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                          SECURITIES AND EXCHANGE COMMISSION

                               WASHINGTON, D.C.  20549
                                     ___________

                                     FORM 10-KSB

(Mark One)

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended JUNE 30, 1997  or
                          -------------

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities 
Exchange Act of 1934

For the transition period from        to        
                              ------    -------
                            Commission File Number 0-20770


                                  RESPONSE USA, INC.
                                  ------------------
                (Exact name of registrant as specified in its charter)
                                           
              DELAWARE                                   22-3088639   
              --------                                ----------------
              (State or other jurisdiction of         (I.R.S. Employer
               incorporation or organization)         Identification No.)

              11-H PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY         08648    
              ---------------------------------------------     -------------
              (Address of principal executive offices)            (Zip Code)

              Registrant's telephone number, including area code: (609)896-4500
                                                                  -------------

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

                                                      NAME OF EACH EXCHANGE
              TITLE OF EACH CLASS                     ON WHICH REGISTERED
              -------------------                     -------------------
                   None                               Not Applicable

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

           COMMON STOCK, $.008 PAR VALUE AND COMMON STOCK PURCHASE WARRANTS
           ----------------------------------------------------------------
                                   (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 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

<PAGE>

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB.  [X]

         The issuer's gross revenues for the most recent fiscal year were
$12,722,903.

         The aggregate market value of the Voting Stock held by non-affiliates
(based upon the closing bid price) on October 4, 1997, was approximately
$19,079,440.

         As of October 4, 1997, there were 6,596,589 shares of Common Stock,
Par Value $.008 Per Share (the "Common Stock"), outstanding.

         Certain exhibits listed in Item 13 of Part IV have been incorporated
by reference.  The index to exhibits appears on page 42.

<PAGE>

                                  RESPONSE USA, INC.
                            1997 Form 10-KSB Annual Report

                                  TABLE OF CONTENTS

Item 1.  Business...........................................................  3

Item 2.  Properties......................................................... 21

Item 3.  Legal Proceedings.................................................. 22

Item 4.  Submission of Matters to a Vote of Security Holders................ 22

Item 5.  Market for the Registrant's Common Stock and Related Security 
         Holder Matters..................................................... 23

Item 6.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.............................................. 24

Item 7.  Financial Statements............................................... 31

Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure............................................... 32

Item 9.  Directors and Executive Officers of the Registrant ................ 33

Item 10. Executive Compensation............................................. 35

Item 11. Security Ownership of Certain Beneficial Owners and Management..... 40

Item 12. Certain Relationships and Related Transactions..................... 41

Item 13. Exhibits and Reports on Form 8-K................................... 42

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                                        PART I

ITEM 1.  BUSINESS

GENERAL

    As used herein, the term "Company" means, unless the context requires 
otherwise, the Company and its wholly-owned subsidiaries, United Security 
Systems, Inc. ("USS"), Emergency Response Systems, Inc. ("ERS"), and Response 
Ability Systems, Inc. ("Systems") and HealthLink, Ltd. ("HealthLink"), an 
entity in which the Company has a 50% equity interest.

    THIS ANNUAL REPORT CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD-LOOKING 
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT 
OF 1995. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS ANNUAL REPORT 
AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS 
OF THE COMPANY, WITH RESPECT TO (I) THE COMPANY'S ACQUISITION AND FINANCING 
PLANS, (II) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF 
OPERATIONS, (III) THE IMPACT OF COMPETITION AND (IV) THE EXPANSION OF CERTAIN
OPERATIONS. ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE 
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS.

    The Company is a fully-integrated security systems provider engaged in 
the monitoring, sale, installation and maintenance of residential and 
commercial security systems and personal emergency response systems ("PERS"). 
The Company is a regional provider of security alarm monitoring services for 
residential and small business subscribers operating in the states of New 
York, New Jersey, Pennsylvania, Delaware and Connecticut. The Company is also 
a nationwide provider of PERS products which enable individual users, such as 
elderly or disabled persons, to transmit a distress signal using a portable 
transmitter. The Company has an aggregate of over 48,000 alarm and PERS 
subscribers for which it provides monitoring services. As a result of the 
Company's acquisitions of subscriber account portfolios, the Company's 
monthly recurring revenue ("MRR") has grown by 60%, to approximately $800,000 
for the month ended June 30, 1997, from approximately $500,000 for the month 
ended June 30, 1995. According to a May 1997 report published by Security 
Distributing and Marketing ("SDM"), an organization which publishes industry 
reports, as of December 31, 1996, the Company is the 31st largest electronic 
security company in the United States, based on total revenues, and the 25th 
largest electronic security company, based on recurring annual revenues.

    The Company's electronic security systems business utilizes electronic 
systems installed in businesses and residences to provide (i) detection of 
events such as intrusion or fire, (ii) surveillance and (iii) control of 
access to property. The detection devices are monitored by a third-party 
monitoring station located in Euclid, Ohio (the "Monitoring Station"). The 
Monitoring Station personnel verify the nature of the emergency and contact 
the appropriate emergency authorities in the user's area. In some instances, 
commercial customers may monitor these devices at their own premises or the 
devices may be connected to local fire or police departments. The products 
and services marketed in the electronic security services industry range from 
residential systems that provide basic entry and fire protection to more 
sophisticated commercial systems.

    The Company's PERS is an electronic device which is designed to monitor,
identify and electronically report emergencies requiring medical, fire or police
assistance, to help elderly, disabled and other individuals. When activated by
the pressing of a button, or automatically, in the case of certain environmental
temperature fluctuations, the transmitter sends a radio signal to a receiving
base installed in the user's home. The receiving base relays the signal over
telephone lines to the Monitoring Station which provides continuous monitoring
services. In addition, this signal establishes two-way voice communication
between the user and the Monitoring Station personnel directly through the PERS
unit, thereby avoiding any need for the user to access a telephone.

    The electronic security services industry is highly fragmented and the 
Company's strategy is to grow by acquisition, as well as by offering new 
products and services. According to an industry report published in 1996, 
there are approximately 12,000 separate security services companies 
nationally and, according to the May 1997 SDM report, the electronic security 
services industry generates


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an aggregate of approximately $13 billion in revenues annually. The Company 
believes that there is an industry-wide trend towards consolidation due, in 
part, to the relatively high fixed costs of maintaining a centralized 
monitoring station and the relatively low incremental cost of servicing 
additional subscribers. The Company completed the acquisition of an aggregate 
of 38 subscriber account portfolios (a total of approximately 25,000 
subscriber accounts) during the three fiscal years ended June 30, 1997. 

    The Company has recently entered into an agreement with Triple A Security 
Systems, Inc. ("Triple A"), pursuant to which the Company would acquire 
substantially all of the assets of Triple A upon the consummation of this 
offering. Triple A is engaged in the installation, monitoring and servicing 
of residential and commercial alarm systems, principally in northeastern 
Pennsylvania. Triple A currently services approximately 14,000 subscriber 
accounts which are monitored by its central monitoring station. In addition, 
the Company has entered into an agreement, pursuant to which, if consummated, 
the Company would acquire approximately 2,000 additional subscribers. See 
"Business -- Pending Acquisitions."

    In March 1997, the Company acquired a 50% interest in HealthLink. 
HealthLink markets a low-cost PERS product containing basic one-way 
transmission features (the "HealthLink System"). The HealthLink System is 
distributed nationally through retail stores, including Target Stores 
("Target") (808 stores), Long's Drugs, a west-coast regional chain (305 
stores), Fred Myer, a northwest regional chain (104 stores), Fry's, a 
southwest regional chain (51 stores) and Bergen Brunswick's west-coast Good 
Neighbor Pharmacies (429 stores), accounting for distribution through a total 
of approximately 1,700 stores as of the date hereof. The Company is 
negotiating with several other chain stores to further increase distribution. 
The Company provides monitoring and related services to HealthLink System 
customers, is responsible for billing and collecting from such customers and 
receives a portion of the recurring revenue as a fee for providing these 
services.

    In November 1996, the Company entered into a two-year agreement, granting 
it the exclusive worldwide distribution rights within the health care 
industry to WanderWatch-TM-, a monitoring system designed to assist in the 
care of patients with Alzheimer's disease, autism, head injury, dementia or 
other diseases or injuries which may involve memory loss. WanderWatch-TM- is 
similar to PERS, except that the transmitter is designed to be continuously 
activated and transmits a signal to the base unit. If the base unit does not 
receive the requisite number of transmissions, it indicates that the patient 
may have wandered outside the "safety range," and triggers an alarm in the 
home base unit. If the alarm is not disabled, a signal is automatically 
transmitted to the Monitoring Station, whose personnel will then place calls 
based upon a set protocol established by the caregivers. The license 
agreement for WanderWatch-TM- provides for automatic one-year renewals and 
the Company's exclusive rights to the license are subject to forfeiture under 
certain circumstances. WanderWatch-TM- is currently being test-marketed by 
the Company and the Company does not anticipate commencing distribution of 
the product until fiscal 1999.

    The Company's revenues consist primarily of recurring payments under
written contracts for the monitoring and servicing of security systems and PERS
products. The Company currently monitors approximately 48,000 subscribers. For
the fiscal year ended June 30, 1997, monitoring and service revenues represented
76.9% of total revenues. MRR is a term commonly used in the 

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alarm industry and means monthly recurring revenue that the Company is 
entitled to receive under contracts in effect at the end of the period. MRR 
is utilized by the alarm industry to measure the size of a company, but not 
as a measure of profitability or performance, and does not include any 
allowance for future attrition or allowance for doubtful accounts. During the 
fiscal year ended June 30, 1997, the Company's MRR grew by 60.0%, to 
approximately $800,000 from approximately $500,000 for the fiscal year ended 
June 30, 1995. Total revenues have increased during such period from 
$9,332,536 to $12,722,903, or 36.3%.

ELECTRONIC SECURITY INDUSTRY

    The security services industry encompasses a wide range of products and 
services, which can be broadly divided into electronic monitoring products 
and services which the Company provides and highly labor intensive manned 
guarding and patrol services, which the Company does not currently provide, 
but will provide upon the consummation of the acquisition of The Jupiter 
Group, Inc. d/b/a Triple A Patrol ("Jupiter"). Electronic monitoring products 
and services consist of the sale, installation, continuous monitoring and 
maintenance of electronic security systems. This business utilizes modern 
electronic devices installed in customers' businesses and residences to 
provide (i) detection of events such as intrusion or fire, (ii) surveillance, 
(iii) control of access and  (iv) control of articles. Event detection 
devices are monitored by a monitoring center, which is linked to the customer 
through telephone lines. This center is often located at remote distances 
from the customer's premises. In some instances, the customer may monitor 
these devices at its own premises or the devices may be connected to local 
fire or police departments. The products and services marketed in the 
electronic security services industry range from residential systems that 
provide basic entry and fire protection to sophisticated commercial systems 
incorporating closed-circuit television systems and access control.  See 
"Business--Pending Acquisitions."

    The Company believes that the electronic security services industry is
characterized by the following attributes: 

    -    HIGH DEGREE OF FRAGMENTATION. The electronic security services
industry is comprised of a large number of local and regional companies and
several integrated national companies. The Company believes that, based on
industry studies, there are approximately 12,000 separate security services
companies nationally generating an aggregate of approximately $13 billion in
revenues annually. A survey published by SDM magazine in May 1996 reported that,
in 1995, based upon information provided by the respondents, the 100 largest
companies in the industry accounted for approximately 23% of total industry
revenues. 

    -    TREND TOWARD CONSOLIDATION. The Company believes that because the
central station monitoring sector of the electronic industry has relatively high
fixed costs but relatively low incremental costs associated with servicing
additional subscribers, the industry offers significant opportunities for
consolidation. In addition, the Company believes that the fragmented nature of
the industry can be attributed to the low capital requirements associated with
performing basic installation and maintenance of electronic security systems.
However, the business of a full service, integrated electronic security services
company which provides central station monitoring services is capital intensive,
and the Company believes that the high fixed costs of establishing 

                                          5


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both central monitoring stations and full service operations contribute to the
small number of national competitors.

    -    CONTINUED PRODUCT DIVERSIFICATION AND INTEGRATION OF SERVICES. A
recent trend in the commercial electronic security services industry has been
increased integration of different types of products into single systems
provided by single vendors. The Company believes that this trend has resulted
from commercial needs for enhanced security services on a more cost-effective
basis. Whereas basic alarm systems were once adequate for many businesses, it
appears that many companies now require access control and closed circuit
television systems integrated into a single system to provide for their overall
security needs. A security system which provides burglar and fire alarm
monitoring along with closed circuit television and access control, all
integrated into one central system, not only provides enhanced security
services, but also is more cost-effective than four separate systems installed
by four separate vendors. The Company is positioning itself to take advantage of
this trend by expanding the breadth of its electronic security service
offerings. 

    -    ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. 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 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 and has substantially reduced service costs because many
diagnostic and maintenance functions can be performed from a company's office
without having to send a technician to the customer's premises. 

    The Company believes that several factors contribute to a favorable market
for electronic security services generally in the United States:

    -    HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting
of crime by the news media has increased, the perception by Americans that crime
is a significant problem has also grown. Concurrently, demand for security
systems has grown with greater awareness of risk management within the business
community. In addition to the protection that electronic detection and
surveillance systems provide, the Company believes that such systems also have a
deterrent effect against crime. 

    -    INSURANCE REQUIREMENTS AND PREMIUM DISCOUNTS. The increase in demand
for security systems may also be attributable, in part, to the requirement of
insurance companies that businesses install an electronic security system as a
condition of insurance coverage. The purchase of an electronic alarm system
often entitles the subscriber to obtain premium discounts as well. In 

                                          6


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addition, in order to comply with many municipal fire codes, the installation of
an electronic fire system is required in many localities. 

ELECTRONIC SECURITY SERVICES

    MONITORED ELECTRONIC SECURITY SYSTEMS

    The Company's electronically-monitored security systems involve the use on
a customer's premises of devices designed to detect or react to various
occurrences or conditions, such as intrusions, movement, fire, smoke, flooding,
environmental conditions (including temperature or humidity variations) and
other hazards. In most systems these detection devices are connected to a
microprocessor-based control panel which communicates through telephone lines to
the Monitoring Station where alarm and supervisory signals are received and
recorded. Systems may also incorporate an emergency "panic button," which when
pushed causes the control panels to transmit an alarm signal that takes priority
over other alarm signals. In most systems, control panels can identify the
nature of the alarm and the areas within a building where the sensor was
activated and transmit the information to the Monitoring Station. Depending upon
the type of service for which the subscriber has contracted, Monitoring Station
personnel respond to alarms by relaying appropriate information to the local
fire or police departments, notifying the customer or taking other appropriate
action. As of June 30, 1997, the Company has approximately 25,000 alarm
subscribers for which it provides monitoring services. Of such alarm
subscribers, approximately 80% are residential and 20% are commercial. 

    RESIDENTIAL SYSTEMS.  Residential security services consists of the sale,
installation, monitoring and maintenance of electronically monitored security
systems to detect intrusion and fire. The Company believes that the demand for
residential systems results from a general awareness of crime and security
concerns. In addition, residential customers are usually able to obtain more
favorable insurance rates if an electronically monitored security system is
installed in their home. Approximately 80% of the Company's customers are
residential. On average, fees charged for residential monitoring services are
lower than the fees charged for commercial monitoring services. Contracts for
residential services are generally for an initial four-year term, automatically
renewing on a year-to-year basis thereafter, unless canceled. 

    COMMERCIAL SYSTEMS.  The Company also provides electronic security services
and products to commercial businesses and facilities. These systems and products
are tailored to customers' specific needs and include electronic monitoring
services that provide intrusion and fire detection, as well as card or keypad
activated access control systems and closed circuit television systems. The
Company also markets standard security packages for specific types of commercial
customers. Certain commercial customers require more complex electronic security
systems. To meet this demand, the Company also sells integrated electronic
security systems that combine a variety of electronic security services and
products. These systems are integrated by the Company to provide a single
computer-controlled security system. 

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    PRODUCTS

    The Company sells products offered by several different manufacturers.
Systems are generally purchased by the customers, although the Company does
lease a limited number of systems. When the system is sold, the customer pays
the Company the purchase price. When the system is leased, only an installation
fee is charged. Customers agree to pay monthly service charges for monitoring
and may also subscribe for maintenance services. Uniform package prices are
offered to residential customers who purchase standard security systems, which
includes a fixed number of detection devices. Frequently, customers add
detection devices at an additional charge to expand the coverage of the system.
Pricing depends upon the monitoring components installed, the type of alarm
transmission and other services required. 

    INSTALLATION, SERVICE AND MAINTENANCE

    As part of its effort to provide high-quality service to its residential
and commercial customers, the Company maintains a trained installation, service
and maintenance staff. These employees are trained by the Company to install and
service the various types of commercial and residential security systems which
the Company sells. The Company does not manufacture any of the components used
in its electronic security service business. 

    Installations of new alarm systems are performed promptly after the
completion of the sale of the account. After completing an installation, the
technician instructs the subscriber on the use of the system and furnishes a
written manual and, in many instances, an instruction video. Additional
follow-up instruction is provided by sales consultants in the branch offices on
an as-needed basis. 

    The increasing density of the Company's subscriber base as a result of the
Company's continuing strategy to "infill" its existing branch service areas with
new subscribers permits more efficient scheduling and routing of field service
technicians and results in economies of scale at the branch level. The increased
efficiency in scheduling and routing also allows the Company to provide faster
field service response and support, which leads to a higher level of subscriber
satisfaction. 

    The Company offers an extended one-year service protection plan which 
provides that, for an additional fee, the Company will cover the normal costs 
of repair and maintainance of its systems during normal business hours after 
the expiration of the initial warranty period.

    CONTRACTS

    The Company's alarm monitoring subscriber contracts generally have initial
terms ranging from four to five years in duration, and provide for automatic
renewal for a fixed period, unless the Company or subscriber elects to cancel
the contract at the end of the applicable period. The Company maintains an
individual file with a signed copy of the contract for each of its subscribers
and a computerized data base. 

    Substantially all of the Company's alarm monitoring agreements for the
Company's residential subscribers (which constitute approximately 80% of the
Company's alarm subscriber customer base) provide for subscriber payments of
between $20 and $32 per month. The Company's commercial subscribers typically
pay between $25 to $50 per month. 

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    In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, the cancellation of purchased accounts in the process of
assimilation into the Company's operations, unfavorable economic conditions,
dissatisfaction with field maintenance service and other reasons. This attrition
is offset to a certain extent by revenues from the sale of additional services
to existing subscribers, price increases, the reconnection of premises
previously occupied by subscribers, conversion of accounts previously monitored
by other alarm dealers and guarantees provided by sellers of such accounts
against account cancellations for a period following the acquisition.
 
ELECTRONIC SECURITY SERVICES BUSINESS STRATEGY

    THE ACQUISITION PROGRAM

    The Company grows primarily by acquiring subscriber accounts from smaller
alarm companies. The Company focuses on acquisitions that allow it to increase
its subscriber density in each area in which it operates. This leads to greater
field maintenance and repair efficiencies. The Company believes that it is an
effective competitor in the acquisition market because of the substantial
experience of its management team over the past three years in completing 38
acquisitions. In addition, the Company has entered into agreements, pursuant to
which, if consummated, the Company would acquire an additional 16,000 subscriber
accounts.

    During the fiscal year ended June 30, 1996, the Company consummated 16 
acquisitions, purchasing approximately 9,200 subscriber accounts for an 
aggregate consideration of $5,638,637 in cash and 294,045 shares of Common 
Stock. As part of the acquisitions, the Company also issued 15,000 shares of 
restricted Common Stock as payment of financing costs to the lender that 
financed the acquisitions. 

    During the fiscal year ended June 30, 1997, the Company consummated 14 
acquisitions, purchasing approximately 5,300 subscriber accounts for an 
aggregate consideration of $3,424,712 in cash and 25,000 shares of Common 
Stock. The Company anticipates continuing its acquisition program. The 
Company typically acquires only the subscriber accounts, and not the 
facilities or liabilities, of acquired companies. As a result, the Company is 
able to obtain gross margins on the monitoring of acquired subscriber 
accounts that are similar to those that the Company currently generates on 
the monitoring of its existing subscriber base. In addition, the Company may 
increase the monitoring charges paid by those subscribers if it is determined 
that those currently being paid do not reflect the market area rates. The 
Company is unable to predict the timing, size or frequency of any 
acquisitions in the future.

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    Since the Company's primary consideration in making an acquisition is the
amount of MRR that will be derived from such new subscribers, the price paid by
the Company is customarily based upon such MRR. To protect the Company against
the loss of acquired accounts and to encourage the seller of such accounts to
facilitate the transfer of the subscribers, management typically requires the
seller to provide guarantees against account cancellation for a period following
the acquisition, typically 9-18 months. The Company usually holds back from the
seller 10%-20% of the acquisition price, and has the contractual right to
utilize such holdback to recapture a portion of the purchase price based on the
lost MRR arising from the cancellation of acquired accounts. 

    In evaluating the quality of the accounts acquired, the Company relies
primarily on management's knowledge of the industry, its due diligence
procedures, its experience integrating accounts into the Company's operations,
its assumptions as to attrition rates for the acquired accounts and the
representations and warranties of the sellers. 

    The Company employs a comprehensive acquisition program to identify,
evaluate, and assimilate acquisitions of new subscriber accounts that includes
three stages: (i) the identification and negotiation stage; (ii) the due
diligence stage; and (iii) the assimilation stage. 

    The Company actively seeks to identify prospective companies and dealers
through membership in trade associations, trade magazine advertising and
contacts through various vendors and other industry participants. The Company's
use of standard form agreements and experience in identifying and negotiating
previous acquisitions, helps to facilitate the successful negotiation and
execution of acquisitions in a timely manner. 

    The Company conducts an extensive pre-closing review and analysis of all
facets of the seller's operations. The process includes a combination of
selective field equipment installations, individual review of substantially all
of the subscriber contracts, an analysis of all the rights and obligations under
such contracts and other types of verification of the seller's operations. 

    The Company develops a specific assimilation process, in conjunction with
the seller, for each acquisition. Assimilation programs typically include a
letter, approved by the Company, from the seller to its subscribers, explaining
the sale and the transition, followed by one or more letters or packages that
include the Company's subscriber service brochures, field service and monitoring
service telephone number stickers, yard signs and window decals. Thereafter,
almost all new subscribers are contacted individually by telephone by a member
of the Company's customer service department for the purpose of soliciting
certain information and addressing the subscriber's questions or concerns. 

                                          10


<PAGE>

    PENDING ACQUISITIONS

    On July 31, 1997, the Company entered into an agreement with 4R Security,
Inc. ("4R Security") to acquire approximately 2,000 alarm monitoring subscriber
accounts and certain assets of 4R Security for a purchase price of approximately
$1,600,000, substantially all of which is payable in cash and a portion of which
is payable in stock, subject to certain adjustments and holdbacks. Since 4R
Security has filed for protection under the United States Bankruptcy Code, the
acquisition is conditioned upon the approval by the United States Bankruptcy
Court for the Eastern District of New York. Pursuant to the agreement, 4R
Security has agreed not to solicit or otherwise communicate with any customer
whose account was purchased by the Company for the purpose of inducing such
customer to discontinue its relationship with the Company. If the acquisition is
consummated, the Company will assume the balance of 4R Security's lease for its
premises in Patchogue, New York.

    On September 30, 1997, the Company entered into an asset purchase 
agreement with Triple A, pursuant to which the Company agreed to acquire 
substantially all of the assets of Triple A for aggregate consideration of 
approximately $12,500,000, including $10,000,000 payable in cash, 
approximately $1,750,000 payable in Common Stock, based on the lesser of 
market (as defined) at closing or the price per share of Common Stock with 
respect to the Company's anticipated offering of Common Stock, and $750,000 
in the assupmtion of liabilities of Triple A. The purchase price is subject 
to adjustment at the closing under certain circumstances. The closing of the 
acquisition is conditioned on the closing of the anticipated offering, and 
the Company intends to utilize a portion of the proceeds from the anticipated 
offering to consummate the acquisition. Triple A is engaged in the 
installation, monitoring and servicing of residential and commercial alarm 
systems, principally in northeastern Pennsylvania.  Triple A currently 
services approximately 14,000 subscriber accounts which are monitored by 
Triple A's central monitoring station. As part of the acquisition, the 
Company has agreed to enter into an employment agreement with Robert L. May, 
President and sole stockholder of Triple A, on terms to be agreed upon by the
parties.

    The holder of all of the common stock of Triple A is the owner of 80% of 
the common stock of Jupiter. In connection with the Triple A acquisition, on 
September 30, 1997, the Company entered into an agreement to acquire all of 
the outstanding stock of Jupiter, a patrol service company. Jupiter's patrol 
services are principally supplied in areas in which the Company believes that 
Triple A is a substantial provider of security systems services. The patrol 
service supplements the Company's alarm monitoring service by providing 
routine patrol of a subscriber's premises and neighborhood, response to alarm 
system activations and "special watch" services, such as picking up mail and 
newspapers and increased surveillance when the customer is on vacation. 

    Jupiter also offers "dedicated" patrol service to homeowners' 
associations in selected markets, for which Jupiter provides a marked car for 
patrol exclusively in such association's neighborhood. The Company believes 
that offering such services will enable it to increase sales of the Company's 
alarm monitoring services within such neighborhoods. The acquisition involves 
a line of business in which the Company has no previous experience and may 
involve risks and uncertainties which are unknown to the Company.

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    DEALER PROGRAM

    The Company recently commenced a dealer program (the "Dealer Program")
which allows it to participate in the growth of the residential security alarm
market by providing monitoring and field service repair services to subscriber
accounts generated on a monthly basis through exclusive purchase agreements with
independent alarm companies specializing in the sale and installation of
residential alarm systems. The dealers that the Company selects for the Dealer
Program are typically small alarm companies that specialize in installing alarm
systems for residential or small businesses in a specified geographic area. The
Company enters into exclusive contracts with such dealers that provide for the
purchase by the Company of the dealers' subscriber accounts on an ongoing basis.
The dealers install alarm systems, arrange for the subscriber to enter into the
Company's alarm monitoring agreements, and install the Company's yard signs and
window decals. In addition, the Company evaluates the credit history of the
prospective new subscriber prior to purchase from the dealer. The Company is
currently purchasing approximately 75 accounts per month through its Dealer
Program and anticipates an expansion of this program during its next fiscal
year. 

PATIENT MONITORING SERVICES

    PERS INDUSTRY

    The personal emergency response industry generally consists of companies
that provide technological support services to help elderly or medically-at-risk
individuals live independently, without the need of supervised care. In the
Company's view, the recent growth of the emergency response market is strongly
linked to the belief of medical professionals that such individuals should be
encouraged to live independently for as long as possible. The Company believes
that the demand for emergency response systems may increase as the number of
people over 65 years of age, and the number of such persons living alone,
increases. Currently, two groups of individuals are perceived to be the
principal users of PERS products. The first group consists of elderly people who
are capable of living independently and who are seeking ways to extend their
ability to maintain their independence. The second group consists of those who
experience short-term medical needs for whom the PERS is primarily used to
reduce the length of a hospital stay and to provide short-term assistance at
home during the recuperation period. Other potential users include "latch-key"
children and others for whom immediate, automatic access to emergency assistance
is desirable. 

                                          12


<PAGE>

    PERS PRODUCTS AND MONITORING SERVICES

    PRODUCTS.  The Company's PERS is designed to monitor, identify and
electronically report emergencies requiring medical, fire and police assistance.
The PERS unit consists of two basic components: (i) a portable pendant
transmitter that is worn around the neck (the system also includes a portable,
hand-held transmitter that can be attached to the user's belt or mounted on a
wall); and (ii) a receiving base that is installed in the user's home and
connected to the user's telephone line. The Company's PERS also includes a smoke
detector (in certain states) that transmits a distress signal to the Monitoring
Station in the event of fire, and a medical/police hand-held transmitter that
transmits a medical or police distress signal to the Monitoring Station. Both
the pendant and medical/police hand-held transmitter send a medical distress
signal to the Monitoring Station; however, the hand-held transmitter also sends
a police distress signal on a separate channel when activated. 

    The Company's PERS has a variety of safety features, including an
environmental control which detects temperature fluctuations, a cancel function
to avoid false alarms, an alternative power source, which allows the system to
remain functional in the event of a generalized power failure, and a special
transmitter designed for use by handicapped persons. In addition, once
activated, the PERS "seizes" the user's telephone line to which the receiving
base is connected and dials the Monitoring Station until a connection is
established, regardless of whether the user's telephone is in use or off the
hook. Each PERS is tested before release for sale and is re-tested immediately
after installation in a user's home. 

    MONITORING SERVICES. Users of the Company's PERS products initiate a
distress signal by pressing a button on the portable transmitter included in the
system. Once activated, the transmitter sends radio signals to the receiving
base (the transmitter has an effective range of approximately 150 feet), which
in turn translates the radio signal and automatically dials the Monitoring
Station using a toll-free telephone number. Once telephone contact is made with
the Monitoring Station, a coded signal automatically initiates the electronic
retrieval of personal data relating to the user who initiated the distress
signal. Such data includes the user's name and address, directions to the user's
home, allergies, medications, best route of entry into the user's home during an
emergency, and the doctor and family members that should be contacted. In
addition, this signal establishes two-way voice communication between the user
and Monitoring Station personnel directly through the PERS hardware, avoiding
any need for the user to access a telephone. Monitoring personnel verify the
nature of the emergency by speaking with the individual and, if necessary,
notify the predetermined emergency authorities in the user's area.  If the
monitoring personnel are unable to establish voice communication with the user,
agencies are notified immediately.  As of June 30, 1997, the Company has
approximately 23,000 PERS monitoring subscribers in approximately 45 states for
whom it provides monitoring services. The Company's monitoring service is
available only to users of the Company's PERS; PERS products cannot be
programmed to permit the customer to utilize a competitor's monitoring service. 

    The Company provides all of its PERS users with a 24-hours-per-day, 365
days-per-year monitoring service. The monthly charge for monitoring services
paid by the subscriber is 

                                          13


<PAGE>

approximately $28. The Company's contracted monitoring facility is located in
Euclid, Ohio and is accessible by PERS users nationwide through toll-free
emergency telephone lines. The monitoring facility contains telecommunications
and computer equipment with the capacity to monitor tens of thousands of PERS
users simultaneously, and to receive and act upon a user's emergency signal. On
average, the Company receives 1,000 calls per day from its PERS users, of which
approximately 60% are made by users for test purposes. The Company maintains a
duplicate set of all customer data at its contracted Euclid, Ohio facility. 

    SALES AND MARKETING

    The Company sells its PERS products in the United States directly to
consumers through referrals by affiliated hospitals and through franchisees and
private label re-sellers (principally home alarm companies). In Canada, the
Company's PERS products are marketed exclusively by a Canadian distributor.
Until 1991, substantially all PERS products were sold through franchisees,
although the sale of new franchises was discontinued in 1987. Currently, the
Company's direct sales are generated principally by the Company's home health
care division, which commenced operations in March 1991. The following is a
summary of the Company's current and proposed marketing programs. 

    FRANCHISEES AND DISTRIBUTORSHIP. The Company ceased offering new franchises
for sale in 1987 and has no current plans to resume selling franchises in the
future. Existing franchisees, however, are allowed to renew their franchise
annually upon payment of a $350 renewal fee. As of August 31, 1997,
approximately 80 franchisees had paid their franchise renewal fee for the 1998
fiscal year.
 
    Franchisees are independent contractors who purchase or lease their PERS
requirements from the Company in accordance with a schedule of prices
established by the Company, and resell PERS products in non-exclusive
territories. Franchisees also are required to contract with the Company to
provide monitoring services to the franchisee's customers. In addition, the
Company offers billing and collection services to franchisees. Franchisees are
required to pay a monthly fee to the Company for each customer monitored, the
amount of which is dependent upon the number of accounts serviced and the level
of other services (for instance, billing and collection) provided. The Company
also sells advertising and promotional materials, accessories and supplies to
its franchisees pursuant to a published price list. 

    HOME HEALTH CARE DIVISION. In March 1991, the Company established a home
health care division to market PERS products to hospitals and home health care
agencies. Hospitals and home health care agencies may either purchase or
lease/purchase PERS products for their patients, with monitoring services
provided by the Company. The consumer acquires the PERS from the home health
care agency, and the Company's obligations are limited to providing monitoring
services. Additional markets for the Company's home health care division include
state and local welfare agencies. The Company is also actively soliciting
agreements with municipalities to provide the Company's PERS services as part of
the municipalities' total health and other assistance programs. The Company has
entered into agreements with the Philadelphia 

                                          14


<PAGE>

Corporation on Aging and the municipality of Los Angeles, Department of Aging,
pursuant to which the Company provides PERS and monitoring services to clients
of such entities.

    PRIVATE LABEL PROGRAMS. The Company also supplies PERS products for vendors
under product names owned by the vendors. Currently, sales under these programs
are limited. Currently, all of the Company's private label vendors provide their
own monitoring services. The Company's gross profit margins on sales in its
private label programs are significantly lower than margins on its direct and
franchisee sales programs. 

PRODUCTION

    The principal materials utilized in the production of PERS products consist
of electronic components which are obtained from several suppliers. The
sub-contractor also purchases molded plastic, printed circuit boards and
miscellaneous hardware from several sources. The Company believes that the
required electronic components are not unique to a particular vendor and that
other sources could be obtained, although some delay in production might result
if it were necessary to find new sources for electronic components. 

HEALTHLINK

    HealthLink is a 50% joint venture between the Company and BKR, Inc. 
HealthLink was formed in March 1997 to distribute the HealthLink System 
through retail pharmacies. In connection with its investment in HealthLink, 
the Company issued 1,094,166 shares of Common Stock to BKR, Inc. and issued a 
performance-based warrant, expiring March 3, 2002, to BKR, Inc., entitling it 
to purchase up to 30,000 shares of Common Stock for each 10,000 PERS products 
sold by HealthLink at an exercise price of $3.00 per share up to a maximum of 
450,000 shares of Common Stock. HealthLink's distribution has grown from 58 
stores in the fourth quarter of 1996 to approximately 1,700 stores as of the 
date hereof. To date, HealthLink has sold and shipped approximately 3,300 
systems to such stores. HealthLink is currently available in Target (808 
stores) nationwide, Long's Drugs (305 stores), Fry's (51 stores), Fred Myer 
(104 stores) and in 429 Bergen Brunswick's west-coast Good Neighbor 
Pharmacies.

    The HealthLink System is designed as a low-cost PERS for use by senior 
citizens. The HealthLink System has a suggested retail price of $129.95 in 
most stores, and provides monitoring revenue to HealthLink of approximately 
$23 per month. The HealthLink System is manufactured by a third-party foreign 
manufacturer. The Company provides monitoring and related services to 
HealthLink System customers, is responsible for billing and collecting from 
such customers and receives a portion of the recurring revenue as a fee for 
providing these services.

                                          15


<PAGE>

WANDERWATCH-TM-

    On November 22, 1996, the Company entered into a two-year agreement 
granting the Company the exclusive worldwide distribution rights within the 
health care industry to WanderWatch-TM-, a wandering compliance monitoring 
system designed for use in home health care and assisted living facility 
environments. The WanderWatch-TM- system is designed to provide 
around-the-clock monitoring of patients that suffer from Alzheimer's disease, 
autism, dementia, head injury or other diseases or injuries which may involve 
memory loss. The WanderWatch-TM-system consists of a wireless ankle 
transmitter that sends a radio frequency transmission to a base unit, usually 
located centrally in a home. If the base unit does not receive a requisite 
number of transmissions within a 60-second interval, it indicates that the 
patient may have wandered outside of the "safety range" and triggers a loud 
beeping alarm in the base unit. If the alarm is not disabled within 60 
seconds, a signal is automatically transmitted to the Monitoring Station. The 
license agreement for WanderWatch-TM- provides for automatic one-year 
renewals, provided that neither party has notified the other that it has 
failed to comply with the terms of the agreement within 60 days prior to the 
expiration of any such renewal term. In addition, the Company's exclusive 
rights to the license are subject to forfeiture in the event that the Company 
fails to achieve certain targeted annual sales increases of WanderWatch-TM- 
and fails to use reasonable efforts to fully and effectively promote the sale 
of WanderWatch-TM-. In such event, the Company's license of WanderWatch-TM- 
would become non-exclusive. The agreement also contains certain 
non-competition provisions which restrict the right of both parties to 
produce products which could be considered directly competitive with 
WanderWatch-TM-. The agreement provides for an initial license fee payable by 
the Company, a per-unit purchase price payable by the Company and a per-unit 
percentage of the monthly recurring revenue received from WanderWatch-TM-, 
subject to a certain maximum fee for recurring revenues.

    Approximately 2,800,000 patients are afflicted with Alzheimer's disease and
are being cared for in their homes. Alzheimer's disease is a progressive,
degenerative disease of the brain, and the most common form of dementia. There
are approximately four million people afflicted with Alzheimer's disease in the
United States. Approximately one in ten persons over the age of 65, and nearly
half of the people over the age of 85, have Alzheimer's disease. Over 70% of
Alzheimer's patients live at home. An Alzheimer's patient will live an average
of eight years and as many as 20 years or more from the onset of symptoms. The
WanderWatch-TM- system will be offered to the caregivers (I.E., family members
and professional caregivers) on a monthly rental basis. Additionally,
WanderWatch-TM- will be offered through the Company's existing distribution
network of home health care companies, hospitals, visiting nurse associations
and various governmental agencies.  WanderWatch-TM- is currently being
test-marketed by the Company, and the Company does not anticipate commencing
distribution of the product until fiscal 1999.

                                          16


<PAGE>

MONITORING STATION

    In April 1994, the Company entered into an agreement with Emergency 
Response Center, Inc. ("ERC"), owner of the Monitoring Station, expiring in 
April 2000. The agreement automatically renews for successive one-year terms 
unless either party gives the other written notice of termination not later 
than six months prior to the end of the then current term of the agreement. 
Pursuant to the agreement, in consideration for providing monitoring services 
and electronic data base storage for the Company, ERC receives monitoring 
service fees based upon the number of subscribers it services and certain 
other start-up and maintenance costs. Upon consummation of the Triple A 
acquisition, the Company will own Triple A's monitoring station, located in 
Wilkes-Barre, Pennsylvania, which will continue to provide monitoring 
services to Triple A customers.

GOVERNMENTAL REGULATION

    The Company's operations are subject to a variety of federal, state, county
and municipal laws, regulations and licensing requirements. Many of the states
in which the Company operates, as well as certain local authorities, require the
Company to obtain licenses or permits to conduct a security alarm services
business. Certain governmental entities also require persons engaged in the
security alarm services business to be licensed and to meet certain standards in
the selection and training of employees and in the conduct of business. The
Company believes that it holds the required licenses and is in substantial
compliance with all licensing and regulatory requirements in each jurisdiction
in which it operates.

    The security alarm industry is also subject to the oversight and
requirements of various insurance, approval, listing and standards
organizations. Adherence to the standards and requirements of such organizations
may be mandatory or voluntary depending upon the type of customer served, the
nature of security service provided and the requirements of the local
governmental jurisdiction. The Company has not had any material difficulties in
complying with such standards and requirements in the past.

    The Company's electronic security business relies on the use of telephone
lines and radio frequencies to transmit signals and to communicate with field
personnel. The cost of such lines and the type of equipment which may be
utilized in telephone line transmissions are regulated by both the federal and
state governments. The operation and utilization of radio frequencies are
regulated by the Federal Communications Commission and state public utilities
commissions. The Company's PERS products are regulated by the Federal Food and
Drug Administration.

    The Company's advertising and sales practices are regulated by both the
Federal Trade Commission (the "FTC") and state consumer protection laws. Such
regulations include restrictions on the manner in which the Company promotes the
sale of its products and the obligation of the Company to provide purchasers of
its products with certain rescission rights. While the Company believes that it
has complied with these regulations in all material respects, there can be no
assurance that none of these regulations were violated in connection with the 

                                          17


<PAGE>

solicitation of the Company's existing subscriber accounts, particularly with
respect to accounts acquired from third parties, or that no such violations will
occur in the future.

    The Company believes that approximately 97% of alarm activations that
result in the dispatch of police or fire department personnel are not
emergencies, and thus are "false alarms." Significant concern has arisen in
certain municipalities about this high incidence of false alarms. This concern
could cause a decrease in the likelihood or timeliness of police response to
alarm activations and thereby decrease the propensity of consumers to purchase
or maintain alarm monitoring services. 

    A number of local governmental authorities have considered or adopted
various measures aimed at reducing the number of false alarms. Such measures
include (i) subjecting alarm monitoring companies to fines or penalties for
transmitting false alarms, (ii) licensing individual alarm systems and the
revocation of such licenses following a specified number of false alarms, (iii)
imposing fines on alarm subscribers for false alarms, (iv) imposing limitations
on the number of times the police will respond to alarms at a particular
location after a specified number of false alarms and (v) requiring further
verification of an alarm signal before the police will respond. Enactment of
such measures could adversely affect the Company's future business and
operations. 

    Although it ceased offering new franchises for sale in 1987, the Company's
continuing relationship with its existing franchisees is subject to regulation
under state laws and by the FTC. Moreover, the Company continues to be bound by
obligations to franchisees under certain state consent orders regarding alleged
franchise sales practices.  At various times, the Company also has been named in
state actions or inquiries related to the sales practices of its franchisees.
The Company believes it is not liable for the actions of its franchisees;
however, there can be no assurance that it will not be subject to future orders.
The Company may be subject to additional regulation in the future, and changes
in laws and regulations applicable to the Company could increase the cost of
compliance and otherwise materially and adversely affect the Company in ways not
presently foreseeable. 

RISK MANAGEMENT

    The nature of the services provided by the Company potentially exposes it
to greater risks of liability for employee acts or omissions, or system
failures, than may be inherent in many other service businesses. To reduce those
risks, substantially all of the Company's customers have subscriber agreements
which contain provisions for limited liability and predetermined liquidated
damages to customers and indemnification by customers against third-party
claims; however, some jurisdictions prohibit or restrict limitations on
liability and liquidated damages. The Company carries insurance of various
types, including general liability and errors and omissions insurance to insure
it from liability arising from acts or omissions of its employees. The Company's
general and umbrella liability insurance policies combined provide up to
$10,000,000 of coverage, depending on the nature of claims. Certain of the
Company's insurance policies and the laws of some states may limit or prohibit
insurance coverage for punitive or certain other kinds of damages arising from
employee misconduct. In addition, in some states the contractual limitation of
liability and indemnification provisions may be ineffective in cases of gross
negligence or intentional misconduct and in certain other situations.

                                          18


<PAGE>

INSURANCE

    The Company maintains general liability insurance policies covering various
types of liability including products liability. The product liability insurance
has policy limits of $1,000,000 per occurrence and $5,000,000 in the aggregate
per year and the errors and omissions liability insurance policy limits are
$1,000,000 per occurrence and $5,000,000 in the aggregate per year with a
deductible of $50,000 per occurrence payable by the Company. These policies are
subject to exclusions and other terms which the Company believes are typical for
policies of similarly situated companies. The Company believes that its
insurance coverage is adequate for its needs, but there can be no assurance that
the Company will not be subjected to claims in the future which are not covered
by its insurance or which exceed its insurance coverage. 

INTELLECTUAL PROPERTY

    The Company owns a federal trademark registration for the trade name
"Response Ability" and holds a license for the names "WanderWatch-TM-" and
"HealthLink." The Company believes that its rights in these trademarks are of
unlimited duration and adequately protected by registration or applications to
register. In addition, the Company relies on trade secret and other laws to
protect its proprietary rights in its security systems and programs. No
assurance can be given that the Company will be able to successfully enforce or
protect its rights to its trademarks or proprietary information in the event
that any of them is subject to third-party infringement or misappropriation. The
Company's central monitoring operations utilize proprietary software which the
Company has licensed from a third party. 

SUPPLIERS, MANUFACTURING AND ASSEMBLY
    
    The Company currently has multiple sources of supply for the components 
used in the electronic security and PERS products that it designs and 
installs. The Company does not manufacture any of the products that it 
designs and installs, or any of the components thereof. The Company's 
products are assembled from such components by third-party contract 
assemblers. The Company believes that a variety of alternative sources of 
supply are available on reasonable terms. However, the Company has no 
guaranteed supply arrangements with its suppliers and purchases components 
pursuant to purchase orders placed from time to time in the ordinary course 
of business. There can be no assurance that shortages of components will not 
occur in the future. Failure of sources of supply and the inability of the 
Company to develop alternative sources of supply if required in the future 
could have a material adverse effect on the Company's operations. 

                                          19
<PAGE>

COMPETITION

    ELECTRONIC MONITORING SERVICES

    The security services business is highly competitive and new competitors
are continually entering the field. Competition is based primarily on price in
relation to quality of service. Sources of competition in the security services
business are other providers of central monitoring services, systems directly
connected to police and fire departments, local alarm systems and other methods
of protection, such as manned guarding. 

    The central monitoring sector of the electronic security business is
characterized by low marginal costs associated with monitoring additional
customers. Despite the opportunity for economies of scale by consolidation of
monitoring and administrative functions, the industry is highly fragmented, with
thousands of small providers.

    There are also a limited number of larger competitors, including ADT
Limited, a division of Tyco, International, Borg-Warner Security Corporation
(under the Wells Fargo and Pony Express brand names), a division of Honeywell,
Inc., Brinks Home Security, a division of The Pittston Company, SecurityLink by
Ameritech and Protection One, Inc.

    PERS

    The emergency response industry is serviced by numerous companies that
provide PERS products and services, including monitoring services. A majority of
the emergency response companies offer systems that are monitored through a
central monitoring facility. In some instances, companies which sell PERS
units establish agreements with local burglar alarm companies to provide the
service on a per-user fee basis, or have their own monitoring capability. A
number of emergency response companies offer their products through hospitals
that distribute and monitor the systems. Several companies offer systems that
utilize a direct dial/pre-recorded telephone message to selected telephone
numbers directly without a monitoring station.

    The Company's principal competitors are other national or regional
emergency response providers and burglar alarm companies that offer medical
emergency features in addition to their home protection systems. Many of these
companies have greater financial resources than the Company and may enjoy a
particular competitive advantage due to their access to a larger client base.
The Company considers its principal competitors to be American Medical Alert
Corp. and Lifeline Systems, Inc. Methods of competition in the PERS industry
consist of quality, service and price of the PERS products. While price is a
factor, the customer's primary consideration in choosing a PERS supplier is the
quality of monitoring service provided and the reliability of the PERS products.
The Company believes that it competes favorably as to all of these factors. 

                                          20


<PAGE>

EMPLOYEES

    At October 1, 1997, the Company employed 137 full-time employees. Of
this number, 14 are engaged in sales, 8 in quality control, 44 in field service
and installation, 27 in customer service, 16 in acquisition assimilation and 28
in administration. None of the Company's employees are represented by a labor
union, and the Company considers its employee relations to be satisfactory. 

ITEM 2.  PROPERTIES

    The Company leases 15,000 square feet in Lawrenceville, New Jersey, for its
executive and administrative offices, at an annual rental of $172,000. The lease
expires in June 1999, after which the Company has a five-year renewal option.
The Company also leases (i)1,100 square feet in Wilmington, Delaware, for use as
a sales and installation facility, at an annual rental of $14,400, which lease
expires in February 1998, after which the Company has a one-year renewal option
on the same terms and conditions; (ii)2,000 square feet in Los Angeles,
California, for use as a sales and installation facility, at an annual rental of
$24,000, which lease expires in October 2000; (iii)5,000 square feet for its
inventory, storage and testing facility in Florida, which is adjacent to the
Company's third-party assembler, at an annual rental of $19,200, which lease
expires in March 1999; and (iv)2,900 square feet in Allentown, Pennsylvania, for
use as a sales and installation facility, at an annual rental of $24,000, which
lease expires in November 1998, after which the Company has two, one-year
renewal options on the same terms and conditions.

    The Company believes that its current facilities are adequate for its
needs. 

                                          21


<PAGE>

ITEM 3.  LEGAL PROCEEDINGS.

    The Company experiences routine litigation in the normal course of its
business. The Company does not believe that any of such pending litigation will
have a material adverse effect on the financial condition or results of
operations of the Company.

    In February 1996, the Company consented to the issuance of an Order 
Instituting Proceedings pursuant to the Securities Act of 1933 (the 
"Securities Act") and the Securities Exchange Act of 1934 as amended (the 
"Exchange Act") and Findings and Order of the Securities and Exchange 
Commission (the "Finding"), without admitting or denying allegations of facts 
contained therein. In July 1993, the Company sold 60,000 shares of Common 
Stock pursuant to what it claimed to be an exemption from registration under 
Regulation S of the Securities Act. The Finding stated that such sales were 
made under circumstances in which the Company knew or should have known that 
such exemption was not available. Consequently, the Finding stated, the sales 
were made in violation of the registration provisions of the Securities Act. 
The Company consented to permanently cease and desist from committing or 
causing any violation, and any future violation, of Section 5 of the 
Securities Act. 

    Prior to its acquisition by the Company, Systems was named in a number of 
civil and administrative proceedings relating to its franchise sales. The 
Company does not presently offer franchises for sale; however, the Company is 
bound by certain consent decrees and regulations involving its continuing 
relationship with franchisees.

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

         None.

                                          22


<PAGE>

    PART II

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS

         The following table sets forth the high and low "bid" and "asked" 
prices, for the quarters indicated, for the Company's Common Stock in the 
over-the-counter market.  Such prices reflect inter-dealer prices, without 
adjustments for retail mark-ups, mark-downs, or other fees or commissions, 
and may not represent actual transactions.

<TABLE>
<CAPTION>
                                                BID                                       ASK

For Fiscal  year  Ending  June 30,  HIGH                 LOW                 HIGH                 LOW
1996
<S>                                 <C>                <C>                 <C>                  <C>
First Quarter                       7 3/16               3 3/4               7 13/16              4 3/8
Second Quarter                      6                    4 1/4               6 1/4                4 5/8
Third Quarter                       6 1/8                4 3/4               6 1/4                5
Fourth Quarter                      8 1/2                5 1/8               8 3/4                5 1/4

<CAPTION>

                                                BID                                       ASK

For Fiscal  year  Ending  June 30,  HIGH                 LOW                 HIGH                 LOW
1997
<S>                                 <C>                <C>                 <C>                  <C>
First Quarter                       8 7/8                3 1/8               9 1/8                3 1/4
Second Quarter                      5 1/8                2 3/8               5 3/8                2 5/8
Third Quarter                       5 3/8                2 11/16             5 5/8                2 7/8
Fourth Quarter                      3                    1 7/16              3 1/8                1 9/16
</TABLE>

         On October 6, 1997 the closing bid price for the Common Stock was 
$3.625 and there were approximately 220 holders of record of the Common Stock.

         The Company has not paid any dividends on its Common Stock since its 
inception and does not intend to pay any dividends to its stockholders in the 
foreseeable future.  The Company currently intends to retain earnings, if 
any, for the development and expansion of its business.  The declaration of 
dividends in the future will be at the discretion of the Board of Directors 
and will depend upon the earnings, capital requirements and financial 
position of the Company, general economic conditions and other pertinent 
factors.  The Company is prohibited from declaring dividends while any 
outstanding balance exists under the Credit Line.  The Company anticipates 
that for the foreseeable future, earnings, if any, will be retained for use 
in the business or for other corporate purposes, and it is not anticipated 
that dividends will be paid.

                                          23


<PAGE>


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

         The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related notes thereto. 

GENERAL

    Since fiscal year-end 1994, substantially all of the Company's growth has
been through the acquisition of smaller alarm companies.

    During the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company 
consummated 16 acquisitions, purchasing approximately 9,200 subscriber 
accounts for an aggregate consideration of $5,638,637 in cash and 294,045 
shares of Common Stock. As part of the acquisitions, the Company also issued 
15,000 shares of Common Stock as payment of financing costs to the lender 
that financed the acquisitions. 

    During the fiscal year ended June 30, 1997 ("Fiscal 1997"), the Company 
consummated 14 acquisitions, purchasing approximately 5,300 subscriber 
accounts for an aggregate consideration of $3,424,712 in cash and 25,000 
shares of Common Stock. The Company typically acquires only the subscriber 
accounts, and not the facilities or liabilities, of acquired companies. As a 
result, the Company is able to obtain gross margins on the monitoring of 
acquired subscriber accounts that are similar to those that the Company 
currently generates on the monitoring of its existing subscriber base. In 
addition, the Company may increase the monitoring charges paid by those 
subscribers if it is determined that those currently being paid do not 
reflect the market area rates. The Company anticipates continuing its 
acquisition program which may subject the Company to certain risks and 
uncertainties. In addition, the Company's financial information for Fiscal 
1997 reflects the Company's investment in a joint venture with BKR, Inc. to 
form HealthLink in March 1997 (see Note 3 of Notes to Consolidated Financial 
Statements of the Company).

                                          24
<PAGE>

    In July 1996, the Company completed a restructuring of its long-term 
debt. The Company obtained a $15,000,000 revolving credit facility (the 
"Credit Line") from Mellon Bank, N.A. (the "Bank") and issued $7,500,000 of 
its Series A Convertible Preferred Stock (the "Preferred Stock") to 
institutional and individual domestic and foreign investors. The 
proceeds were used to reduce the Company's long-term indebtedness 
and resulted in a substantial decrease in the Company's interest 
expense (see Notes 7 and 9 of Notes to Consolidated Financial 
Statements of the Company).

    A majority of the Company's revenues are derived from monthly recurring
payments for the monitoring, rental and servicing of both electronic security
systems and PERS, pursuant to contracts with initial terms up to five years.
Service revenues are derived from payments under extended warranty contracts and
for service calls performed on a time and material basis. The remainder of the
Company's revenues are generated from the sale and installation of security
systems and PERS. Monitoring and service revenues are recognized as the service
is provided. Sale and installation revenues are recognized when the required
work is completed. All direct installation costs, which include materials, labor
and installation overhead, and selling and marketing costs are expensed in the
period incurred. Alarm monitoring and rental services generate significantly
higher gross margins than do the other services provided by the Company. 

    The Company has significantly expanded its operations during the two 
years ended June 30, 1997. Its alarm subscriber base has grown to over 25,000 
customers and the Company's total account base is in excess of an aggregate 
of 48,000 monitoring subscribers as of the date hereof.

                       BALANCE OF PAGE INTENTIONALLY LEFT BLANK



                                          25
<PAGE>

RESULTS OF OPERATIONS

    The following table summarizes the components of the Company's revenues and
cost of revenues for the fiscal years ended June 30, 1996 and 1997:

<TABLE>
<CAPTION>

                                                        YEAR ENDED JUNE 30,
                                               1996                            1997

Operating revenues:
<S>                                      <C>
 Product sales...................        $2,352,449        21.6%        $2,938,618         23.1%
 Monitoring and Service..........         8,515,247        78.4%         9,784,285         76.9%
                                         ----------        -----        ----------         -----
                                         10,867,696       100.0%        12,722,903        100.0%
                                         ----------       ------        ----------        ------
Cost of Revenues*:

  Product sales..................         1,718,689        15.8%         1,970,158         15.5%
  Monitoring and Service.........         1,779,490        16.4%         2,127,257         16.7%
                                          ---------        -----         ---------         -----
                                          3,498,179        32.2%         4,097,415         32.2%
                                          ---------        -----         ---------         -----
  Gross Profit...................        $7,369,517        67.8%        $8,625,488         67.8%
                                         ----------        -----        ----------         -----
</TABLE>

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

*As a percentage of total revenues 

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996:

    Operating revenues increased by $1,855,207, or 17.1%, for Fiscal 1997, as 
compared to Fiscal 1996. Product sales increased by $586,169, or 24.9%, for 
Fiscal 1997, as compared to Fiscal 1996. The increase in product sales was 
due primarily to the sale of PERS to home health care agencies, private label 
wholesalers and sales of electronic security systems to commercial customers. 
The significant growth in monitoring and service revenues of $1,269,038, or 
14.9%, for Fiscal 1997, as compared to Fiscal 1996, was due to the 
acquisition of monitoring contracts and the success of the Company's extended 
warranty program.

    Gross Profit for Fiscal 1997 was $8,625,488, which represents an increase 
of $1,255,971, or 17%, over the $7,369,517 of gross profit recognized in 
Fiscal 1996. The increase was due primarily to an increase in monitoring and 
service revenues, and the success of the extended warranty program, which was 
concurrent with the increase in the Company's subscriber base. The Gross 
Profit Margin ("GPM"), as a percentage of sales, was 67.8% for both Fiscal 
1996 and Fiscal 1997. The GPM on product sales rose from 26.9% for Fiscal 
1996 to 33.0% for Fiscal 1997. The increase was due to increased revenues 
derived from the installation of electronic security 


                                          26
<PAGE>

systems to commercial customers as opposed to residential customers and the
utilization of in-house labor in lieu of subcontractors for the installation of
electronic security systems. The GPM on monitoring and service revenues 
decreased slightly to 78.3% for Fiscal 1997 from 79.1% for Fiscal 1996.

    Selling, general and administrative expenses (excluding charges incurred 
for legal fees in connection with the preferred stock litigation of $475,000, 
the non-cash charge of $689,000 for consulting fees and the non-cash loss 
recognized on available-for-sale securities of $218,000) grew to $7,744,641 
for Fiscal 1997, which represents an increase of $1,328,155, or 20.7%, over 
selling, general and administrative expenses for Fiscal 1996. Selling, 
general and administrative expenses (excluding such charges and losses in the 
aggregate amount of $1,382,000), as a percentage of total operating 
revenues, increased slightly from 59.0% for Fiscal 1996 to 60.9% for 
Fiscal 1997. The increase in selling, general and administrative expenses 
was due primarily to increases in corporate overhead expenses incurred to 
assimilate newly acquired customers into the Company's customer base and 
to support the larger subscriber base.

    On December 16, 1996, the Company granted to employees non-qualified 
stock options at $.10 per share, expiring November 27, 2001, and, on June 27, 
1997, reduced the exercise price of options granted to certain officers and 
directors of the Company from $1.50 to $.01 and, as a result thereof, the 
Company recorded compensation expense of $2,032,200 for Fiscal 1997.  In 
addition, the Company recorded deferred compensation expense of $1,657,500 
for Fiscal 1997 in connection with two employment contracts with officers of USS
(see Note 13 of Notes to Consolidated Financial Statements of the Company).

    Amortization and depreciation expenses increased by $775,539, from 
$2,200,894 to $2,976,433 for Fiscal 1996 and Fiscal 1997, respectively. This 
increase in amortization and depreciation expense is the result of the 
Company's purchase of monitoring contracts totaling $4,168,525 and property 
and equipment totaling $636,659 (including equipment used for rentals in the 
amount of $150,000) during Fiscal 1997.

    Interest expense decreased by $1,836,123, or 57.6%, for Fiscal 1997, as 
compared to Fiscal 1996. In July 1996, the Company completed a restructuring 
of its long-term debt. The Company obtained the $15,000,000 Credit Line from 
the Bank and issued $7,500,000 of its Preferred Stock to institutional and 
individual domestic and foreign investors. The proceeds of the financing were 
utilized to reduce the Company's long-term indebtedness. The restructuring 
resulted in an extraordinary charge of $2,549,708 for early extinguishment of 
debt in Fiscal 1997.

    Equity in loss of joint venture consists of the Company's share ($123,325)
of HealthLink's losses for Fiscal 1997.

    The net loss applicable to common shareholders (net loss adjusted for 
dividends and accretion on Preferred Stock) for Fiscal 1997 was $18,054,144, 
or ($4.05) per share, based on 4,462,721 shares outstanding. The net loss for 
Fiscal 1997, excluding the following nonrecurring charges: (i) loss on early 
debt extinguishment of $2,549,708; (ii) compensation expense recognized from 
the grant of stock options and from employment contracts of $3,689,700; (iii) 
legal fees incurred in connection with the preferred stock litigation of 
$475,000; (iv) the non-cash charge of $689,000 for consulting fees; and (v) 
loss realized on available-for-sale securities of $218,000, was 


                                          27
<PAGE>

$3,556,215, or $(.80) per share, based on 4,462,721 shares outstanding, as 
compared to a net loss of $4,411,898, or $(2.87) per share, based on 
1,536,537 shares outstanding for Fiscal 1996. The net losses for Fiscal 1996 
and Fiscal 1997 are attributable to depreciation, amortization and interest 
expense totaling approximately $5,386,497 and approximately $4,325,913, 
respectively. Earnings before interest, taxes, depreciation and amortization 
("EBITDA"), excluding nonrecurring charges and the loss on the HealthLink 
joint venture, was approximately $950,000 for Fiscal 1996, as compared to 
approximately $880,000 for Fiscal 1997. The decrease was due primarily to 
the write-down of inventory used to service outdated electronic security 
systems acquired from other alarm dealers, and an increase in the Company's 
provision for doubtful accounts, along with direct write-offs to bad debt 
expense totaling approximately $830,000.

                                          28


<PAGE>

ACCOUNTING DIFFERENCES FOR ACCOUNT PURCHASES AND NEW INSTALLATIONS

    A difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of new accounts through
direct sales by the Company's sales force has a significant impact on the
Company's results of operations. The costs of monitoring contracts (acquired
either through the Dealer Program or through acquisition of subscriber account
portfolios) are capitalized and amortized over estimated lives ranging from five
to 10 years for alarm and PERS accounts. Included in capitalized costs are
certain acquisition transition costs associated with incorporating the purchased
subscriber accounts into the Company's operations. Such costs include costs
incurred by the Company in fulfilling the Seller's preacquisition obligations to
the acquired subscribers, such as providing warranty repair services. In
contrast, all of the Company's costs related to the sales, marketing and
installation of new alarm monitoring systems generated by the Company's sales
force are expensed in the period in which such activities occur.

SUBSCRIBER ATTRITION 

    Subscriber attrition has a direct impact on the Company's results of 
operations, since it affects both the Company's revenues and its amortization 
expense. Attrition can be measured in terms of canceled subscriber accounts 
and in terms of decreased MRR resulting from canceled subscriber accounts. 
The Company experiences attrition of subscriber accounts as a result of 
several factors, including relocation of subscribers, adverse financial and 
economic conditions and competition from other alarm service companies. In 
addition, the Company may lose certain subscriber accounts, particularly 
subscriber accounts acquired as part of an acquisition, if the Company does 
not service those subscriber accounts successfully or does not assimilate 
such accounts into the Company's operations. Gross subscriber attrition is 
defined by the Company for a particular period as a quotient, the numerator 
of which is equal to the number of subscribers who disconnect during such 
period, and the denominator of which is the average of the number of 
subscribers at each month end during such period. Net MRR attrition is 
defined by the Company for a particular period as a quotient, the numerator of
which is an amount equal to gross MRR lost as the result of canceled 
subscriber accounts during such period, net of MRR during such period (i) 
generated by increases in rates to existing subscribers, (ii) resulting from 
the reconnection of premises previously occupied by subscribers of the 
Company or of prior subscribers of the Company, (iii) resulting from 
conversions and (iv) associated with canceled accounts with respect to which 
the Company obtained an account guarantee, and the denominator of which is 
the average month-end MRR in effect during such period. Although the Company 
believes that its formulas of gross subscriber attrition and net MRR 
attrition are similar to those used by other security alarm companies, there 
can be no assurance that gross subscriber attrition and net MRR attrition, as 
presented by the Company, are comparable to other similarly titled measures 
of other alarm monitoring companies. During Fiscal 1997, the Company 
experienced gross attrition of approximately 10.6% and net MRR attrition of 
approximately 10.4%.



                                          29


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

    In July 1996, the Company completed a restructuring of its long-term 
debt. The Company obtained the $15,000,000 Credit Line from the Bank and 
issued $7,500,000 of Preferred Stock to institutional and individual domestic 
and foreign investors. The proceeds of the financing were utilized to repay 
the Company's long-term indebtedness and resulted in a substantial decrease 
in the Company's interest expense. As of September 15, 1997, the Company had 
$2,615,000 available under the Credit Line. Amounts outstanding under the 
Credit Line bear interest at the Bank's prime rate, plus 1 3/4%. As of March 
31, 1997 and June 30, 1997, the Company was not in compliance with certain 
financial covenants under the Credit Line. The Company subsequently entered 
into amendments to the Credit Line which amended the covenants for the third 
and fourth quarters of the fiscal year ended June 30, 1997 such that the 
Company was then in compliance with the Credit Line.  There can be no 
assurance that the Company will maintain compliance with the financial 
covenants under the Credit Line, or the the Company will be able to obtain 
necessary consents, waivers or amendments to the Credit Line in the future. 
The restructuring resulted in an extraordinary charge of $2,549,708 for early 
extinguishment of debt in Fiscal 1997. The Company's working capital 
decreased by $6,991,428, from $5,967,623 to a working capital deficiency of 
$1,023,805 at June 30, 1997, as compared to June 30, 1996. On June 30, 1996, 
the Company recorded a preferred stock subscription receivable for 
$6,525,000, from Preferred Stock subscribed with a par value of $7,500,000, 
net of related placement fees of $975,000 paid from the proceeds at the 
closing. With the proceeds received from the issuance of Preferred Stock on 
July 2, 1996 and $10,500,000 from the Credit Line, the Company paid off notes 
payable used to finance its growth through acquisitions, with balances 
aggregating $12,235,000. The Company believes its cash flows from operations 
will be sufficient to fund the Company's interest payments on its debt and 
capital expenditures, which are the Company's principal uses of cash other 
than the acquisitions of portfolios of subscriber accounts.

    Net cash used in operating activities was $3,538,693 for Fiscal 1997, as 
compared to $1,990,415 for Fiscal 1996. A net loss of $11,177,623 (which 
included non-cash charges for depreciation and amortization of $2,976,433, 
compensation expense in connection with the issuance of stock options and 
employment contracts of $3,689,700 and an extraordinary charge for the early 
extinguishment of debt of $2,549,708) was the primary reason for cash used in 
operating activities. Other significant changes included changes in 
inventory, accounts payable and accrued expenses, deferred revenues, and loss 
on available-for-sale securities. The increase in inventory of $146,263 was 
attributable to an anticipated increase in future orders for PERS by both 
private label wholesalers and home health care agencies. Accounts payable and 
accrued expenses decreased by $582,205, primarily due to costs related to 
both the Credit Line (see Note 7 of Notes to Consolidated Financial 
Statements of the Company) and the issuance of Preferred Stock (see Note 9 of 
Notes to Consolidated Financial Statements of the Company) having been 
accrued at June 30, 1996 and remitted in July 1997. Deferred revenue 
increased by $390,395, as a result of the acquisition of subscriber accounts 
from other alarm dealers and the continued success of the Company's extended 
warranty program. During Fiscal 1997, management concluded that a decline in 
the fair value of its available-for sale securities was not temporary and 
therefore recorded a loss on such securities of $218,000.

    Net cash used in investing activities for Fiscal 1997 was $4,472,965, as
compared to $6,359,878 for Fiscal 1996. The purchase of monitoring contracts
during Fiscal 1997 accounted for $3,863,360 of the cash used in investing
activities. Other investing activities included costs incurred in connection
with the joint venture of $12,810, and the purchase of property and 


                                          30
<PAGE>

equipment of $636,659 (including equipment used for rentals in the amount of
$150,000), which was offset by the proceeds from the sale of equipment of
$39,864.

    Net cash provided by financing activities was $6,783,443 for Fiscal 1997,
as compared to $10,117,614 for Fiscal 1996. Net proceeds of $6,487,551 were
received from the issuance of Preferred Stock in July 1996. Proceeds from the
exercise of stock options and warrants totaled $447,745. Net proceeds received
from the Credit Line (see Note 7 of Notes to Consolidated Financial Statements
of the Company), along with the proceeds from the Preferred Stock issuance
totaling $21,700,000, were used to pay off notes payable totaling $12,235,000
and for the purchase of monitoring contracts. Principal payments on long-term
debt, excluding notes payable paid off with the Credit Line and Preferred Stock
proceeds, totaling approximately $3,100,000, were made during Fiscal 1997.

    Systems filed a petition for reorganization under Chapter 11 of the 
United States Bankruptcy Code in October 1987. Systems' Plan of 
Reorganization became effective in February 1990 and provided for, among 
other things, long-term payments to creditors totaling approximately 
$2,800,000. As of June 30, 1997, deferred payment obligations to such 
pre-reorganization creditors totaled $273,560, which is payable in varying 
installments through the year 2000.

    The Company has no material commitments for capital expenditures during the
next 12 months and believes that its current cash and working capital position
and future cash flow from operations will be sufficient to meet its working
capital needs for 12 months. The Company intends to use borrowings under the
Credit Line to acquire monitoring contracts. Additional funds beyond those
currently available will be required to continue the acquisition program, and
there can be no assurance that the Company will be able to obtain such
financing.

INFLATION

    The Company does not believe that inflation  has a material effect on its 
operations.

CERTAIN NON-CASH CHARGES

    The Company may incur certain non-cash charges (i) of up to $900,000 for 
the fiscal year ended June 30, 1998, as deferred compensation expense 
relating to certain performance options granted to two officers of USS, based 
upon fluctuations in the market price of the Common Stock, and (ii) for the 
fiscal year ended June 30, 1998 in connection with the issuance of a certain 
performance warrant issued to BKR, Inc. in connection with the Company's 
Investment in HealthLink, based upon the value of such warrant. See Notes 3 
and 13 of Notes to Consolidated Financial Statements of the Company.  Such 
charges could have a material adverse effect on the Company's results of 
operations.

ITEM 7.  FINANCIAL STATEMENTS

         The response to this Item is submitted as a separate section of this
report commencing on page F-1.

                                          31


<PAGE>

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

         The firm of Fishbein & Company, P.C. ("Fishbein") audited the 
financial statements of the Company for the fiscal years ended June 30, 1990 
through June 30, 1996.  On July 2, 1997, the Board of Directors of the 
Company determined not to appoint Fishbein to audit the financial statements 
of the Company for the fiscal year ended June 30, 1997.  On July 3, 1997, 
pursuant to a vote of the Board of Directors, the firm of Deloitte & Touche 
LLP was selected to audit the financial statements of the Company for the 
year ended June 30, 1997.

         The report of Fishbein on the Company's financial statements for the 
previous years did not contain an adverse opinion or a disclaimer of opinion, 
and was not qualified or modified as to uncertainty, audit scope, or 
accounting principles.  During the entire period of the engagement of 
Fishbein, through July 2, 1997, there had been no disagreement on any matter 
of accounting principles or practices, financial statement disclosure, or 
auditing scope or procedure, which disagreement, if not resolved to 
Fishbein's satisfaction, would have caused Fishbein to make reference in 
connection with its reports to the subject matter of the disagreement.

                      BALANCE OF PAGE INTENTIONALLY LEFT BLANK.

                                          32


<PAGE>

                                       PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The current executive officers and directors of the Company are set forth
below:
 
<TABLE>
<CAPTION>
NAME                                      AGE                                    POSITION
------------------------------------      ---      ---------------------------------------------------------------------
<S>                                   <C>          <C>
Richard M. Brooks(1)................          48   Chief Executive Officer, President, Chief Financial Officer and
                                                   Chairman of the Board
Ronald A. Feldman...................          34   Vice President, Chief Operating Officer, Secretary-Treasurer and
                                                   Director
Todd E. Herman......................          43   Director, President of USS
Robert M. Rubin(1)..................          57   Director
Stuart Levin........................          37   Director
Bruce H. Luehrs(1)(2)...............          44   Director
Stuart R. Chalfin(1)(2).............          56   Director
</TABLE>
 
------------------------
 
(1) Member of Audit Committee
 
(2) Member of Stock Option Committee
 
    Directors are elected to serve until the next annual meeting of stockholders
and until their successors have been elected and have qualified. Directors do
not receive remuneration for their services as such, but may be reimbursed for
expenses incurred in connection therewith, such as the cost of travel to Board
meetings. Under the Credit Line, the Bank is entitled to cause the Company to
nominate one person to the Company's Board of Directors. Bruce H. Luehrs is
currently the Bank's nominee. Officers serve at the pleasure of the Board of
Directors until their successors have been elected and have qualified.
 
    RICHARD M. BROOKS  has been Chief Executive Officer and Chairman of the
Company since July 1994, a director of the Company since August 1990, and has
served as the President and Chief Financial Officer of the Company since
February 1990. Mr. Brooks was Chief Operating Officer of the Company from
February 1990 until July 1994. From August 1986 to February 1990, Mr. Brooks was
general counsel to Systems. Mr. Brooks served as Regional Counsel Mid-Atlantic
Region for the Interstate Commerce Commission from May 1979 to March 1983 and
was a senior attorney for the United States Treasury Department from March 1974
to April 1979. Mr. Brooks received his Bachelor of Science Degree in Business
Administration in June 1970 from Temple University, and graduated from Temple
University School of Law in 1973.
 
    RONALD A. FELDMAN  has been a director and Secretary-Treasurer of the
Company since August 1990 and Chief Operating Officer since July 1994. He has
also served as the Secretary and Treasurer of Systems from June 1990 and Vice
President of the Company since April 1992. From August 1986 through September
1989, he was the supervisor of Systems' manufacturing operations and supervised
the Company's monitoring activities since March 1987. Mr. Feldman attended
Temple University from 1980 to 1982.
 
    TODD E. HERMAN  has been a Director of the Company since February 1995 and
President of USS since 1984. Mr. Herman was also Vice President of Investech
Properties, Inc., a private investment and development firm, from 1984 through
1990. Mr. Herman received his Bachelor of Science degree in Business
Administration from Washington University of St. Louis, Missouri in 1975 and
graduated from Seton Hall School of Law in 1982. Mr. Herman is a Certified
Public Accountant.
 
    ROBERT M. RUBIN  has been a Director of the Company since October 1991. Mr.
Rubin has served as Chairman of Connectsoft Communications Corporation, a
developmental stage company, since June 1997. Mr. Rubin has also served as
Chairman of the Board of Directors of American United Global, Inc.

                                       33
<PAGE>

("AUGI") since May 1991, and was its Chief Executive Officer from May 1991 to 
January 1994. Since January 1996, Mr. Rubin has also served as President and 
Chief Executive Officer of AUGI. Mr. Rubin was the founder, President, Chief 
Executive Officer and a director of Superior Care, Inc. ("SCI") from its 
inception in 1976 until May 1986. Mr. Rubin continued as a director of SCI 
(now known as Olsten Corporation ("Olsten")) until late 1987. Olsten, a New 
York Stock Exchange listed company, is engaged in providing home care and 
institutional staffing services and health care management services. Mr. 
Rubin is Chairman of the Board and a minority stockholder of ERD Waste 
Technology, Inc. ("ERD"), a diversified waste management public company 
specializing in the management and disposal of municipal solid waste, 
industrial and commercial non-hazardous waste and hazardous waste. In 
September 1997, ERD filed for protection under Chapter 11 of the United 
States Bankruptcy Code. Mr. Rubin is a former director and Vice Chairman, and 
currently a minority stockholder, of American Complex Care, Incorporated 
("ACCI"), a public company formerly engaged in providing on-site health care 
services, including intra-dermal infusion therapies. In April 1995, ACCI's 
operating subsidiaries made an assignment of their assets for the benefit of 
creditors without resort to bankruptcy proceedings. Mr. Rubin is also the 
Chairman of the Board of Western Power & Equipment Corp. ("Western") and 
Chairman of the Board of IDF International, Inc. ("IDF"), both public 
companies. Western, a 56.6%-owned subsidiary of AUGI, is engaged in the 
distribution of construction equipment, principally manufactured by Case 
Corporation. IDF, a 58%-owned subsidiary of AUGI, is engaged in providing 
construction consulting services to businesses and municipalities and site 
acquisition, architectural and engineering services for the cellular 
communications industry. Mr. Rubin is also a director and a minority 
stockholder of Diplomat Corporation, a public company engaged in the 
manufacture and distribution of baby products.
 
    STUART LEVIN  has been a Director of the Company since February 1994. Mr.
Levin has been employed by the Company as its Director of Operations since
October 1991 and Director of the Company's home health care division, since
April 1994. Prior to October 1991, Mr. Levin held management positions with
Tandy Corporation, and was the President of W.A.S., Inc., a food distribution
company. Mr. Levin attended Temple University from 1978 to 1980.
 
    BRUCE H. LUEHRS  has been a Director of the Company since September 1997.
Mr. Luehrs has an extensive background in venture capital, mergers and
acquisitions and commercial and investment banking. In September 1996, Mr.
Luehrs formed Penn Valley Capital ("PVC"), which provides advisory services to
companies in transition due to periods of rapid growth or financial difficulty.
From July 1995 to September 1996, Mr. Luehrs was a principal with Columbia
Capital Corporation, a merchant bank focusing on the telecommunications
industry. From June 1992 to July 1995, Mr. Luehrs served as Executive Vice
President and Chief Financial Officer of Seaview Thermal Systems, a
technology-driven environmental services company. From February 1990 through
March 1992, Mr. Luehrs was a principal of PNC Equity Management, an equity fund
affiliated with PNC Corporation. Mr. Luehrs received his undergraduate degree in
economics from Duke University and his Masters in Management from Northwestern
University.
 
    STUART R. CHALFIN  has been a Director of the Company since September 1997.
Since 1975, Mr. Chalfin has been a principal of Fishbein & Company, P.C.,
independent public accountants, where he specializes in advising closely held
businesses and professionals. Mr. Chalfin is affiliated with the Committee on
Relations with Colleges and Universities and the Linda Creed Foundation and is a
member of the American Institute of Certified Public Accountants.

                                          34


<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

<TABLE>
<CAPTION>
                                                                                            LONG-TERM COMPENSATION AWARDS
                                               ANNUAL COMPENSATION                  ---------------------------------------------
                               ---------------------------------------------------                 SECURITIES
                                                                OTHER ANNUAL         RESTRICTED    UNDERLYING       LONG-TERM
NAME AND PRINCIPAL                              BONUS           COMPENSATION            STOCK       OPTIONS/     INCENTIVE PLAN
  POSITION            YEAR     SALARY ($)        ($)               ($)(1)             AWARD(S)      SARS (#)         PAYOUTS
------------------  ---------  -----------  -------------  -----------------------  -------------  -----------  -----------------
<S>                 <C>        <C>          <C>            <C>                      <C>            <C>          <C>
 
Richard M. Brooks,       1997   $ 220,673        --                  --                  --           708,333(2)        --
  President, Chief       1996   $ 217,980        --                  --                  --            --              --
  Executive              1995   $ 175,003        --                  --                  --            --              --
  Officer and
  Chief Financial
  Officer
 
Ronald A. Feldman,       1997   $ 137,307        --                  --                  --           260,067(2)        --
  Chief Operating        1996   $ 135,654        --                  --                  --            --              --
  Officer,               1995   $ 106,495        --                  --                  --            --              --
  Vice President,
  Secretary
  and Treasurer
 
<CAPTION>
                          ALL OTHER
NAME AND PRINCIPAL      COMPENSATION
  POSITION                   ($)
------------------  ---------------------
<S>                 <C>
Richard M. Brooks,           --
  President, Chief           --
  Executive                  --
  Officer and
  Chief Financial
  Officer
Ronald A. Feldman,           --
  Chief Operating            --
  Officer,                   --
  Vice President,
  Secretary
  and Treasurer
</TABLE>
 
------------------------
 
(1) Excludes perquisites and other personal benefits, securities and properties
    otherwise categorized as salary or bonuses which in the aggregate, for each
    of the officers listed above did not exceed the lesser of either $50,000
    or 10% of the total annual salary reported for such person.
 
(2) Such options were originally granted in prior periods; however, on June 15,
    1997, the Company reduced the exercise price of such options from $2.50 per
    share to $1.50 per share. On June 27, 1997, the Company further reduced the
    exercise price of such options from $1.50 per share to $0.01 per share. See
    "Management -- Reduction of Exercise Price of Certain Stock Options."


                        OPTION GRANTS IN LAST FISCAL YEAR

    The following table sets forth information concerning options granted to 
or held by the Named Executive Officers during the fiscal year ended June 30, 
1997:

<TABLE>
<CAPTION>

                                                                  INDIVIDUAL GRANTS
                             ---------------------------------------------------------------------------------------
                                                            PERCENT OF
                                                          TOTAL OPTIONS
                              NUMBER OF SECURITIES          GRANTED TO
                               UNDERLYING OPTIONS          EMPLOYEES IN       EXERCISE OR BASE
NAME                                GRANTED                FISCAL YEAR          PRICE ($/SH)         EXPIRATION DATE
----                         ---------------------        -------------       -----------------      ---------------
<S>                                 <C>                     <C>                  <C>                  <C>
Richard M. Brooks . . . . . .      708,333(1)                 42.7%                 $.03              11/14/04

Ronald A. Feldman . . . . . .      260,067(1)                 15.4%                 $.03              11/14/04

</TABLE>
---------------------

(1) Such options were originally granted in prior periods; however, on June 
    15, 1997, the Company reduced the exercise price of such options from $2.50
    per share to $1.50 per share. On June 27, 1997, the Company further reduced 
    the exercise price of such options from $1.50 per share to $0.01 per 
    share. See "Management -- Reduction of Exercise Price of Certain Stock 
    Options."

                                          35


<PAGE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END 
                     OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                 NUMBER                   VALUE OF
                                                                 OF SECURITIES            UNEXERCISED IN-
                                                                 UNDERLYING               THE-MONEY
                                                                 UNEXERCISED              OPTIONS/SARS 
                                         SHARES       VALUE      SARS AT FY-END           AT FY-END
                                         ACQUIRED ON  REALIZED   EXERCISEABLE/            EXERCISEABLE/
NAME                                     EXERCISE #   ($)        UEXERCISEABLE            UNEXERCISEABLE(1)

<S>                                     <C>           <C>         <C>                  <C>
Richard Brooks, President, Chief          ---           ---      708,333/0              $1,586,666/0
Executive and Financial Officer

Ronald A. Feldman, Chief Operating        ---           ---      260,067/0                $582,550/0
Officer, Vice President, Secretary
and Treasurer
</TABLE>

(1) The value of unexercised options is determined by multiplying the number 
    of options held by the difference between the closing price of the Common 
    Stock of $2 1/4 at June 30, 1997, as reported by the Nasdaq SmallCap 
    Market, and the exercise price of the options.

EMPLOYMENT AND CONSULTING AGREEMENTS 

    Mr. Brooks and Mr. Feldman each have employment agreements, expiring June
30, 2000, to act in the capacities listed above for the Company. Such agreements
provide for initial annual base salaries of $225,000 and $150,000, respectively.
The Credit Line provides that the salaries and bonuses received by
 
                                          36
<PAGE>

Messrs. Brooks and Feldman in any fiscal year shall not exceed $225,000 and
$150,000, respectively. Under their employment agreements, Messrs. Brooks and
Feldman also receive life insurance, disability, hospitalization, major medical,
vacation and other employee benefits, reimbursement of reasonable business
expenses incurred on behalf of the Company, a non-accountable expense allowance
of up to $1,000 per month, in the case of Mr. Brooks, and $500 per month, in the
case of Mr. Feldman, and use of Company-owned vehicles. The employment
agreements are terminable only upon certain circumstances, such as for cause,
disability and death, and if terminated for any other reason, such employees
shall be entitled to receive the present value of all compensation and benefits
through June 30, 2000. The Company maintains and is the beneficiary of key
person life insurance policies in the amount of $3,000,000 and $1,000,000 on the
lives of Messrs. Brooks and Feldman, respectively.
 
    In addition to cash compensation and other benefits, in connection with
amendments to their employment agreements executed in August 1992, Messrs.
Brooks and Feldman received options to purchase 133,333 and 85,067 shares of
Common Stock, respectively, at a price equal to $3.75. These options are
exercisable until November 14, 2004. Messrs. Brooks and Feldman also received
options to purchase 600,000 and 200,000 shares of Common Stock, respectively,
awarded under the Company's Non-Qualified Stock Option Plan. In November 1995,
the exercise price on Messrs. Brooks' and Feldman's options were reduced to the
prevailing market price of $2.50 and subsequently reduced to $1.50 on June 15,
1997 and to $0.01 on June 27, 1997. During February 1996, Messrs. Brooks and
Feldman both exercised options to purchase 25,000 shares of Common Stock.
 
    Mr. Herman and John Colehower have employment agreements with USS, expiring
March 4, 1999, to act as President and Treasurer of USS and Vice President of
USS, respectively. Such agreements provide for an initial base salary of
$120,000, and may be increased at the discretion of the Board of Directors of
the Company, as well as certain additional payments and benefits based upon
increases in the Company's subscriber accounts. As a result of such additional
payments made to Messrs. Herman and Colehower, the Company recorded deferred
compensation expenses of $1,657,500. Under their employment agreements, Messrs.
Herman and Colehower also receive life insurance, disability, hospitalization,
major medical, vacation and other employee benefits. The employment agreements
are terminable only upon certain circumstances, such as for cause, disability
and death or, for any other reason, upon 90 days' written notice.
 
    In addition to cash compensation and other benefits, Messrs. Herman and
Colehower received options to purchase 300,000 shares each of Common Stock at an
exercise price of $1.50. These options were subject to a vesting schedule, which
schedule has been accelerated such that all of such options are fully vested.
 
    Robert M. Rubin, a Director of the Company, has performed consulting 
services for the Company in the past. In February 1993, Mr. Rubin was issued 
a warrant to purchase 5,000 shares of Common Stock at $5.00 per share, in 
consideration of services to the Company. The exercise price of such warrant 
was subsequently reduced to $.008 per share and the warrant was exercised. In 
September 1994, Mr. Rubin was granted options to purchase 5,000 shares of 
Common Stock at the prevailing market price of $.8125, which options were 
exercised. In February 1995, Mr. Rubin was granted options to purchase 
150,000 shares of Common Stock at a price of $3.75 per share, which options 
are exercisable for a period of ten years. In November 1995, Mr. Rubin was 
granted options to purchase 150,000 shares of Common Stock at the prevailing 
market price of $2.50 and  in November 1995, the exercise price of Mr. 
Rubin's options granted in February 1995 were reduced to the prevailing 
market price of $2.50. (See Note 10 of Notes to Consolidated Financial 
Statements of the Company). On June 27, 1997, the exercise price of all of 
Mr. Rubin's options was reduced to $0.01. On October 1, 1994, Mr. Rubin 
entered into a consulting agreement with the Company pursuant to which he was 
paid an annual consulting fee of $60,000 for a period of two years. The 
agreement was terminated on April 30, 1996, at which time Mr. Rubin converted 
outstanding loans in the amount of $200,000 into 252,624 shares of Common 
Stock and converted subordinated debentures in the amount of $101,329 into 
202,659 shares of Common Stock. See "Management" and "Principal Stockholders."

INCENTIVE STOCK OPTION PLAN 

    In March 1992, the Company's Board of Directors and stockholders adopted 
and approved an Incentive Stock Option Plan ("ISO Plan"). The ISO Plan 
provides for the grant to key employees of the Company of stock options 
intended to qualify as "incentive stock options" under the provisions of 
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). A 
total of 40,000 shares of Common Stock have been reserved for issuance under 
the ISO Plan, all of which shares have been granted as of the date hereof. 
The ISO Plan is administered by a committee of the Board of Directors which, 
among other things, has the sole discretion to select optionees and determine 
the number of shares covered by each option, its exercise price and certain 
of its other terms. The exercise price of options granted under the ISO Plan 
may not be less than the fair market value of the Company's Common Stock on 
the date of grant, and not less than 110% of such fair market value in the 
case of participants owning more than 10% of the Company's Common Stock. 
Options expire no later than 10 years after they are granted (five years 
after grant in the case of participants owning more than 10% of the Company's 
Common Stock). The number of shares for which the optionee may exercise an 
option in any calendar year is limited to option shares with an aggregate 
fair market value, determined at the time the option is granted, which does 
not exceed $100,000. The $100,000 limit for any calendar year is subject to 
further reduction by the fair market value of any stock (determined at the 
time of option grant) for which the

                                       37
<PAGE>

employee was granted an option under any Company plan during such calendar year.
Options terminate three months after the optionee ceases to be employed by the
Company unless the optionee's employment is terminated by reason of disability,
in which case, the options shall expire following one year after such employment
termination. The committee has the right to accelerate the expiration date in
certain events. Options granted under the ISO Plan are not transferable, except
by will or the law of descent and distribution.

NON-QUALIFIED STOCK OPTIONS 

         In August 1990, the Company's Board of Directors approved a
Nonqualified Stock Option Plan (the "NQO Plan") pursuant to which the Company
may grant stock options to directors, officers, key employees and consultants. 
A total of 10,357 shares of Common Stock were reserved for issuance under the
NQO Plan, all of which shares have been granted as of June 30, 1997.  Options
shall terminate six months after the optionee ceases to be employed by the
Company or any subsidiary, regardless of the cause for termination.

                                          38


<PAGE>

REDUCTION OF EXERCISE PRICE OF CERTAIN STOCK OPTIONS

         On June 15, 1997, the Company reduced the exercise price of options 
to purchase 1,868,400 shares of Common Stock granted to officers, directors, 
and a key employee of the Company, from $2.50 to $1.50, or the prevailing 
market price.  On June 27, 1997, the Company further reduced the exercise 
price of options to purchase 1,268,400 shares of Common Stock granted to 
officers and directors of the Company, from $1.50 to $0.01, which resulted 
in a compensation expense of $1,889,916.

                                          39


<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of June 30, 1997, the record and beneficial
ownership of Common Stock of the Company by each officer and director, all
officers and directors as a group, and each person known to the Company to own
beneficially or of record five percent or more of the outstanding shares of the
Company:

<TABLE>
<CAPTION>
                                               NUMBER OF             PERCENTAGE OF
NAME AND ADDRESS*                              SHARES OWNED          SHARES
                                               BENEFICIALLY (1)      OUTSTANDING

<S>                                             <C>                  <C>
Richard M. Brooks (2)                                710,315             11.8%

Ronald A. Feldman (3)                                262,067              4.7%

Robert M. Rubin (4)                                  527,281              9.4%
9450 Aegean Drive
Boca Raton, FL 33496

Stuart Levin (5)                                      14,500              0.3%

Todd E. Herman (6)                                   308,000              5.5%

John Colehower (6)                                   301,500              5.4%

BKR, Inc. (7)                                      1,094,164             20.6%

Stuart R. Chalfin                                        -0-               ---

Bruce H. Luehrs                                          -0-               ---

Officers and Directors as a                        1,822,163             26.4%
group (seven persons) (8)
</TABLE>

*   Unless otherwise specified, the address of each named person is c/o
Response USA, Inc., 11-H Princess Road, Lawrenceville, New Jersey.

(1) Shares of Common Stock which are not outstanding but which a person has the
    right to acquire within sixty days pursuant to outstanding options are
    deemed outstanding for the purpose of computing such person's ownership of
    Common Stock and percentage of 

                                          40


<PAGE>

    outstanding Common Stock owned by such person, but are not deemed to be
    outstanding for the purpose of computing number of shares or the percentage
    of Common Stock owned by any other person.

(2) Includes 708,333 shares issuable upon exercise of currently exercisable
    options.  See "Management -- Employment and Consulting Agreements." 

(3) Includes 260,067 shares issuable upon exercise of currently exercisable
    options.  See "Management -- Employment and Consulting Agreements." 


(4) Mr. Rubin's wife and children own 5,520 shares of Common Stock, as to which
    Mr. Rubin disclaims beneficial ownership.  Includes 300,000 shares issuable
    upon exercise of currently exercisable options. See 
    "Management--Employment and Consulting Agreements.''

(5) Of which 14,500 shares are issuable upon exercise of currently exerciseable
    options.

(6) Of which 300,000 shares are issuable upon exercise of currently exercisable
    options. See "Management--Employment and Consulting Argeements.''


(7) The address of BKR, Inc. is 7944 East Beck Lane, Suite 210, Scottsdale, 
    Arizona 85260.

(8) Includes 1,582,900 shares issuable upon exercise of currently 
    exercisable options referred to in notes 2,3,4,5 and 6 above.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         None.

OTHER TRANSACTIONS 


         None.

                       BALANCE OF PAGE INTENTIONALLY LEFT BLANK

                                          41






<PAGE>
                                    PART IV
 
Item 13. Exhibits and Reports on Form 8-K
 
    (a) Exhibits (numbered in accordance with Item 601 of Regulation S-B).
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                               DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
     2(a)    Agreement and Plan of Reorganization dated August 9, 1990, by and among the Company (Corsica Capital
             Corp.), Management of Corsica Capital Corp. and Lifecall Systems, Inc.
     2(b)    Plan and Agreement of Merger dated March 18, 1992 by and between Response USA, Inc. (Delaware) and
             Lifecall America, Inc.
     2(c)    Delaware Certificate of Ownership and Merger Merging Response USA, Inc., a Nevada Corporation with
             and into its wholly-owned subsidiary Response USA, Inc., a Delaware corporation
     2(d)    Nevada Articles of Merger of Response USA, Inc. (formerly Lifecall America, Inc.), a Nevada
             corporation, into Response USA, Inc., a Delaware corporation
     3(a)    Certificate of Incorporation of the Company
     3(b)    Bylaws of the Company
     4(a)    Form of Common Stock Certificate
     4(b)    Form of Warrant Agreement
     4(c)    Form of Class A Warrant Certificate
     4(d)    Form of Class B Warrant Certificate
     4(e)    Form of Class C Warrant Certificate
     4(f)    Form of Preferred Warrant Certificate
     4(h)    Incentive Stock Option Plan of the Company adopted by the Company's Board on March 18, 1992, and
             approved by the Company's stockholders on March 1992
     4(i)    Restricted Stock Option Plan of the Company adopted by the Company's Board on August 20, 1990, as
             amended August 30, 1991, January 2, 1992 and March 18, 1992
    10(a)    Lifecall Systems, Inc. Third Amended Plan of Reorganization with Order Affirming Third Amended Plan
             of Reorganization dated January 9, 1990
    10(b)    Employment Agreement dated August 28, 1992, by and between the Company and Richard R. Brooks, and
             Addendum thereto dated October 1, 1992, as amended
    10(c)    Employment Agreement dated August 28, 1992, by and between the Company and Ronald A. Feldman, and
             Addendum thereto dated October 1, 1992, as amended
    10(d)    Employment Agreement dated March 4, 1994, by and among the Company, USS and Todd Herman
    10(e)    Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower
    10(f)    Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company
    10(g)    Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems,
             Inc.
    10(h)    Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company
    10(i)    Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.
    10(j)    Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997
    10(k)    Agreement dated as of June 18, 1997, by and among the Company and the holder of the Preferred Stock
             who are signatories thereto
    11       Statement re: computation of earnings (loss) per share
    21       Subsidiaries of the registrant
    23(a)    Consent of Deloitte & Touche LLP
    23(b)    Consent of Fishbein & Company, PC
    23(c)    Consent of Terry H. Jones, CPA
    24       Power of Attorney
    27       Financial Data Schedule
 
      (b)    Reports on Form 8-K -- The Company has not filed any Reports on Form 8-K during the last quarter of
             the fiscal year.
</TABLE>
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS


                                                                          PAGE
                                                                          ----

RESPONSE USA, INC. AND SUBSIDIARIES

Independent Auditors' Report for the Fiscal Year Ended 
 June 30, 1997.........................................................    F-2

Independent Auditors' Report for the Fiscal Year Ended
 June 30, 1996.........................................................    F-3

Consolidated Balance Sheets at June 30, 1997...........................    F-4

Consolidated Statements of Operations for the Fiscal 
 Years Ended June 30, 1996 and June 30, 1997...........................    F-6

Consolidated Statements of Stockholders' Equity for 
 the Fiscal Years Ended June 30, 1996 and June 30, 1997................    F-7

Consolidated Statement of Cash Flows for the Fiscal 
 Years Ended June 30, 1996 and June 30, 1997...........................    F-8

Notes to Consolidated Financial Statements.............................   F-13


TRIPLE A SECURITY SYSTEMS, INC.

Independent Auditors' Report...........................................   F-37

Balance Sheets at December 31, 1996 and December 31, 1995..............   F-38

Statements of Income and Retained Earnings for the Years
 Ended December 31, 1996 and December 31, 1995.........................   F-39

Statements of Cash Flows for the Years Ended December 31, 
 1996 and December 31, 1995............................................   F-40

Notes to Financial Statements..........................................   F-41

RESPONSE USA, INC. AND SUBSIDIARIES

Unaudited Pro Forma Financial Statements...............................   F-51

Unaudited Pro Forma Condensed Consolidated Balance Sheet
 at June 30, 1997......................................................   F-52

Unaudited Pro Forma Condensed Consolidated Statement of Operations 
 for the Fiscal Year Ended June 30, 1997...............................   F-53

Notes to Unaudited Pro Forma Financial Statements......................   F-54


                                      F-1


<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors of Response USA, Inc.:

We have audited the accompanying consolidated balance sheet of Response USA, 
Inc. as of June 30, 1997 and the related consolidated statements of 
operations, stockholders' 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 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 statement presents fairly, in all material 
respects, the financial position of the Company as of June 30, 1997 and the 
results of its operations and cash flows for the year then ended in 
conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 8, 1997


                                       F-2

<PAGE>

Stockholders and Directors
Response USA, Inc. and Subsidiaries
Lawrenceville, New Jersey


                          INDEPENDENT AUDITORS' REPORT


    We have audited the consolidated balance sheet (not included herein) of 
RESPONSE USA, INC. AND SUBSIDIARIES as of June 30, 1996, and the related 
consolidated statements of operations, stockholders' equity and cash flows 
for the year then ended. These consolidated financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above 
present fairly, in all material respects, the consolidated financial position 
of Response USA, Inc. and Subsidiaries as of June 30, 1996, and the 
consolidated results of their operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting 
principles.

    As discussed in Note 9, the Company has retroactively reclassified an 
amount from the preferred stock account into additional paid-in capital. 



                                                   FISHBEIN & COMPANY, P.C.

Elkins Park, Pennsylvania
August 22, 1996 (March 13, 1997
 as to the last paragraph hereof)


                                       F-3

<PAGE>




                      RESPONSE USA, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                    AT JUNE 30, 1997
                                                                                    ----------------
<S>                                                                                  <C>

                                       ASSETS
CURRENT ASSETS
  Cash.............................................................................  $     698,551
  Marketable securities............................................................         75,000
  Accounts receivable--Current portion
    Trade-Net of allowance for doubtful accounts of $437,208.......................      1,443,203
    Net investment in sales-type leases............................................         89,124
  Preferred stock subscription receivable..........................................  
  Inventory........................................................................        798,814
  Prepaid expenses and other current assets........................................        271,087
                                                                                     -------------
      Total current assets.........................................................      3,375,779
                                                                                     -------------
MONITORING CONTRACT COSTS--Net of accumulated amortization of $5,217,345...........     18,433,133
                                                                                     -------------
PROPERTY AND EQUIPMENT--Net of accumulated depreciation and amortization of
  $2,363,067.......................................................................      1,512,077
                                                                                     -------------
OTHER ASSETS
  Accounts receivable--Noncurrent portion
    Trade..........................................................................         49,046
    Net investment in sales-type leases............................................        179,752
  Deposits.........................................................................         45,310
  Investment in joint venture......................................................      3,139,484
  Deferred compensation expense....................................................        892,500
  Deferred financing costs--Net of accumulated amortization of $254,154............      3,612,727
                                                                                     -------------
                                                                                         7,918,819
                                                                                     -------------
                                                                                     $  31,239,808
                                                                                     -------------
                                                                                     -------------
</TABLE>

                     See notes to consolidated financial statements

                                      F-4



<PAGE>
                      RESPONSE USA, INC. AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEETS
                              (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                   AT JUNE 30, 1997
                                                                                   ----------------
<S>                                                                                 <C>


                             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Current portion of long-term debt
    Notes payable.................................................................  $      100,329
    Capitalized lease obligations.................................................          57,453
  Accounts payable--Trade.........................................................         556,205
  Purchase holdbacks..............................................................         415,765
  Accrued expenses and other current liabilities..................................       1,288,332
  Deferred revenue................................................................       1,981,500
                                                                                    --------------
      Total current liabilities...................................................       4,399,584
                                                                                    --------------
LONG-TERM LIABILITIES--Net of current portion
  Long-term debt
    Notes payable.................................................................      12,435,287
    Capitalized lease obligations.................................................          85,435
  Deferred compensation expense...................................................       2,550,000
                                                                                    --------------
                                                                                        15,070,722
                                                                                    --------------

COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY
  Preferred stock--Par value $1,000
    Authorized 250,000 shares
      Issued and outstanding 6,890 shares.........................................       7,757,783
  Common stock--Par value $.008
    Authorized 12,500,000 shares
      Issued and outstanding 5,309,206 shares.....................................          42,474
  Additional paid-in capital......................................................      35,411,194
  Accumulated deficit.............................................................     (31,441,949)
                                                                                    --------------
                                                                                        11,769,502
                                                                                    --------------
                                                                                    $   31,239,808
                                                                                    --------------
                                                                                    --------------
</TABLE>
 
                     See notes to consolidated financial statements

                                       F-5



<PAGE>
                      RESPONSE USA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED JUNE 30,
                                                                      -----------------------------
<S>                                                                   <C>            <C>
                                                                          1996            1997
                                                                      -------------  --------------
OPERATING REVENUES
  Product sales.....................................................  $   2,352,449  $    2,938,618
  Monitoring and service............................................      8,515,247       9,784,285
                                                                      -------------  --------------
                                                                         10,867,696      12,722,903
                                                                      -------------  --------------
COST OF REVENUES
  Product sales.....................................................      1,718,689       1,970,158
  Monitoring and service............................................      1,779,490       2,127,257
                                                                      -------------  --------------
                                                                          3,498,179       4,097,415
                                                                      -------------  --------------
GROSS PROFIT........................................................      7,369,517       8,625,488
                                                                      -------------  --------------
OPERATING EXPENSES
  Selling, general and administrative...............................      6,416,486       9,126,641
  Compensation--Options/Employment contracts........................                      3,689,700
  Depreciation and amortization.....................................      2,200,894       2,976,433
  Interest..........................................................      3,185,603       1,349,480
                                                                      -------------  --------------
                                                                         11,802,983      17,142,254
                                                                      -------------  --------------
LOSS FROM OPERATIONS................................................     (4,433,466)     (8,516,766)
                                                                      -------------  --------------
OTHER INCOME/(EXPENSE)
  Interest income...................................................         21,568          12,176
  Joint venture loss................................................                       (123,325)
                                                                      -------------  --------------
                                                                             21,568        (111,149)
                                                                      -------------  --------------
LOSS BEFORE EXTRAORDINARY ITEM......................................     (4,411,898)     (8,627,915)
EXTRAORDINARY ITEM
  Loss on debt extinguishment.......................................                      2,549,708
                                                                      -------------  --------------
NET LOSS............................................................     (4,411,898)    (11,177,623)
  Dividends and accretion on preferred stock........................                     (6,876,521)
                                                                      -------------  --------------
NET LOSS APPLICABLE TO COMMON
  SHAREHOLDERS......................................................  $  (4,411,898) $  (18,054,144)
                                                                      -------------  --------------
                                                                      -------------  --------------
Loss per common share
  Loss before extraordinary item....................................  $       (2.87) $        (1.93)

  Extraordinary item................................................                           (.57)
                                                                      -------------  --------------
  Net loss..........................................................  $       (2.87) $        (2.50)
                                                                      -------------  --------------
                                                                      -------------  --------------
  Net loss applicable to common shareholders........................  $       (2.87) $        (4.05)
                                                                      -------------  --------------
                                                                      -------------  --------------
Weighted average number of shares outstanding.......................      1,536,537       4,462,721
                                                                      -------------  --------------
                                                                      -------------  --------------
</TABLE>
 
                     See notes to consolidated financial statements

                                      F-6



<PAGE>
                      RESPONSE USA, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
                                                                                                               UNREALIZED
                                                                                                                 HOLDING
                                                 PREFERRED STOCK              COMMON STOCK                      LOSSES ON
                                              ----------------------  ---------------------------  ADDITIONAL  AVAILABLE-
                                                NUMBER                    NUMBER                    PAID-IN     FOR-SALE
                                               OF SHARES    AMOUNT      OF SHARES       AMOUNT      CAPITAL    SECURITIES
                                              -----------  ---------  --------------  -----------  ----------  -----------
<S>                                           <C>          <C>        <C>             <C>          <C>         <C>

Balance--June 30, 1995......................                               798,520     $   6,388  $11,438,358   $ (68,343)
 
Exercise of stock options and warrants......                             1,455,300        11,643    4,421,100
 
Conversion of convertible subordinated
  promissory notes--Net of related costs of
  $383,088..................................                             1,116,986         8,936    2,842,976
 
Acquisitions................................                               309,043         2,472      818,086
 
Issuance of common stock for consulting
  services..................................                                 2,000            16        8,109
 
Issuance of common stock as payment of notes
  payable...................................                               173,095         1,385      665,736
 
Sale of preferred stock.....................       7,500   $1,605,000                               4,756,875
 
Unrealized holding losses on
  available-for-sale securities.............                                                                     (125,000)
 
Net loss....................................
                                              -----------  ---------  --------------  -----------  ----------  -----------
 
Balance--June 30, 1996......................       7,500    1,605,000    3,854,944        30,840    24,951,240   (193,343)
 
Accretion on preferred stock due to
  intrinsic value of conversion feature.....                5,895,000
 
Discount on and deemed dividends on
  preferred stock...........................                  876,521
 
Exercise of stock options and warrants......                               166,950         1,336      406,617
 
Issuance of warrants to consultants.........                                                          689,000
 
Repricing of stock purchase warrants........                                                        2,848,765
 
Conversion of convertible subordinated
  promissory notes--Net of related costs of
  $5,068....................................                                11,110            89       44,843
 
Acquisitions................................                                41,700           334       74,666
 
Issuance of stock options...................                                                        2,032,200

Investment in joint venture.................                             1,094,164         8,753    3,291,247

<CAPTION>

                                              ACCUMULATED
                                                DEFICIT       TOTAL
                                              ------------  ----------
<S>                                           <C>           <C>
                                              ------------  ----------
Balance--June 30, 1995......................  $(8,975,907)  $2,400,496
Exercise of stock options and warrants......                 4,432,743
Conversion of convertible subordinated
  promissory notes--Net of related costs of
  $383,088..................................                 2,851,912
Acquisitions................................                   820,558
Issuance of common stock for consulting
  services..................................                     8,125
Issuance of common stock as payment of notes
  payable...................................                   667,121
Sale of preferred stock.....................                 6,361,875
Unrealized holding losses on
  available-for-sale securities.............                  (125,000)
Net loss....................................   (4,411,898)  (4,411,898)
                                              ------------  ----------
Balance--June 30, 1996...................... ($13,387,805) $13,005,932
Accretion on preferred stock due to 
  intrinsic value of conversion feature.....   (5,895,000)           0
Discount on and deemed dividends on
  preferred stock...........................     (876,521)           0
Exercise of stock options and warrants......                   407,953
Issuance of warrants to consultants.........                   689,000
Repricing of stock purchase warrants........                 2,848,765
Conversion of convertible subordinated
  promissory notes--Net of related costs of
  $5,068....................................                    44,932
Acquisitions................................                    75,000
Issuance of stock options...................                 2,032,200
Investment in joint venture.................                 3,300,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                                               UNREALIZED
                                                                                                                 HOLDING
                                                 PREFERRED STOCK              COMMON STOCK                      LOSSES ON
                                              ----------------------  ---------------------------  ADDITIONAL  AVAILABLE-
                                                NUMBER                    NUMBER                    PAID-IN     FOR-SALE
                                               OF SHARES    AMOUNT      OF SHARES       AMOUNT      CAPITAL    SECURITIES
                                              -----------  ---------  --------------  -----------  ----------  -----------
<S>                                           <C>          <C>        <C>             <C>          <C>         <C>
 
Conversion of preferred stock...............        (610)   (618,738)      190,338         1,522      617,216
 
Issuance of warrants to preferred
  shareholders..............................                                                          105,000
 
Issuance of warrants in connection with
  obtaining lines of Credit.................                                                          350,000
 
Cancellation of common stock held in
  escrow....................................                               (50,000)         (400)         400
 
Unrealized holding losses on available-for-
  sale securities recognized in 1997........                                                                      193,343
 
Net loss....................................
                                              -----------  ---------  --------------  -----------  ----------  -----------
 
Balance--June 30, 1997......................       6,890  $7,757,783     5,309,206    $   42,474  $35,411,194  $        0
                                              -----------  ---------  --------------  -----------  ----------  -----------
                                              -----------  ---------  --------------  -----------  ----------  -----------
 
<CAPTION>
 
                                              ACCUMULATED
                                                DEFICIT        TOTAL
                                              ------------   ----------
<S>                                           <C>            <C>
Conversion of preferred stock...............                          0
Issuance of warrants to preferred
  shareholders..............................     (105,000)            0
Issuance of warrants in connection with 
  obtaining lines of Credit.................                    350,000
Cancellation of common stock held in
  escrow....................................                          0
Unrealized holding losses on available-for-
  sale securities recognized in 1997........                    193,343
Net loss....................................  (11,177,623)  (11,177,623)
                                              ------------   ----------
Balance--June 30, 1997......................  ($31,441,949) $11,769,502
                                              ------------   ----------
                                              ------------   ----------
</TABLE>

                     See notes to consolidated financial statements


                                     F-7
<PAGE>

                           RESPONSE USA, INC. AND SUBSIDIARIES
                           CONSOLIDATED STATEMENT OF CASH FLOWS


                                                        YEAR ENDED JUNE 30,
                                                        ------------------
                                                        1996          1997
                                                        ----          ----

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Loss........................................   ($4,411,898)  ($11,177,623)
  Adjustments to reconcile net loss to net cash
    used in operating activities
      Amortization of monitoring contract costs...     1,765,744      2,378,969
      Depreciation and amortization of property
        and equipment............................        435,150        547,464
      Gain on sale of monitoring contracts........       (91,663)
      Loss on sale of property and equipment......        39,851         15,389
      Loss on available-for-sale securities.......                      218,343
      Amortization of deferred financing costs and
        debt discount.............................        85,324        389,674
      Amortization of goodwill (see Note 3).......                       50,000
      Loss on joint venture.......................                      123,325
      Issuance of common stock for interest on
        note payable..............................        11,849
      Issuance of common stock for consulting fees         8,125
      Issuance of warrants for consulting fees....                      689,000
      Compensation expense in connection with the
        issuance of stock options and employment
        agreements................................                    3,689,700
      (Increase) decrease in accounts receivable
        Trade.....................................      (423,709)       (29,004)
        Net investment in sales-type leases.......        31,344         53,843
      Decrease in notes receivable
        Related party.............................        50,000
        Other.....................................        92,879
      Increase in inventory.......................          (171)      (146,263)
      Increase in prepaid expenses and other
        current assets............................       (13,203)      (152,397)
      Decrease in deposits........................         9,014          2,697
      Increase (decrease) in accounts payable-
        trade.....................................       (78,479)       130,672
      Increase (decrease) in accrued expenses and
        other current liabilities.................       196,940       (712,877)
      Increase in deferred revenues...............       302,488        390,395
                                                      ----------     ----------

        Net cash used in operating activities.....    (1,990,415)    (3,538,693)
                                                      ----------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES
  Investment in joint venture.....................                      (12,810)
  Proceeds from the sale of monitoring contracts..       298,938
  Purchase of monitoring contracts (net of
    purchase holdbacks)...........................    (6,210,340)    (3,863,360)
  Proceeds from the sale of property and equipment        11,422         39,864
  Purchase of property and equipment..............      (459,898)      (636,659)
                                                      ----------    -----------

       Net cash used in investing activities......    (6,359,878)    (4,472,965)
                                                      ----------    -----------

                     See notes to consolidated financial statements

                                      F-8


<PAGE>
                      RESPONSE USA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                          INCREASE (DECREASE) IN CASH
                                  (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED JUNE 30,
                                                                      -----------------------------
                                                                          1996            1997
                                                                      -------------  --------------
<S>                                                                   <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from the issuance of preferred stock.....................                      7,500,000
  Costs incurred in connection with the preferred stock issuance....                     (1,012,449)
  Costs incurred in connection with common stock issuances..........                        (34,220)
  Deferred financing costs incurred.................................       (952,537)         22,761
  Convertible subordinated promissory notes issued in connection
    with private placements.........................................      1,960,000
  Proceeds of long-term notes payable...............................      6,963,891      15,235,000
  Principal payments on long-term debt Notes payable................     (2,244,495)    (15,292,934)
  Capitalized lease obligations.....................................        (41,988)        (82,460)
  Net proceeds from the exercise of stock options and warrants......      4,432,743         447,745
                                                                      -------------  --------------
      Net cash provided by financing activities.....................     10,117,614       6,783,443
                                                                      -------------  --------------
NET INCREASE (DECREASE) IN CASH.....................................      1,767,321      (1,228,215)
CASH--BEGINNING.....................................................        159,445       1,926,766
                                                                      -------------  --------------
CASH--ENDING........................................................  $   1,926,766  $      698,551
                                                                      -------------  --------------
                                                                      -------------  --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash paid during the year for interest............................  $   3,012,698  $    1,280,340
  Cash paid (received) during the year for income taxes-- Net.......       --              --
</TABLE>
 

                     See notes to consolidated financial statements

                                       F-9



<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                               STATEMENT OF CASH FLOWS
                                     (Continued)

        SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES

         During the years ended June 30, 1996 and 1997, convertible 
subordinated promissory notes of $3,235,000 and $50,000, respectively, were 
converted to common stock.  The Company reduced deferred financing costs and 
additional paid-in capital in the amount of $383,088 and $5,068, during the 
years ended June 30, 1996 and 1997, respectively.

         During the years ended June 30, 1996 and 1997, long-term notes payable
of $63,933 and $74,028, respectively, were incurred for the purchase of property
and equipment.

         During the years ended June 30, 1996 and 1997, capitalized lease
obligations of $43,933 and $143,100, respectively, were incurred for the
acquisition of property and equipment.

         During the years ended June 30, 1996 and 1997, the Company reduced
monitoring contract costs and the corresponding purchase holdbacks in the amount
of $838,174 and $306,808, respectively.  The Company issued 13,966 shares of its
common stock, valued at $67,781, as payment for purchase holdbacks during the
year ended June 30, 1996.

         During the year ended June 30, 1996, the Company increased monitoring
contract costs and the corresponding transition costs liability (included in
accrued expenses and other current liabilities) in the amount of $525,647.

    During the years ended June 30, 1996 and 1997, the Company issued 309,043
and 41,700 shares of its common stock, valued at $820,558 and $75,000,
respectively, in connection with acquisitions (see Note 2).  The amount includes
15,000 shares valued at $70,311 issued as payment of deferred financing costs
during the year ended June 30, 1996.

         During the year ended June 30, 1996, the Company recorded a 
preferred stock subscription receivable of $6,525,000; for preferred stock 
subscribed with a par value of $7,500,000, net of the related placement fees 
of $1,138,125 (of which $975,000 was paid from the proceeds at closing, and 
$163,125 was included in accrued expenses and paid subsequently).  The 
Company recorded a discount on the preferred stock of $5,895,000.  


                                          F-10
<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                               STATEMENT OF CASH FLOWS
                                     (Continued)

        SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
                                           
         During the year ended June 30, 1997, the Company recorded accretion 
to preferred stock in the amount of $5,895,000 with a corresponding charge to 
accumulated deficit. The accretion represents the intrinsic value of the 
beneficial conversion feature contained within the preferred stock (see Note 9).

         During the year ended June 30, 1997, the Company recorded $350,000 
as additional paid-in capital, related to the issuance of warrants to a 
consultant in connection with the sale of preferred stock.

         During the year ended June 30, 1997, the Company recorded a deemed 
dividend in the amount of $704,271 in connection with the preferred stock 
issuance, with a corresponding charge to accumulated deficit (see Note 9).  
As a result of the beneficial conversion feature within the preferred stock 
dividend, the Company recorded a discount on preferred stock in the amount of 
$172,250.

         During the year ended June 30, 1997, $610,000 of preferred stock and
$8,738 in deemed dividends were converted into 190,338 shares of Common stock.

         During the year ended June 30, 1997, the Company recorded additional
paid-in capital of  $105,000, with a corresponding charge to accumulated
deficit, to reflect the fair value of the additional warrants issued to the
preferred shareholders.

         During the year ended June 30, 1997, the Company issued 1,094,164
shares of its common stock, valued at $3,300,000 in connection with a joint
venture (see Note 3).

         During the year ended June 30, 1997, in connection with the repricing
of stock purchase warrants, the Company recorded deferred financing costs and
additional paid-in capital of $2,848,765.

         During the year ended June 30, 1997, the Company reduced amounts
receivable-trade and accounts receivable - net investment in sales-type leases
in the amount of $28,088 and $126,482, respectively, and recorded monitoring
contract costs of $154,570, in connection with the purchase of monitoring
accounts.

         During the year ended June 30, 1997, the Company recorded consulting
fees in the amount of $689,000 in connection with the exercise of warrants.

                                          F-11


<PAGE>


                         RESPONSE USA, INC. AND SUBSIDIARIES
                               STATEMENT OF CASH FLOWS
                                     (Continued)
                                           
        SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCIAL ACTIVITIES

         During the year ended June 30, 1996, the Company issued 173,095 shares
of its common stock, valued at $667,121, as payment on notes payable.

         During the year ended June 30, 1996, the Company issued 2,000 shares
of its common stock, valued at $8,125 as payment for consulting services.

                       BALANCE OF PAGE INTENTIONALLY LEFT BLANK

                                          F-12



<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    PRINCIPLES OF CONSOLIDATION 

         The accompanying consolidated financial statements include the
accounts of Response USA, Inc. (USA), its wholly-owned subsidiaries Response
Ability Systems, Inc. (RAS), United Security Systems, Inc. (USS), and Emergency
Response Systems, Inc. (ERS) (the "Company). All significant intercompany
transactions and balances have been eliminated.

    NATURE OF BUSINESS AND REVENUE RECOGNITION

         The Company is a fully-integrated security systems provider engaged 
in the monitoring, sale, installation and maintanance of residential and 
commercial security systems and personal emergency response systems ("PERS"). 
The Company is a regional provider of security alarm monitoring services for 
residential and small business subscribers operating in the states of New 
York, New Jersey, Pennsylvania, Delaware and Connecticut. The Company is also 
a nationwide provider of PERS products which enable individual users, such as 
elderly or disabled persons, to transmit a distress signal using a portable 
transmitter which is part of the PERS. Revenues from personal emergency 
response system sales are recognized upon shipment. Revenues under contracts 
for monitoring and service are deferred and recognized ratably over the 
contract period. Revenues from the sale of security and fire alarm systems 
are recognized when installed.

         The Company leases equipment to customers principally under sales-type
leases. The lease payments to be received over the term of the leases are
recorded as receivables at the inception of the lease. Interest income
attributable to the lease contracts is initially recorded as unearned income and
subsequently recognized as finance revenue using the interest method over the
term of the leases. The lease contracts are generally for five-year terms and
the residual value of the leased equipment is nominal at the end of the lease
period.

         The Company also leases certain equipment to customers under
month-to-month operating leases, with revenues recognized as income ratably over
the lease terms.

         The Company sells extended warranty and product maintenance contracts
to its customers. Revenues from these contracts are deferred and recorded as
income using the straight-line method over the term of the contracts. The
Company also provides for estimated future warranty costs as necessary.

    USE OF ESTIMATES

         The presentation 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.

                                         F-13


<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    CONCENTRATION OF CREDIT RISK

         The Company's products are sold directly and through distributors in
the United States to hospitals, home healthcare agencies and individual
consumers. The Company  performs  ongoing credit evaluations of its customers
and, in the case of sales-type leases, the leased equipment serves as collateral
in the transactions. The Company maintains reserves for potential credit losses.

    MARKETABLE SECURITIES 

         The Company's investments in marketable securities have been
categorized as available-for-sale and are stated at fair value. Realized gains
and losses, determined using the specific identification method, are included in
operations; unrealized holding gains and losses are reported as a separate
component of stockholders' equity.

         Marketable securities consist of an investment in the common stock of
one company. During 1997, management concluded that a decline in the fair value
of this common stock was not temporary and recorded a writedown of $218,343
which is included in selling, general and administrative expenses.

    ALLOWANCE FOR DOUBTFUL ACCOUNTS

         An allowance for doubtful accounts is provided by the Company based on
historical collection experience and a review of the current status of existing
receivables.

    INVENTORY

         Inventory is stated at the lower of cost (first-in, first-out method)
or market.

    MONITORING CONTRACT COSTS AND AMORTIZATION

         Monitoring contracts acquired are stated at cost. The costs of
acquired monitoring contracts includes the costs of accounts purchased and any
contractual rights to related monitoring revenues purchased from alarm system
dealers and emergency response system dealers, and the estimated fair value of
the accounts acquired in business acquisitions, including an accrual for
estimated acquisition  transition costs. The estimated transition costs include
costs associated with transferring the customers to the Company's central
monitoring station, notification of change in service provider, and service
calls to customer  premises. Costs related to sales, marketing and installation
of systems for accounts internally generated are charged to expense as incurred.

                                         F-14


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         The Company records purchase holdbacks, in connection with its
acquisitions of monitoring contracts, as a liability for delinquent accounts and
for future cancellations within an agreed upon time period. Monitoring contract
costs and the corresponding purchase holdback liabilities are reduced for
delinquent accounts and cancellations as specified in each agreement.

         The costs of acquired monitoring contracts purchased from emergency
response system dealers and alarm system dealers are amortized using the
straight-line method over estimated lives ranging from five to ten years. It is
the Company's policy to periodically review actual account attrition and, if
necessary, to adjust downward the remaining estimated lives of acquired account
pools to reflect their anticipated future revenue streams.

    PROPERTY AND EQUIPMENT AND DEPRECIATION AND AMORTIZATION

         Property and equipment are stated at cost. Expenditures for additions,
renewals and betterments are capitalized; expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation or amortization are eliminated
from the accounts and any resulting gain or loss is credited or charged to
operations. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets.

    DEFERRED FINANCING COSTS AND AMORTIZATION

         Costs incurred in connection with various financing have been
deferred; amortization is provided using the straight-line method over  the
terms of the financing, and is included in interest expense.

    IMPAIRMENT OF LONG-LIVED ASSETS 

         The Company reviews long lived assets and intangbles for impairment
whenever events or changes in circumstances indicate that the carrying value of
the asset may not be recoverable.  The Company determines the value of
subscriber accounts based on the cash flows from the monthly recurring revenue
(MRR) stream using the most recent historical attrition rate.

    ACCOUNTING FOR STOCK-BASED COMPENSATION

         The Company accounts for transactions in which goods or services are
received in return for the issuance of equity instruments based on the fair
value of the equity instruments or the goods or services received, whichever is
more reliably measured.

                                         F-15


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    NEW ACCOUNTING PRONOUNCEMENTS

         In December 1996, the Financial Accounting Standards Board ("FASB") 
issued SFAS No. 125, ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL 
ASSETS, which the Company has adopted for its fiscal year ended June 30, 
1997. SFAS No. 125 did not have any effect on the Company's financial 
position or results of operations for its year ended June 30, 1997, and the 
Company does not anticipate any material impact on the financial statements 
of the registrant.

         In February 1997, the FASB issued SFAS No. 128, STANDARDS FOR 
COMPUTING AND PRESENTING EARNINGS PER SHARE (EPS), which will be adopted by 
the Company in the year ended June 30, 1998, as required by this statement. 
When adopted, SFAS No. 128 will not have any effect on the Company's 
financial position or results of operations but will require the Company to 
provide expanded disclosure regarding EPS computations.

         In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE 
INCOME. This statement, which establishes standards for reporting and 
disclosure of comprehensive income, is effective for interim and annual 
periods beginning after December 15, 1997. Reclassification of financial 
information for earlier periods presented for comparative purposes is 
required under SFAS No. 130. As this statement only requires additional 
disclosures in the Company's financial statements, its adoption will not have 
any impact on the Company's financial position or results of operations. The 
Company expects to adopt SFAS No. 130 effective July 1, 1998.

         In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT 
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This statement, which 
establishes standards for the reporting of information about operating 
segments and requires the reporting of selected information about operating 
segments in financial statements, is effective for fiscal years beginning 
after December 15, 1997. reclassification of segment information for earlier 
periods presented for comparative purposes is required under SFAS No. 131. As 
this statement only requires additional disclosures in the Company's 
financial statements, its adoption will not have any impact on the company's 
financial position or results of operations. The Company expects to adopt 
SFAS No. 131 effective July 1, 1998.

                                         F-16


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    INCOME TAXES

         The liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. Also, the tax benefits resulting from
the utilization of net operating loss carryforwards are recorded as ordinary
income. A valuation allowance is established for deferred tax assets not
expected to be realized.

         Principal differences between the Company's financial reporting and
tax bases include accounts receivable reserves, inventory reserves, depreciation
and amortization of property and equipment, amortization of capitalized costs,
and deferred revenue.

    LOSS PER COMMON SHARE

         Loss per common share is computed based on the weighted average number
of common shares outstanding during each period after deducting dividends and
accretion on preferred stock. The effect of common stock equivalents on loss per
share is not applicable for loss periods.

2. ACQUISITIONS

         During the year ended June 30, 1996, the Company purchased  monitoring
contracts for an aggregate of $7,996,459. As consideration, the Company paid
$5,638,637 in cash, incurred acquisition costs of $525,647, recorded purchase
holdbacks of $1,081,928 (which are payable over periods of up to eighteen months
based on performance guarantees of the seller), and issued 294,043 shares of its
common stock valued at $750,247. As part of the acquisitions, the Company also
issued 15,000 shares of restricted common stock valued at $70,311 as payment of
financing costs to the lender that financed the acquisitions.

                                         F-17


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. ACQUISITIONS (CONTINUED)

         On March 27,1997, the Company completed the acquisition of all the 
outstanding common stock of Reliable-Hawk, Inc. (RHI), a New Jersey 
corporation, after giving effect to RHI's distribution to its stockholders of 
all of its net assets other than monitoring and service contracts. 
Reliable-Hawk, Inc. is engaged in the installation, servicing and monitoring 
of electronic security systems. In consideration of the acquisition with a 
cost of $1,743,181, the Company paid $1,469,503 in cash, incurred acquisition 
costs of $35,400, recorded purchase holdbacks of $163,278, and issued 25,000 
shares of its common stock valued at $75,000. Proforma results of the Company 
for 1997 giving effect for the RHI acquisition as if it had occurred on July 
1, 1996 are not materially different from the actual results of the Company 
for 1997. The following represents total assets acquired and the liabilities 
assumed:

Assets
  Monitoring Contracts                                             $1,707,781
  Acquisition costs (assigned to monitoring contracts)                 35,400
                                                         --------------------

Total Purchase Price                                               $1,743,181
                                                         ====================

         During the year ended June 30, 1997, the Company purchased additional
monitoring contracts for an aggregate of $2,425,344. As consideration, the
Company paid $1,955,209 in cash, reduced amounts receivable by $154,570,
incurred acquisition costs of $69,541, and recorded purchase holdbacks of
$246,024 (which are payable over periods of up to twenty-one months based on
performance guarantees of the seller). 

3. INVESTMENT IN JOINT VENTURE

         On March 4, 1997, the Company entered into a purchase agreement with
BKR, Inc. (BKR), a Nevada corporation and HealthLink, Ltd. (HL), a Nevada
limited liability company. The parties  agreed to the purchase by the Company of
a 50% interest in the assets of BKR, the contribution of BKR's remaining 50%
interest in the assets to HL, and the contribution of the Company's 50% interest
in BKR's assets to HL. HL is engaged in the sale and monitoring of personal
emergency response systems, (PERS) to the general public primarily through
national retail and pharmacy chains. In consideration of the Joint Venture, the
Company issued 1,094,164 shares of its common stock, valued at $3.3 million, to
BKR for their 50% interest in Healthlink Ltd.

         At the date of the Company's investment in Healthlink, the investment
in Healthlink exceeded the Company's share of the underlying net assets by
$1,500,000.  The excess is being amortized by the straight line method over 10
years.

                                         F-18


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3. INVESTMENT IN JOINT VENTURE (CONTINUED)

The Company's investment in Healthlink at June 30, 1997 is summarized as
follows: 

             Initial Investment                                   $3,312,809
             Cumulative equity in net losses of Healthlink          (123,325)
             Cumulative authorization of Goodwill                    (50,000)
                                                                  ----------

             Total                                                $3,139,484
                                                                  ----------
                                                                  ----------

         The Company accounts for its investment in HL under the equity method.

         BKR , as part of the purchase agreement, is entitled to exercise
warrants to purchase shares of the Company's common stock subject to the
following provisions: (i) for each 10,000 PERS placed on-line by HL, 30,000
shares of common stock may be purchased at an exercise price of $3.00 per share,
and (ii) in no event shall this Warrant be exercisable to purchase more than
450,000 shares of common stock. This Warrant may be exercised in whole or in
part at any time, or from time to time, commencing on March 4, 1997 and expiring
on March 3, 2002.

         The following summary of financial data has been derived from the
unaudited Financial Statements of Healthlink, Ltd. for the four months ended
June 30, 1997:

                  Operating Revenues                                $305,750
                  Cost of Revenues                                   192,059
                                                                     -------
                  Gross Profit                                       113,691
                  Selling, general and administrative 
                  expense                                            355,962

                  Interest expense                                     4,380
                                                                   ----------

                  Net Loss                                         $(246,651)
                                                                   ----------
                                                                   ----------

                  Current Assets                                    $117,870
                  Working capital (deficiency)                      (117,391)
                  Total Assets                                     3,568,176
                  Current Liabilities                                235,621
                  Stockholders' equity                            $3,332,915



                                         F-19


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4. NET INVESTMENT IN SALES-TYPE LEASES

         Information pertaining to the Company's net investment in sales-type
leases is as follows:

Minimum lease payments receivable                                   $363,052
Less: Unearned Interest--Finance revenue                             (65,976)
Allowance for doubtful accounts                                      (28,200)
                                                                    --------

Net Investment in sales-type leases                                 $268,876
                                                                 ===========



         At June 30, 1997, minimum lease payments are receivable as follows:

         YEAR ENDING JUNE 30,

                  YEAR ENDING JUNE 30,

                           1998                                     $127,683
                           1999                                       93,413
                           2000                                       76,776
                           2001                                       55,083
                           2002                                       10,097
                                                             ----------------

                                                                    $363,052
                                                             ================

5.  INVENTORY

                      Parts Inventory                               $613,646
                      Finished Goods                                 185,168
                                                             ----------------

                                                                    $798,814
                                                             ================

                                         F-20

<PAGE>

6. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                 Estimated
                                                                 useful lives
<S>                                                            <C>                     <C>
             Machinery and equipment                             5 years                   $16,715
             Office furniture and equipment                      5 years                 2,496,405
             Equipment held for lease                            5 years                   800,555
             Automotive equipment                                3 years                   343,576
             Leasehold improvements                              5 years                   217,893
                                                                                   ----------------

                                                                                         3,875,144

             Less accumulated depreciation and amortization                              2,363,067
                                                                                   ----------------

                                                                                        $1,512,077
                                                                                   ================
</TABLE>



                     REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.

                                         F-21


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7. LONG-TERM NOTES PAYABLE

<TABLE>

LINE OF CREDIT AGREEMENT 
<S>                                                                     <C>
    Note payable with interest only due through June 30, 2000 at prime 
    Plus 1-3/4% on the outstanding loan balance; a commitment 
    fee of .5% is payable on the average daily unused credit; 
    collateralized by all assets of the Company                         $ 12,235,000

    EQUIPMENT FINANCING 

    Payable in monthly installments aggregating $ 4,557 including interest 
    at rates ranging from 3.90% to 11.83%; final payments due April, 1997
    through March, 2000; collateralized by related equipment                  88,950

    REORGANIZATION DEBT

    As part of the 1990 plan of reorganization of a 1987 bankruptcy, the U.S.
    Bankruptcy Court approved a 30.5% settlement on the total unsecured claims 
    submitted; payments are due March 1 of each year, as follows: 3% ($86,817) 
    each year -- 1998 through 2000; interest imputed at 14%; net of 
    imputed interest of $ 58,894                                             201,557

    Federal priority tax claims payable in annual installments of $2,211
    through March, 1999, and $ 1,896 thereafter                               10,109
                                                                              ------

                                                                          12,535,616
    Less Current Portion                                                     100,329
                                                                             -------

                                                                         $12,435,287
                                                                          ----------
                                                                          ----------
</TABLE>

         Principal payments on long-term notes payable for the next five years
are due as follows: Years ending June 30, 1998 - $100,329; 1999 - $103,146; 2000
- $12,228,020; 2001 - $1,896;  2002 - $1,896.

         On June 30,1996, the Company entered into a four-year $15,000,000
revolving bank line of credit agreement. Loans outstanding bear interest at
prime plus 1-3/4%, are collateralized by all assets of the Company, and are
subject to certain restrictive covenants.  The Company was not in compliance
with certain covenants as of June 30, 1997. (see Note 15, Subsequent Events).
The agreement also provides for a commitment fee payable monthly in arrears, of
 .5% based on the average daily unused credit. As of June 30, 1997, the Company
has available on its revolving credit facility the amount of $2,765,000.  The
Company is prohibited from declaring dividends while any outstanding balance
exists under the line of credit.

                                         F-22


<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. LONG-TERM NOTES PAYABLE (CONTINUED)

         In connection with obtaining the line of credit, the Company issued a
stock purchase warrant (the Warrant) to an affiliate of the bank which provided
the line of credit. The terms of this Warrant, which were subsequently modified
(see below), included the following: (i) number of shares, 1,032,135; (ii)
exercise price, $3.25 per share; (iii) expiration date, June 30, 2006; and (iv) 
    put obligation feature, which the Holder of the warrant can require, during
the period between July 1, 2000 and June 30, 2001 upon 10 days notice, the
Company to purchase the Warrant for the difference between the market price of
the Company's common stock and the exercise price times  1,032,135 shares.

         The Company recorded deferred financing costs of approximately 
$6,800,000 related to the fair market value of the warrant (based on an 
independent valuation) and a related put obligation payable amount. The 
deferred financing costs were originally to be amortized over the life of the
related line of credit (four years) using the straight-line method.  The put 
obligation and the deferred financing costs were adjusted quarterly based 
upon the value (market price less exercise price of the obligation).

         On June 24, 1997, the Company, in return for the holder of the Warrant
forgiving the put obligation feature, reduced the exercise price of the Warrant
to $1.50. This resulted in the Company recording deferred financing costs for
the difference between the unamortized value of the old warrant and the fair 
market value of the new warrant ($2,848,768 based on an independent
valuation), crediting additional paid-in capital for the same amount. The
remaining deferred financing costs will be amortized using the straight-line
method over the remaining life of the line of credit.

                       BALANCE OF PAGE INTENTIONALLY LEFT BLANK

                                         F-23


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7. LONG-TERM NOTES PAYABLE (CONTINUED)

         On August 13, 1997 the Holder exercised the Warrant and received
321,789 shares of common stock and blank check preferred stock convertible into
306,958 shares of common stock. 
No cash was paid by the Warrant holder.

         Also in connection with this agreement, the Company issued warrants to
a consultant to purchase 100,000 shares of the Company's common stock at an
exercise price of $4.50 per share; these warrants expire June 30, 2000. The
value of these warrants ($350,000) is being amortized over four years.

         With the proceeds received from the issuance of preferred stock (see
Note 9) and a $10,500,000 advance on July 1, 1996, from a line of credit, the
Company paid off notes payable with balances aggregating $12,072,668 at June 30,
1996 plus a prepayment penalty. The prepayment penalty of $2,415,877 and
unamortized deferred financing costs of $133, 831 associated with the notes paid
have been recorded as an extraordinary item during the year ended June 30, 1997.

8. CAPITALIZED LEASE OBLIGATIONS

         The Company leases office furniture and equipment with a cost of
$245,808 and a net book value of $188,462 at June 30, 1997, under capital
leases. The following is a schedule by years of future minimum lease payments
under these leases together with the present value of the net minimum lease
payments as of June 30, 1997.

         YEAR ENDING JUNE 30,

                       1998                                           $70,069
                       1999                                            51,061
                       2000                                            43,933
                       2001                                             -----
                       2002                                             -----
                                                         ---------------------
           Total minimum lease payments                               165,063
         Less amount representing interest                             22,175

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

    Present value of net minimum lease payments                      $142,888
                                                         =====================



                                         F-24


<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. PREFERRED STOCK

         In May, 1996, the Company authorized the issuance of 7,500 shares of
1996 - Series A Convertible Preferred Stock  with a Par Value of $1,000 per
share.  The preferred shares are convertible into a number of common shares
determined based on the premium plus $1,000, divided by the conversion price. 
The premium equates to an annual ten percent "deemed" dividend and the
conversion price is equal to the lesser of $5.00 or 80% of the average closing
bid price of the Company's common stock for the five days immediately preceding
the date of conversion.  The holders of Preferred Stock are not entitled to
receive dividends and have no voting rights.

         Up to fifty percent of the preferred stock  may be converted by the 
holder beginning 45 days after closing and the balance may be converted 
beginning 70 days after closing.  Since the convertible preferred stock 
contained a beneficial conversion feature at the date of issue, the company 
allocated a portion of the proceeds equal to the value of that feature 
($5,895,000) to additional paid-in capital. This amount was amortized over 
the 70 day minimum period  the preferred shareholders were required to hold 
the shares before conversion was allowed.  Preferred shares were then 
accreted to their face value by recording $5,895,000 charge to accumulated 
deficit.

         Due to an unexpectedly large volume of conversion requests, after 610
shares of the preferred stock were converted to common shares, the company
suspended conversion of its Series A Convertible Preferred Stock due to the 
negative impact of the conversions on the common stock price.

         Subsequent to the suspension of the conversion of the preferred stock,
three groups of preferred shareholders (Halifax Fund, L.P., Lake Management
L.D.C. and KA Investments, L.D.C.) commenced legal action to force the company
to resume conversion of the preferred stock.  In order to settle the matters of
litigation, the Company reached two separate agreements with the complainants.

         During June, 1997, all preferred shareholders, other than Halifax
Fund, L.P. received 5,000 warrants to purchase common stock of the Company for
$2.00 per share for each 100 shares of preferred stock held. Fifty percent of
said warrants are exercisable after one year from issuance and the remaining
fifty percent are exercisable after two years from issuance.  In return for the
filing by the Company of a registration statement with the SEC for the primary
issuance by the Company of securities to generate approximately $8,750,000 of
net proceeds for use by the Company to redeem all of the Preferred Stock (the
"Registration Statement"), on or before October 11, 1997, the preferred
shareholders agreed to refrain from all conversions of the preferred shares
until November 30, 1997.  The value of these warrants, $90,000, was recorded as
a dividend to the preferred shareholders.

                                         F-25


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         On June 30, 1997 the company reached an agreement with Halifax Fund,
L.P. where the company agreed to convert the 1,000 shares of preferred stock
owned by this group into 900,000 shares of the company's common stock and
assisted in locating a purchaser for the 900,000 shares from the preferred
shareholders for a total of $1,500,000.  The company also issued to these former
preferred shareholders 5,000 warrants to purchase common stock of the company
for $2.00 per share for each 100 shares of preferred stock held. Fifty percent
of said warrants are exercisable after one year from issuance and the remaining
fifty percent are exercisable after two years from issuance.  The Company also
agreed to reimburse these preferred shareholders  $150,000 for legal fees.  In
the event that the Company settles with any other preferred shareholders on
terms which these shareholders, in their sole discretion, believe are better
than those they have received, these shareholders have the right to elect the
alternative settlement.

         During 1997, the Company reclassified $5,895,000 which had been 
previously reported in the 1996 financial statements as Preferred Stock to 
Additional Paid in Capital.  This was a result of March, 1997 comments by the 
Staff of the Securities and Exchange Commission regarding the treatment of 
beneficial conversion features of preferred stock.

         During 1997, deemed convertible preferred stock dividends totaling 
$704,271 were recorded relating to the preferred shares.

10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

         The Company has an Incentive Stock Option Plan which provides for 
the grant for key employees under to purchase a maximum of 40,000 shares of 
the Company's common stock, all of which have been granted. In addition, the 
Company has a Restricted Stock Option Plan which provides for the grant of 
stock options to officers, directors, employees, consultants or advisors of 
the Company to purchase a maximum of 3,453 shares of the Company's Common 
Stock, all of which have been granted. The Company has issued Incentive Stock 
Options to employees in excess of the plan and will convert the 27,050 ISO's 
to Non-Qualified Stock Options during Fiscal 1998.  

                                         F-26


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)

         On December 16, 1996, the Company granted 56,350 Non-Qualified Stock 
Options (NQO) outside of the Restricted Stock Option Plan at $.10 per share, 
expiring November 27, 2001 to employees. As a result, the Company recorded 
compensation expense and increased additional paid-in capital in the amount 
of $142,284. In addition, the Company granted 25,000 NQO's and 4,000 
Incentive Stock Options to employees at $2.625, the prevailing market price, 
expiring November 27, 2001. As of June 30, 1997, 42,450 NQO's at $.10 and 
2,500 NQO's at $3.875 were exercised. The Company recorded common stock of 
$359 and additional paid-in capital of $13,261.

         On June 15, 1997, the Company reduced the exercise price of options
for 1,868,400 shares of common stock, granted to officers, directors and a key
employee of the Company, from $2.50 to $1.50, the market price. On June 27,
1997, the Company further reduced the exercise price of options for 1,268,400
shares of common stock, granted to officers and a director of the Company, from
$1.50 to $.01, which resulted in a compensation expense of $1,889,916.

The following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                                                                              WEIGHTED 
                                                                          OPTION PRICE         AVERAGE
                                                  NUMBER OF SHARES          PER SHARE       EXERCISE PRICE

<S>                                                <C>                  <C>                  <C>
Options outstanding at June 30, 1995                      2,124,298      $3.75-70.00            $4.98
  Options granted                                           129,250      $2.50-4.45             $4.053
  Options exercised                                         (52,500)     $2.50-3.875            $2.565
  Options canceled or expired                              (192,865)     $5.00-70.00            $7.336
                                                          ---------      ----------             ------

Options outstanding at June 30, 1996                      2,008,183      $2.50-35.00            $2.637
  Options granted                                            85,350      $0.01-2.625            $0.958
  Options exercised                                         (44,950)     $0.10                  $0.31
  Options canceled or expired                                (9,625)     $3.875-35.00           $5.896
                                                          ---------      ----------             ------

Options outstanding at June 30, 1997                      2,038,958      $0.01-4.45             $0.687
                                                          ---------      ----------             ------
                                                          ---------      ----------             ------

Options exercisable at June 30, 1997                      2,038,958      $0.01-4.45             $0.687
                                                          ---------      ----------             ------
                                                          ---------      ----------             ------
</TABLE>


                                         F-27


<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  COMMON STOCK AND ADDITIONAL PAID IN CAPITAL (CONTINUED)

         The Company accounts for the Plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the Plans been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock - Based Compensation" (SFAS #123), the Company's pro forma
net loss and loss per share for June 30, 1997 and 1996 would have been as
follows:



                                           REPORTED               PRO-FORMA

1997 Net Loss                             $11,177,623            $11,368,594

1997 Net Loss applicable to Common
Shareholders                               18,054,144             18,245,115

1997 Net Loss per Common Share                   4.05                   4.09

1996 Net Loss                              $4,411,898             $8,558,764

1996 Net Loss per Share                         $2.87                  $5.57


    The weighted average fair value of the stock options during the fiscal
years ended June 30, 1996 and 1997 ranged from $1.17 to $3.81.

    The fair value of options granted under the Plans during fiscals 1996 and
1997 were estimated on the date of grant using the Black - Scholes option
pricing model with the following weighted average assumptions used:

    (i)   no dividend yield
    (ii)  expected volatility of 81% and 75% for 1996 and 1997, respectively
    (iii) risk free interest rate of between 5.81% and 6.25%
    (iv) expected lives ranging from 2 to 10 years

         During the year ended June 30, 1996, the Company issued 309,043 shares
of its common stock, valued at $820,558, in connection with acquisitions (see
Note 2).

         During the year ended June 30, 1996, the Company issued 32,000 shares
of its common stock, valued at $147,200, as payment of a note payable in
connection with the acquisition of a division of Emergency Response Systems,
Inc. (see Note 2), and issued 141,095 shares of its common stock, valued at
$519,920, as payment of notes payable to stockholders and officers (including
interest of $11,849).

         During the year ended June 30, 1996, the Company issued 2,000 shares
of its common stock, valued at $8,125, as payment for consulting services.

                                         F-28


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.  COMMON STOCK AND ADDITIONAL PAID IN CAPITAL (CONTINUED)

         The Company, in December, 1996, canceled 50,000 shares of its common
stock held in escrow, in connection with an acquisition.

         In March, 1997, the Company issued 25,000 shares of its common stock
in connection with a purchase of monitoring contracts and 16,700 shares of its
common stock pursuant to a guarantee of stock valuation in connection with an
acquisition (see Note 2).  As a result, the Company recorded common stock of
$334 and additional paid-in capital of $74,934. 

         On March 4, 1997, the Company issued 1,094,164 shares of its common
stock, valued at $3.3 million in connection with a Joint Venture (see Note 3),
pursuant to a guarantee of stock valuation.  

         During January, 1996, and February, 1996, the Company completed a
private placement of 61 units. Each unit consisted of a $25,000 10% Convertible
Subordinated Promissory Note due December 31, 1997 (the "10% Notes"), and Class
C Warrants to purchase 1,000 shares of the Company's common stock. Through June
30, 1997, all of these notes had been converted to common stock.

         The Company, as part of a consulting agreement, issued warrants to
purchase 200,000 shares of the Company's common stock at a price of $5.125;
these warrants expire April 30, 1999. Also, as part of consulting agreements,
the Company issued warrants to purchase 1,285,000 shares of the Company's common
stock at prices ranging from $2.50 to $3.50;  these warrants were exercised
during the year ended June 30, 1996.

         In connection with the issuance of the preferred stock (see Note 9),
the Company granted transferable warrants to purchase 500,000 shares of the
Company's common stock at an exercise price of $6.13 per share and 250,000
shares of the Company's common stock at an exercise price of $8.00 per share;
these warrants expire June 30, 2001. The Company also issued warrants to a
consultant to purchase 75,000 shares of the Company's common stock at an
exercise price of $4.50; these warrants expire June 30, 2000.

                                         F-29


<PAGE>

                           RESPONSE USA, INC. AND SUBSIDIARIES
                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)

         During the months July, 1996, through September, 1996, 122,000 shares
of the Company's common stock were issued as a result of the exercise of  Class
A and Class C Warrants. The Company recorded common stock of $976 and additional
paid-in capital of $466,684.

    The following is a summary of warrant activity:

<TABLE>
<CAPTION>


                                                                           NUMBER OF           EXERCISE PRICE 
                                                                           SHARES              PER SHARE

<S>                                                                        <C>                 <C>
Warrants outstanding at June 30, 1995                                    2,289,695             $2.50-4.50
    Warrants issued in connection with 13.8% Notes-Class C                  20,000             $3.26
    Warrants issued in connection with 12 % Notes - Class A                 30,667             $2.50
    Warrants issued in connection with 10% Notes -  Class C                 61,000             $5.625
    Warrants issued in connection with consulting agreements             1,485,000             $2.50-5.125
              
    Warrants issued in connection with preferred stock                     275,000             $4.50-8.00
    Warrants issued in connection with line of credit agreement          1,132,135             $1.50-4.50
    Warrants exercised in connection with 12% Notes - Class C              (29,300)            $3.75
    Warrants exercised in connection with 10% Notes - Class C              (28,500)            $5.625
    Warrants exercised in connection with consulting agreements         (1,285,000)            $2.50-3.50
                                                                     -------------            -------------
Warrants outstanding at June 30, 1996                                    3,950,697             $1.50-8.00
    Warrants issued in connection with preferred stock litigation          344,500             $2.00
    Warrants exercised in connection with 12% Notes- Class A               (30,667)            $2.50
    Warrants exercised in connection with 10% Notes- Class C               (30,000)            $5.625
                                                                     -------------            -------------
    Warrants outstanding at June 30, 1997                                4,234,530             $1.50-8.00
                                                                     =============            =============
</TABLE>

                                          F-30


<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11. INCOME TAXES

         The differences between the provision for income taxes and income
taxes computed using the federal income statutory tax rate are as follows:


<TABLE>
<CAPTION>

                                                               YEAR ENDED JUNE 30,

                                                         1996                       1997

<S>                                                   <C>                         <C>
Amount computed using the statutory rate             ($1,500,050)                ($3,800,392)

Increase (decrease) in taxes resulting from:
Prior net operating loss carryforwards
  Nondeductible expenses                                  24,400                      12,626


State taxes, net of federal taxes                       (216,900)                        -0-

Other

Federal tax valuation allowance                        1,692,550                   3,787,766
                                                   ------------------------------------------
Income taxes (benefit)                                $    --0--                  $     --0--
                                                   -------------               --------------
                                                   -------------               --------------
</TABLE>

         At June 30, 1997, the cumulative temporary differences resulted in net
deferred tax assets or liabilities consisting primarily of:



Deferred tax assets:

Accounts receivable reserves              $  186,163

Inventory reserves                             8,366

Property                                   1,069,849

Warranty reserve                              55,792

Accrued vacation accrual                      45,564

Uncollected Interest Revenue                 100,453

Deferred Expenses                            973,600

Other                                         49,330

Net operating loss carryforwards           6,752,044
                                          ----------
                                           9,241,161
Less valuation allowance                   9,241,161
                                          ----------
                                          $      -0-
                                          ----------
                                          ----------

                                         F-31


<PAGE>

                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. INCOME TAXES (CONTINUED)

For income tax reporting, the Company has net operating loss carryforwards
available to reduce future federal and state income taxes. If not used, the
carryforwards will expire as follows:

Year ending June 30,    Federal             State
    2000                ---               $ 1,191,025
    2001                ---                 3,253,300
    2002                ---                 3,206,666
    2003            $   254,200             3,491,200
    2004                 23,100             2,433,632
    2005           
    2006                 15,000        
    2007           
    2008                                      136,300
    2009              3,605,100               390,100
    2010              2,997,000               147,800
    2011              3,504,400               160,100
    2012              6,897,226               260,490
                    -----------           -----------

                    $17,296,026           $14,669,947
                    -----------           -----------
                    -----------           -----------

         The utilization of the federal net operating loss carryforwards
aggregating $277,300 expiring June 30, 2003, and 2004, are subject to an annual
limitation of $23,110 per year through June, 2004, in accordance with the
provisions of the Internal Revenue Code. This annual limitation may be adjusted
due to ownership changes in future years.

12. PROFIT SHARING PLAN

         Effective June 1, 1995, the Company established a qualified profit
sharing plan under section 401(k) of the Internal Revenue Code, covering certain
of its salaried employees. The Company contributes 50% of each participant's
elective deferral up to maximum Company contributions of  2.50% of eligible
salaries. Contributions to the plan by the Company for the years ended June 30,
1996 and 1997, were $23,008 and $36,981, respectively.

                                         F-32


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13. COMMITMENTS AND CONTINGENCIES

    EMPLOYMENT AGREEMENTS

         The Company has employment contracts with certain key personnel for
terms expiring in June 2000. The contracts provide for initial annual base
salaries aggregating $375,000.

         The Company has employment contracts with certain key personnel of USS
for terms expiring March, 1999.  The contracts provide for initial base salaries
aggregating $240,000 which are subject to incremental increases as determined by
the Board of Directors on all payments provided the following conditions are
realized: (i) if the Company increases its net alarm system subscriber accounts
by at least 10,000 accounts before March 1999, the Company shall pay each
employee $1.0 million dollars less the gross proceeds received from the sale or
exercise of their options; (ii) if the Company increases its net alarm system
subscriber accounts by at least 15,000 accounts before March, 1999, the Company
shall pay each employee $1.5 million less the gross proceeds received from the
sale or exercise of their options; and (iii) any increases in net alarm systems
between 10,000 and 15,000 account shall entitle certain employees to a pro rated
amount between $1.0 million and $1.5 million as determined in provisions (i) and
(ii) above.  As a result, the Company recorded compensation expense and a 
deferred liability at June 30, 1997 relating to such contracts.

    CONSULTING AGREEMENT

         In April, 1996, the Company entered into a two-year consulting
agreement which provides for a minimum annual fee of $42,000. In March, the
consulting agreement was terminated. As a result of the termination of the
agreement, the Company recorded a charge of $63,000 to consulting fees for the
fiscal year ended June 30, 1997.

    MONITORING AGREEMENT

         In April, 1994, the Company entered into a three-year monitoring
agreement, which has been extended through April, 2000, providing for a
minimum annual cost of $420,000 plus increases based on the number of
subscribers as defined, for monitoring services previously provided directly by
the Company. Total cost under this agreement was $494,000 and $703,470 for the
years ended June 30, 1996 and 1997, respectively.

                                         F-33


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


13. COMMITMENTS AND CONTINGENCIES (CONTINUED)

    LEASE COMMITMENTS

         The Company leases its facilities and various equipment under
operating leases expiring at various dates through December 2000. The following
is a schedule of future minimum rental payments required under these leases:


            YEAR ENDING JUNE 30,

           1998               $321,074
           1999                256,564
           2000                 40,038
           2001                 12,944
           2002                      -
                             ---------
                              $630,620
                             ---------
                             ---------


         The leases provide that the Company pay as additional rent taxes,
insurance and other operating expenses applicable to the leased premises. Total
rent expense under all operating leases aggregated $369,852 and $344,117 for the
years ended June 30, 1996 and 1997, respectively.

    CONTINGENCIES

         In the normal course of business, the Company is subject to
litigation, none of which is expected to have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company.

         As part of certain acquisitions and a joint venture, the Company has
guaranteed the value of its common stock at various prices ranging from $3.01 to
$5.00 for periods expiring at various dates through March 2000. As of June 30,
1997, the Company's contingent liabilities under these agreements aggregated
approximately $20,000, which may be settled in cash or by the issuance of common
stock; to the extent that settlement is in common stock, the holders are
entitled to piggy-back registration rights and the Company has filed a
registration statement for 94,402 shares of common stock which are expected to
be sufficient to satisfy the Company's obligation.

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amount of cash approximates its fair value because of its
short maturity. The carrying amount of marketable securities, none of which are
held for trading purposes, is fair value (see Note 1.)

         The carrying amount of the line of credit approximates its fair value
because the interest rates on this obligation approximate market rates.

                                         F-34


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         It was not deemed practicable to estimate the fair value of the
reorganization debt due to the nature of the financing arrangements.

         The carrying amount of  equipment financing and capitalized lease
obligations approximates its fair value because the interest rates on these
obligations approximate market rates.


15. SUBSEQUENT EVENTS

         On September 30, 1997, the Company, entered into an agreement with 
Triple A Security Systems, Inc. ("Triple A"), a Pennsylvania corporation, and 
Robert L. May, an individual to acquire substantially all of the assets of 
Triple A Security Systems, Inc. Triple A which is engaged in the 
installation, servicing and monitoring of electronic security systems. 

         In consideration of the acquisition of approximately 14,000 
subscriber accounts, the Company will pay Triple A an aggregate of 
approximately $12,500,000, consisting of $10,000,000 in cash and $1,750,000 
million in shares of its common stock; additionally the Company will assume 
certain liabilities totaling $750,000. Summarized financial data of Triple A 
for the years ending December 31, 1995 and 1996 is as follows:

                                                   1995             1996

             Revenues                              $5,138,532      $5,206,608
             Cost of Revenues                       2,319,741       2,652,662
                                                   ----------      ----------
             Gross Profit                           2,818,791       2,553,946
             Operating Expenses                     2,528,204       2,315,544
             Interest Expense (net)                   101,959         113,362
                                                   ----------      ----------
             Net Income                              $188,628        $125,040
                                                   ----------      ----------
                                                   ----------      ----------


         In October 1997, the Company entered into an agreement to acquire all
of the outstanding stock of Jupiter, a patrol service company.  Jupiter's patrol
services are principally supplied in areas in which the Company believes that
Triple A is a substantial provider of security systems services.  The patrol
service supplements the Company's alarm monitoring service by providing routine
patrol of a subscriber's premises and neighborhood, response to alarm system
activations and "special watch" services, such as picking up mail and newspapers
and increased surveillance when the customer is on vacation.

                                         F-35


<PAGE>
                         RESPONSE USA, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



15. SUBSEQUENT EVENTS (CONTINUED)

         On July 31, 1997, the Company  entered into an Agreement with 4R
Security ("4R Security") to acquire approximately 2,000 alarm monitoring
subscriber accounts and certain assets of 4R Security for a purchase price of
approximately $1,600,000, substantially all of which is payable in cash and a
portion of which is payable in stock, subject to certain adjustments and
holdbacks.  Since 4R has filed for protection under the United States Bankruptcy
Code, the acquisition is conditioned upon the approval by the United States
Bankruptcy Court for the Eastern District of New York.  Pursuant to the
agreement, 4R Security has agreed not to solicit or otherwise communicate with
any customer whose account was purchased by the Company for the purpose of
inducing such customer to discontinue its relationship with the  Company.  If
the acquisition is consummated, the Company will assume the balance of 4R
Security's lease for its premises in Patchogue, New York.

         On June  18, 1997, and October 1, 1997, Mellon amended certain
financial covenants in the Loan and Security Agreement dated June 30, 1996, as
follows: (i) ratio of cash flow to interest expense; (ii) ratio of senior funded
debt to cash flow; (iii) net income (loss); and (iv) capital expenditures. 
The Company believes it will be in compliance with the terms of the amended 
covenants.

         In October, 1997, the Company filed a Form SB-2 Registration Statement
under the Securities Act of 1933, offering 7,200,000 shares of Common Stock, par
value $.008 per share. The Company has granted the Underwriters a 45-day option
to purchase up to an additional 1,080,000 shares of Common Stock solely to cover
over-allotments, if any. In connection with the offering, the Underwriters will
receive warrants to purchase up to an aggregate of 720,000 shares of Common
Stock from the Company.

         The net proceeds from the sale of Stock will be used for the 
acquisition of Triple A, to redeem the preferred stock and the remainder to 
pay down amounts outstanding under the credit line.

         The Company anticipates declaring a one-for-three reverse stock 
split prior to the effective date of the Form SB-2 Registration Statement.  

                                         F-36




<PAGE>
                          INDEPENDENT AUDITORS' REPORT
 
To the Stockholder of
Triple A Security Systems, Inc.:
 
    We have audited the accompanying balance sheets of Triple A Security
Systems, Inc. as of December 31, 1996 and 1995, and the related statements of
income and retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
    We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our 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 Triple A Security Systems,
Inc. as of December 31, 1996 and 1995 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
 
Terry Jones, CPA
March 27, 1997
 
                                      F-37


<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                                           1996          1995
                                                                                       -----------  ------------
<S>                                                                                    <C>          <C>
                                                     ASSETS
CURRENT ASSETS:
Cash.................................................................................  $   126,941  $   235,963
Marketable securities................................................................      110,176      108,583
Accounts receivable, net of allowance for doubtful accounts of $50,000 in 1996 and
  $29,000 in 1995....................................................................      551,432      343,589
Employee advance.....................................................................        6,871        5,658
Inventory and work-in-progress.......................................................      483,875      384,553
Prepaid expenses.....................................................................       14,981        8,693
Deposits.............................................................................        7,950        7,370
Due from stockholder.................................................................        9,857       14,068
Due from affiliate...................................................................       84,169      103,135
Other current assets.................................................................        5,951           --
                                                                                       -----------  -----------
    Total Current Assets.............................................................    1,402,203    1,211,612
                                                                                       -----------  -----------
PROPERTY AND EQUIPMENT:
Property and equipment, net of accumulated depreciation..............................    1,185,326      821,916
Property and equipment held for lease, net of accumulated depreciation...............      611,251      542,624
                                                                                       -----------  -----------
                                                                                         1,796,577    1,364,540
                                                                                       -----------  -----------
INTANGIBLE ASSETS, net...............................................................      210,980      281,304
                                                                                       -----------  -----------
                                                                                       $ 3,409,760  $ 2,857,456
                                                                                       -----------  -----------
                                                                                       -----------  -----------
 
                                      LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Demand notes payable.................................................................  $    65,000  $        --
Current portion of long-term.........................................................      344,224      259,582
Accounts payable.....................................................................      583,504      188,031
Deferred revenue.....................................................................      683,338      702,992
Accrued expenses.....................................................................      118,912      209,319
Payroll taxes withheld and accrued...................................................       10,635       16,741
Sales and use tax payable............................................................        2,555        2,881
                                                                                       -----------  -----------
    Total Current Liabilities........................................................    1,808,168    1,379,546
LONG-TERM DEBT, net of current portion...............................................    1,215,348    1,121,678
                                                                                       -----------  -----------
    Total Liabilities................................................................    3,023,516    2,501,224
                                                                                       -----------  -----------
 
COMMITMENT AND CONTINGENCY
STOCKHOLDER'S EQUITY:
Common stock, $100 par, 5,000 shares authorized, 1,250 issued and outstanding........      125,000      125,000
Additional paid-in capital...........................................................      215,814      215,814
Net unrealized loss on marketable securities.........................................       (4,286)      (5,696)
Retained earnings....................................................................       49,716       21,114
                                                                                       -----------  -----------
    Total Stockholder's Equity.......................................................      386,244      356,232
                                                                                       -----------  -----------
                                                                                       $ 3,409,760  $ 2,857,456
                                                                                       -----------  -----------
                                                                                       -----------  -----------
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                      F-38


<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   STATEMENTS OF INCOME AND RETAINED EARNINGS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                                         1996          1995
                                                                                     ------------  ------------
<S>                                                                                  <C>           <C>
REVENUES...........................................................................  $ 5,041,574  $ 5,158,440
COST OF REVENUES (SCHEDULE 1)......................................................    2,319,741    2,652,662
                                                                                     -----------  -----------
 
    Gross Profit...................................................................    2,721,833    2,505,778
                                                                                     -----------  -----------
 
OPERATING EXPENSES:
Selling expenses (schedule.........................................................      644,213      761,250
General and administrative expenses (schedule 3)                                       1,312,056    1,106,715
                                                                                     -----------  -----------
 
    Total Operating Expenses.......................................................    1,956,269    1,867,965
                                                                                     -----------  -----------
Income Before Depreciation and Amortization........................................      765,564      637,813
                                                                                     -----------  -----------
 
DEPRECIATION AND AMORTIZATION:
Depreciation of property and equipment.............................................      380,375      325,230
Amortization of intangibles........................................................       70,323       77,204
                                                                                     -----------  -----------
 
    Total Depreciation and Amortization............................................      450,698      402,434
                                                                                     -----------  -----------
Income From Operations.............................................................      314,866      235,379
                                                                                     -----------  -----------
 
OTHER INCOME (EXPENSE):
Finance and service charge income..................................................       65,930       31,134
Miscellaneous income...............................................................       31,028       17,034
Interest income....................................................................       14,303       22,310
Gain on sale of assets.............................................................        4,890          207
Dividend income....................................................................        3,957        4,335
Interest expense...................................................................     (120,219)    (140,007)
Loss on abandonment................................................................      (55,783)      --
Conversion costs...................................................................      (41,214)     (45,352)
Relocation expense.................................................................      (29,130)      --
                                                                                     -----------  -----------
 
    Other Expense, Net.............................................................     (126,238)    (110,339)
                                                                                     -----------  -----------
 
NET INCOME.........................................................................      188,628      125,040
 
RETAINED EARNINGS:
Beginning of year..................................................................       21,114       39,724
 
Distributions......................................................................     (160,026)    (143,650)
                                                                                     -----------  -----------
 
End of year........................................................................  $    49,716  $    21,114
                                                                                     -----------  -----------
                                                                                     -----------  -----------
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.

                                      F-39


<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                            STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1996 AND 1995
 
<TABLE>
<CAPTION>
                                                                                            1996         1995
                                                                                         -----------  -----------
<S>                                                                                      <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................  $  188,628  $  125,040
Adjustments to reconcile net income to net cash provided by operating activities:......
Depreciation...........................................................................     380,375     325,230
Amortization of intangible assets......................................................      70,323      77,204
Other amortization.....................................................................        (182)       (231)
Gain on sale of assets.................................................................      (4,890)       (207)
Loss on abandonment....................................................................      55,783          --
Changes in assets and liabilities:
  (Increase) decrease in assets:.......................................................
  Accounts receivable..................................................................    (207,843)    100,408
  Employee advances....................................................................      (1,213)     12,566
  Inventory and work-in-progress.......................................................     (99,322)    100,591
  Prepaid expenses.....................................................................     (14,551)     52,563
  Deposits.............................................................................        (580)      1,347
  Due from affiliate...................................................................      27,246      17,701
  Other current assets.................................................................      (5,951)         --
Increase (decrease) in liabilities:
  Accounts payable.....................................................................     395,473    (108,596)
  Deferred revenue.....................................................................     (19,654)    (47,954)
  Accrued expenses.....................................................................     (90,407)     88,898
  Payroll taxes withheld and accrued...................................................      (6,106)      2,043
  Sales and use tax payable............................................................        (326)       (793)
                                                                                         ----------  ----------
Net Cash Provided by Operating Activities..............................................     666,803     745,810
                                                                                         ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of marketable securities....................................................          --      (3,200)
  Proceeds from sale of equipment......................................................       4,890       2,900
  Capital expenditures.................................................................    (652,452)   (354,199)
  Advances to stockholder..............................................................     (52,216)    (19,657)
                                                                                         ----------  ----------
Net Cash Used in Investing Activities..................................................    (699,788)   (374,156)
                                                                                         ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings on demand notes...........................................................      65,000          --
  Proceeds from long-term debt.........................................................     292,650     105,274
  Payments on long-term debt...........................................................    (330,097)   (233,846)
  Distributions to stockholder.........................................................    (103,600)    (70,900)
                                                                                         ----------  ----------
Net Cash used in Financing Activities..................................................     (76,047)   (199,472)
                                                                                         ----------  ----------
NET INCREASE (DECREASE) IN CASH........................................................    (109,022)    172,182
CASH - BEGINNING.......................................................................     235,963      63,781
                                                                                         ----------  ----------
CASH - ENDING..........................................................................  $  126,941  $  235,963
                                                                                         ----------  ----------
                                                                                         ----------  ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................................................  $  118.567  $   140.76
                                                                                         ----------  ----------
                                                                                         ----------  ----------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
  FINANCING ACTIVITIES:
Fair value of property and equipment acquired and liabilities assumed..................  $  215,750  $   31,941
                                                                                         ----------  ----------
                                                                                         ----------  ----------
Payment on stockholder loan through non-cash distributions.............................      56,426      72,750
Payment on stockholder loan from personal assumption of note payable-- unsecured.......  $       --  $  148,254
                                                                                         ----------  ----------
                                                                                         ----------  ----------
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                      F-40


<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
                           DECEMBER 31, 1996 AND 1995
 
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
 
    NATURE OF OPERATIONS
 
    Triple A Security Systems, Inc. (the company) is engaged in the sale, lease,
installation, service and monitoring of security systems to commercial and
residential customers. The company grants credit to customers throughout
Northeastern Pennsylvania. Consequently, the company's ability to collect the
amounts due from customers is affected economic fluctuations within the
geographic area.
 
    REVENUE RECOGNITIONS
 
    Rental, monitoring and service fees related to operating leases, monitoring
and service contracts are recorded as income when earned. All contracts contain
an initial noncancellable three or five year term with subsequent annual
renewals cancellable within sixty days of the anniversary date. Advance billings
are reflected as deferred revenue in the accompanying balance sheet.
Installation fees are recognized when the leased equipment is installed.
 
    At December 31, 1996, the retail monthly recurring revenues were
approximately $245,576 and the wholesale monthly recurring revenues were
approximately $13,567.
 
    INVENTORY AND WORK-IN-PROGRESS
 
    Inventory consisting of equipment held for sale or lease and related repair
parts is valued at the lower of cost or market determined on a first-in,
first-out basis. Work-in-progress inventory is valued at cost.
 
    PROPERTY AND EQUIPMENT
 
    Property and equipment are carried at cost. Depreciation is computed
primarily using the straight-line method over the following estimated useful
lives:
 
<TABLE>
<CAPTION>
                                                                                          YEARS
                                                                                        ---------
<S>                                                                                     <C>
Monitoring equipment..................................................................      10-12
Other equipment.......................................................................       3-12
Office furniture and fixtures.........................................................       5-12
Vehicles..............................................................................          5
Leasehold improvements................................................................       7-40
</TABLE>
 
    Expenditures for maintenance and repairs are charged to operations as
incurred. Cost of replacement and renewals are capitalized.
 
    Upon sale or other disposition, the asset account and related deprecation
account are relieved, and any gain or loss is included in operations.
 

                                      F-41
<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995
 
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
        (CONTINUED)

    MARKETABLE SECURITIES
 
    Effective January 1, 1995, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The company's investment securities are classified
as available-for-sale. Accordingly, unrealized gains and losses are excluded
from earnings and reported as a separate component of stockholders' equity.
Realized gains or losses are computed based on specific identification of the
securities sold.
 
    SFAS No. 115 superseded SFAS No. 12, "Accounting for Certain Marketable
Securities," under which investment securities were generally carried at the
lower of aggregate market or amortized cost and unrealized gains were not
recognized. The effect of the initial adoption of SFAS No. 115 was not material.
 
    INTANGIBLE ASSETS
 
    Costs incurred in connection with the organization of the company and
purchases of contracts from predecessor entities are being amortized using the
straight-line method over the following lives:
 
<TABLE>
<CAPTION>
                                                                                            YEARS
                                                                                            -----
<S>                                                                                      <C>
Monitoring contracts...................................................................         7-8
Goodwill...............................................................................           5
Noncompete agreements..................................................................        3-11
Loan origination fees..................................................................        5-11
Deferred acquisition costs.............................................................           5
</TABLE>
 
    INCOME TAXES
 
    The company has elected to be taxed as an "S" Corporation as provided in the
Federal and State Income Tax Codes. All income and losses are passed through to
the stockholder and are taxed at the individual level. As such, no provision for
federal or state income taxes is included in the financial statements.
 
    RECLASSIFICATIONS
 
    Certain accounts for the year ended December 31, 1995 have been reclassified
for comparative purposes to conform with the year ended December 31, 1996.
 
    ESTIMATES
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
 

                                      F-42
<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995
 
NOTE 2: MARKETABLE SECURITIES
 
    The following tables reflect the amortized cost and estimated fair values of
marketable debt and equity securities held at December 31, 1996 and 1995. All
investments held by the company are classified as available-for-sale.
 
<TABLE>
<CAPTION>
                                                                                              1996
                                                                                           -----------
                                                                                 GROSS        GROSS
                                                                              UNREALIZED   UNREALIZED
                                                                  AMORTIZED     HOLDING      HOLDING       FAIR
                                                                     COST        GAINS       LOSSES       VALUE
                                                                  ----------  -----------  -----------  ----------
<S>                                                               <C>         <C>          <C>          <C>
Equity securities...............................................  $   7,805   $  1,525     $     16    $   9,314
U.S. government obligations.....................................     12,292      2,873        --          15,165
Mortgage-backed securities......................................     40,664      --           2,927       37,737
Mutual funds....................................................     53,700      --           5,740       47,960
                                                                  ---------  ----------   ----------   ---------
                                                                  $ 114,461   $  4,398     $  8,683    $ 110,176
                                                                  ---------  ----------   ----------   ---------
                                                                  ---------  ----------   ----------   ---------
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                              1995
                                                                                           -----------
                                                                                 GROSS        GROSS
                                                                              UNREALIZED   UNREALIZED
                                                                  AMORTIZED     HOLDING      HOLDING       FAIR
                                                                     COST        GAINS       LOSSES       VALUE
                                                                  ----------  -----------  -----------  ----------
<S>                                                               <C>         <C>          <C>          <C>
Equity securities...............................................  $   7,805   $    588     $    279    $   8,114
U.S. government obligations.....................................     12,086      2,644        --          14,730
Mortgage-backed securities......................................     40,688       --          3,266       37,422
Mutual funds....................................................     53,700       --          5,383       48,317
                                                                  ---------  ----------   ----------   ---------
                                                                  $ 114,279   $  3,232     $  8,928    $ 108,583
                                                                  ---------  ----------   ----------   ---------
                                                                  ---------  ----------   ----------   ---------
</TABLE>


                                      F-43
<PAGE>

                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995


NOTE 2: MARKETABLE SECURITIES (Cont'd)

    U.S. government obligations mature in 2024 and mortgage-backed securities
mature in 2023. The change in net unrealized holding losses on marketable debt
and equity securities in the amount of $1,359 and $11,632 has been charged to
stockholder's equity for the years ended December 31, 1996 and 1995,
respectively.
 
NOTE 3: INVENTORY AND WORK-IN-PROGRESS
 
    Inventory and work-in-progress consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                         1996        1995
                                                                      ----------  ----------
<S>                                                                   <C>         <C>
Raw materials.......................................................  $ 347,679  $ 264,942
Work-in-progress....................................................    136,196    119,611
                                                                      ---------  ---------
                                                                      $ 483,875  $ 384,553
                                                                      ---------  ---------
                                                                      ---------  ---------
</TABLE>


NOTE 4: RELATED PARTY TRANSACTIONS
 
    The balance due from stockholder is an unsecured loan requiring interest
only at 5.65%. The balance at December 31, 1996 and 1995 due from affiliate of
$84,169 and $103,135 represents money advanced to a company which is
substantially owned by the stockholder of Triple A Security Systems, Inc.
Interest has been accrued on the 1996 and 1995 average balance at prime plus 1%.
Interest accrued for the years ended December 31, 1996 and 1995 was $8,280 and
$9,341, respectively.
 
NOTE 5: PROPERTY AND EQUIPMENT
 
    Property and equipment consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                   1996          1995
                                                               ------------  ------------
<S>                                                            <C>           <C>
Monitoring equipment.........................................  $    686,851  $    686,851
Other equipment..............................................     1,266,810     1,378,284
Office furniture & fixtures..................................       267,595       402,975
Vehicles.....................................................       470,447       355,615
Leasehold improvements.......................................       328,746       123,781
                                                               ------------  ------------
                                                                  3,020,449     2,947,506
Less accumulated depreciation                                    (1,835,123)   (2,125,590)
                                                               ------------  ------------
                                                               $  1,185,326  $    821,916
                                                               ------------  ------------
                                                               ------------  ------------
</TABLE>


                                      F-44
<PAGE>

                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995



NOTE 6: OPERATING LEASES
 
    LESSOR TRANSACTIONS
 
    The company is the lessor of security monitoring equipment under operating
leases expiring in various years through 2001.
 
    Property on or held for lease consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                       1996         1995
                                                                   -----------  -----------
<S>                                                                <C>          <C>
Monitoring equipment.............................................  $ 1,480,778  $ 1,303,611
Less accumulated depreciation....................................     (869,527)    (760,987)
                                                                   -----------  -----------
                                                                   $   611,251  $   542,624
                                                                   -----------  -----------
                                                                   -----------  -----------
</TABLE>
 
    LESSEE TRANSACTIONS
 
    The company is currently leasing its facilities under several one year or
month-to-month renewable operating lease agreements. Annual rentals were $47,715
and $43,478, in 1996 and 1995, respectively.

    RELATED PARTY TRANSACTIONS
 
    The company leases two of its facilities from the stockholder on a triple
net basis. One agreement is a noncancellable lease requiring payments that
increase annually at predetermined amounts through June, 2000. Thereafter,
payments are adjusted annually in accordance with the Consumer Price Index. The
other is a month-to-month lease at $1,070 per month. Rent expense for the year
ended December 31, 1996 was $69,533.
 
    At December 31, 1996, minimum future lease payments under the noncancellable
lease are as follows:
 
<TABLE>
<CAPTION>
                          YEAR ENDING                                LEASE
                          DECEMBER 31                              OBLIGATION
----------------------------------------------------------------  ------------
<S>                                                               <C>
1997............................................................  $    97,067
1998............................................................      109,867
1999............................................................      122,667
2000............................................................      128,000
2001............................................................      128,000
Thereafter......................................................    1,845,000
                                                                  -----------
                                                                  $ 2,430,601
                                                                  -----------
                                                                  -----------
</TABLE>
 

                                      F-45
<PAGE>

                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995


NOTE 7: INTANGIBLE ASSETS
 
    Intangible assets, net of accumulated amortization consist of the following
at December 31:
 
<TABLE>
<CAPTION>
                                                                         1996       1995
                                                                      ---------  ---------
<S>                                                                   <C>        <C>
Monitoring contracts................................................  $  82,051  $ 112,504
Goodwill............................................................        605      1,815
Noncompete agreements...............................................    114,824    132,642
Loan origination fees...............................................      4,147      6,280
Deferred acquisition costs..........................................      9,353     28,060
                                                                      ---------  ---------
                                                                      $ 210,980  $ 281,304
                                                                      ---------  ---------
                                                                      ---------  ---------
</TABLE>
 
NOTE 8: DEMAND NOTES PAYABLE
 
    The company has available $130,000 under a line of credit agreement with
Summit Bank, expiring June 30, 1997. The terms are interest payable monthly at
prime plus 1% on the outstanding balance, with principal and interest due in
full at the expiration of the term. This note is cross-collateralized with the
company's other notes with Summit Bank. At December 31, 1996, the company had
$55,000 outstanding on this line of credit.
 
    The company has available $150,000 under a revolving line of credit
agreement with Summit Bank, expiring April, 1997. The terms are interest payable
monthly at prime plus .25% on the outstanding balance, with principal and
interest due in full at the expiration of the term. This note is cross-
collateralized and cross-defaulted with the company's other notes with Summit
Bank. At December 31, 1996, the company had $10,000 outstanding on this line of
credit.
 

                                      F-46
<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995
 
NOTE 9: LONG-TERM DEBT
 
    Long-term debt consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                        1996          1995
                                                                    ------------  ------------
 
<S>                                                                 <C>           <C>
Summit Bank:
 
Term loan payable in monthly installments of $15,946, including
  interest at 8.13%, maturing October, 2000. Pledged as collateral
  is accounts receivable. The loan is personally guaranteed by the
  stockholder. The loan has cross-default provisions with the
  other Summit Bank notes.........................................    $  642,544    $  774,783
Term loan payable in monthly installments of $1,200, including
  interest at 8.13%, maturing October, 2000. Pledged as collateral
  is accounts receivable. The loan is personally guaranteed by the
  stockholder. The loan has cross-default provisions with the
  other Summit Bank notes.........................................        48,355        58,306
Revolving line of credit, payable monthly, at 1.67% of the
  outstanding principal balance plus interest at prime plus 1%,
  with a floor of 6% and a ceiling of 10%, maturing October, 1999.
  Maximum borrowing under this agreement is $500,000. Pledged as
  collateral are accounts receivable, inventory, machinery,
  equipment, furniture and fixtures. The loan is personally
  guaranteed by the stockholder. The note is cross-collateralized
  and has cross-default provisions with the other summit Bank
  notes...........................................................       234,731       176,321
Term note payable in monthly installments of $1,670, including
  interest at 8.5%, maturing September, 1997. Pledged as
  collateral are accounts receivable, inventory, machinery,
  equipment, furniture and fixtures. The loan is personally
  guaranteed by the stockholder. The note is cross-collateralized
  and has cross-default provisions with the other Summit Bank
  notes...........................................................        16,428        34,204
Term note payable in monthly installments of $2,556, including
  interest at 8.35%, maturing October, 2001. Pledged as collateral
  are accounts receivable, inventory, machinery, equipment,
  furniture and fixtures. The loan is personally guaranteed by the
  stockholder. The note is cross-collateralized and has
  cross-default provisions with the other Summit Bank notes.......       121,180            --
</TABLE>

                                      F-47
<PAGE>
                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995
 
NOTE 9: LONG-TERM DEBT (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                        1996          1995
                                                                    ------------  ------------

<S>                                                                 <C>           <C>

Former owner--Acquired Company:

Promissory note payable in monthly installments of $3,744,
  including interest at 8% maturing October, 2003. Pledged as
  collateral are assets acquired in acquisition as well as the
  personal guarantee of the stockholder and the common stock of
  Triple A Security Systems, Inc..................................       233,757       258,886
 
Fidelity Bank:
Two notes payable in monthly installments of $706, including
  interest at prime plus .5%, maturing in April, 1997 and January,
  1998. Pledged as collateral are vehicles with a book value of
  $11,292.........................................................         7,340        14,781
Note payable in monthly installments of $1,707, including interest
  at prime plus .75%, maturing April, 1997. Pledged as collateral
  are vehicles with a book value of $20,660.......................         6,237        25,176
 
First Heritage Bank:
Note payable in monthly installments of $266, including interest
  at prime plus .5%, maturing December, 1998. Pledged as
  collateral is a vehicle with a book value of $3,917.............         5,827         8,390
Note payable in monthly installments of $798, including interest
  at prime plus .5%, maturing January, 1999. Pledged as collateral
  are vehicles with book value of $19,690.........................        18,173        25,734

</TABLE>


                                      F-48
<PAGE>


                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995
 
NOTE 9: LONG-TERM DEBT (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                        1996          1995
                                                                    ------------  ------------

<S>                                                                 <C>           <C>

Note payable in monthly installments of $6,252, including interest
  at 8.75%, maturing June, 2000. Interest of $1,640 way payable
  monthly through December, 1996. Pledged as collateral are
  vehicles with a book value of $193,934..........................       225,000            --

Lake Ariel Bank:
Installment note payable matured November, 1996...................            --         4,679
                                                                    ------------  ------------
                                                                       1,559,572     1,381,260
    Less current portion..........................................       344,224       259,582
                                                                    ------------  ------------
                                                                    $  1,215,348  $  1,121,678
                                                                    ------------  ------------
                                                                    ------------  ------------
</TABLE>

    The aggregate principal payments required on the long-term debt obligations
at December 31, 1996 are as follows:
 
<TABLE>
<CAPTION>
                                  YEAR ENDING
                                  DECEMBER 31                                        AMOUNT
--------------------------------------------------------------------------------  ------------
<S>                                                                               <C>
1997............................................................................  $    344,224
1998............................................................................       332,404
1999............................................................................       465,758
2000............................................................................       282,587
2001............................................................................        61,433
Thereafter......................................................................        73,166
                                                                                  ------------
                                                                                  $  1,559,572
                                                                                  ------------
                                                                                  ------------
</TABLE>


                                    F-49

<PAGE>

                        TRIPLE A SECURITY SYSTEMS, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
 
                           DECEMBER 31, 1996 AND 1995

 
NOTE 10: COMMITMENT AND CONTINGENCY
 
    COMMITMENT--SUMMIT BANK LOAN COVENANTS
 
    Under the terms of the company's loan agreements with Summit Bank there are
various covenants including minimum debt coverage ratio requirements, maximum
officer salary, limitations on distributions to the stockholder, and limitations
on acquisitions of other companies. The company must also maintain a primary
depository relationship with Summit Bank. The company was in compliance with all
covenants at December 31, 1996 and 1995.
 
    CONTINGENCY
 
    A customer, to which the company provides installation, repair and alarm
monitoring service, incurred a loss of approximately $817,008, due to a burglary
at its warehouse in October, 1993. Counsel for the company's customer has
advised the company that it has considered the possibility of seeking
contribution or indemnity from the company to the extent of its loss.
 
    Counsel for the company has advised that there is no litigation with regard
to this matter at the time of the release of these financial statements. The
company believes that any potential claim would be without merit and will defend
its position vigorously. The company maintains $10 million of commercial general
liability/errors and omissions insurance.
 
NOTE 11: PROFIT SHARING PLAN
 
    The company maintains a voluntary 401K profit-sharing plan that covers
substantially all of the employees. Contributions to the plan are at the
discretion of the Board of Directors. For the years ended December 31, 1996 and
1995, contributions of $8,792 and $5,772 have been made to the plan.
 
NOTE 12: SUBSEQUENT EVENT
 
    The company borrowed $50,000 from Summit Bank in February, 1997. The note
requires monthly payments of $1,019, including interest at 8.22% through
February, 2002. The note is cross-collateralized and has cross-default
provisions with the other Summit Bank notes.



                                      F-50



<PAGE>
                    UNAUDITED PRO FORMA FINANCIAL STATEMENTS
 
    The following unaudited pro forma combined statement of operations for 
the year ended June 30, 1997, gives effect to the following: (i) the sale of 
2,400,000 shares of common stock through a secondary offering and the use of 
the net proceeds therefrom to redeem preferred stock, (ii) a one-for-three 
reverse stock split, and (iii) the Company's acquisition of Triple A Security 
Systems, Inc. (Triple A) as if such events had been completed at July 1, 1996 
for purposes of the pro forma statement of operations and as of June 30, 1997 
for purposes of the pro forma balance sheet. The historical information 
pertaining to Triple A is for the twelve months ended June 30, 1997. The pro 
forma information is based on the historical financial statements of the 
Company and Triple A, giving effect to the transactions under the purchase 
method of accounting and the assumptions and adjustments described in the 
accompanying notes to the unaudited pro forma financial statement.  In the 
preparation of the pro forma combined balance sheet, the columns pertaining 
to Triple A contain information as to the assets and the liabilities acquired 
as of its date of acquisition.
 
    This pro forma statement of operations may not be indicative of the results
that actually would have occurred if the acquisition had occurred on July 1,
1996.


                                       F-51



<PAGE>
                       RESPONSE USA INC. AND SUBSIDIARIES
            UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                                 JUNE 30, 1997
<TABLE>
<CAPTION>
                                                                   HISTORICAL               PRO FORMA
                                                             ----------------------  -----------------------
                                                              RESPONSE    TRIPLE A   ADJUSTMENTS   COMBINED
                                                             -----------  ---------  -----------  ----------
<S>                                                           <C>          <C>        <C>          <C>
                          ASSETS
Current Assets
  Cash.....................................................  $   698,551  $ 139,645 $ 22,185,000(a)  $   838,196
                                                                                     (10,000,000)(b)
                                                                                     (12,185,000)(c)
  Marketable securities....................................       75,000    112,465                      187,465
  Accounts receivable (net)                                    1,532,327    278,114                    1,810,441
  Inventory................................................      798,814    446,296                    1,245,110
  Prepaid expenses and other current assets................      271,087    170,125      (86,893)(b)     354,319
                                                             ----------- ---------- ------------     -----------
        Total current assets...............................    3,375,779  1,146,645      (86,893)      4,435,531
                                                             ----------- ---------- ------------     -----------
Monitoring Contract Costs (net)............................   18,433,133    236,036     (236,036)(b)  28,083,461
                                                                                       9,650,328(b)
                                                             ----------- ---------- ------------     -----------
Property and Equipment (net)...............................    1,512,077  1,832,798                    3,344,875
                                                             ----------- ---------- ------------     -----------
Other Assets...............................................
  Accounts receivable (net)................................      228,798                                 228,798
  Deposits.................................................       45,310     11,737                       57,047
  Investment in joint venture..............................    3,139,484                               3,139,484
  Deferred compensation expense............................      892,500                                 892,500
  Deferred financing costs (net)...........................    3,612,727                               3,612,727
                                                             ----------- ---------- ------------     -----------
                                                               7,918,819     11,737                    7,930,556
                                                             ----------- ---------- ------------     -----------
                                                             $31,239,808 $3,227,216 $  9,327,399     $43,794,423
                                                             ----------- ---------- ------------     -----------
                                                             ----------- ---------- ------------     -----------
           LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
  Current portion of long-term debt........................  $   157,782  $ 411,452    ($411,452)(b) $   157,782
  Accounts payable-Trade...................................      556,205    331,505     (331,505)(b)     556,205
  Purchase holdbacks.......................................      415,765                                 415,765
  Accrued expenses and other current liabilities               1,288,332    152,223     (152,223)(b)   1,288,332
  Deferred revenue.........................................    1,981,500    797,115                    2,778,615
                                                             ----------- ---------- ------------     -----------
                                                               4,399,584  1,692,295     (895,180)      5,196,699
                                                             ----------- ---------- ------------     -----------
Long-Term Liabilities
  Long-term debt...........................................   12,520,722  1,126,654   (1,126,654)(b)   8,810,722
                                                                                     (12,185,000)(c)
                                                                                       8,475,000(d)
  Deferred compensation expense............................    2,550,000                               2,550,000
                                                             ----------- ---------- ------------     -----------
                                                              15,070,722  1,126,654   (4,836,654)     11,360,722
                                                             ----------- ---------- ------------     -----------
Stockholders' Equity.......................................
  Preferred stock..........................................    7,757,783              (7,757,783)(d)
  Common stock.............................................       14,158    125,000     (125,000)(b)      34,651
                                                                                           1,293(b)
                                                                                          19,200(a)
  Additional paid-in capital...............................   35,439,510    213,817     (213,817)(b)  58,644,300
                                                                                       1,756,207(b)
                                                                                      22,165,800(a)
                                                                                        (717,217)(d)
  Accumulated Deficit......................................  (31,441,949)    69,450      (69,450)(b) (31,441,949)
                                                             ----------- ---------- ------------     -----------
                                                              11,769,502    408,267   15,059,233      27,237,002
                                                             ----------- ---------- ------------     -----------
                                                             $31,239,808 $3,227,216 $  9,237,399     $43,794,423
                                                             ----------- ---------- ------------     -----------
                                                             ----------- ---------- ------------     -----------
</TABLE>
    The accompanying notes are an integral part of the financial statements.

                                       F-52
<PAGE>
                       RESPONSE USA INC. AND SUBSIDIARIES
         UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                                                HISTORICAL                    PRO FORMA
                                                       ----------------------------  ----------------------------
<S>                                                    <C>             <C>           <C>           <C>
                                                          RESPONSE       TRIPLE A    ADJUSTMENTS      COMBINED
                                                       --------------  ------------  ------------  --------------
Operating Revenues
  Product Sales......................................  $    2,938,618  $  1,787,897                $    4,726,515
  Monitoring and service.............................       9,784,285     3,345,642                    13,129,927
                                                       --------------  ------------  ------------  --------------
                                                           12,722,903     5,133,539                    17,856,442
Cost of Revenues.....................................       4,097,415     2,353,190                     6,450,605
                                                       --------------  ------------  ------------  --------------
Gross Profit.........................................       8,625,488     2,780,349                    11,405,837
                                                       --------------  ------------  ------------  --------------
Operating Expenses
  Selling, general and administrative................       9,126,641     2,044,430                    11,171,071
  Compensation--Options/Employment contracts.........       3,689,700                                   3,689,700
  Depreciation and amortization......................       2,976,433       463,914       (55,434)(e)   4,349,946
                                                                                          965,033(f)
  Interest...........................................       1,349,480       128,574      (128,574)(g)   1,049,667
                                                                                         (298,913)(h)
                                                       --------------  ------------  ------------  --------------
                                                           17,142,254     2,636,918      (481,212)     20,260,384
                                                       --------------  ------------  ------------  --------------
Income/(Loss) From Operations........................      (8,516,766)      143,431      (481,212)     (8,854,547)
                                                       --------------  ------------  ------------  --------------
Other Income/(Expense)
  Interest Income....................................          12,176        13,755                        25,931
  Joint Venture Loss.................................        (123,325)                                   (123,325)
                                                       --------------  ------------  ------------  --------------
                                                             (111,149)       13,755             0         (97,394)
                                                       --------------  ------------  ------------  --------------
Loss Before Extraordinary Item.......................      (8,627,915)      157,186      (481,212)     (8,951,941)
Extraordinary Item
  Loss on debt extinguishment........................       2,549,708                                   2,549,708
                                                       --------------  ------------  ------------  --------------
Net Income/(Loss)....................................     (11,177,623)      157,186      (481,212)    (11,501,649)

Dividends and accretion on preferred stock...........      (6,876,521)                  6,876,521(i)            0
                                                       --------------  ------------  ------------  --------------
Net Loss Applicable to Common Shareholders...........    ($18,054,144) $    157,186  $  6,395,309    ($11,501,649)
                                                       --------------  ------------  ------------  --------------
                                                       --------------  ------------  ------------  --------------
Loss per common share
  Loss before extraordinary item.....................          ($5.80)                                     ($2.21)
  Extraordinary item.................................          ($1.71)                                     ($0.63)
                                                       --------------                              --------------
  Net loss...........................................          ($7.51)                                     ($2.84)
                                                       --------------                              --------------
                                                       --------------                              --------------
  Net loss applicable to common shareholders.........         ($12.14)                                     ($2.84)
                                                       --------------                              --------------
                                                       --------------                              --------------
Weighted average number of shares outstanding........       1,487,574                   2,561,609(j)    4,049,183
                                                       --------------                ------------  --------------
                                                       --------------                ------------  --------------
</TABLE>

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

                                       F-53


<PAGE>

RESPONSE USA INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS


Unaudited Pro Forma Balance Sheet
---------------------------------

(a) To reflect the net proceeds from the Secondary Offering as if it occurred 
    on June 30, 1997 of $22,185,000.

(b) To record the acquisition of Triple A Sysytems, Inc. ("Triple A").  The
    purchase price of $12,500,000 (payable in cash of $10,000,000, stock valued
    at $1,750,000 and assumption of $750,000 in liabilities) which was allocated
    to the assets acquired and liabilities assumed based on their fair value 
    with the remainder, $9,650,328, classified as Contract Monitoring Costs.

(c) To record principal paid on the line of credit from the remaining proceeds 
    from the Secondary Offering of $12,185,000

(d) To record the redemption of the preferred stock for $8,475,000

Unaudited Pro Forma Income Statement
------------------------------------

(e) To eliminate amortization of monitoring contracts purchased from Triple 
    A previously recorded in Triple A's historical financial statements.

(f) To provide amortization on the net increase or purchased monitoring 
    contracts.  Monitoring contracts purchased from Triple A are amortized
    using the straight-line method over a ten-year estimated life.

(g) To eliminate interest expense on debt not acquired.

(h) To reduce interest expense on the net decrease in long-term debt as a 
    result of using the remaining proceeds from the offering, after the Triple A
    acquisition and the redemption of preferred stock, to repay bank debt.

(i) To eliminate dividends and accretion on preferred stock recorded during 
    the first quarter of 1997 since this preferred stock is presumed to have 
    been retired in these pro forma financial statements.

(j) In calculating earnings per share, effect has been given to the shares 
    issued in the acquisition of Triple A (161,609 shares) and the Secondary
    Offering (2,400,000 shares).


                                       F-54

<PAGE>

                                      SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized.

                                  RESPONSE USA, INC.

                                  By: /s/ Richard M. Brooks
                                  -------------------------
                                  Richard M. Brooks
                                  President, Chief Executive, 
                                  and Financial Officer and a 
                                  Director
Dated: October 9, 1997


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons, which include the
Chief Executive Officer, the Chief Financial Officer and a majority of the Board
of Directors, on behalf of the Registrant and in the capacities and on the dates
indicated:

NAME                    TITLE                         DATE 

/s/ Richard M. Brooks   President, Chief Executive     October 9, 1997
----------------------  and Financial Officer and a 
Richard M. Brooks       Director (Principal Executive
                        Financial Officer)

/s/ Ronald A. Feldman   Chief Operating Officer,       October 9, 1997
----------------------  Vice President, Secretary,
Ronald A. Feldman       Treasurer and a Director

                        Director                       October  , 1997
----------------------
Robert M. Rubin

                        Director                       October  , 1997
----------------------
Bruce H. Luehrs

/s/ Stuart R. Chalfin   Director                       October 9, 1997
----------------------
Stuart R. Chalfin

/s/ Todd Herman         Director                       October 9, 1997
----------------------
Todd Herman

/s/ Stuart Levin        Director                       October 9, 1997
----------------------
Stuart Levin


<PAGE>
The following exhibits are filed herewith:
 
<TABLE>
<CAPTION>
EXHIBIT NO.                                               DESCRIPTION
-----------  -----------------------------------------------------------------------------------------------------
<C>          <S>
     4(f)    Form of Preferred Warrant Certificate
    10(b)    Employment Agreement dated August 28, 1992, by and between the Company and Richard R. Brooks, and
             Addendum thereto dated October 1, 1992, as amended
    10(c)    Employment Agreement dated August 28, 1992, by and between the Company and Ronald A. Feldman, and
             Addendum thereto dated October 1, 1992, as amended
    10(d)    Employment Agreement dated March 4, 1994, by and among the Company, USS and Todd Herman
    10(e)    Employment Agreement dated March 4, 1994, by and among the Company, USS and John Colehower
    10(f)    Agreement dated as of November 22, 1996 between Sloan Electronics, Incorporated and the Company
    10(g)    Asset Purchase Agreement dated October 1, 1997 between the Company and Triple A Security Systems,
             Inc.
    10(h)    Loan and Security Agreement dated as of June 30, 1996 between Mellon Bank, N.A. and the Company
    10(i)    Purchase Agreement dated as of March 4, 1997, among BKR, Inc., the Company and HealthLink, Ltd.
    10(j)    Operating Agreement of HealthLink, Ltd. dated as of March 4, 1997
    11       Statement re: computation of earnings (loss) per share
    21       Subsidiaries of the registrant
    27       Financial Data Schedule
</TABLE>