<PAGE>

                                                                    EXHIBIT 13.1
 
-----------------------
SELECTED FINANCIAL DATA
-----------------------

In thousands, except per share data

<TABLE> 
<CAPTION> 
Operating Statement Data

                                         December 26,      December 27,     December 29,      December 30,     December 31,
Year Ended                                       1997              1996             1995              1994             1993/a/
------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>               <C>              <C>               <C>              <C> 
Service revenues                           $1,001,889        $  906,247       $  862,793        $  849,960       $  772,026
Cost of services                              877,016           791,877          771,172           773,526          688,995
Gross profit                                  124,873           114,370           91,621            76,434           83,031
Operating expenses                             89,039            81,256           61,857            57,983           54,982
Amortization of intangible assets               9,397             9,335            8,873            10,240            8,323
Write-down of intangible assets and                                                                         
         other special charges                     --                --               --            14,435            3,800
Gain from litigation settlements, net              --                --               --            (2,369)              --
Operating profit (loss)                        26,437            23,779           20,891            (3,855)          15,926
Provision for reserve against investment           --                --               --                --            3,267
Interest expense, net                           2,897             2,253            2,870             3,969            4,238
Other income                                       --            (1,962)              --                --               --
Income (loss) before income taxes              23,540            23,488           18,021            (7,824)           8,421
Provision for income taxes                      8,807            11,038            7,521             2,418            5,220
Net income (loss)                          $   14,733        $   12,450       $   10,500        $  (10,242)      $    3,201
------------------------------------------------------------------------------------------------------------------------------ 
Basic earnings (loss) per share/b,c/       $     1.17        $      .99       $      .84        $     (.83)      $      .26
Diluted earnings (loss) per share/b,c/     $     1.12        $      .97       $      .84        $     (.82)      $      .26
------------------------------------------------------------------------------------------------------------------------------ 
<CAPTION> 

Balance Sheet Data                                                                                          
At Year End                                      1997              1996             1995              1994             1993
------------------------------------------------------------------------------------------------------------------------------ 
<S>                                      <C>               <C>              <C>               <C>              <C> 
Working capital/d/                         $   86,599        $  104,459       $   90,225        $   85,400       $   92,100
Total assets                                  324,196           315,281          290,909           278,090          282,738
Current maturities of long-term debt            8,575             8,575            8,575             8,575            8,575
Long-term debt, less current maturities        25,019            37,313           34,275            42,850           51,425
Total stockholders' equity/e/                 143,629           130,381          113,725           103,422          111,631
Book value per common share/c,f/           $    10.96        $    10.19       $     9.08        $     8.31       $     9.02
------------------------------------------------------------------------------------------------------------------------------ 
<CAPTION> 

Other Financial Data                                                                                        
Year                                             1997              1996             1995              1994             1993
------------------------------------------------------------------------------------------------------------------------------ 
<S>                                      <C>               <C>              <C>               <C>              <C> 
Gross profit margin                              12.5%             12.6%            10.6%              9.0%            10.8%
Operating profit (loss) margin                    2.6%              2.6%             2.4%             (0.5)%            2.1%
Current ratio/d/                                 1.84              2.10             2.05              2.06             2.27
Long-term debt-to-equity ratio                    .17               .29              .30               .41              .46
Return on beginning equity                       11.3%             10.9%            10.2%             (9.2)%            2.8%
Return on ending capital/g/                       9.8%              8.5%             8.8%             (4.9)%            3.1%
Operating cash flow/h/                     $   31,277        $   28,858       $   25,876        $   17,913       $   19,504
EBITDA/i/                                  $   42,981        $   42,149       $   36,267        $   24,300       $   28,962
------------------------------------------------------------------------------------------------------------------------------ 
</TABLE> 

a The Company's fiscal year 1993 consisted of 53 weeks, whereas all other
  fiscal years presented consisted of 52 weeks.

b The earnings per share amounts reflect the application of Statement of
  Financial Accounting Standards No. 128, "Earnings per Share," for all periods
  presented.

c Effective August 27, 1997, a three-for-two stock split was accomplished by
  means of a stock dividend whereby one new share was distributed for each two
  shares held. All per share amounts have been adjusted accordingly.

d Working capital and current ratio include the effect of the acquisition of
  WKD Security GmbH on January 1, 1997, for $22.4 million in cash. The Company
  borrowed $11.6 million in December 1996 under its revolving line of credit,
  and paid the balance of the acquisition price of $10.8 million from its
  general funds in January 1997.

e No cash dividends were declared during the five years presented.

f Book value per common share has been calculated based upon weighted average
  common shares and dilutive potential common shares outstanding during each
  year.

g In 1994, return on ending capital was computed using the statutory tax rate.

h Operating cash flow represents net income (loss) plus amortization and
  depreciation for all years. Also added back to determine operating cash flow
  were: provision for reserve against investment in 1993 and write-down of
  intangible assets in 1994.

i EBITDA represents net income (loss) plus interest, taxes, depreciation and
  amortization. Also added back to determine EBITDA were: provision for reserve
  against investment in 1993 and write-down of intangible assets in 1994.

24
<PAGE>
 
  --------------------------------------------------------------------------    
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
                                  OPERATIONS
  --------------------------------------------------------------------------

Pinkerton's fiscal year comprises the 52-week (or 53-week) period ending on the
Friday closest to December 31, within the reporting year.

Results of Operations
  1997 compared to 1996

Service Revenues

The Company's service revenues increased by $95.7 million, or 10.6%, from
$906.2 million in 1996 to $1,001.9 million in 1997. This increase reflects $30.5
million of revenues from businesses acquired during 1997, a net increase in all
other business of $66.7 million, and revenue reductions arising from currency
fluctuations of $1.5 million.

Domestic Service Revenues 

Compared with the prior year, the Company's domestic service revenues increased
by $64.0 million, or 8.6%, from $747.4 million in 1996 to $811.4 million in
1997. This increase reflects $8.9 million of revenues from businesses acquired
during 1997, with revenues from all other domestic sources increasing $55.1
million. Domestic service revenues reflect $119.7 million and $106.7 million of
revenue from General Motors in 1997 and 1996, respectively.

International Service Revenues 

Service revenues of the Company's international operations increased by $31.7
million, or 20.0%, from $158.8 million in 1996 to $190.5 million in 1997. This
increase reflects $21.6 million of revenues from businesses acquired in 1997 and
additional business from new and existing clients of $11.6 million, partially
offset by reductions arising from currency fluctuations of $1.5 million. As a
percentage of total service revenues, international operations were 19.0% in
1997 and 17.5% in 1996.

Cost of Services and Gross Profit 

The Company's cost of services increased by $85.1 million, or 10.7%, from
$791.9 million in 1996 to $877.0 million in 1997. This increase was primarily
due to payroll and related expenses accompanying the increase in service
revenues noted above. The Company's gross profit margin decreased from 12.6% in
1996 to 12.5% in 1997, principally as a result of increased overtime costs, the
costs of a national infrastructure for the Company's systems integration
businesses, and costs incurred in the Company's United Kingdom (U.K.) subsidiary
in connection with a reorganization program to reposition the U.K. business for
the future, partially offset by higher margins from operations of businesses
acquired in 1997.

Operating Expenses 

Operating expenses increased by $7.7 million, or 9.5%, from $81.3 million in
1996 to $89.0 million in 1997. Operating expenses were 8.9% of service revenues
in 1997 and 9.0% of service revenues in 1996. The slightly lower operating
expense percentage reflects the favorable impact of the Company's ability to
leverage semi-fixed operating expenses on higher revenues, partially offset by
increased expenses incurred at the Company's U.K. subsidiary to reposition the
U.K. business for the future.

Amortization 

Amortization of intangible assets increased by $0.1 million, or 1.1%, from $9.3
million in 1996 to $9.4 million in 1997, primarily due to acquisitions made in
1997.

Operating Profit 

Operating profit was $26.4 million, or 2.6% of service revenues in 1997, as
compared with an operating profit of $23.8 million, or 2.6% of service revenues
in 1996. Operating profit remained constant as a percentage of revenues. A
decrease in the gross profit margin was offset by a decrease in operating
expenses as a percentage of revenues.

Interest

Interest income decreased $1.2 million to $1.2 million in 1997 as a result of a
decrease in average invested funds, primarily due to $10.8 million paid from the
Company's general funds in partial payment of the $22.4 million purchase price
of WKD Security GmbH on January 1, 1997, and as a result of lower interest rates
in 1997 as compared with 1996.

                                                                              25
<PAGE>
 
    Interest expense decreased by $0.5 million, or 10.9%, from $4.6 million in
1996 to $4.1 million in 1997, primarily as a result of a reduced average level
of outstanding debt in 1997 as compared with 1996.

Other Income

In 1996, the Company entered into an agreement with the previous owner related
to the acquisition of Pinkerton's, Inc. by California Plant Protection, Inc. in
1988. As a result of this agreement, the Company received a cash payment of $5.2
million. Of this amount, $3.2 million represents a reimbursement of income and
other taxes paid on behalf of the previous owner, which had been recorded as a
receivable in the consolidated balance sheet; the remaining amount of $2.0
million was recorded as other income.

Income Taxes

Income taxes were $8.8 million in 1997, as compared with $11.0 million in 1996.
The effective tax rate in 1997 was 37.4%, as compared with 47.0% in 1996. The
lower effective tax rate was the result of the tax benefit of a loss related to
the U.K. subsidiary.

                                     * * *

1996 compared to 1995

Service Revenues

The Company's service revenues increased by $43.4 million, or 5.0%, from $862.8
million in 1995 to $906.2 million in 1996. This increase reflects $19.8 million
of revenues from businesses acquired during 1996, a net increase in all other
business of $27.4 million, and revenue reductions arising from currency
fluctuations of $3.8 million.

Domestic Service Revenues 

Compared with the prior year, the Company's domestic service revenues increased
by $21.2 million, or 2.9%, from $726.2 million in 1995 to $747.4 million in
1996. This increase reflects $14.3 million of revenues from businesses acquired
during 1996, with revenues from all other domestic sources increasing $6.9
million. Domestic service revenues reflect $106.7 million and $96.4 million of
revenue from General Motors in 1996 and 1995, respectively.

International Service Revenues

Service revenues of the Company's international operations increased by $22.2
million, or 16.3%, from $136.6 million in 1995 to $158.8 million in 1996. This
increase reflects $5.5 million of revenues from businesses acquired in 1996 and
additional business from new and existing clients of $20.5 million, partially
offset by reductions arising from currency fluctuations of $3.8 million. As a
percentage of total service revenues, international operations were 17.5% in
1996 and 15.8% in 1995.

Cost of Services and Gross Profit 

The Company's cost of services increased by $20.7 million, or 2.7%, from $771.2
million in 1995 to $791.9 million in 1996. This increase was primarily due to
payroll and related expenses accompanying the increase in service revenues noted
above. The Company's gross profit margin improved from 10.6% in 1995 to 12.6% in
1996, principally as a result of operating cost efficiencies and reduction in
the number of unprofitable contracts. Gross profit was also favorably impacted
by the inclusion of the Company's security systems integration operations, which
typically experience higher gross margins than the Company's security service
operations.

Operating Expenses 

Operating expenses increased by $19.4 million, or 31.3%, from $61.9 million in
1995 to $81.3 million in 1996. Operating expenses were 9.0% of service revenues
in 1996 and 7.2% of service revenues in 1995. The higher operating expense
percentage reflects the Company's ongoing expenditures for new systems, quality
processes and training programs implemented to enhance customer value. Operating
expenses also reflect the operations of the Company's security systems
integration service operations, which have both higher gross profit margins and
operating expenses than the Company's security service operations.

                                                                              26
<PAGE>
 
Amortization

Amortization of intangible assets increased by $0.4 million, or 4.5%, from $8.9
million in 1995 to $9.3 million in 1996, primarily due to acquisitions made in
1996.

Operating Profit

Operating profit was $23.8 million, or 2.6% of service revenues in 1996, as
compared with an operating profit of $20.9 million, or 2.4% of revenues in 1995.
Operating profit increased as a percentage of revenues due to improved gross
profit margins, partially offset by an increase in operating expenses discussed
above.

Interest 

Interest income decreased $0.3 million to $2.4 million in 1996 as a result of a
decrease in interest rates in 1996 as compared with 1995. Interest expense
decreased by $1.0 million, or 17.9%, from $5.6 million in 1995 to $4.6 million
in 1996 as a result of a reduced average level of outstanding debt in 1996 as
compared with 1995. In December 1996, the Company borrowed DM 18 million ($11.6
million) in connection with the acquisition of WKD Security GmbH.

Other Income 

In 1996, the Company entered into an agreement with the previous owner related
to the acquisition of Pinkerton's, Inc. by California Plant Protection, Inc. in
1988. As a result of this agreement, the Company received a cash payment of $5.2
million. Of this amount, $3.2 million represents a reimbursement of income and
other taxes paid on behalf of the previous owner, which had been recorded as a
receivable in the consolidated balance sheet; the remaining amount of $2.0
million was recorded as other income.

Income Taxes 

Income taxes were $11.0 million in 1996, as compared with $7.5 million in 1995.
The effective tax rate in 1996 was 47.0%, as compared with 41.7% in 1995. In
1995, the Company's effective tax rate was caused by tax minimization strategies
and benefits from targeted jobs tax credits that expired in 1995.


                                     * * *

Financial Conditions

Capital Resources

At December 26, 1997, the Company had $24.2 million in cash, a decrease of $9.5
million from December 27, 1996, and a zero balance in marketable securities, an
$8.5 million decrease from December 27, 1996. Net cash provided by operating
activities of $20.5 million was reduced by $19.6 million of net cash payments
relating to investing activities and $10.4 million of net cash payments relating
to financing activities. The Company's principal investing activities during
1997 were acquisitions ($22.0 million), the purchase of computer and other
equipment ($6.1 million), and net sales of marketable securities ($8.5 million).
The Company's principal financing activities during 1997 were an annual
principal installment of $8.6 million, reducing the Company's Senior Note debt;
$2.2 million of payments on the revolving line of credit; and $0.4 million of
cash receipts related to the exercise of stock options.

    The Company has an acquisitions program intended to implement its strategy
to become a world-class, global security solutions provider. The Company also
has an ongoing program to replace capital equipment and upgrade systems as
required. Both of these activities will continue during 1998. In addition, an
annual principal installment of $8.6 million on the Company's Senior Note debt
is due each June.
 
    One of Pinkerton's significant capital resources is the Pinkerton name, to
which a value of approximately $54.8 million was assigned upon the acquisition
of Pinkerton's Inc. by California Plant Protection, Inc. in January 1988. The
Company believes that the carrying value of the name is supported by its market
value. Management expects that the Company will be able to further capitalize on
the Pinkerton name in the security and security-related service and product
business. 

Liquidity 

Pinkerton's cash needs during the first six months of each year are greater
because of the impact of higher payroll taxes. In addition, the Company is
required to make annual principal

                                                                              27
<PAGE>
 
payments of approximately $8.6 million (in the month of June) through the year
2000 in repayment of its Senior Notes. Semi-annual interest payments of
approximately $1.3 million and $0.9 million related to the Senior Notes are due
in June and December 1998, respectively.

    The Company has an unsecured revolving credit facility with a group of
banks. On June 27, 1997, the facility was amended to increase the available
borrowings from up to $70.0 million to up to $100.0 million, of which $50.0
million may be letters of credit. No cash borrowings were made in 1997. At
December 26, 1997, there were DM 14.0 million ($7.9 million) of cash borrowings
outstanding under the revolving line of credit. Also at December 26, 1997, $31.7
million in letters of credit had been issued by the Company to secure
obligations under the Company's self-insurance programs. Such programs cover
workers' compensation, general liability, fidelity, health, dental and
automobile risks up to certain limits. Payments under these programs are not
entirely predictable.

    The Company believes existing liquid resources, cash generated from
operations, and funds available under the revolving credit facility are
sufficient for all planned operating and capital requirements. The Company also
has access to capital markets, if necessary, to raise funds for working capital,
capital spending and other investments for business growth.



Outlook: Issues and Risks

Certain statements contained in this report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve estimates, assumptions and
uncertainties, and accordingly, actual results could differ materially from
those expressed in the forward-looking statements. Such uncertainties include,
among others, the factors set forth below and the factors set forth in Item 1 of
the Company's Annual Report on Form 10-K for the fiscal year ended December 26,
1997.

Billing Rates and Competition

Future billing rates the Company will be able to charge for its services may
vary from historical levels, depending on market factors.

Availability and Cost of Labor

The Company's ability to deliver quality services depends heavily on the ready
availability and cost of labor in the Company's markets. A strong economy may
cause labor shortages in a geographical market, which may result in margins
being constrained by unbillable overtime costs.

Risk Arising From Litigation 

The nature of the Company's business subjects it to a significant volume of
ordinary, routine claims and lawsuits incidental to such business. The Company
maintains self-insurance programs and insurance coverage that it believes are
appropriate for its liability risks. Nonetheless, many claims or lawsuits
brought against the Company allege substantial damages that, if awarded and
ultimately paid by the Company (rather than insurers or indemnitors), could have
a material adverse effect on the results of operations or financial condition of
the Company. See Note 14 of Notes to Consolidated Financial Statements,
"Commitments and Contingencies."

Year 2000 Issues 

In April 1996, the Company began converting its domestic U.S. security computer
information systems to a new client-server enterprise system that is year 2000
compliant. A similar but smaller scale conversion commenced in November 1997 for
the Company's domestic systems integration businesses. Both conversions are
expected to be completed before the year 2000. As part of an enterprise-wide
program implemented by management in June 1997, the Company has identified some
applications that are not year 2000 compliant. The majority of these
applications will be replaced by enterprise systems the Company has identified
and will be implementing prior to the year 2000.
 
    The costs of the replacement systems have been, or will be, recorded as an
asset and amortized. A significant portion of the costs associated with making
applications not covered by

                                                                              28
<PAGE>
 
new systems year 2000 compliant is not likely to be an incremental cost to the
Company, but rather will represent the redeployment of existing information
technology resources. Accordingly, the Company does not expect the amounts
required to be expensed over the next two years to have a material effect on its
financial position or results of operations.

Currency Exchange 

The Company makes acquisitions and operates in various countries, and transacts
such business in international currencies, subjecting the Company to currency
rate fluctuations. Other than natural hedges created by foreign currency
borrowings, the Company does not invest in foreign currency hedging or other
derivative investments.

European Currency 

The creation of a new European common market currency (the Euro) may require
that the Company transact in two different currencies with the same customer and
within the same country. This requirement cannot currently be met by the
Company's computer information systems. The Company is evaluating enterprise
systems that will allow it to meet this requirement.

Accounting Standards

Accounting standards promulgated by the Financial Accounting Standards Board
change periodically. Changes in such standards may have an impact on the
Company's future reported earnings.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. SFAS
No. 130 is effective for financial statements issued for periods beginning after
December 15, 1997. The application of SFAS No. 130 will require the inclusion of
the Company's foreign currency translation and minimum retirement plans
liability adjustments in comprehensive income.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
annual financial reports issued to shareholders. SFAS No. 131 is effective for
annual financial statements issued for periods beginning after December 15,
1997. The application of SFAS No. 131 is not expected to have a material effect
on the Company's consolidated financial statements.

Retirement Plan Liabilities and Interest Rates 

The Company maintains two unfunded retirement plans and one funded retirement
plan, the liabilities of which are significantly affected by changes in
long-term interest rates. Changes in long-term interest rates could have an
impact on the Company's future reported earnings and financial position.

Termination of Contracts

A majority of the Company's revenue is derived from security guard contracts,
which are typically for one-year terms but generally provide for earlier
termination by either party in certain circumstances. A net increase in
terminations could have an adverse impact on the Company's future reported
earnings; however, the Company has historically experienced a low rate of
cancellations.

Ability to Sustain Growth Through Acqusition 

The Company's revenue growth is partially dependent upon the Company's ability
to attract and acquire additional business through acquisition.

International Operations 

The Company operates in various international markets and engages in security
activities that may contain more risk than operations in the United States. The
profitability of such operations and associated risks may affect the Company's
results and recoverability of goodwill.

                                                                              29
<PAGE>
 
---------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------

                                                December 26,  December 27,
In thousands                                            1997          1996
--------------------------------------------------------------------------
Assets

Current assets:
  Cash and cash equivalents                        $  24,243    $  33,761
                                                
  Investment in marketable securities                     --        8,460
                                                
  Accounts receivable (includes unbilled amounts
    of $32,397 in 1997 and $30,196 in 1996)          149,668      137,055
                                                
  Less allowance for doubtful receivables              2,948        2,572
                                                
                                                     146,720      134,483
                                                
  Inventory                                            4,190        3,799
                                                
  Prepaid expenses and taxes                           8,111       11,566
                                                
  Deferred income taxes                                6,129        7,121

    Total current assets                             189,393      199,190

Equipment and leasehold improvements,
  net of accumulated depreciation and amortization
  of $29,685 in 1997 and $26,818 in 1996              16,745       14,977

Other assets:

  Intangible assets, net                              68,210       57,311
                       
  Deferred income taxes                               24,924       23,467
                       
  Other                                               24,924       20,336

                                                     118,058      101,114

                                                   $ 324,196    $ 315,281
-------------------------------------------------------------------------

Liabilities and Stockholders' Equity

Current liabilities:
  Accounts payable                                 $  14,021    $   9,790

  Accrued liabilities                                 80,198       76,366

  Current maturities of long-term debt                 8,575        8,575

    Total current liabilities                        102,794       94,731

Accrued retirement benefits and other
  non-current liabilities                             52,754       52,856

Long-term debt, less current maturities               25,019       37,313

Commitments and contingencies

Stockholders' equity:
  Common stock                                            12            8

  Additional paid-in capital                          75,329       74,887

  Other adjustments                                   (7,368)      (5,441)

  Retained earnings                                   75,656       60,927

                                                     143,629      130,381

                                                   $ 324,196    $ 315,281
-------------------------------------------------------------------------

See accompanying Notes to Consolidated Financial Statements.

                                                                              30
<PAGE>
 
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------

<TABLE> 
<CAPTION> 

                                        December 26,        December 27,        December 29,
In thousands, except per share data             1997                1996                1995
-------------------------------------------------------------------------------------------- 
<S>                                     <C>                 <C>                 <C> 
Service revenues                         $ 1,001,889         $   906,247         $   862,793

Cost of services                             877,016             791,877             771,172

Gross profit                                 124,873             114,370              91,621

Operating expenses                            89,039              81,256              61,857

Amortization of intangible assets              9,397               9,335               8,873

Operating profit                              26,437              23,779              20,891

Other (income) deductions:                                                

   Interest Income                            (1,186)             (2,393)             (2,713)
   Interest Expense                            4,083               4,646               5,583
   Other                                          --              (1,962)                 --
                                               2,897                 291               2,870
Income before income taxes                    23,540              23,488              18,021
Provision for income taxes                     8,807              11,038               7,521
Net income                               $    14,733         $    12,450         $    10,500
-------------------------------------------------------------------------------------------- 
Basic earnings per share                 $      1.17         $       .99         $       .84
Diluted earnings per share               $      1.12         $       .97         $       .84
-------------------------------------------------------------------------------------------- 
</TABLE> 

See accompanying Notes to Consolidated Financial Statements.

                                                                              31
<PAGE>
 
<TABLE> 
<CAPTION> 

----------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------

                                                                         Additional                                      Total
                                                 Preferred       Common     Paid-In        Other     Retained    Stockholders'
In thousands                                         Stock        Stock     Capital  Adjustments     Earnings           Equity
------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>          <C>         <C>        <C>            <C>          <C> 
Balance at December 30, 1994                     $      16    $       8   $  73,745    $  (8,325)   $  37,978        $ 103,422

Dividends on preferred stock                            --           --          --           --           (1)              (1)

Redemption of preferred stock                           (1)          --          --           --           --               (1)

Cancellation of restricted common stock                 --           --        (233)          --           --             (233)

Exercise of stock options                               --           --         951           --           --              951

Minimum retirement plans liability adjustment           --           --          --         (640)          --             (640)

Foreign currency translation adjustment                 --           --          --         (273)          --             (273)

Net income                                              --           --          --           --       10,500           10,500

Balance at December 29, 1995                            15            8      74,463       (9,238)      48,477          113,725

Redemption of preferred stock                          (15)          --          --           --           --              (15)

Cancellation of restricted common stock                 --           --          (2)          --           --               (2)

Exercise of stock options                               --           --         426           --           --              426

Minimum retirement plans liability adjustment           --           --          --        2,693           --            2,693

Foreign currency translation adjustment                 --           --          --        1,104           --            1,104

Net income                                              --           --          --           --       12,450           12,450

Balance at December 27, 1996                            --            8      74,887       (5,441)      60,927          130,381

Common stock split                                      --            4          --           --           (4)              --

Exercise of stock options                               --           --         442           --           --              442

Minimum retirement plans liability adjustment           --           --          --          (24)          --              (24)

Foreign currency translation adjustment                 --           --          --       (1,903)          --           (1,903)

Net income                                              --           --          --           --       14,733           14,733

Balance at December 26, 1997                     $      --    $      12   $  75,329    $  (7,368)   $  75,656        $ 143,629
------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

See accompanying Notes to Consolidated Financial Statements 

                                                                              32
<PAGE>
 
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------

<TABLE> 
<CAPTION> 

                                                                      December 26,           December 27,          December 29,
In thousands                                                                  1997                   1996                  1995
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                    <C>                   <C> 
Operating Activities:
Net income                                                               $ 14,733               $ 12,450            $ 10,500  

Adjustments to reconcile net income to net cash                                                                               
   provided by operating activities:                                                                                             

      Amortization of intangible assets                                     9,397                  9,335               8,873  

      Depreciation and other amortization                                   7,147                  7,073               6,503  

      Provision for losses on doubtful receivables                            885                  1,635               1,719  

      Deferred income taxes                                                  (449)                (2,079)             (2,731) 

Changes in assets, liabilities and stockholders' equity:                                                                      

      Accounts receivable                                                  (6,489)               (18,103)             (2,501) 

      Inventory                                                               682                   (430)                437  

      Prepaid expenses and taxes                                            3,766                  2,342                (799) 

      Other assets                                                         (5,602)                (5,525)             (3,276) 

      Accounts payable                                                      2,117                  1,196                  88  

      Accrued and other non-current liabilities                            (5,089)                 3,593               4,032  

      Foreign currency revaluation of net assets                             (532)                   920                (867) 

Net cash provided by operating activities                                  20,566                 12,407              21,978  


INVESTING ACTIVITIES:                                                                                                         

Purchase of marketable securities                                         (16,081)               (21,545)            (52,673) 

Sales/redemptions of marketable securities                                 24,541                 32,481              43,858  

Purchase of equipment and leasehold improvements                           (6,086)                (5,827)             (5,336) 

Payments for net assets of acquired businesses,                                                                               
      net of cash acquired                                                (22,018)                (7,272)             (7,515) 

Net cash used in investing activities                                     (19,644)                (2,163)            (21,666) 


FINANCING ACTIVITIES:                                                                                                         

Proceeds from long-term debt                                                   --                 11,613                  --  

Principal repayment of long-term debt                                     (10,858)                (8,575)             (8,575) 

Exercise Of stock options                                                     418                    279                 735  

Redemption of preferred stock                                                  --                    (15)                 (1) 

Net cash (used in) provided by financing activities                       (10,440)                 3,302              (7,841) 

Net (decrease) increase in cash and cash equivalents                       (9,518)                13,546              (7,529) 

Cash and cash equivalents at beginning of year                             33,761                 20,215              27,744  

Cash and cash equivalents at end of year                                 $ 24,243               $ 33,761            $ 20,215  
----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:                                                                            

Cash paid during the year for:                                                                                                

      Interest                                                           $  3,820               $  4,449            $  5,448  
      Income taxes                                                       $  6,258               $ 13,191            $ 10,215   
----------------------------------------------------------------------------------------------------------------------------
</TABLE> 

See accompanying Notes to Consolidated Financial Statements.

                                                                              33
<PAGE>
 
                  ------------------------------------------
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------

Note 1

Corporate Organization

      The Company's operations consist mainly of providing security officer,
      systems integration and investigation services to industrial, commercial,
      financial and other similar business clients. Substantially all business
      activity is with customers located throughout the United States, Canada,
      Europe, Asia, Mexico and South America, and is not concentrated in any
      particular geographical region therein or by any type of economic
      activity.

Note 2

Summary of Significant Accounting Policies

Accounting Cycle

      Pinkerton's fiscal year comprises the 52-week (or 53-week) period ending
      on the Friday closest to December 31, within the reporting year. The
      Company's quarterly reporting periods consist of three four-week periods
      for the first, second and third quarters, and four four-week periods for
      the fourth quarter. 

Principles of Consolidation 

      The consolidated financial statements include the accounts of Pinkerton's,
      Inc. "the Company" and its subsidiaries, which are primarily wholly owned.
      All significant intercompany accounts and transactions have been
      eliminated.

Revenue Recognition

      Service revenues are recognized as services are provided, including
      amounts for unbilled, rendered services. The Company's systems integration
      businesses recognize revenue based on the percentage-of-completion method.

Use of Estimates

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make certain
      estimates and assumptions. These affect the reported amounts of assets or
      liabilities, and the amount of contingent assets or liabilities disclosed
      in the consolidated financial statements. Actual results could differ from
      the estimates made.

Equipment and Leasehold Improvements

      Equipment and leasehold improvements are recorded at cost. Equipment is
      depreciated over the estimated useful life of the related assets. The
      estimated useful life of equipment is three to 10 years. Leasehold
      improvements are amortized over the period of the related lease or the
      estimated life of the improvement, whichever is shorter. Accelerated
      methods of depreciation are used for income tax purposes, and the 
      straight-line method is utilized for substantially all assets for
      financial reporting purposes. When equipment and leasehold improvements
      are retired or otherwise disposed of, the cost and related accumulated
      depreciation and amortization are removed from the accounts and any
      resulting gain or loss is included in the results of operations.

Intangible Assets 

      Intangible assets include goodwill, which represents the excess of the
      purchase price of acquired businesses over fair values of related net
      tangible assets, and identifiable intangible assets such as non-compete
      agreements, contract rights and copyrights. Goodwill and other intangibles
      are amortized on a straight-line basis over periods of 10 to 25 years, and
      three to 10 years, respectively.

           The Company assesses the recoverability of goodwill and other
      intangible assets by determining whether the amortization of those
      balances can be recovered through projected (undiscounted) future cash
      flows. The amount of impairment, if any, is measured based on projected
      discounted future cash flows using a discount rate reflecting the
      Company's average cost of capital.

Self-insurance Reserves

      The Company maintains various self-insurance programs for workers'
      compensation, general liability, fidelity, health, dental and automobile
      liability risks in the United States. These programs are administrated by
      the Company, insurance companies and other third parties. The Company is
      self-insured up to specified per-occurrence limits and maintains insurance
      coverage for losses in excess of specified amounts and for certain
      international activities not covered by the Company's self-insurance
      programs. Estimated costs under

                                                                              34
<PAGE>
 
      these programs, including incurred but not reported claims, are recorded
      as expenses primarily based upon actuarially determined historical
      experience and trends of paid and incurred claims.

Income Taxes

      Income taxes are accounted for under the asset and liability method.
      Deferred income taxes are recognized for the future tax consequences
      attributable to differences between the financial statement carrying
      amounts of existing assets and liabilities, and their respective tax
      bases, operating loss and tax credit carryforwards. Deferred tax assets
      and liabilities are measured using enacted tax rates expected to apply to
      taxable income in the years in which those temporary differences are
      expected to be recovered or settled. The effect on deferred taxes of a
      change in tax rates is recognized in income in the period that includes
      the enactment date.

           Income taxes have not been provided on the undistributed earnings of
      certain foreign subsidiaries, as such earnings will continue to be
      invested in those subsidiaries for an indefinite period.

Foreign Currency Translations 
      
      The Company translates revenues and expenses of its foreign subsidiaries
      using the average exchange rates prevailing during the year. The assets
      and liabilities of such subsidiaries are translated at the rate of
      exchange in effect at year end, and translation adjustments are recorded
      as a component of stockholders' equity in the consolidated balance sheets.
      At December 26, 1997, and December 27, 1996, the cumulative multi-year
      effect of translation adjustments was a decrease to stockholders' equity
      of $5.7 million and $3.8 million, respectively.

Earnings Per Share 

      In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
      Earnings per Share. SFAS No. 128 replaced the calculation of primary and
      fully diluted earnings per share with basic and diluted earnings per
      share. Unlike primary earnings per share, basic earnings per share
      excludes any dilutive effects of options, warrants, and convertible
      securities. Diluted earnings per share is very similar to fully diluted
      earnings per share. Where appropriate, all earnings per share amounts for
      all periods have been restated to conform to the SFAS No. 128
      requirements.

Fair Value of Financial Instruments 

      The carrying amount of the Company's financial instruments, which
      principally include cash, marketable securities, accounts receivable,
      accounts payable and accrued expenses, approximates fair value due to the
      relatively short maturity of such instruments. The fair value of the
      Company's Senior Notes is estimated to be $26.9 million at December 26,
      1997, based on market interest rates for comparable loans.

Credit Concentrations

      Sales to a single customer aggregated $134.5 million in 1997, $121.6
      million in 1996 and $109.5 million in 1995. The Company estimates an
      allowance for doubtful accounts based on the credit worthiness of its
      customers as well as general economic conditions. Consequently, an adverse
      change in those factors could affect the Company's estimate of its bad
      debts.

Stock-Based Compensation

      Statement of Financial Accounting Standards No. 123, Accounting for Stock-
      Based Compensation, encourages, but does not require, companies to record
      compensation cost for stock-based employee compensation plans at fair
      value. The Company has chosen to continue to account for stock-based
      compensation using the intrinsic value method prescribed in Accounting
      Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
      and related interpretations. Accordingly, compensation cost for stock
      options is measured as the excess, if any, of the quoted market price of
      the Company's stock at the date of the grant over the amount an employee
      must pay to acquire the stock.

                                                                              35
<PAGE>
 
Marketable Secutites

      The Company adopted Statement of Financial Accounting Standards, SFAS No.
      115, Accounting for Certain Investments in Debt and Equity Securities, on
      January 1, 1994. SFAS No. 115 requires investments to be classified in one
      of three categories: held-to-maturity securities, available-for-sale
      securities, and trading securities. The Company classifies its
      investments, comprised principally of highly liquid debt instruments with
      maturities greater than 90 days, as available-for-sale securities.
      Available-for-sale securities are reported at fair value.

Statement of Cash Flows 

      The Company considers cash equivalents to be all highly liquid investments
      with original maturities of 90 days or less.

Stock Split 

      Effective August 27, 1997, the Company split its outstanding shares of
      common stock on a three-for-two basis. The split was accomplished by means
      of a stock dividend whereby each holder of common stock received one new
      share for each two shares held. All share and per share data included in
      the Company's consolidated financial statements have been restated to
      reflect the stock split.

Reclassifications 

      Certain reclassifications have been made to the prior year balances to
      conform to the 1997 presentation.

Note 3

Earnings per Share

      The following table sets forth the computation of basic and diluted
      earnings per share:

In thousands, except                December 26,   December 27,   December 29,
per share data                              1997           1996           1995
--------------------------------------------------------------------------------

Numerator:
   Net income                         $   14,733     $   12,450     $   10,500

Denominator:

   Denominator for basic
   earnings per share -
   weighted average common
   shares outstanding                     12,559         12,529         12,468

Effect of dilutive securities:
   Employee stock options                    544            267             59

Denominator for diluted
earnings per share - weighted
average common shares and
dilutive potential common
shares outstanding                        13,103         12,796         12,527
--------------------------------------------------------------------------------
Basic earnings per share              $     1.17     $      .99     $      .84

Diluted earnings per share            $     1.12     $      .97     $      .84
--------------------------------------------------------------------------------


      For the years ended December 26, 1997, December 27, 1996, and December 29,
      1995, employee stock options relating to 416,000, 89,000 and 449,000
      shares, respectively, were not included in the computation of diluted
      earnings per share because the options' exercise prices were greater than
      the average market price of the common shares, and therefore, the effect
      would be antidilutive.

Note 4

Acquisitions

      The Company is pursuing its strategic plan to provide a broader array of
      products and services to its client base, including security systems
      integration services and products. In pursuit of these plans, the Company
      has acquired eight regional security systems integration companies over
      the past three years: two in 1995, four in 1996 and two in 1997. In
      January 1997, the Company also acquired all of the outstanding stock of
      WKD Security GmbH, a German-

                                                                              36
<PAGE>
 
      based provider of uniformed security officer and cash transit services.
      The purchase price was $22.4 million, paid in cash. The Company borrowed
      $11.6 million under its revolving line of credit, with the borrowing
      denominated in German Deutsche Marks (DM 18.0 million). The balance of the
      acquisition price, or $10.8 million, was paid from the Company's general
      funds. In June 1997, the Company purchased 50 percent ownership in Steel,
      S.A., a uniformed security officer provider based in Chile. This
      investment is accounted for under the equity method. In 1996, the Company
      acquired the security operations of Select Security, Inc. in Canada.

           Pro-forma financial information with respect to the 1996 and 1997
      acquisitions (except for WKD) is not included as it is not significant to
      the consolidated financial statements. Had Pinkerton's purchased WKD in
      1996, service revenues, net income and diluted earnings per share on the
      Company's consolidated statement of operations for the year ended December
      27, 1996, would have been $930.0 million, $14.3 million and $1.11,
      respectively. Operations for the year ended December 26, 1997, include a
      full year of WKD results.

Note 5

Intangible Assets

      Intangible assets in the accompanying consolidated balance sheets consist
      of the following:


                                             December 26,       December 27,
In thousands                                         1997               1996
-----------------------------------------------------------------------------

Goodwill                                       $   86,447         $   76,150

Less accumulated amortization                     (35,335)           (31,573)

                                                   51,112             44,577

Other intangibles                                  48,837             40,954

Less accumulated amortization                     (31,739)           (28,220)

                                                   17,098             12,734

                                               $   68,210         $   57,311
-----------------------------------------------------------------------------

NOTE 6

Long-Term Debt

      On June 14, 1990, the Company issued $60.0 million of unsecured Senior
      Notes to major insurance companies. Under the terms of the Note Purchase
      Agreement, which has a term of 10 years, interest is fixed at a rate of
      10.35% per annum, payable semi-annually on June 15 and December 15 of each
      year. Six annual principal payments of $8.6 million are required under the
      agreement beginning in June 1994, with an additional seventh payment of
      $8.6 million required at maturity. The balance at December 26, 1997, was
      $25.7 million including $8.6 million of current maturities.

           The Company has an unsecured revolving credit facility with a group
      of banks. On June 27, 1997, the facility was amended to increase the
      available borrowings from up to $70.0 million to up to $100.0 million, of
      which $50.0 million may be letters of credit (used primarily to support
      obligations under the Company's self-insurance programs). Under the
      agreement, the Company is required to pay a fee on outstanding letters of
      credit of 0.5% per annum, payable quarterly, and interest on cash
      borrowings computed at the prime rate of the agent bank, payable monthly.
      A commitment fee of .175% per annum, payable monthly, is also required on
      any unused portions of the facility. At December 26, 1997, $31.7 million
      in letters of credit were outstanding and there were DM 14.0 million ($7.9
      million) of cash borrowings outstanding under the revolving line of
      credit, included in long-term debt in the accompanying balance sheet,
      which were used to acquire WKD on January 1, 1997.
 
           Under the terms of the Note Purchase Agreement and Revolving Credit
      Agreement, the Company is required to maintain certain financial ratios
      and meet certain net worth and working capital requirements. As of
      December 26, 1997, the Company was in compliance with its covenants. In
      addition, the agreements limit the Company's ability to pay dividends,
      dispose of assets, make capital expenditures and acquisitions, and incur
      additional indebtedness, as well as other limitations .

           The Company had no foreign or domestic derivatives, interest rate
      swaps or other hedge products as of

                                                                              37
<PAGE>
 
      December 26, 1997.

Note 7

Accrued and Other Non-current Liabilities

      Accrued liabilities consist of the following:

                                       December 26,        December 27,
In thousands                                   1997                1996
-----------------------------------------------------------------------

Self-insurance reserves,
current                                  $   10,107          $   12,802

Salaries and wages                           26,258              25,053

Payroll taxes and 
   withholdings                               7,740               6,777

Estimated liability for 
   vacation benefits                          9,611               8,376

Other                                        26,482              23,358

                                         $   80,198          $   76,366
-----------------------------------------------------------------------


           The Company establishes self-insurance reserves for the estimated
      costs under workers' compensation, general liability, fidelity, health,
      dental and automobile liability insurance programs, including reserves for
      known claims, estimates of incurred but not reported claims, and the
      expected loss development of unsettled claims. Estimated requirements are
      periodically reviewed and revisions are charged to operations in the
      period that estimates are changed. Activity in these reserve accounts for
      1997, 1996 and 1995 is summarized as follows:

                             December 26,     December 27,       December 29,
In thousands                         1997             1996               1995
--------------------------------------------------------------------------------

Balance at beginning
   of year                     $   47,240       $   49,839         $   45,078

Provision charged
   to operations                   36,885           35,263             44,500

Payments                          (43,059)         (37,862)           (39,739)

Balance at
   end of year                     41,066           47,240             49,839

Less current portion
   included in accrued
   liabilities                     10,107           12,802             15,086

Long-term portion              $   30,959       $   34,438         $   34,753
--------------------------------------------------------------------------------

           The Company is required to secure its financial obligation to cover
      potential future claims. This requirement is being satisfied with letters
      of credit issued under the revolving credit facility.

           The Company has established trust accounts for its contributions to a
      voluntary employees' beneficiary association (VEBA), from which all
      employee medical insurance claims, premiums and vacation pay under 
      Company-sponsored plans are paid. Accrued liabilities at December 26,
      1997, and December 27, 1996, reflect the estimated liability to the
      trusts.

Note 8

Income Taxes

      The components of income (loss) before income taxes for domestic and
      foreign operations were as follows:

                        December 26,     December 27,     December 29,
In thousands                    1997             1996             1995
-----------------------------------------------------------------------


Domestic                  $   26,999       $   27,378       $   22,132

Foreign                       (3,459)          (3,890)          (4,111)
-----------------------------------------------------------------------
                          $   23,540       $   23,488       $   18,021
-----------------------------------------------------------------------


      The following is a summary of the provision (benefit) for income taxes:

                        December 26,     December 27,     December 29,
In thousands                    1997             1996             1995
-----------------------------------------------------------------------

Current:

Federal                   $    5,885       $    9,827       $    7,891
State                          1,831            2,424            1,855
Foreign                        1,490              757              506
-----------------------------------------------------------------------
                               9,206           13,008           10,252

Deferred:
-----------------------------------------------------------------------

Federal                         (364)          (1,586)          (2,343)
State                            (35)            (384)            (388)
                                (399)          (1,970)          (2,731)
-----------------------------------------------------------------------
                          $    8,807       $   11,038       $    7,521
-----------------------------------------------------------------------

                                                                              38
<PAGE>
 
           The provision for income taxes for the years ended December 26, 1997,
      December 27, 1996, and December 29, 1995, differed from the amount
      computed by applying the statutory federal income tax rate of 35% in each
      year to income before income taxes. The reasons for these differences are
      as follows:

                                December 26,     December 27,     December 29,
In thousands                            1997             1996             1995
-------------------------------------------------------------------------------

U.S. Federal income
   tax at statutory rate          $    8,239       $    8,220       $    6,307

State income taxes, net of
   Federal benefit                     1,170            1,372              954
                                       9,409            9,592            7,261

Changes resulting from:

Targeted jobs tax credit                (521)              --             (986)

Purchase price adjustment                 --             (769)              --

Amortization of intangible
   assets                                982              911              789

Undistributed earnings of
   foreign subsidiaries                2,461              268              211

Tax-exempt interest income              (120)            (123)             (92)

Non-taxable dividend income               --             (168)              --

Tax benefit of loss related to
   U.K. subsidiary                    (4,281)              --               --

Other, net                               637             (313)               5

Change in valuation
   allowance                             240            1,640              333

                                  $    8,807       $   11,038       $    7,521
-------------------------------------------------------------------------------


           The tax effects of temporary differences that give rise to
      significant portions of deferred tax assets and liabilities are presented
      as follows:


                                         December 26,     December 27,
In thousands                                     1997             1996
-----------------------------------------------------------------------

Deferred tax assets:

Allowance for doubtful
   receivables                             $      895       $      727

Self-insurance reserves                        16,635           18,430
                                                                    
Retirement plans                                6,658            5,644
                                                                    
Provision against investment                    1,512            1,592
                                                                    
Vacation pay                                    3,289            2,911 

Benefit from acquired net
   operating loss                                 995              717

Amortization of intangibles                     4,379            3,524

Foreign loss carryover                          4,439            4,199

Other                                             459              771

Total deferred tax assets                      39,261           38,515

Deferred tax liabilities:

State taxes                                     1,909            1,895

Prepaid insurance                                 825              587

Contribution to VEBA                              311              336

Other                                             724              910

Total deferred tax liabilities                  3,769            3,728

Deferred tax assets
   valuation allowance                         (4,439)          (4,199)

Net deferred tax assets                    $   31,053       $   30,588
-----------------------------------------------------------------------


Note 9

Other Income

      In 1996, the Company entered into an agreement with the previous owner
      related to the acquisition of Pinkerton's, Inc. by California Plant
      Protection, Inc. in 1988. As a result of this agreement, the Company
      received a cash payment of $5.2 million. Of this amount, $3.2 million
      represents a reimbursement of income and other taxes paid on behalf of the
      previous owner, which had been recorded as a receivable in the
      consolidated balance sheet; the remaining amount of $2.0 million was
      recorded as other income.

                                                                              39
<PAGE>
 
Note 10

Retirement Plans

 The Company maintains the Supplemental Retirement Income Plan (SRIP) for
certain executives and key employees. The plan has two benefit levels: (i) a
benefit at age 62 of 2.0% of final five-year average compensation for each full
year of participation, up to a maximum of 40.0%; or (ii) a benefit at age 62 of
3.5% of final five-year average compensation for each full year of
participation, up to a maximum of 52.5%. Vesting of benefits under the SRIP
normally occurs when a participant has five years of SRIP participation.

 The SRIP has no plan assets. The Company has purchased life insurance policies
on the lives of certain individual executives as an investment that it may use
to provide pre-retirement death benefits and retirement benefits. The cash
surrender value of these policies aggregated $11.5 million and $9.3 million as
of December 26, 1997, and December 27, 1996, respectively, and is included in
other assets on the Company's consolidated balance sheets. The projected net
present value of future death benefits exceeds the cash surrender value by $21.2
million for both December 26, 1997, and December 27, 1996.
 
 In connection with the acquisition of Pinkerton's, the Company assumed
liability for the Discretionary Unfunded Deferred Compensation Plan for Key
Employees (DUDCPKE), a plan covering a group of former Pinkerton executives.
Participants are entitled to receive monthly payments of deferred compensation
for life upon reaching age 60, in amounts ranging from 20.0% to 40.0% of the
average three highest annual compensation amounts, depending on years of
service. In connection with the operation of a large security contract at the
Company's Canadian subsidiary, the Company operates a Canadian Pension Plan for
the related security guards. The Canadian Pension Plan is a funded plan with
plan assets of $1,481,000.

 The following table sets forth the status of the Company's retirement plans and
amounts recognized in the Company's consolidated balance sheets as of December
26, 1997, and December 27, 1996:

                                              December 26,   December 27,
In thousands                                          1997           1996
--------------------------------------------------------------------------------

Actuarial present value of
  benefit obligations:

Vested accumulated benefit obligation             $ 19,446       $ 17,894

Unvested accumulated benefit                                 
  obligation                                         2,549          1,790

Accumulated benefit obligation                    $ 21,995       $ 19,684

Projected benefit obligation                      $ 26,537       $ 24,086

Plan assets                                          2,034          1,468

Projected benefit obligation                                 
  in excess of plan assets                          24,502         22,618

Unrecognized net loss                               (5,851)        (5,795)

Prior service cost not yet recognized                        
  in net retirement plan cost                       (4,450)        (4,763)

Accrued periodic retirement plan                             
  cost before minimum liability                     14,201         12,060

Additional minimum liability                         6,141          6,397

Liability included in accrued                                
  retirement benefits and other                                
  non-current liabilities                         $ 20,342       $ 18,457
--------------------------------------------------------------------------------


 Net retirement plan cost for 1997, 1996 and 1995 included the following
components:


                               December 26,   December 27,   December 29,
In thousands                           1997           1996           1995
--------------------------------------------------------------------------------

Service cost benefits earned
  during the period                $  2,219       $  1,992       $  1,349

Interest cost on projected
  benefit obligation                  1,540          1,440          1,531
                                                               
Amortization of net loss                252            274            137
                                                               
Amortization of past                                           
  service cost                          313            313            313

Net periodic retirement
  plan cost                        $  4,324       $  4,019       $  3,330
--------------------------------------------------------------------------------


    Assumptions used in accounting for the retirement plans as of 1997, 1996 and
1995 were:


                               December 26,   December 27,   December 29,
                                       1997           1996           1995
--------------------------------------------------------------------------------

Discount rates                         7.0%           7.0%           7.0%
Rates of increase in
   compensation levels         4.0% to 5.0%   4.0% to 5.0%   4.0% to 5.0%
--------------------------------------------------------------------------------

 The Company has no significant post-retirement obligations other than the SRIP,
DUDCPKE and the Canadian Pension Plan.

                                                                              40
<PAGE>
 
Note 11

Employee Stock Purchase Plan

The Company has a stock purchase plan for eligible employees under which
Company stock can be purchased at market value through payroll deductions.


Note 12

Stock Option Plans

Effective August 27, 1997, the Company split its outstanding shares of common
stock on a three-for-two basis. The split was accomplished by means of a stock
dividend whereby each holder of common stock received one new share for each two
shares held. Share figures set forth in this note have, to the extent
appropriate, been adjusted to reflect this split.


1990 Stock Option Plan

In February 1990, the Company adopted the 1990 Stock Option Plan "the 1990
Plan," which provided for the granting of either incentive stock options or
nonstatutory stock options to key employees and directors of the Company to
purchase up to an aggregate 405,000 shares of common stock. In April 1993, the
1990 Plan was amended to increase the number of shares of common stock reserved
for issuance upon the exercise of options granted under the Plan from 405,000 to
1,830,000.

In February 1995, in connection with the adoption of the 1995 Pinkerton
Performance and Equity Incentive Plan, the 1990 Plan was frozen such that no
further grants would be made under the plan. At that time, under the 1990 Plan,
options with respect to 1,175,325 shares were outstanding, options with respect
to 48,000 shares had been exercised, and 606,675 shares remained available under
the plan with respect to which future option grants could have been made. At
December 26, 1997, options with respect to 899,020 shares were outstanding,
expiring through December 30, 2004, of which options with respect to 600,430
shares were exercisable.


1995 Pinkerton Performance And Equity Incentive Plan

In February 1995, the Company adopted the 1995 Pinkerton Performance and Equity
Incentive Plan "the 1995 Plan," which provides for the granting of stock
options, stock appreciation rights, restricted stock awards and performance
awards to employees, and stock options or certain common stock grants to
non-employee directors of the Company, to purchase up to an aggregate 606,675
shares of common stock. In November 1997, subject to approval by the
stockholders at the 1998 Annual Meeting of Stockholders, the Board of Directors
unanimously approved an amendment to the 1995 Plan, increasing the maximum
number of shares of common stock with respect to which awards may be granted to
2,296,087, subject to further adjustment for stock dividends, stock splits,
recapitalizations or similar capital changes.

At December 26, 1997, options with respect to 1,190,436 shares were outstanding,
expiring through October 15, 2007, of which options with respect to 130,403
shares were exercisable.

The Company's stock option plans are administered by the Compensation Committee
of the Board of Directors, which consists of four non-employee directors. The
committee is authorized to determine the participants in the 1995 Plan and the
time of, type of, and number of shares underlying awards under such plan.


                                                                              41
<PAGE>
 
A summary of the status of the Company's stock option plans as of December 26,
1997, December 27, 1996, and December 29, 1995, and changes during the years
ended on those dates is presented below:

                                                       Weighted Average
                               Number of Shares         Exercise Price
--------------------------------------------------------------------------------

Outstanding at
December 30, 1994                     1,172,788              $   12.17
                                                 
Granted                                  49,800                  11.49
                                                 
Exercised                               (94,138)                  9.43
                                                 
Canceled                                (83,100)                 14.14
                                                 
Outstanding at                                   
December 29, 1995                     1,045,350                  12.23
                                                 
Granted                                 361,500                  12.75
                                                 
Exercised                               (25,201)                 11.07
                                                 
Canceled                                (73,631)                 14.42
                                                 
Outstanding at                                   
December 27, 1996                     1,308,018                  12.27
                                                 
Granted                                 844,575                  20.39
                                                 
Exercised                               (33,811)                 12.38
                                                 
Canceled                                (29,326)                 14.97
                                                 
Outstanding at                                   
December 26, 1997                     2,089,456              $   15.51
--------------------------------------------------------------------------------
Options exercisable:

  December 29, 1995                     303,007
  December 27, 1996                     475,092
  December 26, 1997                     730,833



 The following table summarizes information about stock options outstanding at
December 26, 1997:


OPTIONS OUTSTANDING
--------------------------------------------------------------------------------
                           Number of
                             Options           Weighted
                      Outstanding at            Average            Weighted
Range of                 December 26,         Remaining             Average
Exercise Prices                 1997   Contractual Life      Exercise Price
--------------------------------------------------------------------------------

$    9.83 - 14.50          1,168,456                7.0      $        11.85
$   17.00 - 23.29            921,000                7.8      $        20.16

OPTIONS EXERCISABLE
--------------------------------------------------------------------------------

                           Number of
                             Options
                      Exercisable at                        Weighted
Range of                 December 26,                        Average
Exercise Prices                 1997                  Exercise Price
--------------------------------------------------------------------------------

$    9.83 - 14.50            642,333                  $        11.62
$   17.00 - 23.29             88,500                  $        17.70


Had compensation cost for the Company's stock plans been determined based upon
the fair value at the grant date for awards under these plans, consistent with
the methodology prescribed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, the Company's net income and
diluted earnings per share would have been reduced by approximately $2.1
million, or $0.16 per share, for the year ended December 26, 1997, and
approximately $0.6 million, or $0.05 per share, for the year ended December 27,
1996. The weighted average fair value of the options granted during the year
ended December 26, 1997, and December 27, 1996, was estimated as $11.80 per
share and $8.09 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

                               December 26,  December 27,
                                      1997          1996
--------------------------------------------------------------------------------

Dividend yield                         --            --

Volatility                            .35           .37

Risk-free interest rate               6.1%          6.0%

Expected life                     7 years       7 years
--------------------------------------------------------------------------------

                                                                              42
<PAGE>
 
Note 13

Capital Stock

Capital stock at December 26, 1997, and December 27, 1996, consists of the
following:

                                                        Number of Shares    
                                                  ---------------------------
                                                  December 26,  December 27,
                                                         1997          1996
-----------------------------------------------------------------------------

8% cumulative preferred stock,
  $100 par value:

  Class A:
    Authorized                                          1,000         1,000
    Issued and outstanding                                 --            --

  Class B:
    Authorized                                         47,000        47,000
    Issued and outstanding                                 --            --

11% cumulative preferred stock, 
  $100 par value:

Class C:
    Authorized                                         20,000        20,000
    Issued and outstanding                                 --            --

Designated preferred stock, 
  $.001 par value:

    Authorized                                      5,000,000     5,000,000
    Issued and outstanding                                 --            --

Common stock, $.001 par value:

    Authorized                                    100,000,000   100,000,000
    Issued and outstanding                         12,576,778    12,542,519
-----------------------------------------------------------------------------


Note 14

Commitments and Contingencies

The Company has commitments under operating leases, primarily for building and
office space, expiring at various dates through December 2003. Certain leases
provide for additional rent based on increases in the consumer price index or
upon stated future rent revisions, payment of insurance, property taxes and
certain other costs of occupancy. Most leases contain renewal options. Rental
expense for the years ended December 26, 1997, December 27, 1996, and December
29, 1995, was approximately $10,481,000, $9,403,000 and $7,747,000,
respectively. The following is a schedule of future minimum annual rental
payments required under the Company's operating leases as of December 26, 1997:

In thousands
--------------------------------------------------------------------------------

1998                                                          $        9,930
1999                                                                   8,464
2000                                                                   6,683
2001                                                                   5,019
2002                                                                   4,447
2003 and thereafter                                                    8,824
                                                              $       43,367
--------------------------------------------------------------------------------

     In addition to the above, the Company has agreements with leasing companies
to lease automobiles over periods of 24 to 60 months, which are primarily used
in the conduct of the Company's security operations. At December 26, 1997, the
Company had 1,563 vehicles leased under these operating lease agreements. The
maximum aggregate future rental commitment on the vehicles currently leased is
$6,525,000.

     The nature of the Company's business subjects it to a significant volume of
ordinary, routine claims and lawsuits incidental to such business. The Company
maintains self-insurance programs and insurance coverage that it believes are
appropriate for its liability risks. Nonetheless, many claims or lawsuits
brought against the Company allege substantial damages that, if awarded and
ultimately paid by the Company (rather than insurers or indemnitors), could have
a material adverse effect on the results of operations or financial condition of
the Company.

     In the opinion of management, based on currently known facts and the advice
of legal counsel, there is no single claim or lawsuit, or group of claims or
lawsuits based on the same facts, pending against the Company that the
disposition of which will have a material adverse effect on the Company's
consolidated financial statements taken as a whole.

                                                                              43
<PAGE>
 
Note 15

International Operations

The Company has international operations located in Europe, Canada, Mexico,
South America and Asia. Summarized information relating to the international
subsidiaries is as follows:

                        December 26,       December 27,        December 29,
In thousands                    1997               1996                1995
--------------------------------------------------------------------------------

For the year:

   Service revenues        $ 190,451          $ 158,873           $ 136,611
                                                         
   Operating loss          $  (2,330)         $  (3,417)          $  (3,062)
                                                         
At year end:                                          
                                                         
   Total assets            $  68,857          $  71,671           $  41,407
--------------------------------------------------------------------------------

Note 16

Quarterly Financial Information (Unaudited)

Pinkerton's fiscal year is comprised of the 52-week (or 53-week) period ending
on the Friday closest to December 31, within the reporting year. The Company's
quarterly reporting periods consist of three four-week periods for the first,
second and third quarters, and four four-week periods for the fourth quarter.


                                        First     Second      Third     Fourth
In thousands, except per share data   Quarter    Quarter    Quarter    Quarter
--------------------------------------------------------------------------------

Year ended December 26, 1997

Service revenues                     $220,468   $230,789   $233,736   $316,896

Gross profit                           26,135     27,598     29,735     41,405

Net income                              1,981      2,715      3,378      6,659

Basic earnings per            
  share/b,c,d/                       $    .16   $    .22   $    .27   $    .53

Diluted earnings per          
  share/b,c,d/                       $    .15   $    .21   $    .26   $    .50

Year ended December 27, 1996  

Service revenues                     $200,036   $200,918   $207,496   $297,797

Gross profit                           23,186     23,990     27,558     39,636

Net income                              1,709      3,047      3,031      4,663

Basic earnings per            
  share/b,c,d/                       $    .14   $    .24   $    .24   $    .37

Diluted earnings per          
  share/b,c,d/                       $    .14   $    .24   $    .24   $    .36
--------------------------------------------------------------------------------

a   The second quarter of 1996 includes $2.0 million of nonrecurring other
    income, resulting from a final agreement regarding certain reimbursable
    costs under the 1988 purchase agreement for the acquisition of Pinkerton's.

b   The sum of the quarterly earnings per share amounts do not equal the annual
    amount reported, since per share amounts are computed independently for each
    quarter and for the full year, based on the respective weighted average
    common shares and dilutive potential common shares outstanding.

c   The earnings per share amounts reflect the application of Statement of
    Financial Accounting Standards No. 128, "Earnings per Share," for all
    periods presented.

d   Effective August 27, 1997, a three-for-two stock split was accomplished by
    means of a stock dividend whereby one new share was distributed for each two
    shares held. All per share amounts have been adjusted accordingly.



                                                                              44
<PAGE>

                             -------------------- 
                             Report of Management
                             --------------------

The management of Pinkerton's, Inc. is responsible for the preparation,
integrity and accuracy of the accompanying consolidated financial statements and
related information. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and include amounts based on our best estimates and informed judgments, as
required.

     Management maintains a comprehensive system of internal controls supported
by formal policies and procedures, a written code of business conduct, periodic
internal audits and management reviews. Although no cost-effective system will
preclude all errors and irregularities, we believe Pinkerton's, Inc. has in
place a system of internal controls which provides reasonable assurance that
assets are safeguarded against material loss from unauthorized use or
disposition, transactions are recorded in accordance with our policies, and the
financial information presented to our stockholders is reliable.

     The Audit Committee of the Board of Directors is comprised solely of
outside directors. The Audit Committee meets periodically with the independent
auditors, our internal auditors, and financial management to ensure that each is
carrying out its responsibilities. Both the independent auditors and the
internal auditors have free and direct access to the Audit Committee.

     The Company's independent auditors are recommended by the Audit Committee
and selected by the Board of Directors. The consolidated financial statements
have been audited by KPMG Peat Marwick LLP, who have expressed their opinion
elsewhere herein with respect to the fairness of the statements. Their audits
included a review of the system of internal control and tests of transactions to
the extent they considered necessary to render their opinion.


/s/ Denis R. Brown

Denis R. Brown
President and Chief Executive Officer


/s/ James P. McCloskey

James P. McCloskey
Executive Vice President and Chief Financial Officer


/s/ Steven A. Lindsey

Steven A. Lindsey
Vice President and Controller


                                                                              45
<PAGE>

-------------------------------------
STOCKHOLDER AND CORPORATE INFORMATION
-------------------------------------

STOCK MARKET INFORMATION

The Company's common stock is traded on the New York Stock Exchange (NYSE)
under the symbol PKT. From its 1990 initial public offering to June 25, 1996,
the Company's common stock was traded on the Nasdaq National Market (Nasdaq)
under the symbol PKTN. The following table shows the high and low sales prices
as reported by the NYSE and the high and low bid prices reported by Nasdaq.
Effective August 27, 1997, a three-for-two stock split was accomplished by means
of a stock dividend whereby one new share was distributed for each two shares
held. The prices for 1997 and 1996 have been adjusted accordingly.


                                                    High             Low
--------------------------------------------------------------------------------

1997

Fourth Quarter                               $     24.19     $     21.25

Third Quarter                                      23.31           20.00

Second Quarter                                     20.42           16.83

First Quarter                                      18.67           16.25

                                                        
1996                                                    

Fourth Quarter                               $     18.00     $     14.92

Third Quarter                                      16.67           14.00

Second Quarter                                     17.00           13.17

First Quarter                                      13.67           12.17

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

     The Company historically has not paid cash dividends on its common stock,
and its present policy is to retain any earnings for use in its business. The
Company does not intend to change such policy in the foreseeable future.
Additionally, certain covenants of the Company's Note Purchase Agreement place
restrictions on the Company's ability to pay dividends.

     On March 4, 1998, there were 255 stockholders of record of the Company's
common stock.


                                                                              47