<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the Fiscal Year ended December 31, 1996

                                       OR

[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
                              Exchange Act of 1934

                         Commission file number 0-24510

                          HOLMES PROTECTION GROUP, INC.
             (Exact name of registrant as specified in its charter)


              Delaware                                 06-1070719
     (State or other jurisdiction of       (I.R.S. Employer Identification No.)
      incorporation or organization)


           440 Ninth Avenue
          New York, New York                           10001-1695
   (Address of principal executive offices)            (Zip Code)

       Registrant's telephone number including area code: (212) 760-0630

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

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

                     Common Stock, par value $.01 per share
                                (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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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-K or any amendment to
this Form 10-K. [ ]

Based on the closing sale price per share of the registrant's Common Stock of
$14.25 on March 27, 1997 as quoted on the NASDAQ National Market, the aggregate
market value of the voting shares held by non-affiliates of the registrant
(including 1,106,819 shares held by the "Institutions" (as defined herein)) was
$60.9 million.

At March 27, 1997, the number of shares outstanding of the registrant's Common
Stock, par value $.01 per share, was 5,828,062 shares.

<PAGE>
\

Certain statements in this Annual Report on Form 10-K constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. All such forward-looking statements involve known and 
unknown risks, uncertainties and other factors which may cause the actual 
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; 
cancellation rates of subscribers; competitive factors in the industry,
including additional competition from existing competitors or future entrants
to the industry; social and economic conditions; local, state and federal
regulations; changes in business strategy or development plans; the Company's
indebtedness; availability, terms and deployment of capital; availability of
qualified personnel; and other factors referenced in this Annual Report on Form
10-K.








































                                                      
                                      - ii -
                                                       

<PAGE>


<TABLE>
<CAPTION>



                                Table of Contents


                                                                                                         Page

PART I
<S>    <C>                                                                                                <C>
  Item 1.  Business........................................................................................1
  Item 2.  Properties.....................................................................................15
  Item 3.  Legal Proceedings..............................................................................15
  Item 4.  Submission of Matters to a Vote of Security Holders............................................15

PART II
  Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters..........................17
  Item 6.  Selected Consolidated Financial Data...........................................................18
  Item 7.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations...............................................................20
  Item 8.  Financial Statements and Supplementary Data....................................................24
  Item 9.  Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure................................................................24

PART III
  Item 10. Directors and Executive Officers of the Registrant.............................................24
  Item 11. Executive Compensation.........................................................................24
  Item 12. Security Ownership of Certain Beneficial Owners and Management.................................25
  Item 13. Certain Relationships and Related Transactions.................................................25

PART IV
  Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................25
              Signatures..................................................................................28

Index to Financial Statements............................................................................F-1

</TABLE>

DOCUMENTS INCORPORATED BY REFERENCE:

The information required by Part III, Items 10, 11, 12 and 13 is incorporated
by reference to the registrant's definitive proxy statement if filed with the
Securities and Exchange Commission (the "Commission") on or before April 30,
1997 or, if such proxy statement is not filed, will be filed with the
Commission as an amendment to this Form 10-K under cover of Form 10-K/A, not
later than April 30, 1997.




                                     - iii -

<PAGE>


PART I

Item 1.  Business

The Company

         Holmes Protection Group, Inc. (the "Company" or "Holmes") provides
security alarm monitoring services and designs, sells, installs and services
electronic security systems for commercial and mid- to high-end residential
subscribers. These systems include event detection devices, surveillance
equipment and access control devices which restrict access to specified areas.
The Company currently provides its services in New York, New Jersey,
Pennsylvania, Texas, Tennessee, California, Massachusetts and Florida, and
conducts its operations primarily through 15 branch offices, five central
monitoring station and 69 independent alarm service dealers and franchisees.
According to the latest available survey, published in May 1996, the Company was
the twelfth largest provider of electronic security services in the United
States in terms of total 1995 revenues.

         Following an internal management transition and reorganization in 1995,
the Company, in 1996, engaged the services of several former senior executives
of The National Guardian Corporation, a large national electronic security 
alarm services company which was acquired by Ameritech Monitoring Services, 
Inc., in October 1995. Among the executives hired by the Company was George V.
Flagg, the Company's President and Chief Executive Officer, who served as the 
President and Chief Executive Officer of National Guardian from 1986 to 1995. 
Under the direction of the Company's new management team, the Company is 
implementing a business strategy involving a combination of strategic
acquisitions and internal growth. In regard to strategic acquisitions, the
Company intends to pursue both (i) fold-in acquisitions, which consist of
businesses or portfolios of alarm monitoring accounts that can be readily
combined with the Company's existing branch offices and management structure
and (ii) new market acquisitions, which consist of companies in the electronic
security services industry located outside the Company's current geographic
market. In regard to its internal growth strategy, the Company intends to
capitalize on public recognition of the historic Holmes brand name (which has
been utilized in the security services industry since 1858) in connection with
(i) expanding its security services product offerings, including the HolmesNet
system for wireless data communications; (ii) strengthening its national
accounts program; (iii) increasing its sales and marketing efforts; and (iv)
expanding its dealer operations.

         The Company's revenues consist primarily of recurring payments under
written contracts for security alarm monitoring activities and associated
services, which represented approximately 70% of total revenues in 1996. The
Company monitors digital alarm signals arising from various activities,
including burglaries, fires and other events, through security systems
installed at subscribers' premises. These signals are received and processed
at the Company's relevant central monitoring station. In order to reduce
overall manpower requirements, achieve economies of scale and other cost 
efficiencies, and enhance the quality of service being provided, the Company
consolidated its central monitoring stations in the Northeast into one facility
located in Edison, New Jersey, with monitoring capacity of approximately 60,000
accounts. In addition, the Company has acquired several businesses with central
monitoring stations with the capacity to process 56,000 additional accounts. An
additional 21% of the Company's total revenues in 1996 was comprised of direct
sales and installation of security equipment. The balance of the Company's
revenues in 1996 was derived from (i) jewelry vault rentals, (ii) insured
parcel delivery services for the jewelry trade and (iii) royalty fees and 
product sales relating to its franchise and dealer operations.

         Approximately 80% of the Company's business is derived from commercial
customers, including financial institutions, jewelry and fine art dealers,
corporate headquarters, manufacturers, distribution facilities and health care
and education facilities. The Company's residential business focuses
principally on mid- to high-end customers.

         Electronic security services is a consolidating but still a highly
fragmented industry, consisting of a large number of local and regional
companies and several integrated national companies. 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 providing central station monitoring services is capital
intensive, and the Company believes that the high fixed costs of establishing
both central monitoring stations and full service operations contribute to the
small number of national competitors. The low marginal cost of monitoring
additional customers has been one of the principal factors leading full
service, integrated

<PAGE>


electronic security services companies to seek acquisitions of other electronic
security businesses to consolidate into their existing operations. The principal
focus of the Company's business strategy is to pursue acquisitions in this
environment.

Market Overview And Trends

         The Company is a leading competitor in the electronic security
services industry, offering services in both the commercial and mid- to high-
end residential segments of the market. The products and services marketed in
the electronic security services industry range from alarm systems that provide
basic intrusion and fire detection to sophisticated systems incorporating such
features as closed circuit television and access control. The industry consists
of companies that design, sell, install, monitor and maintain intrusion, fire
alarm and other electronic security systems. It includes companies using both
hardwire and wireless technology for systems installed on subscribers' premises
and digital, multiplex and wireless (radio) technologies for the transmission
of alarm signals to a central monitoring center, such as the Company's central
station monitoring facilities. The Company believes that the electronic 
security services industry is characterized by the following attributes:

      o      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
             11,000 separate companies in the industry generating approximately
             $12 to $13 billion in revenues annually.  A survey published by
             SDM magazine (formerly Security Distributing and Marketing) 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.   According to
             the same survey, which contains the latest available information,
             the Company ranks twelfth among the 100 largest companies in the 
             industry in terms of total 1995 revenues.

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

      o      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.

       o     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

                                      - 2 -

<PAGE>


             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.

       o     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.

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

Business Strategy

         Management believes that Holmes is uniquely positioned to pursue a
business strategy involving a combination of strategic acquisitions and
internal growth. Because the historic Holmes brand name is well established in
the Northeast and has been utilized since 1858, the Company believes that it 
can capitalize on public recognition of this name and its historic reputation
in connection with expanding into new geographic markets throughout the United
States, strengthening its national accounts program, increasing its sales and
marketing strategy and expanding its dealer operations and achieving continued
market penetration by increasing its sales force. The Company further believes
that its new management team's previous experience will be helpful in
successfully implementing its business strategy.

         Growth through Acquisitions

         The Company continues to pursue two fundamental types of acquisitions:
fold-in acquisitions and new market acquisitions. Various factors will be
considered when evaluating any potential acquisition, including the purchase
price and other financial terms of the transaction, the business prospects and
competitive position of and services provided by the acquisition candidate and
the extent to which any such acquisition would enhance the Company's future
prospects. In addition to determining the economic viability of the proposed
acquisition, an acquisition candidate will be evaluated for stability of
subscriber base, market share, quality of operations, compatibility of
equipment and contract terms and growth opportunities.

         Fold-in Acquisitions. Fold-in acquisitions will mainly target
         businesses or portfolios of alarm monitoring accounts that can be 
         readily consolidated with existing Holmes branch offices and
         monitoring centers. Such acquisitions are attractive because the 
         Company believes that, through consolidation, cost savings will be
         achieved due to the low variable cost associated with monitoring and
         supporting additional subscriber accounts. The Company believes that
         certain fold-in acquisitions may also add specialized expertise to the
         Company. For example, acquiring a business that specializes in
         fire system installation would bring many of the expected financial
         benefits of a typical fold-in acquisition, and in addition, would
         enhance the Company's ability to broaden its product and service
         offerings with the added industry-specific knowledge and management
         obtained through the acquisition.


                                      - 3 -

<PAGE>


         New Market Acquisitions. The Company also continues to expand its
         operations through strategic acquisitions of electronic security
         services companies in new geographic markets throughout the United
         States, thereby diversifying its business base beyond the Northeast.
         In the Company's view, expansion into new geographic markets will also
         create additional opportunities for fold-in acquisitions. The Company
         believes that acquiring existing companies that have established a
         local market presence in areas outside of the Northeast is a less
         costly alternative to the internal development of new markets. In
         addition, through the retention of certain of the existing employees
         of acquired companies who are familiar with local markets, the Company
         believes it will be able to capitalize on local affiliations and 
         relationships. New market acquisitions will be sought in geographic
         markets which the Company believes can serve as a framework for
         establishing national accounts business from subscribers who require
         electronic security services at multiple locations nationwide.

         In September 1996, the Company acquired an alarm monitoring company
based in Stanton, California (the "California Corporation") which provides
alarm monitoring services for customers of other alarm companies through its
state-of-the-art central monitoring facility. The Company is maintaining this
Southern California facility in order to monitor the accounts of customers of
other alarm companies as well as those of authorized Holmes dealers and does
not anticipate consolidating this newly acquired facility with its central
monitoring facility located in Edison, New Jersey.

         In addition, as of March 15, 1997, the Company purchased alarm
operations in Dallas and Arlington, Texas; San Francisco, California; the
Boston, Massachusetts metropolitan area; Nashville, Tennessee; Harrisburg,
Pennsylvania; and Lakeland, Florida.

         The Company is actively exploring other acquisition opportunities and
has had discussions with a number of prospects. Except as disclosed above, the
Company has not completed any other acquisitions as of the date hereof.

         Internal Growth

         The Company also plans to continue growing internally by expanding its
product and service offerings, strengthening its national accounts program
which focuses on commercial subscribers conducting business in multiple 
locations nationwide, enhancing its sales and marketing activities and 
expanding its dealer operations. The Company believes that this type of
expansion will increase usage and cost efficiencies of its newly consolidated
state-of-the-art central monitoring station in Edison, New Jersey. The
Company's target market remains oriented toward the commercial and mid- to
high-end residential subscriber.

         Expanding Security Services Product Offerings. The Company believes
         that it has established a reputation as a provider of quality systems
         and services and that this reputation is the result, in part, of the
         Company's attention to advances in technology and their application to
         the Company's products and services. In this regard, the Company
         maintains an Equipment Evaluation Committee that evaluates new
         products and the development of improvements to existing products and 
         services. The Company is committed to offering a broad range of 
         services, products and features that incorporate the latest technology
         generally available to the industry. As a result, the Company has
         entered into a relationship with ARDIS, a Company owned by Motorola,
         Inc., under which the Company plans to utilize a national wireless 
         data communications network for highly reliable and immediate
         transmissions of alarm signals as part of its Holmes Net system. 
         Wireless data transmission methods are less susceptible to accidental
         or intentional signal transmission interruptions because they are less
         reliant on land-based telephone wiring networks. Due to its high level
         of security and reliability, the Company believes that the Holmes Net 
         system will be attractive to customers such as jewelry stores, banks 
         and others who require more than a conventional digital (telephone
         based) alarm system. The Company also offers other specialized 
         services using products from various manufacturers to allow itself
         maximum flexibility in the types of systems and services that it
         provides. These include, but are not limited to LifeNet, a
         sophisticated vehicle tracking system which uses global positioning
         satellite ("GPS") technology and is designed to provide a high level
         of security to executives while they travel in automobiles; CargoNet,
         also a GPS-based system, designed to protect trucks and trailers from
         theft; ViewNet(TM), an interactive video and verification system 
         designed for commercial sites in which central station staff can
         monitor in "real time" as events occur and central station operators
         can talk to customers or suspected criminals at the monitored site;
         and ProWatch, an integrated security system for high-rise office

                                      - 4 -

<PAGE>


         buildings designed to automate fire and burglar alarms and access
         control systems located on tenants' premises as well as in the
         buildings' common areas, thereby reducing the need for physical guards
         on-site.

         Strengthening National Accounts Program. The Company believes that
         large companies conducting business on a national scale with multiple
         locations throughout the United States can achieve cost benefits by
         centralizing all of their security needs with a single vendor. The
         Company intends to enhance its national accounts program to enable it
         to more effectively compete for business from large commercial 
         subscribers with multi-location security needs. This program is
         designed to offer national account subscribers, through an account
         manager, a single source for centralized and standardized system
         design, installation, service, billing, comprehensive activity and
         data reporting, nationwide monitoring and system operation for all of
         the subscriber's locations. The Company believes that a stronger  
         national accounts program will enhance its competitive position and 
         increase the marketability of its services and products. The national
         accounts management team and sales force will operate the national 
         accounts business. The Company's branch offices, dealers from its
         dealer program and selected subcontractors, under the direction of the
         national accounts management team, provide service and installation
         support for all national account subscribers.

         Increasing Sales and Marketing Activities. The Company will continue
         to focus its marketing efforts on increasing its visibility throughout 
         the United States. The Company aggressively markets and sells its 
         products and services through its growing sales force. Sales
         compensation and incentive plans have been revised to increase the 
         motivation of the sales force by reducing base salaries and increasing
         incentive compensation. The Company provides its sales force and 
         operational personnel with advanced training and market resources,
         including professionally prepared literature and presentation manuals,
         background research and technical information. The Company believes
         that such training and resources will expand the expertise and
         knowledge of its employees and enable each branch office to offer a 
         full range of security products and services. In addition, the Company
         has returned to one of the original Holmes logos used in the early part
         of this century, which it believes will further increase public
         recognition and awareness of Holmes and its historical presence and 
         long-standing reputation in the industry.

         Expanding Dealer Operations. The Company plans to expand its dealer
         operations by adding a number of new independent dealers to its
         authorized Dictograph dealer program and by implementing a separate
         Holmes authorized dealer program. The Dictograph program had 
         previously been operated as a franchise network prior to 1996. As of
         March 15, 1997, the Company had 15 Dictograph dealers and 25 Holmes
         dealers. New Dictograph dealers will acquire exclusive territories 
         from the Company and will be required to purchase a minimum quota of 
         specialized proprietary security equipment from the Company. On the
         other hand, while authorized Holmes dealers will not be provided with
         exclusive territories, they will be allowed to purchase specialized
         proprietary security equipment from the Company without meeting 
         minimum purchase requirements. In addition, Holmes dealers will be
         authorized to use the Holmes brand name to gain market advantage. Both
         Dictograph and Holmes dealers will be offered the opportunity to
         provide service and installation support for certain of the Company's 
         national accounts subscribers. It is also anticipated that the Company 
         will provide central monitoring services to some of its dealers' 
         customers.

         The Company believes that its dealer programs will provide it with a
         presence in local markets in which the Company may not have an office
         and thereby broaden recognition of its brand names. In addition, the
         dealers, who will be located throughout the United States, will give
         the Company greater geographic coverage for its developing national
         accounts business by providing subcontractor installation services. 
         The Company believes that the development of these dealer programs
         will be an important aspect of establishing and supporting its
         national accounts program. In addition, the Company anticipates that, 
         as a result of its dealer programs, revenues may be increased through 
         the provision of monitoring services to its dealers' customers and by
         sales of its products to its dealers.

Description Of The Business


                                      - 5 -

<PAGE>


         Alarm Monitoring Services

         Central Monitoring Activity. The Company monitors signals arising from
various activities, including burglaries, fires and other events, through 
certain of the systems described below which are installed at the subscriber's 
premises. The Company's monitored security systems consist of sensors,
transmitters and other event detection devices designed to detect a variety of
conditions including, but not limited to, entry, movement, fire, temperature,
water flow and electric power interruption. The sensors and other event 
detection devices are connected to a control panel/transmitter which sends 
signals to a central monitoring station maintained by the Company. Signals may
be transmitted over leased telephone lines, multiplex circuits, public 
telephone lines and cellular and radio networks. The control panel/transmitters
are generally microprocessor-based and can identify the nature of the emergency
and the area within a building where the sensor or other device was activated.
Company personnel at its central monitoring stations respond to incoming alarm
signals by contacting the subscriber, alerting the police, the fire department
or other emergency response services or, where contracted, dispatching a Holmes
response agent.

         Central Monitoring Stations. In order to reduce overall manpower
requirements, achieve economies of scale and other cost efficiencies and
enhance the quality of service being provided, the Company consolidated its
central monitoring facilities in the Northeast into one facility located in
Edison, New Jersey.

         The Company monitors the accounts of customers of other alarm
companies primarily at its central monitoring station located in Southern
California. The Company intends to monitor the accounts of customers of its 
authorized Holmes dealers at this location as well. In addition, the Company 
acquired small central stations in Arlington, Texas; Nashville, Tennessee and
San Francisco, California, in connection with its acquisitions in these cities.
Future plans for these central stations have not been finalized. See "Business
-- Business Strategy/Growth through Acquisitions."

       The Company's central monitoring stations incorporate the use of
communications and computer systems that route incoming alarm signals and
telephone calls to operators at each station. Each operator sits before a
computer monitor that provides immediate information concerning the nature of
the alarm signal, the subscriber whose alarm has been activated and the premises
on which such alarm is located. All telephone conversations are automatically
recorded. Due to the security-sensitive nature of their employment, the
Company's central monitoring employees are subject to extensive pre-employment
screening.

         The Company's central computer system in Edison, New Jersey, 
consisting of two computers with built-in redundancy, has the capacity to
monitor up to 60,000 subscriber accounts. The Company's central computer system
in Stanton, California also consists of two computers with built-in redundancy
and has the capacity to monitor up to 40,000 customer accounts. The equipment 
at the Edison facility includes: phone switching equipment; digital receivers
that process the incoming signals; a multi-channel, voice-activated recording
system; an uninterruptable power supply; dual backup generators supplied by
different fuel sources; and other equipment in support of specialized services 
such as LifeNet, CargoNet and ProWatch. The Company's smaller central stations
in California, Texas and Tennessee have the combined capacity to monitor up to
16,000 additional customer accounts.

         The Company's central monitoring stations are listed by Underwriters
Laboratories Inc. ("UL").The Company also offers Factory Mutual Research
Corporation ("FM") approved services through its Edison, New Jersey central
monitoring station. UL and FM specifications for central monitoring stations
include building integrity, back-up systems, staffing and standard operating
procedures. UL and FM confirm compliance with their respective specifications
through periodic on-site inspections. In many jurisdictions, applicable law
requires that security alarms for certain buildings be monitored by UL-listed
and/or FM-approved facilities. In addition, such listing and/or approval is
required by certain commercial subscribers' insurance companies as a condition
to insurance coverage.

         Operation of Central Monitoring Stations. Depending upon the type of
service for which the subscriber has contracted, central monitoring station
personnel respond to alarms by relaying information to the local fire or police
departments, notifying the subscriber, or taking other appropriate action, such
as dispatching alarm response personnel to the subscriber's premises where this
service is available. Other non-emergency administrative signals are generated

                                      - 6 -

<PAGE>


by low battery status, deactivation and reactivation of the alarm monitoring
system, and test signals, and are processed automatically by computer. Each of
the Company's central monitoring stations operates 24 hours per day, seven days
a week, including all holidays. Each operator receives training that includes
familiarization with substantially every type of alarm system in the Company's
subscriber base. The Company's training program encompasses classroom study as
well as personalized instruction by experienced operators on all aspects of
alarm monitoring procedure.

         Subscriber Contracts. The Company's alarm monitoring subscriber
contracts generally have initial terms of five years in duration and provide
for automatic renewal terms for fixed periods (typically one or two years)
unless the Company or the subscriber elects to cancel the contract at the end
of its term.

         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 services 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 and conversions of accounts previously
monitored by other alarm companies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

         Alarm Response Services. The Company supplements its security alarm
monitoring services by providing to certain subscribers "alarm response 
service" in connection with alarm system activations. Upon receipt of an alarm
activation signal from an alarm response service subscriber, a response guard
is dispatched by the Company to the subscriber's premises. If the Company's
response guard observes potential criminal activity upon arrival at the
subscriber's premises, the response guard will report the activity to the
dispatch office, which will in turn notify local law enforcement. The response
guard will then maintain surveillance until law enforcement officers arrive.
Depending upon a subscriber's preference, the dispatch of the Company's 
response guards may be used as an alternative to the dispatch of local police.

         The Company's patrol and response officers are subject to extensive
pre-employment screening. Patrol and response officers are required to have
firearm permits and applicable state and city guard licenses. The Company's
training program for patrol and response officers includes arrest procedure,
criminal law, firearms usage and patrol and search tactics. This training
program complies with state-mandated requirements. The provision of patrol and
alarm response services subjects the Company to greater risks, including those
relating to accidents or inappropriate employee behavior, than other types of
services.

         The Company believes that demand for alarm response service may
increase as a result of a trend on the part of local police departments to
limit their response to alarm activations and other factors that may lead to a
decrease of police presence. In addition, the Company believes that alarm
response service is an effective means to assist subscribers in reducing their
exposure to false alarm fines.

         Electronic Security Alarm Systems and Associated Services

         Electronic Security Systems. The Company uses what it believes to be
the highest quality, most cost- effective components and products in the design
and installation of electronic security systems for its customers. An effort is
being made to incorporate the most suitable combination of products such that
each system provides the highest level of security required at competitive
prices. The Company designs, sells, installs and services the following types 
of security alarm systems.

         Intrusion Detection Systems incorporate control panels and sensors to
         detect glass breakage, unauthorized door and window openings,
         vibration, motion and noise, together with personal emergency alarms 
         and other peripheral equipment such as sirens and bells. Activity 
         indicating the presence of intruders is automatically communicated to
         the Company's central monitoring stations, a monitoring facility at
         the subscriber's own premises or the local police or fire department.


                                      - 7 -

<PAGE>



         Commercial and industrial businesses are the traditional users of
         these types of systems and generally regard them as a necessary
         business expense. In addition, residential purchases of these systems
         have grown in recent years. In an effort to minimize false alarms and
         improve customer service, the Company provides a video alarm
         verification system (Computect VS) for use in conjunction with 
         intrusion detection systems. The Company is in the process of adding
         two-way voice capabilities to its central monitoring facility in
         Edison, New Jersey.

         Fire Detection Systems incorporate heat, ionization, smoke and flame
         sensing devices, manual pull stations, evacuation sounders, sprinkler
         systems, elevator controls and evacuation systems. Fire detection 
         systems are designed to comply with applicable fire codes. Activities
         indicating fire related conditions or events are automatically
         communicated to the Company's central monitoring stations, a local
         police or fire department or a monitoring center at the subscriber's
         own premises.

         Access Control Systems are primarily designed to exclude unauthorized
         personnel from specified areas. These systems provide access control
         that is generally card-activated and can be integrated with fire and
         burglary detection systems. Entry and exit activity can be monitored   
         or recorded, and may be controlled on the basis of time and authority  
         level. In addition to standard access control systems, the Company has
         introduced ProWatch, an integrated building security system specially 
         designed for multi-tenant office buildings. ProWatch integrates access 
         control and intrusion and fire detection systems, which systems may be
         controlled and monitored by a Holmes central monitoring station.

         Closed Circuit Television Systems can monitor and record entry and
         exit activity or provide surveillance of designated areas. These
         systems can deter theft and vandalism or support other access control
         systems. These systems can be monitored either by a video recorder or
         in real time via a monitoring screen.

         Critical Condition Monitoring provides supervision of various
         commercial systems and processes. A common form of this service is
         monitoring of sprinkler system functions, such as water flow, air and
         water pressure, fire pump conditions, shut-off valves and water tank 
         levels. Additionally, these systems can consist of ambient temperature
         sensors that signal failure of heating or refrigeration systems,
         devices that monitor manufacturing processes, and other equipment that
         monitors power levels, water levels and energy waste.

         Interactive Video and Verification designed for commercial sites allow
         central station staff, using ViewNet(TM), to monitor a location in
         "real time" as events occur, and enables central station operators to 
         talk to people they are monitoring as needed, offering instruction to
         customers, or engaging a suspected criminal before police arrive.

         Vehicle Tracking Systems provide covert tracking of vehicles and can
         pinpoint the location of a vehicle anywhere in the continental United
         States using global positioning satellite technology. In addition to
         providing tracking capabilities, the Company's LifeNet system and
         CargoNet system control a vehicle's engine functions thereby allowing 
         LifeNet or CargoNet, as the case may be, to direct a vehicle to a 
         complete halt. CargoNet also protects commercial trucks and trailers 
         from theft.

         Wireless Security Transmission Systems are designed to be monitored by
         a central monitoring facility via wireless security transmissions. In 
         1996 the Company introduced HolmesNet, an in-building wireless
         security transmission system which is constantly monitored by a Holmes
         central monitoring station. HolmesNet is also a two-way communication 
         network that allows a subscriber to send a message directly to a 
         Holmes central monitoring station and receive a confirmation that such
         message was received.

         Field Repair Services. The Company believes one of the most effective
         ways of improving customer retention is the provision of quality, 
         responsive field repair service by Company employees. Repair services
         generate revenues primarily through billable field service calls and
         contractual payments under the Company's extended service program. The
         increasing density of the Company's subscriber base, as a result of
         the Company's continuing effort to infill areas surrounding its
         branch operations 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

                                      - 8 -

<PAGE>


         in scheduling and routing also allows the Company to provide faster 
         field services response and support, which leads to a higher level of
         subscriber satisfaction.

Franchise And Dealer Operations

         The Company acquired the business of Dictograph Franchise Corporation
in 1988. Headquartered in Edison, New Jersey, this business operates a
widespread franchise network and authorized Dictograph dealer program
throughout the United States and the Caribbean. As of March 15, 1997, the
Company had 29 independent franchisees and 15 independent Dictograph dealers, 
all authorized to do business under the name of Dictograph Security Systems. 
The Company is in the process, however, of phasing out its franchise operations
and, since 1993, has not established additional franchise relationships. 
Accordingly, the existing Dictograph franchisees are being given an option
either to convert their franchises into dealerships by June 30, 1997, or to
maintain their franchises under existing franchise agreements. The Company's 
franchise agreements require franchisees to purchase products based on
individual minimum quotas and pay royalties based on a percentage of their
revenues.

         In accordance with its current business strategy, the Company plans to
increase the number of Dictograph dealers in the Dictograph dealer program and
has established an authorized Holmes dealer program. As of March 15, 1997, the
Company had 25 independent Holmes dealers. Under both programs, dealers are
independent electronic security services businesses which sell, install and
service security equipment. These businesses are typically small and often
cannot properly provide monitoring services because they lack a sufficient
number of subscribers to support the fixed operating expenses associated with
such services. Hence, Dictograph and Holmes dealers are able to have their
customers' security systems monitored by the Company. Other Company services
are also available to dealers under both programs, including technical support,
sales training and marketing assistance. In addition, it is intended that both
Dictograph and Holmes dealers will be offered the opportunity to provide
service and installation support for certain of the Company's national accounts
subscribers. Pursuant to dealership arrangements under the Dictograph dealer
program, dealers acquire exclusive operating territories and are required to
purchase a minimum quota of specialized proprietary security equipment from the
Company on an annual basis. On the other hand, under the Holmes program,
authorized Holmes dealers will not be provided with exclusive operating
territories, but will be allowed to purchase specialized proprietary security
equipment from the Company without meeting minimum purchase requirements. In
addition, Holmes dealers will be authorized to use the Holmes brand name to
gain market advantage.

         To date, the Company's revenues from its franchise and dealer
operations are derived primarily from (i) the gross margin on the sale of
security equipment to franchisees and Dictograph dealers, (ii) royalties
received from franchisees based upon their revenues and (iii) subcontract
monitoring charges from security alarm services performed for monitoring
franchisee and Dictograph dealer accounts. See "Business -- Business Strategy."

Other Services

         Jewelry Vault Rentals. The Company operates a maximum security safe
deposit vault facility in the jewelry district of New York City. Vault rentals
are provided on a short-term or long-term basis to jewelers, many of whom also
utilize the Company's security alarm services for their businesses located in
the jewelry district.

         Insured Parcel Delivery. In 1995, the Company began providing insured
parcel delivery services to the jewelry markets of New York City, Los Angeles
and other locations after acquiring the assets of its One Service business. 
This business involves the arranging of overnight shipping of insured jewelry
parcels from jewelry centers in New York, Los Angeles and other locations to
various points throughout the United States. The Company's insured parcel
delivery service provides a number of special handling features to ensure the
security of the parcel, including computerized tracking and proof of delivery.
In addition, insurance coverage is provided for each parcel in an amount up to
$50,000 of the declared value of such parcel with no deductible.

Marketing and Sales


                                      - 9 -

<PAGE>


         The Company is currently focusing its marketing efforts on increasing
its visibility throughout the United States. This is accomplished through
national and local advertising in various forms of print media, direct mail
campaigns, telemarketing efforts, referrals from existing customers and
attendance at national trade shows. Additionally, the Company's marketing
strategy includes the return to one of the original Holmes logos used in the
early part of this century. The Company believes that use of this original logo
will increase public recognition and awareness of Holmes and its historical
presence and long-standing reputation in the industry. The Company provides its
sales force with extensive training and market resources, including
professionally prepared literature and presentation materials, background
research and technical information.

         The Company installs security equipment either on the basis of an
outright sale of the equipment to the subscriber, or as a "company-owned
system" where Holmes charges the subscriber for the installation, but retains
title to the equipment. Sales of alarm systems are generally made at the
customer's premises, typically through visits by a sales representative. The 
Company's sales representatives analyze a customer's security needs and, acting
in coordination with necessary technical support staff, design or specify an
appropriate security system to meet those needs and coordinate the installation
of the system in the customer's premises. The Company maintains installation
and field service personnel, as well as inventories of parts, in each of its
branch offices. See "Business -- Business Strategy."

Competition

         The electronic security services industry in the United States is
highly competitive and highly fragmented, with new competitors continually
entering the field. Competition is based primarily on price in relation to
quality of service. The Company believes that it derives competitive strength
from its emphasis on high quality systems and services and its attention to
technological advances. Sources of competition in the electronic security
services industry are other providers of central monitoring services, systems
directly connected to local police and fire departments, local alarm systems
and other methods of protection, such as locks and gates and manned guarding.
The Company believes that it competes with numerous local, regional and
national companies. The Company's primary nationwide competitors include ADT
Security Systems, Inc., Ameritech Monitoring Services, Inc., Wells Fargo Alarm 
Services and Honeywell, Inc. Some of the Company's national competitors have
greater financial, marketing and other resources than the Company. It is 
possible that, subject to regulatory compliance, companies such as those 
engaged in the telephone and cable business, if not already competing, may in 
the future endeavor to enter the electronic security services industry.

Suppliers

         The Company currently has multiple sources of supply for the
components used in the electronic security and fire detection systems that it
designs and installs. The Company does not manufacture any of the equipment or
components that it designs and installs. The Company believes that a variety of
alternative sources of supply is 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.

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 Holmes operates, as well as certain local authorities, require
Holmes 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.


                                     - 10 -

<PAGE>


         In addition, there has been a trend recently on the part of
municipalities and other localities to attempt to reduce the level of false
alarms through various measures such as the licensing of individual alarm
systems and the imposition of fines upon customers, revocation of customer
licenses or non-response to alarms after a certain number of false alarms.
While such statutes and ordinances have not had a material adverse effect on
Holmes' business operations to date, Holmes is unable to predict whether such
statutes or ordinances, or any similar statues or ordinances enacted by other
jurisdictions, will adversely affect its business and operations in the future.
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.

         Holmes' 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.

Risk Management

         The nature of the services provided by Holmes 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 Holmes' 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 in cases of gross negligence or intentional
misconduct and in certain other situations. Holmes carries insurance of various
types, including general and umbrella liability and errors and omissions
insurance to insure it from liability arising from acts or omissions of its
employees.

Intellectual Property

         Holmes Protection and Dictograph are the Company's principal
trademarks and service marks. The Company also uses the Computect service mark
in connection with its alarm services and related products, the LifeNet and
CargoNet service marks for its vehicle tracking systems, the HolmesNet service
mark in connection with its wireless transmission system and the One service
mark for its insured parcel delivery service. The Company believes that its
rights in these trademarks and service marks are of unlimited duration and
adequately protected by registration or applications to register. In addition,
the ProWatch trademark is authorized for use by the Company from a third party.
The Company believes that certain of its trademarks and service marks are
important to the marketing of its security alarm services, particularly as the
Company strives to establish a strong identity for Holmes with its customers.
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, service marks 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.

Employees

         As of March 15, 1997, the Company had approximately 565 full-time
employees. The Company believes that relations with its employees and their
unions are satisfactory. Approximately 85% of the Company's installation and
service personnel and a small portion of its response personnel are represented
by unions under the following collective bargaining agreements with the
Company's subsidiaries:



                                     - 11 -

<PAGE>


<TABLE>
<CAPTION>


                                                                                         Agreement               Employees
     Subsidiary*                                   Union                              Expiration Date             Covered
----------------------         ---------------------------------------------      -----------------------      -------------
<S>                            <C>                                                <C>                          <C>    
Holmes Protection              United Service Workers of America, Local           December 31, 2001                 18
of Long Island, Inc.           355

Holmes Protection              Local No. 98, International Brotherhood of         November 9, 2000                  18
of Philadelphia, Inc.          Electrical Workers

Holmes Protection              United Service Workers of America, Local           September 30, 2001                38
of New Jersey, Inc.            355

Holmes Protection              Local 3, International Brotherhood of              January 31, 2001                  69
of New York, Inc.              Electrical Workers

Holmes Protection              United Service Workers of America, Local           March 24, 2002                    10
of New York, Inc.              355

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

*        These subsidiaries have all been merged into the Company's
         wholly-owned subsidiary, Holmes Protection, Inc., as of December 31,
         1996.
Historical Developments

         The 1992 Restructuring

         On August 13, 1992, the Company effected a financial restructuring 
(the "1992 Restructuring") pursuant an exchange agreement, dated as of December
18, 1991, which agreement was amended as of January 31, 1992, May 24, 1992 and
June 30, 1992 (the "Exchange Agreement"), between the Company and seven U.S.
insurance companies and other institutions (together, the "Institutions").
Stockholder approval of the Exchange Agreement was received on August 10, 1992.
The Exchange Agreement provided for the satisfaction of certain notes
representing approximately $72.6 million of loans (including accrued interest
and penalties thereon, as at June 30, 1992) to the Company by the Institutions
by a combination of cash payment, an exchange of Common Stock for debt, and
forgiveness of approximately $34.5 million of debt. The Company implemented a
twenty-five-for-one reverse stock split and then sold for 8.75 British pounds
(approximately $16.91) per share additional shares of Common Stock to the
Institutions as well as a total of 1,151,947 shares to its existing 
stockholders and directors and to certain institutional investors. Upon the 
completion of the 1992 Restructuring, the Institutions received a total of
1,603,224 new shares of Common Stock (representing 54.3% of the resulting
outstanding shares of Common Stock), warrants (the "Institution Warrants") to
purchase an aggregate of 147,572 shares of Common Stock at 8.75 British pounds 
per share (representing 5% of the resulting outstanding shares), and a cash
payment of $12.6 million. As of August 13, 1992, after giving effect to the
reverse stock split, the average trading price of the Common Stock on the
London Stock Exchange was 7.28 British pounds per share and, based upon such
price, the aggregate value of the shares issued to the Institutions was
approximately $22.5 million. (United States dollar equivalents stated in this
paragraph assume an exchange rate of $1.9323 per British pound.) John Hancock 
Mutual Life Insurance Company and The Mutual Life Insurance Company of New York,
and their respective affiliates, are currently the two largest stockholders
among the Institution group.

         In connection with the 1992 Restructuring and the Exchange Agreement,
the Institutions received the right to nominate three directors of the Company
("Institution Nominees"), subject to adjustment based on their percentage
ownership of total Common Stock. As of the date hereof, the Institutions have
the right to nominate only two directors.



                                     - 12 -

<PAGE>


         The 1994 Investment Agreement

         On August 1, 1994, pursuant to an investment agreement, dated as of
June 29, 1994 (the "Investment Agreement"), between the Company and HP Partners
L.P., a Delaware limited partnership (the "Investor"), the Investor purchased
1,515,886 shares of Common Stock (the "Investor Shares") (representing
approximately 34% of the then outstanding shares of Common Stock) and warrants
(the "Investor Warrants") to purchase an aggregate of 685,714 shares of Common
Stock at an exercise price of $4.58 per share, for an aggregate consideration
of $10 million. The Investment Agreement and the transactions contemplated
thereby, including amendments to the Company's By-Laws and the adoption of the 
Restated Certificate of Incorporation of the Company which effected a one-for-
fourteen reverse stock split of the Common Stock, were approved by the 
Company's stockholders on July 29, 1994. As a result of the Investment
Agreement, the Common Stock was delisted from the London Stock Exchange and 
listed on the Nasdaq SmallCap Market effective March 27, 1995. In addition, on
March 27, 1995, the Company implemented a one-for-fourteen reverse stock split. 
Unless otherwise noted, all share amounts referred to herein have been adjusted
to reflect this reverse stock split.

         In connection with the Investment Agreement, the Investor received the
right to nominate four directors of the Company ("Investor-Nominees"), subject
to adjustment based on the number of Institution Nominees and the Investors'
percentage ownership of total Common Stock. As of the date hereof, the
Investors have the right to nominate only three directors.

Other Developments

         1996 Credit Facility

         In August 1996, the Company entered into a credit agreement dated as
of August 30, 1996, as amended and restated as of December 31, 1996 (the
"Credit Facility") with Merita Bank Ltd. and Bank of Boston Connecticut 
(together, the "New Banks") providing for a two-year, $25 million revolving
credit facility which converts into a five-year term loan on September 30, 1998.
Certain funds under the Credit Facility were used by the Company to replace its
previous loan facility and to repay the outstanding balance thereunder. In
connection with the Credit Facility, the New Banks received warrants to
purchase an aggregate of 166,666 shares of Common Stock at an exercise
price of $9.75 per share (the "New Bank Warrants") and were granted certain
registration rights with respect thereto.


         Registration Rights

         In connection with the Investment Agreement, the Company entered into
substantially similar registration rights agreements, each dated August 1, 1994,
with the Investor and each of the Institutions, respectively (the "Registration
Rights Agreements"). Pursuant to the Registration Rights Agreements, the
Company agreed to use its best efforts to prepare and file with the Securities
and Exchange Commission and thereafter keep effective for a period of up to 15
years a registration statement under the Securities Act of 1933 (the
"Securities Act") permitting the public resale of the Investor Shares, the
1,588,105 shares held by the Institutions on August 1, 1994, and the shares of
Common Stock issuable upon exercise of the Investor Warrants and the
Institution Warrants. The Registration Rights Agreements provide that the
Company may not grant any "piggyback" registration rights with respect to
underwritten offerings to any person without the written consent of the
Investor and the holders of more than 50% of Registrable Securities (as 
defined therein) held by the Institutions.

         In connection with the Credit Facility, the Company entered into a
registration rights agreement, dated as of August 30, 1996, with the New Banks
(the "New Banks Registration Rights Agreement"). Pursuant to the New Banks
Registration Rights Agreement, the Company has agreed to, at the request of the
New Banks, use its best efforts to prepare and file with the SEC and thereafter
keep effective for a period of 120 days a registration statement under the
Securities Act permitting the resale of the Shares underlying the New Bank
Warrants.


                                     - 13 -

<PAGE>


         In connection with an acquisition (the "Acquisition") that the Company
made in 1996, the Company issued restricted shares of Common Stock and entered
into substantially similar registration rights agreements with each of the
various parties that acquired such restricted shares of Common Stock (the
"Acquisition Registration Rights Agreements"). Pursuant to the Acquisition
Registration Rights Agreements, the Company has agreed to, at the request of
the various parties thereto, use its best efforts to prepare and file with the
SEC and thereafter keep effective for a period of 90 days, a registration
statement under the Securities Act permitting the resale of 103,805 shares of 
restricted Common Stock that were issued in connection with the Acquisition.

         The 1995 Outsourcing Agreement

         In 1995, the Company entered into a ten-year, $51 million information
technology services agreement, as amended (the "Outsourcing Agreement"), with
PremiTech Corporation ("PremiTech"), a subsidiary of Electronic Data Systems,
Inc. PremiTech is a limited partner in the Investor, holding a partnership
interest equivalent to approximately 6% of the Company's Common Stock. Pursuant
to the Outsourcing Agreement, PremiTech assisted the Company in consolidating
the Company's four central monitoring stations located in the Northeast to a
single location in Edison, New Jersey. The consolidation was completed in
February 1997. The Outsourcing Agreement also provided for PremiTech to manage
all of the Company's technological infrastructure and to perform certain other
administrative functions.

         In March 1997, the Company and PremiTech reached an agreement in
principle to terminate the Outsourcing Agreement, under which the Company will
record a one-time, non-recurring charge of approximately $1.5 million in the
first quarter of 1997. See Notes 3 and 15 to Notes to Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operation."

         The 1996 Public Offering

         In October 1996, the Company completed a secondary public offering,
underwritten by Brean Murray & Co., Inc., of 1.1 million shares of its Common
Stock resulting in net proceeds to the Company of $12.1 million dollars, which
were used to fund acquisitions, meet working capital requirements and reduce
long-term debt obligations.











                                     - 14 -

<PAGE>


Item 2.   Properties

               As of March 15, 1997, the Company leased the following principal
properties:
<TABLE>
<CAPTION>



                                                                     
                                                                      Square        Annual
         Address                        Principal Use                  Feet         Rental           Lesse Expires
---------------------------     ---------------------------------    --------     ----------     --------------------
<S>                             <C>                                   <C>           <C>           <C>    
440 9th Avenue                   Corporate and sales offices           20,000      $392,800        February 28, 2002
New York, NY

21 Northfield Avenue             Sales, service center and central     15,620      $210,768        June 30, 2006
Edison, NJ                       station

10579 Dale Avenue #200           Sales office and central station       3,168      $ 46,416        March 31, 1999
Stanton, CA
</TABLE>


Item 3.    Legal Proceedings

         The Company experiences routine litigation in the normal course of its
business, which claims are generally covered under the Company's insurance
policies. The Company believes that none of such pending litigation will have a
material adverse effect on its consolidated financial condition, future results
of operations or liquidity.

         As previously reported, the Company was a defendant in a lawsuit
captioned Pan American Diamond Corporation and Wasko Gold v. Holmes Protection
of New York, Inc., commenced in New York State Supreme Court, New York County,
in January, 1994. The complaint sought compensatory, consequential and punitive
damages in excess of $1,000,000 arising out of a burglary at a New York City
jewelry manufacturing Company in which an employee of the Company participated.
The Company, under the claim, was subject to an uninsured exposure for any
damages that could be awarded in excess of $100,000. In March 1997, the parties
to this action settled all claims with an aggregate payment made by the Company
and its insurance carrier of $250,000.
 
Item 4.    Submission of Matters to a Vote of Security Holders

         The Annual Meeting of Stockholders of the Company was held on December
5, 1996. The holders of 5,828,062 shares of Common Stock of the Company were
entitled to vote at the meeting. The holders of 4,819,830 shares of Common
Stock, or 82.70% of shares entitled to vote at the meeting, were represented by
proxy. The holders of 142 shares of Common Stock, or approximately .0021364% of
shares entitled to vote at the meeting, were present in person. The following
actions took place:

1.       The stockholders voted for the reelection of each of the following
persons nominated to serve as a director of the Company for a three-year term 
which will expire at the Company's  annual meeting in 1999: George V. Flagg,
Lawrence R. Glenn, and Edward L. Palmer.  The remaining directors whose terms 
of office did not expire at the meeting were Pierre Besuchet, Daniel T. Carroll,
Mark S. Hauser, William P. Lyons, and David Jan Mitchell.  The holders of
4,816,672 shares voted for each nominated director, the holders of 3,300 shares 
voted against each nominated director, the holders of 0 shares abstained from
voting and 0 shares were broker non-votes.

2.       The stockholders approved a proposal to amend and restate the
Company's Restated Certificate of Incorporation to delete Article Seventh which
relates to certain creditors' and stockholders' rights to effect compromises or
reorganizations. The holders of 3,538,075 shares voted for the proposal, the
holders of 2,202 shares voted against the proposal, the holders of 1,300 shares
abstained from voting and 1,278,395 shares were broker non-votes.


                                     - 15 -

<PAGE>



3.       The stockholders voted to adopt the Company's 1996 Stock Incentive
Plan. The holders of 4,405,109 shares voted for the adoption, the holders of
364,352 shares voted against the adoption, the holders of 6,560 shares
abstained from voting and 43,951 shares were broker non-votes.

4.       The stockholders voted to ratify the appointment of Arthur Andersen
LLP as the Company's independent public accountants for the year ended December
31, 1996. The holders of 4,817,170 shares voted for the appointment, the 
holders of 502 shares voted against the appointment, the holders of 2,300
shares abstained from voting and 0 shares were broker non-votes.




                                     - 16 -

<PAGE>


PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

Authorized Capital Stock

         The Company's authorized capital stock consists of 12,000,000 shares
of Common Stock, par value $.01 per share, of which 5,828,062 shares are
outstanding as of March 27, 1997, and 1,000,000 shares of undesignated
Preferred Stock, par value $1.00 per share, of which no shares are outstanding
as of March 27, 1997.

         On March 27, 1995 the Company effected a reverse stock split pursuant
to which one new share of Common Stock, $.01 par value, was exchanged for every
fourteen (14) whole shares of Common Stock, $.25 par value, then issued or
outstanding and shareholders received a cash payment in lieu of any fractional
shares (the "Reclassification"). References to "Common Stock" herein refer to
the Common Stock of the Company both prior to and following the 
Reclassification as the context requires. All share amounts and related share
price information in this report have been adjusted to give effect to the
Reclassification.

Price Range of Common Stock

         The Company's Common Stock traded on the London Stock Exchange from
1984 through March 24, 1995. From March 27, 1995 through September 20, 1996,
the Common Stock traded on the Nasdaq SmallCap Market ("NASDAQ/SmallCap").
Since September 23, 1996, the Common Stock has traded on the Nasdaq National
Market ("NASDAQ/NM") under the trading symbol "HLMS." The following table sets
forth, as applicable for the periods indicated, the range of the high and low
mid-market closing prices for the Common Stock as reported by the London Stock
Exchange and the range of high and low sale prices as reported by
NASDAQ/SmallCap and NASDAQ/NM. The prices set forth below have been adjusted to
give effect to the Reclassification.

<TABLE>
<CAPTION>

                                              U.S. Dollars*                British Pounds
                                      ---------------------------     ----------------------------
                                 
                                        High            Low              High              Low
                                        ----            ---              ----             ---
<S>                                     <C>            <C>             <C>              <C>

1995
     1st Quarter (on London             
     Stock Exchange through    
     March 24, 1995)................    $6.25          $5.81          (pound)3.92      (pound)3.64
     1st Quarter (on                                
     NASDAQ/SmallCap
     effective March 27, 1995)......     6.25           6.25             --               --
     2nd Quarter....................     7.25           5.50             --               --
     3rd Quarter....................     9.25           4.25             --               --
     4th Quarter....................     6.50           3.75             --               --
1996      
     1st Quarter....................    $9.00          $4.38             --               --
     2nd Quarter....................     9.25           7.75             --               --
     3rd  Quarter...................    11.50           9.00             --               --
     4th Quarter....................    15.13          11.25             --               --
</TABLE>


-------------------------
* For purposes of this table, historical pound/dollar exchange rates have been
used based on the average of the rates at the end of each month during each
quarterly period.


                                     - 17 -

<PAGE>


At March 27, 1997, the Company had approximately 1,451 shareholders of record.

Dividend Policy

         The Company has not paid cash dividends on the Common Stock since 1989
and does not anticipate paying such dividends in the foreseeable future. The
Company currently intends to retain any future earnings for use in the
Company's business. The payment of any future dividends will be determined by 
the Board in light of the conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board. In addition, the Company is subject to certain restrictions 
regarding the payment of cash dividends and the making of other distributions
in respect of the Common Stock pursuant to the Credit Facility (as hereinafter
defined in "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources") and any other new 
financing arrangements.

Item 6.    Selected Consolidated Financial Data

         The selected consolidated financial data set forth below as of
December 31, 1996 and 1995 are derived from the Company's financial statements 
included elsewhere in this Form 10-K, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected consolidated 
financial data set forth below as of December 31, 1994, 1993 and 1992 are
derived from financial statements not included in this Form 10-K. This data 
should be read in conjunction with the Company's consolidated financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," included elsewhere herein.

<TABLE>
<CAPTION>


                                                                                Year Ended December 31,
                                                        1996            1995             1994           1993          1992
                                                        ----            ----             ----           ----          ----
                                                                (in thousands, except per share amounts)
Statement of Operations Data:(1)
<S>                                                 <C>             <C>               <C>           <C>           <C>     
Revenues......................................      $ 50,975        $ 50,075          $51,402       $ 53,500      $ 56,173
Cost of sales (exclusive of depreciation             (28,124)        (26,262)         (24,885)       (29,916)      (29,560)
expense)......................................
Gross profit..................................        22,851          23,813           26,517         26,584        26,613
Selling, general and administrative expenses..       (14,989)        (16,668)         (15,051)       (17,837)      (17,287)
Depreciation and amortization.................       (10,574)        (10,390)          (9,736)        (8,919)       (8,139)
Income (loss) before income taxes and
cumulative effect of change in accounting
principle.....................................        (3,667)         (5,793)             982            145         3,803
Income (loss) before cumulative effect of
change in accounting principle and                    
extraordinary item............................        (2,452)         (3,674)             404            (55)       (3,795)  
Cumulative effect of change in accounting             
principle.....................................            --           2,477               --             --            --
Extraordinary item  ..........................            --              --               --             --        23,187
Net income (loss).............................        (2,452)         (1,197)             404            (55)       19,392
Earnings (loss) per common share before
cumulative effect of change in accounting 
principle and extraordinary item..............         (0.51)          (0.82)            0.11          (0.02)        (3.04)
Earnings (loss) per common share(2)...........         (0.51)          (0.27)            0.11          (0.02)        15.54
Weighted average shares outstanding...........         4,827           4,459            3,580          2,944         1,250
</TABLE>


                                     - 18 -

<PAGE>



<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                        1996            1995            1994          1993          1992
                                                        ----            ----            ----          ----          ----
                                                                                     (in thousands)
Other Data:
<S>   <C>                                             <C>            <C>             <C>           <C>           <C>     
EBITDA(3) ...................................         $8,144         $ 7,392         $11,659       $ 9,649      $ 12,312
Interest Expense.............................            537             721             941           585           370
Capital expenditures.........................          9,428           7,494           7,361         7,883         7,074
Net cash provided by operating activities....          3,337           6,144           6,164         2,335         1,797
                                                       




                                                                                    At December 31,
                                                        1996            1995            1994          1993          1992
                                                         ----            ----            ----         ----          ----
                                                                                    (in thousands)
Balance Sheet Data:
Working Capital..............................        $(2,171)       $ (5,246)        $(1,818)     $ (9,107)     $ (8,307)
Total Assets ................................         89,817          80,208          87,148        84,078        83,450
Long-term debt, net of current maturities....          4,370           4,862           6,709         5,995           435
Shareholders' equity ........................         60,395          47,672          48,420        39,319        38,006

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

(1)      Results of operations vary significantly among the years due to
         reorganization and a recapitalization of the Company. Net loss for 
         1996 reflects the effect of a non-recurring charge of $700,000. Net 
         loss for 1995 reflects the effect of a non-recurring charge of 
         $2,074,000 and the cumulative effect of a change in the method of 
         accounting for non-refundable payments received from customers for
         Company-owned systems resulting in a net credit after tax of 
         $2,477,000. See Notes 4 and 5 to Notes to Consolidated Financial
         Statements for further explanations. Net income for 1992 reflects the
         effect of an extraordinary gain, net of tax of $23,187,000, resulting
         from the restructuring of debt that occurred in August 1992.

(2)      The net income (loss) per common share data has been adjusted to give
         effect to the Reclassification on March 27, 1995.

(3)      EBITDA means earnings before interest, taxes, depreciation and
         amortization and is presented because it is an accepted and useful
         financial indicator of a Company's ability to service and incur debt.
         EBITDA should not be considered (i) as an alternative to net income or
         any other GAAP measure of performance, (ii) as an indicator of
         operating performance or cash flows generated by operating, investing
         or financing activities or (iii) as a measure of liquidity. EBITDA for
         1996 does not reflect a non-recurring charge of $700,000. EBITDA for
         1995 does not reflect the cumulative effect of a change in accounting
         principle of $2,477,000 or a non-recurring charge of $2,074,000.
         EBITDA for 1992 does not reflect an extraordinary gain of $23,187,000.



                                     - 19 -

<PAGE>


Item 7. Management's Discussion and Analysis of Financial
        Condition and Results of Operations

Results of Operations
<TABLE>
<CAPTION>


                                                                                    Year Ended December 31,
                                                                                        (in thousands)
                                                                  1996            1995            1994              1993
                                                                  ----            ----            ----              ----
<S>                                                            <C>            <C>             <C>               <C>     
Monitoring and service.............................            $35,656        $ 37,912        $ 39,747          $ 41,004
Installation ......................................             10,537           8,155           8,425             9,141
Franchise royalties, product sales
  and other........................................              4,782           4,008           3,230             3,355
                                                               -------       ---------       ---------          --------
Total revenues.....................................             50,975          50,075          51,402            53,500
Cost of sales (exclusive of
  depreciation expense shown below)................            (28,124)        (26,262)        (24,885)          (26,916)
                                                               -------         --------        --------          --------
Gross profit.......................................             22,851          23,813          26,517            26,584
Selling, general and administrative
  expenses.........................................           (14,989)         (16,668)        (15,051)          (17,837)
Depreciation and amortization......................           (10,574)         (10,390)         (9,736)           (8,919)
Non-recurring charge...............................              (700)          (2,074)              --                --
Other income ......................................               282              247             193               902
Interest expense, net..............................              (537)            (721)           (941)             (585)
                                                              --------       -- -------       ---------         ---------
Income (loss) before income taxes and
  cumulative effect of change in
  accounting principle.............................            (3,667)          (5,793)            982               145
Provision (benefit) for income taxes...............            (1,215)          (2,119)            578               200
                                                               -------       ---------        --------          ---------
Income (loss) before cumulative effect
  of change in accounting principle................            (2,452)          (3,674)            404               (55)
Cumulative effect of change in
  accounting principle, net of 
  tax of $1,942....................................                 --           2,477           --                  --
                                                             ---------       ---------        --------          ----------
Net income (loss)..................................          $ (2,452)       $  (1,197)       $    404          $    (55)
                                                             =========       =========        ========          ==========
</TABLE>

       Overview

         The majority of the Company's revenues is derived from a combination
of (i) recurring payments received from subscribers for providing monitoring,
service and equipment relating to electronic security systems, primarily under
renewable contracts which generally have an initial five-year term, (ii)
non-refundable charges received in connection with the installation of
Company-owned systems in subscribers' premises, (iii) direct sales of 
electronic security systems and (iv) billable service charges, primarily from
subscribers who own their systems outright. The remainder of the Company's
revenues is derived from its insured parcel delivery service for the jewelry 
trade, jewelry vault rentals and royalties and product sales relating to its
franchise and dealer operations.

         Recurring revenues are payable monthly, quarterly or annually in
advance and are recognized as service is provided. Effective January 1, 1995,
the Company changed its method of accounting for installation revenues with
respect to the recording of non-refundable payments received from customers
upon the completion of the installation of Company-owned systems. The 
cumulative net effect of this change was to increase net income by $2.5 million
in 1995. The Company believes that recognizing revenues upon completion of the
installation results in a better matching of revenues and expenses, better
reflects the actual level of new business activity and conforms with the 
dominant practice being followed by the electronic security services industry
See Note 4 to Notes to Consolidated Financial Statements.


                                     - 20 -

<PAGE>


         Direct installation costs of Company-owned systems, which include
materials, labor and installation overhead, are capitalized and depreciated 
over the average useful life of subscriber contracts (including renewals),
estimated by the Company to be twelve years. Other than direct installation 
costs of Company-owned systems, all costs are recognized in the period in which
they are incurred.

         Fiscal Year Ended 1996 Compared with Fiscal Year Ended 1995

         Revenues increased $0.9 million (1.8%) to $51.0 million in 1996 from
$50.1 million in 1995. The increase was attributable to an increase in
installation revenues of $2.4 million (29.2%) primarily from new installations
of customer-owned systems and an increase of approximately $0.8 million in
other revenues which represents an increase in revenues associated with the One
Service business acquired in March, 1995 offset by a decline in revenues from
the Company's Dictograph operations. The increase in installation and other
revenues was partially offset by a decrease in monitoring and service revenue
of $2.2 million (6.0%) relating to the cancellation of annual recurring
revenues in excess of new sales. The annualized cancellation rate was 10.8% in 
996 compared to 10.9% in 1995. The annual recurring revenue base declined from 
$35.5 million at December 31, 1995 to $35.0 million at December 31, 1996. In
1996, the Company acquired approximately $1.9 million of annual recurring
revenue most of which was acquired in December.

         Cost of sales increased $1.8 (7.1%) to $28.1 million in 1996 from 
$26.3 million in 1995. This increase was a result of the costs associated with
the increase of new installations of customer-owned systems and the costs
associated with the increased One Service business. New installation margins
on customer-owned systems remained constant for 1996 as compared to 1995.

         Selling, general and administration expenses decreased $1.7 million
(10.1%) to $15.0 million in 1996 from $16.7 in 1995. The decrease reflects
reduced costs associated with staff reductions completed in the fourth quarter
of 1995 and additional reductions completed in 1996 offset slightly by
increased selling expenses associated with increased sales in 1996.

         Depreciation and amortization expense increased $0.2 million (1.8%) to
$10.6 million in 1996 from $10.4 million in 1995. The increase relates to
additional depreciation of installation costs relating to new and upgraded
company-owned systems partially offset by a reduction in depreciation on other
assets as a result of the writedown of leasehold improvements and other fixed
assets in the fourth quarter of 1995.

         Interest expense, net of interest income, declined by $0.2 million
(25.5%) from $0.7 million in 1995 to $0.5 million in 1996 primarily due to a
declining debt balance.

         Non-recurring charges of $0.7 million in 1996 included $0.5 million
relating to severance pay and related benefits in connection with additional
reserves required for the staff reductions announced in the fourth quarter of
1995 and further reductions in 1996 as well as a settlement of an outstanding
legal matter. In 1995, non-recurring charges of $2.1 million included $1.1
million relating to severance pay and related benefits for staff reductions and
approximately $1.0 million relating to the write-off of unamortized leasehold
improvements and other assets in connection with the Company's central station
consolidation and the relocation of the Company's corporate headquarters.

         The Company recorded a net loss in 1996 of $2.5 million compared to a
net loss of $1.2 million in 1995. In 1995, the Company changed its method of
accounting for non-refundable installation fees on company-owned systems. The
cumulative net effect of this change was to increase net income by $2.5 million
in 1995.

         Fiscal Year Ended 1995 Compared with Fiscal Year Ended 1994

         Revenues declined $1.3 million (2.6%) to $50.1 million in 1995 from
$51.4 million in 1994. A portion of the decline was attributable to a reduction
in revenues of $1.8 million from the Company's monitoring and service 
operations relating to the cancellation of annual recurring revenues in excess
of new sales. Such annual recurring revenue base declined from $37.4 million at
December 31, 1994 to $35.5 million at December 31, 1995. In addition, reduced
revenues resulted from a decline in revenues of $.7 million from franchise and
dealer operations and $.7 million from the change in the method of accounting
for non-refundable installation fees on Company-owned systems. The decline in
revenues

                                     - 21 -

<PAGE>


was partially offset by revenues from the insured parcel delivery service of
$1.4 million, which business was acquired in March 1995. In 1995, the franchise
and dealer operations experienced the loss of several franchisees and a
reduction in related royalties and product sales. The change in accounting
policy regarding non-refundable installation fees, while having a favorable
cumulative effect on net income, resulted in lower installation income
recognition in 1995. The Company's cancellation rate continued to improve from
a high in 1991 of 15.2%, to 10.9% in 1995, which was slightly better than the
11.1% cancellation rate in 1994. This improvement reflects continued efforts to
upgrade older accounts with new systems and to provide high quality service to
subscribers.

         Cost of sales increased by $1.4 million (5.5%) to $26.3 million in
1995 from $24.9 million in 1994 primarily due to costs incurred in the 
operation of the insured parcel delivery business.

         Selling, general and administrative expenses increased by $1.6 million
(10.7%) to $16.7 million in 1995 from $15.1 million in 1994. The increase
relates in part to legal and professional fees incurred in connection with the
Outsourcing Agreement and a significant prospective acquisition which did not
materialize. Increased selling expenses were incurred in connection with new
marketing efforts relating to the ProWatch and LifeNet systems.

         Depreciation and amortization expense increased $.7 million (6.7%) to
$10.4 million in 1995 from $9.7 million in 1994. The increase relates to
additional depreciation of installation costs relating to new Company-owned
systems as well as those systems which have been upgraded.

         Interest expense, net of interest income, declined by $0.2 million
(23.4%) from $0.9 million in 1994 to $.7 million in 1995 primarily due to an
increase in interest income on investments and a declining debt balance under
the Loan Agreement.

         Non-recurring charges of $2.1 million in 1995 included $1.1 million
relating to (i) severance pay and related benefit costs in connection with the
selective reduction of approximately 70 employees in the Company's work force,
all of whom were terminated, notified or identified at December 31, 1995 and
(ii) approximately $1.0 million relating to the write-off of unamortized
leasehold improvements and other assets in connection with the Company's
central station consolidation and the relocation of the Company's corporate 
headquarters which took place in late 1996. See Note 4 to Notes to Consolidated
Financial Statements.

         In 1995, the Company changed its method of accounting for
non-refundable installation fees on Company-owned systems. The cumulative net
effect of this change was to increase net income by $2.5 million in 1995.
However, excluding the cumulative effect, this change resulted in an increase
in net loss of $0.4 million in 1995. The Company believes that, on an ongoing
basis, the effect on net income of this change will not be significant. See 
Note [3] to Notes to Consolidated Financial Statements.

         The Company recorded a net loss in 1995 of $1.2 million compared to
net income of $0.4 million in 1994. The net reduction in income of $1.6 million
in 1995 is due to all the various changes described above.

Liquidity and Capital Resources

         Fiscal Year Ended 1996

         Cash and cash equivalents increased by $0.6 million from $0.4 million
in 1995 to $1.0 million in 1996. In 1996, net cash provided by operating
activities of $3.3 million and net cash provided by financing activities of 
$7.8 million was offset by $10.5 million of cash used by investing activities.

         Net cash provided by operating activities of $3.3 million in this
period principally consisted of cash provided by sales of electronic security
services, adjusted for non-cash charges for depreciation and amortization, an
increase in inventory of $0.8 million, a decrease in accounts payable and
accrued expenses of $1.8 million and an increase in customer deposits of $1.0
million. The excess of current liabilities over current assets decreased from
$5.2 million in 1995 to $2.2 million in 1996 primarily as a result of a
reduction in long-term debt, accounts payable and accrued expenses.

                                     - 22 -

<PAGE>


         Net cash of $10.5 million used by investing activities in 1996
consisted of $9.4 million of capital expenditures (primarily for installation of
alarm equipment on subscribers' premises) and investments in acquired companies
of $3.2 million, offset by a net reduction of $2.0 million from net maturities
of short-term investments.

         Net cash of $7.8 million provided by financing activities during this
period consisted principally of net proceeds from the issuance of Common Stock
of $12.1 million and proceeds from the Credit Facility of $12.0 million, offset
by repayments of amounts due under the Loan Agreement of $6.2 million, the
Credit Facility of $8.5 million, and short-term borrowings of $1.0 million. In
addition, $0.6 million was used for issuance costs associated with the Credit
Facility. See Notes 7 and 8 to Notes to Consolidated Financial Statements.

         Fiscal Year Ended 1995

         Cash and cash equivalents declined by $1.0 million from $1.4 million
in 1994 to $.4 million in 1995. In 1995, net cash provided by operating
activities of $6.1 million was offset by $1.5 million of cash used by financing
activities and $5.6 million of cash used by investing activities.

         Net cash provided by operating activities of $6.1 million in this
period principally consisted of cash provided by sales of electronic security
services, adjusted for non-cash charges for depreciation and amortization, an
increase in accounts receivable of $1.6 million, an increase in accounts 
payable and accrued expenses of $1.8 million and a decrease in customer 
deposits and other liabilities of $1.6 million. The excess of current
liabilities over current assets increased from $1.8 million in 1994 to $5.2 
million in 1995 primarily as a result of a reduction in long-term debt, 
additions to property, plant and equipment and establishment of the reserve for
severance and related benefit costs.

         Net cash of $5.6 million used by investing activities in 1995
consisted of $7.5 million of capital expenditures (primarily for installation
of alarm equipment on subscribers' premises), offset by a net reduction of $1.9
million from net maturities of short-term investments.

         Net cash of $1.5 million used by financing activities during this
period consisted principally of repayments of amounts due under the Loan
Agreement and short-term borrowings under a Company margin account. See Note 6
to Notes to Consolidated Financial Statements.

         Future Commitments and Cash Requirements

         Liquid assets available to the Company as of December 31, 1996
included cash and cash equivalents of $1.0 million. At December 31, 1996 the 
Company had undrawn funds of $21.5 million under its new revolving credit
facility.

         In August 1996, the Company entered into the Credit Facility with
Merita Bank Ltd. and Bank of Boston Connecticut (see "Business -- Other
Developments/1996 Credit Facility"), to provide a two-year, $25 million
revolving credit facility to the Company which converts into a five-year term
loan on September 30, 1998. At December 31, 1996, the outstanding balance under
the Credit Facility was $3.5 million. At such date outstanding balances under
the Company's previous loan agreement, aggregating $6.2 million, were paid in
full and such agreement was subsequently canceled.

         The Credit Facility matures on September 30, 2003, with principal
payments payable in increasing quarterly installments commencing December 31,
1998. Borrowings under the Credit Facility bear interest, at the Company's
option, at an annual rate equal to either a base rate, defined as the higher of
the prime rate or a specified federal funds rate, or a specified Eurodollar
rate plus, in each case, an applicable margin which varies with the Company's
leverage (the ratio of total debt to EBITDA less capital expenditures). The
Company is obligated to pay a commitment fee of 1/2% per annum of any undrawn
amounts. The New Banks also received warrants to purchase an aggregate of
166,666 shares of Common Stock at an initial exercise price of $9.75 per share
and were granted certain registration rights in connection therewith.

         Mandatory prepayment of the Credit Facility will be required under
certain circumstances. Additionally, the Credit Facility contains a number of
negative covenants customary in credit agreements for this type of loan,
including, without limitation, restrictions on additional indebtedness,

                                     - 23 -

<PAGE>


certain acquisitions, dividends, investments, mergers and sales of assets,
creation of liens, guarantees, issuance of capital stock by the Company's
subsidiaries and transactions with affiliates. The Company is also required to
comply with various financial covenants, tests and ratios, including those 
relating to (i) ratios of total debt to recurring monthly revenue, (ii) minimum 
debt service coverage, (iii) minimum net worth, (iv) maximum capital
expenditures and (v) maximum subscriber attrition rate (as defined in the
Credit Facility).

         The Credit Facility is secured by all current and future assets and 
the pledge of the capital stock of the Company's subsidiaries.

         In 1995, the Company entered into the Outsourcing Agreement with
PremiTech which provides for PremiTech to manage the Company's technological
infrastructure, perform certain of the Company's administrative functions, and
assist in the consolidation of the Company's central monitoring facilities. For
on-going services during the ten-year term of the agreement, the Company was
obligated to pay PremiTech a total of $47.7 million in equal monthly
installments aggregating $4.8 million per year, subject to certain adjustments.
In addition, the Company agreed to pay PremiTech a total of $3.3 million for its
consolidation activities. In March 1997, the Company and PremiTech reached an
agreement in principle to terminate the Outsourcing Agreement, under which the
Company will record a one-time, non-recurring charge of approximately $1.5
million in the first quarter of 1997. See Notes 3 and 15 to Notes to
Consolidated Financial Statements.

         The Company has in the past experienced cash flow shortages. The
Company believes that net cash provided by operations, together with funds
available under the Credit Facility, will enable it to meet its future cash
operating needs.

         In the course of its business, the Company plans on-going annual
capital expenditures for Company-owned alarm equipment installed at subscriber
premises. Additionally, the Company continues to invest in the replacement and
modernization of the equipment utilized in its central monitoring activities and
associated security services. All such capital expenditures will require
substantial financial resources which are expected to be provided by internally
generated funds and, as necessary, supplemental funding from other sources,
including its Credit Facility.

Item 8.    Financial Statements and Supplementary Data

         The Company's consolidated financial statements and a related schedule
are included on pages F-1 to F-20 and S-1.

Item 9.    Changes in and Disagreements with Accountants on Accounting and 
           Financial Disclosure

           Not Applicable.


PART III

Item 10.   Directors and Executive Officers of the Registrant

         The information required by this item is incorporated herein by
reference to "Directors and Executive Officers of the Registrant" in the
registrant's definitive proxy statement for 1997, if filed by April 30, 1997.

Item 11.   Executive Compensation

         The information required by this item is incorporated herein by
reference to "Executive Compensation" in the registrant's definitive proxy
statement for 1997, if filed by April 30, 1997.


                                     - 24 -

<PAGE>


Item 12.   Security Ownership of Certain Beneficial Owners and Management

         The information required by this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management"
in the registrant's definitive proxy statement for 1997, if filed by April 30,
1997.

Item 13.   Certain Relationships and Related Transactions

         The information required by this item is incorporated herein by
reference to "Certain Relationships and Related Transactions" in the
registrant's definitive proxy statement for 1997, if filed by April 30, 1997.


PART IV

Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (a)      Financial Statements

           Consolidated Balance Sheets at December 31, 1996 and 1995

           Consolidated Statements of Operations for the years ended December 
           31, 1996, 1995 and 1994

           Consolidated Statements of Shareholders' Equity for the years ended
           December 31, 1996, 1995 and 1994

           Consolidated Statements of Cash Flows for the years ended December
           31, 1996, 1995 and 1994

           Notes to Consolidated Financial Statements

  (b)      Financial Statement Schedule

           Schedule II - Valuation and Qualifying Accounts


  (c)      Exhibits

     Exhibit
     No.

  3.1      Restated Certificate of Incorporation of the Company, as amended(*)
  3.2      Amended and Restated By-Laws of the Company(5)
  4.1      Specimen of Common Stock Certificate(5)
  4.3      Investor Warrant(2)
  4.4      Form of Institution Warrant(2)
  4.5      New Bank Warrants(11)
  10.1     Investment Agreement between HP Partners L.P. ("Investor") and the
           Company, dated as of June 29, 1994(1)
  10.2     Registration Rights Agreement between Investor and the Company,
           dated August 1, 1994(2)
  10.3     Exchange Agreement, dated as of December 18, 1991, among the Company
           and a number of insurance companies and other institutions listed
           therein ("Institutions")(1)
  10.4     First Amendment to the Exchange Agreement, dated January 31, 1992(1) 
  10.5     Second Amendment to the Exchange Agreement, dated May 24, 1992(1)

                                     - 25 -

<PAGE>


  10.6     Third Amendment to the Exchange Agreement, dated June 30, 1992(1)
  10.7     Amended and Restated Senior Executives Option Plan(2)
  10.8     Master Lease Agreement No. 12223, dated December 18, 1992, between
           Data General Corporation and the Company(1)
  10.9     Letter Agreement, dated July 12, 1995, and Lease Schedule No. 006,
           dated July 26, 1995, to Master Lease Agreement No. 12223 between 
           Data General Corporation and the Company(7) 
  10.10    Letter Agreement, dated September 3, 1996, and Revised Lease
           Schedule No. 006 to Master Lease Agreement 12223 between Data
           General Corporation and the Company(11)
  10.11    Software License and Sublicense Agreement, dated April 4, 1995, 
           among Monitoring Automation Systems, PremiTech Corporation and the
           Company(6)
  10.12    Employment Agreement between the Company and George V. Flagg, dated 
           January 8, 1996(9)
  10.13    Employment Agreement between the Company and James L. Boehme, dated
           January 8, 1996(9)
  10.13(a) Amendment to Employment Agreement between the Company and James L.
           Boehme, dated June 5, 1996(10)
  10.14    Employment Agreement between the Company and Lawrence R. Irving,
           dated May 13, 1996(10)
  10.15    Lease Agreement, dated as of July 1, 1995, between Holmes Protection
           of New York Inc. ("HPNY") and Forty-Seventh-Fifth Company;  Lease
           Guaranty by the Company, dated as of July 1, 1995(7)
  10.16(a) Lease Agreement, dated March 2, 1987, between HPNY and Ninth Avenue 
           Associates (including First Amendment, dated August 9, 1988
           thereto)(1)
  10.16(b) Second Amendment to Lease Agreement, dated October 7, 1987(2)
  10.16(c) Third Amendment to Lease Agreement, dated October 27, 1994(3)
  10.16(d) Fourth Amendment to Lease Agreement, dated November 13, 1995(9)
  10.17    Lease Agreement, dated June 1992, among Holmes Protection of Long
           Island, Inc., Holmes Protection Group, Inc. and J&B Properties
           Ltd.(1)
  10.18    Lease Agreement, dated January 31, 1974, between Holmes Protection
           of Philadelphia, Inc. and George Shapiro (including amendments 
           thereto)(1)
  10.19    Form of Registration Rights Agreement with Institutions(2)
  10.20    Agreement For Information Technology Services, dated as of April 4,
           1995, between PremiTech Corporation (formerly Premisys Corporation)
           and the Company ("Outsourcing Agreement")(7)
  10.21    First Amendment to Outsourcing Agreement, dated as of August 1,
           1995(8)
  10.22    Second Amendment to Outsourcing Agreement, dated as of December 14, 
           1995(9)
  10.23    Third Amendment to Outsourcing Agreement, dated as of January 19,
           1996(9)
  10.24    Parent Corporation Guarantee, dated April 4, 1995, among Electronic 
           Data Systems Corporation, PremiTech Corporation and the Company(6)
  10.25    Credit Agreement, dated as of August 30, 1996, among Merita Bank 
           Ltd.,  Bank of Boston Connecticut (together, the "New Banks"), the
           Company and Holmes Holding Company, Inc. (the "New Credit
           Agreement")(11)
  10.25(a) The New Credit Agreement, as amended and restated(*)
  10.26    Registration Rights Agreement, dated as of August 30, 1996, between
           the Company and the New Banks(11)
  18.1     Letter from Arthur Andersen LLP, dated March 20, 1996, regarding
           change in accounting principle(9)
  21.1     Subsidiaries of the Company(*)
  27.1     Financial Data Schedule(*)
  99.1     Definitive Proxy Statement(12)


  (*)  Filed herewith.
  (**) To be filed by amendment.
       
                                     - 26 -

<PAGE>



  (1)     Incorporated by reference to the Company's Registration Statement on
          Form 10, dated July 11, 1994.
  (2)     Incorporated by reference to Amendment No. 1 to the Company's 
          Registration Statement on Form 10/A, dated October 13, 1994.
  (3)     Incorporated by reference to Amendment No. 2 to the Company's
          Registration Statement on Form 10/A, dated December 13, 1994.
  (4)     Incorporated by reference to Amendment No. 3 to the Company's 
          Registration Statement on Form 10/A, dated January 25, 1995.
  (5)     Incorporated by reference to the Company's Annual Report on Form 10-K
          for the fiscal year ended December 31, 1994.
  (6)     Incorporated by reference to the Company's Quarterly Report on Form 
          10-Q for the quarter ended March 31, 1995.
  (7)     Incorporated by reference to the Company's Quarterly Report on Form 
          10-Q for the quarter ended June 30, 1995.
  (8)     Incorporated by reference to the Company's Quarterly Report on Form 
          10-Q for the quarter ended September 30, 1995.
  (9)     Incorporated by reference to the Company's Annual Report on Form 10-K
          for the fiscal year ended December 31, 1995.
  (10)    Incorporated by reference to the Company's Registration Statement on
          Form S-1, dated July 26, 1996.
  (11)    Incorporated by reference to Amendment No. 1 to the Company's
          Registration Statement on Form S-1, dated September 25, 1996.
  (12)    To be incorporated by reference.


                                     - 27 -

<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-K to be signed on its behalf by the undersigned, thereunto duly authorized.

                                           HOLMES PROTECTION GROUP, INC.


                             By:         /s/ George V. Flagg
                                         ----------------------
                                         George V. Flagg
                                         President and Chief Executive Officer

Date: April 7, 1997


         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates indicated.


Date:


April 7, 1997                            /s/ George V. Flagg
                                         -------------------
                                         George V. Flagg
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)


April 7, 1997                            /s/ Lawrence R. Irving
                                         ----------------------
                                         Lawrence R. Irving
                                         Vice President/Finance
                                         (Principal Financial Officer)


April 7, 1997                            /s/ Lawrence R. Glenn
                                         ---------------------
                                         Lawrence R. Glenn
                                         Director


April 7, 1997                            /s/ Mark S. Hauser
                                         ------------------
                                         Mark S. Hauser
                                         Director


April 7, 1997                            /s/ William P. Lyons   
                                         ----------------------
                                         William P. Lyons
                                         Director


April 7, 1997                            /s/ David Jan Mitchell
                                         ----------------------
                                         David Jan Mitchell
                                         Director


                                     - 28 -

<PAGE>



April 7, 1997                            /s/ Edward L. Palmer
                                         --------------------
                                         Edward L. Palmer
                                         Director


April 7, 1997                            /s/ Daniel T. Carroll
                                         ---------------------
                                         Daniel T. Carroll
                                         Director


                                     - 29 -




<PAGE>








                          INDEX TO FINANCIAL STATEMENTS



                                                                       Page


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                F-2

CONSOLIDATED FINANCIAL STATEMENTS:

    Consolidated Balance Sheets as of
      December 31, 1996 and 1995                                        F-3

    Consolidated Statements of Operations for the
      Years Ended December 31, 1996, 1995 and 1994                      F-4

    Consolidated Statements of Shareholders' Equity 
      for the Years Ended December 31, 1996, 1995 and 1994              F-5

    Consolidated Statements of Cash Flows for the Years
      Ended December 31, 1996, 1995 and 1994                            F-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-7 - F-20



SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                         S-1



                                      F-1
<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Holmes Protection Group, Inc.:

We have audited the accompanying consolidated balance sheets of Holmes
Protection Group, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Holmes Protection
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

As discussed in Note 4 to the consolidated financial statements, effective
January 1, 1995, the Company changed its revenue recognition policy of
accounting for non-refundable payments received from customers upon completion
of installation of Company owned systems.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed on the Index to
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
                                                       
                                                          ARTHUR ANDERSEN LLP

New York, New York
February 28, 1997 (except with respect to the matter discussed in Note 15, as
to which the date is March 12, 1997)


                                      F-2
<PAGE>



                                       


                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995
                                 (000's omitted)
<TABLE>
<CAPTION>


                                          ASSETS                                                1996          1995
CURRENT ASSETS:                           ------                                                ----          ----
                            
<S>                                                                                       <C>            <C>       
    Cash and cash equivalents                                                             $      990     $      435
    Short-term investments                                                                        -           2,043
    Accounts receivable, less allowance for doubtful accounts of $973 in 1996 and
       $1,340 in 1995                                                                          5,333          4,997
    Inventories                                                                                2,795          1,923
    Prepaid expenses and other                                                                 1,871          1,899
                                                                                          ----------     ----------
                 Total current assets                                                         10,989         11,297
                                                                                          ----------     ----------

FIXED ASSETS, net                                                                             47,198         45,231

SUBSCRIBER CONTRACTS, at cost, less accumulated amortization of $25,137 in 1996 and
    $22,522 in 1995                                                                           19,650         18,894
TRADENAMES, less accumulated amortization of $2,045 in 1996
    and $1,875 in 1995                                                                         4,063          4,234
OTHER ASSETS                                                                                   7,917            552
                                                                                          ----------     ----------
                                                                                          $   89,817     $   80,208
                                                                                          ==========     ==========

                          LIABILITIES AND SHAREHOLDERS' EQUITY
                          ------------------------------------

CURRENT LIABILITIES:
    Short-term borrowings                                                                 $       -      $      943
    Current maturities of long-term debt                                                         364          2,497
    Accounts payable and accrued expenses                                                      7,290          8,689
    Deferred revenue                                                                           2,693          2,664
    Customer deposits                                                                          2,813          1,750
                                                                                          ----------     ----------
                 Total current liabilities                                                    13,160         16,543
                                                                                          ----------     ----------

LONG-TERM LIABILITIES:
    Long-term debt                                                                             4,370          4,862
    Other long-term liabilities                                                                  555            834
    Deferred income taxes                                                                     11,337         10,297
                                                                                          ----------     ----------
                 Total long-term liabilities                                                  16,262         15,993
                                                                                          ----------     ----------

COMMITMENTS AND CONTINGENCIES (Note 13)

SHAREHOLDERS' EQUITY:
    Preferred stock, $1.00 par value; 1,000 authorized shares; none outstanding                   -              -
    Common stock, $0.01 par value; 12,000 authorized shares; 5,835 issued
       in 1996 and 4,466 issued in 1995                                                           58             45
    Additional paid-in capital                                                               133,251        120,763
    Accumulated deficit                                                                      (72,829)       (70,188)
    Minimum pension liability adjustment                                                          -          (2,863)
                                                                                          ----------     ----------
                                                                                              60,480         47,757
    Less- Treasury stock - 7 shares in 1996 and 1995 at cost                                     (85)           (85)
                                                                                          ----------     ----------
                 Total shareholders' equity                                                   60,395         47,672
                                                                                          ----------     ----------
                                                                                          $   89,817     $   80,208
                                                                                          ==========     ==========
</TABLE>
         The accompanying notes to financial statements are an integral part of
these balance sheets.



                                      F-3
<PAGE>

                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                (000's omitted, except earnings per share data)
<TABLE>
<CAPTION>


                                                                                 1996           1995          1994
REVENUES:                                                                        ----           ----          ----

<S>                                                                         <C>           <C>            <C>       
    Monitoring and service                                                  $   35,656    $   37,912     $   39,747
    Installation                                                                10,537         8,155          8,425
    Franchise royalties, product sales and other                                 4,782         4,008          3,230
                                                                            ----------    ----------     ----------
                 Total revenues                                                 50,975        50,075         51,402
                                                                            ----------    ----------     ----------


COST OF SALES (exclusive of depreciation expense shown below):
    Monitoring and service                                                      18,054        18,554         18,632
    Installation                                                                 5,831         3,971          3,595
    Franchise royalties, product sales and other                                 4,239         3,737          2,658
                                                                            ----------    ----------     ----------
                 Total cost of sales                                            28,124        26,262         24,885



SELLING, GENERAL AND ADMINISTRATIVE                                             14,989        16,668         15,051

DEPRECIATION AND AMORTIZATION                                                   10,574        10,390          9,736

NON-RECURRING CHARGE                                                               700         2,074             -
                                                                            ----------    ----------     ---------
                                                                                54,387        55,394         49,672
                                                                            ----------    ----------     ----------

                 Income (Loss) from operations                                  (3,412)       (5,319)         1,730

OTHER INCOME                                                                       282           247            193

INTEREST EXPENSE (net of interest income of $62 in 1996,
    $276 in 1995 and $70 in 1994)                                                 (537)         (721)          (941)
                                                                            ----------    ----------     ----------

INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
    ACCOUNTING PRINCIPLE                                                        (3,667)       (5,793)           982

PROVISION (BENEFIT) FOR INCOME TAXES                                            (1,215)       (2,119)           578
                                                                            ----------    ----------     ----------

                 Income (Loss) before cumulative effect of change in
                 accounting principle                                           (2,452)       (3,674)           404

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAXES
    OF $1,942                                                                       -          2,477             -
                                                                            ----------    ----------       ---------

                 Net Income (Loss)                                          $   (2,452)   $   (1,197)    $      404
                                                                            ==========    ==========     ==========

EARNINGS (LOSS) PER COMMON SHARE:

    Earnings (Loss) before cumulative effect of change in accounting
       principle                                                            $    (0.51)   $    (0.82)    $     0.11
    Cumulative effect of change in accounting principle                             -           0.55             -
                                                                            ----------    -----------    ---------
    Net Earnings (Loss) per common share                                    $    (0.51)   $    (0.27)    $     0.11
                                                                            ----------    ----------     ----------
WEIGHTED AVERAGE SHARES OUTSTANDING                                              4,827         4,459          3,580
                                                                            ==========    ==========     ==========
</TABLE>

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



                                      F-4
<PAGE>


                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (000's omitted)

<TABLE>
<CAPTION>



                                                                                
                                                                                  Minimum                                   
                                                                    Additional    Pension                                   
                                           Common        Treasury    Paid- In    Liability      Accumulated                 
                                            Stock         Stock      Capital     Adjustment       Deficit         Total      
                                            -----         -----      -------     ----------       -------         -----       
                                                                                


<S>                                      <C>          <C>          <C>            <C>          <C>            <C>                   
BALANCE, January 1, 1994                 $   10,330   $   (85)     $  101,978     $ (3,509)    $  (69,395)     $   39,319
    Net income for year                          -         -               -            -             404             404
    Proceeds from issuance of shares
       of common stock                        5,305        -            4,695           -              -           10,000
    Common stock issuance and other
       related costs                             -         -           (1,500)          -              -           (1,500)
    Change in minimum pension
       obligation (net of taxes of
       $155)                                     -         -               -           197             -              197
    Effect of reverse stock split           (14,518)       -           14,518           -              -               -
    Effect of change in par value            (1,072)       -            1,072           -              -               -
                                         ----------   -------      ----------   ----------     ----------      ---------
BALANCE, December 31, 1994                       45       (85)        120,763       (3,312)       (68,991)         48,420
    Net loss for year                            -         -               -            -          (1,197)         (1,197)
    Change in minimum pension
       obligation (net of taxes of
       $307)                                     -         -               -           449             -              449
                                         ----------   -------      ----------   ----------     ----------      ----------
BALANCE, December 31, 1995                       45       (85)        120,763       (2,863)       (70,188)         47,672
    Net loss for year                            -         -               -            -          (2,452)         (2,452)
    Change in minimum pension
       obligation (net of taxes of
       $2,295)                                   -         -               -         2,863             -            2,863
    Proceeds from issuance of shares
       of common stock (net of
       expenses of $1,815)                       12        -           12,089           -              -           12,101
    Issuance of shares to former
       stockholders of acquired company           1        -               (1)          -            (189)           (189)
    Fair value of warrants issued in
       connection with new Credit
       Facility                                  -         -              400           -              -              400
                                         ----------   -------      ----------   ----------     ----------      ----------
BALANCE, December 31, 1996               $       58   $   (85)     $  133,251     $     -      $  (72,829)     $   60,395
                                         ==========   =======      ==========     ========     ==========      ==========

</TABLE>



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



                                      F-5
<PAGE>

                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                 (000's omitted)
<TABLE>
<CAPTION>

                                                                               1996             1995             1994
CASH FLOWS FROM OPERATING ACTIVITIES:                                          ----             ----             ----
<S>                                                                       <C>              <C>              <C>       
    Net Income (Loss)                                                     $   (2,452)      $   (1,197)      $      404
    Adjustments to reconcile net income (loss) to net cash provided by
       operating activities-
          Depreciation and amortization                                       10,574           10,390            9,736
          Provision for doubtful accounts                                       (146)             486              506
          Cumulative effect of change in accounting principle                     -            (2,477)               -
          Non-recurring charge                                                   700            2,074                -
          Deferred income taxes                                               (1,465)          (2,319)             484
          Changes in operating assets and liabilities-
              Increase in accounts receivable                                    (30)          (1,628)            (423)
              (Increase) decrease in inventories                                (837)              57              337
              Decrease in prepaid expenses and other current assets               97              559              957
              (Increase) decrease in other assets                             (1,165)              -                58
              (Decrease) increase in accounts payable and accrued
                 expenses                                                     (1,844)           1,840           (2,812)
              Increase (decrease) in customer deposits                         1,063             (696)             376
              Decrease in deferred revenue                                      (139)            (123)            (801)
              Decrease in pension and other liabilities                       (1,019)            (822)          (2,658)
                                                                          ----------       -----------      -----------
                 Net cash provided by operating activities                     3,337            6,144            6,164
                                                                          ----------       ----------       ----------



CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of fixed assets                                                  (9,428)          (7,494)          (7,361)
    Purchase of subscriber contracts                                              -                -            (1,840)
    Acquisition of businesses, net of cash acquired                           (3,185)              -                -
    Purchase of short-term investments                                            -            (6,601)          (5,486)
    Maturities of short-term investments                                       2,043            8,544            1,500
    Other                                                                         -               (50)              -
                                                                          ----------       ----------       ---------
                 Net cash used by investing activities                       (10,570)          (5,601)         (13,187)
                                                                          ----------       -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from Credit Facility                                             11,996               -                -
    Payments on Credit Facility                                               (8,496)              -                -
    Payments for issuance costs related to debt obligation                      (568)              -                -
    Proceeds from secured note                                                    -                -             3,405
    Payments on secured note                                                  (6,188)          (2,250)          (3,681)
    Payments on other long-term debt                                            (114)            (210)            (449)
    Proceeds from issuance of common stock                                    13,916               -            10,000
    Transaction and other related costs                                       (1,815)              -            (1,500)
    (Repayments) proceeds from short-term borrowings                            (943)             943               -
                                                                          ----------       ----------       ---------
                 Net cash provided (used) by financing activities              7,788           (1,517)           7,775
                                                                          ----------       ----------       ----------
                 Net increase (decrease) in cash and cash equivalents            555             (974)             752


CASH AND CASH EQUIVALENTS, beginning of year                                     435            1,409              657
                                                                          ----------       ----------       ----------

CASH AND CASH EQUIVALENTS, end of year                                    $      990       $      435       $    1,409
                                                                          ==========       ==========       ==========
CASH PAYMENTS FOR:
    Interest                                                              $      636       $    1,016       $      992
    Income taxes                                                          $      301       $      167       $      155

NON-CASH INVESTING AND FINANCING ACTIVITIES:
    Capital lease obligations                                             $       -        $      234       $      302
    Issuance of warrants in connection with new Credit Facility           $      400       $       -        $       -
    Issuance of notes payable in connection with acquired businesses      $      179       $       -        $       -
</TABLE>

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



                                      F-6
<PAGE>

                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation

         Holmes Protection Group, Inc. (the "Company"), a Delaware corporation,
is the holding company for its subsidiaries which operate in the security alarm
business primarily in the Northeastern United States. The consolidated financial
statements incorporate all the accounts of the Company and its subsidiaries. 
All intercompany transactions and balances have been eliminated. Certain 
amounts for prior periods have been reclassified to conform to the 1996
presentation.

         Revenue Recognition

         The Company's subsidiaries design, install, service and monitor
security alarm systems, which are either sold outright ("customer owned") or
the Company retains title to the equipment ("Company owned"). Installation
revenue, and related cost under customer owned contracts, is recognized upon
completion of installation. In 1995, the Company changed its method of 
accounting for installation revenue for contracts relating to Company owned
equipment, (see Note 4). In both cases, revenue from monitoring and servicing 
activities is recognized on a straight-line basis over the life of the contract.

         Allowance for Doubtful Accounts

         Management reviews the collectibility of accounts receivables on a
regular basis. Amounts, if any, which are determined to be uncollectible are
provided for in the financial statements in the period such determination is
made.

         Fixed Assets

         Fixed assets are recorded at cost. The Company's equipment installed
on the subscribers' premises for Company owned systems is capitalized on the
basis of the cost of materials, labor and overhead relating to the specific
installation. The Company provides for depreciation of equipment on subscribers'
premises, central stations and vaults using the straight-line method over an
average life of 12 years. Periodically, management will review these lives to
assess their adequacy given changes in its business. If circumstances warrant a
significant change in lives, management will adjust such lives to those which
are more representative of its business environment. The Company depreciates
other equipment, including computers, utilizing the straight-line method over a
period ranging between 5 to 12 years, and automotive equipment over the
equipment's useful lives ranging from 3 to 5 years. Leasehold improvements are
depreciated utilizing the straight-line method over the asset's useful life or
the remaining lease term, whichever is shorter. Assets held under capital lease
obligations are depreciated utilizing the straight line method over the life of
the lease or asset, whichever is applicable.

         Repair and maintenance costs are expensed as incurred.



                                      F-7
<PAGE>

         Subscriber Contracts

         The cost of acquired subscriber contracts is amortized, based upon
average experience, on a straight-line basis over their estimated useful lives
which has been determined to be 12 years. Such life is periodically reviewed by
management in order to assess its reasonableness. When, in the opinion of the
Company's management, a permanent diminution in the value of subscriber
contracts has occurred, the amount of the diminution would be included in the
consolidated statements of operations. In order to determine whether a
permanent diminution in value has occurred, management monitors the Company's
cancellation rates. If an increasing trend in cancellation rates exists and is
recurring, and such cancellation rates indicate nonrecoverability of the assets,
a write down of assets is reflected in the consolidated statement of operations
based upon the discounted future net cash flows of the remaining subscriber
contracts or other method to determine fair market value of such assets.

         Amortization expense was $2,615,000, $2,580,000 and $2,483,000 in 1996,
1995 and 1994, respectively.

         Tradenames

         Tradenames are amortized on a straight-line basis over a period of
forty years. Such life is periodically reviewed by management in order to 
assess its adequacy. When, in the opinion of the Company's management, a 
permanent diminution in the value of tradenames has occurred, the amount of the
diminution would be included in the consolidated statements of operations.
Amortization expense was $170,000 for each year presented.

         Inventories

         Inventories consist primarily of parts used in the installation and
repair of equipment on subscribers' premises and equipment sold to franchise
dealers. Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. Inventories as of December 31, 1996
and 1995 consist of the following (000's omitted):

<TABLE>
<CAPTION>
                                                     1996        1995
                                                     ----        ----
                   
<S>                                              <C>            <C>    
         Materials                               $   1,749      $ 1,390
         Work-in-process                             1,046          533
                                                   ---------    ---------
                                                 $   2,795      $ 1,923
                                                    =========    =======

</TABLE>

         Cash and Cash Equivalents

         Cash equivalents consist principally of short-term investments having
original maturities of 90 days or less, and are carried at cost, which
approximates market.



                                      F-8
<PAGE>

         Short-Term Investments

         Short-term investments consisted primarily of short-term U.S.
Government obligations ($1,853,000 at December 31, 1995), which had an original
maturity of greater than 90 days, as well as certificates of deposit ($190,000
at December 31, 1995). All such investments matured during 1996.

         In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". This Statement requires the classification of
debt and equity securities based on whether the securities will be held to
maturity, are considered trading securities or are available for sale.
Classification within these categories may require the securities to be
reported at their fair market value with unrealized gains and losses included
either in current earnings or reported as a separate component of shareholders'
equity, depending on the ultimate classification. The Company adopted the 
provisions of this statement effective January 1, 1994, the adoption of which
had no impact on the Company's consolidated financial statements. As of
December 31, 1995, all short-term investments used as part of the Company's
investment management had been classified as held to maturity. These 
investments are stated at cost which approximates market. Interest is accrued
as earned.

         Stock-Based Compensation

         The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees." Under APB No. 25, the Company applies the intrinsic value method
of accounting and therefore does not recognize compensation expense for options
granted, because options are only granted at a price equal to market value on
the day of grant.

         During 1996, Statement of Financial Accounting Standards No. 123 
("SFAS No. 123"), "Accounting for Stock Based Compensation," became effective 
for the Company. SFAS No. 123 prescribes the recognition of compensation
expense based on the fair value of options determined on the grant date.
However, SFAS No. 123 allows companies currently applying APB No. 25 to 
continue using that method. The Company has therefore elected to continue
applying the intrinsic value method under APB No. 25. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. See Note 9
for additional discussion.

         Income Taxes

Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income
taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on the enacted tax law rates. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.

         Long-Lived Assets

         Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," requires that long-lived assets be reviewed for impairment whenever events 
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The new standard, which was adopted in 1996,
did not have a material effect on the Company's results of operations, cash
flows or financial position.

         Earnings Per Share

         Earnings per common share calculations are based on the weighted
average number of shares of common stock outstanding and dilutive common stock
equivalents outstanding. All earnings per share amounts have been adjusted to
give effect of the reverse stock split (Note 8).




                                      F-9
<PAGE>

         Use of Estimates

         The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.

2.  ACQUISITIONS

         In September 1996, the Company acquired an alarm monitoring company
using the pooling of interest method. In connection with this acquisition
103,805 shares were exchanged for all the outstanding stock of the acquired
company. The consolidated financial statements of the Company have not been
restated to reflect the impact of the pooling of interests as such amounts are
immaterial.

         In addition, during the fourth quarter of 1996, the Company acquired
five alarm companies for an aggregate purchase price of $3,364,000. These
acquisitions are accounted for using the purchase method. Accordingly, the
purchase price was allocated based on their estimated values and the results of
operations of the acquired entities have been included in the accompanying
consolidated statements of operations from the respective dates of the
acquisition. The results of operations for these acquisitions were not
significant to the consolidated financial statements of the Company.

3.  INFORMATION TECHNOLOGY SERVICES AGREEMENT

         On April 4, 1995, the Company entered into an information technology
services agreement with PremiTech Corporation ("PremiTech"), a subsidiary of
Electronic Data Systems Corporation. The ten year $51 million outsourcing
agreement provided for PremiTech to consolidate and manage the Company's data
processing, communications and certain administrative functions. In connection
with the consolidation of its operations, the Company paid PremiTech $3.3
million. This amount was to compensate PremiTech for the cost of constructing
the new central station facility and certain leasehold improvements.

         PremiTech is a limited partner of the Investor (see Note 8), holding a
partnership interest equivalent to approximately 5% of the Company's common
stock. Payments made to PremiTech for managing the Company's data processing,
communications and certain administrative functions amounted to $4,772,000
during 1996 and $3,073,000 during 1995. (See "Subsequent Event" Note 15).

4.  CHANGE IN ACCOUNTING PRINCIPLE

         Effective January 1, 1995 the Company changed its method of accounting
for installation revenue with respect to the recording of non-refundable
payments received from customers upon the completion of the installation of
Company owned systems. Previous to this change, the Company deferred the
difference between these payments and estimated selling costs and amortized 
such difference over the life of the non-cancelable customer monitoring and 
service contract (generally five years). The Company believes that recognizing
revenue upon completion of the installation results in a better matching of 
revenue and expenses, better reflects recorded installation revenues with the
actual level of new business activity, and conforms with the dominant practice 
being followed by the security alarm industry. Excluding the cumulative effect, 
this change resulted in an increase in net loss of $443,000 or $0.10 net loss
per share in 1995. The Company estimates that the effect of adopting this 
accounting principle would have resulted in a decrease in the results from 
operations of $470,000 or $0.13 per share in 1994.



                                      F-10
<PAGE>

5.  NON-RECURRING CHARGE

         In connection with the Company entering into the information 
technology services agreement (see Note 3), the Company determined that certain
existing asset and resource requirements were to be redeployed or no longer
required. After analyzing numerous alternatives regarding its consolidation,
management determined that certain existing assets and personnel resources
would no longer be necessary. Accordingly, the Company recorded a non-recurring
charge of $2,074,000 in 1995 which consisted of severance and related benefit
costs of $1,133,000 covering selected reductions in work force throughout the 
Company of approximately 70 employees, all of whom were terminated, notified or
identified at December 31, 1995 and writedowns of leasehold improvements and
other fixed assets amounting to $941,000 which will no longer be utilized.

         In 1996, the Company recorded a non-recurring charge of $700,000. This
charge consists of (i) $387,000 for additional severance and related benefits
resulting from delays in the Company's consolidation, (ii) $163,000 for
severance and related benefit costs associated with additional staff reductions
in connection with the restructuring of the operations and (iii) $150,000 for
the settlement of an outstanding legal matter. These employees have been
terminated or notified at December 31, 1996. At December 31, 1996, the reserve
for severance and related benefit costs was $863,000. The Company anticipates
completing its consolidation in February 1997.

6.  FIXED ASSETS

         Fixed assets as of December 31, 1996 and 1995 consist of the following
(000's omitted):
<TABLE>
<CAPTION>

                                                                   1996             1995
                                                                   ----             ----
         
<S>                                                            <C>            <C>         
          Subscriber installation costs                        $    103,903   $     97,558
          Central station and other equipment                        10,051          9,588
          Leasehold improvements                                      5,955          4,087
          Furniture and fixtures                                      1,038            917
          Construction in progress                                    1,009            615
                                                               ------------   ------------
                                                                    121,956        112,765
          Less- Accumulated depreciation                            (74,758)       (67,534)
                                                               ------------   ------------
                                                               $     47,198   $     45,231
                                                               ============   ============
</TABLE>

         Depreciation expense relating to cost of sales is $6,428,000,
$6,378,000 and $6,507,000 for 1996, 1995 and 1994, respectively.

7.  DEBT

         Short-Term Borrowings

         Short-term borrowings of $943,000 at December 31, 1995 consisted of
borrowings from a margin account, which were secured against the value of the
securities in the Company's short term investment account. The weighted average
interest rate on the outstanding balances during 1995 was 8%.




                                      F-11
<PAGE>

         Long-Term Debt

         At December 31, 1996 and 1995, the Company had the following long-term
indebtedness outstanding (000's omitted):
<TABLE>
<CAPTION>
                                                                 1996           1995
                                                                 ----           ----
          
<S>                                                            <C>          <C>     
          Credit Facility                                      $   3,500    $     -
          Term Note                                                   -         6,188
          Capital lease obligations, interest rates
             ranging from 9.0% to 12.6%, maturing 
             through August 2000                                     896          981
          Other                                                      338          190
                                                               ---------    ---------
                                                                   4,734        7,359
          Less- Current portion                                      364        2,497
                                                               ---------    ---------
                                                               $   4,370    $   4,862
                                                               =========    =========
</TABLE>

         The maturities of long-term debt due within the next five years are as
follows (000's omitted):
                                           1996  
                                           ----  
               1997                     $     364 
               1998                           460  
               1999                           922  
               2000                           888  
               2001                           700  
               Thereafter                   1,400  
                                        ---------  
                                        $   4,734  
                                        =========  


         In 1993 the Company negotiated a credit facility of $12 million (the
"loan agreement") with its bank. The loan agreement provided for a $9 million
five-year term note ("Term Note") and a $3 million revolving loan facility
("Credit Note"). These amounts were used in 1993 and 1994 to replace the
Company's existing short-term borrowings, to finance acquisitions and to provide
for working capital. The Term Note bore interest on the outstanding balance at
the bank's prime rate (8.5 percent at December 31, 1995) plus 2 percent.
However, the Company had a separate agreement with a bank which provided for a
minimum and a maximum interest rate on its term note of 8% and 10.25%,
respectively. The Credit Note bore interest on outstanding balances at the
bank's prime rate (8.5 percent at December 31, 1995) plus 1 percent and was
subject to renewal at the option of the bank on May 31, 1996. The outstanding
balance on the Term Note was $6,188,000 on December 31, 1995.

         On August 30, 1996, the Company entered into a new credit agreement
(the "Credit Agreement") and amended and restated this agreement on December 31,
1996 with Merita Bank Ltd. and Bank of Boston Connecticut (together, the "New
Banks") pursuant to which the New Banks have agreed, subject to the terms and
conditions set forth therein, to provide a two-year $25 million revolving credit
facility to the Company, the borrowings of which automatically converts into a
five-year term loan on September 30, 1998 (the "Credit Facility").

         The Credit Facility matures on September 30, 2003 with principal
payments payable in increasing quarterly installments commencing December 31,
1998. Borrowings under the Credit Facility bear interest, at the Company's
option, at an annual rate equal to either a base rate, defined as the higher of

                                      F-12
<PAGE>

the prime rate or a specified federal funds rate, or a specified Eurodollar rate
plus, in each case, an applicable margin which varies with the Company's
leverage (as defined in the Credit Agreement). The Company is obligated to pay
a commitment fee of 1/2% per annum of any undrawn amounts. The New Banks also
received warrants to purchase an aggregate of 166,666 shares of Common Stock at
an initial exercise price of $9.75 per share (the "New Bank Warrants") and were
granted certain registration rights in connection therewith. Such warrants were
valued at approximately $400,000 and are being amortized over the life of the
Credit Facility. At December 31, 1996, the outstanding balance under the Credit
Facility was $3.5 million at an interest rate of 9.75%.

         The Company is subject to certain covenants under the Credit Facility
which include, but are not limited to, ratios of total debt to recurring
monthly revenue, minimum debt service coverage, minimum net worth, maximum
capital expenditures, maximum subscriber attrition rate (as defined in the 
Credit Agreement), restrictions on additional indebtedness, certain
acquisitions, dividends, investments, mergers and sales of assets, creation of 
liens, guarantees and issuance of capital stock by the Company's subsidiaries.

         The Credit Facility is secured by all current and future assets, and
the pledge of the Company's common stock of the Company's subsidiaries.

         The carrying amounts of the Company's short-term borrowings and
long-term debt approximate their fair value. The fair value of the Company's
long-term debt is estimated based on current rates offered to the Company for
debt with similar remaining maturities.

8.  COMMON STOCK

         On August 13, 1992, the Company issued warrants to purchase 193,150
shares of common stock, subject to adjustment upon certain dilutive events, in
connection with a restructuring of debt. These warrants expire on August 13,
2002 and are exercisable at any time prior to expiration at an exercise price
of $10.68, subject to adjustment upon certain dilutive events.

         On August 1, 1994, the Company sold to HP Partners L.P. (the
"Investor") for $10,000,000 (i) 1,515,886 shares of common stock and (ii)
warrants to purchase 685,714 shares of common stock at an exercise price of
$4.58 per share. The warrants are exercisable at any time prior to their
expiration date on August 1, 2004 and are subject to adjustment upon certain
dilutive events.

         On March 27, 1995, the Company effected a reverse stock split pursuant
to which one share of common stock, $.01 par value, was exchanged for every 14
shares of common stock, $.25 par value, then issued or outstanding. In addition,
the Company reduced its authorized shares of preferred and common stock from
10,000,000 and 100,000,000 shares to 1,000,000 and 12,000,000 shares,
respectively. The share information included in the accompanying financial
statements reflect the effect of the reverse stock split effected March 27,
1995.

         On September 25, 1996, the Company issued 1,265,000 shares of Common
Stock at $11.00 per share, par value $0.01 per share, in a public offering for
net proceeds of approximately $12.1 million.

         At December 31, 1996, the Company has 2,196,861 shares of common stock
reserved for share option plans and 1,045,530 for warrants.



                                      F-13
<PAGE>

Changes in common stock outstanding are as follows (000's omitted):
<TABLE>
<CAPTION>

                                                             Common          Treasury
                                                              Stock            Stock
                                                              ------          ------- 
<S>                                                      <C>                 <C>
    January 1, 1994                                            2,951             7
          Additions - Sales of common stock                    1,515             -
                                                           -----------       --------
      December 31, 1994                                        4,466             7
          Additions                                               -              -
                                                           -----------       --------
      December 31, 1995                                        4,466             7
          Additions - Sales of common stock                    1,265             -
          Additions - Common stock issued for an
          acquisition                                            104             -
                                                           -----------       --------
      December 31,1996                                         5,835              7
                                                           ===========       =========
</TABLE>

9.  STOCK OPTIONS

         The Company, with the approval of its stockholders, adopted the 1992
Senior Executives' Option Plan (the "Executives Plan") and the 1992 Directors'
Option Plan (the "Directors Plan"). The Executives Plan and the Directors Plan
(collectively, the "Option Plans") took effect on August 13, 1992. On such date,
one-time grants of options were made to certain current and former directors
under the Directors Plan. At December 31, 1996, options to purchase 165,429
shares of common stock were outstanding under the Directors Plan, of which no
options were exercisable. Under the Directors Plan, all options vested on
January 1, 1993.

         On July 29, 1994 (the "Effective Date"), the Company's stockholders
approved the amendment and restatement of the Executives Plan, which amendment
and restatement (i) replaced all options outstanding under the Plan with a like
number of options at a reduced exercise price of $7.28 per share, (ii) 
commenced a new vesting period for such options, (iii) reduced the "hurdle rate"
relating to the price at which the shares must trade prior to becoming 
exercisable and (iv) modified the provisions of the Plan to satisfy the 
requirements of Rule 16b-3 of the Securities Exchange Act of 1934. Under the
Executives Plan, initial option grants to certain designated senior executives
made on the Effective Date will become exercisable as to thirty percent (30%) 
of the option shares on the first anniversary of the Effective Date; twenty
percent (20%) of the option shares on the second and third anniversaries of the
Effective Date, and fifteen percent (15%) of the option shares on each of the 
fourth and fifth anniversaries of the Effective Date. At December 31, 1996, 
options to purchase 31,432 shares of common stock were outstanding under the
Executives Plan, of which no options were exercisable.

         No options granted under the Executives Plan or the Directors Plan will
become exercisable until the price of the shares subject thereto reaches or has
reached a trading price of $13.30 and $24.45, respectively, and remains at or
above such price for 30 consecutive trading days. The options will expire ten
years after the date of grant. No further stock options or other awards shall
be granted under the Executives Plan and the Directors Plan. All stock options
outstanding under the Executives Plan and the Directors Plan shall continue to
be governed by the terms of the respective plans, and the relevant stock option
agreement pertaining to each such stock option.

         During 1995, the Company adopted the 1996 Stock Incentive Plan (the
"Plan"), which permits the issuance of incentive stock options, non qualified
stock options and restricted stock. The Plan provides for the granting of up to
2,000,000 shares of the Company's common stock. Pursuant to the terms and
conditions of the Plan, 300,000 and 702,500 options to purchase common stock
were granted during 1995 and 1996, respectively, at exercise prices ranging


                                      F-14
<PAGE>

from $5.50 to $12.00 per share. At December 31, 1996, options to purchase
465,500 shares of common stock were exercisable. Each option issued under the
Plan vests at a rate and expires on a date designated by the Compensation
Committee of the Board of Directors.

         The Company accounts for awards granted to employees and directors
under APB No. 25, under which no compensation cost has been recognized for 
stock options granted. Had compensation cost for these stock options been 
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                             1996              1995
                                                             ----              ----
<S>                              <C>                  <C>                 <C>            
              Net loss:          As reported          $   (2,452,000)    $   (1,197,000)
                                 Pro forma                (2,711,000)        (1,596,000)
             
              Loss per share:    As reported                   (0.51)             (0.27)
                                 Pro forma                     (0.56)             (0.36)
</TABLE>

         The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts as additional awards in future years are
anticipated.

         Option activity for the three years ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
     
                                                                              Weighted Average
                                                                                  Exercise
                                                          Number of Shares         Price
                                                          ----------------         -----  
<S>                                                          <C>             <C>      
     Options outstanding, January 1, 1994                        247,928         $   12.54
         Granted                                                  73,930         $    7.28
         Canceled                                                (29,515)        $   13.97
         Exercised                                                    -               -
                                                             --------------      -----------
     Options outstanding, December 31, 1994                      292,343         $   11.07
         Granted                                                 308,854         $    5.57
         Canceled                                                (56,672)        $    7.28
         Exercised                                                    -               -
                                                            --------------       -----------
     Options outstanding, December 31, 1995                      544,525         $    8.34
         Granted                                                 702,500         $    9.00
         Canceled                                                (47,664)        $    7.28
         Exercised                                                    -               -
                                                             --------------       -----------
     Options outstanding, December 31, 1996                    1,199,361         $    8.77
                                                             ==============       ===========
</TABLE>

         There were 977,500 options available for future grant at December 31,
1996.

         The weighted average fair value of options granted is $3.58 and $2.18
for the years ended December 31, 1996 and 1995, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for

                                      F-15
<PAGE>

grants in 1996 and 1995: risk-free interest rate of 5.72%; expected life of 4
years; expected volatility of 50% and expected dividend yield of 0%.

         The following table summarized information with respect to stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
                                        Options Outstanding                           Options Exercisable                  
                     ------------------------------------------------------     ----------------------------------        
                                              Weighted                                                                  
                         Number of            Average                                                    Weighted         
                         Options             Remaining          Weighted         Number of Options        Average         
     Range of          Outstanding at        Contractual        Average            Exercisable at        Exercise         
  Exercise Prices     December 31, 1996        Life          Exercise Price     December 31, 1996         Price    
  ---------------     -----------------        ----          --------------     -----------------         -----              
<S>                            <C>                   <C>           <C>                   <C>               <C>      
     $5.50 - $8.25          629,432               6.0           $    6.33             401,000           $    5.76
     $8.26 -$12.39          404,500               9.0           $   10.44              64,500               10.40
    $12.40 -$13.97          165,429               5.0           $   13.97                  -                 -
     $5.50 -$13.97        1,199,361               6.9           $    8.77             465,500                6.40
                                        
</TABLE>                            

10.  INCOME TAXES

         Income tax provision (benefit) include current and deferred taxes as
follows (000's omitted):
<TABLE>
<CAPTION>

                                                 For the Years Ended December 31
                                              1996            1995             1994
                                              ----            ----             ----
<S>                                         <C>            <C>               <C>     
     Current:
         Federal                            $     -        $      -          $      -
         State                                   250             200                94
                                            --------         -------          --------
                                                 250             200                94
                                            --------         -------          --------
     Deferred:
         Federal                              (1,125)         (1,764)              301
         State                                  (340)           (555)              183
                                            --------         -------          --------
                                              (1,465)         (2,319)              484
                                            --------         -------          --------
                                            $ (1,215)      $  (2,119)        $     578
                                            ========       =========         =========
     
</TABLE>

         The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax liability and deferred tax asset and
their approximate tax effects are as follows at December 31 (000's omitted):
<TABLE>
<CAPTION>

                                                                         1996           1995
                                                                         ----           ----
<S>                                                                 <C>             <C>       
             Current deferred tax asset:
                 Accrued expenses                                   $      119      $      414
                 Allowance for doubtful accounts                           395             589
                 Other                                                     (48)            145
                                                                    ----------      ----------
                           Net current deferred tax asset                  466           1,148
             
             Noncurrent deferred tax liability:
                 Fixed assets                                          (12,017)        (11,867)
                 Subscriber contracts                                   (5,645)         (4,990)
                 Net operating loss carryforward                         9,569           7,418
                 Prepaid pension                                        (2,176)             -
                 Accrued expenses and other                             (1,068)           (858)
                                                                    ----------      ----------
                           Net noncurrent deferred tax liability       (11,337)        (10,297)
                                                                    ----------      ---------- 
                           Net deferred tax liability               $  (10,871)     $   (9,149)
                                                                    ==========      ==========
</TABLE>

                                      F-16
<PAGE>

         The tax expense allocated to shareholders' equity related to the change
in the minimum pension obligation was $2,295,000, $307,000 and $155,000 in 1996,
1995 and 1994, respectively. Reconciliation of tax at the U.S. statutory income
tax rate of 34% to the provision (benefit) for income taxes was as follows
(000's omitted):
<TABLE>
<CAPTION>

                                                              1996              1995            1994
                                                              ----              ----            ----
<S>                                                          <C>             <C>              <C>      
     U.S. statutory rate                                     $(1,247)        $  (1,970)       $     334
     Nondeductible amortization                                   58                58               58
     State income taxes                                          (59)             (234)             163
     Other                                                        33                27               23
                                                             -------         ---------        ---------
               Tax provision (benefit)                       $(1,215)        $  (2,119)       $     578
                                                             =======         =========        =========
</TABLE>

         The Company has net operating loss carryforwards for tax purposes at
December 31, 1996 of approximately $22,000,000 which expire through 2011, and is
limited as to its utilization in any one year due to a previous change in
ownership of the Company. Future changes in ownership, as defined by Section 382
of the Internal Revenue Code, could limit the amount of net operating loss
carryforwards in any one year.

11. PENSION PLANS

         The Company covers approximately 15 percent of its employees under two
defined benefit pension plans which were frozen at June 30, 1987. The benefits
under these plans are based upon compensation levels and length of service. The
pension plans are being funded in accordance with the Employee Retirement Income
Security Act of 1974.

         The components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>

                                                                            1996              1995
                                                                       ----------        ----------
<S>                                                                    <C>               <C>       
      Components:                                                      
          Service cost - benefits earned during period                 $      150        $      150
          Interest cost on projected benefit obligation                     1,552             1,623
          Actual return on assets                                          (2,551)           (3,174)
          Net amortization and deferral                                       973             1,795
                                                                       ----------        ----------
                       Net periodic pension cost                       $      124        $      394
                                                                       ==========        ==========
      Assumptions:
          Discount rate for benefit obligations                               7.5%              7.5%
          Expected long-term rate of return on assets                         8.5%              8.5%

</TABLE>



                                      F-17
<PAGE>


The following table sets forth the funded status of the plans at September 30,
1996 and 1995 and amounts recognized in the Company's consolidated balance
sheets at December 31, 1996 and 1995, respectively (000's omitted):
                                                                  
<TABLE>
<CAPTION>
                                                                   1996                   1995
                                                             --------------   ----------------------------
                                                                   Over           Over           Under
                                                                  Funded         Funded          Funded
                                                                  Plans           Plan            Plan
                                                               -----------    -----------     -----------
<S>                                                            <C>            <C>             <C>         
        Vested benefits                                        $   (20,917)   $    (1,601)    $   (19,838)
                                                               ===========    ===========     ===========
        Accumulated benefit obligation                         $   (20,970)   $    (1,603)    $   (19,892)
                                                               -----------    -----------     -----------
        Projected benefit obligation                               (20,970)        (1,603)        (19,892)
        Plan assets at fair value                                   21,964          1,645          18,871
                                                               -----------    -----------     -----------
                  Plan assets in excess of (less than)
                      projected benefit obligation                     994             42          (1,021)
                                                                ----------    -----------     -----------
        Unrecognized net (gain) loss                                 4,472            602           5,164
        Unrecognized prior service cost                                 -              -               -
        Unrecognized net transition obligation (asset)                  (2)           (10)             (5)
        Fourth quarter contribution                                    146             18             203
        Adjustment required to recognize minimum liability              -              -           (5,159)
                                                               -----------    -----------     -----------
                  Prepaid (accrued) pension cost recognized
                      in the balance sheet                     $     5,610    $       652     $      (818)
                                                               ===========    ===========     ===========
</TABLE>

         Pension plan assets are primarily invested in corporate common stocks
and bonds and U.S. government securities.

12. SUPPLEMENTARY FINANCIAL  STATEMENT DATA
<TABLE>
<CAPTION>

                                                                       1996          1995
                                                                       ----          ----
                                                                         (000's omitted)
<S>                                                                 <C>           <C>      
          Prepaid expenses and other:
              Deferred tax assets                                   $     466     $   1,148
              Prepaid pension cost                                        250           652
              Other                                                     1,155            99
                                                                    ---------     ---------
                                                                    $   1,871     $   1,899
                                                                    =========     =========
          Other Assets:
              Prepaid pension cost                                  $   5,360     $      -
              Other                                                     2,557           552
                                                                    ---------     ---------
                                                                    $   7,917     $     552
                                                                    =========     =========

          Accounts payable and accrued expenses:
              Accounts payable                                      $   4,090     $   3,975
              Accrued pension                                             162           740
              Accrued severance                                           792         1,020
              Accrued expenses                                          2,246         2,954
                                                                    ---------     ---------
                                                                    $   7,290     $   8,689
                                                                    =========     =========
</TABLE>


                                      F-18
<PAGE>

13.  COMMITMENTS AND CONTINGENCIES

         The Company conducts its operations principally from leased facilities
and has entered into capital lease arrangements for certain fixed assets.
Future minimum lease payments with respect to leases in effect at December 31, 
1996 are as follows (000's omitted):

                                        Capital       Operating
                                        -------       ---------
   1997                                 $  308         $  1,497
   1998                                    296            1,380
   1999                                    294            1,147
   2000                                    146              767
   2001                                     -               644
   Thereafter                               -             1,016
                                         -----         --------
                                         1,044         $  6,451
 Less-Amount representing interest         148        =========
                                         -----         
                                        $  896 
                                        ====== 
                                                
         Rental expense for the years ended December 31, 1996, 1995 and 1994
was approximately $1,467,000, $1,084,000 and $1,166,000 respectively.

         Certain subsidiaries of the Company are defendants or co-defendants in
various lawsuits, some of which claim damages in substantial amounts. Management
of the Company is of the opinion that the ultimate resolution of all these
claims is not likely to have a material adverse effect on the consolidated
financial condition of the Company, future results of operations or liquidity.

         The Company has entered into employment agreements with certain of its
employees. Termination of employment for reasons other than (i) "Cause" (ii)
such employee's "Disability" (each defined in the employment agreements), (iii)
the employee's death, incompetence or bankruptcy or (iv) the expiration of the
term of the employment agreement will obligate the Company to pay the employee's
salary for a period of twelve months and maintain certain benefits. The amount
of this obligation would be approximately $595,000. In addition, the employment
agreements grant these employees the right to receive their respective salaries
and certain other benefits for a period of twelve months if the Company
terminates any of such employees within twelve months of a change in control of
the Company (as defined). Upon a change in control, the salary obligation would
result in an aggregate payment of approximately $595,000 based upon such
employee's 1996 salary.

14.  QUARTERLY FINANCIAL DATA (UNAUDITED)

         The following is a summary of the quarterly results of operations for
the years ended December 31, 1996 and 1995: 

                                           Three Months Ended 
                           -----------------------------------------------------
                           March 31     June 30    September 30      December 31
                           --------     -------    ------------      -----------
                               (000's omitted, except per share data)
1996: 
  Revenue                   $ 12,292     $ 12,191       $ 13,037       $ 13,455 
  Gross profit                 5,863        5,811          5,797          5,380 
  Net income (loss)             (253)        (483)          (712)        (1,004)
                             -------      -------         ------        ------- 
  Earnings (loss) per share  $ (0.06)     $ (0.11)        $(0.15)       $ (0.17)
                             =======      =======         ======        ======= 

                               


                                      F-19
<PAGE>

<TABLE>
<CAPTION>


                                                                         Three Months Ended
                                                -----------------------------------------------------------------
                                                 March 31*       June 30*        September 30*        December 31
                                                 ---------       --------        -------------        -----------
                                                                 (000's omitted, except per share data)
   
   1995:
<S>                                             <C>            <C>               <C>                   <C>       
       Revenue                                  $   12,584     $     12,539      $    12,569           $   12,383
       Gross profit                                  6,405            6,155            5,787                5,466
       Income (loss) before cumulative
          effect of accounting change                    5             (645)          (1,040)              (1,994)
       Net income (loss)                             2,482             (645)          (1,040)              (1,994)
                                               -----------     ------------   --------------       --------------
       Earnings (loss) per share before
          cumulative effect of accounting
          change                                $       -      $      (0.14)      $    (0.23)         $     (0.45)
       Earnings (loss) per share                $     0.55     $      (0.14)      $    (0.23)         $     (0.45)
                                                ==========      ===========       ===========          ==========
</TABLE>

(*) First, second and third quarter 1995 results have been restated for the
    change in accounting principle (see Note  4).

15.  SUBSEQUENT EVENT

         On March 12, 1997, the Company announced that it had reached an
agreement in principle (the "Agreement") with PremiTech to terminate its
outsourcing agreement effective April 1, 1997. The recent changes in the
Company's growth strategy and the sale by PremiTech of its alarm monitoring
business in late 1995 led both parties to re-evaluate the outsourcing agreement.
Pursuant to the Agreement, the Company will be obligated to pay $650,000 in 
cash and execute a noninterest bearing promissory note ("Note") in the amount 
of $1,000,000 payable to EDS in twenty quarterly installments of $50,000,
beginning January 1, 1998. The Note will be secured by an irrevocable letter of
credit for $1,000,000. In addition, the Company has agreed to lease certain
computer equipment for a three year term with an option to purchase the
equipment at the end of the lease for the fair market value. The Company expects
to record a pretax charge of approximately $1,500,000.



                                      F-20
<PAGE>



                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES


                    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (000's omitted)
<TABLE>
<CAPTION>




                                                       
                                                        
                                          Balance at     Charged to    
                                         Beginning of     Costs and      Charged to                        Balance at   
        Description                         Period        Expenses     Other Accounts   (A) Deductions   End of Period
        -----------                         ------        --------     --------------   --------------   ------------- 
<S>                                       <C>              <C>            <C>            <C>               <C>      
Allowance for doubtful accounts:
       December 31-
          1996                            $   1,340        $ (146)        $    -         $   (221)         $     973
          1995                                1,315           486              -             (461)             1,340
          1994                                1,240           506              -             (431)             1,315

</TABLE>

         (A) Deductions represent the net effect of write-offs and recoveries.


                                      S-1
<PAGE>


                                 EXHIBIT INDEX

Exhibit No.         Description of Exhibits                             Page No.
----------          -----------------------                             --------
   3.1         Restated Certificate of Incorporation of the Company, as 
               amended(*)
   3.2         Amended and Restated By-Laws of the Company(5)
   4.1         Specimen of Common Stock Certificate(5)
   4.3         Investor Warrant(2)
   4.4         Form of Institution Warrant(2)
   4.5         New Bank Warrants(11)
   10.1        Investment Agreement between HP Partners L.P. ("Investor") and
               the Company, dated as of June 29, 1994(1)
   10.2        Registration Rights Agreement between Investor and the Company,
               dated August 1, 1994(2)
   10.3        Exchange Agreement, dated as of December 18, 1991, among the
               Company and a number of insurance companies and other
               institutions listed therein ("Institutions")(1)
   10.4        First Amendment to the Exchange Agreement, dated January 31,
               1992(1)
   10.5        Second Amendment to the Exchange Agreement, dated May 24, 
               1992(1)
   10.6        Third Amendment to the Exchange Agreement, dated June 30,
               1992(1)
   10.7        Amended and Restated Senior Executives Option Plan(2)
   10.8        Master Lease Agreement No. 12223, dated December 18, 1992,
               between Data General Corporation and the Company(1)
   10.9        Letter Agreement, dated July 12, 1995, and Lease Schedule No.
               006, dated July 26, 1995, to Master Lease Agreement No. 12223
               between Data General Corporation and the Company(7)
   10.10       Letter Agreement, dated September 3, 1996, and Revised Lease
               Schedule No. 006 to Master Lease Agreement 12223 between Data 
               General Corporation and the Company(11)
   10.11       Software License and Sublicense Agreement, dated April 4, 1995, 
               among Monitoring Automation Systems, PremiTech Corporation and 
               the Company(6)
   10.12       Employment Agreement between the Company and George V. Flagg,
               dated January 8, 1996(9)
   10.13       Employment Agreement between the Company and James L. Boehme, 
               dated January 8, 1996(9) 
   10.13(a)    Amendment to Employment Agreement between the Company and James
               L. Boehme, dated June 5, 1996(10)
   10.14       Employment Agreement between the Company and Lawrence R. Irving,
               dated May 13, 1996(10)
   10.15       Lease Agreement, dated as of July 1, 1995, between Holmes
               Protection of New York Inc. ("HPNY") and Forty-Seventh-Fifth 
               Company;  Lease Guaranty by the Company, dated as of July 1,
               1995(7)
   10.16(a)    Lease Agreement, dated March 2, 1987, between HPNY and Ninth 
               Avenue Associates (including First Amendment, dated August 9,
               1988 thereto)(1)
   10.16(b)    Second Amendment to Lease Agreement, dated October 7, 1987(2)
   10.16(c)    Third Amendment to Lease Agreement, dated October 27, 1994(3)
   10.16(d)    Fourth Amendment to Lease Agreement, dated November 13, 1995(9)
   10.17       Lease Agreement, dated June 1992, among Holmes Protection of
               Long Island, Inc., Holmes Protection Group, Inc. and J&B
               Properties Ltd.(1)
   10.18       Lease Agreement, dated January 31, 1974, between Holmes 
               Protection of Philadelphia, Inc. and George Shapiro (including
               amendments thereto)(1)
   10.19       Form of Registration Rights Agreement with Institutions(2)


<PAGE>



   10.20       Agreement For Information Technology Services, dated as of April
               4, 1995, between PremiTech Corporation (formerly Premisys
               Corporation) and the Company ("Outsourcing Agreement")(7)
   10.21       First Amendment to Outsourcing Agreement, dated as of August 1,
               1995(8)
   10.22       Second Amendment to Outsourcing Agreement, dated as of December 
               14, 1995(9
   10.23       Third Amendment to Outsourcing Agreement, dated as of January 
               19, 1996(9)
   10.24       Parent Corporation Guarantee, dated April 4, 1995, among 
               Electronic Data Systems Corporation, PremiTech Corporation and
               the Company(6)
   10.25       Credit Agreement, dated as of August 30, 1996, among Merita Bank
               Ltd.,  Bank of Boston Connecticut (together, the "New Banks"), 
               the Company and Holmes Holding Company, Inc. (the "New Credit
               Agreement")(11)
   10.25(a)    The New Credit Agreement, as amended and restated(*)
   10.26       Registration Rights Agreement, dated as of August 30, 1996,
               between the Company and the New Banks(11)
   18.1        Letter from Arthur Andersen LLP, dated March 20, 1996, regarding
               change in accounting principle(9)
   21.1        Subsidiaries of the Company(*)
   27.1        Financial Data Schedule(*)
   99.1        Definitive Proxy Statement(12)


   --------
   (*)    Filed herewith.
   (**)   To be filed by amendment.
   (1)    Incorporated by reference to the Company's Registration Statement on 
          Form 10, dated July 11, 1994.
   (2)    Incorporated by reference to Amendment No. 1 to the Company's 
          Registration Statement on Form 10/A, dated October 13, 1994.
   (3)    Incorporated by reference to Amendment No. 2 to the Company's 
          Registration Statement on Form 10/A, dated December 13, 1994.
   (4)    Incorporated by reference to Amendment No. 3 to the Company's 
          Registration Statement on Form 10/A, dated January 25, 1995.
   (5)    Incorporated by reference to the Company's Annual Report on Form 10-K 
          for the fiscal year ended December 31, 1994.
   (6)    Incorporated by reference to the Company's Quarterly Report on Form 
          10-Q for the quarter ended March 31, 1995.
   (7)    Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended June 30, 1995.
   (8)    Incorporated by reference to the Company's Quarterly Report on Form
          10-Q for the quarter ended September 30, 1995.
   (9)    Incorporated by reference to the Company's Annual Report on Form 10-K 
          for the fiscal year ended December 31, 1995.
   (10)   Incorporated by reference to the Company's Registration Statement on
          Form S-1, dated July 26, 1996.
   (11)   Incorporated by reference to Amendment No. 1 to the Company's 
          Registration Statement on Form S-1, dated September 25, 1996.
   (12)   To be incorporated by reference.