<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A

[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/A constitute
"forward-looking statements" within he 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 form 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/A.

The undersigned Registrant is filing this amended Annual Report on Form 10-K/A
to restate its consolidated financial statements for the years ended December
31, 1996 and 1995 resulting from a change in its method of accounting for
installation revenue, and to make certain corresponding and other changes.

PART II

Item 6.  Selected Financial Data.

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

PART III

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.                           Description
                  -----------                           -----------

                  23    ................... Consent of Independent Public
                                            Accountants

                  27    ................... Restated Financial Data Schedule 
                                            for the year ended December 31, 1996

Except for the foregoing exhibit, no exhibits are being filed with this Form
10-K/A. An index to exhibits is set forth in Item 14 of the Form 10-K as
originally filed.
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA (1)

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/A, 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/A. 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>
                                                                             For the Year Ended December 31
                                                       --------------------------------------------------------------------
                                                         1996          1995           1994            1993           1992
                                                       --------       --------       --------       --------       --------
                                                                    (000's omitted, except per share amounts)
                                                               (Restated)
<S>                                                    <C>            <C>            <C>            <C>            <C>     
Statement of Operations Data (2):
Revenues                                               $ 51,424       $ 50,821       $ 51,402       $ 53,500       $ 56,173
Cost of sales (exclusive of depreciation expense)       (28,124)       (26,262)       (24,885)       (29,916)       (29,560)
                                                       --------       --------       --------       --------       --------
Gross profit                                             23,300         24,559         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                        (3,218)        (5,047)           982            145          3,803
                                                       --------       --------       --------       --------       --------
Income (loss) before extraordinary item                  (2,185)        (3,231)           404            (55)        (3,795)
Extraordinary item                                         --             --             --             --           23,187
                                                       --------       --------       --------       --------       --------
Net income (loss)                                        (2,185)        (3,231)           404            (55)        19,392
Earnings (loss) per common share before                   
    extraordinary item                                    (0.45)         (0.72)          0.11          (0.02)         (3.04)
Earnings (loss) per common share (3)                      (0.45)         (0.72)          0.11          (0.02)         15.54
Weighted average shares outstanding                       4,827          4,459          3,580          2,944          1,250


                                                                          For the Year Ended December 31
                                                       --------------------------------------------------------------------
                                                         1996           1995           1994           1993           1992
                                                       --------       --------       --------       --------       --------
                                                                              (000's omitted)
                                                               (Restated)
<S>                                                   <C>            <C>            <C>            <C>           <C>
Other Data:
EBITDA (4)                                             $  8,593       $  8,138       $ 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

</TABLE>
                                        3

<PAGE>

<TABLE>
<CAPTION>

                                                                                 December 31
                                                   ----------------------------------------------------------------------
                                                       1996          1995          1994           1993           1992
                                                       ----          ----          ----           ----           ----
                                                                              (000's omitted)
                                                            (Restated)
<S>                                                <C>           <C>           <C>            <C>            <C>        
Balance Sheet Data:
Working Capital                                    $   (2,870)   $   (6,054)   $   (1,818)    $   (9,107)    $   (8,307)
Total Assets                                           90,394        80,859        87,148         84,078         83,450
Long-term debt, net of current maturities               4,370         4,862         6,709          5,995            435
Shareholders' equity                                   58,628        45,638        48,420         39,319         38,006

</TABLE>

       (1) See Note 1 to Consolidated Financial Statements for information
           concerning the Company's restatement of its financial statements for
           the years ended December 31, 1996 and 1995. All financial data in
           this table above as of and for the years ended December 31, 1996 and
           1995 reflect such restatement.

       (2) 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. See Note 4 to Consolidated Financial Statements for
           further explanation. 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.

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

       (4) 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 a non-recurring charge of $2,074,000.
           EBITDA for 1992 does not reflect an extraordinary gain of
           $23,187,000.

                                        4
<PAGE>

ITEM 7.    MANAGEMENT'S DISCUSSION AND
           ANALYSIS OF FINANCIAL CONDITION
           AND RESULT OF OPERATIONS

Results of Operations
---------------------
<TABLE>
<CAPTION>

                                                                             Year Ended December 31
                                                             ----------------------------------------------------
                                                                 1996          1995          1994          1993
                                                                 ----          ----          ----          ----
                                                                                (000's omitted)

<S>                                                          <C>           <C>           <C>           <C>       
    Monitoring and service                                   $   35,656    $   37,912    $   39,747    $   41,004
    Installation                                                 10,986         8,901         8,425         9,141
    Franchise royalties, product sales and other                  4,782         4,008         3,230         3,355
                                                             ----------    ----------    ----------    ----------
    Total revenues                                               51,424        50,821        51,402        53,500
    Cost of sales (exclusive of depreciation expense shown
        below)                                                  (28,124)      (26,262)      (24,885)      (26,916)
                                                             ----------    ----------    ----------    ----------
    Gross profit                                                 23,300        24,559        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)
    Nonrecurring charge                                            (700)       (2,074)           -             -
    Other income                                                    282           247           193           902
    Interest expense, net                                          (537)         (721)         (941)         (585)
                                                             ----------    ----------    ----------    ----------
    Income (loss) before income taxes                            (3,218)       (5,047)          982           145
    Provision (benefit) for income taxes                         (1,033)       (1,816)          578           200
                                                             ----------    ----------    ----------    ----------
    Net income (loss)                                        $   (2,185)   $   (3,231)   $      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 the service is provided. Installation revenue is recognized on
completion for systems sold outright to the subscriber. For those systems to
which the Company retains ownership, revenue is recognized to the extent of the
selling expense on completion of the installation, and the remaining revenue is
recognized over the initial term of the contract. Direct installation costs,
which include materials, labor and installation overhead are capitalized in the
case of Company owned systems and are depreciated over the average useful life
of the contract (including renewals), estimated by the Company to be twelve
years. Other than as described above, all costs (including installation costs
relating to outright sales) are recognized in the period in which they are
incurred.

                                        5

<PAGE>

Restatement
-----------

Effective January 1, 1995, the Company changed its method of accounting for
installation revenue to record 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 the
estimated selling costs and amortized such difference over the initial term of
the non-cancelable customer monitoring and service contract (generally five
years) (the "Deferral Method"). Following discussions with the staff of the
Division of Corporate Finance of the Securities and Exchange Commission, in
connection with a Registration Statement filed by the Company, the Company has
determined to restate its consolidated financial statements for the years ended
December 31, 1996 and 1995 using the Deferral Method. Accordingly, the
consolidated financial statements for such years included in Item 8 have been
restated from those originally reported. This Deferral Method of recording
revenue had no impact on the Company's liquidity or cash flows.

Fiscal Year Ended 1996 Compared
With Fiscal Year Ended 1995
-------------------------------

Revenues increased $0.6 million (1.2%) to $51.4 million in 1996 from $50.8
million in 1995. The increase was attributable to an increase in installation
revenues of $2.1 million (23.4%) 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 1996 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.


                                        6


<PAGE>

Nonrecurring 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, nonrecurring 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 $2.2 million compared to a net loss
of $3.2 million in 1995. The net increase income of $1.0 million in 1996 is due
to all the various changes described above.

Fiscal Year Ended 1995 Compared
With Fiscal Year Ended 1994
-------------------------------

Revenues declined $0.6 million (1.1%) to $50.8 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 $0.7 million from franchise and
dealer operations. The decline in revenues 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 franchises and a reduction in related royalties and product sales.
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 $0.7 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 $0.7 million in 1995 primarily due to an increase in
interest income on investments and a declining debt balance under the Loan
Agreement.

Nonrecurring charges of $2.1 million in 1995 included $1.1 million relating to
(i) severance pay and related benefits 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 


                                        7

<PAGE>

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.

The Company recorded a net loss in 1995 of $3.2 million compared to net income
of $0.4 million in 1994. The net reduction in income of $3.6 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 $6.1 million in 1995
to $2.9 million in 1996 primarily as a result of a reduction in long-term debt,
accounts payable and accrued expenses.

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 6 and 7 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
$0.4 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 $6.1 million in 1995 primarily as
a result of a reduction in long-term debt, 


                                        8


<PAGE>

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 Equivalents
---------------------------------------

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, 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 


                                        9


<PAGE>

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,
nonrecurring charge of approximately $1.5 million in the first quarter of 1997.
See Notes 4 and 14 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.

The foregoing information under the caption "Future Commitments and Cash
Equivalents" is set forth as of April 7, 1997, the date of filing the Form 10-K
being amended by the Form 10-K/A. For current information relating to the
Company's liquidity and other matters set forth under such caption, see the
Company's Form 10-Q/A for the quarterly period ended September 30, 1997.


                                       10
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>


                                                                                                Page
                                                                                                ----

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

CONSOLIDATED FINANCIAL STATEMENTS:

    Consolidated Balance Sheets as of December 31, 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-22

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                                                  S-1

</TABLE>


                                      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, as restated (see Note 1) and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years ended December 31, 1996 and 1995, as restated, and for the year ended
December 31, 1994. 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, as restated, and
the results of their operations and their cash flows for each of the two years
ended December 31, 1996 and 1995, as restated, and for the year ended December
31, 1994 in conformity with generally accepted accounting principles.

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.


                                                          /s/ Arthur Andersen
                                                          -------------------
                                                          ARTHUR ANDERSEN LLP

New York, New York
February 28, 1997 (except with respect to the matters discussed in Notes 14 and
15, as to which the dates are March 12, 1997, and December 18, 1997,
respectively, and with respect to the restatement information in Notes 1b, 1c,
8, 9 and 11, as to which the date is December 18, 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:                                                                                           (Restated)
<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                                                                    2,448                2,550
                                                                                              ---------            ---------
                 Total current assets                                                            11,566               11,948
                                                                                              ---------            ---------

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
                                                                                              ---------            ---------
                                                                                              $  90,394            $  80,859
                                                                                              =========            =========
                          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                                                                              3,969                4,123
    Customer deposits                                                                             2,813                1,750
                                                                                              ---------            ---------
                 Total current liabilities                                                       14,436               18,002
                                                                                              ---------            ---------

LONG-TERM LIABILITIES:
    Long-term debt                                                                                4,370                4,862
    Other long-term liabilities                                                                   2,503                3,048
    Deferred income taxes                                                                        10,457                9,309
                                                                                              ---------            ---------
                 Total long-term liabilities                                                     17,330               17,219
                                                                                              ---------            ---------

COMMITMENTS AND CONTINGENCIES (Note 12)

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                                                                         (74,596)             (72,222)
    Minimum pension liability adjustment                                                           --                 (2,863)
                                                                                              ---------            ---------
                                                                                                 58,713               45,723
    Less- Treasury stock - 7 shares in 1996 and 1995 at cost                                        (85)                 (85)
                                                                                              ---------            ---------
                 Total shareholders' equity                                                      58,628               45,638
                                                                                              ---------            ---------
                                                                                              $  90,394            $  80,859
                                                                                              =========            =========
</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
                                                                            ----------    ----------     ----------
                                                                                    (Restated)
<S>                                                                         <C>           <C>            <C>       
REVENUES:
    Monitoring and service                                                  $   35,656    $   37,912     $   39,747
    Installation                                                                10,986         8,901          8,425
    Franchise royalties, product sales and other                                 4,782         4,008          3,230
                                                                            ----------    ----------     ----------
                 Total revenues                                                 51,424        50,821         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                                  (2,963)       (4,573)         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                                               (3,218)       (5,047)           982

PROVISION (BENEFIT) FOR INCOME TAXES                                            (1,033)       (1,816)           578
                                                                            ----------    ----------     ----------

                 Net Income (Loss)                                          $   (2,185)   $   (3,231)    $      404
                                                                            ==========    ==========     ==========

EARNINGS (LOSS) PER COMMON SHARE:

    Net Earnings (Loss) per common share                                    $    (0.45)   $    (0.72)    $     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 (Restated)                 --             --             --             --           (3,231)        (3,231)
    Change in minimum pension
       obligation (net of taxes of
       $307)                                     --             --             --              449           --              449
                                            ---------      ---------      ---------      ---------      ---------      ---------
BALANCE, December 31, 1995 (Restated)              45            (85)       120,763         (2,863)       (72,222)        45,638
    Net loss for year (Restated)                 --             --             --             --           (2,185)        (2,185)
    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 (Restated)       $      58      $     (85)     $ 133,251      $    --        $ (74,596)     $  58,628
                                            =========      =========      =========      =========      =========      =========
</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:                                              (Restated)
<S>                                                                       <C>              <C>              <C>       
    Net Income (Loss)                                                     $   (2,185)      $   (3,231)      $      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
          Non-recurring charge                                                   700            2,074                -
          Deferred income taxes                                               (1,283)          (2,016)             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                                      (588)            (869)            (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
    ------------------------------------------

(a) 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.

(b) Restatement
    -----------

Effective January 1, 1995, the Company changed its method of accounting for
installation revenue to record 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 the
estimated selling costs and amortized such difference over the initial term of
the non-cancelable customer monitoring and service contract (generally five
years) (the "Deferral Method"). Following discussions with the staff of the
Division of Corporate Finance of the Securities and Exchange Commission, in
connection with a Registration Statement filed by the Company, the Company has
determined to restate its consolidated financial statements for the years ended
December 31, 1996 and 1995 using the Deferral Method. Accordingly, the
accompanying consolidated financial statements for the years ended December 31,
1996 and 1995 have been restated from those originally reported to reflect such
determination. The Deferral Method of recording revenue had no impact on the
Company's liquidity or cash flows. The following table provides selected
summarized financial information illustrating the effect of the restatement on
the Company's consolidated financial statements for the years ended December 31,
1996 and 1995.

<TABLE>
<CAPTION>

                                                                December 31, 1996               December 31, 1995
                                                         -----------------------------   -----------------------------
                                                               As                               As
                                                           Originally          As           Originally          As
                                                            Reported        Restated         Reported        Restated
                                                         --------------   ------------   --------------    -----------
     Income Statement                                                             (000's omitted)
     ----------------
<S>                                                            <C>             <C>             <C>             <C>
     Revenue                                             $     50,975    $     51,424    $     50,075    $     50,821
     Income (loss) before income taxes                         (3,667)         (3,218)         (5,793)         (5,047)
     Income (loss) before cumulative effect of change          
         in accounting principle                               (2,452)         (2,185)         (3,674)         (3,231)
     Cumulative effect of change in accounting                     -               -            2,477              -
         principle
     Net income (loss)                                         (2,452)         (2,185)         (1,197)         (3,231)

</TABLE>




                                      F-7
<PAGE>

<TABLE>
<CAPTION>
                                                                December 31, 1996               December 31, 1995
                                                         -----------------------------   -----------------------------
                                                               As                               As
                                                           Originally          As           Originally          As
                                                            Reported        Restated         Reported         Restated
                                                         --------------   ------------   --------------    -----------
                                                                                (000's omitted)
<S>                                                      <C>             <C>             <C>             <C> 
     Earnings (loss) per common share:
         Before cumulative effect of change in
            accounting principle                         $       (.51)   $       (.45)   $       (.82)   $       (.72)
         Cumulative effect of change in accounting
            principle                                               -               -             .55               -
         Net loss                                                (.51)           (.45)           (.27)           (.72)

     Balance Sheet
     -------------

     Current assets                                            10,989          11,566          11,297          11,948
     Current liabilities                                       13,160          14,436          16,543          18,002
     Long-term liabilities                                     16,262          17,330          15,993          17,219
     Shareholders' equity                                      60,395          58,628          47,672          45,638
</TABLE>


(c)   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 contracts relating to Company-owned equipment, an amount equal
to the estimated selling cost is recognized upon completion of the installation,
and the remaining revenue is deferred and recognized over the term of the
initial contract (generally 5 years). In both cases, revenue from monitoring and
servicing activities is recognized on a straight-line basis over the life of the
contract.

(d)   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.

(e)   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.

                                      F-8
<PAGE>

Repair and maintenance costs are expensed as incurred.

(f)   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.

(g) 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.

(h) 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):


                                                 1996        1995
                                                 ----        ----

                   Materials                  $   1,749    $ 1,390
                   Work-in-process                1,046        533
                                              ---------    -------
                                              $   2,795    $ 1,923
                                              =========    =======


(i) 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-9
<PAGE>

(j)  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 have
been classified as held to maturity. These investments are stated at cost which
approximates market. Interest is accrued as earned.

(k)  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 8 for additional
discussion.

(l)  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.

(m)  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.

                                      F-10
<PAGE>

(n)  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 7).

(o)  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 forth 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 7), 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 14).

4.   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 

                                      F-11
<PAGE>

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.

5.  FIXED ASSETS
    ------------
Fixed assets as of December 31, 1996 and 1995 consist of the following (000's
omitted):

                                                    1996           1995
                                                ------------   ------------

      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
                                                ============   ============

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

6.  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-12
<PAGE>


Long-Term Debt
--------------

At December 31, 1996 and 1995, the Company had the following long-term
indebtedness outstanding (000's omitted):

                                                         1996          1995
                                                       ---------    ---------

       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
                                                       =========    =========

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 further 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 the prime
rate or a specified federal funds rate, or a specified Eurodollar rate plus, in
each case, an 

                                      F-13
<PAGE>

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.

7.  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-14

<PAGE>

Changes in common stock outstanding are as follows (000's omitted):

                                                   Common Stock     Treasury
                                                                      Stock

    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
                                                     ========       ========

8.  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, no 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 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 

                                      F-15
<PAGE>

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 reduced to the following pro forma amounts:

                                                      1996           1995
                                                  ------------  ------------
                                                           (Restated)

      Net loss:              As reported          $(2,185,000)  $(3,231,000)
                             Pro forma             (2,444,000)   (3,630,000)

      Loss per share:        As reported          $     (0.45)  $     (0.72)
                             Pro forma                  (0.51)        (0.81)


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:

                                                                    Weighted 
                                                                    Average
                                                     Number         Exercise 
                                                    of Shares        Price
                                                   ----------       --------
    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         1,199,360         $ 8.77
                                                   =========         ======

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 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%.

                                      F-16
<PAGE>

The following table summarized information with respect to stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
                                      Options Outstanding                           Options Exercisable
                            -----------------------------------------------    -----------------------------
                               Number of        Weighted                         Number of
                                Options          Average                          Options          Weighted
                            Outstanding at      Remaining      Weighted        Exercisable at       Average                        
          Range of            December 31,     Contractual      Average          December 31,       Exercise
       Exercise Prices            1996            Life       Exercise Price          1996             Price
      --------------------- --------------     -----------   --------------    --------------      ---------
<S>    <C>                     <C>               <C>           <C>              <C>               <C>   
       $  5.50 - $ 8.25          629,431           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        1,199,360           6.9           $ 8.77           465,500             6.40
</TABLE>

9.   INCOME TAXES

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

                                      For the Years Ended December 31
                                   --------------------------------------
                                     1996          1995            1994
                                   --------     ---------       ---------
                                          (Restated)
     Current:
         Federal                   $      -      $      -        $      -
         State                          250           200              94
                                   --------     ---------       ---------
                                        250           200              94
                                   --------     ---------       ---------
     Deferred:
         Federal                       (943)       (1,461)            301
         State                         (340)         (555)            183
                                   --------     ----------      ---------
                                     (1,283)       (2,016)            484
                                   --------     ----------      ---------
                                   $ (1,033)    $  (1,816)      $     578
                                   ========     =========       =========

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):

                                                             1996         1995
                                                          --------     --------
                                                                 (Restated)
   Current deferred tax asset:
       Accrued expenses                                   $    119     $    414
       Deferred revenue                                        577          651
       Allowance for doubtful accounts                         395          589
       Other                                                   (48)         145
                                                          --------     --------
                 Net current deferred tax asset              1,043        1,799
                                                          --------     --------

   Noncurrent deferred tax liability:
       Fixed assets                                        (12,017)     (11,867)
       Subscriber contracts                                 (5,645)      (4,990)
       Net operating loss carryforward                       9,569        7,418
       Deferred revenue                                        880          988
       Prepaid pension                                      (2,176)          -
       Accrued expenses and other                           (1,068)        (858)
                                                          --------     --------
                 Net noncurrent deferred tax liability     (10,457)      (9,309)
                                                          --------     --------
                 Net deferred tax liability               $ (9,414)    $ (7,510)
                                                          ========     ========

                                      F-17
<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):

                                            1996          1995         1994
                                            ----          ----         ----
                                                 (Restated)
     U.S. statutory rate                 $(1,094)      $  (1,716)    $     334
     Nondeductible amortization               58              58            58
     State income taxes                      (30)           (185)          163
     Other                                    33              27            23
                                         -------       ---------     ---------
               Tax provision (benefit)   $(1,033)      $  (1,816)    $     578
                                         =======       =========     =========

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.

10.  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:

                                                        1996           1995
  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%

                                      F-18
<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)
                                                               -----------    -----------     -----------
        Project 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.

11.  SUPPLEMENTARY FINANCIAL  STATEMENT DATA
     ---------------------------------------
                                                          1996          1995
                                                       ---------     ---------
                                                              (Restated)
                                                            (000's omitted)
      Prepaid expenses and other:
          Deferred tax assets                          $   1,043     $   1,799
          Prepaid pension cost                               250           652
          Other                                            1,155            99
                                                       ---------     ---------
                                                       $   2,448     $   2,550
                                                       =========     =========

      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
                                                       =========     =========

                                      F-19

<PAGE>
                                                          1996          1995
                                                       ---------     ---------
                                                            (000's omitted)
          Other:
              Deferred installation revenue            $   1,948     $   2,214
              Other long-term liabilities                    555           834
                                                       ---------     ---------
                                                       $   2,503     $   3,048
                                                       =========     =========

12.  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
employees 1996 salary.

                                      F-20

<PAGE>


13.  QUARTERLY FINANCIAL DATA (UNAUDITED)
     -----------------------------------

The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                          (Restated)
                                          ----------------------------------------------------------------------
                                           March 31           June 30           September 30         December 31
                                          --------            --------            --------            --------
                                                              (000's omitted, except per share data)
<S>                                       <C>                 <C>                 <C>                 <C>     
   1996:
      Revenue                             $ 12,305            $ 12,350            $ 13,159            $ 13,610
      Gross profit                           5,876               5,970               5,919               5,535
      Net income (loss)                       (245)               (388)               (639)               (913)
                                          --------            --------            --------            --------
      Earnings (loss) per share           $  (0.05)           $  (0.09)           $  (0.13)           $  (0.15)
                                          ========            ========            ========            ========
                                                                       Three Months Ended
                                                                          (Restated)
                                          ----------------------------------------------------------------------
                                           March 31           June 30           September 30         December 31
                                          --------            --------            --------            --------
                                                              (000's omitted, except per share data)
   1995:
      Revenue                             $ 12,704           $ 12,749            $ 12,785            $ 12,583
      Gross profit                           6,525              6,365               6,003               5,666
      Net income (loss)                         76               (520)               (912)             (1,875)
                                          --------           --------            --------            --------
      Earnings (loss) per share           $    .02           $  (0.12)           $  (0.20)           $  (0.42)
                                          ========           ========            ========            ========
</TABLE>

14.  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.

15.  OTHER EVENTS
     ------------

As set forth in the Company's third-quarter report on Form 10-Q, as of September
30, 1997, the Company has $1 million of borrowing capacity remaining under its
bank credit agreement and was not in compliance with certain of the financial
covenants contained therein. The banks have waived such noncompliance for
periods prior to or ending on that date.

Subsequently, management determined that the Company was not in compliance as of
October 31, 1997, with certain of the financial covenants contained in the
credit agreement referred to above, and does not expect that it will be in
compliance with those covenants for November and December 1997. Accordingly, the
Company has obtained waivers from its banks waiving such noncompliance through
and including December 31, 1997.

                                      F-21
<PAGE>

The Company does not presently have any remaining loan availability under the
above credit agreement, and the Company is continuing its discussions with the
banks with regard to additional financing required to meet its short-term
operating and working capital needs. The Company is also in discussions with its
banks to amend the credit agreement covenants.

The Company's independent public accountants, Arthur Andersen LLP, have informed
the Company that, if the Company is unable to obtain additional financing and
amend its present credit agreement, its report on the financial statements for
the year ending December 31, 1997 may be modified because of substantial doubt
about the Company's ability to continue as a going concern.

                                      F-22
<PAGE>


                 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES


                    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (000's omitted)


<TABLE>
<CAPTION>

                                              Charged
                              Balance at      to Costs       Charged                           Balance at
                              Beginning         and          to Other          (A)               End of  
      Description             of Period       Expenses       Accounts       Deductions           Period 
      -----------             ---------       --------       --------       ----------           ------ 
 Allowance for doubtful    
    accounts:
       December 31-
<S>       <C>                 <C>              <C>            <C>            <C>               <C>      
          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>

                                   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/A 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:   December 29 , 1997