation ("FINOVA"). In conjunction with the
      retirement of the FINOVA debt, SAI wrote off the remaining loan
      origination fees of $456,257. Principal payments to McGinn during fiscal
      2001 were approximately $894,000 and approximately $2,266,000 is due
      during fiscal 2002. With completion of the McGinn financing, SAI's total
      debt at December 31, 2001, has increased by approximately $5,695,000 when
      compared to total debt at December 31, 2000. The agreement contains
      certain covenants, including required amounts of recurring monthly revenue
      ("RMR") and cash collections. In the event of default, McGinn may replace
      SAI as collection agent and remove SAI as the central monitoring station,
      resulting in a loss of monitoring fees and all associated net revenue
      after fees.

      During the third quarter of 2001 and the first quarter of 2002, SAI was
      not in compliance with two covenants contained in the McGinn financing
      agreement. The agreement required that the monitoring contracts used to
      collateralize the financing must yield a defined level of RMR and a
      defined level of cash collections. SAI obtained amendments or received
      waivers for the covenants described above, which set out new minimum
      requirements or waived the event of default. Under the most recent
      amendment, the Company must maintain an average $1,600,000 RMR throughout
      the term of the agreement. Currently, these monitoring contracts yield
      approximately $1,700,000. We anticipate the recurring monthly revenue will
      decrease to some extent as a result of the consolidation effort and the
      elimination of non-profitable accounts. In management's opinion, there
      should be adequate RMR and cash collections to satisfy the amended loan
      covenants during the remainder of 2002.

      On August 6, 2001, in a series of transactions with Foamart Limited and
      SecurityVillage.com. accounted for as the issuance of various equity
      instruments for cash and a note, SAI issued (a) 12,100 shares of Series A
      Preferred Stock (convertible into 1,210,000 shares of SAI's common stock);
      (b) 1,210,000 shares of SAI common stock; (c) warrants to purchase
      1,815,000 shares of common stock (at an exercise price of $3.50 per
      share), with lives of ten years; and (d) assumed $1,100,000 of liabilities
      which included 149,270 shares of common stock issued to
      SecurityVillage.com employees for past services in exchange for $4,000,000
      in cash and a note receivable in the amount of $1,673,250. This note has
      matured and was payable to SAI on December 31, 2001. In January 2002, this
      note was declared in default and KC Acquisition Corp has made claims
      relating to the termination of the proposed merger between SAI and KC
      Acquisition Corp that KC Acquisition Corp believes nullifies the note
      receivable. SAI filed a counter-claim. Subsequently, both parties have
      agreed to settle all claims against each other. KC Acquisition Corp will
      pay to SAI $900,000 in installments of $20,000 per month beginning April
      15, 2002, through December 15, 2002, and will pay the balance of $720,000
      on December 31, 2002.

      On October 3, 2001, SAI issued to EGI-Fund (01) Investors, L.L.C., 20,000
      shares of Series B Preferred Stock (convertible into 2,000,000 shares of
      common stock) in exchange for $5,000,000 in cash and a warrant to purchase
      2,500,000 shares of common stock at $2.50 per share with a life of four
      years in exchange for $1,000.

      Expenses relating to the issue of the Series A and B Stock described above
      amounted to approximately $495,000.

      SAI's loss from operations for the twelve months ended December 31, 2001
      increased to $10,641,654 from $4,169,080 for the twelve months ended
      December 31, 2000. Included in


                                      F-9
<PAGE>


      this loss from operations in 2001 are costs related to the aborted
      acquisition of KC Acquisition Corp as well as restructuring expenses and
      other expenses which totaled $4,586,903. During the third quarter of 2001,
      management of SAI commenced a strategic review of SAI's business
      operations and its corporate organization structure with a view to
      developing a business strategy that would place SAI in a stronger position
      to deal with the changing business environment and challenges facing the
      Company's core operation. The objectives of the review were to set out a
      plan to improve the entire structure of the business operations in order
      to create a more profitable, efficient organization with significantly
      improved marketing, selling, and servicing capabilities supported by
      upgraded management information systems. This review was completed during
      the fourth quarter of 2001, and the implementation of a plan to
      consolidate our monitoring centers to three facilities from six regional
      facilities commenced. It is currently anticipated that the consolidation
      should be substantially completed by the end of the second quarter of
      2002. Once complete, management of SAI believes that based upon the
      efficiencies to be achieved, SAI should be able to provide positive cash
      from operations no later than the second quarter of 2002. Notwithstanding
      the projected effects from the consolidation, SAI currently anticipates
      that the Company will use approximately $5,000,000 in cash during 2002,
      which includes approximately $2,266,000 in principal repayments, capital
      expenditures of approximately $800,000 and payments relating to
      restructuring, severance and other related items that should range between
      $1,400,000 and $1,500,000.

      In August 2001, the Company's Board of Directors accepted and approved the
      assignment of an agreement between Mr. Raymond Gross, Mr. Stephen Ruzika,
      Mr. Paul Lucking and, Mr. Thomas Salvatore. The agreement sets out that
      these individuals would join SAI and hold the positions of Chief Executive
      Officer, Vice Chairman of the Board and Chief Operating Officer,
      respectively. In addition, the agreement also states that Mr. Salvatore
      would hold the position of Chairman of the Board. These individuals,
      including Mr. Salvatore, are charged with the responsibility of developing
      and executing a business strategy designed to significantly improve SAI's
      overall financial condition, strategic direction and growth objectives. In
      order to directly incentivize these four individuals, SAI agreed to pay
      them collectively, in addition to their base compensation and consulting
      fees, one hundred percent of the first year's improvement in annualized
      Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA")
      as measured for the quarter ended June 30, 2002, versus the quarter ended
      June 30, 2001, with a "true-up" at December 31, 2002. During the first
      quarter of fiscal 2002, SAI has executed agreements with each of the
      aforementioned individuals with respect to this incentive and their terms
      and conditions of employment or consultancy.

      As of April 15, 2002, SAI has an unrestricted cash balance of
      approximately $2,100,000 as a result of the transactions and events
      described above. SAI believes that it will have the funds necessary to
      complete operational obligations, such as the completion of the
      consolidation plan, as well as normal course of business expenditures
      through the end of 2002, but this may come in to question if certain
      assumptions are not met. These assumptions include: certain levels of
      revenue, which include new and cancelled business, as well as telephone
      expenses and headcount reductions through efficiencies in the three
      remaining facilities. However, without additional capital injections or
      restructuring of existing debt payments, including deferring existing
      principal payments on the Company's loans, the Company will not have the
      ability to pay the EBITDA obligations to the management team or pay any
      liability incurred as a result of the SAFE litigation. If the Company is
      unable to meet these obligations, SAI may become a party to litigation. In
      such an instance, should judgement be entered against SAI, the prevailing
      parties would be treated as unsecured creditors of SAI. In an effort to
      address the ongoing liquidity needs described above, the Company is in
      current discussions with TJS Partners, L.P. (SAI's largest shareholder),
      our debt provider, certain key officers and consultants, as well as other
      third parties regarding providing additional capital resources or


                                      F-10
<PAGE>


      agreeing to defer payments which are due or may become due during 2002.
      Based upon discussions to date, the Company is optimistic that new capital
      may be made available and payments may be restructured in such a manner
      that will satisfy SAI's cash requirements for 2002. However, management
      cannot give any assurance that these discussions will be successful.

3.    SUMMARY OF MAJOR ACCOUNTING POLICIES AND ACCOUNTS

      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 accounting
      principles generally accepted in the United States 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.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of 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.

      RECLASSIFICATIONS

      Certain amounts from the 1999 and 2000 financial statements have been
      reclassified in order to conform to the 2001 presentation.

      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 $294,700
      and $285,200 as of December 31, 2000 and 2001, respectively.

      RESTRICTED CASH

      Restricted cash at December 31, 2001 totaled $355,000, which represents
      the principal and accrued interest due on the debt to McGinn at December
      31, 2001. The amount was paid to McGinn on January 2, 2002. McGinn
      controls the Company's lockbox and one cash account. The McGinn agreement
      calls for cash receipts, beginning with the first business day of each
      month, to be set aside as unusable funds. Once the cash balance in the
      account reaches


                                      F-11
<PAGE>


      125% of the next month's principal and interest payment due on the debt,
      the Company can use any amount that exceeds the monthly cash requirement
      for general corporate purposes.

      OTHER CURRENT ASSETS

      Other current assets consist of the following at December 31, 2000, and
December 31, 2001:

<Table>
<Caption>
                                          DECEMBER 31
                                   -------------------------
                                      2000           2001
                                   ----------     ----------
<S>                                <C>            <C>
Prepaid insurance                  $  153,460     $  127,739
Prepaid rent                           96,074         86,609
Deposits                               69,912         58,456
Other prepaid expense                  47,215         83,735
Deferred acquisition costs            490,971             --
                                   ----------     ----------
                                   $  857,632     $  356,539
                                   ==========     ==========
</Table>

      OTHER LONG-TERM ASSETS, NET

      Other long-term assets, net as of December 31, 2001 include $500,000 of
      cash to provide a debt service reserve, which is required to be maintained
      by McGinn. As of December 31, 2000, other long-term assets, net consisted
      primarily of net deferred financing costs of approximately $460,000
      associated with debt provided by FINOVA. The deferred financing costs were
      being amortized over the life of the loan. The FINOVA debt was repaid in
      January 2001, from net proceeds made available under the McGinn financing
      and accordingly, any remaining net deferred financing costs were written
      off as a component of interest expense in January 2001.

      GOODWILL AND NEW ACCOUNTING PRONOUNCEMENTS

      Goodwill is recorded as the cost of purchased businesses in excess of the
      fair value of the net assets acquired. Goodwill resulting from
      acquisitions prior to July 1, 2001 was being amortized on a straight-line
      basis over a period of three to fifteen years. Goodwill in the
      accompanying consolidated balance sheets is net of accumulated
      amortization of approximately $7,918,000 and $10,622,000 as of December
      31, 2000 and 2001, respectively. Amortization of goodwill amounted to
      $2,421,043, $2,877,107 and $2,703,071 for the twelve months ended December
      31, 1999, 2000 and 2001, respectively.

      In July 2001, The Financial Accounting Standards Board ("FASB") issued
      SFAS No. 141, "Business Combinations". SFAS No. 141 supercedes prior
      guidance and requires that all business combinations in the scope of this
      statement be accounted for using the purchase method. The provisions of
      this statement apply to all business combinations initiated after June 30,
      2001, as well as business combinations accounted for using the purchase
      method for which the date of acquisition is July 1, 2001, or later. The
      Company adopted this statement as required on July 1, 2001, and it did not
      have a material affect on the financial statements.

      In July, 2001, the FASB issued SFAS No. 142, "Goodwill and Other
      Intangible Assets". SFAS No. 142 supercedes prior guidance and requires
      that goodwill no longer be amortized to earnings, but instead be annually
      reviewed for impairment. The impairment test under SFAS No. 142 is based
      upon a two-step process involving: (i) comparing the estimated fair value
      of the related reporting unit to its net book value, and (ii) comparing
      the estimated implied fair value of goodwill to its carrying value. The
      Company has elected to adopt SFAS No. 142 in


                                      F-12
<PAGE>


      the first quarter of 2002. Accordingly, the Company will not record
      amortization expense of approximately $2,590,000 in fiscal 2002 based upon
      the amount of goodwill at December 31, 2001.

      Certain acquired intangible assets will not be reclassified and accounted
      for apart from goodwill upon transition to SFAS No. 142. FASB Staff
      Announcement Topic No. D-100 states that the transition provisions do not
      allow entities to "carve-out" from goodwill any intangible assets not
      identified and measured at fair value in the initial rendering of a
      business combination and subsequently accounted for separately from
      goodwill. The Company recognized its relationships with its dealers,
      evidenced by dealer service agreements, and goodwill as a single asset
      labeled "Goodwill". The Company has amortized the combined assets over
      their useful lives ranging from three to fifteen years. According to SFAS
      No. 142, a goodwill impairment loss is measured as the excess of the
      carrying amount of goodwill (which includes the carrying value of the
      acquired intangible assets) over the implied fair value of goodwill (which
      excludes the fair value of the acquired intangible assets.). Thus, a
      future measured goodwill impairment loss may be substantially larger than
      it would have been had the acquired intangible assets been initially
      recognized apart from goodwill.

      In August 2001, the FASB issued SFAS No. 144, "Accounting for the
      Impairment of Disposal of Long Lived Assets". Consistent with prior
      guidance, SFAS No. 144 continues to require a three step approach for
      recognizing and measuring the impairment of assets to be held and used.
      Assets to be sold must be stated at the lower of the asset's carrying
      amount or fair value and deprecation is no longer recognized. SFAS No. 144
      is effective for fiscal years beginning after December 15, 2001. The
      adoption of SFAS No. 144 is not expected to have a material impact on the
      Company's financial position or results of operations.

      FURNITURE AND EQUIPMENT

      Furniture and equipment are stated at cost. Depreciation is calculated
      using straight-line methods and accelerated methods for financial
      statement purposes. The straight line method was used for assets purchased
      prior to 1999 using an estimated useful life of three to seven years. The
      double declining method was used on purchases beginning in fiscal 1999.
      Depreciation expense for fiscal years 1999, 2000 and 2001 was $1,028,300,
      $1,733,024 and $1,498,619, respectively.

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

<Table>
<Caption>
                                                 DECEMBER 31
                                        -----------------------------
                                            2000             2001
                                        ------------     ------------
<S>                                     <C>              <C>
Equipment                               $  5,996,921     $  6,364,277
Leasehold improvements                     1,817,411        1,653,685
Work in process                              525,138          880,263
                                        ------------     ------------
                                           8,339,470        8,898,225

Less- Accumulated depreciation             3,275,987        4,340,424
                                        ------------     ------------
                                        $  5,063,483     $  4,557,801
                                        ============     ============
</Table>


                                      F-13
<PAGE>


      ACCRUED EXPENSES

      Accrued expenses are composed of the following:

<Table>
<Caption>
                                                DECEMBER 31
                                      -----------------------------
                                          2000             2001
                                      ------------     ------------
<S>                                   <C>              <C>
Accrued payroll and vacation          $    732,750     $  1,253,402
Accruals related to sale of owned
    subscriber accounts                    117,701          284,400
Accrued restructuring                           --        1,243,802
Accrued telephone                          129,600          217,500
Accrued professional fees                   66,500          572,070
Other                                      169,890          164,354
                                      ------------     ------------
                                      $  1,216,441     $  3,735,528
                                      ============     ============
</Table>

      OTHER LONG-TERM LIABILITIES

      In conjunction with the restructuring plan that was announced in November,
      2001, SAI has entered into severance agreements with certain former
      officers of the Company which are payable through 2004. These amounts are
      not included in the restructuring reserve. As of December 31, 2001,
      $353,281 in future payments are included in other long-term liabilities.

      OTHER EXPENSES

      Other expenses of $2,164,891 are principally comprised of (i) legal fees
      of $450,000 for litigation related to prior transactions with SAFE and KC
      Acquisition Corp (ii) a write-off of $396,000 for assets relating to
      out-dated GPS technology which have been abandoned and (iii) approximately
      $184,000 in other one-time expenses. In conjunction with the Company
      taking a new strategic direction in fourth quarter of 2001, the Company
      agreed to a settlement of $1,136,000 for existing employment agreements
      with two directors of the Company. In 2001, $250,000 has been paid,
      $532,436 will be paid in 2002 and $353,281 will be paid in 2003 and
      beyond. The legal fees discussed above are not considered normal operating
      expenses, but relate to the SAFE and KC Acquisition Corp litigation.

      ACQUISITION RELATED EXPENSES

      Acquisition related expenses of $1,022,290 are principally comprised of a
      $500,000 break-up fee and the write-off of $522,290, approximately
      $491,000 from 2000 and $31,300 from 2001, of capitalized expenses related
      to the aborted KC Acquisition Corp transaction.

      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, 2000 and 2001, SAI had net operating loss
      carryforwards of approximately $20,500,000 and $29,500,000 respectively.
      The tax net operating losses begin to expire in 2005. As of December 31,
      2000 and 2001, no tax benefit has been recognized for these loss
      carryforwards.

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


                                      F-14
<PAGE>


<Table>
<Caption>
                                                 2000              2001
                                             ------------      ------------
<S>                                          <C>               <C>
Net operating loss carryforwards             $  7,761,000      $ 11,359,000
Capital loss carryforward                         663,000           815,000
Temporary timing differences                      358,000         1,422,000
                                             ------------      ------------

           Total deferred tax assets            8,782,000        13,596,000
                                             ------------      ------------
Valuation allowance                            (8,782,000)      (13,596,000)
           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, Series A
      and Series B convertible preferred stock have not been included in the
      calculation of net loss per share as their effect would be antidilutive.

      STATEMENT OF CASH FLOWS

      Supplemental cash flow information includes the following:

<Table>
<Caption>
                                                                            DECEMBER 31
                                                           ----------------------------------------------
                                                               1999             2000             2001
                                                           ------------     ------------     ------------
<S>                                                        <C>              <C>              <C>
Supplemental schedule of cash flow information-
       Cash paid during the year for interest              $  1,861,887     $  1,472,781     $  2,355,614
Supplemental schedule of noncash activities-
       Issuance of stock for central station and
           contract rights acquisitions                         337,478          146,211               --
       Issuance of stock in exchange for note
           receivable                                                --               --          848,250
       Accretion of interest related to note
           receivable issued in exchange for stock                   --               --           51,750

       Accrued expenses incurred in the sale of owned
           subscriber accounts                                3,097,278               --               --
       Purchase of contract rights reduced by unearned
           revenue acquired                                     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
                                                                279,629               --               --
       Purchase of contract rights with notes                   245,850               --               --
                                                           ============     ============     ============
</Table>


                                      F-15
<PAGE>


4.    RESTRUCTURING RESERVE

      In November 2001, the Company announced a new strategic direction and
      initiated certain activities designed to restructure its core operating
      platform resulting in a charge to operations of approximately $1,400,000.
      The new direction is targeted at strengthening the infrastructure of the
      core operations of the business, as well as positioning the Company to
      offer new growth opportunities for our current and new dealers. The
      primary initiative was to consolidate the central monitoring centers from
      six regional centers to three centers. Actions began in November to close
      the centers in Cleveland, OH; Dallas, TX; and Seattle, WA. Dealer accounts
      from these centers were reassigned to either the center in Arlington
      Heights, IL or Pompano Beach, FL. The facility in Ogden, Utah will remain
      operating as a small regional central station. These actions resulted in
      the termination of approximately 131 employees. The components of the
      restructuring charges are set out below:


<Table>
<S>                                                                          <C>
Severance for operators and administrative staff                             $  466,522
Consulting fees and broadband expenses                                          124,200
Travel expenses                                                                 190,000
Facility and equipment leases, net of anticipated sub-lease income
                                                                                592,000
Other                                                                            27,000
Total restructuring expense                                                   1,399,722
                                                                             ----------

Less- Payments made during 2001                                                (155,920)
                                                                             ----------
Restructuring reserve, December 31, 2001                                     $1,243,802
                                                                             ==========
</Table>

5.    ACQUISITIONS

      During 2000, the Company entered into a definitive agreement to acquire KC
      Acquisition Corp. The consideration for this proposed transaction included
      $6,500,000 in cash, the equivalent of 4,500,000 shares of the Company's
      common stock and the assumption of approximately $36,000,000 in debt. In
      connection with the then pending KC Acquisition Corp transaction, SAI
      advanced approximately $1,150,000 to KC Acquisition Corp. As previously
      reported on Form 8-K, formal negotiations with KC Acquisition Corp were
      suspended on July 3, 2001. As a result, SAI agreed to forgive $500,000 of
      the advances and this amount was written off as an expense and is included
      in the line item "Acquisition related expenses" reflected in the
      Consolidated Statement of Operations for the year ended December 31, 2001.
      On August 1, 2001, KC Acquisition Corp repaid SAI the remaining $650,000.

      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 three to fifteen year period. The consolidated financial
      statements include the results of these acquired companies since the date
      of acquisition.

      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 7 is shown as if the transaction occurred at the
      beginning of 1999.


                                      F-16
<PAGE>


      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>
                                                                     1999
                                                                  -----------
                                                                  (UNAUDITED)
<S>                                                               <C>
Monitoring fees and other revenues                                $    18,969
Selling and administrative expenses                                    18,166
Payroll expense paid to terminated employees                               --
Amortization and depreciation                                           3,395
                                                                  -----------
                     Loss from operations                              (2,592)

Interest expense                                                        1,589
                                                                  -----------
                     Loss before income taxes                          (4,181)

Income tax expense                                                         --
                                                                  -----------
                     Net loss                                          (4,181)

Dividends accrued on preferred stock                                      450
                                                                  -----------
Net loss available to common stockholders                         $    (4,631)
                                                                  ===========

Net loss per share                                                $      (.66)
Weighted average shares outstanding                                 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.

6.    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.

      On August 6, 2001, in a series of transactions with Foamart Limited and
      SecurityVillage.com accounted for as the issuance of various equity
      instruments for cash and a note, SAI issued: (a) 12,100 shares of Series A
      Preferred Stock (convertible into 1,210,000 shares of SAI's common stock);
      (b) 1,210,000 shares of SAI common stock; (c) warrants to purchase
      1,815,000 shares of common stock (at an exercise price of $3.50 per
      share), with lives of ten years; and (d) assumed $1,100,000 of liabilities
      which included 149,270 shares of common stock issued to
      SecurityVillage.com employees for past services in exchange for $4,000,000
      in cash and a note receivable in the amount of $1,673,250. This note has
      matured and was payable to SAI on December 31, 2001. In January, 2002,
      this note was declared in default and KC Acquisition Corp has made claims
      relating to the termination of the proposed merger between SAI and KC
      Acquisition Corp that KC Acquisition Corp believes nullifies the note
      receivable. SAI filed a counter-claim. Subsequently, both parties have
      agreed to settle all claims against each other. KC Acquisition Corp will
      pay to SAI $900,000 in installments of


                                      F-17
<PAGE>


      $20,000 per month beginning April 15, 2002, through December 15, 2002, and
      will pay the balance of $720,000 on December 31, 2002.

      The Series A convertible preferred stock has a $10 par value, a
      liquidation preference of $350 per share and is convertible into
      14,945,900 shares of SAI's common stock. The Series A convertible
      preferred stock is also entitled to receive dividends equal to those that
      would have been received if the holders had converted into common stock.

      The holders of Series A convertible preferred stock are 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 holders 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 the Company's stockholders.

      On October 3, 2001, SAI issued to EGI-Fund (01) Investors, L.L.C., 20,000
      shares of Series B Preferred Stock (convertible into 2,000,000 shares of
      common stock) in exchange for $5,000,000 in cash and a warrant to purchase
      2,500,000 shares of common stock at $2.50 per share with a life of four
      years in exchange for $1,000.

      The Series B convertible preferred stock has a $10 par value, a
      liquidation preference of $250 per share and is convertible into 2,000,000
      shares of SAI's common stock. The Series B 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


7.    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 (SAFE). 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. If
      certain minimum performance criteria were satisfied, a note to SAFE in the
      amount of $1,800,000 bearing an interest rate of 8% per annum for 14
      months and 14% per annum thereafter was to have been deemed paid in full.
      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. A dispute has arisen as to: (1) whether SAI has
      fulfilled its obligations under the agreement and (2) whether SAFE met all
      of its contractual commitments. SAI is in the preliminary stages of a
      binding arbitration process before the American Arbitration Association in
      regard to these matters. SAFE filed its claim on July 3, 2001, and SAI has
      filed its response on August 1, 2001.

      SAI also agreed to guarantee attrition between 8% and 13% on a substantial
      majority of the portfolio sold for a one-year period. An accrual for
      approximately $1,700,000 was recorded in 1999 to recognize this guarantee
      and $1,400,000 was paid to SAFE in fiscal 2000 and $170,000 in fiscal 1999
      to satisfy this obligation. Additionally, in 1999, SAI recorded an accrual
      of $850,000 to provide for moving the accounts sold to phone lines owned
      by the purchaser. SAI subsequently determined that the accrual required to
      complete the project was insufficient and an additional $438,000 was
      recorded in 2001 for remaining anticipated phone reprogramming charges to
      complete the project. At December 31, 2001, the accrual balance related to
      the sale of owned subscriber accounts is approximately $284,000 and is to
      be paid during 2002.


                                      F-18
<PAGE>


8.    LONG-TERM DEBT

      During the first quarter 2001, SAI entered into a new financing agreement
      with McGinn. Net proceeds under the agreement totaled approximately
      $22,000,000, which is net of a $2,310,000 original issue discount and a
      $500,000 mandatory debt service reserve. $16,351,960 of the proceeds was
      used to settle all outstanding debt to FINOVA. In conjunction with the
      retirement of the FINOVA debt, SAI wrote off the remaining loan
      origination fees of $456,257. The debt is comprised of a senior note of
      $19,000,000 at 10.5% interest and a junior note of $5,840,000 at an
      interest rate of 12.5%. The debt matures as follows:

<Table>
<Caption>
       AS OF DECEMBER 31-     SENIOR DEBT    JUNIOR DEBT          TOTAL
       ------------------     -----------    -----------       -----------
<S>                           <C>            <C>               <C>
       2002                   $ 2,266,000    $        --       $ 2,266,000
       2003                     3,545,000             --         3,545,000
       2004                     4,924,000             --         4,924,000
       2005                     6,467,000             --         6,467,000
       2006                       904,008      5,840,000         6,744,008
                              -----------    -----------       -----------
                              $18,106,008    $ 5,840,000       $23,946,008
                              ===========    ===========       ===========
</Table>

      Long-term debt consists of the following:

<Table>
<Caption>
                                                                   DECEMBER 31
                                                         ------------------------------
                                                             2000              2001
                                                         ------------      ------------
<S>                                                      <C>               <C>
Debt                                                     $ 16,351,960      $ 23,946,008
Note payable in connection with sale
    of owned subscriber accounts                            1,800,000         1,800,000
Original issue discount, net of
    amortization                                                   --        (1,899,067)
                                                         ------------      ------------
                     Total long-term debt                  18,151,960        23,846,941

Current maturities: debt and original
    issue discount                                         (2,249,679)       (3,604,231)
                                                         ------------      ------------
                                                         $ 15,902,281      $ 20,242,710
                                                         ============      ============
</Table>

9.    EMPLOYEE BENEFIT PLAN

      The Company sponsors a 401(k) plan for employees 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, 2000 and 2001 were approximately $85,000, $83,400 and $66,700,
      respectively.

      On April 1, 1999, SAI adopted an employee stock purchase plan to provide
      employees an opportunity to purchase shares of its common stock at $2.76
      per share through payroll deductions. Employees in the plan as of April 1,
      1999, were entitled to receive their shares on July 1, 2001. Total shares
      committed, based on employees in the plan, are approximately 100,000. As
      of July 1, 2001, the SAI stock price was $2.35 per share, a price lower
      than the employee's could purchase SAI stock under the plan. Employees
      remaining in the plan at June 30, 2001, rescinded their option to buy
      shares. No additional employee stock purchase plan has been implemented.


                                      F-19
<PAGE>


10.   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 Accounting Principles Board ("APB") Opinion No. 25 in
      accounting for options and warrants issued to employees and directors.
      Accordingly, no compensation cost has been recognized for stock options
      and warrants granted to those individuals.

      In January, 2000, SAI issued options to purchase 840,000 shares of common
      stock to its officers and directors under a stock option plan. Options to
      purchase these shares have an exercise price of $2.75 per share, vest over
      a two-year period and expire 6 years from the date of the grant except for
      75,000 options to three outside directors which vest immediately. In
      February, 2000, options to purchase 100,000 shares at an exercise price of
      $2.88 per share were issued to new officers of SAI. In March, 2000,
      options to purchase 123,000 shares at an exercise price of $3.13 per share
      were issued to key employees. These options expire 6 years from the date
      of grant and vest over a three-year period. The options are valued at
      $1.62, $1.71 and $1.85, per share respectively under the Black-Scholes
      option pricing model.

      In May, 2000, SAI issued options to purchase 150,000 shares of common
      stock at an exercise price of $3.625 per share to a director in return for
      his services as a broker. These options vest immediately and expire 60
      days from the date of the grant. The options are valued at $0.32 each
      under the Black-Scholes option pricing model. The aggregate value of the
      options of $56,000 were capitalized as part of the purchase price in SAI's
      merger with KC Acquisition Corp and subsequently written off in 2001 as
      part of the $522,290 write-off of capitalized assets related to the
      aborted KC Acquisition Corp transaction. The options were exercised in
      June 2000.

      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 six years from
      the date of grant and vest over a three-year period. The options were
      valued at $1.29 and $1.04 per share respectively under the Black-Scholes
      option pricing model.

      In 2001, the Company granted options to purchase 4,350,000 shares of
      common stock to its officers, former officer and directors under a stock
      option plan not yet approved by the shareholders. However, management of
      SAI believes that the approval of these option grants is reasonably
      assured. Accordingly, these option grants have been accounted for as if
      they have been approved. Options to purchase 450,000 of these shares have
      an exercise price of $2.50 per share, 300,000 of these shares have an
      exercise price of $2.20 per share and the remaining 3,600,000 shares have
      an exercise price of $2.50 per share. These options expire three years,
      six years, and ten years, respectively, from the date of grant and vest
      immediately or over a three-year period. The options were valued at $1.26,
      $1.36 and $1.31 per share respectively under the Black-Scholes
      option-pricing model.

      The options granted above are included in the pro forma net income and
      earnings in the table shown below.


                                      F-20
<PAGE>


      Had compensation costs for the stock options and warrants issued to
      directors and employees been determined based on the fair value at their
      grant date, the Company's net income and earnings per share would have
      been reduced to the pro forma amounts indicated below:

<Table>
<Caption>
                                                DECEMBER 31
                            ----------------------------------------------------
                                1999               2000               2001
                            -------------      -------------      --------------
<S>                         <C>                <C>                <C>
Net loss-
    As reported             $  (4,046,635)     $  (5,752,424)     $  (14,244,872)
    Pro forma                  (5,887,335)        (7,559,774)        (19,935,872)
Primary loss per share-
    As reported                      (.59)              (.77)              (1.71)
    Pro forma                        (.85)             (1.02)              (2.39)
                            =============      =============      ==============
</Table>

      In August, 2001, SAI issued warrants to purchase 1,815,000 shares of
      common stock at an exercise price of $3.50 per share to Foamart Limited.
      These warrants expire ten years from the date of the grant. In October,
      2001, SAI issued warrants to purchase 2,500,000 shares of common stock at
      an exercise price of $2.50 per share to EGI-Fund (01) Investors L.L.C. in
      exchange for $1,000. These warrants vest immediately and expire four years
      from the date of the grant. The warrants are valued at $1.22 and $1.20
      respectively under the Black-Scholes option pricing model.

      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, 1999, 2000 and 2001, were 548,802, 635,528 and
      647,434, respectively. The amount charged to expense related to stock and
      warrants issued under this program was $255,282, $302,352, $233,858 in
      1999, 2000 and 2001, 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 3.0% and 6.65%, zero
      dividend yield, expected lives through the expiration dates, and
      volatility between 51.35% and 88.1%.


                                      F-21
<PAGE>


      The following summarizes the stock options and warrants for common stock
      as of December 31, 1999, 2000 and 2001, and the changes during the years
      then ended:

<Table>
<Caption>
                                        1999                         2000                        2001
                              -----------------------      -----------------------      -----------------------
                                             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                418,827     $   3.53       1,908,827     $   5.18       2,756,605    $   4.70

    Granted                    1,580,000         5.25       1,213,000         2.91       4,350,000        2.48
    Exercised                     90,000         1.07         322,222         2.81              --          --
    Canceled                          --           --          43,000         3.05         781,778        4.35
                              ----------     --------      ----------     --------      ----------    --------

End of year                    1,908,827     $   5.18       2,756,605     $   4.70       6,324,827    $   3.09
                              ==========     ========      ==========     ========      ==========    ========
Exercisable at end of year
                                 268,275                      702,996                    3,180,659
                              ==========                   ==========                   ==========
</Table>

      The future expiration of the common stock options and warrants is as
follows:

<Table>
<Caption>
                                      SHARES OUTSTANDING           SHARES EXERCISABLE
                                   -----------------------       ----------------------
                                                  WEIGHTED                     WEIGHTED
                                     NUMBER       AVERAGE          NUMBER       AVERAGE
                                       OF         EXERCISE           OF        EXERCISE
                                     SHARES        PRICE           SHARES       PRICE
                                   ----------     --------       ----------    --------
<S>                                <C>            <C>            <C>           <C>
As of December 31-
    2002                              831,104      $4.71            546,104      $5.05
    2003                               22,723       4.14             16,723       3.47
    2004                              475,000       2.68            465,000       2.61
    2005                              620,000       5.25            430,000       5.25
    2006                              476,000       2.83            222,832       2.81
    2007                              300,000       2.20            300,000       2.20
    2011                            3,600,000       2.50          1,200,000       2.50
                                    6,324,827      $3.09          3,180,659      $3.32
                                   ==========      =====         ==========      =====
</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.


                                      F-22
<PAGE>


      The following summarizes the stock options and warrants for convertible
      preferred stock as of December 31, 1999, 2000 and 2001, and the changes
      during the years then ended:

<Table>
<Caption>
                                        1999                         2000                        2001
                              -----------------------      -----------------------      -----------------------
                                             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                  2,227     $ 137.79           1,327     $ 153.80              77    $  53.16

    Granted                           --           --              --           --              --          --
    Exercised                        900       106.94           1,000       125.00              --          --
    Canceled                          --           --             250       300.00              --          --
                              ----------     --------      ----------     --------      ----------    --------
End of year                        1,327     $ 153.80              77     $  53.16              77    $  53.16
                              ==========     ========      ==========     ========      ==========    ========
</Table>


11.   RELATED PARTY TRANSACTIONS

      In 2001, the Company entered into a three year consulting arrangement with
      Thomas Salvatore, the Company's Chairman of the Board and managing partner
      of TJS Partners, L.P. (SAI's largest shareholder). In accordance with the
      arrangement, Mr. Salvatore is to receive consulting fees in the amount of
      $240,000 per year from January 1, 2001 through December 31, 2003. In
      addition, in 2001, Mr. Salvatore received 525,000 shares of common stock
      for past services rendered to SAI and was given 600,000 options to
      purchase common stock at $2.50 per share. The common stock grant given to
      Mr. Salvatore is yet to be issued and the option award has yet to be
      approved by SAI's common shareholders. In 2000, Mr. Salvatore received
      options to purchase 25,000 shares of common stock at $2.50 per share and
      options to purchase150,000 shares of common stock at $3.625 per share. In
      addition, 100,000 shares of common stock were granted to Mr. Salvatore for
      his services rendered regarding a private placement of securities
      involving SAI. Under the terms of the private placement of securities, SAI
      received $250,000 in cash.

      In August, 2001, the Company's Board of Directors accepted and approved
      the assignment of an agreement between Mr. Gross, Mr. Ruzika, Mr. Lucking
      and, Mr. Salvatore. The agreement sets out that these individuals would
      join SAI and hold the positions of Chief Executive Officer, Vice Chairman
      of the Board and Chief Operating Officer, respectively. In addition, the
      agreement also states that Mr. Salvatore would hold the position of
      Chairman of the Board. These individuals, including Mr. Salvatore, are
      charged with the responsibility of developing and executing a business
      strategy designed to significantly improve SAI's overall financial
      condition, strategic direction and growth objectives. In order to directly
      incentivize these four individuals, SAI agreed to pay them collectively,
      in addition to their base compensation and consulting fees, one hundred
      percent of the first year's improvement in annualized EBITDA as measured
      for the quarter ended June 30, 2002, versus the quarter ended June 30,
      2001, with a "true-up" at December 31, 2002. During the first quarter of
      fiscal 2002, SAI has executed agreements with each of the aforementioned
      individuals with respect to this incentive and their terms and conditions
      of employment or consultancy.


                                      F-23
<PAGE>


12.   COMMITMENTS AND CONTINGENCIES

      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
      2010. Rent expense was approximately $920,000, $943,000 and $1,149,000 for
      the years ended December 31, 1999, 2000 and 2001, respectively. During the
      fourth quarter of 2001, SAI entered into a restructuring plan to reduce
      the number of central stations from six regional facilities to three
      facilities and accordingly a rent reserve of $545,000 was provided as part
      of the accrued restructuring reserve account for rental properties, which
      will be vacated. In arriving at this amount, the Company has taken into
      consideration any anticipated sub-lease payments but these amounts have
      been excluded from the table below.

      Future minimum lease payments are as follows:

<Table>
<S>                                                        <C>
                As of December 31-
                    2002                                   $1,137,000
                    2003                                      962,000
                    2004                                      602,000
                    2005                                      588,000
                    2006 and thereafter                     2,626,000
                                                           ----------
                                     Total                 $5,915,000
                                                           ==========
</Table>

      LEGAL PROCEEDINGS

      On September 10, 1999, a Writ of Summons was issued against SAI North
      Central Command Center, Inc., our wholly owned subsidiary, and Blair
      Communications, Inc. (First Evangelical Lutheran Church vs. Blair
      Communications, Inc. et al, No. 1999-04689 (Blair County, Pennsylvania)).
      The case involves damages resulting from a fire at the First Evangelical
      Lutheran Church. In June, 2000, a complaint was filed asserting that SAI
      North Central was liable for the damage to the church based on the theory
      that the installing dealer was acting as SAI North Central's agent.
      Damages sought exceed $4,000,000. SAI believes it has no liability in this
      matter and will vigorously defend its position.

      On March 1, 2001, an amended Complaint against United Security Systems,
      Inc., National Security Monitoring, United Video Security, Inc., Emergency
      Response Center and Vector Security, was filed in the United States
      District Court for the Eastern District of New York (CV 007487). Emergency
      Response Center is an assumed name of one of our subsidiaries. The case
      involves damages resulting from a fire at the Flushing Jewish Center which
      occurred on December 5, 1996. The claim alleges breach of contract and
      breach of warranty by the defendants in installing an alarm system that
      was inadequate and failing to monitor or service the system. Damages
      sought are approximately $1,000,000. SAI will vigorously defend its
      position. Management believes any ultimate liability will be covered by
      insurance.

      On July 3, 2001, SAFE filed a claim with the American Arbitration
      Association asserting that SAI owed SAFE approximately $5,500,000. SAI has
      denied their claims and has counterclaimed for an amount in excess of
      $2,000,000. See liquidity footnote for additional details.

      In January, 2002, KC Acquisition Corp filed a complaint alleging certain
      claims relating to the termination of the proposed merger between SAI and
      KC Acquisition Corp that KC Acquisition


                                      F-24
<PAGE>


      Corp believed nullified the note receivable. SAI filed a counter-claim.
      Subsequently, both parties agreed to settle all claims against each other.
      See liquidity footnote for additional details.

      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.

      MANAGEMENT AND DIRECTOR INCENTIVE COMPENSATION

      In August, 2001, the Company's Board of Directors accepted and approved
      the assignment of an agreement between Mr. Gross, Mr. Ruzika, Mr. Lucking
      and, Mr. Salvatore. The agreement sets out that these individuals would
      join SAI and hold the positions of Chief Executive Officer, Vice Chairman
      of the Board and Chief Operating Officer, respectively. In addition, the
      agreement also states that Mr. Salvatore would hold the position of
      Chairman of the Board. These individuals, including Mr. Salvatore, are
      charged with the responsibility of developing and executing a business
      strategy designed to significantly improve SAI's overall financial
      condition, strategic direction and growth objectives. In order to directly
      incentivize these four individuals, SAI agreed to pay them collectively,
      in addition to their base compensation and consulting fees, one hundred
      percent of the first year's improvement in annualized EBITDA as measured
      for the quarter ended June 30, 2002, versus the quarter ended June 30,
      2001, with a "true-up" at December 31, 2002. During the first quarter of
      fiscal 2002, SAI has executed agreements with each of the aforementioned
      individuals with respect to this incentive and their terms and conditions
      of employment or consultancy.


13.   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. The Company
      sold its owned accounts on June 30, 1999. Prior to that, the Company
      identified two operating segments, based upon the types of customers
      served: owned accounts, which the Company invoiced subscribers directly;
      and dealers. The Company now exclusively provides monitoring to dealers in
      its central station operation.

      The accounting policies of the segments are the same as those described in
      the summary of significant accounting policies. The Company evaluates
      performance based on operating income or loss before interest and income
      taxes and operating cash flows as defined by operating income or loss plus
      depreciation and amortization. The Company did not separately identify
      interest expense, for its operating segments. Intersegment sales and
      transfers are immaterial and therefore not disclosed below. The Company
      also did not allocate corporate general and administrative and payroll
      expense to its operating segments.

      On June 30, 1999, SAI sold its owned accounts (see Note 7).


                                      F-25
<PAGE>


      Financial data by operating segment, together with the items necessary to
      reconcile these amounts to the consolidated financial statements, are
      shown below for the year ended December 31, 1999, for comparative
      purposes:

<Table>
<Caption>
                                           OWNED           CENTRAL        CORPORATE AND
                                         ACCOUNTS          STATION        INTERCOMPANY      CONSOLIDATED
                                        -----------      ------------     ------------      ------------
<S>                                     <C>              <C>              <C>               <C>
Year ended December 31, 1999-
    Revenues                            $ 3,720,169      $ 19,768,281     $   (799,317)     $ 22,689,133
    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-26

<PAGE>
      On December 3, 2001, SAI filed a Current Report on Form 8-K, dated
December 3, 2001, that reported the planned consolidation of SAI's then existing
six central monitoring stations in to two monitoring stations.

                                   SIGNATURES

      In accordance with 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.



April 14, 2002                 By:    /s/ Raymond A. Gross
                                  ---------------------------------------
                                          Raymond A. Gross,
                                           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/ Raymond A. Gross            President (Principal Executive Officer)    April 14, 2002
---------------------------     Principal Financial Officer (Principal
Raymond A. Gross                Accounting Officer) and Director

/s Ronald I. Davis              Director                                   April 14, 2002
---------------------------
Ronald I. Davis

/s/ Thomas J. Salvatore         Director                                   April 14, 2002
---------------------------
Thomas J. Salvatore

/s/ Douglas Oberlander          Director                                   April 14, 2002
---------------------------
Douglas Oberlander

/s/ Michael B. Jones            Director                                   April 14, 2002
---------------------------
Michael B. Jones

/s/ Stephen J. Ruzika           Director                                   April 14, 2002
---------------------------
Stephen J. Ruzika

/s/ Mark Radzik                 Director                                   April 14, 2002
---------------------------
Mark Radzik

</TABLE>




                                       48
<PAGE>
                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

                      (FOR EACH INCOME STATEMENT PRESENTED)

<TABLE>
<CAPTION>
                                                                   Additions
                                     ----------------------------------------------------------------------
                                      Balance at                   Charged to
                                     Beginning of    Charged to      Other                      Balance at
             Description                Period        Expense       Accounts     Deductions    End of 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, 1999            737,000       190,000        220,000      (648,000)       499,000
Year ended December 31, 2000            499,000       392,700              -      (597,000)       294,700
Year ended December 31, 2001            294,700       356,000         20,800      (386,300)       285,200
                                     ------------    ----------    ----------    ----------    -------------
</TABLE>
<PAGE>
                                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)
     3.7     Certificate of Designations, Rights, Preferences and Limitations of
             Series C Convertible Preferred Stock, $10.00 par value per share,
             of Security Associates International, Inc.(14)
     3.8     Certificate of Designations, Rights, Preferences and Limitations of
             Series D Convertible Preferred Stock, $10.00 par value per share,
             of Security Associates International, Inc.(14)
     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)
   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)
</TABLE>
<PAGE>
<TABLE>
<S>          <C>
   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)
   10.47     Plan and Agreement of Merger among Security Associates
             International, Inc., King Central Acquisition Corp., KC Acquisition
             Corp., Mr. Thomas Few Sr. and Mr. Timothy McGinn dated May 2,
             2000.(13)
   10.48     Amendment to Plan and Agreement of Merger among Security Associates
             International, Inc., King Central Acquisition Corp., KC Acquisition
             Corp., Mr. Thomas Few Sr. and Mr. Timothy McGinn dated March 15,
             2001.(13)
   10.49     Monitoring Receivable Financing Agreement by and among McGinn,
             Smith Acceptance Corp. and SAI Funding Corporation and Security
             Associates International, Inc. as Collection Agent dated January
             16, 2001.(13)
   10.50     Purchase and Contribution Agreement among Security Associates
             International, Inc., SAI Northwest Command Center - Seattle, Inc.,
             SAI Southwest Command Centers, Inc., and SAI North Central Command
             Center, Inc., as Sellers and SAI Funding Corporation as Purchaser
             dated January 16, 2001.(13)
   10.51     Lease Agreement between LaSalle Bank National Association,
             Successor Trustee to American National Bank and Trust Company of
             Chicago as Trustee under Trust No. 59948 and Registrant dated
             August 12, 2000.(13)
   10.52     Investment Agreement.(13)
   10.53     Employment Agreement between Registrant and Ray Gross dated August
             6, 2001.
   10.54     Employment Agreement between Registrant and Paul Lucking dated
             August 6, 2001.
   10.55     Employment Agreement between Registrant and Stephen J. Ruzika dated
             August 15, 2001.
    21.1     Subsidiaries of Registrant.(13)
</TABLE>


(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.
(13) Previously filed with the Registrant's Form 10-KSB Annual Report for the
     fiscal year ended December 31, 2000.
(14) Previously filed with the Registrant's Form 10-QSB Quarterly Report for
     the Quarter ended June 30, 2001.