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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                |X| Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                   For the Fiscal Year Ended December 31, 1998

              |_| Transition Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934
                  For the transition period from _____ to _____

                         Commission File Number 0-28490

                          GUARDIAN INTERNATIONAL, INC.

           (Name of Small Business Issuer as specified in its charter)

             Nevada                                      58-1799634
 (State or other jurisdiction of            (I.R.S. Employer Identification No.)
  incorporation or organization)

         3880 N. 28 Terrace                            (954) 926-5200
      Hollywood, Florida 33020            (The Company's telephone number, 
(Address of principal executive offices)        including area code)

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

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 Par Value

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of registrant 's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         The issuer's revenues for the 1998 fiscal year were $15,165,755.

         The aggregate market value of voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the stock was sold
as of March 25, 1999 was $3,863,905.

         As of March 25, 1999, there are 8,582,241 shares of Class A Voting
Common Stock, par value $.001 per share, and 634,035 shares of Class B Nonvoting
Common Stock, par value $.001 per share, of the issuer outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None


    Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]


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                                                 TABLE OF CONTENTS
                                                                                                         Page No.
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<S>                       <C>                                                                              <C>
Introductory Note                                                                                           1

PART I.  

Item 1.                   Description of Business                                                           1

Item 2.                   Description of Property                                                          14

Item 3.                   Legal Proceedings                                                                15

Item 4.                   Submission of Matters to a Vote of Security Holders                              15

PART II.

Item 5.                   Market for Common Equity and Related Stockholder Matters                         15

Item 6.                   Management's Discussion and Analysis of Financial Condition and                  19
                             Results of Operations

Item 7.                   Financial Statements                                                             27

Item 8.                   Changes In and Disagreements With Accountants on Accounting                      47
                             and Financial Disclosure

PART III.

Item 9.                   Directors, Executive Officers, Promoters and Control Persons;                    47
                             Compliance with Section 16(a) of the Exchange Act

Item 10.                  Executive Compensation                                                           50

Item 11.                  Security Ownership of Certain Beneficial Owners and Management                   51

Item 12.                  Certain Relationships and Related Transactions                                   52

Item 13.                  Exhibits and Reports on Form 8-K                                                 53


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Introductory Note

FORWARD-LOOKING STATEMENTS.

         In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 ("the Reform Act"), Guardian International, Inc.
(the "Company") is hereby providing cautionary statements identifying important
factors that could cause the Company's actual results to differ materially from
those projected in forward-looking statements made herein. Any statements that
express, or involve discussions as to, expectations, beliefs, plans, objectives,
assumptions or future events or performance (often, but not always, identified
through the use of words or phrases such as the Company or management
"believes," "expects," "anticipates," "hopes," words or phrases such as "will
result," "are expected to," "will continue," "is anticipated," "estimated,"
"projection" and "outlook," and words of similar import) are not statements of
historical facts and may be forward-looking. These forward-looking statements
are based largely on the Company's expectations and are subject to a number of
risks and uncertainties, including but not limited to, economic, competitive,
regulatory, growth strategies, available financing and other factors discussed
elsewhere in this report and in the documents filed by the Company with the
Securities and Exchange Commission ("SEC"). Many of these factors are beyond the
Company's control. Actual results could differ materially from the
forward-looking statements made. In light of these risks and uncertainties,
there can be no assurance that the results anticipated in the forward-looking
information contained in this report will, in fact, occur.

         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 following: (i) the ability of the Company to add additional
customer accounts to its account base through acquisitions from third parties,
through internal sales efforts and through strategic alliances; (ii) the level
of subscriber attrition; (iii) the availability of capital to the Company
relative to certain larger companies in the security alarm industry which have
significantly greater capital and resources; (iv) increased false alarm fines
and/or the possibility of reduced public response to alarm signals; (v) changes
in local, state and federal regulations; (vi) availability of qualified
personnel; (vii) competitive factors in the industry, including additional
competition from existing competitors or future entrants to the industry; (viii)
social and economic conditions; (ix) natural disasters; and (x) other risk
factors described in the Company's reports filed with the SEC from time to time.

         Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time and it is not
possible for management to predict all of such factors, nor can it assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.


         PART I.

Item 1.  Description of Business

The Company's Services

         The Company is presently a leading supplier of security monitoring and
high grade monitored security and fire systems in Florida and New York City. The
Company's principal activities include the following: (i) monitoring services

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provided pursuant to alarm contracts owned by the Company; (ii) acquisition of
alarm contracts in connection with the acquisition of other alarm companies;
(iii) the sales and installation of electronic security systems including alarm,
closed circuit television ("CCTV") and access control systems; (iv) maintenance
of electronic security systems; and (v) monitoring services provided pursuant to
alarm contracts owned by other alarm companies (wholesale monitoring).

         The majority of the Company's revenue is derived from recurring
payments for the monitoring and maintenance of security and fire systems,
pursuant to contracts with initial terms typically ranging from one to five
years. The remainder of the Company's revenue is derived from the sale and
installation of security and fire systems and the servicing and upgrades of such
installed systems. For the fiscal year 1998, monitoring revenues represented
approximately 60% of total revenues. The balance of the Company's revenues was
derived from (i) the sale and installation of security and fire systems
(approximately 31% of total revenues); (ii) the provision of maintenance
services (approximately 7% of total revenues) and (iii) miscellaneous sources
(approximately 2% of total revenues).

         Based on the Company's gross revenues for the year ended December 31,
1997, the Company and its wholly-owned subsidiary, Mutual Central Alarm
Services, Inc. "Mutual", were ranked 57th and 60th, respectively, in Security
Distributing and Marketing Magazine's ("SDM Magazine") May 1998 issue with the
annual listing of the top security companies in the United States. The
combination of Guardian and Mutual would occupy the position of 27th largest
security company based on total revenues. Based on monthly recurring revenues
("MRR"), a standard industry measurement, the combination would hold the
position of 21st largest company. The Company expects that it will be ranked
among the top 25 security companies in SDM Magazine's 1999 annual listing. In
addition, according to the 1998 Fact Book Issue of Security Sales (Vol. 20, No.
12, supplement), only 6.8% of all security companies in the United States
generate gross revenues in excess of $2,500,000. These statistics place the
Company as a leader among United States security firms. As reflected in the
Company's financial statements set forth in Item 7 below, the Company's net
revenues for the year ended December 31, 1998 were $15,165,755.

Retail Monitoring Services

         The Company monitors digital signals arising from burglaries, fires and
other events through security systems installed at subscribers' premises. Most
of these signals are received and processed at the Company's two central
monitoring stations, one of which is located in Hollywood, Florida and the other
of which is located in New York City, New York. Each central monitoring station
is listed by Underwriters Laboratories, Inc. ("UL") as (i) a burglar alarm
system central station; and (ii) a protective signaling services central
station. The Company's Florida central station is constructed to withstand
hurricane-force winds and both central stations can, using generators, maintain
operations indefinitely without electrical power from third parties.

         The Company's central monitoring stations have many security devices,
including closed circuit television ("CCTV"), motion detecting units, high
intensity lighting and access control. All of the equipment the Company uses to
monitor its customers' systems and to protect its central monitoring station is
generally the latest enhancement, with most of the equipment being less than
four years old.

         The central monitoring stations operate with redundant systems and,
therefore, upon any failure of equipment, an exact duplicate is available to
back it up within minutes. The central station monitoring facility is largely
paperless, resulting in lower costs and greater efficiency than would be
obtained otherwise. The Company's phone system is digital (as opposed to
analog); all conversations are recorded and compressed digitally. Every alarm
function is handled through automation including the dialing of customer and
police telephone numbers, thereby reducing the possibility of human error.

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         The central monitoring stations are comprised of a number of electronic
devices including: alarm receiving equipment, telephone dialers, radio signal
receiving equipment, a telephone recorder, a digital telephone system and a
voice mail/auto phone attendant. All of these devices are maintained internally
by the Company's technical personnel. The balance of the Company's equipment
includes dual redundant Data General Aviion(TM) servers, associated CRTs
(terminals) and the software which runs the automated functions of the Company's
security, service and accounting functions. The software is maintained by
Monitoring Automation Systems (Irvine, CA) ("MAS") and the Data General
Corporation computers and terminals are maintained by Data General Corporation
(Boston, MA) ("Data General") pursuant to annual maintenance contracts.

         Monitoring services provided by the Company include monitoring homes
and commercial facilities for burglary, fire and environmental problems. If an
alarm condition is detected, a signal is transmitted over telephone and/or radio
transmission to the Company's central monitoring station. When the conditions
require verification and/or dispatch action, the Company's human operators react
in accordance with standard procedures.

         The central monitoring system also monitors opening and closing
schedules for the Company's commercial customers. Commercial customers have the
option of receiving periodic reports reflecting the date, time, action and
employee name with respect to each opening or closing activity during the
relevant period. The reports can be sent to any location around the world via
mail, facsimile or email.

         Retail monitoring generated revenue of approximately $8.5 million and
$3.2 million in 1998 and 1997, respectively (see "1998 Developments"). As of the
date of this Annual Report, the Company had approximately 23,400 retail
customers, which includes the accounts acquired during 1998 (see "1998
Developments"). No individual retail customer represents more than 5% of the
Company's total revenues.

Wholesale Monitoring Program

         Under the Company's wholesale monitoring program, (the "Wholesale
Monitoring Program") subscribers are monitored on a "wholesale" basis for
certain third party security alarm companies, some of which are competitors of
the Company. This practice is commonly referred to in the industry as "third
party monitoring" or "wholesale" monitoring. The Company also offers such third
party companies additional services, such as off-site data entry and account
maintenance, automated account history and testing via touch tone telephone,
marketing and technical support.

         Under the Wholesale Monitoring Program, the Company bills the third
party company a monthly amount for all services rendered. The third-party
company is responsible for billing its customers. Typical fees for wholesale
monitoring are approximately 20% of the amount billed directly by the Company to
its retail customers. While wholesale monitoring results in significantly lower
margins than are obtained with respect to the Company's retail subscribers, the
wholesale customer base creates an opportunity for the Company to expand its
customer base by purchasing customer accounts from third party companies. In
fact, the Company, in the past, purchased customer accounts that were being
monitored under the Wholesale Monitoring Program.

         The Wholesale Monitoring Program generated revenues of approximately
$606,000 and $573,000 in 1998 and 1997, respectively. As of the date of this
Annual Report, the Company had approximately 22,900 wholesale customers. No such
wholesale account represents more than 5% of the Company's total revenues.

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Installation and Sale of Electronic Security Systems

         The Company typically installs electronic security and fire systems for
its residential and commercial customers. These systems can range in complexity
from simple alarm panels interfaced with one or two sensors up to highly
integrated card access and CCTV systems. With the exception of sales to builders
of residential developments or communities, most of the electronic security
systems sold by the Company are leased to the customer for a period of time
coinciding with the monitoring contract.

         Most of the alarm-related products sold by the Company are manufactured
or distributed by subsidiaries of Pittway Corporation. The Company sells a
variety of brands of access control and CCTV products, depending upon the
specific application.

         Revenues derived from the installation and sale of security and fire
systems totaled approximately $4.7 million and $1.3 million in 1998 and 1997,
respectively. Increased revenues are a result of the business acquisitions in
1998 (see "Recent Developments" below) and of the increased sales and marketing
efforts of the Company.

Maintenance of Electronic Security and Fire Systems

         A strong maintenance and service capability is an important element in
maintaining good customer relations and low attrition. The Company provides
responsive service to its customers whose electronic security and fire systems
require repair or upgrading. Depending on the nature of the problem and the
customer, such services are typically provided within 24-48 hours.

         Maintenance of security and fire systems generates revenue primarily
through billable field service calls or contractual payments under service
agreements. Revenue derived from maintenance services totaled approximately $1.1
million and $489,000 in 1998 and 1997, respectively. Increased revenues
correlate to the increase in the Company's account base, which increased to
approximately 23,400 subscriber accounts at December 31, 1998 from approximately
11,900 subscriber accounts at December 31, 1997.

History

         The Company was incorporated under the laws of the State of Nevada on
October 30, 1986.

         On January 15, 1996, the Company formed Federal Alarm Systems, Inc.
("FASI"), a wholly-owned subsidiary organized under the laws of the State of
Florida. FASI was established to provide monitoring services for the owners of
burglar alarm systems installed by Specialty Devices, Inc. ("SDI") and to
monitor and service purchased burglar alarm contracts. Subsequent to the
establishment of FASI, the Company's management decided to perform these
services and FASI was dissolved.

         On August 15, 1996, the Company executed an Agreement and Plan of
Merger ("Merger Agreement") with Guardian International, Inc. ("Guardian"), a
Florida corporation. The merger ("Merger") was completed on August 28, 1996.
Pursuant to the terms of the Merger Agreement, in reliance upon the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), the Company issued 3,226,902 shares of Class A
Common Stock to the shareholders of Guardian in exchange for all of the
outstanding shares of common stock of Guardian. These shares represented
approximately fifty percent (50%) of the Company's then issued and outstanding
Class A Common Stock. Also, pursuant to the terms of the Merger Agreement, the

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Company paid approximately $1.8 million to Harold Ginsburg, one of the
shareholders of Guardian, in repayment of certain loans to Guardian and as a
return of capital.

         Following the Merger, the Company changed its name to Guardian
International, Inc. The Company's directors preceding the Merger resigned
following the Merger and the directors of Guardian filled the vacancies on the
Board. For a listing of the Company's directors, see Item 9 - Directors,
Executive Officers, Promoters and Control Persons.

         In October and November, 1997, the Company issued 2,500,000 shares of
Class A Common Stock for $1.50 per share ($3,750,000 in the aggregate) and
1,875,000 newly authorized shares of Series A 9 3/4% Convertible Cumulative
Preferred Stock for $2.00 per share ($3,750,000) to Westar Capital, Inc., a
subsidiary of Western Resources, Inc. ("Western"). Such shares were subsequently
contributed by Western to its majority-owned security business subsidiary,
Protection One, Inc. ("Protection One").

1998 Developments

         Acquisition of Mutual Central Alarms Services, Inc.

         In February 1998, the Company completed the acquisition of all of the
capital stock of Mutual Central Alarm Services, Inc. ("Mutual"), the nation's
60th largest monitored alarm company (according to SDM Magazine) and one of the
largest independent alarm companies in the metropolitan New York area. Founded
nine years ago, Mutual grew through a strategy of concentrating on high-grade UL
listed commercial security, fire, CCTV and access control systems. Mutual
provides services to high-end retail businesses, financial institutions and
Fortune 500 companies. As a result of the acquisition, the Company increased its
subscriber base by approximately 2,600 accounts and added MRR of approximately
$320,000. The effective date of the acquisition was February 1, 1998 and was
accounted for using the purchase method of accounting.

         The total purchase price was approximately $10.5 million in cash and
1,981,700 shares (the "Mutual Shares") of unregistered Class A Common Stock. The
Company granted certain rights to the Selling Security Holders to have the
Mutual Shares registered by the Company under the Securities Act. The shares
were registered with the SEC, effective August 13, 1998.

         Pursuant to the terms of the Stock Purchase Agreement between the
Company and Mutual, the Company and Mutual entered into employment agreements
with Joel A. Cohen and Raymond L. Adams. Mr. Cohen was retained under a five
year agreement as President of Mutual and was appointed to serve as a Vice
President of the Company. Mr. Cohen was granted options to purchase 100,000
shares of Class A Common Stock. Twenty percent (20%) of the options vest and are
exercisable on each of the first five anniversaries of the effective date of Mr.
Cohen's employment agreement. Mr. Adams was retained under a three year
agreement as a Vice President of Mutual. Mr. Adams was granted options to
purchase 100,000 shares of Class A Common Stock. One-third of the options vest
and are exercisable on each of the first three anniversaries of the effective
date of Mr. Adams' employment agreement.

         The Company funded the cash portion of the acquisition with borrowings
under its Renewed Credit Facility (the "Renewed Credit Facility") with Heller
Financial, Inc. ("Heller") (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources") and proceeds from a $4.0 million preferred stock investment from
Protection One. Protection One purchased 1,600,000 shares of Series B Preferred
Stock at $2.50 per share. The Company granted to Protection One certain rights
to have the shares of Class A Common Stock issuable upon conversion of the

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Series B Preferred Stock on a share-for-share basis registered by the Company
under the Securities Act. These shares were subsequently exchanged in a
transaction outlined below in "Protection One Investment".

         Mutual is continuing to operate under its trade name as a wholly-owned
subsidiary of the Company.

         Other 1998 Acquisitions

         During 1998, the Company acquired three additional security alarm
installation and monitoring companies, two of which were located in the state of
Florida and one in Staten Island, New York. The additional acquisitions
increased the subscriber base by approximately 6,100 customers and increased MRR
by approximately $208,000. The aggregate consideration for these acquisitions
was approximately $6.9 million in cash and approximately 578,000 shares of Class
A Common Stock. These acquisitions were accounted for using the purchase method
of accounting. For additional information on the acquisitions see Note 2 in
Notes to Consolidated Financial Statements.

         Protection One Investment

         On October 21, 1998, Protection One purchased 10,000 shares of Series D
6% Convertible Cumulative Preferred Stock, par value $.001 per share ("Series D
Preferred Stock"), of the Company for $10 million.

         The Series D Preferred Stock is non-convertible until the third
anniversary of the date of issuance, after which date, the shares are
convertible at a rate of 333.3333 shares of Class A Common Stock for each share
of Series D Preferred Stock. Dividends are payable annually either in cash or in
additional shares of Series D Preferred Stock. The holders of Series D Preferred
Stock have no voting rights until such shares are converted into Class A Common
Stock except that the holders of Series D Preferred Stock are allowed to vote on
an as-converted basis with the holders of Class A Common Stock under the
following circumstances: (i) until the third anniversary of the date of
issuance, upon a Change in Control as that capitalized term is defined in the
Certificate of Designations for the Series D Preferred Stock (see Exhibit 4(i));
(ii) or at any time the Series D Preferred Stock is outstanding, under an Event
of Default, as that capitalized term is defined in the Certificate of
Designations for the Series D Preferred Stock (see Exhibit 4(i)). The holders of
Series D Preferred Stock have no redemption rights except upon a Change in
Control. After the third anniversary of issuance, the Company can elect to
redeem the Series D Preferred Stock for a premium.

         The proceeds of the sale of the Series D Preferred Stock were used to
pay down long-term debt, which will position the Company to make further
acquisitions and to carry out other corporate purposes including a stock
repurchase program (see "Stock Repurchase Program").

         In addition, Protection One exchanged its existing equity holdings in
Guardian (2,980,000 million shares of Class A Common Stock, 2,037,133 million
shares of Guardian Series A 9 3/4% Convertible Cumulative Preferred Stock, par
value $.001 per share, and 1,704,232 million shares of Guardian Series B 10 1/2%
Convertible Cumulative Preferred Stock, par values $.001 per share) for 16,397
shares of Series C 7% Redeemable Preferred Stock, par value $.001 ("Series C
Preferred Stock"), of the Company. After giving effect to the transactions,
Guardian had approximately 9.2 million shares of Common Stock outstanding,
including 634,035 shares of Class B Non-Voting Common Stock, par value $.001 per
share, held by Heller.

         The Series C Preferred Stock is non-voting and is redeemable on the
sixth anniversary of the date of issuance at a liquidation value of $1,000 per
share. Dividends are payable quarterly in cash. The Company's first quarterly

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dividend payment was made in January 1999. The holders of Series C Preferred
Stock have the right to optional redemption upon a Change in Control, as that
capitalized term is defined in the Certificate of Designations for the Series C
Preferred Stock (see Exhibit 4(h)). At any time after issuance, the Company can
elect to redeem the Series C Preferred Stock for a premium. Due to the
redeemable nature of the Series C Preferred Stock, the capital will reside
outside the stockholders' equity section in the mezzanine section of the balance
sheet, following long-term debt. This treatment is consistent with the hybrid
characteristics of the issue.

         The holders of the Series D Preferred Stock do not have any right to
nominate directors unless and until conversion of the Series D Preferred Stock.
After giving effect to the transaction, Protection One presently owns
approximately 26% of the outstanding capital stock of the Company on a
fully-diluted as-converted basis.

Stock Repurchase Program

         The Company's Board of Directors also authorized the repurchase of up
to $1 million of Class A Common Stock of the Company in the open market during
the period from October 1998 to April 2000. Repurchase decisions will be based
on comparisons of Guardian's trading price as a multiple of common industry
performance measurements compared to the selling prices of private security
monitoring companies as a multiple of those same parameters. As of March 25,
1999, the Company had not repurchased any shares of Class A Common Stock of the
Company under this program.

Heller Credit Facility

         The Company's credit facility with Heller was amended in October 1998
to include Heller's consents: (i) to allow the above-mentioned transactions;
(ii) to improve the Company's borrowing base calculation; (iii) to allow for the
payment of cash dividends on the Series C Preferred Stock; (iv) to allow for use
of funds drawn on the credit facility for the Company's stock repurchase
program; and (v) to extend the termination date to May 2001.

Market Overview and Trends

         The Company's target market consists of the owners of single family
residences, builders of and homeowners within residential development
communities and the owners and tenants of commercial establishments.

         The security alarm industry is characterized by a high degree of
fragmentation and currently is comprised of a small number of relatively large
competitors (greater than $20 million annual sales) and a great many small
providers of alarm systems and services. A survey published by SDM Magazine in
May 1998 reported that in 1997, based upon information provided by its
respondents, the 100 largest companies in the alarm industry accounted for
approximately 25% of industry revenues. The Company believes that thousands of
smaller alarm service companies, because of their small size, have higher
overhead expenses as a percentage of revenues than the Company and lack access
to capital on terms as attractive as those available to the Company. Moreover,
due to a decline in security system installation prices over the last two years,
security alarm companies participating in market growth are required to make a
substantial investment in each new subscriber. In order to be competitive,
security alarm companies must sell equipment at or below cost or transfer
equipment gratuitously in the expectation of generating future recurring
monitoring revenues. Consequently, access to capital has become an increasingly
important factor in a security alarm company's success.

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         The residential security alarm market is also characterized by rapid
growth, but a relatively low level of market penetration and is, therefore,
still in a relatively immature stage. The pricing has only recently made it
accessible to a broader homeowners' market. The Company believes that several
factors have spawned an increased demand for residential security alarm systems
in the markets where the Company operates, including unacceptably high levels of
crime, increased public concern about crime and the prevalence of insurance
company discounts to homeowners who purchase alarm systems, which discounts are
typically larger when alarm systems are monitored by a central station. In
addition, insurance companies may require that businesses install an alarm
system as a condition to obtaining or renewing insurance coverage. Also, the
Company enjoys the benefits of operating in two separate sectors of the
industry: high-grade commercial and traditional residential. By operating in
both sectors, economic strength in one may subsidize any weaknesses that may
occur in the other, a reputation earned in one sector may carry over into the
reputation for the other, and cash flow from commercial projects may help fund
investments in the residential market.

         Advances in digital communications technology have prompted some
consolidation in the security alarm industry. Prior to the development of
digital communications technology, alarm monitoring required a dedicated
telephone line, which made long-distance monitoring uneconomic. Consequently, in
order to achieve a national or regional presence, alarm monitoring companies
were required to maintain a large number of geographically dispersed local
monitoring stations. The development of digital communications technology
eliminated the need for dedicated telephone lines, reducing the cost of
monitoring services to the subscriber and permitting the monitoring of
subscriber accounts over a wide geographic area from a central monitoring
station. The elimination of local monitoring stations has decreased the cost of
providing alarm monitoring services and has substantially increased the
economies of scale for larger alarm service companies. In addition, the
concurrent development of microprocessor-based control panels has substantially
reduced the cost of the equipment available to subscribers in the residential
and commercial markets. Digital technology has also enabled equipment
manufacturers to build more features into security systems, such as remote user
interface, lighting and heating controls and user programming features.

         Large, consumer-oriented companies in industries facing deregulation,
including long distance and local telephone companies and electric and gas
utilities, including Southern California Edison, Western Resources, Inc. and
Ameritech Corporation, have demonstrated an increased interest in the security
alarm industry over the last several years. The Company believes
telecommunications and utility companies are interested in offering their
customers additional services, including security services, as a means of
enhancing customer loyalty and reducing future risk of losing customers in a
fully competitive environment. The entrance by such large companies into the
security alarm business poses the threat that such companies will engage in
price wars with other companies in the alarm industry. Such price wars, if they
were to occur, could have a materially adverse effect on the Company's financial
condition. As evidenced by Protection One's total investment of $21.5 million
cash in Guardian, the Company believes that its strategic alliance with
affiliates of Western Resources, Inc. has helped and will help the Company's
competitive position by (i) improving the Company's financial strength by
increasing the Company's equity; (ii) lowering its cost of capital; (iii)
improving its appeal to potential sellers of alarm accounts or alarm companies;
and (iv) improving and expanding acquisition and investment opportunities made
available to the Company.

Business Strategy

         The Company has never had any net income and has a history of
consistent and sometimes significant net losses. Although no assurance can be
given by the Company as to when or if the Company will realize net earnings, the
Company anticipates that, based on its strategy of continued growth and customer
account expansion, and barring any unforeseen significant changes in the nature
of its business or operations (including its method of financing customer

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account acquisitions through its existing and/or any Renewed Credit Facility
with Heller and the accounting for such acquisitions), it will continue to
record such net losses until such time as it has significantly reduced its
indebtedness and has substantially increased its customer base.

         The Company's strategy for growth has consisted primarily of the
implementation of an aggressive and strategic acquisition plan, while
maintaining a strong balance sheet. Since 1994, prior to its merger into the
Company, Guardian has acquired a combination of over 25 alarm companies and/or
portfolios of customer monitoring contracts from existing alarm companies. The
financing for these acquisitions has been derived from an initial $7 million
credit facility with Heller, which has been replaced by the Company's Renewed
Credit Facility of $20 million (see "Management's Discussion and Analysis -
Liquidity and Capital Resources - Capital Resources"), and with the proceeds
from several investments by Protection One (see "History" and "1998
Developments").

         Management believes that numerous acquisition opportunities continue to
be available and the Company is pursuing, and intends to continue to pursue,
acquisitions of alarm companies of portfolios of subscriber accounts, some of
which may be significant to the Company's expected future growth. Through its
1998 acquisition of Mutual, the Company has expanded its operations outside of
Florida and into New York. The Company plans to continue pursuing other
acquisitions outside Florida, not only in New York, but in major metropolitan
areas throughout North America. Acquisitions of account portfolios, thus far,
have been achieved primarily through the acquisition of alarm companies and
through the Company's "Independent Alarm Acquisition Program" as described
below.

         Under the Independent Alarm Acquisition Program, the Company acquires
customer contracts from independent alarm companies in Florida. Under this
program, the independent alarm company solicits sales of its own alarm systems
from potential residential or commercial customers. Such customers are also
offered the option to enter into an agreement with the independent alarm
company, in the independent alarm company's own name, for the provision of alarm
monitoring and/or repair services, typically for a period not to exceed a 60
month term. The independent alarm company then sells the customer contract to
Guardian for an amount typically between 25 to 35 times the amount of MRR to be
generated by the contract, or a proportionately smaller multiple of MRR if the
contract is for less than 60 months. The costs of such acquisitions are
accounted for at the fair value as of the date of acquisition and amortized over
10 years.

         Under the program, the independent alarm company (the "Contract
Seller") may be required to guarantee that a minimum number of payments (usually
between 12 and 18 monthly payments) will be received by the Company from the
customer (the "Minimum Payment Period") and that customers will pay any amounts
owed within 90 days during such Minimum Payment Period. If the guaranteed number
of payments is not received by the Company, or if a customer is late in paying
any amounts due for a period exceeding 90 days, the Contract Seller must replace
the subscriber contract with a new contract of equal original duration and MRR.
In order to ensure that such Contract Seller guarantees are met, the Company
typically withholds an average of 10% of the payment made to the Contract Seller
at the inception of the transaction (referred to as a "holdback"). After the
guarantee period lapses, the Company will pay the Contract Seller the holdback
monies due.

         Another source of growth of the Company's account portfolio is the
Company's internal sales departments. The Company has various marketing programs
in place intended to generate additional subscribers, the most notable of which
is the Company's affiliation with First Alert Professional, an equipment
manufacturer that provides a variety of joint marketing programs. The Company
expects that its internal sales programs will create accounts in excess of
attrition, affording the Company moderate growth even in the absence of
significant acquisitions.

                                       9

<PAGE>


         Based on projections for new home starts from its builder clients,
management expects additional revenue from the Company's new construction
residential installations. The Company is under contract with builders of new
home developments in South Florida, greater Tampa Bay area and Orlando. The
Company is one of the leading providers of alarm systems to the new residential
construction market in the state of Florida.

         In addition, the Company currently has master association contracts
("Master Contracts") with three development companies throughout Florida. Each
Master Contract calls for Company-installed alarms to be monitored by the
central station with one bill each month to the relevant master homeowners
association. Closings on homes located in these developments began in the first
quarter of 1996 and will continue for the next three years. The Company's
revenue under a Master Contract increases incrementally with each closing.
Current MRR under the Master Contracts is approximately $13,000. Management
anticipates that upon completion of the development projects, the Company will
generate over $28,000 in additional MRR under the Master Contracts; there can be
no assurances, however, as to the completion of these projects or the
realization of the additional MRR.

         The Company's commercial business units in Florida and New York are
among the leaders in their respective areas. The Company intends to broaden
geographic coverage in the Northeast via its 1998 acquisition of the Staten
Island burglar alarm company and to increase direct sales representation and
product lines offered in Florida.

         Historically, the Company's retrofit residential sales efforts have
been concentrated on responding to inquiries and referrals from the Company's
account base. In 1999, the Company intends to initiate a larger-scale marketing
effort in South Florida to compete for residential alarm monitoring business,
capitalizing on the Company's large share of market in that region.

         The financial strategy for effecting the business goals is enhanced by
the Company's relationship with Protection One (see "Protection One
Investment"). The Company believes that the relationship will enhance its access
to capital for the future, affording management the ability to focus on
executing the business strategy. Some of the relationship's many potential
benefits are enumerated in "Market Overview and Trends" above.

Equipment and Technology

         General Corporate Technology

         Computer automation is an integral part of the Company's operations.
The Company believes that it utilizes automation equipment that is more advanced
than that used by smaller and comparably-sized companies in the industry and up
to par with those systems utilized by the largest national security alarm
companies. The Company has had an active program to replace and enhance its
automation equipment on an as-needed basis and also on a proactive basis, as
determined by management, to maintain efficiency and to ensure that the Company
can offer its customers state-of-the-art services.

         The Company operates two alarm-monitoring centers, one in Hollywood,
Florida, and the other in mid-town Manhattan, the commercial center of New York
City. Each control center is equipped with equipment that enables the Company to
receive, analyze, and process information from alarm, fire, temperature-sensing,
video, and access control systems located at customer sites. The Company can, in
most cases, also perform remote diagnostics from the control center. The
automation equipment also enables the Company to process accounting information,
service maintenance, and scheduled compliance requirements required by the
Company's customers.

                                       10

<PAGE>


         In 1998 the Company purchased departmental file servers which
accommodated the Company's internal e-mail network, new accounts payable and
general ledger software, as well as proprietary alarm system manufacturers'
software to enhance the Company's ability to communicate with customer security
alarm panels.

         In conjunction with the Company's June 1997 monitoring hardware
upgrades, these enhancements also enabled the Company to link its Tampa, Florida
and Miami, Florida offices into the main system. Furthermore, the Company
initiated a consumer web site (www.4Guardian.com) where customers can make
routine requests for small items, request service, and order additional security
equipment. These requests are routed automatically to the appropriate
department. These enhancements enable a large part of the Company to share one
customer database and to improve its efficiency in the areas of monitoring,
service routing, and internal communication. This investment increased capacity
and improved the productivity of operators and other administrative staff using
the automation and accounting systems. The Company expects to upgrade its
security monitoring system periodically as necessary to keep up with
technological advances.

         In 1998 the Company also invested in its internal client computer
network. As of December 1998, over 97% of all internal client desktops were
powered by Pentium(R) class processors.

         The Company currently operates under the MAS 5.50.65 version for its
automation, service and billing system. The Company also relies heavily on
integrated MAS fax technology. MAS technology gives the Company the ability to
automate numerous aspects of information that were previously processed
manually. In addition, such technological advancements as the provision of
alphanumeric alarm indications give the Company the ability to process data
efficiently with little or no human interaction.

         The Company's central monitoring system currently has the capacity to
monitor up to approximately 250,000 subscribers with moderate upgrades to the
storage and processor capacity of its existing hardware system. Moreover, the
operating facility would require minimal physical changes to accommodate such a
volume of accounts.

         Mutual Central Alarm Services Enhancement Project

         In October 1998, the Company embarked on a $250,000 upgrade project, in
conjunction with the renewal of the Company's lease in New York City. The
primary objective of the project was the upgrading of the New York monitoring,
accounting, and service system from an older PICK operating system-based
automation system to the same automation and accounting systems used by the rest
of the Company.

         The project significantly increases consistency of operations between
the Florida and New York offices of the Company, which permits the Company to
realize efficiencies across numerous critical disciplines. In addition, the New
York monitoring station now has additional capacity to aggregate more customers
on a faster, newer system.

         On March 3, 1999, the Company consolidated the monitoring of its
subscribers in Staten Island from a competitive third party monitoring station
into the new system at Mutual. In addition, the Manhattan and Staten Island
offices were upgraded with additional communication equipment, which enables
live access to the new system from the satellite office in Staten Island. A
dedicated circuit from New York to the Company's Hollywood headquarters is also

                                       11

<PAGE>


planned in the second quarter of 1999 which will enable the New York financial
team to have live access to the newly installed general ledger and accounts
payable system in Hollywood, Florida.

         The Company expects to complete the entire project by April 30, 1999,
with all subscribers on the new systems by mid-May 1999.

Marketing

         A large portion of the Company's marketing activities has consisted of
referrals and a limited amount of advertising. As mentioned above, the Company
elected to become a First Alert Professional(TM) dealer to enhance its direct
sales efforts. The direct sales staff was significantly increased during 1998.
In 1999, the Company plans to apply significantly more resources to direct mail
and limited media advertising, improved distribution of Company yard signs, and
other innovative marketing programs.

Competition

         Competitive conditions vary within each segment of the security
industry. The largest segment is composed of security system dealers. Most of
these companies have fewer than twenty employees, average one hundred fifty to
eight hundred fifty (150-850) customer accounts, are usually under-capitalized,
are owner-managed, and do not have their own central monitoring stations.

         According to a 1997 survey conducted by SDM Magazine (published in May
1998), the 100 largest companies in the security industry account for
approximately twenty-five percent (25%) of the industry's total revenue.
Therefore, the majority of industry revenue is generated by smaller alarm
service companies.

         The segment of the industry composed of central monitoring services is
characterized by a small number of companies that provide both wholesale and
retail monitoring. The barriers to entry in this segment are high due to the
large investment required to equip and conform the facilities for UL approval.
This segment is divided into national and regional firms. The smaller regional
companies have difficulty competing with the larger national firms due to higher
overhead, the inability to purchase service and equipment on volume discounts
and, often, the lack of capital or financing to make acquisitions. The Company
believes that large regional companies, such as Guardian, have a competitive
advantage relative to large national companies, because large national companies
provide sales and/or leases, installations and service of security systems and
provide central monitoring services, but typically provide only retail
monitoring for security systems installed by them. They generally do not enter
the wholesale market. In contrast, regional companies typically provide
wholesale monitoring services to other regional and local alarm companies that
are unable to supply the monitoring function for the security systems which they
sell (see "Wholesale Monitoring Program").

         There are a number of larger companies which may have significantly
greater capital and resources than the Company (see "Market Overview and
Trends"). The following chart reflects the size of Guardian as compared to the
nine largest alarm companies. The information was obtained from the May 1998
issue of SDM Magazine.

                                       12

<PAGE>


                                           1997 Revenue (in         Number of 
Company                                        millions)            Accounts
-------                                        ---------            --------
ADT Security                                    $1,100              1,600,000
SecurityLink from Ameritech                        450              1,100,000
Wells Fargo Alarm Services, Inc. (1)               227                170,000
Honeywell, Inc. Home & Building Control            201                200,000
Brinks Home Security, Inc.                         180                511,500
Protection One, Inc. (2)                           145                756,800
The Westec Security Group (3)                       85                120,000
Slomins Security                                    51                 84,800
Entergy Security, Inc. (3)                          50                168,000
Guardian International, Inc.                         6                 13,500

---------------
(1)   Subsequently purchased by ADT Security.
(2)   Protection One, Inc., a Delaware corporation, a majority-owned subsidiary
      of Western Resources, Inc., owns 26% of the Company's outstanding shares 
      of Class A Common Stock, on an as-converted basis, as of March 25, 1999.
(3)   Subsequently purchased by Southern California Edison.

Government Regulation

         The Company's operations are subject to federal, state, county and
municipal laws, regulations and licensing requirements. The Company's employees
include four State of Florida licensed low-voltage electrical contractors. In
addition, the Company believes it holds all the licenses required to operate in
the counties and municipalities in Florida in which it is presently providing
services. In New York, the Company is qualified to provide low-voltage
electrical services, uniformed response services and fire monitoring for
customers in New York.

         Because the Company operates a central monitoring station and installs
burglar and fire alarms, the State of Florida requires that the Company's
employees directly involved in the monitoring of customers and provision of
field repair services complete a certification program and that the Company
maintain a license to conduct its monitoring business. The Company believes that
it holds the necessary licenses to conduct its business and that it is in
compliance with all licensing and regulatory requirements in each jurisdiction
in which it operates.

         The Company relies on the use of telephone lines and radio frequencies
to transmit signals and relay alarm calls. The cost and type of equipment that
may be employed for telephone lines is regulated by the federal and state
governments. The use and operation of radio frequencies is regulated by the
Federal Communications Commission and the state public utilities commissions.

Trademarks

         During 1997, the Company filed an application with the United States
Patent and Trademark Office ("Office") to register the mark "Security By
Guardian International" and "G" design. In late 1997, the Company received
notification from the Office that its application had not been accepted. The
Company retained the Washington D.C. intellectual property law firm of Cohen &
Smith. The Company was advised to continue its common law use of the mark and
file for state trademark protection. Two state trademark registrations were
granted for Guardian International Security and G design (T98000000478 on April
29, 1998) and a G design contained within a circle (T98000000637 on June 1,
1998). The Company has been using these marks in Florida since January 1993
without third party opposition. Based on a later review of the federal register,

                                       13

<PAGE>


Cohen & Smith advised the Company to refile an application for the mark
"Security by Guardian International" and "G" design (U.S. application for the
mark (U.S. application serial no. 75/597, 830 on November 30, 1998).

         In July 1998, the Company filed a federal trademark application with
the Office for the mark "Mutual Central Alarm Services, Inc." & design (U.S.
application serial no. 75/513, 770 on July 6, 1998). This application has been
approved for publication in the Official Gazette for third party opposition. The
Company is currently monitoring its trademarks: Guardian International, Inc.,
Gibraltar Security Alarm Services, Alarm Control, Inc., Mutual Central Alarm
Services, Inc. and Gator Telecom, Inc. in order to evaluate the availability and
feasibility of continuing to operate under separate trademarks or of
consolidating them into one name. No assurances can be given that third parties
will not attempt to assert superior trademark rights in similar marks or that
the Company will be able to successfully enforce and protect its rights in its
trademarks against third party infringers.

Employees

         At December 31, 1998, the Company employed 194 individuals, all but one
of whom were full-time employees. Any future increase in the number of employees
will depend upon growth of the Company's business.


Research and Development and Environmental Issues

         The Company does not conduct any research and development activity.

         The Company has the need to dispose of many batteries, which constitute
environmentally sensitive waste. The used batteries are stored in the Company's
warehouse until such time as they are transported to a recycling center for
disposal.

Item 2.  Description of Property

         The Company leases its corporate headquarters from Guardian
Investments, a Florida partnership owned by Harold and Sheilah Ginsburg, both of
whom are directors, officers and principal shareholders of the Company (see Item
12 - Certain Relationships and Related Transactions, below). The Company's
corporate headquarters occupies a 12,000 square foot building which houses a
central monitoring facility located at 3880 North 28 Terrace, Hollywood,
Florida, 33020. The telephone number is (954) 926-5200. The lease expires on
December 31, 2002, but has a renewal option for an additional five years under
the same terms and conditions. The annual rent is approximately $102,000, with
annual increases not to exceed three percent (3%). The terms of the lease are no
less favorable to the Company than those which could be obtained from an
unaffiliated third party.

         With the acquisition of Mutual, the Company became the assignee on a
lease with Windbrook Realty for space at 10 West 46th Street, New York, New
York, 10036. The assignment commenced February 19, 1998 and extends through
December 31, 1999. Subsequently, the lease was extended through December 2004,
with a renewal option for an additional five years under the same terms and
conditions. The 3,500 square feet of leased space houses a central monitoring
station, offices and warehouse facilities. The annual rent is approximately
$91,000.

         The Company also leases office space in Miami, Orlando and Tampa,
Florida and in Staten Island, New York. The leases expire on various dates
through July 2003 and most are renewable at the option of the Company.

                                       14

<PAGE>


Item 3.  Legal Proceedings


         The Company experiences routine litigation in the normal conduct of its
business. The Company believes that any such pending litigation will not have,
individually or in the aggregate, a material adverse effect on its respective
business, financial condition or results of operations.


Item 4.  Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of security holders, through proxy
or otherwise, during 1998.


                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         The Class A Common Stock has been publicly traded under the symbol
"GIIS" since November 1996 through the National Quotation Bureau's National
Daily Quotation Price Sheets.

         The following table set for the high and low bid information of the
Class A Common Stock for the periods indicated below, as reported by the
National Quotation Bureau during such periods.

                                               High               Low
                                               ----               ---
           1997
           ----
           1st Quarter                        $2.50               $1.00
           2nd Quarter                        $1.25               $0.63
           3rd Quarter                        $1.75               $0.78
           4th Quarter                        $2.50               $1.47

           1998
           ----
           1st Quarter                        $3.38               $2.06
           2nd Quarter                        $2.69               $1.66
           3rd Quarter                        $1.84               $0.94
           4th Quarter                        $1.44               $0.56


         The Company is authorized to issue 30,000,000 shares of Preferred
Stock, of which 26,517 shares are issued and outstanding as of March 25, 1999.
The Company is presently authorized to issue 100,000,000 shares of Class A
Common Stock, of which 8,582,241 are outstanding as of March 25, 1999. There are
130 holders of record of Class A Common Stock. The Company is authorized to
issue 1,000,000 shares of Class B Common Stock, of which 634,035 shares are
issued and outstanding as of March 25, 1999. Heller is the sole holder of record
of the Class B Common Stock.

         In connection with the merger of Guardian into the Company, Heller
received 484,035 shares of Class B Common Stock in exchange for certain capital
appreciation rights with respect to the common stock of pre-merger Guardian held
by Heller. In addition, pursuant to the terms of an agreement entered into among
the pre-merger Guardian shareholders and Heller, the Company was required to
issue 150,000 shares of Class B Common Stock to Heller. In order to fulfill this
commitment, the Company's Articles of Incorporation were amended to authorize
additional shares of Class B Common Stock which were issued to Heller in
November 1997.

                                       15
<PAGE>


Dividends

         The Company has not declared any cash dividends on its Common Stock
since its inception and does not anticipate paying such dividends in the
foreseeable future. The Company plans to retain any future earnings for use in
the Company's business. In addition to the self-imposed restriction on the
payment of dividends resulting from the Company's own policies, the payment of
dividends is currently restricted pursuant to the terms of the existing credit
facility with Heller and is likely to remain subject to such restriction for the
foreseeable future (see "Management's Discussion and Analysis - Liquidity and
Capital Resources ").

         Quarterly dividends are payable at a rate of 1.75% on the Series C
Preferred Stock in either cash or additional shares of the preferred stock. The
Company has elected to pay the Series C Preferred Stock quarterly dividends in
cash. The Series D Preferred Stock pays dividends at a rate of 6% on an annual
basis in either cash or additional shares of the Series D Preferred Stock. The
Company has elected to pay the Series D Preferred dividends in additional shares
of the preferred stock.

Transfer Agent

         In October 1998, the Company began using the services of Continental
Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004.

Recent Sales of Unregistered Securities

           On March 12, 1996, the Company issued 30,000 shares of Everest common
stock to employees and directors of the Company as payment for their services.
The issuance was exempt from registration under Section 4(2) of the Securities
Act.

                            Date of           Number of         Aggregate 
        Purchaser          Purchases       Common Shares     Consideration Paid
        ---------          ---------       -------------     ------------------
   Frank Bauer              3/12/96           10,000               $100
   Gary Liscio              3/12/96            5,000                 50
   Harvey Doischen          3/12/96            5,000                 50
   Karl Gelbard             3/12/96           10,000                100


         On August 14, 1996, the Company issued a total of 1,000,000 shares of
Everest common stock at $3.50 per share to the following institutions. The
issuance was exempt from registration under Regulation S promulgated under the
Securities Act.

                                  Date of       Number of         Aggregate 
              Purchaser           Purchases   Common Shares   Consideration Paid
              ---------            ---------   -------------  ------------------
   Bank of Austria                 8/14/96        15,000            $52,500
   (Switzerland)
   Bank Leu                        8/14/96        60,000            210,000
   Coutts & Co. AG Zurich          8/14/96        15,000             52,500
   Credit Suisse                   8/14/96       170,000            595,000
   Darier  Hentsch  Private Bank   8/14/96        30,000            105,000
   & Trust
   FAI Overseas Investments        8/14/96       200,000            700,000
   Royal Bank of Scotland          8/14/96       400,000          1,400,000
   Swiss Bank Corp.                8/14/96       110,000            385,000


                                       16

<PAGE>


         On October 4, 1996, pursuant to a Plan and Agreement of Merger between
the Company (then known as Everest Security Systems Corporation) and Guardian
International, Inc., a Florida corporation ("Guardian"), 3,226,902 shares of
Common Stock were issued to the shareholders of Guardian in exchange for all of
the outstanding shares of common stock of Guardian. These shares were issued in
reliance upon the exemption from registration afforded by Section 4(2) of the
Securities Act.

                                       Date of             Number of
           Purchaser                  Purchases          Common Shares
           ---------                  ---------          -------------
    Harold Ginsburg                   10/04/96             903,533
    Rhonda Ginsburg                   10/04/96             629,245
    Richard Ginsburg                  10/04/96             629,246
    Sheilah Ginsburg                  10/04/96             903,533
    Robert and Nancy Kansky           10/04/96             161,345


         In connection with the acquisition of the assets of Alarm Control,
Inc., the Company issued 50,000 shares of Class A Common Stock to Terry Akins
and options to purchase 100,000 shares of Class A Common Stock at a price of
$2.50 per share, pursuant to the Option Agreement dated May 7, 1997. The
issuance was exempt from registration under Section 4(2) of the Securities Act.

                                      Date of             Number of
     Purchaser                       Purchases          Common Shares
     ---------                       ---------          -------------
    Terry Akins                        5/7/97               50,000


         On October 21, 1997 and November 24, 1997, pursuant to a Stock Purchase
Agreement between the Company and Protection One, dated as of October 14, 1997,
the Company issued 2,500,000 shares of Class A Common Stock to and 1,875,000
shares of Series A Preferred Stock to Protection One. The shares were exchanged
in a transaction outlined above in "1998 Developments". The issuance was exempt
from registration under Section 4(2) of the Securities Act.


                                      Date of             Number of
     Purchaser                       Purchases          Common Shares
     ---------                       ---------          -------------
    Protection One                    10/16/97            2,500,000
    Protection One                    11/24/97            1,187,000*

---------------
* On an as-converted basis.

                  On February 19, 1998, the Company issued 1,981,700 shares of
Class A Common Stock, pursuant to a Stock Purchase Agreement dated February 23,
1998, as partial consideration in acquiring all of the outstanding common stock
of Mutual (see Note 2 to the Consolidated Financial Statements). The shares were
registered with the Securities and Exchange Commissions, effective August 13,
1998.

                                 Number of Common 
     Purchaser                        Shares
     ---------                        ------
    Mutual Sellers                  1,981,700
    

         On February 19, 1998, pursuant to a Stock Purchase Agreement between
the Company and Protection One, dated as of February 23, 1998, the Company
issued 1,600,000 shares of Series B Preferred Stock at $2.50 per share, the

                                       17

<PAGE>


proceeds of which were used in the funding of the Mutual acquisition (see Note 2
to the Consolidated Financial Statements). The issuance was exempt from
registration under Section 4(2) of the Securities Act; however, these shares
were exchanged in a transaction outlined above in "Description of Business -
1998 Developments".

                              Date of     Number of Common      Aggregate 
     Purchaser                Purchase       Shares          Consideration Paid
     ---------                --------       ------          ------------------
     Protection One             2/19/98     1,600,000 *            $4,000,000

---------------
* On an as-converted basis.


         In connection with the acquisition of the assets of Gator Telecom,
Inc., the Company issued 94,937 shares of Class A Common Stock on March 9, 1998.
The issuance was exempt from registration under Section 4(2) of the Securities
Act.

                                   Date of         Number of Common
     Purchaser                     Purchase            Shares
     ---------                     --------            ------
     Gator Telecom, Inc.            3/9/98             94,937


         On April 27, 1998, the Company issued 194,269 shares of Class A Common
Stock, pursuant to a Stock Purchase Agreement, dated April 27, 1998, as partial
consideration in acquiring all of the outstanding common stock of Precision
Security Systems, Inc. The issuance was exempt from registration under Section
4(2) of the Securities Act.

                                   Date of         Number of Common
     Purchaser                     Purchase            Shares
     ---------                     --------            ------
     David Weston                  4/27/98            194,269


         On May 4, 1998, the Company issued 5,513 shares of Class A Common Stock
to Terry E. Akins, for services performed in connection with an acquisition by
the Company in December 1997. The issuance was exempt from registration under
Section 4(2) of the Securities Act.

                                   Date of         Number of Common
     Purchaser                     Purchase            Shares
     ---------                     --------            ------
     Terry E. Akins                 5/4/98              5,513

         On August 13, 1998, the Company issued 289,018 shares of Class A Common
Stock, pursuant to a Stock Purchase Agreement, dated August 13, 1998, as partial
consideration for the Company's acquisition of the outstanding common stock of
Stat-Land Burglar Alarm Systems & Devices, Inc. The issuance was exempt from
registration under Section 4(2) of the Securities Act.

                                   Date of         Number of Common
     Purchaser                     Purchase            Shares
     ---------                     --------            ------
     Stat-Land sellers             8/13/98            289,018


                                       18

<PAGE>


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         The information contained below includes statements of the Company's or
management's beliefs, expectations, hopes, goals and plans that are
forward-looking statements subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a description of such risks and uncertainties,
see the information set forth in the Introductory Note to this Annual Report
under the caption "Forward-Looking Statements," which information is
incorporated herein by reference.


Overview

         The majority of the Company's revenues is derived from recurring
payments for the monitoring, maintenance and leasing of security and fire
systems, pursuant to contracts with initial terms typically ranging from one to
five years. The remainder of the Company's revenues is derived from the sale and
installation of security and fire systems and the servicing and upgrades of such
installed systems. Monitoring and service revenues are recognized as the service
is provided. On installations for which the Company retains title to the
electronic security systems, the excess of installation revenue over estimated
selling costs is amortized over the initial term of the related
service/monitoring contract (generally five years). All other installation
revenues are recognized in the period in which installation occurs. All direct
installation costs, which include materials, labor and installation overhead are
capitalized and amortized over a five year period. When the Company maintains
ownership of the equipment, the costs of such equipment are capitalized to
property and equipment and amortized over seven to ten years.

         Alarm monitoring revenues generate favorable gross margins.
Historically, installation and service activity generated unfavorable gross
margins because such activity was necessary for the generation and retention of
residential and mid-market commercial alarm monitoring customers. With the
February, 1998, acquisition of Mutual, a New York City-based provider to
high-end commercial customers, however, more than half of the Company's
installation activity now generates favorable gross margins. This installation
activity is of a more substantial nature due to the increased security needs of
the Company's high-end commercial clientele and is perceived to be of greater
value.

         The Company's objective is to provide residential and commercial
security services to an increasing number of subscribers. The Company's growth
strategy is to enhance its position in the security alarm monitoring industry in
Florida and in the Metropolitan New York City area by increasing the number and
density of subscribers for whom it provides services. The Company is pursuing
this strategy through a balanced growth plan involving incorporating
acquisitions of portfolios of subscriber accounts in existing and contiguous
markets and growth of the Company's core business through referrals and
traditional local marketing. The Company believes that increasing the number and
density of its subscribers will help it to achieve economies of scale and
enhance its results of operations. The Company also regularly reviews
opportunities for expanding its operations into other large metropolitan
markets.


Key Operating Measures

         The Company believes that EBITDA, MRR, and MRR Attrition are key
measurements of performance in the security monitoring industry.

         EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") does not represent cash flow from operations as defined by generally
accepted accounting principles, should not be construed as an alternative to
operating income and is indicative neither of operating performance nor cash
flows available to fund the cash needs of Guardian. Items excluded from EBITDA

                                       19

<PAGE>


are significant components in understanding and assessing the financial
performance of Guardian. Guardian believes presentation of EBITDA enhances an
understanding of financial condition, results of operations and cash flows
because EBITDA is used by Guardian to satisfy its debt service obligations and
its capital expenditure and other operational needs, as well as to provide funds
for growth. In addition, EBITDA is used by senior lenders and the investment
community to determine the current borrowing capacity and to estimate the
long-term value of companies with recurring cash flows from operations.
Guardian's computation of EBITDA may not be comparable to other similarly titled
measures of other companies. The following table provides a calculation of
EBITDA for the years ended December 31, 1998 and 1997:

                                                   Year Ended December 31,

                                                    1998              1997
                                                    ----              ----

    Net loss                                      $(2,148,842)      $(1,574,091)

    Plus:
         Amortization of customer contracts         3,972,575         1,181,607
         Depreciation and amortization                545,181           295,666
         Interest expense                           1,312,703         1,001,187
                                                  -----------       -----------
              EBITDA                              $ 3,681,617         $ 904,369
                                                  ===========         =========

         Monthly Recurring Revenue. MRR represents the monthly recurring revenue
the Company is entitled to receive under subscriber contracts in effect at the
end of the period. MRR is a term commonly used in the security alarm industry as
a measure of the size of a company and as a key factor in assessing the value of
a company. It does not measure profitability or performance, and does not
include any allowance for future subscriber attrition or uncollectible accounts
receivable. MRR at December 31, 1998 and 1997 was approximately $927,000 and
$329,000, respectively.

         MRR Attrition. The Company experiences customer cancellations, i.e.,
attrition, of monitoring and related services as a result of subscriber
relocation, the cancellation of acquired accounts during the process of
integrating such accounts into the Company's operations, unfavorable economic
conditions and other reasons. This attrition is offset to a certain extent by
revenues from the sale of additional services to existing subscribers, the
reconnection of premises previously occupied by subscribers, the conversion of
accounts previously monitored by other alarm companies and guarantees provided
by the sellers of such accounts. The Company defines attrition numerically for a
particular period as a quotient, the numerator of which is equal to the
difference of gross MRR lost as the result of canceled subscriber accounts less
the sum of (i) MRR replaced pursuant to guarantees from sellers of accounts
purchased by the Company; (ii) MRR replaced by executing monitoring agreements
with the new residents of addresses where the Company formerly enjoyed a
customer; and (iii) MRR replaced by executing monitoring agreements with regard
to the relocated residences or businesses of Company clients, and the
denominator of which is the expected month-end MRR calculated at the end of such
period. Net MRR attrition of the Company's customers during the years ended
December 31, 1998 and 1997 was less than 10%, on an annualized basis.

                                       20

<PAGE>


Consolidated Statements of Operations

The following table sets forth certain operating data as a percentage of total
revenues for the periods indicated.
                                                           Year Ended
                                                          December 31,
                                                          ------------

                                                         1998      1997
                                                         ----      ----
     Revenues:
        Monitoring                                       60.2      67.1
        Installation and service                         39.8      32.9
                                                        -----     -----
     Total revenues                                     100.0     100.0
     Operating expenses
        Monitoring                                       13.2      10.3
        Installation and service                         27.4      29.4
        General and administrative                       35.1      44.2
                                                        -----     -----
                                                         75.7      83.9
                                                        -----     -----
     Income before interest expense, amortization and
           depreciation                                  24.3      16.1
                                                        -----     -----
     Interest expense                                     8.7      17.8
     Amortization of customer contracts                  26.2      21.0
     Depreciation and amortization                        3.6       5.3
                                                        -----     -----
                                                         38.5      44.1
                                                        -----     -----
     Net loss                                           (14.2)    (28.0)
                                                        =====     =====

         The Company has never had any net income and has a history of
consistent and sometimes significant net losses. Although no assurance can be
given by the Company as to when or if the Company will realize net earnings, the
Company anticipates that, based on its strategy of continued growth and customer
account expansion, and barring any unforeseen significant changes in the nature
of its business or operations (including its method of financing customer
account acquisitions through its existing and/or any Renewed Credit Facility
with Heller and the accounting for such acquisitions), it will continue to
record such net losses until such time as it has significantly reduced its
indebtedness and has substantially increased its customer base.

Year Ended December 31, 1998 and 1997

         Revenue. Total revenues for 1998 increased 170% to $15,165,755, from
$5,624,790 for 1997. Monitoring revenues increased by 142% to $9,125,514 during
1998, from $3,772,108 during 1997. Installation and service revenues increased
by 226% to $6,040,241 during 1998, compared to $1,852,682 during 1997. Total
retail subscribers numbered approximately 23,400 at December 31, 1998, compared
to approximately 11,900 at December 31, 1997, a net increase of approximately
97%. The increase in revenues and number of subscribers from 1997 to 1998 is
primarily attributable to the Company's acquisition of Mutual and the other 1998
acquisitions, which added approximately 11,700 retail subscribers. The increase
in installation revenue, which is generally one-time, project oriented activity,
is also a direct result of the acquisition of Mutual, which provides such
services to the high-end commercial market in the New York City area.

                                       21

<PAGE>


         Operating Expenses. Total operating expenses, net of amortization of
customer contracts and depreciation and amortization, for 1998 increased 143% to
$11,484,138, from $4,720,421 during 1997. Monitoring expenses increased 246% to
$2,002,700 during 1998, compared to $579,373 during 1997. As a percentage of
monitoring revenues, monitoring expenses increased to 22% in 1998, compared to
15% in 1997. The increase in monitoring expenses, in absolute as well as on a
percentage basis, from 1997 to 1998 was a result of the significant increase in
monitoring revenues and number of subscriber accounts, as well as the
acquisition of Mutual, which operates its own central monitoring facility.
Installation and service costs for 1998 increased by 152% to $4,161,520,
compared to $1,653,003 during 1997. The increase in total installation and
service costs from 1997 to 1998 was partly the result of increases in volume of
installation activities in 1998 from 1997. As a percentage of installation and
service revenue, such costs were 69% in 1998, compared to 89% in 1997, due to
the larger gross margins Mutual derives from its large commercial security
system sales.

         Gross Profit. Total gross profit, defined as total revenues less
monitoring costs and installation and service costs, increased by 165% to
$9,001,535 in 1998, compared to $3,392,414 in 1997. Gross profit from monitoring
revenues increased by 123% to $7,122,814 in 1998, compared to $3,192,735 in
1997. Gross profit from installation and service activities increased 841% to
$1,878,721 in 1998 compared to $199,679 in 1997. See the previous two paragraphs
for a discussion of revenues and expenses of such monitoring and installation
and service activity.

         General and Administrative. General and administrative ("G&A") costs
increased by 114% to $5,319,918 in 1998, compared to $2,488,045 during 1997. The
increase in G&A costs from 1997 to 1998 is related primarily to the Company's
1998 acquisitions and its growth in revenue, resulting in an increase in the
Company's overhead cost structure. Included in G&A is bad debt expense of
$511,333 in 1998, compared to $287,870 in 1997. The increased bad debt expense
during 1998 over 1997 resulted from increases in revenues and the expanded
customer base, which increased the Company's exposure to delinquent accounts. As
a percentage of total revenues, G&A decreased to 35% in 1998 compared to 44% in
1997.

         Amortization of Customer Contracts. Amortization of customer contracts
increased 236% to $3,972,575 during 1998, compared to $1,181,607 during 1997.
The increase in such costs from 1997 to 1998 resulted from the increase in the
amount of capitalized customer contracts, which increased from a balance of
$8,048,495 at December 31, 1997 to $31,552,324 at December 31, 1998. Such costs
are amortized over 10 years, unless a contract is canceled and not replaced by
the corresponding independent alarm company, or otherwise, in which case the
remaining unamortized balance is written off as a charge to amortization
expense.

         Depreciation and Amortization. Depreciation and amortization increased
by 84% to $545,181 during 1998, compared to $295,666 during 1997. Such costs
include depreciation of property and equipment (the gross balance of which
increased from approximately $1.2 million at December 31, 1997 to approximately
$3.2 million at December 31, 1998, as a result of (i) the Company's continued
expansion activities and (ii) the Company's 1998 acquisitions, which resulted in
additional property and equipment being acquired), goodwill amortization (a
gross balance of approximately $0.6 million was recorded in connection with the
1998 acquisitions, which is being amortized over 10 years) and amortization of
certain other intangible assets.

         Interest Expense. Interest expense increased 31% to $1,312,703 during
1998, compared to $1,001,187 during 1997. The increase in interest expense was
the result of additional debt incurred primarily in connection with the cost of
acquiring subscriber accounts. A substantial portion of such subscriber
acquisition costs were financed by Heller. Total borrowings under the Renewed
Credit Facility were approximately $6.0 million as of December 31, 1998 compared
to approximately $753,000 as of December 31, 1997. As of March 25, 1999, the

                                       22

<PAGE>


Company had approximately $6.4 million of borrowings under the Heller Renewed
Credit Facility.

         Net Loss. Net loss applicable to Class A Common Stock for the year
ended December 31, 1998 was approximately $3.1 million, or $(0.28) per share,
basic and diluted, compared to a net loss of approximately $1.6 million, or
$(0.21) per share, for the year ended December 31, 1997.

Liquidity and Capital Resources

         Capital Resources. In May 1997, the Company refinanced its existing
credit facility with Heller. Under the Renewed Credit Facility, the maximum
credit facility available to the Company was increased from an existing $7.0
million to $15.0 million. In connection with the acquisition of Mutual (see Note
2 - Consolidated Financial Statements), the Renewed Credit Facility was further
amended to increase the maximum available credit to $20.0 million. The Renewed
Credit Facility expires in May 2001. Availability under the Renewed Credit
Facility is subject to certain "Borrowing Base" limitations (as defined in the
Renewed Credit Facility). In connection with the investment by Protection One
(See "Description of Business - 1998 Developments"), in October 1998, Heller
made other amendments to the Renewed Credit Facility to conform the agreement
with the transactions discussed in Note 11 in Notes to Consolidated Financial
Statements. The Renewed Credit Facility includes customary covenants including,
but not limited to, restrictions related to the incurring of other debt, the
encumbrance or sale of the Company's assets, and the payment of dividends or
making of other distributions to the Company's shareholders and other financial
performance covenants. The Company believes it was in compliance with all such
covenants as of December 31, 1998.

         The Renewed Credit Facility will be used primarily for acquisitions of
subscriber accounts. The Company's continued plan of growth through acquisitions
of subscriber accounts is contingent upon its ability to borrow under the
Renewed Credit Facility.

         Liquidity. Net cash provided by operating activities during the year
ended December 31, 1998 was approximately $3.5 million. The Company incurred a
net loss of approximately $2.2 million during such period; however, included in
such loss was depreciation and amortization expense, amortization of customer
accounts, amortization of capitalized installation costs and amortization of
deferred financing costs totaling approximately $5.4 million, bad debt provision
of approximately $0.5 million, cash outflows of approximately $1.3 million
related to increases in accounts receivable and other assets and cash inflows of
approximately $1.1 million related to net increases in liabilities.

         Net cash used in investing activities was approximately $23.0 million
during the year ended December 31, 1998 and was comprised of approximately $16.7
million used in the 1998 acquisitions, the purchase and placement of customer
accounts of approximately $4.5 million and the purchases of fixed assets of
approximately $1.8 million which includes equipment under lease at customer
premises of approximately $1.3 million.

         Net cash provided by financing activities was approximately $20.2
million during the year ended December 31, 1998, consisting of net proceeds from
issuance of Preferred Stock of approximately $13.8 million, proceeds under
borrowings from Heller of approximately $18.3 million reduced by repayments to
Heller and other long-term debt of approximately $11.9 million. As of December
31, 1998, the Company's cash balance was $865,857.

         Total shareholders' equity increased by a net amount of $99,267 during
fiscal 1998 to $9,115,493 as of December 31, 1998. The net increase resulted
from the investment in the Company by Protection One and the issuance of Class A

                                       23

<PAGE>


Common Stock in connection with the Company's 1998 acquisitions less the
Company's repurchase of the Class A Common Stock held by Protection One and the
net loss of approximately $2.2 million (see "Description of Business - 1998
Developments").

         Affiliation with Western Resources, Inc. Protection One is a
majority-owned subsidiary of Western Resources, Inc. As evidenced by the capital
raised and acquisitions completed since October, 1997, the Company has reasons
to believe that its strategic alliance with affiliates of Western Resources,
Inc. has helped and will help the Company's competitive position by (i)
improving the Company's financial strength by increasing the Company's equity
and mezzanine capital; (ii) lowering the cost of such capital; (iii) improving
its appeal to potential sellers of alarm accounts or alarm companies; and (iv)
improving and expanding acquisition and investment opportunities made available
to the Company.

                  The Company does not currently have any significant
commitments for capital outlays.

Year 2000 Compliance

General

         Guardian faces the same Year 2000 problem that other participants in
the security and alarm monitoring industry face given the high reliance on
computer-based monitoring and electronic customer site equipment. The Year 2000
problem is a result of prior computer programming limiting the use of the year
placeholder to a two digit number, such as "98" (rather than a four digit), so
that when the year 2000 arrives, many systems could interpret the year date "00"
as being of the turn of a prior century. This is generally referred to as the
"Year 2000 Issue." Accordingly, unless corrective action is taken to ensure that
such systems are "Year 2000 Ready," many systems may fail or the processes which
those systems control may malfunction due to the inappropriate year
interpretation.

         Guardian does not believe that the Year 2000 problem will have a
significant impact on the Company or on its continuing ability to deliver
installation and alarm monitoring goods and services to its present installed
customer base and/or prospective customers.

State of Readiness

         The Company's primary business process is the act of monitoring
electronic signals from equipment placed at residential and commercial customer
premises, which are generally sent over standard analog telephone lines.
Guardian conducts this primary process, including secondary processes of
accounting and financial reporting, through the use of systems acquired from
Monitoring Automation Systems ("MAS"). In a recent technical bulletin received
from MAS, the Company was informed that all of the MAS monitoring, database and
billing systems are Year 2000 compliant, however, its general ledger and
accounts payable programs are no longer being offered. Guardian is in the final
stages of implementing Year 2000 compliant general ledger and accounts payable
software. The Company's other significant monitoring station resides at its
Mutual subsidiary in New York. A conversion process to a MAS central station
package is nearing completion at that site and will also be Year 2000 compliant
by mid-1999.

         The Company is aware of certain non-information technology-related
("IT") processes which are of critical importance to Guardian's business, but
are largely beyond the Company's ability to control. These non-IT processes
encompass the Company's interaction with providers of local and long-distance
telephony, local police and fire response, utilities including, but not limited
to, electricity and water, and both public and private transportation.

                                       24

<PAGE>


         In order to address the remainder of what the Company believes to be
its Year 2000 risk, it has developed a multi-phase plan to identify, assess and
remediate the Year 2000 problem from its business processes. Accordingly, the
Company has categorized the following phases through which it intends to
progress in the near future:

<TABLE>
<CAPTION>


                  Phase                                                          Estimated Completion Date
                  -----                                                          -------------------------
<S>      <C>                                                                            <C>
I.       Identification                                                                 Completed
         o   Establish readiness program and methodology
         o   Identify all computer programs and collect manufacturers' statements
         o   Identify and evaluate all equipment with embedded programs
II.      Assessment and Inventory                                                       April 1999
         o   Awareness assessment (vendors) and inventory phase
III.     Contingency Plans                                                              June 1999
         o   Develop written contingency plan and policy
IV.      Remediation and Testing                                                        August 1999
         o   Corrective application and sample testing
V.       Post-Evaluation                                                                March 2000
         o   Post Y2K evaluation of life safety systems (implementation of full testing field services)


</TABLE>

While the Company expects its critical internal business systems to be Year 2000
ready by August 1999, testing may extend beyond that date.

Costs

         The Company estimates that the total cost to remediate its controllable
Year 2000 risks will be approximately $30,000. These costs will primarily be
incurred on IT upgrades. As of December 31, 1998, none of these dollars had been
expended.

Risks

         The Company believes that its most reasonably likely worst case
scenario is a limited failure of some portion of its customer premise equipment
leased by the Company. As a general rule, such equipment is Year 2000 compliant
either as a result of recent vendor updates and upgrades, new equipment, or
equipment that is not date dependent. However, the Company does not believe that
it will be able to physically visit, assess, test and potentially remediate the
thousands of leased systems that are currently in operation. The Company intends
to work in concert with its equipment vendors to ensure that the risk of the
most reasonable likely worst case scenario actually occurring is reduced to a
minimum level.

Contingency Plans

         As of December 31, 1998, the Company had not developed specific,
actionable contingency plans. In the event of failure of the Company's primary
monitoring process, Guardian is currently capable of performing the monitoring
of electronic signals on a manual basis, as required by its Underwriters
Laboratory certification. However, as the Company works through the planned
phases described above, a contingency plan will be created prior to July 1999.

         The Company acquires other companies from time to time as part of its
business development strategy, and it anticipates that acquisitions will
continue through the Year 2000. In the course of conducting due diligence

                                       25

<PAGE>


investigations of acquisition candidates, the Company intends to ascertain
whether or not their products or services, or those of their critical suppliers,
are Year 2000 ready, and whether or not such suppliers and key customers, if
any, will be adversely affected by the Year 2000 issue. While acquisition
candidates may provide certain information or make representations and
warranties regarding Year 2000 readiness, in some cases, the Company may be
unable to verify same until the acquisition is completed and the steps outlined
herein as part of the Company's Year 2000 program are undertaken.

         The preceding "Year 2000 Readiness Disclosures" contain forward-looking
statements of the Company's expectations regarding the ability of its products
and systems to be Year 2000 ready, as well as its ability to assess the
readiness of its suppliers and customers, and related risks. These statements
relate to future events, the outcome of which is uncertain, and should be read
in conjunction with the cautionary factors listed in the Introductory Note to
this report.

Concentration of Credit Risk

                  Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial customers.
The Company extends credit to its customers in the normal course of business,
performs periodic credit evaluations and maintains allowances for potential
credit losses.

                                       26

<PAGE>


Item 7.  Financial Statements


                   Index to Financial Statements

                                                                         Page

       Report of Independent Public Accountants (1998)                    28

       Report of Independent Certified Public Accountants (1997)          29

       Consolidated Balance Sheet                                         30
           December 31, 1998

       Consolidated Statements of Operations                              31
           For the Years Ended December 31, 1998 and 1997

       Consolidated Statement of Changes in Shareholders' Equity          32
           For the Years Ended December 31, 1998 and 1997

       Consolidated Statements of Cash Flows                              33
           For the Years Ended December 31, 1998 and 1997


       Notes to Consolidated Financial Statements                         34


                                       27

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of
   Guardian International, Inc.:


We have audited the accompanying consolidated balance sheet of Guardian
International, Inc. (a Nevada corporation) and subsidiaries as of December 31,
1998 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.


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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Guardian International, Inc.
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.


                                                ARTHUR ANDERSEN LLP


Dallas, Texas
February 19, 1999

                                       28

<PAGE>


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of
   Guardian International, Inc.:


We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity and cash flows of Guardian International, Inc. and
subsidiary ("the Company") for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Guardian
International, Inc. and subsidiary for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.


                                       McKEAN, PAUL, CHRYCY, FLETCHER & CO.

Miami, Florida,
  March 5, 1998.

                                       29


<PAGE>

<TABLE>
<CAPTION>



                                           GUARDIAN INTERNATIONAL, INC.
                                            CONSOLIDATED BALANCE SHEET
                                                 DECEMBER 31, 1998


            <S>                                                                               <C>
            ASSETS
            Current assets:
                 Cash and cash equivalents                                                     $   865,857
                 Accounts receivable, net of allowance for doubtful accounts of
                  $488,793                                                                       1,994,795
                 Current portion of notes receivable                                               146,210
                 Inventory                                                                         393,982
                 Other                                                                             173,102
                                                                                               -----------
                      Total current assets                                                       3,573,946

            Property and equipment, net                                                          2,438,854
            Customer accounts, net                                                              31,552,324
            Goodwill and other intangible assets, net                                            2,063,256
            Notes receivable, less current portion                                                  52,042
            Deposits and other assets                                                               98,564
                                                                                               -----------
                      Total assets                                                             $39,778,986
                                                                                               ===========
            LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
                Accounts payable and accrued expenses                                          $ 2,727,058
                Current portion of unearned revenue                                              2,744,462
                Current portion of long term obligations                                           683,838
                                                                                               -----------
                      Total current liabilities                                                  6,155,358
            Unearned revenue, less current portion                                               1,311,480
            Long term obligations, less current portion                                          6,799,655
                                                                                               -----------
                      Total liabilities                                                         14,266,493

            Commitments and contingencies (see Note 9)

            Redeemable preferred stock, 16,397 shares issued and outstanding                    16,397,000

            Shareholders' equity:
            Preferred stock, $.001 par value, 30,000,000 shares authorized:
               Series D preferred stock, 10,120 shares issued and outstanding                           10
            Class A voting common stock, $.001 par value, 100,000,000 
               shares authorized, 11,569,241 shares issued and 8,582,241 shares                     11,569
            outstanding                                
            Class B non-voting common stock, $.001 par value,1,000,000 
               shares authorized, 634,035 shares issued and outstanding                                634
            Additional paid-in capital                                                          23,336,470
            Accumulated deficit                                                                 (6,164,596)
            Treasury shares, at cost                                                            (8,068,594)
                                                                                               -----------
                       Total Shareholders' Equity                                                9,115,493
                                                                                               -----------
                       Total Liabilities and Shareholders' Equity                              $39,778,986
                                                                                               ===========
</TABLE>

         The accompanying notes are an integral part of this consolidated
financial statement.

                                       30

<PAGE>


                          GUARDIAN INTERNATIONAL, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997


                                                        1998           1997
                                                        ----           ----

Revenues:
     Monitoring                                    $ 9,125,514    $ 3,772,108
     Installation and service                        6,040,241      1,852,682
                                                   -----------    -----------
          Total revenues                            15,165,755      5,624,790
                                                   -----------    -----------
Operating expenses:
     Monitoring                                      2,002,700        579,373
     Installation and service                        4,161,520      1,653,003
     Selling, general and administrative             5,319,918      2,488,045
     Amortization of customer accounts               3,972,575      1,181,607
     Depreciation and amortization                     545,181        295,666
                                                   -----------    -----------
          Total operating expenses                  16,001,894      6,197,694
                                                   -----------    -----------
          Operating loss                              (836,139)      (572,904)

Interest and other                                   1,352,203      1,001,187
                                                   -----------    -----------
          Net loss                                  (2,188,342)    (1,574,091)

Preferred stock dividends                              896,336         38,065
                                                   -----------    -----------
          Net loss applicable to common stock      $(3,084,678)   $(1,612,156)
                                                   ===========    ===========
Loss per common share                                  $ (0.28)       $ (0.21)
                                                   ===========    ===========

Weighted average shares outstanding                 11,084,009      7,510,549
                                                   ===========    ===========


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

                                       31


<PAGE>


                          GUARDIAN INTERNATIONAL, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>


                                                                       Common Stock           Common Stock       
                                             Preferred Stock              Class A               Class B          
                                             ---------------              -------               -------
                                                                                                                 
                                              Shares      Amount      Shares      Amount     Shares     Amount
                                              ------      ------      ------      ------     ------     ------
<S>                                         <C>          <C>      <C>            <C>       <C>           <C>     
Balance, December 31, 1996                          -     $         6,453,804    $ 6,454    484,035      $ 484   
                                                               -                                                 
  Purchase of treasury shares                       -          -            -          -          -          -   
  Write-off of notes receivable
    From sale of stock                              -          -            -          -          -          -   
  Issuance of Class B Common Stock
    to financial institution                        -          -            -          -    150,000        150   
  Issuance of Class A Common Stock,
    in connection with an acquisition               -          -       50,000         50          -          -   
  Sale of Series A Preferred Stock and
    Class A Common Stock, net of
    Issuance costs of $188,335              1,875,000      1,875    2,500,000      2,500          -          -   
  Stock dividend on Series A Preferred
    Stock                                      19,033         19            -          -          -          -   
  Net loss                                          -          -            -          -          -          -
                                            ---------      -----  -----------    -------   --------      -----
Balance, December 31, 1997                  1,894,033      1,894    9,003,804      9,004    634,035        634   
  Stock dividend on Series A Preferred
    Stock                                     143,100        143            -          -          -          -   
  Sale of Series B Preferred Stock, net
    of issuance costs of $13,855            1,600,000      1,600            -          -          -          -   
  Stock dividend on Series B Preferred
    Stock                                     104,232        104            -          -          -          -   
  Retirement of Series A and Series
    B Preferred Stock, acquisition of
    Treasury stock                         (3,741,365)    (3,741)           -          -          -          -   
  Sale of Series D Preferred Stock, net
    of issuance costs of $130,882              10,000         10            -          -          -          -   
  Cash dividend on Series C Preferred
    Stock                                           -          -            -          -          -          -   
  Stock dividend on Series D Preferred
    Stock                                         120          -            -          -          -          -   
  Issuance of Class A Common Stock
    in connection with acquisitions,
net                                                 -          -    2,565,437      2,565          -          -   
    of issuance costs of $28,034
  Net loss                                          -          -            -          -          -          -
                                            ---------      -----  -----------    -------   --------      -----    
Balance December 31, 1998                      10,120      $  10   11,569,241    $11,569    634,035      $ 634   
                                            =========      =====  ===========    =======   ========      =====


</TABLE>

<TABLE>
<CAPTION>
                                                                                                                 
                                                                                             Note
                                              Additional                                   Receivable
                                               Paid-in      Accumulated     Treasury       from Sale                         
                                               Capital        Deficit        Shares        of Stock         Total
                                               -------        -------        ------        --------         -----
                                           
<S>                                            <C>          <C>                 <C>          <C>          <C>              
Balance, December 31, 1996                     $4,777,772   $(1,467,762)       $           $(201,358)     $3,115,590
  Purchase of treasury shares                           -              -        (6,438)            -          (6,438)
  Write-off of notes receivable
    From sale of stock                           (201,358)             -              -      201,358               -
  Issuance of Class B Common Stock
    to financial institution                      130,350              -              -            -         130,500
  Issuance of Class A Common Stock,
    in connection with an acquisition              38,950              -              -            -          39,000
  Sale of Series A Preferred Stock and
    Class A Common Stock, net of
    Issuance costs of $188,335                  7,307,290              -              -            -       7,311,665
  Stock dividend on Series A Preferred
    Stock                                          38,046       (38,065)              -            -               -
  Net loss                                              -    (1,574,091)              -            -      (1,574,091)
                                              -----------   ------------    -----------    ---------      ----------
Balance, December 31, 1997                     12,091,050    (3,079,918)         (6,438)           -       9,016,226
  Stock dividend on Series A Preferred
    Stock                                         286,055      (286,198)              -            -               -
  Sale of Series B Preferred Stock, net
    of issuance costs of $13,855                3,984,545              -              -            -       3,986,145
  Stock dividend on Series B Preferred
    Stock                                         260,476      (260,580)              -            -               -
  Retirement of Series A and Series
    B Preferred Stock, acquisition of
    Treasury stock                             (8,331,103)             -     (8,062,156)           -     (16,397,000)
  Sale of Series D Preferred Stock, net
    of issuance costs of $130,882               9,869,108              -              -            -       9,869,118
  Cash dividend on Series C Preferred
    Stock                                               -      (229,558)              -            -        (229,558)
  Stock dividend on Series D Preferred
    Stock                                         120,000      (120,000)              -            -               -
  Issuance of Class A Common Stock
    in connection with acquisitions,
net                                             5,056,339              -              -            -       5,058,904
    of issuance costs of $28,034
  Net loss                                                   (2,188,342)                                  (2,188,342)
                                              -----------   ------------    -----------    ---------      ----------
Balance December 31, 1998                     $23,336,470   $(6,164,596)    $(8,068,594)  $               $ 9,115,493
                                              ===========   ============    ===========   ==========      ===========
</TABLE>



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

                                       32

<PAGE>

<TABLE>
<CAPTION>



                                                             GUARDIAN INTERNATIONAL, INC.
                                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997

                                                                                          1998            1997
                                                                                          ----            ----
<S>                                                                                 <C>                <C>
Cash flows from operating activities:
     Net loss                                                                       $ (2,188,342)      $(1,574,091)
       Adjustments to reconcile net loss to net cash provided by
          operating activities:
          Depreciation and amortization                                                  545,181           295,666
          Amortization of customer accounts                                            3,972,575         1,181,607
          Amortization of capitalized installation costs                                 650,210                 -
          Amortization of deferred financing costs                                       256,178           323,210
          Provision for doubtful accounts                                                511,333           287,870
     Changes in assets and liabilities, net of acquisitions:
          Accounts receivable                                                           (623,556)         (258,202)
          Deposits and other assets                                                     (712,558)         (248,043)
          Accounts payable and accrued expenses                                          812,635           301,316
          Unearned revenue                                                               307,296           118,207
                                                                                    ------------       -----------
               Net cash provided by operating activities                               3,530,952           427,540
                                                                                    ------------       -----------
Cash flows from investing activities:
     Purchase of fixed assets                                                         (1,786,027)         (215,712)
     Business acquisitions, net of cash acquired                                     (16,650,382)                -
     Purchase and placement of customer accounts                                      (4,537,787)       (4,181,552)
                                                                                    ------------       -----------
               Net cash used in investing activities                                 (22,974,196)       (4,397,264)
                                                                                    ------------       -----------
Cash flows from financing activities:
     Payments of long term obligations                                               (11,940,666)      (11,938,404)
     Proceeds from line of credit                                                     18,328,227         7,659,353
     Issuance of preferred stock, net of issuance costs                               13,827,227         7,311,665
     Purchase of treasury shares                                                               -            (6,438)
                                                                                    ------------       -----------
              Net cash provided by financing activities                               20,214,788         3,026,176
                                                                                    ------------       -----------
               Net increase (decrease) in cash and cash equivalents                      771,544          (943,548)

Cash and cash equivalents, beginning of year                                              94,313         1,037,861
                                                                                    ------------       -----------
Cash and cash equivalents, end of year                                               $   865,857       $    94,313
                                                                                    ============       ===========

Supplemental disclosures:
     Interest paid                                                                     $ 874,514        $  698,833
     Income taxes paid                                                                    70,500
                                                                                                                 -
Non cash investing and financing activities:
    Exchange of Class A common stock, retained as treasury shares                     (8,062,156)                -
    Retirement of Series A and Series B Preferred Stock                               (8,334,844)                -
    Issuance of Series C Redeemable Preferred Stock                                   16,397,000                 -
    Issuance  of  Class  A  common  stock  in  consideration   for  business           5,058,904                 -
acquisitions
    Stock dividends on Series A and Series B preferred stock                             546,778            38,065
    Stock dividends on Series D preferred stock                                          120,000                 -
    Financed acquisition of property and equipment                                                         150,000
                                                                                               -
    Recognition of Class B common stock to be issued                                           -           130,500
    Issuance of common stock to purchase customer contracts                                    -            22,130
    Issuance of common stock to purchase vehicles                                              -            16,870
    Contract holdbacks applied against accounts written off                              156,397            98,029
    Write off of note receivable from sale of stock                                            -           201,358

</TABLE>

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

                                       33


<PAGE>


                          GUARDIAN INTERNATIONAL, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Basis of Consolidation
     The consolidated financial statements include the accounts of Guardian
     International, Inc., a Nevada Corporation ("Guardian") and its wholly owned
     subsidiaries, collectively the Company (the "Company"). All significant
     intercompany accounts and transactions have been eliminated in
     consolidation.

     Description of Business
     The Company operates two central monitoring alarm stations and monitors and
     maintains electronic security systems for residential and commercial
     customers in the United States (its primary market).

     Revenue Recognition
     Installation Revenue. Prior to 1998, installation revenues were recognized
     when installation of security alarm systems were performed. Costs of
     providing installations were charged to income in the period when the
     installation occurred, except in cases where the Company maintained
     ownership of the equipment installed, in which case the Company capitalized
     the cost of the equipment to property and equipment and depreciated the
     amount over a seven year period. Net margins on installation activities
     prior to 1998 were not material to the Company's operations.

     In 1998, as a result of the acquisition of Mutual, the Company adopted a
     new accounting policy related to installation activity due to the nature of
     the high-end commercial installations performed by Mutual. The Company
     defers the excess of installation revenue over estimated selling costs and
     amortizes such difference over the initial term of the non-cancelable
     customer monitoring/service contract (generally over five years). Costs
     attributed to providing the installations, which include direct labor,
     direct materials and direct overhead, are capitalized and amortized over a
     five year period. All other costs associated with the installation are
     charged to income in the period when the installation occurs. Customers are
     billed for installation services when the installation is completed.

     Monitoring/Service Revenue. Customers are billed for monitoring and
     maintenance services primarily on a monthly or quarterly basis in advance
     of the period in which such services are provided. Deferred revenues result
     from billings in advance of performance of services. Contracts for
     monitoring services are generally for an initial non-cancelable term of
     five years with automatic renewal on an annual basis thereafter, unless
     terminated by either party. A substantial number of contracts are on an
     automatic renewal basis.

     Cash and Cash Equivalents
     All highly liquid investments purchased with a remaining maturity of three
     months or less at the date acquired are considered cash equivalents.

                                       34

<PAGE>


     Restricted Cash
     Included in Cash and Cash Equivalents is restricted cash of $24,811
     representing cash held in escrow pursuant to the Company's 1998
     acquisition activity.

     Customer Accounts, Net
     Customer accounts acquired from alarm dealers are reflected at cost. The
     cost of acquired accounts is based on the estimated fair value at the date
     of acquisition and included in "Customer Accounts, net" in the accompanying
     consolidated balance sheet. Acquired customer accounts are capitalized and
     amortized on a straight-line basis over a 10-year period. Costs applicable
     to providing installation of internally generated customer accounts are
     capitalized and amortized over the life of the monitoring/service contract
     (generally five years). It is the Company's policy to perform monthly
     evaluations of acquired customer account attrition and, if necessary, to
     adjust the remaining useful lives. The Company periodically estimates
     future cash flows from customer accounts. Because expected cash flows
     continue to exceed the unamortized cost of customer accounts, the Company
     has not recorded an impairment loss.

     Goodwill and Other Intangible Assets, Net
     Goodwill is the excess of purchase consideration given over the net assets
     acquired in a purchase business combination. The Company amortizes its
     goodwill balances over a ten-year life. Intangible assets are recorded at
     cost and amortized over their estimated useful lives. The carrying value of
     intangible assets is periodically reviewed and impairments are recognized
     when expected operating cash flows derived from such intangibles are less
     than their carrying value. Included in other intangible assets are deferred
     financing costs which are amortized over the respective terms of associated
     long term debt obligations using the interest method.

     Inventories
     Inventories, comprised of alarm systems and parts, are stated at the lower
     of average cost or market.

     Concentration of Credit Risk
     Financial instruments, which potentially subject the Company to
     concentrations of credit risk, consist principally of trade receivables
     from a large number of customers, including both residential and
     commercial. The Company extends credit to its customers in the normal
     course of business, performs periodic credit evaluations and maintains
     allowances for potential credit losses.

     Concentration of Vendor Risk
     The Company purchases alarm systems for sale and installation from a small
     number of vendors. At December 31, 1998, approximately 50% of accounts
     payable were due to one supplier.

     Property and Equipment
     Property and equipment are stated at cost. Depreciation of property and
     equipment is provided on the straight-line method. The estimated useful
     lives for property and equipment range from three to seven years and the
     estimated useful lives for leasehold improvements is approximately ten
     years. During 1998, the Company adjusted its estimate of useful economic
     life for leasehold improvements from thirty years to ten years. There was
     no material impact on the loss for the year as a result of the change in
     the estimated useful life.

                                       35

<PAGE>


     Fair Value of Financial Instruments
     Carrying amounts of certain of the Company's financial instruments
     including cash and cash equivalents, accounts receivable, accounts payable
     and other accrued liabilities approximate fair value because of their short
     term maturities.

     The fair value of the Company's credit facility approximates fair value
     because the interest rates are based on floating rates identified by
     reference to market rates. The fair value of the Company's other long term
     debt approximates carrying value.

     The estimated fair values may not be representative of actual values of the
     financial instruments that could have been realized at year end or may be
     realized in the future.

     Income Taxes
     The Company has established deferred tax assets and liabilities for
     temporary differences between financial statement and tax bases of assets
     and liabilities, using enacted tax rates in effect in the years in which
     the differences are expected to reverse. Net deferred tax assets have been
     fully reserved as it is more likely than not that the asset will not be
     utilized in the future.

     Comprehensive Income
     In June 1997, the Financial Accounting Standards Board (FASB) issued
     Statement of Finanacial Accounting Standards No. 130 (SFAS 130), "Reporting
     Comprehensive Income". SFAS 130 established reporting and disclosure
     requirements for comprehensive income and its components within the
     financial statements. The Company had no comprehensive income components
     for the years ended December 31, 1998 and 1997, therefore, comprehensive
     loss is the same as net loss for both periods.

     Accounting Pronouncements
     Accounting standards setters in the United States have issued several
     accounting pronouncements that the Company will be required to adopt in
     future fiscal reporting periods.

     Statement of Financial Accounting Standards 133 "Accounting for Derivative
     Instruments and Hedging Activities" establishes accounting and reporting
     standards for derivative instruments, including certain derivative
     instruments embedded in other contracts, (collectively referred to as
     derivatives) and for hedging activities. It requires that an entity
     recognize all derivatives as either assets or liabilities in the statement
     of financial position and measure those instruments at fair value. This
     Statement is effective for all fiscal quarters, beginning after June 15,
     1999. Management has not traditionally been required to utilize derivative
     instruments in managing its business and does not anticipate utilizing them
     in 1999.

     SOP 98-1 "Accounting for the Costs of Computer Software Developed or
     Obtained for Internal Use" provides guidance on accounting for the costs of
     computer software developed or obtained for internal use, generally
     requiring direct development costs to be capitalized while training and
     data conversion costs should be expensed as incurred. The SOP is effective
     for fiscal years beginning after December 15, 1998. Management anticipates
     the adoption of this pronouncement in fiscal year 1999 will not have a
     material impact on its financial statements. The Company is currently in
     the process of installing and implementing a new general ledger and
     accounts payable system, for which the accounting treatment has been
     substantially consistent with the guidance found in the SOP.

                                       36

<PAGE>


     Loss Per Common Share
     The Company adopted SFAS No. 128, "Earnings Per Share", in December 1997.
     Basic loss per common share is computed by dividing net loss attributable
     to common shareholders (net loss plus the preferred stock dividends) by the
     weighted average number of shares of common stock outstanding during the
     year. Diluted loss per share, which assumes that the convertible preferred
     stock is converted into Class A Common Stock and the stock options to
     purchase shares of Class A Common Stock (see Note 12) are exercised, is not
     presented because the effect would be anti-dilutive for both 1998 and 1997.
     The weighted average shares outstanding used in the computation of net loss
     attributable to common shares are as follows:

                                                Weighted Average Shares
                                               Outstanding for the Year
                                                  Ended December 31,
                                                  ------------------
                                                  1998         1997
                                                  ----         ----
       Class A Common Stock                    10,449,974    7,008,842
       Class B Common Stock                       634,035      501,707
                                               ----------    ---------
                                               11,084,009    7,510,549

     Advertising Costs
     Advertising costs are expensed as incurred. Total advertising expense was
     $100,268 and $14,229 for the years ended December 31, 1998 and 1997.

     Use of Estimates
     The preparation of financial statements, in conformity with generally
     accepted accounting principles, requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. Actual results could differ from those
     estimates.

     Reclassification
     Certain 1997 amounts in the consolidated statements of operations,
     shareholders' equity and cash flows have been reclassified to conform to
     the 1998 presentation. Such reclassifications have no impact on the net
     loss reported for 1997.

2.   ACQUISITIONS

     In February 1998, the Company acquired all of the capital stock of Mutual
     Central Alarm Services, Inc. ("Mutual"). The total purchase price was
     approximately $10.5 million in cash and 1,981,700 shares (the "Shares") of
     unregistered Class A Common Stock. The Company granted certain rights to
     the Selling Security Holders to have the Mutual Shares registered by the
     Company under the Securities Act. These shares were registered under the
     Securities Act in August 1998. The effective date of the acquisition was
     February 1, 1998. The results of operations of Mutual are included in the
     consolidated statements of operations for the period from the date of
     acquisition onwards. The transaction was accounted for using the purchase
     method of accounting.

     Pursuant to the terms of the Stock Purchase Agreement between the Company
     and Mutual, the Company and Mutual entered into employment agreements with
     Joel A. Cohen and Raymond L. Adams. Mr. Cohen was retained under a five
     year agreement as President of Mutual and was appointed to serve as a Vice

                                       37

<PAGE>


     President of the Company. Mr. Cohen was granted options to purchase 100,000
     shares of Class A Common Stock. Twenty percent (20%) of the options vest
     and are exercisable on each of the first five anniversaries of the
     effective date of Mr. Cohen's employment agreement. Mr. Adams was retained
     under a three year agreement as a Vice President of Mutual. Mr. Adams was
     granted options to purchase 100,000 shares of Class A Common Stock.
     One-third of the options vest and are exercisable on each of the first
     three anniversaries of the effective date of Mr. Adams' employment
     agreement. Both Mr. Adams and Mr. Cohen's options were priced at the
     five-day average closing price for the five day period prior to the public
     announcement of the transaction. Mr. Cohen's options were later cancelled
     and re-issued, as discussed in Note 12.

     The Company funded the cash portion of the acquisition with borrowings
     under its Renewed Credit Facility with Heller Financial, Inc. ("Heller")
     and proceeds from a $4.0 million preferred stock investment from Protection
     One, Inc. ("Protection One"). Protection One purchased 1,600,000 shares of
     Series B Preferred Stock at $2.50 per share. The Company granted to
     Protection One certain rights to have the shares of Class A Common Stock
     issuable upon conversion of the Series B Preferred Stock on a
     share-for-share basis registered by the Company under the Securities Act.
     These shares of Series B Preferred Stock were subsequently exchanged (see
     Note 11). Mutual is continuing to operate under its trade name as a
     wholly-owned subsidiary of the Company.

     Unaudited pro forma condensed results of operations, giving effect to the
     February 1998 acquisition of Mutual as of January 1, 1998 and 1997, are
     reflected below.

<TABLE>
<CAPTION>


                                                                  For the Year Ended
                                                                     December 31,
                                                             -------------------------------
                                                                  1998             1997
                                                                  ----             ----
             <S>                                               <C>             <C>        
             Revenues, net                                     $15,642,463     $11,768,572
             Income (loss) from operations                      (1,046,061)        235,489
             Net loss applicable to common shares               (3,246,114)     (1,388,962)
             Loss per common share                                   (0.29)          (0.15)
             Average common shares outstanding                  11,254,179       9,492,249

</TABLE>

     The pro forma average number of common shares outstanding represents the
     number of shares of common stock outstanding after giving effect to the
     1,981,700 shares issued in connection with the acquisition of Mutual.

     The pro forma information is not necessarily indicative of the results of
     operations that would have occurred had the acquisition taken place on
     January 1 of the periods presented, or of results which may occur in the
     future.

     Other 1998 Acquisitions

     During 1998, the Company acquired three additional security alarm
     installation and monitoring companies, two of which were located in the
     state of Florida and one New York-based alarm company. The aggregate
     consideration for these additional acquisitions was approximately $6.9
     million in cash and approximately 578,000 shares of Class A Common stock.
     These acquisitions were accounted for using the purchase method of
     accounting and the respective results of operations of the acquired
     companies are included in the consolidated statements of operations from
     the dates of the acquisitions onwards.

                                       38
<PAGE>


     Following is a summary of the Company's 1998 acquisitions, all of which
were accounted for using the purchase method of accounting:



                                             Purchase Price
                                 ----------------------------------------
                                                        Class A Common 
       Company Acquired                Cash                 Stock
       ----------------                ----                 -----
       Mutual                          $10,522,713      1,981,700 shares
       All others                        6,916,099        578,224 shares
                                       -----------      ---------
                                       $17,438,812      2,559,924 shares
                                       ===========      =========

     In conjunction with these acquisitions, net cash consideration paid was as
follows:

        Assets acquired                                      $26,982,581
        Liabilities assumed                                   (4,470,612)
        Equity issued                                         (5,073,157)
                                                             -----------
        Cash paid                                             17,438,812
        Less - cash acquired                                    (788,430)
                                                             -----------
        Net cash paid                                        $16,650,382
                                                             ===========

3.   NOTES RECEIVABLE

     Notes receivable consist of the following at December 31, 1998:

        Installment sales                                       $ 54,025
        Notes with customers and dealers                         144,227
                                                                --------
                                                                 198,252
        Current portion                                         (146,210)
                                                                --------
        Notes receivable, less current portion                  $ 52,042
                                                                ========

     The above notes are repayable in monthly installments of principal and
     interest, will be fully repaid at various intervals during 1999 and 2000
     and have interest rates varying from 0.0% to 18.85%.

4.   CUSTOMER ACCOUNTS, NET

     The following is an analysis of the changes in acquired customer accounts
for the year ended December 31, 1998:

        Balance, beginning of year                            $  8,048,495
           Purchase of customer accounts from dealers            2,605,647
           Customer accounts acquired in acquisitions           23,588,827
           Internally generated accounts                         2,088,537
           Charges against contract holdbacks                     (156,397)
           Amortization of capitalized installation costs         (650,210)
           Amortization of customer accounts                    (3,972,575)
                                                              ------------
        Balance, end of year                                   $31,552,324
                                                              ============

                                       39

<PAGE>


     The accumulated amortization of customer accounts was $4,400,439 at
     December 31, 1998. In conjunction with certain purchases of customer
     contracts and accounts, the Company withholds a portion of the price as a
     credit to offset qualifying attrition of the acquired customer accounts and
     for purchase price settlements of assets acquired and liabilities assumed.
     The Company had a total balance withheld of $95,596 at December 31, 1998,
     as contract holdbacks in connection with the acquisition of customer
     accounts which are included in "Accounts payable and accrued expenses" in
     the accompanying consolidated balance sheet.

5.   PROPERTY AND EQUIPMENT, NET

     Property and equipment, net, consist of the following at December 31, 1998:

       Property and equipment, at cost:
           Station equipment                                   $2,120,048
           Vehicles, furniture and office equipment               739,709
           Leasehold improvements                                 324,970
                                                               ----------
                                                                3,184,727
       Accumulated depreciation and amortization                 (745,873)
                                                               ----------
                                                               $2,438,854
                                                               ==========

     Included in property and equipment at December 31, 1998 was $150,000 of
     assets held under capital leases. The accumulated depreciation on such
     assets at December 31, 1998 was $33,929.

     The depreciation and amortization charge (including amortization of assets
     held under capital leases) was $325,373 and $138,384 for the years ended
     December 31, 1998 and 1997, respectively.

     The Company believes there are no impairments of long-lived assets based on
     review of expected cash flows from the use of such assets.

6.   GOODWILL AND OTHER INTANGIBLE ASSETS, NET

     Goodwill and other intangible assets, net, consist of the following at
     December 31, 1998:

                                               Amortization
                                                  Period
                                                  ------
       At cost:
          Goodwill                               10 years            $1,798,101
          Deferred financing costs                3 years               812,667
          Covenant not to compete and other    5 - 10 years             500,837
                                                                     ----------
                                                                      3,111,605
       Accumulated amortization                                      (1,048,349)
                                                                     ----------
                                                                     $2,063,256
                                                                     ==========

     The amortization of goodwill, covenant not-to-compete and other intangible
     assets was $219,808 and $157,282 for the years ended December 31, 1998 and
     1997, respectively. Amortization of deferred financing costs, included in
     interest expense, was $256,178 and $323,210 for the years ended December
     31, 1998 and 1997, respectively.

                                       40

<PAGE>


7.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES

     Accounts payable and accrued expenses consist of the following, at December
     31, 1998:


     Trade accounts payable                                   $  749,621
     Contract holdbacks                                           95,596
     Preferred dividend payable                                  229,558
     Accrued expenses                                          1,652,283
                                                              ----------
                                                              $2,727,058
                                                              ==========

8.   LONG TERM OBLIGATIONS

     Long term obligations consist of the following at December 31, 1998:

   
       Credit facility with financial institution                    $5,993,992
       Capital lease obligations                                        110,682
       Equipment notes payable and other                              1,378,819
                                                                     ----------
    
                                                                      7,483,493
       Less-current portion                                            (683,838)
                                                                     ----------
                                                                     $6,799,655
                                                                     ==========
       Estimated maturities of long-term debt are as follows:
       1999                                                          $  683,838
       2000                                                             689,300
       2001                                                           6,094,624
       2002                                                              15,731
       2003                                                                   -
       Thereafter
                                                                              -
                                                                     ----------
                                                                     $7,483,493
                                                                     ==========

     Credit Facility. In connection with the acquisition of Mutual (see Note 2),
     the Company amended its credit facility (the "Renewed Credit Facility")
     with Heller Financial, Inc., the Company's senior lender. Under the Renewed
     Credit Facility, borrowings will bear interest at floating rates, either at
     Prime plus 1 3/4% or, at the Company's election, LIBOR plus 3 1/2% and is
     collateralized by substantially all of the Company's assets. At December
     31, 1998, the debt was bearing interest at varying rates. The Renewed
     Credit Facility expires in May 2001. The $20 million total availability
     under the Renewed Credit Facility is subject to certain "Borrowing Base"
     limitations (as defined in the Renewed Credit Facility). In connection with
     the investment by Protection One (See "Description of Business - 1998
     Developments"), in October 1998, Heller made other amendments to the
     Renewed Credit Facility to conform the agreement with the transactions
     discussed in Note 11. The Renewed Credit Facility includes customary
     covenants including, but not limited to, restrictions related to the
     incurring of other debt, the encumbrance or sale of the Company's assets,
     and the payment of dividends or making of other distributions to the
     Company's shareholders and other financial performance covenants. The
     Company believes it was in compliance with all such covenants as of
     December 31, 1998.

                                       41

<PAGE>


     Capital Lease Obligations. During 1997, the Company entered into a lease
     agreement for central station equipment, expiring in 2002. The lease has
     been capitalized in accordance with generally accepted accounting
     principles using an interest rate of 10.51%. The future minimum payments
     under this lease are disclosed in Note 9.

     Equipment Notes. Equipment notes payable and other relate to purchases of
     vehicles and equipment and the purchase of an account portfolio. Interest
     rates vary from 6.0% to 10.51%. The notes are repayable in monthly
     installment of principal and interest through 2001.


9.   COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

     Leased Facilities
     The Company leases its corporate headquarters from an affiliate which is
     owned by the principal shareholders of the Company. The Company's corporate
     headquarters occupies a 12,000 square foot building which houses its
     central monitoring facility located in Hollywood, Florida. The lease
     expires on December 31, 2002, but has a renewal option for an additional
     five years under the same terms and conditions. The annual rent is
     approximately $102,000, with annual increases commencing January 2000 not
     to exceed three percent (3%). The terms of the lease are no less favorable
     to the Company than those which could be obtained from an unaffiliated
     third party.

         With the acquisition of Mutual, the Company became the assignee on a
     lease for space in New York City. The assignment commenced February 19,
     1998 and extends through December 31, 1999. Subsequently, the lease was
     extended through December 2004, with a renewal option for an additional
     five years under the same terms and conditions. The 3,200 square feet of
     leased space houses a central monitoring station, offices and warehouse
     facilities. The annual rent is approximately $91,000 with provisions for
     escalations.

         The Company also leases office space in Miami, Orlando and Tampa,
     Florida and in Staten Island, New York. The leases expire on various dates
     through July 2003 and most are renewable at the option of the Company.

     Future minimum payments under operating leases and capital leases (see Note
     8) are as follows:

                                             Operating       Capital
                                             ---------       -------
        1999                                $  421,836      $ 38,700
        2000                                   408,322        38,700
        2001                                   283,643        38,700
        2002                                   256,314        16,125
        2003                                   119,000             -
        Thereafter                             102,600             -
                                            ----------      --------
                                            $1,591,715       132,225
        Less interest                       ==========       (21,543)
        Capital lease obligations reflected as current      --------
          ($28,407) and non-current ($82,275)
          portions of long-term obligations                 $110,682
                                                            ========

                                       42

<PAGE>


10.  INCOME TAXES

     At December 31, 1998, the Company has net operating loss carryforwards for
     federal income tax purposes of approximately $4.6 million, which begin to
     expire in 2010. The components of deferred tax assets and liabilities at
     December 31, 1998 are as follows:


        Deferred tax (liabilities) assets
            Allowance for doubtful accounts - current            $188,077
            Difference in amortization of customer contracts     (582,485)
            Net operating loss carryforwards                    1,803,222
            Installation activity                                (212,877)
            Other                                                   2,600
                                                               ----------
                                                                1,198,537
            Less valuation allowance                           (1,198,537)
                                                               ----------
        Net deferred tax (liabilities) assets                  $        -
                                                               ==========

     The Company's 1998 and 1997 losses have not been benefited for financial
     reporting purposes because it is more likely than not that the Company will
     be unable to generate sufficient future taxable income to offset such
     losses.

11.  SHAREHOLDERS' EQUITY

     In October and November 1997, the Company issued 2,500,000 shares of Class
     A Common Stock for $1.50 per share ($3,750,000 in the aggregate) and
     1,875,000 newly authorized shares of Series A 9 3/4% Convertible Cumulative
     Preferred Stock for $2.00 per share ($3,750,000 in the aggregate). The
     proceeds of the $7,500,000 investment was used to reduce debt and for
     acquisitions. In February 1998, the Company issued 1,600,000 newly
     authorized shares of Series B 10 1/2% Convertible Cumulative Preferred
     Stock for $2.50 per share ($4,000,000 in the aggregate). The proceeds of
     the $4,000,000 investment was used in the acquisition of Mutual. Both
     issuances of the Preferred Stock paid quarterly preferred stock dividends.
     A total of 143,100 dividend shares of Series A Preferred Stock and 104,232
     dividend shares of Series B Preferred Stock were issued in 1998.

     On October 21, 1998, Protection One exchanged 2,980,000 million shares of
     Class A Common Stock, 2,037,133 million shares of Series A Preferred Stock
     and 1,704,232 million shares of Series B Preferred Stock for 16,397 shares
     of Series C 7% Redeemable Cumulative Preferred Stock, par value $.001
     ("Series C Preferred Stock"), of the Company. After giving effect to the
     transactions, Guardian had approximately 9.2 million shares of Common Stock
     outstanding including 634,035 shares of Class B Non-Voting Common Stock,
     par value $.001 per share. The Company has retired the Series A Preferred
     Stock and the Series B Preferred Stock, subsequent to the exchange
     transaction.

     Also on October 21, 1998, Protection One purchased 10,000 shares of Series
     D 6% Convertible Cumulative Preferred Stock, par value $.001 per share
     ("Series D Preferred Stock"), of the Company for $10 million.

     The proceeds of the sale of the Series D Preferred Stock were used to pay
     down long-term debt.

                                       43

<PAGE>


     Due to the redeemable nature of the Series C Preferred Stock, the capital
     will reside outside the stockholders' equity section in the mezzanine
     section of the balance sheet, following long-term debt. This treatment is
     consistent with the hybrid characteristics of the issue.

     The Company at December 31, 1998 had a stock repurchase plan in effect. The
     aggregate amount of purchases under the Board-approved plan is $1 million.
     There have been no purchases under the plan through March 25, 1999.

12.  STOCK OPTIONS

     During 1998, the Company issued options to purchase shares of common stock
     at exercise prices ranging from $1.73 to $3.25 per share to various
     employees and a director. The options are exercisable on a pro rata basis
     on the anniversary dates of the agreements under which they were granted.

     On December 14, 1998, the Company canceled 375,000 of options held by
     certain members of management, other senior employees and directors (the
     "option holders"). Such options had been issued in 1997 and 1998 with
     exercise prices ranging from $1.95 to $3.25 per share. On the same date,
     375,000 new options were issued to the option holders with an exercise
     price of $0.84 per share, being the market price of the Company's stock on
     such date. There were no other changes to the terms of the options.

     The following is a summary of stock option activity for the years ended
     December 31, 1998 and 1997:

                                                          Weighted Average
                                                Option        Exercise 
                                                Shares         Price
                                                ------         -----
       Outstanding at December 31, 1996        184,720         $2.05
          Granted                              300,000         $2.13
          Expired                              (10,000)        $3.00
                                              --------
       Outstanding at December 31, 1997        474,720         $2.08
          Granted                              703,902         $1.77
          Cancelled                           (375,000)        $2.41
                                              --------
       Outstanding at December 31, 1998        803,622         $1.66
                                              ========

       Exercisable at 12/31/97                 214,720         $1.99
                                              ========
       Exercisable at 12/31/98                 369,720         $1.84
                                              ========

     The following table summarizes stock options outstanding and exercisable at
     December 31, 1998:

<TABLE>
<CAPTION>


                                                                               Weighted Average         Weighted
                            Range of         Number of         Number of           Remaining            Average
                            Exercise          Options           Options       Contractual Life in       Exercise 
         Description         Price          Outstanding       Exercisable            Years               Price
         -----------         -----          -----------       -----------            -----               -----
       <S>                   <C>              <C>               <C>                  <C>                 <C>  
       1995 options          $2.00            174,720           174,720                2                 $2.00
       1997 options          $2.50            100,000           100,000                3                 $2.50
       1997 options          $0.84            200,000            80,000                9                 $0.84
       1998 options          $0.84            175,000            15,000                9                 $0.84
       1998 options          $1.73             53,902                 -               10                 $1.73
       1998 options          $3.25            100,000                 -                9                 $3.25

</TABLE>


                                       44

<PAGE>


     The Company has adopted Statement No. 123, ("SFAS No. 123") "Accounting for
     Stock-Based Compensation", which requires the Company to either recognize
     expense for stock based award based on the fair value on the date of grant
     or provide footnote disclosure regarding the impact of such charges. The
     Company continues to account for stock options pursuant to APB No. 25.
     Accordingly, the Company does not record compensation costs unless the
     market price exceeds the exercise price on the date of the grant. If the
     Company had elected to recognize compensation cost based on the fair value
     of the options granted, the pro forma net loss and net loss per common
     share for the years ended December 31, 1998 and 1997 would be as follows:

                                                      1998               1997
                                                      ----               ----
       Net loss applicable to common shares:
           As reported for 1998 and 1997           $3,084,678         $1,612,156
           Pro forma for SFAS No. 123               3,354,476          1,758,116

       Net loss per common share:
           As reported for 1998 and 1997             $0.28               $0.21
           Pro forma for SFAS No. 123                 0.30                0.23
 
     The weighted average fair value of options granted, estimated on the date
     of grant was $1.27 for the year ended December 31, 1998 and $1.52 for the
     year ended December 31, 1997. The fair value of options granted was
     estimated on the date of grant using the following weighted average
     assumptions:

                                                  Year Ended December 31,
                                                  -----------------------
                                                  1998               1997
                                                  ----               ----
       Dividend yield                             0.00%               0.00%
       Expected stock price volatility          124.44%             157.00%
       Risk free interest rate                    5.32%             6% - 7%
       Expected option life                     9.5 years         5 - 10 years

13.  401 (k) SAVINGS PLAN

     The Company established a voluntary 401(k) Savings Plan (the "Plan") for
     its employees effective July 1, 1998. Employees who are over the age of 21
     and have completed six months of service with the Company are eligible to
     participate in the Plan. The Company matches 10% of the first 4% of each
     employee's contribution. Participants have a choice of several investing
     options for their contributions and have sole direction over the investment
     of their contributions. The Company's contribution to the Plan for the year
     ended December 31, 1998 was approximately $7,300.

14.  SEGMENT REPORTING

     Effective January 1, 1998, the Company adopted Statement of Financial
     Accounting Standards 131 (SFAS 131) "Disclosures About Segments of an
     Enterprise and Related Information". SFAS 131 established standards for
     reporting information about operating segments in annual financial
     statements. It also established standards for related disclosures about
     products and services and geographic areas.

                                       45

<PAGE>


     For the years ended December 31, 1998 and 1997, the Company operated under
     a single reportable segment providing alarm monitoring services, and
     selling and installing alarm systems to residential and commercial
     customers in the United States. Accordingly, no further segment reporting
     beyond the consolidated financial statements is presented.

                                       46

<PAGE>


Item 8.  Changes in and Disagreements With Accountants on Accounting and 
         Financial Disclosure

         The Board of Directors has selected Arthur Andersen LLP as the
Company's independent accountants to audit the financial statements of the
Company and its subsidiaries for the fiscal year ending December 31, 1998,
following the dismissal of McKean, Paul, Chrycy, Fletcher & Co. ("McKean Paul").
This selection is subject to the ratification by the Stockholders at the Annual
Meeting. This change in independent accountants was approved by the Board of
Directors effective September 1, 1998.

         McKean Paul served as the Company's independent auditors for the fiscal
years ending December 31, 1997 and 1996. The reports of McKean Paul on the
Company's financial statements for both of the past two fiscal years did not
contain an adverse opinion nor a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.

         In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1997 and 1996, respectively, and
in the subsequent interim period preceding McKean Paul's dismissal, there were
no disagreements on any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure which, if not resolved to
the satisfaction of McKean Paul, would have caused McKean Paul to make
references to the matter in their report.

         During the most recent fiscal year and any subsequent interim period,
there have been no "reportable events" as defined in Regulation S-K Item
304(a)(1)(v) with McKean Paul.

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons; 
         Compliance with Section 16(a) of the Exchange Act

         The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of December 31, 1998. A
summary of the background and experience of each of these individuals is set
forth following the table. Under the Company's by-laws, directors hold office
for a period of one year, at which time the shareholders elect new directors.
Further, under the Company's by-laws, directors hold office until their
successors are elected and qualified.

<TABLE>
<CAPTION>


     Name                          Age       Position
     ----                          ---       --------
     <S>                           <C>       <C>                                                   
     Richard Ginsburg (1)          30        Chief Executive Officer, President, Director
     Harold Ginsburg (1)           66        Chairman of the Board of Directors
     Sheilah Ginsburg (1)          60        Secretary, Treasurer, Director
     Darius G. Nevin               41        Vice President, Chief Financial Officer, Director
     William Remington             69        Director
     Terry Akins                   52        Chief Operating Officer, Vice President
     Douglas T. Lake               48        Director
     Joel A. Cohen                 59        Vice President, President of Mutual
     Raymond L. Adams              69        Vice President of Mutual

</TABLE>

 (1) Harold and Sheilah Ginsburg are married and Richard Ginsburg is their son.
     Harold Ginsburg

                                       47

<PAGE>


         Mr. Ginsburg was a co-founder and the President of Guardian from its
inception in 1993 until August 15, 1996. Mr. Ginsburg is an acknowledged
authority on electronic/computer technology security systems and has personally
developed high-tech security systems for many well-known regional and national
firms. Mr. Ginsburg also has served as a consultant to financial organizations
and government agencies throughout Latin America and Europe. In addition to
being regarded as an international consultant in the alarm service and
monitoring industry, he is responsible for the start-up of several successful
security companies, including Guardsman Security Corporation, which he owned and
operated from 1983 to 1991. In 1991, Guardsman was sold to Alert Centre, now
owned by ADT Security, Inc. In 1978, Mr. Ginsburg founded Gibraltar Central
Security Corporation, which he partially owned and operated until 1982, at which
time Gibraltar Central was sold to Security Centres of London, England.

         Mr. Ginsburg does not hold directorships in any other reporting 
companies.

Sheilah Ginsburg

         Mrs. Ginsburg was a co-founder of Guardian. She is responsible for the
human resources and certain other administrative functions of the Company. Prior
to her participation in the development of Guardian, Mrs. Ginsburg was the Vice
President/Controller of Guardsman Central Security, a business similar to
Guardian.

         Mrs. Ginsburg does not hold directorships in any other reporting
companies.

Richard Ginsburg

         Mr. Ginsburg was a co-founder of Guardian. He has been President and
Chief Executive Officer of Guardian since August 1996. He received a Bachelor of
Science degree in communications from the University of Miami. He subsequently
acquired management skills at Guardsman Central Security Corporation where he
was the Central Station Manager from 1987 to 1990. Mr. Ginsburg then became
Operations Manager for the Alert Centre, another security alarm company, a
position he filled from 1990 to 1992.

         Mr. Ginsburg does not hold directorships in any other reporting
companies.

Darius G. Nevin

         Mr. Nevin assumed the position of Chief Financial Officer of the
Company in October 1997. For most of the ten years leading up to that time, Mr.
Nevin served as Chief Financial Officer of Guard Technologies, Inc. (now
Security Technologies Group, Inc.), a provider of electronic security systems
and services to the commercial market. For the last three years, prior to
joining the Company, Mr. Nevin also served as President of Guard Technologies,
Inc. Before entering the security industry, Mr. Nevin was a junior partner of
Madison Dearborn Partners, at that time the venture capital division of First
Chicago Corp. Mr. Nevin holds an A.B. from Harvard University and an M.B.A. from
the University of Chicago.

         Mr. Nevin does not hold directorships in any other reporting companies.

                                       48

<PAGE>


Douglas T. Lake

         Mr. Lake has been a Director of the Company since April 1998. Mr. Lake
is Executive Vice President and Chief Strategic Officer of Western Resources,
Inc., an entity which maintains a material investment in the Company. From 1995
to 1998, Mr. Lake was Senior Managing Director of Investment Banking with Bear
Stearns & Company in New York City. Prior to 1995, he was Managing Director with
Dillon Reed & Company in New York City. Mr. Lake holds a B.A. from Trinity
College in Hartford, Connecticut and an M.B.A. from Amos Tuck School at
Dartmouth.

         Mr. Lake also holds a directorship with Oneok, Inc, a publicly-held
company.

William Remington

         Mr. Remington has been a director of the Company since 1996. Mr.
Remington is a Canadian citizen and resident and for the past twenty-one years,
has been the Director General of the Town of Hampstead, Quebec, Canada. In
addition, Mr. Remington has participated in the design and installation of
central monitoring stations for alarm monitoring companies located in Montreal,
Canada, Kingston, Jamaica, London, England and Florida.

         Mr. Remington does not hold directorships in any other reporting
companies.

Terry E. Akins

         Mr. Akins served as president of ACI, which he co-founded in 1970,
between 1989 and May 1997. From 1970 to 1989, Mr. Akins served as Vice President
of ACI. In addition, Mr. Akins has been active with local, state and national
alarm associations, having served in 1989 as President of The Alarm Association
of Florida, an association he co-founded in 1970. Mr. Akins received a Bachelor
of Science from the Georgia Institute of Technology in 1969.

Joel A. Cohen

         Mr. Cohen is Vice President of the Company and President of Mutual. Mr.
Cohen has served as President of Mutual since March 1989. He holds a B.A. from
Brooklyn College and an M.B.A. from LIU in Brooklyn.

Raymond L. Adams

         Mr. Adams is Vice President of Mutual. He has served as Vice President
of Mutual since January 1991. Mr. Adams holds a B.A. from Syracuse University.


Section 16(a) Beneficial Ownership Reporting Compliance

         The Company's directors and executive officers are required to file
initial reports of ownership and reports of changes in ownership of Common Stock
with the SEC. Based upon review of these filings and written representations
from the directors and officers, all required filings were timely made in 1998.

                                       49

<PAGE>


Item 10.  Executive Compensation

Executive Compensation

         The following sets forth certain information regarding the aggregate
cash and other compensation paid to or earned by the executive officers of the
Company.

<TABLE>
<CAPTION>


                                                          Year             Salary              Other

    <S>                                                   <C>            <C>                <C>      
    Richard Ginsburg                                      1998           $100,000           $12,219  (1)
        President and CEO, Director                       1997             91,985            10,800
    Darius G. Nevin                                       1998            135,537            12,084  (1)
        Vice President and Chief Financial Officer,       1997             25,660  (2)          462
        Director
    Joel A. Cohen                                         1998            135,577  (3)       10,928  (1)
        Vice President                                    1997                  -
    Terry E. Akins                                        1998            144,808  (4)       12,559  (1)
        Chief Operating Officer, Vice President,          1997             96,346             7,089
        President of  Mutual

</TABLE>

---------------
    (1) Included in other annual compensation are auto allowances and payments
        for medical insurance coverage.

    (2) Mr. Nevin joined the Company in October 1997, with the execution of his
        employment agreement. The annualized compensation for 1997 for Mr. Nevin
        was $135,000.

    (3) Mr. Cohen joined the Company in February 1998, with the execution of his
        employment agreement. The annualized compensation for 1998 for Mr. Cohen
        was $150,000.

    (4)Mr. Akins joined the Company in May 1997, with the execution of his
        employment agreement. The annualized compensation for 1997 and 1998 for
        Mr. Akins was $150,000. Mr. Akins took extra vacation time in 1998 for
        which he was not compensated.

Compensation of Directors

         As compensation for serving as a director, Mr. Lake received options to
purchase 75,000 shares of Guardian Class A Common Stock. Mr. Remington receives
compensation of $250 for each meeting of the Board of Directors which he
attends.

Options/SAR Grants in Last Fiscal Year
Individual Grants

<TABLE>
<CAPTION>


                             Number of        Percent of Total
                             Securities         Options/SARs      Exercise of
                             Underlying          Granted to           SRAs 
                            Options/SARs    Employees in Fiscal      Price
            Name              Granted               Year          ($/Share)              Expiration Date
            ----              -------               ----           ----                 ---------------
    <S>                       <C>                  <C>               <C>               <C> 
    Richard Ginsburg          100,000              14.2%             $0.84      (1)    October 15, 2007
    Darius G. Nevin           100,000              14.2%             $0.84      (1)    October 15, 2007
    Joel Cohen                100,000              14.2%             $0.84      (1)    February 23, 2008
</TABLE>

    (1) Issued December 14, 1998, see Note 12 in Notes to Consolidated Financial
        Statements.

                                       50


<PAGE>


Item 11.  Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Management

         The following table sets forth information with respect ot the
beneficial ownership as of March 25, 1999 of Class A Common Stock by (i) each
Director of the Company; (ii) each nominee to the Board of Directors; (iii) the
Chief Executive Officer; and (iv) all directors and executive officers of the
Company as a group. On March 26, 1999, there were 11,569,241 and 8,582,241
shares of Class A Common Stock issued and outstanding, respectively.

                                                    Shares         Percentage of
                                                 Beneficially       Outstanding
Name of Beneficial Owner of Identity Group         Owned (1)        Shares (2)
-------------------------------------------        ---------        ----------
Richard Ginsburg (3), (4), (5)                      672,096            7.8%
Harold Ginsburg (3), (4)                          1,003,533           11.7%
Sheilah Ginsburg (3), (4)                           903,533           10.5%
Darius G. Nevin (3), (5)                             49,000            0.6%
William Remington (3)                                     0            0.0%
Douglas T. Lake (6), (7)                             30,000            0.3%
Joel A. Cohen (8), (9)                              218,009            2.5%
Terry E. Akins (3), (10)                            160,513            1.8%
Other Directors and Officers, as a group (11)     3,036,684           23.3%

---------------
    (1) Each director and executive officer has sole voting and investment power
        with respect to the shares beneficially owned.

    (2) For purposes of this table, a person is deemed to have "beneficial
        ownership" of any shares of Class A Common Stock which such person has
        the right to acquire on or within 60 days of March 26, 1999. For
        purposes of computing the percentage of the class of Class A Common
        Stock held by each person named above, any shares which such person has
        or has the right to acquire on or within 60 days after March 26, 1999
        are deemed to be outstanding for such person, but are not deemed to be
        outstanding for the purpose of computing the percentage ownership of any
        other person.

    (3) The address of such shareholder is c/o Guardian International, Inc.,
        3880 North 28 Terrace, Hollywood, Florida 33020-1118.

    (4) Richard Ginsburg is the son of Harold and Sheilah Ginsburg. Harold and
        Sheilah Ginsburg are husband and wife and each disclaims ownership of
        the others' shares. (5) Includes 40,000 options which are immediately
        exercisable.

    (6) Includes 15,000 options which are immediately exercisable.

    (7) The address of such shareholder is c/o Western Resources, Inc. 818 South
        Kansas Avenue, Topeka, Kansas, 66612-1203.

    (8) Includes 20,000 options which are immediately exercisable.

    (9) The address of such shareholder is c/o Mutual Central Alarm Services,
        Inc., 10 West 46th Street, New York, New York, 10036.

    (10)Includes 100,000 options which are immediately exercisable.

    (11)Includes Mssrs. Richard Ginsburg, Harold Ginsburg, Nevin, Remington,
        Lake, Cohen, Akins and Mrs. Ginsburg.

                                       51

<PAGE>


Security Ownership of Certain Beneficial Owners

         The following table sets forth information with respect to the
beneficial ownership as of March 25, 1999 of any person (including any "group")
known by the Company to be the beneficial of more than 5% of any class of stock.

<TABLE>
<CAPTION>


                                                                          Amount and Nature    Percent
                                           Name and Address of              of Beneficial     of Class
    Title of Class                           Beneficial Owner                Ownership (1)      (2) (3)
    --------------                           ----------------                -------------     -------
    <S>                               <C> <C>                                  <C>              <C>  
    Preferred Stock (4),(6)           Protection One, Inc. (5)                    26,517        100.0
    Class A Common Stock              Harold Ginsburg                          1,003,533         11.7
    Class A Common Stock              Sheilah Ginsburg                           903,533         10.5
    Class A Common Stock              Richard Ginsburg                           672,096          7.8
    Class A Common Stock              Rhonda Ginsburg                            629,645          7.3
    Class A Common Stock              Estate of Norman Rubin                     501,827          5.8
    Class B Common Stock (4)          Heller                                     634,035        100.0

</TABLE>

---------------
    (1) Each beneficial owner listed in the above table has sole voting and
        investment power with respect to the shares beneficially owned.

    (2) For purposes of this table, a person is deemed to have "beneficial
        ownership" of any shares which such person has the right to acquire on
        or within 60 days of March 26, 1999. For purposes of computing the
        percentage of the class held by each person named above, any shares
        which such person has or has the right to acquire on or within 60 days
        after March 26, 1999 are deemed to be outstanding for such person, but
        are not deemed to be outstanding for the purpose of computing the
        percentage ownership of any other person.

    (3) On a fully diluted basis, Protection One, Inc. holds 25.9%, Harold
        Ginsburg holds 7.7%, Sheilah Ginsburg holds 6.9%, Richard Ginsburg holds
        5.1%, Rhonda Ginsburg holds 4.8%, Estate of Norman Rubin holds 3.8% and
        Heller owns 4.9% of the outstanding securities of the Company.

    (4) Shares of Preferred Stock are not convertible until at least the third
        anniversary of their issuance (see Westar Security, Inc. Investment in
        Part I, Item 1) at a rate of one share for 333.3333 shares of Class A
        Common Stock. Class B Common Stock is immediately convertible into Class
        A Common Stock on a share-for-share-basis at any time.

    (5) The address for Protection One, Inc. is 6225 North State Highway 161,
        Suite 400, Irving, Texas 75038.

    (6) The amount includes stock dividends accumulated through December 31,
        1998.


Item 12. Certain Relationships and Related Transactions

     The Company leases its corporate headquarters from Guardian Investments, a
Florida partnership owned by Harold and Sheilah Ginsburg, both of whom are
directors, officers and principal shareholders of the Company. The Company
occupies a 12,000 square foot building which houses its central monitoring
facility located at 3880 North 28 Terrace, Hollywood, Florida 33020. The
telephone number is (954) 926-5200. The lease expires on December 31, 2002, but
has a renewal option for an additional five years under the same terms and
conditions. The annual rent is approximately $102,000, with annual increases not
to exceed three percent (3%). The terms of the lease are no less favorable to
the Company than those which could be obtained from an unaffiliated third party.

                                       52

<PAGE>


Item 13. Exhibits and Reports on Form 8-K

Exhibits

3(i)       Articles of Incorporation dated October 30, 1986 incorporated by
           reference to Exhibit 3(i) of the Company's Form 10SB filed May 6,
           1996.
3(i)(a)    Amendment to the Articles of Incorporation incorporated by reference
           to Exhibit 3(i)(a) of the Company's Form 10SB filed May 6, 1996.
3(i)(b)    Amendment to the Articles of Incorporation incorporated by reference
           to Exhibit 3(i)(b) of the Company's Form 10SB filed May 6, 1996.
3(i)(c)    Amendment to the Articles of Incorporation incorporated by reference
           to Exhibit 3(i)(c) of the Company's Form 10SB/A filed January 24,
           1997.
3(ii)      Amended and Restated By-Laws of the Company incorporated by reference
           to Exhibit 3(ii) of the Company's Quarterly Report on Form 10-QSB
           filed as of November 14, 1997.
4(a)       Specimen Stock Certificate incorporated by reference to Exhibit 4 of
           the Company's Form 10-SB12G as of June 18, 1996
4(b)       Certificate of the Designations, Voting Power, Preferences and
           Relative, Participating, Optional and Other Special Rights and
           Qualifications, Limitations or Restrictions of Preferred Stock, of
           Guardian International, Inc., filed in the Office of the Secretary of
           State of the State of Nevada on November 24, 1997 designating the
           first series of Preferred Stock of the Company as Series A 9 3/4%
           Convertible Cumulative Preferred Stock, par value $.001 per share,
           incorporated by reference to Exhibit 4(b) of the Company's Form
           10-KSB filed March 31, 1998.
4(c)       Certificate of the Designations, Voting Power, Preferences and
           Relative, Participating, Optional and Other Special Rights and
           Qualifications, Limitations or Restrictions of Preferred Stock, of
           Guardian International, Inc., filed in the Office of the Secretary of
           State of the State of Nevada on February 23, 1998 designating the
           second series of Preferred Stock of the Company as Series B 10 1/2%
           Convertible Cumulative Preferred Stock, par value $.001 per share,
           incorporated by reference to Exhibit 4(c) of the Company's Form
           10-KSB filed March 31, 1998.
4(d)       Amendment to Certificate of the Designations, Voting Power,
           Preferences and Relative, Participating, Optional and Other Special
           Rights and Qualifications, Limitations or Restrictions of the Series
           A 9 3/4% Convertible Cumulative Preferred Stock, par value $.001 per
           share, of Guardian International, Inc., filed in the Office of the
           Secretary of State of the State of Nevada on March 13, 1998,
           incorporated by reference to Exhibit 4(d) of the Company's Form
           10-KSB filed March 31, 1998.
4(e)       Amendment to Certificate of the Designations, Voting Power,
           Preferences and Relative, Participating, Optional and Other Special
           Rights and Qualifications, Limitations or Restrictions of the Series
           B 10 1/2% Convertible Cumulative Preferred Stock, par value $.001 per
           share, of Guardian International, Inc., filed in the Office of the
           Secretary of State of the State of Nevada on March 13, 1998,
           incorporated by reference to Exhibit 4(e) of the Company's Form
           10-KSB filed March 31, 1998.
4(f)       Amendment to Certificate of the Designations, Voting Powers,
           Preferences and Relative, Participating, Optional and Other Special
           Rights and Qualifications, Limitations or Restrictions of the Series
           A 9 3/4% Convertible, Cumulative Preferred Stock, par value $.001 per
           share, of Guardian International, Inc., filed in the Office of the
           Secretary of the State of Nevada on October 19, 1998, incorporated by
           reference to Exhibit 4(a) of the Company's Form 8-K filed November 3,
           1998.
4(g)       Amendment to Certificate of the Designations, Voting Powers,
           Preferences and Relative, Participating, Optional and Other Special
           Rights and Qualifications, Limitations or Restrictions of the Series

                                       53

<PAGE>

           B 10 1/2% Convertible, Cumulative Preferred Stock, par value $.001
           per share, of Guardian International, Inc., filed in the Office of
           the Secretary of the State of Nevada on October 19, 1998,
           incorporated by reference to Exhibit 4(b) of the Company's Form 8-K
           filed November 3, 1998.
4(h)       Certificate of the Designations, Voting Powers, Preferences and
           Relative, Participating, Optional and Other Special Rights and
           Qualifications, Limitations or Restrictions of Series C Preferred
           Stock, filed in the Office of the Secretary of the State of Nevada on
           October 21, 1998 designating the third series of Preferred Stock of
           the Company as "Series C 7.00% Redeemable Cumulative Preferred Stock,
           par value $.001 per share", incorporated by reference to Exhibit 4(c)
           of the Company's Form 8-K filed November 3, 1998.
4(i)       Certificate of the Designations, Voting Powers, Preferences and
           Relative, Participating, Optional and Other Special Rights and
           Qualifications, Limitations or Restrictions of Series D Preferred
           Stock, filed in the Office of the Secretary of the State of Nevada on
           October 21, 1998 designating the fourth series of Preferred Stock of
           the Company as "Series D 6.00% Convertible Cumulative Preferred
           Stock, par value $.001 per share", incorporated by reference to
           Exhibit 4(d) of the Company's Form 8-K filed November 3, 1998.
10(a)      Amended and Restated Loan and Security Agreement with Heller
           Financial, Inc. dated as of February 23, 1998, incorporated by
           reference to Exhibit 10(j) of the Company's Form 10-KSB filed March
           31, 1998.
10(b)      Stock Purchase Agreement dated as of February 23, 1998 incorporated
           by reference to Exhibit 10(a) of the Company's Form 8-K filed as of
           March 10, 1998.
10(c)      Registration Rights Agreement dated as of February 23, 1998
           incorporated by reference to Exhibit 10(b) of the Company's Form 8-K
           filed as of March 10, 1998.
10(d)      Escrow and Pledge Agreement dated as of February 23, 1998
           incorporated by reference to Exhibit 10(c) of the Company's Form 8-K
           filed as of March 10, 1998.
10(e)      Employment Agreement with Joel A. Cohen dated as of February 1, 1998
           incorporated by reference to Exhibit 10(d) of the Company's Form 8-K
           filed as of March 10, 1998.
10(f)      Employment Agreement with Raymond L. Adams dated as of February 1,
           1998 incorporated by reference to Exhibit 10(e) of the Company's Form
           8-K filed as of March 10, 1998.
10(g)      Asset Purchase Agreement effective as of March 9, 1998 incorporated
           by reference to Exhibit 10(a) to the Company's Form 8-K filed as of
           March 24, 1998.
10(h)      Warranty  Bill of Sale dated as of March 5, 1998  incorporated  by 
           reference to Exhibit 10(b) to the Company's Form 8-K filed as of
           March 24, 1998.
10(i)      Assignment and Assumption Agreement dated as of March 5, 1998
           incorporated by reference to Exhibit 10(c) to the Company's Form 8-K
           filed as of March 24, 1998.
10(j)      Guaranty  Agreement dated as of March 9, 1998  incorporated by 
           reference to Exhibit 10(d) to the Company's Form 8-K filed as of 
           March 24, 1998.
10(k)      Escrow Agreement date March 9, 1998  incorporated by reference to 
           Exhibit 10(e) to the Company's Form 8-K filed as of March 24, 1998.
10(l)      Employment Agreement with Dan Lawrence dated March 9, 1998
           incorporated by reference to Exhibit 10(f) to the Company's Form 8-K
           filed as of March 24, 1998.
10(m)      Amendment to Registration Rights Agreement dated as of February 23,
           1998, incorporated by reference to Exhibit 10(gg) to the Company's
           Form 10-KSB filed as of March 31, 1998.
10(n)      Stock Subscription Agreement dated as of February 23, 1998,
           incorporated by reference to Exhibit 10(hh) to the Company's Form
           10-KSB filed as of March 31, 1998.
10(o)      Stock Purchase Agreement dated as of April 27, 1998, incorporated by
           reference to Exhibit 10(a) to the Company's Form 10-QSB filed as of
           August 14, 1998.

                                       54

<PAGE>


10(p)      Employment Agreement with David Weston between Precision and the
           Company dated as of April 27, 1998, incorporated by reference to
           Exhibit 10(b) to the Company's Form 10-QSB filed as of August 14,
           1998.
10(q)      Indemnification Agreement between sellers of Precision and the
           Company dated April 27, 1998, incorporated by reference to Exhibit
           10(c) to the Company's Form 10-QSB filed as of August 14, 1998.
10(r)      Confidentiality, Noncompetition and Nonsolicitation Agreement with
           Alan Dubow dated April 27, 1998, incorporated by reference to Exhibit
           10(d) to the Company's Form 10-QSB filed as of August 14, 1998.
10(s)      Confidentiality, Noncompetition and Nonsolicitation Agreement with
           Richard Clark dated April 27, 1998, incorporated by reference to
           Exhibit 10(e) to the Company's Form 10-QSB filed as of August 14,
           1998.
10(t)      Confidentiality, Noncompetition and Nonsolicitation Agreement with
           Jeff Chivers dated April 27, 1998, incorporated by reference to
           Exhibit 10(f) to the Company's Form 10-QSB filed as of August 14,
           1998.
10(u)      Stock Purchase Agreement dated as of August 13, 1998, incorporated by
           reference to Exhibit 10(a) to the Company's Form 10-QSB filed as of
           November 16, 1998.
10(v)      Escrow Agreement dated as of August 13, 1998,  incorporated by 
           reference to Exhibit 10(b) to the Company's Form 10-QSB filed as of 
           November 16, 1998.
10(w)      Employment Agreement between Vincent Monardo and the Company dated
           August 13, 1998, incorporated by reference to Exhibit 10(c) to the
           Company's Form 10-QSB filed as of November 16, 1998.
10(x)      Employment Agreement between Kevin Killea and the Company dated
           August 13, 1998, incorporated by reference to Exhibit 10(d) to the
           Company's Form 10-QSB filed as of November 16, 1998.
10(y)      Employment Agreement between Michael Assenza and the Company dated
           August 13, 1998, incorporated by reference to Exhibit 10(e) to the
           Company's Form 10-QSB filed as of November 16, 1998.
10(z)      Employment Agreement between Paul Ferrara and the Company dated
           August 13, 1998, incorporated by reference to Exhibit 10(f) to the
           Company's Form 10-QSB filed as of November 16, 1998.


Reports on Form 8-K

     Form 8-K filed as of October 21, 1998 announced that: (i) Westar Security,
Inc. ("Westar") purchased 10,000 shares of the Company's Series D 6% Convertible
Cumulative Preferred Stock, par value $.001 per share; (ii) Westar exchanged its
existing equity holdings for 16,197 shares of the Company's Series C 7%
Redeemable Preferred Stock; and (iii) the Company's Board of Directors
authorized the repurchase of up to $1 million of Guardian Class A Common Voting
Stock, par value $.001 per share.

                                       55

<PAGE>


                                   SIGNATURES

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

                                         GUARDIAN INTERNATIONAL, INC.


                                  By:  /s/ Richard Ginsburg
                                       --------------------------
                                       Richard Ginsburg
                                       President and Chief Executive Officer

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

<TABLE>
<CAPTION>



Signature                            Title                                                    Date
---------                            -----                                                    ----

<S>                                  <C>                                                      <C>


/s/ Harold Ginsburg                  Chairman of the Board of Directors                       March 31, 1999
-----------------------------------
Harold Ginsburg

/s/ Richard Ginsburg                 Director, President and Chief Executive Officer          March 31, 1999
-----------------------------------  (Principal Executive Officer)
Richard Ginsburg

/s/ Darius G. Nevin                  Director, Vice President and Chief Financial             March 31, 1999
-----------------------------------  Officer
Darius G. Nevin                      (Principal Financial and Principal Accounting
                                     Officer)

/s/ Sheilah Ginsburg                 Director, Secretary and Treasurer                        March 31, 1999
-----------------------------------
Sheilah Ginsburg

</TABLE>