UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|ý                                                                |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2007                     
|OR                                                              
|o                                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

|Commission file number: 1-12181-01                                                  | Commission file number: 1-12181                                                            
|----------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|Protection One, Inc.(Exact name of registrant as specified in its charter)          | Protection One Alarm Monitoring, Inc.(Exact name of registrant as specified in its charter)
|Delaware(State or other jurisdiction of
incorporation or organization)              | 93-1063818(I.R.S. Employer
Identification No.)                                             
|1035 N. 3rd Street, Suite 101,
Lawrence, KS(Address of principal executive offices) | 66044(Zip Code)                                                                            

785-856-5500(Registrant's telephone number, including area code)

N/A(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Name of each exchange on which registeredNone

None


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

Title of Each ClassCommon Stock, par value $.01 per share, of Protection One, Inc.


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.

Yes o    No ý

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
ý    No o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes
o    No ý

As of June 29, 2007, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $110,408,286
based on the closing sale price as reported on the NASDAQ Global Market.

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at March 10, 2008Common Stock, $0.01 par value per share

25,306,913 shares


DOCUMENTS INCORPORATED BY REFERENCE

|Document                                                                                                                   |  | Parts Into Which Incorporated
|-------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|Information Statement for the Annual Meeting of Stockholders to be held on or before July 26, 2008 (Information Statement) |  | Part I, II, III and IV       



---





TABLE OF CONTENTS

|         |  |                                                                                                                 |  | Page
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                                                        |  | 4   
|Item 1A. |  | Risk Factors                                                                                                    |  | 13  
|Item 1B. |  | Unresolved Staff Comments                                                                                       |  | 20  
|Item 2.  |  | Properties                                                                                                      |  | 20  
|Item 3.  |  | Legal Proceedings                                                                                               |  | 21  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 21  
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 22  
|Item 6.  |  | Selected Financial Data                                                                                         |  | 24  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           |  | 26  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 51  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                     |  | 52  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 107 
|Item 9A. |  | Controls and Procedures                                                                                         |  | 107 
|Item 9B. |  | Other Information                                                                                               |  | 109 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrants                                                             |  | 110 
|Item 11. |  | Executive Compensation                                                                                          |  | 110 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 110 
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                       |  | 110 
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 110 
|PART IV 
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                      |  | 111 

2

---





PART 1    FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the materials incorporated by reference herein include "forward-looking statements" intended to qualify for
the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. These forward-looking
statements generally can be identified by, among other things, the use of forward-looking language such as the words "estimate," "project," "intend," "believe," "expect," "anticipate," "may," "will,"
"would," "should," "could," "seeks," "plans," "intends," or other words of similar import or their negatives. Such statements include those made on matters such as our earnings and financial
condition, litigation, accounting matters, our business, our efforts to consolidate and reduce costs, our customer account acquisition strategy and attrition, our liquidity and sources of funding and
our capital expenditures. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking
statements. The forward-looking statements included herein are made only as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances, except as required by federal securities laws. Certain factors that could cause actual results to differ include: our history of losses, which are likely to
continue; principal and interest payment requirements of and restrictive covenants governing our indebtedness; difficulty in integrating the businesses of Protection One and Integrated Alarm Services
Group, Inc. ("IASG"); disruption from our merger with IASG, including lost business opportunities and difficulty maintaining relationships with employees, customers and suppliers; competition,
including competition from companies that are larger than we are and have greater resources than we do; losses of our customers over time and difficulty acquiring new customers; termination of our
marketing alliance with BellSouth; limited access to capital which may affect our ability to invest in the acquisition of new customers; changes in technology that may make our services less
attractive or obsolete or require significant expenditures to upgrade; the development of new services or service innovations by our competitors; potential liability for failure to respond adequately
to alarm activations; changes in management; the potential for environmental or man-made catastrophes in areas of high customer concentration; changes in conditions affecting the economy
or security alarm monitoring service providers generally; and changes in federal, state or local government or other regulations or standards affecting our operations. New factors emerge from time to
time, and it is not possible for us to predict all of such factors or the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements.

See
also Item 1A, "Risk Factors" for a discussion of these and other risks and uncertainties that could cause actual results to differ materially from those contained in our
forward-looking statements.

INTRODUCTION

Unless the context otherwise indicates, all references in this report to the "Company," "Protection One," "we," "us" or "our" or similar words are to Protection
One, Inc., its direct wholly owned subsidiary, Protection One Alarm Monitoring, Inc. and Protection One Alarm Monitoring's wholly owned subsidiaries, and accordingly, there are no
separate financial statements for Protection One Alarm Monitoring, Inc. Protection One, Inc. and Protection One Alarm Monitoring are Delaware corporations organized in September 1991.

On
April 2, 2007, we completed our acquisition of IASG (the "Merger"), whereby IASG became our wholly owned subsidiary. The acquisition was accounted for under the purchase method
and operating results for IASG subsequent to the Merger are included in the consolidated financial statements.

Stockholders
and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this
Form 10-K have not occurred.

3

---



ITEM 1.    BUSINESS

Overview

We are a leading national provider of electronic security alarm monitoring services, providing installation, maintenance and electronic monitoring of alarm
systems to single-family residential, commercial, multifamily and wholesale customers. We monitor signals originating from alarm systems designed to detect burglary, fire, medical, hold-up
and environmental conditions, and from access control and closed-circuit-television ("CCTV") systems. Most of our monitoring services and a large portion of the maintenance services we provide our
customers are governed by multi-year contracts with automatic renewal provisions that provide us with recurring
monthly revenue ("RMR"). As of December 31, 2007 we monitored approximately 1.7 million sites. Based on information provided by a leading industry publication, we are the third largest
provider of electronic security monitoring services in the United States based on RMR.

We
conduct our business through the following operating segments:



Our
monitoring and related services revenue for the years ended December 31, 2007, 2006 and 2005 and our monitored sites composition at December 31, 2007, 2006 and 2005
were as follows:

Percentage of Total2007

2006

2005Market

Monitoring
and Related
Services Revenue

Sites

Monitoring
and Related
Services Revenue

Sites

Monitoring
and Related
Services Revenue

SitesRetail

77.9
%
34.5
%
81.8
%
51.0
%
81.2
%
50.9
%Wholesale

11.9

49.6

4.5

19.5

4.3

17.7Multifamily

10.2

15.9

13.7

29.5

14.5

31.4Total

100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%


For
the year ended December 31, 2007, we generated consolidated revenue of $347.9 million. Retail accounted for 79.8% of consolidated revenue, or $277.5 million,
Wholesale accounted for 10.9% of consolidated revenue, or $38.0 million, and Multifamily accounted for 9.3% of consolidated revenue, or $32.4 million. Financial information for the past
three years for each of our business segments is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations"
and in Item 8, Note 15 "Segment Reporting," and is incorporated herein by reference.

4

---



Retail

Our Retail segment provides installation, maintenance and monitoring of electronic security systems to single-family residential and commercial customers. Our
Retail business serves approximately 602,000 Retail customers with no single customer comprising more than 1% of our total consolidated revenue. Retail serves customers from 66 field locations and two
centralized monitoring centers. Except for the customers acquired in the Merger, the majority of our new Retail customers are generated organically through our internal sales force, with less than 2%
of our customer additions in 2007 acquired by purchase of customer contracts. Our reliance on an internal sales force enables us to control the sales process from inception and to manage the level of
customer care afforded.

Wholesale

Our Wholesale segment provides alarm monitoring services to independent alarm companies. Our Wholesale business serves approximately 4,800 independent alarm
monitoring companies representing approximately 865,000 customers. Typically, we act as the sole provider of monitoring services to independent monitoring companies. For the year ended
December 31, 2007, our Wholesale business accounted for 10.9% of our consolidated revenue.

Multifamily

Our Multifamily segment provides alarm monitoring services to owners and managers of apartments, condominiums and other multifamily dwellings. We believe
Multifamily is the leading national provider of alarm monitoring services to the multifamily sector with approximately 278,000 units in 1,600 properties in 485 cities.

Sources of Revenue

Revenue is primarily generated from providing monitoring services in our Retail, Wholesale and Multifamily segments. For the year ended December 31, 2007,
revenue generated from monitoring and related services accounted for 90.1% of our total revenue.

Monitoring
revenue is generated based on contracts that we enter into with our residential and commercial Retail and Multifamily customers. The typical initial contract term is three
years for
residential customers, five years for commercial customers and five to ten years, with an average of eight years, for Multifamily customers, with automatic renewal provisions where permitted. Our
Wholesale customer contracts are generally month-to-month agreements. We generate incremental contractual recurring revenue from nearly all of our residential and commercial
customers by providing additional services, such as maintenance.

For
the year ended December 31, 2007, installation and other revenue, derived principally from the sale of electronic security systems, contributed 9.9% of our total revenue.
Electronic security systems typically are provided at a loss in connection with generating new contracts for recurring monitoring services. Approximately $0.5 million, or 1.6%, of installation
and other revenue was derived from interest and fees related to our dealer loan program.

Industry and Competition

According to an industry publication, the market for electronic security system sales, leasing, installation, monitoring and service totaled an estimated
$32 billion in 2007. Over the past ten years, the industry has grown at an estimated compounded annual rate of 8.6%. Factors driving this growth include heightened security awareness and
concerns regarding crime, demographic changes, an increase in dual income households, increased business travel and personal time away from the home, customer

5

---



acceptance
of value-added offerings such as wireless back-up, the rise in video applications and continuing strength in capital spending by businesses.

The
industry is comprised of more than 14,000 small and mid-sized, regional participants, the vast majority of which generate annual revenue of less than $500,000. We believe
our primary competitors with national scope include the following:



Competition
in the security alarm industry is based primarily on brand awareness and company reputation, price, quality and reliability of services and systems, product solutions offered
and the ability to identify and to solicit prospective customers as they move into homes and businesses or experience major life events such as marriage or the birth of a child. We believe that we
compete effectively with other national, regional and local security alarm companies in both the residential and commercial markets.

Operations

Our operations consist principally of installing, servicing and monitoring electronic security systems in the United States for residential and commercial Retail,
Wholesale and Multifamily customers.

Centralized Monitoring, Customer Service and Enhanced Services



Intrusion and fire alarm systems include many different types of devices installed at customer premises designed to detect or react to various occurrences or
conditions, such as intrusion or the presence of fire or smoke. These devices are connected to a computerized control panel that communicates through wire line and/or wireless communication channels
to one of our monitoring facilities. In most systems, control panels can identify the nature of the alarm and the areas within the building where the sensor was activated and can transmit that
information to one of our central monitoring stations.

Access
control systems provide physical security for a customer facility. They do this by limiting access to areas through locks and door mechanisms that are controlled by a computer or
web service. Customers may establish schedules for when doors are unlocked or they may define access to individuals via uniquely identified cards. The cards are electronically validated at each door
station
through an electronic card reader. By limiting, enabling or disabling each user's card through the central controller, access control systems replace the need to manage keys.

Video
solutions provide customers with the ability to monitor remote locations via cameras. Video may be viewed live over a network, recorded on site or sent electronically upon a
specified event. Video solutions may be coupled with alarm systems to provide verification of alarm conditions.



Our existing Retail monitoring customer contracts generally have initial terms ranging from three to five years in duration, and, in most states, provide for
automatic renewals for a fixed period (typically one year) unless we or the customer elect to cancel the contract at the end of its term. Since 2002, most new single-family residential customers have
entered into contracts with an initial term of three years, and most new commercial customers have entered into contracts with an initial term of five

6

---



years.
Multifamily contracts have initial terms that range from five to ten years. Typically, Retail customers sign alarm monitoring contracts that include a bundled monthly charge for monitoring and
extended service protection, which covers the costs of normal repairs of the security system. Customers may elect to sign an alarm monitoring contract providing for a reduced monthly charge that
excludes extended service protection. A significant percentage of new residential and commercial customers also elect to include line security based on cellular technology in their service bundle. Our
Wholesale customer contracts are generally month-to-month contracts.



We provide monitoring services to our customer base from several monitoring facilities. The table below provides additional detail about our monitoring
facilities:

Location

Approximate Number of
Customers Monitored

Primary MarketsIrving, TX

353,000

Retail and MultifamilyLongwood, FL

208,000

WholesaleWichita, KS

527,000

RetailCypress, CA

239,000

WholesaleSt. Paul, MN

126,000

WholesaleManasquan, NJ

292,000

Wholesale


Our
monitoring facilities operate 24 hours per day, seven days a week, including all holidays. Each monitoring facility incorporates the use of communications and computer systems
that route incoming alarm signals and telephone calls to operators. Each operator within a monitoring facility monitors a computer screen that presents information concerning the nature of the alarm
signal, the customer whose alarm has been activated and the premises at which such alarm is located. Other non-emergency administrative signals are generated by low battery status, arming
and disarming of the alarm monitoring system and test signals, and such signals are processed automatically by computer. Depending upon the type of service for which the customer has contracted,
monitoring facility personnel respond to alarms by relaying information to local fire or police departments, notifying the customer, or taking other appropriate action, such as dispatching alarm
response personnel to the customer premises where this service is available. In advanced video solutions, operators may be presented with a video clip associated with the alarm condition, further
enhancing the response capabilities. Customers may also contract for remote video monitoring whereby operators will be prompted on a specified schedule to view live video of customer locations and
respond upon abnormal conditions.

All
of our monitoring facilities are listed by Underwriters Laboratories, Inc. ("UL") as protective signaling services stations. UL specifications for monitoring
facilities include building integrity, back-up computer and power systems, staffing and standard operating procedures. In many jurisdictions, applicable law requires the security and life
safety alarms for certain buildings be monitored by UL listed facilities. In addition, such listing is required by certain commercial customers' insurance companies as a condition to insurance
coverage.



Our Retail backup facility in Wichita, Kansas is a fully operable resource with the ability to backup all mission critical operations normally performed at our
primary Retail monitoring center and our Wholesale center in Longwood, FL. The structure is equipped with diverse voice and data telecommunication paths, backup power that includes standby
uninterruptible power supplies, access

7

---



control,
video surveillance and data vaults. In addition, we have deployed hot redundancy for our entire complement of equipment essential in the remote monitoring of the Retail security systems we
offer. Furthermore, we have replicated the computer systems that are used to maintain our mission critical applications. This facility was purchased with the ability to be expanded for future internal
growth and is actively used for other business-related operations.



Each of our primary Wholesale monitoring facilities operates independently from our Retail and Multifamily facilities. Through our Wholesale monitoring
facilities, we provide wholesale monitoring services to independent alarm companies. Under the typical arrangement, alarm companies subcontract monitoring services to us, primarily because they cannot
cost-effectively provide their own monitoring service. We may also provide billing and other services. These independent alarm companies retain ownership of the monitoring contracts and
are responsible for every other aspect of the relationship with customers, including field repair service. We are in the process of creating one integrated network among our Wholesale monitoring
centers that we believe will enable us to deliver a higher level of customer care while improving our efficiency.



Customer care personnel answer non-emergency telephone calls typically regarding services, billing and alarm activation issues. Most business hours
customer care functions for our Retail customers are handled by our local Retail branches. During business hours, monitoring facility personnel receive inbound customer calls forwarded from branches
when the latter are unable to answer within a specified number of rings. After regular business hours, all customer calls are forwarded to our monitoring facilities.

Customer
care personnel in our Retail branches and in our monitoring facilities' help desks assist customers in understanding and resolving minor service and operating issues related to
security systems. Branch personnel schedule technician appointments. We also operate a dedicated telesales center in Wichita to address questions that Retail customers or potential customers have
about our services, as well as to perform outbound sales and marketing activities.



We offer alarm monitoring and administrative services to dealers, such as billing and collection, as well as new and emerging products and services. Our
acquisition and financing solutions provide capital to dealers, allowing them to compete with larger competitors on the initial price of equipment and installation to the end-user. We also
provide dealers with access to technical sophistication and back office services that they may not otherwise have (or be able to profitably operate), while allowing them to maintain visible contact
with their local customers, the end-users of the alarm.



As a means of increasing revenue and enhancing customer satisfaction, we offer Retail and Wholesale customers an array of enhanced security services discussed
below. These services position us as a full service provider and give our sales representatives more features to sell in their solicitation of new customers.



8

---





Retail and Multifamily Branch Operations

We currently maintain approximately 66 field locations in the United States from which we provide some or all of the following services in our Retail and
Multifamily segments: security system
installation, field repair, customer care, alarm response and sales services. Our nationwide network of branches operates in some of the largest cities in the United States and plays a critical role
in enhancing customer satisfaction, reducing customer loss and building brand awareness. Repair services generate revenue primarily through billable field service calls and recurring payments under
our extended service protection program. By focusing growth in targeted areas, we hope to increase the density of our customer base, which will permit more effective scheduling and routing of field
service technicians and will create economies of scale.

Wholesale Alarm Monitoring Contract Acquisition and Dealer Financing Operations

We provide financing to security alarm dealers in the form of loans or alarm monitoring contract purchases. We structure the payment terms and pricing of both our
alarm monitoring contract purchases and loans to provide us with an acceptable internal rate of return. When providing financing to dealers, we obtain a security interest in the underlying alarm
monitoring contracts.

In
addition to the alarm monitoring contract acquisition and finance process described above, we generally require that dealers use us to monitor all of their alarm monitoring contracts,
not just those that have been acquired or financed. This monitoring requirement enables us to control the quality of the monitoring services and reduce the risk of loan default.

Sales and Marketing

Our current customer acquisition strategy for our Retail segment relies primarily on internally generated sales, utilizing personnel in our existing branch
infrastructure. The internal sales program for our Retail segment generated $2.3 million, $2.1 million and $1.9 million of new Retail RMR in 2007, 2006 and 2005, respectively. The
internal sales program for our Wholesale segment generated $0.8 million, $0.2 million and $0.2 million of new Wholesale RMR in 2007, 2006 and 2005, respectively. We operate a
dedicated telesales center from which we respond to questions that customers or potential customers have about our services and provide quality control follow-up calls to customers for
whom we recently provided installation or maintenance services.

Since
2002 we have been a partner in a marketing alliance with BellSouth Corporation (now part of AT&T) that offers monitored security services to the residential, single-family market
and to businesses in 17 of the larger metropolitan markets in the nine-state AT&T region of the southeastern

9

---



United
States. The marketing alliance with AT&T will end on or before June 30, 2008. AT&T provided us with information about new owners of single-family residences and businesses in its
territory and of transfers of existing AT&T customers within its territory. We followed up on the information to create leads for our sales force. We pay AT&T a commission for each new contract
generated in the nine-state region, regardless of whether the new contract came directly from an AT&T lead, as well as a recurring royalty based on a percentage of recurring charges. The
commission is a direct and incremental cost of acquiring the customer and accordingly, for residential customers and certain commercial customers, is deferred as a customer acquisition cost and
amortized over the initial contract term. The recurring royalty is expensed as incurred and is included in the cost of monitoring and related services revenue. We estimate that approximately
$0.2 million or 8.0%, $0.2 million or 9.0% and $0.2 million or 8.5% of our new Retail RMR created in the years ended December 31, 2007, 2006 and 2005, respectively, can be
attributed to sales arising directly from AT&T leads.

Upon
termination of the marketing alliance, we will re-brand our 17 southeast branches as Protection One. For a period of three years following termination of the marketing
alliance, unless we agree upon a lump-sum payment, we are required to continue paying a recurring royalty to AT&T for active customers added during the term of the existing agreement. We
will, however, no longer be required to pay AT&T a commission for new contracts added in the nine-state region. We expect out of pocket costs for the re-branding will
approximate $1.0 million, all of which we expect to incur during 2008. Unless we agree with AT&T to make a one-time payment in 2008 in lieu of royalty payments over the three years
following the termination, we do not believe termination of the AT&T marketing alliance will have a material impact on our combined net cash flow from operating and investing activities.

Concurrent
with the phase out of the AT&T alliance, we are implementing an integrated marketing program to increase awareness for the Protection One brand name nationally and to generate
new lead sources and opportunities. We will reach out to targeted customers, both residential and commercial, through a variety of mediums in a planned and sequenced manner. These channels will
include, but are not limited to, on-line programs and placements, third-party purchases and outbound calling and traditional mass communications, such as radio, print and direct mail.

Leads
resulting from these activities will flow to our Retail sales professionals who are responsible for identifying new prospects and closing sales of monitoring systems and services.
The sales force also generates revenue from selling equipment upgrades and add-ons to existing customers and by competing for those customers who are terminating their relationships with
our competitors.

We
will continue to analyze opportunities for alliance partnerships which benefit our Retail segment. Our capabilities and reach, technological innovation and proven flexibility in
dealing with partners
across a variety of industries position us well for consideration by many potential partners. We are disciplined in our assessment of alliance opportunities, considering many factors such as brand
impact, sales channel considerations and financial return.

Our
Multifamily segment utilizes a salaried and commissioned sales force to produce new accounts. We market our Multifamily services and products primarily to developers, owners and
managers of apartment complexes and other multifamily dwellings. Multifamily sales and marketing activities consist of national and regional advertising, nationwide professional field sales efforts,
prospective acquisition marketing efforts and professional industry-related association affiliations. Services are sold directly to the property owner, and payment is based on a monthly price
per-unit basis. Ongoing service for the duration of the lease includes providing equipment, maintenance, 24-hour monitoring from our central monitoring station, customer
service and individual market support. Our Multifamily customer contracts generally have initial terms that fall within a range of five to ten years and average eight years at inception. These
contracts typically provide for automatic

10

---



renewal
for fixed multi-year periods (typically five years) unless we or the customer elects to cancel the contract at the end of its term.

Our
Wholesale segment employs a salaried and commissioned sales force that is geographically distributed throughout the United States and is responsible for identifying sales
opportunities. Our sales force is supported by an internal sales and marketing team that tracks prospects and coordinates selling efforts. We also employ product specialists who assist the sales force
in identifying and proposing financing alternatives and billing services and account managers who provide ongoing operational support to our Wholesale customers.

We
continually evaluate our customer creation and marketing strategy, including evaluating each respective channel for economic returns, volume and other factors and may shift our
strategy or focus, including the elimination of a particular channel.

Attrition

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsAttrition," which is incorporated herein by
reference, for more information regarding attrition calculations, the impact of attrition on our operating results and customer attrition by business segment.

Intellectual Property

We own trademarks related to the name and logo for Protection One, Network Multifamily Security, King Central and Criticom Monitoring Services, as well as a
variety of trade and service marks related to individual services we provide. While we believe our trademarks, service marks and proprietary information are important to our business, we do not
believe our inability to use any one of them, other than the trademarks we own in our name and logo, would have a material adverse effect on our business as a whole.

Regulatory Matters

A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms. See Item 1A,
"Risk Factors," for additional information. Such measures include:



Our
operations are subject to a variety of other laws, regulations, and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to
obtain licenses or permits, to comply with standards governing employee selection and training, and to meet certain standards in the conduct of our business.

The
alarm industry is also subject to requirements imposed by various insurance, approval, listing and standards organizations. Depending upon the type of customer served, the type of
security service provided, and the requirements of applicable local governmental jurisdiction, adherence to the

11

---



requirements
and standards of such organizations is mandatory in some instances and voluntary in others.

Our
advertising and sales practices are regulated in the United States by both the Federal Trade Commission and state consumer protection laws. In addition, certain administrative
requirements and laws of the jurisdictions in which we operate also regulate such practices. Such laws and regulations include restrictions on the manner in which we promote the sale of our security
alarm systems and the obligation to provide purchasers of our alarm systems with rescission rights.

Our
alarm monitoring business utilizes wire line and wireless telephone lines, radio frequencies, and broadband data circuits to transmit alarm signals. The cost of telephone lines and
the type of equipment which may be used in telephone line transmissions are currently regulated by both federal and state governments. The Federal Communications Commission and state public utilities
commissions regulate the operation and utilization of radio frequencies.

Risk Management

The nature of the services we provide potentially exposes us to greater risks of liability for employee acts or omissions, or system failure, than may be inherent
in other businesses. Substantially all of our alarm monitoring agreements and other agreements, pursuant to which we sell our products and services, contain provisions limiting liability to customers
in an attempt to reduce this risk.

We
carry insurance of various types, including general liability and professional liability insurance in amounts management considers adequate and customary for our industry and
business. Our loss experience, and the loss experiences of other security service companies, may affect the availability and cost of such insurance. Some of our insurance policies, and the laws of
some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence.

Employees

At December 31, 2007 we had approximately 3,200 full and part time employees. Our workforce is not unionized. We generally consider our relationship with
our employees to be good.

Code of Ethics

We have adopted a code of ethics that applies to all employees, including executive officers and senior financial and accounting employees. It is our policy to
comply strictly with the letter and spirit of all laws affecting our business and the conduct of our officers, directors and employees in business matters. We make available the code of ethics, free
of charge, on our website atwww.protectionone.comand by responding to requests addressed to our investor relations department. The investor relations
department can be contacted by mail at Protection One, Inc., Attn: Investor Relations, 1035 N 3rd Street, Suite 101, Lawrence, KS 66044 or by calling
(785) 856-9368.

Access to Company Information

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K with the Securities and Exchange Commission ("SEC"). The SEC maintains an Internet site (www.sec.gov) that contains reports,
proxy and information statements and other information regarding issuers that file electronically.

We
make available, free of charge, through our website atwww.protectionone.com, and by responding to requests addressed to our investor
relations department, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. These reports are
available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information contained on our website is not part of this document.

12

---





ITEM 1A.    RISK FACTORS

You should read the following risk factors in conjunction with discussions of factors discussed elsewhere in this and other of our filings with the SEC. These
cautionary statements are intended to highlight certain factors that may affect our financial condition and results of operations and are not meant to be an exhaustive discussion of risks that apply
to public companies with broad operations, such as us.



We incurred net losses of $32.2 million, $17.4 million, $15.6 million and $11.4 million for the years ended December 31, 2007
and 2006 and for the periods February 9 to December 31, 2005 and January 1 to February 8, 2005, respectively. Our losses reflect the following, among other factors:



We
will continue to incur substantial expenses arising from interest and amortization of customer accounts and we do not expect to attain profitability in the near future.

Our marketing alliance with AT&T, which was used for the generation of many new Retail accounts, will be terminated in 2008.

Beginning
in 2002, we had a marketing relationship with BellSouth Corporation ("BellSouth") (now part of AT&T) to offer monitored security services to the residential, single-family
market and to businesses in 17 of the larger metropolitan markets in the southeastern United States. Pursuant to notification received from AT&T, that marketing alliance will be terminated at the end
of the second quarter of 2008. We estimate that approximately $0.2 million or 8.0%, $0.2 million or 9.0% and $0.2 million or 8.5% of our new Retail RMR created in the year ended
December 31, 2007, 2006 and 2005, respectively, can be attributed to sales arising directly from AT&T leads. Termination of the agreement could have a short-term material adverse effect on our
ability to generate new customers and RMR in this territory.



We have, and will continue to have, a significant amount of indebtedness. As of December 31, 2007, the face value of our total indebtedness, including
capital leases, was approximately $526.0 million. Our level of indebtedness has important consequences. For example, it will:



13

---





One
or a combination of these factors could adversely affect our financial condition. Subject to restrictions in the agreements governing our indebtedness, we may incur additional
indebtedness which could increase the risks associated with our already substantial indebtedness.

Restrictive covenants restrict our ability to operate our business and to pursue our business strategies, and our failure to comply with these covenants could
result in an acceleration of our indebtedness.

The
credit agreement (the "Senior Credit Agreement") governing our senior credit facility, the indenture (the "Senior Secured Notes Indenture") governing our 12% senior secured notes due
2011 (the "Senior Secured Notes") and the credit agreement ("Unsecured Term Loan Agreement") governing the new unsecured term loan facility we entered into in March 2008 contain covenants that
restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be
important to our growth strategy or otherwise important to us. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and
Capital ResourcesDebt Obligations," for more information on our indebtedness. Our Senior Credit Agreement, the Senior Secured Notes Indenture and the Unsecured Term Loan Agreement
restrict, among other things, our ability to:



In
addition, our senior credit facility requires us to meet certain financial ratios and to repay outstanding borrowings with portions of the proceeds we receive from certain sales of
property or assets and specified future debt and equity offerings. Our financial results may be affected by unforeseen adverse events, and we may not be able to meet the financial ratio requirements.

Any
breach of the covenants in our Senior Credit Agreement, Unsecured Term Loan Agreement or Senior Secured Notes Indenture could cause a default under such instruments. If there were an
event of default under any of our debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt instrument to be due and
payable immediately. Our assets and cash flow would not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. If, as or when required,
we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our Senior Credit Agreement or Senior Secured Notes Indenture, the lenders under our
senior credit facility or the trustee under the Senior Secured Notes Indenture could institute

14

---



foreclosure
proceedings against the assets securing borrowings under our senior credit facility or Senior Secured Notes.

Entities affiliated with Quadrangle Group and Monarch Alternative Capital are our principal stockholders and together can exercise a controlling influence over
us, which may adversely affect the trading price of our common stock.

Quadrangle
Capital Partners LP, Quadrangle Capital Partners-A LP and Quadrangle Select Partners LP (collectively "Quadrangle") and Monarch Debt Recovery
Master Fund Ltd and Monarch Opportunities Master Fund Ltd (collectively "Monarch" and together with Quadrangle the "Principal Stockholders"), collectively own approximately 70.0% of our outstanding
common stock. Pursuant to a stockholders agreement, subject to the Principal Stockholders, acting together, maintaining a certain threshold of ownership in us, the Principal Stockholders, acting
together, will be able to control the election of a majority of our directors and accordingly exercise a controlling influence over our business and affairs, including any determinations with respect
to mergers or other business combinations involving us, appointment of our officers, our acquisition or disposition of material assets and our incurrence of indebtedness. Similarly, the Principal
Stockholders, acting together, will continue to have the power to determine matters submitted to a vote of our stockholders without the consent of other stockholders and to take other actions that
might be favorable to the Principal Stockholders, whether or not these actions would be favorable to us or to our stockholders in general.

We rely on technology that may become obsolete, which could require significant capital expenditures.

Our
monitoring services depend upon the technology (hardware and software) of security alarm systems. In order to maintain our customer base that currently uses security alarm components
that are or could become obsolete, we may be required to upgrade or implement new technologies that could require significant capital expenditures. For example, we have an installed base of alarm
systems that use an analog wireless network for sending signals from the location of the alarm system to our monitoring centers. The carriers that provide the required analog wireless network services
have discontinued providing that service or will do so in the near future. As a result, we are upgrading some of the affected alarm systems. The cost and process of this upgrade adversely affected our
earnings and cash flow during the last half of 2007 and will adversely affect our earnings and cash flow during the
first quarter of 2008 and could adversely affect attrition. In the future, we may not be able to successfully implement new technologies or adapt existing technologies to changing market demands. If
we are unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

Shifts in our current and future customers' selection of telecommunications services could increase customer attrition and could adversely impact our earnings and
cash flow.

Certain
elements of our operating model rely on our customers' selection and continued use of traditional, land-line telecommunications services, which we use to communicate
with our monitoring operations. In order to continue to service existing customers who cancel their land-line telecommunications services and to service new customers who do not subscribe
to land-line telecommunications services, customers must upgrade to alternative and often more expensive wireless or internet based technologies. Higher costs may reduce the market for new
customers of alarm monitoring services, and the trend away from traditional land lines to alternatives may mean more existing customers will cancel service with us. Our Multifamily segment, in
particular, has experienced customer cancellations which we believe are due in part to low penetration of land-line based phone services in rental units. Continued shifts in customers'
preferences regarding telecommunications services could continue to have an adverse impact on our earnings, cash flow and customer attrition.

15

---



The failure to successfully integrate IASG's business and operations in the expected time frame may adversely affect the combined company's future
results.

The
success of the Merger will partially depend on the combined company's ability to realize the anticipated benefits from combining the businesses of Protection One and IASG. Among the
most critical of the few remaining integration tasks are the internal control assessment of IASG controls during 2008, the migration of Retail account monitoring to Retail central stations and the
completion of an upgrade of the Wholesale central stations to one technology platform.

Integration
efforts will divert management attention and could have a material adverse effect on the combined company. As part of the integration process, we continue to integrate the
accounting and internal control systems of IASG with ours. As of December 31, 2005, IASG's management and independent auditor determined that IASG did not maintain effective controls over
accounts receivable, revenue and deferred revenue accounts and that this control deficiency constituted a material weakness. In its Annual Report on Form 10-K for the fiscal year
ended December 31, 2006, IASG concluded that as of December 31, 2006, those material weaknesses had been remediated. While we believe IASG has taken remedial action in response to its
material weaknesses, as part of the
integration process, we or our independent auditor may identify additional material weaknesses or significant deficiencies in the future.

We may not be able to realize any or all of the anticipated benefits from prior or future acquisitions of portfolio alarm monitoring contracts.

Acquisitions of end-user alarm monitoring contracts involve a number of risks, including the possibility that the acquiring company will not be able
to realize the recurring monthly revenue stream it contemplated at the time of acquisition because of higher than expected attrition rates or fraud. Although we generally complete an extensive due
diligence process prior to acquiring alarm monitoring contracts and obtain representations and warranties from sellers, we may not detect fraud, if any, on the part of any seller, including the
possibility that any seller misrepresented the historical attrition rates of the sold contracts or sold or pledged the contracts to a third party. If the sale of alarm monitoring contracts involves
fraud or the representations and warranties are otherwise inaccurate, it may not be possible to recover from the seller damages in an amount sufficient to fully compensate us for any resulting losses.
In such event, we may incur significant costs in litigating ownership or breach of acquisition contract terms.

We face continuing competition and pricing pressure from other companies in our industry and, if we are unable to compete effectively with these companies, our
sales and profitability could be adversely affected.

We
compete with a number of major domestic security monitoring services companies, as well as a large number of smaller, regional competitors. We believe that this competition is a
factor in our attrition, limits our ability to raise prices, and, in some cases, requires that we lower prices. Some of our competitors, either alone or in conjunction with their respective parent
corporate groups, are larger than we are and have greater financial resources, sales, marketing or operational capabilities or brand recognition than we do. In addition, opportunities to take market
share using innovative products, services and sales approaches may attract new entrants to the field. We may not be able to compete successfully with the offerings and sales tactics of other
companies, which could result in the loss of customers and, as a result, decreased revenue and operating results.

Our customer acquisition and creation strategies and the competitive market for the acquisition and creation of customer accounts may affect our future
profitability.

Prior
to 2000, we grew very rapidly by acquiring portfolios of alarm monitoring accounts through acquisitions and dealer purchases. Since the current management team joined us in 2001,
our account

16

---



acquisition
strategy has evolved to emphasize our internal sales force, supported by traditional marketing practices and by forming marketing alliances. In addition, we seek to augment our internal
efforts with acquisitions when suitable market conditions exist. If our current strategy is not successful, our customer base could continue to decline.

If
we are successful executing a customer acquisition strategy emphasizing internal sales, selling costs will increase our expenses and uses of cash. Failure to replace customers lost
through attrition or increased use of cash to replace those customers could have a material adverse effect on our business, financial condition, results of operations and ability to service debt
obligations. Increased competition from other alarm monitoring companies could require us to reduce our prices for installations, decrease the monitoring fees we charge our customers and take other
measures that could reduce our margins. These decreases and other measures could have a material adverse effect on us.

We
compete with several companies that have account acquisition and loan programs for independent dealers and some of those competitors are larger than we are and have more capital than
we do. Increased competition from other alarm monitoring companies could require us to pay more for account acquisitions and take other measures that could reduce returns from investing in
acquisitions of customer accounts. These measures could have a material adverse effect on us.



We experience the loss of accounts as a result of, among other factors:



We
may experience the loss of newly acquired or created accounts to the extent we do not integrate or adequately service those accounts. Customer loss may not become evident for some
time after an acquisition is consummated because some acquired accounts are prepaid on an annual, semiannual or quarterly basis. While attrition rates in our Retail segment had declined significantly
prior to the Merger, higher attrition rates from the Retail portfolio acquired from IASG could result in our losing more Retail RMR than we add in the near term. We also expect Multifamily account and
RMR losses to exceed additions until the efforts we are making to acquire new accounts and further reduce our rate of attrition become more successful than they have been to date. Wholesale attrition
could increase if some of IASG's dealers choose not to be monitored by a company affiliated with us due to perceptions of channel conflict or due to solicitations from former IASG employees. Net
losses of customer accounts could materially and adversely affect our business, financial condition and results of operations.

17

---



Increased adoption of "false alarm" ordinances by local governments may adversely affect our business.

An
increasing number of local governmental authorities have adopted, or are considering the adoption of, laws, regulations or policies aimed at reducing the perceived costs to
municipalities of responding to false alarm signals. Such measures could include:



Enactment
of these measures could adversely affect our future business and operations. For example, concern over false alarms in communities adopting these ordinances could cause a
decrease in the timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services, and our costs to service affected
accounts could increase.

Increased adoption of statutes and governmental policies purporting to void automatic renewal provisions in our customer contracts, or purporting to characterize
certain of our charges as unlawful, may adversely affect our business.

Our
customer contracts typically contain provisions automatically renewing the term of the contract at the end of the initial term, unless cancellation notice is delivered in accordance
with the terms of the contract. If the customer cancels prior to the end of the contract term, other than in accordance with the contract, we may charge the customer the amounts that would have been
paid over the remaining term of the contract, or charge an early cancellation fee.

Several
states have adopted, or are considering the adoption of statutes, consumer protection policies or legal precedents which purport to void the automatic renewal provisions of our
customer contracts, or otherwise restrict the charges we can impose upon contract cancellation. Such initiatives could compel us to increase the length of the initial term of our contracts, and
increase our charges during the initial term, and consequently lead to less demand for our services and increase our attrition. Adverse judicial determinations regarding these matters could cause us
to incur legal exposure to customers against whom such charges have been imposed, and the risk that certain of our customers may seek to recover such charges through litigation. In addition, the costs
of defending such litigation and enforcement actions could have an adverse effect on us.

Due to a concentration of accounts in California, Florida and Texas, we are susceptible to environmental incidents that may negatively impact our results of
operations.

Almost
44% of our RMR at December 31, 2007 was derived from customers located in California, Florida and Texas. A major earthquake, hurricane or other environmental disaster in an
area of high account concentration could disrupt our ability to serve those customers or render those customers uninterested in continuing to retain us to provide alarm monitoring services.

We are susceptible to downturns in the housing market which may negatively impact our results of operations.

We
believe demand for alarm monitoring services in our Retail segment is affected by the turnover in the single family housing market. Downturns in the rate of sale of existing single
family homes would reduce opportunities to make sales of new security systems and services and reduce opportunities to

18

---



take
over existing security systems that had previously been monitored by our competitors. These reduced opportunities to add RMR could negatively affect our results of operations.

Declines in rents, occupancy rates and new construction of multifamily dwellings may affect our sales in this marketplace.

We
believe demand for alarm monitoring services in the Multifamily segment is tied to the general health of the multifamily housing industry. This industry is dependent upon prevailing
rent levels and occupancy rates as well as the demand for construction of new properties. Given the generally cyclical nature of the real estate market, we believe that, in the event of a decline in
the market factors described above, it is likely that demand for our alarm monitoring services to multifamily dwellings would also decline, which could negatively impact our results of operations.

We could face liability for our failure to respond adequately to alarm activations.

The
nature of the services we provide potentially exposes us to greater risks of liability for employee acts or omissions or system failures than may be inherent in other businesses. In
an attempt to reduce this risk, our alarm monitoring agreements and other agreements pursuant to which we sell our products and services contain provisions limiting our liability to customers and
third parties. In the event of litigation with respect to such matters, however, these limitations may not be enforced. In addition, the costs of such litigation could have an adverse effect on us.

In the event that adequate insurance is not available or our insurance is not deemed to cover a claim, we could face liability.

We
carry insurance of various types, including general liability and professional liability insurance in amounts management considers adequate and customary for the industry. Some of our
insurance policies, and the laws of some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence. If we incur
increased losses related to employee acts or omissions, or system failure, or if we are unable to obtain adequate insurance coverage at reasonable rates, or if we are unable to receive reimbursements
from insurance carriers, our financial condition and results of operations could be materially and adversely affected.

Future government regulations or other standards could have an adverse effect on our operations.

Our
operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain
licenses or permits to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of
conditions to the granting or retention of such licenses, could have an adverse effect on us. In the event that these laws, regulations and/or licensing requirements change, we may be required to
modify our operations or to utilize resources to maintain compliance with such rules and regulations. In addition, new regulations may be enacted that could have an adverse effect on us.

The loss of our Underwriter Laboratories listing could negatively impact our competitive position.

All
of our alarm monitoring centers are Underwriters Laboratories ("UL") listed. To obtain and maintain a UL listing, an alarm monitoring center must be located in a
building meeting UL's structural requirements, have back-up and uninterruptible power supplies, have secure telephone lines and maintain redundant computer systems. UL
conducts periodic reviews of alarm monitoring centers to ensure compliance with their regulations. Non-compliance could
result in a suspension of our UL listing. The loss of our UL listing could negatively impact our competitive position.

19

---



We depend on our relationships with alarm system manufacturers and suppliers. If we are not able to maintain or renew these alliances or our manufacturers and
suppliers fail to provide us with innovative product offerings, our ability to create new customers and service our existing account base could be negatively affected.

We
currently have agreements with certain electronic security system manufacturers and suppliers of hardware for products that we install in customer locations as part of new systems or
as replacement parts for existing systems. We may not be able to maintain or renew our existing product sourcing arrangements on terms and conditions acceptable to us, or at all, if one or more of our
suppliers discontinue offering a technology we have relied on or if one or more of our suppliers exits the electronic security system market. If we are unable to maintain or renew our existing
relationships, we may incur additional costs creating new supplier arrangements and in servicing existing customers

We
are also dependent on our electronic security system manufacturers for continued technological innovation. If the electronic security system product families we have invested in fail
to keep pace with other manufacturers' and suppliers' technologies, we may incur additional training and inventory costs and our ability to attract new customers and service our existing customers
could be adversely affected.

We are dependent upon our experienced senior management, who would be difficult to replace.

The
success of our business is largely dependent upon the active participation of our executive officers, who have extensive experience in the industry. As a result, we have entered into
employment agreements with each of our executive officers. The terms of these employment agreements are automatically extended for an indefinite number of one-year periods unless either
party sends written notice to the other party of its intention not to renew the agreement at least 30 days prior to the expiration of the one-year period. The loss of service of one
or more of such officers or the inability to attract or retain qualified personnel for any reason may have an adverse effect on our business.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

We maintain our executive offices at 1035 N. 3rd Street, Suite 101, Lawrence, Kansas 66044. We operate primarily from the following
facilities, although we also lease office space for our approximately 66 field locations.

|Location      |  | Approximate
Size (sq. ft.) |  | Lease/Own |  | Principal Purpose                                                  
|------------- |  | -------------------------- |  | --------- |  | -------------------------------------------------------------------
|Irving, TX    |  | 53,750                     |  | Lease     |  | Retail and Multifamily monitoring facility/administrative functions
|Longwood, FL  |  | 20,000                     |  | Lease     |  | Wholesale monitoring facility/administrative functions             
|Lawrence, KS  |  | 21,000                     |  | Lease     |  | Financial/administrative headquarters                              
|Cypress, CA   |  | 17,000                     |  | Lease     |  | Wholesale monitoring facility                                      
|St. Paul, MN  |  | 6,550                      |  | Lease     |  | Wholesale monitoring facility                                      
|Manasquan, NJ |  | 7,200                      |  | Own       |  | Wholesale monitoring facility                                      
|Wichita, KS   |  | 50,000                     |  | Own       |  | Retail monitoring facility/administrative functions                
|Wichita, KS   |  | 122,000                    |  | Own       |  | Backup Retail monitoring center/administrative functions           

20

---



ITEM 3.    LEGAL PROCEEDINGS

Information on our legal proceedings is set forth in Item 8, Note 12 "Commitments and Contingencies" of the Notes to the Consolidated Financial
Statements, which are incorporated herein by reference.

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

No matters were submitted to Protection One's stockholders during the fourth quarter of 2007.

21

---





PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price Information

Our common stock has been listed on the NASDAQ Global Market under the symbol "PONE" since April 2, 2007. Prior to April 2, 2007, our common stock
traded on the OTC Bulletin Board under the symbol "PONN." The table below sets forth for each of the calendar quarters indicated the high and low sales prices per share of our common stock, as
reported by the OTC Bulletin Board in 2006 and the first quarter of 2007 and as reported by the NASDAQ Global Market after April 2, 2007. The quotations in 2006 and for the first quarter of
2007 reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

High

Low2006:First Quarter

$
18.00

$
17.00Second Quarter


27.00


14.50Third Quarter


15.08


12.10Fourth Quarter


13.15


11.502007:First Quarter

$
21.90

$
11.25Second Quarter


18.00


11.70Third Quarter


15.67


11.48Fourth Quarter


13.99


9.23


Dividend Information

The Unsecured Term Loan Agreement, Senior Secured Notes Indenture and Senior Credit Agreement restrict Protection One Alarm Monitoring's ability to pay dividends
or to make other distributions to its corporate parent. Consequently, these agreements restrict our ability to declare or pay any dividend on, or make any other distribution in respect of, our capital
stock unless we satisfy the financial and other tests set forth in such agreements. We did not declare or pay any dividends for the year ended December 31, 2007.

On
May 12, 2006, we paid a cash dividend of $70.5 million, or $3.86 per share, to all holders of record of our common stock on May 8, 2006, including the Principal
Stockholders, which owned approximately 97.1% of the outstanding shares of our common stock at that date. Our board of directors also approved a cash payment of $4.5 million or $2.89 for each
vested and unvested option awarded in February 2005 under the 2004 Stock Option Plan, including to members of senior management. This payment is referred to as the "compensatory make-whole
payment." Approximately $3.2 million of the compensatory make-whole payment related to options that had not yet vested and accordingly this amount plus related taxes was recorded as
compensation expense in the second quarter of 2006 and is reflected as recapitalization costs in the Consolidated Statement of Operations and Comprehensive Loss. Approximately $1.3 million of
the compensatory make-whole payment related to vested options and was recorded to additional paid in capital. In addition, the exercise price of each vested and unvested option was reduced
by $0.98. Our board of directors decided to pay the compensatory make-whole payment and reduce the option exercise price because the payment of the May 2006 dividend decreased the value of
the equity interests of holders of options, as these holders were not otherwise entitled to receive the dividend. Accordingly, our board of directors awarded the same amount to the option holders, on
a per share basis, in the form of the compensatory make-whole payment and the reduced option exercise price.

22

---



Number of Stockholders

As of March 10, 2008, there were approximately 393 stockholders of record who held shares of our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The information called for by the item relating to "Securities Authorized for Issuance Under Equity Compensation Plans" is set forth under that heading in
Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and is incorporated herein by reference.

Performance Graph

The following chart compares the cumulative total stockholder returns on the Common Stock since December 31, 2002 to (1) the cumulative total
returns over the same period of the Russell MicroCap index; (2) the group of companies selected as our peers at the current time ("the new peer group") and (3) our old peer group. The
current peer group is comprised of Brinks Company and Devcon International. The old peer group is comprised of Brinks, IASG and Lifeline Systems, Inc. Our peer grouped changed in 2007 due to
the Merger and Lifeline Systems, Inc's acquisition by another company. Devcon International was added to our peer group because they are also a publicly traded security services company. The annual
returns for the New Peer Group and the Old Peer Group indices are weighted based on the capitalization of each company within the peer group at the beginning of each period for which a return is
indicated. The chart assumes the value of the investment in the Common Stock and each index was $100 at December 31, 2002 and that all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Protection One, Inc., The Russell MicroCap Index,  A New Peer Group And An Old Peer Group

GRAPHIC

---

23

---





ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial statements and notes to the financial statements of Protection One, which can be found in Item 8. Due to the impact
of the changes resulting from the push down accounting adjustments described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
OperationsSignificant ActivitiesPush Down Accounting Adjustments" below, the statement of operations data and cash flow data
presentations for 2005 separate our results into two periods: (1) the period prior to the February 8, 2005 consummation of the exchange transaction and (2) the period beginning
after that date utilizing the new basis of accounting. The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting. The condensed financial
data set forth below include the financial results for IASG beginning April 2, 2007, the date the Merger was consummated. All amounts are in thousands, except per share and customer data,
unless otherwise noted.

|                                                                                     |  | SELECTED CONSOLIDATED FINANCIAL DATA |           
|------------------------------------------------------------------------------------ |  | ------------------------------------ | ----------
|
|
|Statements of operations data                                                        |  |                                      |           
|Revenue                                                                              |  | $                                    | 347,871   
|Cost of revenue (exclusive of amortization and depreciation shown below)             |  |                                      | 140,705   
|Selling, general and administrative expenses                                         |  |                                      | 125,398   
|Merger-related costs                                                                 |  |                                      | 4,344     
|Change in control, restructuring, recapitalization and corporate consolidation costs |  |                                      |          
|Amortization of intangibles and depreciation expense                                 |  |                                      | 62,064    
|                                                                                     |  |                                      |           
|Operating income (loss)                                                              |  |                                      | 15,360    
|Interest expense, net                                                                |  |                                      | 46,977    
|Loss on retirement of debt                                                           |  |                                      |          
|Other income                                                                         |  |                                      | (90       
|                                                                                     |  |                                      |           
|Loss before income taxes                                                             |  |                                      | (31,527   
|Income tax expense (benefit)(c)                                                      |  |                                      | 713       
|                                                                                     |  |                                      |           
|Net loss                                                                             |  | $                                    | (32,240   
|                                                                                     |  |                                      |           
|Net loss per share of common stock(b)                                                |  | $                                    | (1.37     
|                                                                                     |  |                                      |           
|Weighted average number of shares of common stock outstanding(b)                     |  |                                      | 23,525,652
|Consolidated balance sheet data                                                      |  |                                      |           
|Working capital (deficit)                                                            |  | $                                    | 5,555     
|Customer accounts, net(a)                                                            |  |                                      | 282,396   
|Goodwill, net(a)                                                                     |  |                                      | 41,604    
|Total assets(a)                                                                      |  |                                      | 672,717   
|Long term debt, including capital leases, net of current portion                     |  |                                      | 521,180   
|Total stockholders' equity (deficiency in assets)                                    |  |                                      | (22,517   

24

---



|Cash flow data                                        |  |   |           |   |   |         |   |   |           |   |  |  |   |        |   |   |           |   |   |           |  
|----------------------------------------------------- |  | - | --------- | - | - | ------- | - | - | --------- | - |  |  | - | ------ | - | - | --------- | - | - | --------- | -
|Cash flows provided by operations                     |  | $ | 57,664    |   | $ | 49,527  |   | $ | 40,413    |   |  |  | $ | 3,710  |   | $ | 61,814    |   | $ | 59,035    |  
|Cash flows used in investing activities               |  |   | (34,670   | ) |   | (36,687 | ) |   | (24,151   | ) |  |  |   | (2,473 | ) |   | (30,369   | ) |   | (27,471   | )
|Cash flows provided by (used in) financing activities |  |   | (6,595    | ) |   | (8,133  | ) |   | (50,134   | ) |  |  |   |       |   |   | (14,120   | ) |   | 1,865     |  
|Other operating data                                  |  |   |           |   |   |         |   |   |           |   |  |  |   |        |   |   |           |   |   |           |  
|Number of monitored sites at end of period            |  |   | 1,745,425 |   |   | 994,012 |   |   | 1,012,797 |   |  |  |   |        |   |   | 1,030,113 |   |   | 1,048,320 |  

---

25

---





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

Introduction

In this section, we explain our general financial condition and operating results, including:



As
you read this section, please refer to our Consolidated Statements of Operations and Comprehensive Loss and accompanying notes found in Item 8. These statements show our
operating results for the years ended December 31, 2007 and 2006, and the periods February 9, 2005 through December 31, 2005 and January 1, 2005 through February 8,
2005. In this section we analyze and explain the significant annual changes of specific line items in the Consolidated Statements of Operations and Comprehensive Loss.

Overview

We are a leading national provider of electronic security alarm monitoring services, providing installation, maintenance and electronic monitoring of alarm
systems to single-family residential, commercial, multifamily and wholesale customers. We monitor signals from burglary, fire, medical and environmental alarm systems and manage information from
access control and CCTV systems.

Our
business consists of three primary segments: Retail, Wholesale and Multifamily. Our Retail segment provides monitoring and maintenance services for electronic security systems
directly to residential and business customers. We also sell and install electronic security systems for homes and businesses through our Retail segment in order to meet their security needs. Our
Wholesale segment contracts with independent security alarm dealers nationwide to provide alarm system monitoring and support services to their residential and business customers. We also provide
business support services as well as financing assistance for these independent dealers by providing loans secured by alarm contracts and by purchasing alarm contracts. Our Multifamily segment
provides electronic security system installation and alarm monitoring services to owners and managers of apartments, condominiums and other multifamily dwellings. We market our services to these
customer segments through separate internal sales and installation branch networks.

Business Strategy

Our strategy is to increase RMR by generating more accounts at a higher average RMR, by acquiring portfolios of security monitoring accounts, and by acquiring
security monitoring companies. Our overall goal is to strengthen our leadership position in delivering security monitoring services and related installation services in principal markets across the
United States in order to improve our returns on the capital we invest in creating and serving customers. Specific goals include (i) lowering attrition rates; (ii) increasing RMR
additions; (iii) reducing acquisition costs for each dollar of RMR created; and (iv) increasing the efficiency of our monitoring and service activities. We plan to achieve these
objectives by building upon our core strengths, including our national branch platform, our brand

26

---



recognition,
our internal sales force model and our highly skilled and experienced management team and workforce.

Significant Activities



On March 14, 2008, we borrowed approximately $110.3 million under a new unsecured term loan facility (the "Unsecured Term Loan") to allow us to
redeem all of the 8.125% Senior Subordinated Notes due January 2009 (the "Senior Subordinated Notes"). Using the proceeds from the Unsecured Term Loan and available cash on hand, we deposited with the
trustee under the Senior Subordinated Notes Indenture (the "Trustee") an amount sufficient to redeem all of the Senior Subordinated Notes. Accordingly, our obligations under the Senior Subordinated
Notes Indenture were satisfied and discharged effective March 14, 2008. The Senior Subordinated Notes were called for redemption on March 14, 2008 and will be redeemed effective
April 14, 2008, as provided by the Senior Subordinated Notes Indenture.



On April 2, 2007 we acquired IASG. Holders of IASG common stock received 0.29 shares of Protection One, Inc. common stock for each share of IASG
common stock held. A total of 7,066,960 shares of Protection One common stock were issued in exchange for IASG common stock with cash paid in lieu of fractional shares. A total of 713,104 Protection
One stock options were issued in exchange for 2,459,001 outstanding IASG options.

We
have consolidated the financial results of IASG beginning on April 2, 2007. Pro forma information, which includes IASG financial results as if the Merger had been consummated
on January 1, 2007, is included in Note 3, "IASG Acquisition," to the Financial Statements. As a result, we now evaluate our operating and financial performance based on three segments:
Retail, Wholesale and Multifamily. Prior to the Merger, our performance was evaluated in two segments: Protection One Monitoring and Network Multifamily. Prior year information has been reclassified
to conform to the new segment presentation.



As a result of the Principal Stockholders obtaining over 95% of our common stock on February 8, 2005, we determined that SEC Staff Accounting Bulletin
Topic 5J, "Push Down Basis of Accounting Required in Certain Limited Circumstances," required that our post-acquisition financial statements reflect a new basis of accounting. We "pushed
down" the Principal Stockholders' basis to a proportionate amount of our underlying assets and liabilities acquired based on the estimated fair market values of the assets and liabilities. The "push
down" accounting adjustments did not impact cash flows. The primary changes to the balance sheet reflect (1) the reduction of deferred customer acquisition costs and revenue, which have been
subsumed into the estimated fair market value adjustment for customer accounts; (2) adjustments to the carrying values of debt to estimated fair market value (or the Principal Stockholders'
basis in the case of the credit facility); (3) adjustments to historical goodwill to reflect goodwill arising from the push down accounting adjustments; (4) the recording of a value for
our trade names; and (5) an increase to the equity section from these adjustments. The primary changes to the income statement include (1) the reduction in installation and other revenue
due to a lower level of amortization from the reduced amortizable base of deferred customer acquisition revenue; (2) the reduction in installation and other costs of revenue and selling
expenses due to a lower level of amortization from the reduced amortizable base of deferred customer acquisition costs; (3) an increase in interest expense due to amortization of debt discounts
arising from

27

---



differences
in fair values and carrying values of our debt instruments; and (4) the reduction in amortization related to the reduction in the amortizable base of customer accounts.

Due
to the impact of the changes resulting from the push down accounting adjustments described above, the 2005 statements of operations and cash flows presentations separate our results
into two periods: (1) the period prior to the February 8, 2005 consummation of the exchange transaction and (2) the period beginning after that date utilizing the new basis of
accounting. The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting.



On May 12, 2006, we completed a recapitalization of our balance sheet by increasing our debt in order to pay a cash dividend of $70.5 million, or
$3.86 per share, to all holders of record of our common stock on May 8, 2006, including the Principal Stockholders, which owned approximately 97.1% of the outstanding shares of our common stock
at that date.

As
part of the recapitalization, our board of directors also approved the compensatory make-whole payment of $4.5 million or $2.89 for each vested and unvested option
awarded in February 2005 under the 2004 Stock Option Plan, including to members of senior management. Approximately $3.2 million of the compensatory make-whole payment related to
options that had not yet vested and accordingly this amount plus related taxes was recorded as compensation expense in the second quarter of 2006 and is reflected as recapitalization costs in the
Consolidated Statement of Operations and Comprehensive Loss. Approximately $1.3 million of the compensatory make-whole payment related to vested options and was recorded to
additional paid in capital. In addition, the exercise price of each vested and unvested option was reduced by $0.98.

Additionally,
in consideration of the adverse impact of the cash dividend on SARs granted in 2005, our board of directors agreed to amend the SARs agreements by effectively fixing the
exercise price on 439,160 outstanding SARs at $5.02. Therefore, if there is not a qualified sale prior to February 8, 2011, the holders of such SARs will be entitled to receive the difference
between $7.50 and $5.02 per SAR, or $2.48, from us for a total cash outlay of approximately $1.1 million on February 8, 2011. We have established a liability of approximately
$0.3 million and $0.1 million as of December 31, 2007 and 2006, respectively, to reflect the portion of the SARs that have been earned since the date of the amendment. Assuming
there is no qualified sale prior to February 8, 2011, the Company expects to record approximately $0.2 million in expense per year through February 8, 2011 related to these SARs.
As of December 31, 2007, no value has been ascribed to the SARs that have not been modified and no value will be allocated to those SARs unless and until it becomes probable that a qualified
sale will occur.

Other Significant Activities



We incurred a net loss of $32.2 million for the year ended December 31, 2007. This net loss includes $4.3 million in Merger-related costs.
The remaining net loss reflects substantial charges incurred by us for amortization of customer accounts, interest incurred on indebtedness and other factors discussed below.

Industry Metrics



At various times during each year, we measure all of the monthly revenue we are entitled to receive under contracts with customers in effect at the end of the
period. Our computation of RMR may not be comparable to other similarly titled measures of other companies, and RMR should not be

28

---



viewed
by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles.

We
had approximately $26.7 million, $20.0 million and $19.9 million of RMR as of December 31, 2007, 2006 and 2005, respectively. The increase in RMR in 2007
is primarily the result of the Merger.

We
believe the presentation of RMR is useful to investors because the measure is used by investors and lenders to value companies such as ours with recurring revenue streams. Management
monitors
RMR, among other things, to evaluate our ongoing performance. The table below reconciles our RMR to revenue reflected on our consolidated statements of operations (information for the period
January 1, 2005 through February 8, 2005 was not considered to be material in a comparison of RMR as of fiscal year end and therefore has not been presented).

Year Ended
December 31,
2007

Year Ended
December 31,
2006

February 9
December 31
2005(dollar amounts in millions)RMR at December 31

$
26.7

$
20.0

$
19.9Amounts excluded from RMR:Amortization of deferred revenue


1.0


0.8


0.5Other revenue(a)


3.0


1.9


1.9Revenue (GAAP basis):December


30.7


22.7


22.3February 9  November 30, 2005








212.2January  November


317.2


247.9


Total period revenue

$
347.9

$
270.6

$
234.5




Our
RMR includes amounts billable to customers with past due balances that we believe are collectible. We seek to preserve the revenue stream associated with each customer contract,
primarily to maximize our return on the investment we made to generate each contract. As a result, we actively work to collect amounts owed to us and to retain the customers at the same time. In some
instances, we may allow up to six months to collect past due amounts, while evaluating the ongoing customer relationship. When we categorize accounts as at-risk because accounts receivable
balances exceed certain guidelines or because notice of intent to cancel or move has been provided by the customer, we include the account in attrition calculations. After we have made every
reasonable effort to collect past due balances, we will disconnect the customer and include the loss in attrition calculations.

Our
RMR calculation is not considered an alternative to revenue calculated under accounting principles generally accepted in the United States of America ("GAAP") and is not a substitute
indication of our operating performance under GAAP. We believe, however, that the supplemental presentation of RMR is useful to investors because the measure is used by investors and lenders to value
companies such as ours with recurring revenue streams.

29

---



The
following table provides a roll-forward of RMR (beginning RMR, additions, losses, price changes and other changes and ending RMR) by segment and in total for the years
indicated.

|                                     |  | Year Ended December 31 |       
|------------------------------------ |  | ---------------------- | ------
|
|
|
|Beginning RMR balance                |  | $                      | 16,429
|RMR additions from direct sales      |  |                        | 2,331 
|RMR additions from Merger            |  |                        | 4,133 
|RMR additions from account purchases |  |                        | 32    
|RMR losses                           |  |                        | (2,514
|Price changes and other              |  |                        | 217   
|                                     |  |                        |       
|Ending RMR balance                   |  | $                      | 20,628
|                                     |  |                        |       

The table below reconciles our RMR by segment to revenue reflected in our segment results of operations (information for the period
January 1, 2005 through February 8, 2005 was not considered to be material in a comparison of RMR as of fiscal year end and therefore has not been presented).

|                                 |  | Year Ended December 31, |       | Year Ended December 31, |   | February 9December 31,
|-------------------------------- |  | ----------------------- | ----- | ----------------------- | - | -----------------------
|
|
|
|RMR at December 31               |  | $                       | 20.6  |                         | $ | 3.6                    
|Amounts excluded from RMR:       |  |                         |       |                         |   |                        
|Amortization of deferred revenue |  |                         | 1.0   |                         |   |                       
|Other revenue(a)                 |  |                         | 2.5   |                         |   | 0.4                    
|                                 |  |                         |       |                         |   |                        
|Revenue (GAAP basis):            |  |                         |       |                         |   |                        
|December                         |  |                         | 24.1  |                         |   | 4.0                    
|February 9  November 30, 2005   |  |                         |      |                         |   |                       
|January  November               |  |                         | 253.4 |                         |   | 34.0                   
|                                 |  |                         |       |                         |   |                        
|Total period revenue             |  | $                       | 277.5 |                         | $ | 38.0                   
|                                 |  |                         |       |                         |   |                        

---



In each of the last three years, monitoring and related service revenue comprised over 90% of our total revenue. Monitoring and related services revenue in 2007
increased over 2006, primarily due to the Merger. The table below identifies the monitoring and related services gross margin and gross margin percent for the presented periods, which is exclusive of
amortization and depreciation.

|                                                |  |   |         |   |   | 2005    |  
|----------------------------------------------- |  | - | ------- | - | - | ------- | -
|
|
|Monitoring and related services revenue         |  | $ | 313,330 |   | $ | 247,370 |  
|Cost of monitoring and related services revenue |  |   | 99,835  |   |   | 71,823  |  
|                                                |  |   |         |   |   |         |  
|Gross margin                                    |  | $ | 213,495 |   | $ | 175,547 |  
|                                                |  |   |         |   |   |         |  
|Gross margin percent                            |  |   | 68.1    | % |   | 71.0    | %
|                                                |  |   |         |   |   |         |  

30

---



Our monitoring and related services gross margin percentage has decreased from the prior periods due to several factors, the impact of which we expect to continue into the near to medium
term: (i) increased percentage of Wholesale customers which provide lower margins, (ii) increased third party costs for cellular service due to the growing number of customers who choose
to have primary or back-up cellular monitoring service, and (iii) increased percentage of commercial customers in our base who choose enhanced services, such as open/close and fire
inspections.



Our customer base reflected a net increase of 751,413 customers during 2007 compared to a net loss of 18,785 and 17,316 customers during 2006 and 2005,
respectively. The increase in 2007 is primarily the result of the Merger, through which 115,175 Retail and 597,478 Wholesale customers were acquired. During 2007, Retail customers increased by a net
95,831, Wholesale customers increased by a net 670,978 and Multifamily had a net loss of 15,396 customers. Net losses of customer accounts materially and adversely affect our business, financial
condition and results of operations.

Attrition
has a direct impact on our results of operations since it affects our revenue, amortization expense and cash flow. We monitor attrition each quarter based on a quarterly
annualized and trailing twelve-month basis. This method utilizes each segment's average RMR base for the applicable period in measuring attrition. Therefore, in periods of RMR growth, the computation
of RMR attrition may result in a number less than would be expected in periods when RMR remains stable. In periods of RMR decline, the computation of RMR attrition may result in a number greater than
would be expected in periods when RMR remains stable. We believe the presentation of RMR attrition is useful to investors because the measure is used by investors and lenders to value companies such
as ours with recurring revenue streams. In addition, we believe RMR attrition information is more useful than customer account attrition because it reflects the economic impact of customer losses.

In
the table below, we define attrition as a ratio, the numerator of which is the gross amount of lost RMR, which includes price decreases, for a given period, net of the adjustments
described below, and the denominator of which is the average amount of RMR for a given period. In some instances, we use estimates to derive attrition data. In the calculations directly below, we do
not reduce the gross RMR lost during a period by RMR added from "move in" accounts, which are accounts where a new customer moves into a home installed with our security system and vacated by a prior
customer, or
from "competitive takeover" accounts, which are accounts where the owner of a residence monitored by a competitor requests that we provide monitoring services.

As
defined above, recurring monthly revenue attrition by business segment is summarized at December 31, 2007, 2006 and 2005. As expected, the relatively higher retail gross
attrition on the acquired IASG retail portfolio compared to the legacy Retail portfolio caused Retail gross attrition to increase in 2007.

Recurring Monthly Revenue AttritionDecember 31, 2007

December 31, 2006

December 31, 2005Annualized
Fourth
Quarter

Trailing
Twelve
Month

Annualized
Fourth
Quarter

Trailing
Twelve
Month

Annualized
Fourth
Quarter

Trailing
Twelve
MonthRetail

13.3
%
13.2
%
11.6
%
12.5
%
12.3
%
13.4
%Wholesale

21.8
%
22.6
%
16.5
%
16.5
%
15.4
%
20.9
%Multifamily

9.0
%
10.6
%
21.2
%
13.9
%
6.7
%
9.3
%


In
the table below, in order to enhance the comparability of our Retail segment attrition results with those of other industry participants, many of which report attrition net of
move-in accounts, we

31

---



define
the denominator the same as above but define the numerator as the gross amount of lost RMR, which includes price decreases, for a given period reduced by RMR added from move-in
accounts.

Recurring Monthly Revenue AttritionDecember 31, 2007

December 31, 2006

December 31, 2005Annualized
Fourth
Quarter

Trailing
Twelve
Month

Annualized
Fourth
Quarter

Trailing
Twelve
Month

Annualized
Fourth
Quarter

Trailing
Twelve
MonthRetail

11.7
%
11.3
%
9.5
%
10.2
%
10.0
%
11.0
%


Our
actual attrition experience shows that the relationship period with any individual customer can vary significantly. Customers discontinue service with us for a variety of reasons,
including relocation, service issues and cost. A portion of the customer base can be expected to discontinue service every year. Any significant change in the pattern of our historical attrition
experience would have a material effect on our results of operations.

Sources of Revenue

For both Retail and Multifamily segments, revenue is primarily generated from providing monitoring services. Monitoring revenue is generated based on contracts
that we enter into with our customers. Our Retail customer contracts typically have three-year initial terms for residential customers and five-year initial terms for
commercial customers. Our Multifamily customer contracts have initial terms that fall within a range of five to ten years and average eight years at inception. Our contracts generally also provide for
automatic renewal provisions where permitted. Renewal terms are generally one year for Retail customers and up to five years in the case of Multifamily customers. Many of our residential and
commercial contracts require us to provide additional services, such as maintenance services, generating incremental revenue for us. Wholesale revenue includes monitoring services as well as business
support services with contracts generally on a month-to-month basis. Installation and other revenue consists primarily of sales of burglar alarms, CCTV systems, fire alarms and
card access control systems to commercial customers.

Costs of Revenue; Expenses

Monitoring and related services costs generally relate to the cost of providing monitoring service and include the costs of monitoring, billing, customer service
and field operations. Installation and other costs of revenue consist primarily of equipment and labor charges to install alarm systems, closed circuit television systems, fire alarms and card access
control systems sold to our customers.

Selling
expenses include employee compensation, benefits and recruiting for our internal sales force, advertising, customer signage, marketing materials, trade show expense, and
amortization of previously deferred selling costs. General and administrative expenses include lease expenses on office space and office equipment, telecommunications, costs of debt collection
efforts, employee compensation and benefits, professional service fees and other miscellaneous expenses. Amortization of intangibles and depreciation includes amortization of customer accounts, dealer
relationships and non-competition agreements as well as depreciation on property and equipment.

Critical Accounting Policies

Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in
accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to bad debts, inventories, investments,
customer accounts, goodwill, intangible assets, income taxes,

32

---



contingencies
and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions.



We account for our acquisitions of security monitoring businesses using the purchase method. The purchase method requires that we estimate the fair value of the
individual assets and liabilities acquired. The estimation of the fair value of the assets and liabilities acquired and consideration given involves a number of judgments and estimates See
Note 3, "IASG Acquisition," for additional information regarding the fair value estimates and purchase price allocation related to the Merger.



As described in "Significant ActivitiesPush Down Accounting Adjustments" above, in 2005 we "pushed
down" the Principal Stockholders' basis to a proportionate amount of our underlying assets and liabilities acquired based on the estimated fair market values of the assets and liabilities. The "pushed
down" basis as of February 8, 2005 was used to value customer accounts, property and equipment, trade name, goodwill, deferred customer acquisition costs and revenue, debt, additional paid in
capital and deficit as of the restructuring. Additions of assets or liabilities subsequent to February 8, 2005 are initially recorded at cost.



Revenue is recognized when security services are provided. System installation revenue, sales revenue on equipment upgrades and direct and incremental costs of
installations and sales are deferred for residential customers with monitoring service contracts. For commercial customers and our national account customers, revenue recognition is dependent upon
each specific customer contract. In instances when we pass title to a system, we recognize the associated revenue and costs related to the sale of the equipment in the period incurred regardless of
whether the sale is accompanied by a service agreement. In cases where we retain title to the system, we defer and amortize revenue and direct costs.

Deferred
system and upgrade installation revenue are recognized over the estimated life of the customer utilizing an accelerated method for our Retail customers and a
straight-line method for our Multifamily customers. Deferred costs in excess of deferred revenue are recognized utilizing a straight-line method over the initial contract term,
typically two to three years for residential systems, five years for commercial systems and five to ten years for Multifamily systems. To the extent deferred costs are less than deferred revenue, such
costs are recognized over the estimated life of the customer utilizing the same method as with the related deferred revenue. Therefore, a change in the estimated life of a customer pool would result
in a change in the amount of previously deferred revenue that would be amortized to income but would also result in a similar change in the amount of previously deferred costs that are amortized to
expense. For example, if we had determined as of January 1, 2007 that the estimated life of each pool should be shortened by one year, the amount of previously deferred revenue amortized to
revenue for the year ended December 31, 2007 would have increased by $1.0 million. Similarly, the amount of previously deferred cost of revenue would have increased by
$1.0 million resulting in no net impact to gross profit.

The
table below reflects the impact of our accounting policy on the respective line items of the Statement of Operations for the years ended December 31, 2007 and 2006 and the
periods February 9, 2005 through December 31, 2005 and January 1, 2005 through February 8, 2005. The "Total amount incurred" line represents the current amount of billings
that were made and the current costs that were

33

---



incurred
for the period. We then subtract the deferral amount and add back the amortization of previous deferral amounts to determine the amount we report on the Statement of Operations.

|                                           |  | For the Year Ended December 31,
2007 |         | For the Year Ended December 31,
2006 |   | February 9December 31,
2005 |   |   |         | January 1February 8,
2005 |  
|------------------------------------------ |  | ------------------------------------ | ------- | ------------------------------------ | - | ---------------------------- | - | - | ------- | -------------------------- | -
|
|
|Retail segment:                            |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Total amount incurred                      |  | $                                    | 52,648  |                                      | $ | 58,778                       |   | $ | 47,921  |                            | $
|Amount deferred                            |  |                                      | (29,790 | )                                    |   | (37,317                      | ) |   | (19,209 | )                          |  
|Amount amortized                           |  |                                      | 10,669  |                                      |   | 16,906                       |   |   | 15,986  |                            |  
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Amount included in Statement of Operations |  | $                                    | 33,527  |                                      | $ | 38,367                       |   | $ | 44,698  |                            | $
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Wholesale segment:                         |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Total amount incurred(a)                   |  | $                                    | 546     |                                      | $ |                             |   | $ | 1,430   |                            | $
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Multifamily segment:                       |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Total amount incurred                      |  | $                                    | 308     |                                      | $ | 3,473                        |   | $ | 1,749   |                            | $
|Amount deferred                            |  |                                      | (20     | )                                    |   | (2,957                       | ) |   | (470    | )                          |  
|Amount amortized                           |  |                                      | 180     |                                      |   | 1,987                        |   |   | 145     |                            |  
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Amount included in Statement of Operations |  | $                                    | 468     |                                      | $ | 2,503                        |   | $ | 1,424   |                            | $
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Total Company:                             |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Total amount incurred                      |  | $                                    | 53,502  |                                      | $ | 62,251                       |   | $ | 51,100  |                            | $
|Amount deferred                            |  |                                      | (29,810 | )                                    |   | (40,274                      | ) |   | (19,679 | )                          |  
|Amount amortized                           |  |                                      | 10,849  |                                      |   | 18,893                       |   |   | 16,131  |                            |  
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  
|Amount reported in Statement of Operations |  | $                                    | 34,541  |                                      | $ | 40,870                       |   | $ | 47,552  |                            | $
|                                           |  |                                      |         |                                      |   |                              |   |   |         |                            |  

---

In addition to the amounts reflected in the table above relating to our costs incurred to create new accounts, our Retail segment also capitalized
purchases of rental equipment in the amount of $4.4 million, $2.8 million and $0.8 million for the years ended December 31, 2007, and 2006 and the period February 8,
2005 through December 31, 2005, respectively. During 2007, we also purchased customer accounts valued at $1.0 million.



As discussed in "Significant ActivitiesPush Down Accounting Adjustments" above, because the Principal
Stockholders acquired substantially all of our common stock, resulting in a new basis of accounting, new values for intangible assets were recorded in the first quarter of 2005 based on estimates of
fair market values. New values were recorded for customer accounts, trade names and goodwill. In addition, intangible assets acquired in the Merger were recorded in 2007.

Customer
accounts were valued by segment based on a combination of (1) the income approach utilizing our projections of cash flow, operating margins and customer attrition and
(2) the market approach based on available industry transaction data generally expressed as a multiple of recurring monthly revenue. Trade name values were based on the identifiable revenue
associated with each segment and were valued based on the income approach. Goodwill represents the excess of the purchase price over the fair value of net assets acquired. Goodwill and trade names are
tested for impairment on at least an annual basis or as circumstances warrant.

34

---



Customer
accounts are tested on a periodic basis or as circumstances warrant. For purposes of this impairment testing, goodwill is considered to be directly related to the acquired
customer accounts. Factors we consider important that could trigger an impairment review include the following:



An
impairment test of customer accounts would have to be performed when the undiscounted expected future operating cash flows by asset group, which consists primarily of capitalized
customer accounts and related goodwill, is less than the carrying value of that asset group. An impairment would be recognized if the fair value of the customer accounts is less than the net book
value of customer accounts.

We
evaluate goodwill for impairment annually as of the beginning of the third quarter and any time an event occurs or circumstances change that could reduce the fair value for a
reporting unit below its carrying amount. Goodwill is recorded in our Retail, Wholesale and Multifamily operating segments, which are also our reporting units for purposes of evaluating our recorded
goodwill for impairment. If the carrying value of the reporting unit exceeds its fair value, we are required to impair goodwill. We determine fair value by using an enterprise valuation methodology
determined by a discounted cash flow approach or valuation report, both of which we believe are an appropriate method to determine
fair value. There is considerable management judgment with respect to cash flow estimates to be used in determining fair value. We completed our annual impairment testing during the third quarter of
2007 and determined that no impairment of our non-amortizable goodwill and intangible assets was required as of July 1, 2007. No impairment charge was recorded in 2006 or 2005.



The choice of an amortization life and method is based on our estimates and judgments about the amounts and timing of expected future revenue from customer
accounts and average customer account life. Amortization methods and selected periods were determined because, in our opinion, they would adequately match amortization cost with anticipated revenue.
We evaluate the appropriateness of the amortization life and method of each of our customer account pools based on the actual historical attrition experience of each pool and, when deemed necessary,
perform a lifing study on our customer accounts to assist us in determining appropriate lives of our customer accounts. These analyses are needed in light of the inherent declining revenue curve over
the life of a pool of customer accounts. We have identified four distinct pools of customer accounts, as shown in the table below, each of which has distinct attributes that effect differing attrition
characteristics. For the Retail and Wholesale pools, the result of lifing studies indicated to us that we can expect attrition to be greatest in years one through five of asset life and that a
declining balance (accelerated) method would therefore best match the future amortization cost with the estimated revenue stream from these customer pools. We switch from the declining balance method
to the straight-line method in the year the straight-line method results in greater amortization expense.

35

---



Our
amortization rates consider the average estimated remaining and historical projected attrition rates. The amortization method for each customer pool is as follows:

Pool

MethodCustomer Accounts:Retail-Protection One

Ten-year 135% declining balanceRetail-IASG

Nine-year 150% declining balanceMultifamily

Nine-year straight-lineDealer Relationships:Wholesale

Fifteen-year 150% declining balance


We
conduct comprehensive reviews of our attrition experience on an ongoing basis and adjust the estimated lives of our customer accounts and dealer relationships as needed. We recorded
approximately $45.5 million of customer account amortization and $3.6 million of dealer relationship amortization for the year ended December 31, 2007. We recorded approximately
$31.9 million of customer account amortization and $0.6 million of dealer relationship amortization for the year ended December 31, 2006. We recorded approximately
$32.0 million and $0.6 million of customer account and dealer relationship amortization for the period February 9, 2005 through December 31, 2005, respectively and
$5.5 million and $0.1 million of customer account and dealer relationship amortization for the period January 1, 2005 through February 8, 2005, respectively. This amount
would change if we changed the estimated life or amortization rate for customer accounts and dealer relationships. For example, if we had determined that the estimated remaining life as of
January 1, 2007 of each customer pool should be reduced by one year, customer account and dealer relationship amortization expense would have been approximately $52.4 million and
$3.9 million, respectively, for the year ended December 31, 2007.



As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we
operate. Significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities. This process involves us estimating our actual current
tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered. To the extent we
believe that recovery is not likely, we must establish a valuation allowance. We believe that recovery of most of our deferred tax assets is not likely. Accordingly, a valuation allowance for 99.6% of
our deferred tax assets has been established.

We
currently do not expect to be in a position to record tax benefits for losses incurred in the future.

In
June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxesan interpretation
of FASB Statement No. 109." This interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements. The cumulative effect, if any, of
applying FIN 48 is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. Our adoption of this interpretation on January 1, 2007 did not
have an impact on our consolidated financial statements.



In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
("SFAS 159"). SFAS 159 is effective for

36

---



financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS 159 permits the measurement of specified financial
instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. We do
not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. The FASB issued FASB Staff Position No. FAS 157-1, Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, ("FSP
FAS 157-1"). FSP FAS 157-1 excludes FASB Statement No.13 as well as other accounting pronouncements that address fair value measurement on lease classification or
measurement from the scope of SFAS 157. During February 2008, the FASB also issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.157, ("FSP
FAS 157-2"), which delays the effective date of FAS 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after
November 15, 2008. We do not anticipate that adoption of FAS 157, FSP FAS 157-1 or FSP FAS 157-2 will have a material impact on our consolidated
financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statementsan
amendment of ARB No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards that require non-controlling interests in a subsidiary to be reported as
a component of equity, changes in a parent's ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained
non-controlling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. The Statement also establishes reporting requirements that clearly
identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective as of the beginning of the first fiscal year
beginning on or after December 15, 2008. We do not anticipate that adoption of this statement will have a material impact on our consolidated financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R establishes the
principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree; 2) in a business combination achieved in stages, sometimes referred to as a step acquisition, recognizes the identifiable assets and
liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values; 3) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase. SFAS 141R establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the
business combination. This Statement is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or
after December 15, 2008. The adoption of SFAS 141R will have an impact on our accounting for future business combinations; however, the materiality of that impact cannot be determined.

In
December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 ("SAB 110") which allows companies that do not have sufficient historical
experience for estimating the expected term of "plain vanilla" share option grants to provide a reasonable estimate and to continue use of the "simplified" method after December 31, 2007.
SAB 110 extends the opportunity to use the "simplified" method beyond December 31, 2007, as was allowed by Staff

37

---



Accounting
Bulletin No. 107 ("SAB 107"). Adoption of SAB 110 will not impact our consolidated financial statements as we did not use the "simplified" method to estimate lives of
share-based awards.

Results of Operations



For the year ended December 31, 2007, we incurred a consolidated net loss of $32.2 million or loss per share of common stock of $1.37. For the year
ended December 31, 2006, we incurred a consolidated net loss of $17.4 million or loss per share of common stock of $0.95. For the periods February 9, 2005 through
December 31, 2005 and January 1, 2005 through February 8, 2005, we incurred consolidated net losses of $15.6 million and $11.4 million, respectively, or losses per
share of common stock of $0.86 and $5.80, respectively. Interest expense of $49.5 million and Merger-related costs of $4.3 million as well as increased amortization and depreciation
expense of $20.4 million as a result of the Merger contributed to the net loss for the year ended December 31, 2007. Interest expense of $37.4 million and recapitalization costs
of $4.5 million contributed to the net loss for the year ended December 31, 2006. Interest expense of $31.2 million and a loss on retirement of debt of $6.7 million
contributed to the net loss for the period February 9, 2005 through December 31, 2005. The net loss in the period January 1, 2005 through February 8, 2005 includes
$5.9 million for change in control and debt restructuring costs.

Monitoring
and related services revenue increased in 2007, primarily as a result of the Merger. Cost of monitoring and related services revenue increased approximately 39.0% in 2007
compared to 2006, primarily due to our increased customer base. Monitoring and related services margin as a percentage of related revenue was at or above 68% in 2007, 2006 and 2005. Our monitoring and
related services gross margin percentage has decreased from the prior period due to several factors, the impact of which we expect to continue into the near to medium term: (i) increased
percentage of Wholesale customers, which provide lower margins, (ii) increased third party costs for cellular service due to the growing number of customers who choose to have primary or
back-up cellular monitoring service, and (iii) increased percentage of commercial customers in our base who choose enhanced services, such as open/close and fire inspections which
typically have lower gross margins than our standard monitoring services. Interest expense in 2007 increased approximately 32.3% due to indebtedness assumed in the Merger. Interest expense includes
approximately $6.9 million, $6.5 million and $7.5 million of amortization of debt issue costs and debt discounts and premium for the years ended December 31, 2007 and 2006
and the period February 9, 2005 through December 31, 2005, respectively.

38

---







We present the table below to show how the operating results for the Retail segment have changed over the periods presented. Next to each period's results of
operations, we provide the relevant percentage of total revenue so that you can make comparisons about the relative change in revenue and expenses. As a result of the push down accounting adjustments
described in "Significant ActivitiesPush Down Accounting Adjustments" above, the information in post-push down periods (years
ended December 31, 2007and 2006 and period February 9, 2005 through December 31, 2005) and the pre-push down periods (period January 1, 2005 through
February 8, 2005) presented in the following table may not be comparable.

|                                                                         |                                                                                           |   |         |         |      |       |   |         |         | February 9 through December 31, |       |   |         | January 1 through February 8, |     
|------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | - | ------- | ------- | ---- | ----- | - | ------- | ------- | ------------------------------- | ----- | - | ------- | ----------------------------- | ----
|
|
|
|Revenue                                                                  |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|                                                                         | Monitoring and related services                                                           |   | $       | 243,963 |      | 87.9  | % | $       | 202,355 |                                 | 89.9  | % | $       | 178,301                       |     
|                                                                         | Installation and other                                                                    |   |         | 33,527  |      | 12.1  |   |         | 22,684  |                                 | 10.1  |   |         | 14,917                        |     
|                                                                         |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|                                                                         | Total Revenue                                                                             |   |         | 277,490 |      | 100.0 |   |         | 225,039 |                                 | 100.0 |   |         | 193,218                       |     
|Cost of revenue (exclusive of amortization and depreciation shown below) |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|                                                                         | Monitoring and related services                                                           |   |         | 72,526  |      | 26.2  |   |         | 58,551  |                                 | 26.0  |   |         | 51,160                        |     
|                                                                         | Installation and other                                                                    |   |         | 38,367  |      | 13.8  |   |         | 27,956  |                                 | 12.4  |   |         | 18,145                        |     
|                                                                         |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|                                                                         | Total cost of revenue (exclusive of amortization and depreciation shown below)            |   |         | 110,893 |      | 40.0  |   |         | 86,507  |                                 | 38.4  |   |         | 69,305                        |     
|Operating Expenses                                                       |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|                                                                         | Selling expenses                                                                          |   |         | 44,698  |      | 16.1  |   |         | 38,684  |                                 | 17.2  |   |         | 26,690                        |     
|                                                                         | General and administrative expenses                                                       |   |         | 63,359  |      | 22.8  |   |         | 53,617  |                                 | 23.8  |   |         | 46,640                        |     
|                                                                         | Merger-related costs                                                                      |   |         | 4,344   |      | 1.6   |   |         |        |                                 |      |   |         |                              |     
|                                                                         | Change in control and debt restructuring costs in 2005 and recapitalization costs in 2006 |   |         |        |      |      |   |         | 4,452   |                                 | 2.0   |   |         |                              |     
|                                                                         | Amortization of intangibles and depreciation expense                                      |   |         | 49,501  |      | 17.8  |   |         | 34,443  |                                 | 15.3  |   |         | 37,144                        |     
|                                                                         |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|Total operating expenses                                                 |                                                                                           |   | 161,902 |         | 58.3 |       |   | 131,196 |         | 58.3                            |       |   | 110,474 |                               | 57.1
|                                                                         |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     
|Operating income (loss)                                                  |                                                                                           | $ | 4,695   |         | 1.7  | %     | $ | 7,336   |         | 3.3                             | %     | $ | 13,439  |                               | 7.0 
|                                                                         |                                                                                           |   |         |         |      |       |   |         |         |                                 |       |   |         |                               |     

2007 Compared to 2006.Retail had a net increase of 95,831 customers in 2007 compared
to a net decrease of 9,145 customers in 2006. The increase in 2007 is primarily attributable to 115,175 customers acquired in the Merger. The weighted average customer base was 583,397 for 2007
compared to 511,261 for 2006.

Further
analysis of the change in the Retail customer account base is shown in the table below.

2007

2006

2005Beginning Balance, January 1,

506,688

515,833

532,542Customer additions, excluding additions from Merger

56,788

54,574

53,974Customer additions from Merger

115,175



Customer losses

(74,696
)
(62,201
)
(69,620
)Other adjustments

(1,436
)
(1,518
)
(1,063
)Ending Balance, December 31,

602,519

506,688

515,833


39

---



For
a roll-forward of Retail segment RMR, please see the segment table in "Industry MetricsRecurring Monthly
Revenue," above.

Monitoring and related service revenueincreased 20.6% in 2007 compared to 2006, primarily due to the addition of Retail customers
acquired through the Merger. Excluding the impact of the Merger, monitoring and related services revenue increased approximately 2.0% as a result of an increase in billable service calls, commercial
customer growth and customer retention efforts. This revenue consists primarily of contractual revenue derived from providing monitoring and maintenance service.

Installation and other revenueincludes $10.7 million in amortization of previously deferred revenue in 2007 compared to
$7.2 million in 2006. In 2007, we experienced an $8.2 million increase in commercial sales arrangements which result in immediate revenue recognition. The increase in commercial sales is
primarily due to an increase in the commercial and national accounts sales force, partially as a result of the Merger, and includes an increase in the installation of CCTV and access control systems.
Installation and other revenue is generated from our internal installations of new alarm systems and consists primarily of sales of burglar alarms, CCTV systems, fire alarms and access control systems
to commercial customers, as well as amortization of previously deferred revenue.

Cost of monitoring and related services revenueincreased 23.9% in 2007 compared to 2006, primarily due to the addition of Retail
customers acquired through the Merger. Excluding the impact of the Merger, cost of monitoring and related services revenue increased 6.3% due to increases in service expense and increased wages and
related costs. These costs generally relate to the cost of providing monitoring service and include the costs of monitoring, billing, customer service and field operations. Cost of monitoring and
related services revenue as a percentage of the related revenue increased to 29.7% in 2007 from 28.9% in 2006 due to an increase in commercial customers with lower margins as well as increased
customers selecting cellular phone back-up at a lower margin. See "Monitoring and Related Services Margin," above, for additional information related to the increase in the cost of
monitoring and related services revenue.

Cost of installation and other revenueincludes $16.9 million in amortization of previously deferred customer acquisition costs in
2007 compared to $11.9 million in 2006. We also experienced a $5.5 million increase in cost of installation and other revenue for our commercial sales in 2007 compared to 2006, related
to the increase in revenue. Cost of installation and other revenue consists primarily of
equipment and labor charges to install alarm systems, CCTV systems, fire alarms and card access control systems sold to our customers, as well as amortization of previously deferred customer
acquisition costs.

Selling expenseincludes $16.0 million in amortization of previously deferred customer acquisition costs in 2007 compared to
$12.0 million in 2006. Other selling expenses have increased over 2006 levels by approximately $2.0 million due to increases in wages, benefits, commissions and other expenses related to
an increase in commercial sales activities.

General and administrative expenseincreased 18.2% in 2007 compared to 2006. Increases in salaries and related expense of
$5.6 million and $2.4 million in professional fees were primarily related to the Merger. General and administrative expense as a percent of revenue decreased to 22.8% in 2007 from 23.8%
in 2006 as a result of increased scale arising from the Merger.

Merger-related costsin 2007 were primarily for severance and retention payments to employees of IASG.

Recapitalization costsin 2006 include approximately $1.2 million in fees to third party consultants in connection with the
amendment to the Senior Credit Agreement and approximately $3.2 million related to the compensatory make-whole payment described in "Significant
ActivitiesRecapitalization," above.

40

---



Amortization of intangibles and depreciationexpense in 2007 includes amortization of customer accounts on an accelerated basis and
depreciation of fixed assets on a straight-line basis over the useful life of the asset. Annual amortization expense of customer accounts increased in 2007 primarily due to the Merger.

2006 Compared to 2005.Retail had a net decrease of 9,145 customers in 2006 compared to a net
decrease of 16,709 customers in 2005. The average customer base was 511,261 for 2006 compared to 524,188 for 2005.

Monitoring and related service revenueincreased 1.3% in 2006 compared to 2005. We believe our focus on customer retention coupled with
price increases and growth in our commercial customer base
contributed to the increase. This revenue consists primarily of contractual revenue derived from providing monitoring and maintenance service.

Installation and other revenueincludes $7.2 million in amortization of previously deferred revenue in 2006 compared to
$3.6 million and $0.8 million for the post-push down and pre-push down periods in 2005, respectively. In 2006, we experienced a $3.2 million increase in
commercial sales arrangements which result in immediate revenue recognition. Installation and other revenue is generated from our internal installations of new alarm systems and consists primarily of
sales of burglar alarms, CCTV systems, fire alarms and card access control systems to commercial customers, as well as amortization of previously deferred revenue.

Cost of monitoring and related services revenueincreased 2.2% in 2006 compared to 2005. These costs generally relate to the cost of
providing monitoring service and include the costs of monitoring, billing, customer service and field operations. Cost of monitoring and related services revenue as a percentage of the related revenue
increased to 28.9% in 2006 from 28.7% in 2005. See "Monitoring and Related Services Margin," above, for additional information related to the increase in the cost of monitoring and related services
revenue.

Cost of installation and other revenueincludes $11.9 million in amortization of previously deferred customer acquisition costs in
2006 compared to $5.6 million and $1.5 million for the post-push down and pre-push down periods in 2005, respectively. We also experienced a $1.8 million
increase in cost of installation and other revenue for our outright commercial sales in 2006 compared to 2005. Cost of installation and other revenue consists primarily of equipment and labor charges
to install alarm systems, CCTV systems, fire alarms and card access control systems sold to our customers, as well as amortization of previously deferred customer acquisition costs.

Selling expenseincludes $12.0 million in amortization of previously deferred customer acquisition costs in 2006 compared to
$5.9 million and $1.5 million for the post-push down and pre-push down periods in 2005, respectively. Other selling expenses have increased over 2005 levels by
approximately $3.7 million due to increases in wages, benefits, commissions and other expenses related to an increase in the number of sales managers and salespeople in our internal sales
force.

General and administrative expenseincreased slightly (less than 1.0%) in 2006 compared to 2005. An increase in bad debt expense of
$1.1 million was partially offset by a reduction in outside legal services of $0.9 million. In addition, share-based compensation, exclusive of those costs reflected as recapitalization
costs, of approximately $1.4 million was expensed in 2006 because we adopted SFAS 123R as of January 1, 2006. Expense related to share-based compensation was not required in 2005.
Share-based compensation costs and increases in other general and administrative expenses were offset by expense allocated to Multifamily for the cost of administrative functions absorbed by
Protection One Alarm Monitoring, Inc. as part of the Multifamily consolidation. The period January 1, 2005 through February 8, 2005 includes $0.4 million in retention bonus
expense. Excluding the impacts of share-based compensation in 2006 and of the retention bonus expense in 2005, general and administrative expenses declined approximately $0.6 million in 2006
compared to 2005.

41

---



Recapitalization costsin 2006 include approximately $1.2 million in fees to third party consultants in connection with the
amendment to the Senior Credit Agreement and approximately $3.2 million related to the compensatory make-whole payment described in "Significant
ActivitiesRecapitalization," above.

Change in control and debt restructuring costsfor the 2005 pre-push down period include $5.6 million in fees paid upon
completion of the restructuring as well as legal and other fees related to the debt restructuring.

Amortization of intangibles and depreciationexpense in 2006 includes amortization of customer accounts over a ten-year life
on an accelerated basis and depreciation of fixed assets on a straight-line basis over the useful life of the asset. Annual amortization expense of customer accounts has decreased in the
post-push down period due to a push down adjustment reducing the gross customer account asset being amortized.



We present the table below to show how the operating results of the Wholesale segment have changed over the periods presented. Next to each period's results of
operations, we provide the relevant percentage of total revenue so that you can make comparisons about the relative change in revenue and expenses. As a result of the push down accounting adjustments
described in "Significant ActivitiesPush Down Accounting Adjustments" above, the information in post-push down periods (years
ended December 31, 2007 and 2006 and period February 9, 2005 through December 31, 2005) and the pre-push down periods (period January 1, 2005 through
February 8, 2005) presented in the following table may not be comparable.

|                                                                         |                                                                                |   |        |        |      |       |   |       |        | February 9 through December 31, |       |   |       | January 1 through February 8, |     
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | - | ------ | ------ | ---- | ----- | - | ----- | ------ | ------------------------------- | ----- | - | ----- | ----------------------------- | ----
|
|
|
|Revenue                                                                  |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Monitoring and related services                                                |   | $      | 37,432 |      | 98.6  | % | $     | 11,117 |                                 | 100.0 | % | $     | 9,557                         |     
|                                                                         | Installation and other                                                         |   |        | 546    |      | 1.4   |   |       |       |                                 |      |   |       |                              |     
|                                                                         |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Total Revenue                                                                  |   |        | 37,978 |      | 100.0 |   |       | 11,117 |                                 | 100.0 |   |       | 9,557                         |     
|Cost of revenue (exclusive of amortization and depreciation shown below) |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Monitoring and related services                                                |   |        | 19,599 |      | 51.6  |   |       | 5,589  |                                 | 50.3  |   |       | 4,338                         |     
|                                                                         |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Total cost of revenue (exclusive of amortization and depreciation shown below) |   |        | 19,599 |      | 51.6  |   |       | 5,589  |                                 | 50.3  |   |       | 4,338                         |     
|Operating Expenses                                                       |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Selling expenses                                                               |   |        | 1,430  |      | 3.8   |   |       | 270    |                                 | 2.5   |   |       | 253                           |     
|                                                                         | General and administrative expenses                                            |   |        | 6,574  |      | 17.3  |   |       | 2,357  |                                 | 21.2  |   |       | 2,204                         |     
|                                                                         | Amortization of intangibles and depreciation expense                           |   |        | 6,274  |      | 16.5  |   |       | 795    |                                 | 7.1   |   |       | 810                           |     
|                                                                         |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|Total operating expenses                                                 |                                                                                |   | 14,278 |        | 37.6 |       |   | 3,422 |        | 30.8                            |       |   | 3,267 |                               | 34.2
|                                                                         |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     
|Operating income                                                         |                                                                                | $ | 4,101  |        | 10.8 | %     | $ | 2,106 |        | 18.9                            | %     | $ | 1,952 |                               | 20.4
|                                                                         |                                                                                |   |        |        |      |       |   |       |        |                                 |       |   |       |                               |     

42

---



2007 Compared to 2006.Wholesale had a net increase of 670,978 monitored sites in
2007, including 597,478 acquired in the Merger, compared to a net increase of 15,263 monitored sites in 2006. The weighted average number of monitored sites was 679,044 for 2007 compared to 186,554
for 2006.

Further
analysis of the change in the Wholesale base of monitored sites is shown in the table below.

2007

2006

2005Beginning Balance, January 1,

194,185

178,922

167,061Customer additions, excluding additions from Merger

209,957

49,838

43,954Customer additions from Merger

597,478



Customer losses

(136,107
)
(29,812
)
(31,971
)Other adjustments

(350
)
(4,763
)
(122
)Ending Balance, December 31,

865,163

194,185

178,922


For
a roll-forward of Wholesale segment RMR, please see the segment table in "Industry MetricsRecurring Monthly
Revenue," above.

Monitoring and related service revenueincreased significantly in 2007 compared to 2006 primarily due to the Merger which resulted in
approximately $25.3 million additional revenue. Excluding the impact of the Merger, monitoring and related services revenue increased approximately 9.2%. This revenue consists primarily of
contractual revenue derived from providing monitoring services to Wholesale customers and dealers.

Installation and other revenuerepresents interest income and loan fees generated from our dealer loan program.

Cost of monitoring and related services revenuegenerally relates to the cost of providing monitoring service including the costs of
monitoring and dealer care. These costs increased approximately $13.3 million due to the Merger and the cost of monitoring and related services revenue as a percentage of related revenue
increased to 52.4% in 2007 from 50.3% in 2006. We are in the process of aligning the infrastructure acquired in the Merger with our systems in an effort to improve operating efficiency. Excluding the
impact of the Merger, cost of monitoring and related services revenue increased approximately 13.3%.

Selling expensein 2007 increased compared to 2006 due to the Merger and the resulting significant increase in revenue. Wages and related
expense increased $0.6 million and trade show expense increased approximately $0.1 million.

General and administrative expenseincreased by $4.2 million primarily due to the addition of $4.0 million in costs as a
result of the Merger. As a percentage of revenue, general and administrative expense decreased to 17.3% in 2007 from 21.2% in 2006 due to economies of scale gained through the Merger.

Amortization of intangibles and depreciationexpense increased significantly in 2007 compared to 2006 as a result of increased
amortization of $5.6 million related to the acquisition of dealer relationships in the Merger. Excluding the impact of the Merger, amortization of intangibles and depreciation expense decreased
approximately 14.0%.

2006 compared to 2005.We had a net increase of 15,263 monitored sites in 2006, compared to a net
increase of 11,861 monitored sites in 2005. The average number of monitored sites was 186,554 for 2006 compared to 172,992 for 2005.

Monitoring and related service revenueincreased 4.2% in 2006 compared to 2005. This revenue consists primarily of contractual revenue
derived from providing monitoring services to Wholesale customers and dealers.

43

---



Cost of monitoring and related services revenueincreased 15.4% in 2006 compared to 2005. These costs include the costs of monitoring,
billing and dealer care. Cost of monitoring and related services revenue as a percentage of the related revenue increased to 50.3% in 2006 from 45.4% in 2005. These costs increased in 2006 due to
additional labor costs associated with monitoring and billing system conversion. See "Monitoring and Related Services Margin," above, for additional information related to the increase in the cost of
monitoring and related services revenue.

Selling expensewas $0.3 million in 2006, which was consistent with 2005.

General and administrative expensedecreased $0.1 million in 2006 compared to 2005. General and administrative expense as a
percentage of revenue decreased to 21.2% in 2006 from 23.2% in 2005 due to the increase in revenue.

Amortization of intangibles and depreciationexpense decreased by less than $0.1 million in 2006 compared to 2005 and includes
depreciation of fixed assets on a straight-line basis over the useful life of the asset. Annual amortization expense of customer accounts has decreased in the post-push down
period due to a push down adjustment reducing the gross customer account asset that is being amortized.



The following table provides information for comparison of the Multifamily operating results for the periods presented. Next to each year's results of operations,
we provide the relevant percentage of total revenue so that comparisons about the relative change in revenue and expenses can be made. As a result of the push down accounting adjustments described in
"Significant ActivitiesPush Down Accounting Adjustments" above, the post-push down results for the years ended
December 31, 2007 and 2006 and period February 9, 2005 through December 31, 2005 may not be comparable to the pre-push down results for the period January 1,
2005 through February 8, 2005.

|                                                                         |                                                                                |   |       |        |      |       |   |       |        | February 9 through
December 31, |       |   |       | January 1 through
February 8, |     
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | - | ----- | ------ | ---- | ----- | - | ----- | ------ | ------------------------------- | ----- | - | ----- | ----------------------------- | ----
|
|
|
|Revenue                                                                  |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Monitoring and related services                                                |   | $     | 31,935 |      | 98.6  | % | $     | 33,898 |                                 | 98.5  | % | $     | 31,618                        |     
|                                                                         | Installation and other                                                         |   |       | 468    |      | 1.4   |   |       | 498    |                                 | 1.5   |   |       | 88                            |     
|                                                                         |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Total Revenue                                                                  |   |       | 32,403 |      | 100.0 |   |       | 34,396 |                                 | 100.0 |   |       | 31,706                        |     
|Cost of revenue (exclusive of amortization and depreciation shown below) |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Monitoring and related services                                                |   |       | 7,710  |      | 23.8  |   |       | 7,683  |                                 | 22.3  |   |       | 6,745                         |     
|                                                                         | Installation and other                                                         |   |       | 2,503  |      | 7.7   |   |       | 1,610  |                                 | 4.7   |   |       | 671                           |     
|                                                                         |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Total cost of revenue (exclusive of amortization and depreciation shown below) |   |       | 10,213 |      | 31.5  |   |       | 9,293  |                                 | 27.0  |   |       | 7,416                         |     
|Operating Expenses                                                       |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Selling expenses                                                               |   |       | 1,424  |      | 4.4   |   |       | 2,050  |                                 | 6.0   |   |       | 1,913                         |     
|                                                                         | General and administrative expenses                                            |   |       | 7,913  |      | 24.4  |   |       | 6,939  |                                 | 20.2  |   |       | 8,313                         |     
|                                                                         | Corporate consolidation costs                                                  |   |       |       |      |      |   |       | 20     |                                 |      |   |       | 2,339                         |     
|                                                                         | Amortization of intangibles and depreciation expense                           |   |       | 6,289  |      | 19.4  |   |       | 6,429  |                                 | 18.7  |   |       | 5,788                         |     
|                                                                         |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|                                                                         | Total operating expenses                                                       |   |       | 15,626 |      | 48.2  |   |       | 15,438 |                                 | 44.9  |   |       | 18,353                        |     
|                                                                         |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     
|Operating income                                                         |                                                                                | $ | 6,564 |        | 20.3 | %     | $ | 9,665 |        | 28.1                            | %     | $ | 5,937 |                               | 18.7
|                                                                         |                                                                                |   |       |        |      |       |   |       |        |                                 |       |   |       |                               |     

44

---



2007 compared to 2006.Multifamily had a net decrease of 15,396 monitored sites in
2007 as compared to a net decrease of 20,541 monitored sites in 2006 (excluding conversion adjustments). The "Conversion adjustments" line item in the table below reflects the impact of the conversion
of our billing system to our new technology platform, MAS. Monitored sites are defined differently in the new system and the result is a decrease in the number of monitored sites in the new system.
Multifamily identified a 1,129 decrease in the number of monitored sites in 2005 and, in the second quarter of 2006, identified the existence of duplicate accounts resulting in an additional decrease
of 4,362 monitored sites for a total decrease of 5,491 monitored sites from the conversion. There was no impact on either revenue or accounts receivable resulting from conversion adjustments. The
average number of Multifamily monitored sites was 285,441 for 2007 compared to 305,591 for 2006. The change in Multifamily's base of monitored sites for the period is shown below.

2007

2006

2005Beginning Balance, January 1,

293,139

318,042

330,510Customer additions

8,277

14,726

9,444Customer losses

(24,141
)
(35,267
)
(20,783
)Other

468



Conversion adjustments



(4,362
)
(1,129
)Ending Balance, December 31,

277,743

293,139

318,042


For
a roll-forward of Multifamily segment RMR, please see the segment table in "Industry MetricsRecurring Monthly
Revenue," above.

Monitoring and related services revenuedecreased 5.8% in 2007 compared to 2006 as a result of the decline in the customer base from
cancellations in excess of additions. Low penetration of land-line services in rental units led to a large decline in installation backlog during 2006 and, as a result, less installations
in 2007. While our sales increased in 2007 due to the availability of a product that utilizes wireless technology, our installation backlog has also increased as a result of the long lead time
involved with new property construction. This revenue consists primarily of contractual revenue derived from providing monitoring and maintenance service.

Installation and other revenueincludes $0.2 million in amortization of previously deferred revenue in 2007 and 2006. This revenue
consists primarily of amortization of previously deferred revenue associated with the installation of alarm systems and revenue from the sale of access control systems.

Cost of monitoring and related services revenueincreased slightly (less than 1%) in 2007 compared to 2006. This cost includes monitoring,
billing, customer service and field operations related to providing our monitoring services. Cost of monitoring and related services revenue as a percentage of the related revenue increased to 24.1%
in 2007 from 22.7% in 2006 due to the decline in revenue.

Cost of installation and other revenueincludes $2.0 million in amortization of previously deferred customer acquisition costs in
2007 compared to $1.1 million in 2006. This cost also includes the cost to install access control systems.

Selling expensedecreased by approximately $0.6 million and includes approximately $0.1 million in amortization of
previously deferred customer acquisition costs in 2007 compared to less than $0.05 million in 2006. Other selling expense decreased due to the elimination of the Vice President of Sales
position in 2007. Responsibilities for this position, in addition to oversight of field service and installation personnel, were transitioned to a new Senior Vice President position, which is
classified as general and administrative expense.

45

---



General and administrative expenseincreased approximately $1.0 million or 14.0% in 2007 compared to 2006. Increases in wages and
related expense, travel and professional services were primarily responsible for the increase, including amounts related to the new Senior Vice President position described in "Selling expense,"
above.

Corporate consolidation costsin 2006 include severance and retention payments for those employees whose responsibilities were
consolidated into the parent company.

Amortization of intangibles and depreciation expenserepresents amortization of customer accounts over a nine-year life and
depreciation of fixed assets over their useful life on a straight-line basis.

2006 compared to 2005.Excluding conversion adjustments described above, we had a net decrease of
20,541 monitored sites in 2006 compared to a net decrease of 11,339 monitored sites in 2005. This decrease is due primarily to fewer monitored site additions, which did not replace sites lost due to
attrition. Demand for our services from owners and managers of multifamily properties was negatively affected by the increasing preference of occupants of multifamily units to subscribe only for
cellular telephone services and not for traditional telephone service, which our alarm systems have historically used to transport alarm signals to our monitoring center. The average number of
monitored sites was 305,591 for 2006 compared to 324,276 for 2005.

Monitoring and related services revenuedecreased 4.5% in 2006 compared to 2005 as a result of the decline in the customer base. This
revenue consists primarily of contractual revenue derived from providing monitoring and maintenance service.

Installation and other revenueincludes $0.2 million in amortization of previously deferred revenue in 2006 compared to
$0.1 million and $0.2 million for the post-push down and pre-push down periods in 2005, respectively. This revenue consists primarily of amortization of
previously deferred revenue associated with the installation of alarm systems and revenue from the sale of access control systems.

Cost of monitoring and related services revenueincreased 2.2% in 2006 compared to 2005. This cost includes monitoring, billing, customer
service and field operations related to providing our monitoring services. Cost of monitoring and related services revenue as a percentage of the related revenue increased to 22.7% in 2006 from 21.2%
in 2005.

Cost of installation and other revenueincludes $1.1 million in amortization of previously deferred customer acquisition costs in
2006 compared to $0.6 million and $0.7 million in the post-push down and pre-push down periods in 2005, respectively. This cost also includes the cost to install
access control systems.

Selling expenseincludes approximately $44.0 thousand in amortization of previously deferred customer acquisition costs in 2006
compared to $28.0 thousand and $36.0 thousand for the post-push down and pre-push down periods in 2005, respectively. Other selling expense decreased
approximately 5.1% in 2006 compared to 2005 due in part to corporate consolidation efforts.

General and administrative expensedecreased approximately 26.9% in 2006 compared to 2005 primarily due to corporate consolidation efforts
undertaken in the fall of 2005.

Corporate consolidation costsinclude severance and retention payments for those employees whose responsibilities were consolidated into
the parent company.

Amortization of intangibles and depreciation expenserepresents amortization of customer accounts over a nine-year life and
depreciation of fixed assets over their useful life on a straight-line basis.

46

---



Liquidity and Capital Resources



We expect to generate cash flow in excess of that required for operations, for interest payments and for principal payments required under the Senior Credit
Agreement. On March 14, 2008, we borrowed approximately $110.3 million under a new unsecured term loan facility to allow us to redeem all of the Senior Subordinated Notes. The Unsecured
Term Loan bears interest at the prime rate plus 11.5% per annum and matures in 2013. Using the proceeds from the Unsecured Term Loan and available cash on hand, we deposited with the Trustee an amount
sufficient to redeem all of the Senior Subordinated Notes. Accordingly, our obligations under the Senior Subordinated Notes Indenture were satisfied and discharged effective March 14, 2008. The
Senior Subordinated Notes were called for redemption on March 14, 2008 and will be redeemed effective April 14, 2008 as provided by the Senior Subordinated Notes Indenture. Our senior
credit facility would have been subject to an early maturity date of June 30, 2008 had the Senior Subordinated Notes not been refinanced.

On
April 26, 2006, we amended and restated our Senior Credit Agreement increasing our outstanding term loan borrowings under the senior credit facility by approximately
$66.8 million to $300.0 million. The applicable margin with respect to the amended term loan was reduced by 0.5% to 1.5% for base rate borrowing and 2.5% for Eurodollar borrowing.

On
March 13, 2007, we further amended our Senior Credit Agreement. Pursuant to the Senior Credit Agreement amendment, the lenders, among other things, consented to: (1) the
consummation of the Merger, (2) the issuance by Protection One Alarm Monitoring, Inc. ("POAMI") of the 12% Senior Secured Notes due November 2011 (the "Senior Secured Notes"),
(3) the guarantee by IASG and its subsidiaries of our obligations under the Senior Credit Agreement, (4) the guarantee and granting of second priority security interests by Protection
One, Inc. and its subsidiaries to the holders of the Senior Secured Notes, (5) the adjustment of certain financial covenants contained in the Senior Credit Agreement and (6) the
amendment of certain negative covenants contained in the Senior Credit Agreement in order to reflect the increased size of the loan parties and activities of IASG. The Senior Credit Agreement
amendment also reduced the applicable margin with respect to term loans under the Senior Credit Agreement by 0.25% to 1.25% for base rate borrowing and 2.25% for Eurodollar borrowing. Furthermore,
pursuant to the Senior Credit Agreement amendment, we may request the establishment of one or more new term loan commitments in an aggregate amount of up to $50 million, provided that the
administrative agent may decline to arrange such new term loan commitments and any lender may decline to provide such new term loan commitments.

The
senior credit facility continues to include a $25.0 million revolving credit facility, of which approximately $22.2 million remains available as of March 10,
2008 after reducing total availability by approximately $2.8 million for an outstanding letter of credit. We intend to use any other proceeds from borrowings under the senior credit facility,
from time to time, for working capital and general corporate purposes. The revolving credit facility matures in 2010 and the term loan matures in 2012.

In
an effort to limit our exposure to interest rate risk on our variable rate senior credit facility, we purchased interest rate caps in the aggregate amount of $0.9 million
during the second quarter of 2005. Our objective is to protect against increases in interest expense caused by fluctuation in LIBOR. One interest rate cap provides protection on a $75 million
tranche of our long term debt over a five-year period ending May 24, 2010 if LIBOR exceeds 6%. A second interest rate cap provides protection on a separate $75 million
tranche of our long term debt over a three-year period ending May 23, 2008 if LIBOR exceeds 5%.

The
Unsecured Term Loan Agreement, the Senior Secured Notes Indenture and the Senior Credit Agreement contain certain covenants and restrictions, including with respect to our ability to
incur debt and pay dividends, based on earnings before interest, taxes, depreciation and amortization, or EBITDA.

47

---



The
definition of EBITDA varies between the Unsecured Term Loan Agreement, the Senior Secured Notes Indenture and the Senior Credit Agreement. EBITDA is generally derived by adding to income (loss)
before income taxes, the sum of interest expense, depreciation and amortization expense, including amortization of deferred customer acquisition costs less amortization of deferred customer
acquisition revenue. However, under the varying definitions, additional adjustments are sometimes required.

Our
amended and restated Senior Credit Agreement, Senior Secured Notes Indenture and Unsecured Term Loan Agreement contain the financial covenants and current tests, respectively,
summarized below:

Debt Instrument

Financial Covenant and Current TestSenior credit facility

Consolidated total debt on last day of period/consolidated EBITDA for most recent four fiscal quarters less than 6.0 to 1.0 andConsolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters greater than 1.75 to 1.0Senior Secured Notes

Current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0Unsecured Term Loan

Consolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters greater than 2.25 to 1.0


At
December 31, 2007, we were in compliance with the financial covenants and other maintenance tests for the senior credit facility and Senior Subordinated Notes. The interest
coverage ratio incurrence test under each of the Senior Secured Notes Indenture and Unsecured Term Loan is an incurrence based test (not a maintenance test), and we cannot be deemed to be in default
solely due to failure to meet the interest coverage ratio test. Failure to meet the interest coverage ratio test could result in restriction on our ability to incur additional ratio indebtedness;
however, we may borrow additional funds under other permitted indebtedness provisions of the Senior Secured Notes Indenture, including all amounts currently available under our revolving credit
facility.

Our
obligations under the Senior Subordinated Notes Indenture were satisfied and discharged effective March 14, 2008. The Senior Subordinated Notes were subject to a financial
covenant of current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0.

Our
outstanding debt instruments also restrict our ability to pay dividends to stockholders, but do not otherwise restrict our ability to fund cash obligations.



Through June 30, 2008, we expect to remain a partner through our Retail segment in a marketing alliance with AT&T (through its acquisition of BellSouth)
that offers monitored security services to the residential, single-family market and to businesses in 17 of the larger metropolitan markets in the nine-state AT&T region of the
southeastern United States. We pay AT&T a commission for each new contract generated in the nine-state region, regardless of whether the new contract came directly from an AT&T lead, as
well as a recurring royalty based on a percentage of recurring charges. Upon termination of the agreement and for a period of three years following termination of the marketing alliance, unless a
one-time payment is agreed to by the parties, we are required to continue to pay a recurring royalty to AT&T for active customers added during the term of the existing agreement. We will,
however, no longer be required to pay AT&T a commission for new contracts added in the

48

---



nine-state
region. We expect out of pocket costs for the re-branding will approximate $1.0 million, all of which we expect to incur during 2008.



Operating Cash Flows for the Year Ended December 31, 2007.Our operating activities provided
net cash flows of $57.7 million, $49.5 million, $40.4 million and $3.7 million for the years ended December 31, 2007 and 2006, and for the periods February 9,
2005 through December 31, 2005 and January 1, 2005 through February 8, 2005, respectively. Working capital was $5.6 million as of December 31, 2007 and was a deficit
of $5.0 million and $5.1 million as of December 31, 2007, 2006 and 2005, respectively. Cash interest payments were $47.1 million for the year ended December 31, 2007
compared to $30.9 million, $25.2 million, $6.5 million for the year ended December 31, 2006 and the periods February 9, 2005 through December 31, 2005 and
January 1, 2005 through February 8, 2005, respectively. We made Merger-related payments, primarily severance, of $4.3 million in 2007. We made recapitalization payments of
$4.5 million in 2006. We made corporate consolidation, change in control, debt restructuring and retention and severance payments of $2.3 million and $9.1 million for the periods
February 9, 2005 through December 31, 2005 and January 1, 2005 through February 8, 2005, respectively.

Investing Cash Flows for the Year Ended December 31, 2007.We used a net $34.7 million
for our investing activities for the year ended December 31, 2007. We invested a net $31.1 million in cash to install and acquire new accounts, $8.1 million to acquire fixed
assets, and $4.4 million in non-monitored leased equipment. We decreased restricted cash by $0.2 million, received $5.8 million from the sale of accounts and other
assets, which is primarily due to proceeds of $5.4 million related to the assets and liabilities of the IASG business that were transferred prior to the Merger, and acquired a net
$2.9 million from the Merger. We used a net $36.7 million for our investing activities for the year ended December 31, 2006. We invested a net $29.4 million in cash to
install and acquire new accounts, invested $4.6 million to acquire fixed assets, invested $2.8 million in non-monitored leased equipment, increased restricted cash by
$0.2 million and received $0.3 million from the sale of accounts and other assets. We used a net $24.2 million and $2.5 million for our investing activities in the periods
February 9, 2005 through December 31, 2005 and January 1, 2005 through February 8, 2005, respectively. We invested a net $22.5 million in cash to install and acquire
new accounts, invested $5.7 million to acquire fixed assets, invested $0.8 million in non-monitored leased equipment, increased our restricted cash by $0.6 million and
we received an aggregate of $5.4 million from the disposition of marketable securities and other assets and from the redemption of preferred stock in the period February 9, 2005 through
December 31, 2005. We invested a net $2.2 million in cash to install and acquire new accounts and $0.3 million to acquire fixed assets in the period January 1, 2005 through
February 8, 2005.

Financing Cash Flows for the Year Ended December 31, 2007.Financing activities used
$6.6 million in the year ended December 31, 2007. We used $4.8 million to retire senior credit facility and capital lease debt and $1.8 million for debt and stock issuance
costs. Financing activities used a net $8.1 million in the year ended December 31, 2006. We used $2.8 million to retire debt, distributed $70.5 million to shareholders and
$1.3 million to vested option holders, used $0.3 million for debt issuance costs and received $66.8 million in proceeds from additional borrowings under our senior credit
facility. Financing activities used a net $50.1 million in cash in the period February 9, 2005 through December 31, 2005. We used $293.7 million to retire debt,
$7.2 million for debt and stock issuance costs, $0.9 million for interest rate
caps and received $250.0 million for our new senior credit facility and $1.8 million in proceeds from the sale of common stock.

Capital Expenditures.As discussed above, we made capital expenditures of approximately
$43.6 million in 2007. Of such amount we invested approximately $31.1 million in net customer

49

---



acquisition
costs, $4.4 million in non-monitored leased equipment and $8.1 million for fixed assets. Assuming we have available funds, capital expenditures for 2008 and 2009
are expected to be approximately $57.0 million and $61.4 million, respectively, of which approximately $10.1 million and $8.9 million, respectively, would be used for fixed
asset purchases, with the balance to be used for customer acquisition costs and non-monitored leased equipment. These estimates are prepared for planning purposes and are revised from time
to time. Actual expenditures for these and other items not presently anticipated may vary materially from these estimates during the course of the years presented.

Off Balance Sheet Arrangements

We had no off-balance sheet arrangements at December 31, 2007, other than as discussed below.

Material Commitments

We had the following future, material, long-term commitments as of December 31, 2007:

|                                                                           |  | Payment Due by Period
|-------------------------------------------------------------------------- |  | ---------------------
|
|
|At December 31, 2007:                                                      |  |                      
|Contractual Obligations                                                    |  |                      
|Long-Term Debt Obligations(a)                                              |  | $                    
|Interest Obligations on Long-Term Debt and Capital Lease Obligations(a)(b) |  |                      
|Operating Leases Obligations                                               |  |                      
|Capital Leases Obligations                                                 |  |                      
|Purchase Obligations(c)                                                    |  |                      
|                                                                           |  |                      
|Total                                                                      |  | $                    
|                                                                           |  |                      

---

The
table below shows our total commercial commitments and the expected expiration per period:

|                             |                              | Amount of Commitment Expiration Per Period
|---------------------------- | ---------------------------- | ------------------------------------------
|
|
|At December 31, 2007:        |                              |                                           
|Other Commercial Commitments |                              |                                           
|Standby letters of credit    |                              |                                           
|                             |                              |                                           
|                             | Total commercial commitments |                                           
|                             |                              |                                           

50

---





Credit Ratings

As of March 10, 2008, our public debt was rated as follows:

Senior credit
facility

8.125% Senior
Subordinated
Notes Due 2009

12.0% Senior
Subordinated
Notes Due 2009

OutlookS & P

BB

B-

B+

NegativeMoody's

Ba3

Caa1

B3

Stable


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our senior credit facility is a variable rate debt instrument, and as of March 10, 2008, we had borrowings of $294.8 million outstanding. Interest
rate caps purchased in the second quarter of 2005 cap LIBOR (i) for three years ending May 23, 2008 at 5.0% on a $75 million tranche of borrowings and (ii) for five years
ending May 24, 2010 at 6% on a separate $75 million tranche. Depending on the level of LIBOR, a 100 basis point change in the debt benchmark rate would affect pretax income as
indicated in the table below.

LIBOR

Increase in pretax income
due to 100bp decrease in
interest rates

Decrease in pretax income
due to 100bp increase in
interest rates(dollars in millions)Below 4.0%

$
2.9

$
(2.9
)4.5%

$
2.9

$
(2.6
)5.0%

$
2.9

$
(2.2
)5.5%

$
2.6

$
(1.8
)6.0%

$
2.2

$
(1.4
)


51

---





ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Protection One, Inc
Lawrence, Kansas

We
have audited the accompanying consolidated balance sheets of Protection One, Inc and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated
statements of operations and comprehensive loss, stockholders' equity (deficiency in assets) and cash flows for the years ended December 31, 2007, 2006 and for the periods from
February 9, 2005 through December 31, 2005 and January 1, 2005 through February 8, 2005. Our audits also included the financial statement schedule listed in the Index at
Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Protection One, Inc and subsidiaries as of December 31,
2007 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2007 and 2006, and for the periods from February 9, 2005 through
December 31, 2005 and January 1, 2005 through February 8, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2007, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 17, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.

As
discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for share-based compensation upon its adoption of Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment," on January 1, 2006.

/s/DELOITTE AND TOUCHE LLP

Kansas City, Missouri
March 17, 2008

52

---



PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except for per share amounts)

|                                                                                                                                                                 |                                                                                                         | December 31, |         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------ | --------
|
|ASSETS                                                                                                                                                           |                                                                                                         |              |         
|Current assets:                                                                                                                                                  |                                                                                                         |              |         
|                                                                                                                                                                 | Cash and cash equivalents                                                                               |              | $       
|                                                                                                                                                                 | Accounts receivable (net of allowance of $5,860 and $7,258 at December 31, 2007 and 2006, respectively) |              |         
|                                                                                                                                                                 | Notes receivable                                                                                        |              |         
|                                                                                                                                                                 | Inventories, net                                                                                        |              |         
|                                                                                                                                                                 | Prepaid expenses                                                                                        |              |         
|                                                                                                                                                                 | Other                                                                                                   |              |         
|                                                                                                                                                                 |                                                                                                         |              |         
|                                                                                                                                                                 | Total current assets                                                                                    |              |         
|Restricted cash                                                                                                                                                  |                                                                                                         |              | 2,779   
|Property and equipment, net                                                                                                                                      |                                                                                                         |              | 33,770  
|Customer accounts, net                                                                                                                                           |                                                                                                         |              | 282,396 
|Dealer relationships, net                                                                                                                                        |                                                                                                         |              | 41,565  
|Other intangibles, net                                                                                                                                           |                                                                                                         |              | 2,099   
|Goodwill                                                                                                                                                         |                                                                                                         |              | 41,604  
|Trade name                                                                                                                                                       |                                                                                                         |              | 28,612  
|Notes receivable (net of current portion)                                                                                                                        |                                                                                                         |              | 3,267   
|Deferred customer acquisition costs                                                                                                                              |                                                                                                         |              | 130,881 
|Other                                                                                                                                                            |                                                                                                         |              | 10,079  
|                                                                                                                                                                 |                                                                                                         |              |         
|Total Assets                                                                                                                                                     |                                                                                                         | $            | 672,717 
|                                                                                                                                                                 |                                                                                                         |              |         
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)                                                                                                      |                                                                                                         |              |         
|Current liabilities:                                                                                                                                             |                                                                                                         |              |         
|                                                                                                                                                                 | Current portion of long-term debt and capital leases                                                    |              | $       
|                                                                                                                                                                 | Accounts payable                                                                                        |              |         
|                                                                                                                                                                 | Accrued liabilities                                                                                     |              |         
|                                                                                                                                                                 | Deferred revenue                                                                                        |              |         
|                                                                                                                                                                 |                                                                                                         |              |         
|                                                                                                                                                                 | Total current liabilities                                                                               |              |         
|Long-term debt and capital leases, net of current portion                                                                                                        |                                                                                                         |              | 521,180 
|Deferred customer acquisition revenue                                                                                                                            |                                                                                                         |              | 79,742  
|Deferred tax liability                                                                                                                                           |                                                                                                         |              | 1,293   
|Other liabilities                                                                                                                                                |                                                                                                         |              | 2,909   
|                                                                                                                                                                 |                                                                                                         |              |         
|Total Liabilities                                                                                                                                                |                                                                                                         |              | 695,234 
|                                                                                                                                                                 |                                                                                                         |              |         
|Commitments and contingencies (see Note 12)                                                                                                                      |                                                                                                         |              |         
|Stockholders' equity:                                                                                                                                            |                                                                                                         |              |         
|Preferred stock, $.10 par value, 5,000,000 shares authorized                                                                                                     |                                                                                                         |              |        
|Common stock, $.01 par value, 150,000,000 shares authorized, 25,306,913 and 18,239,953 shares issued and outstanding at December 31, 2007 and 2006, respectively |                                                                                                         |              | 253     
|Additional paid-in capital                                                                                                                                       |                                                                                                         |              | 179,352 
|Accumulated other comprehensive loss                                                                                                                             |                                                                                                         |              | (530    
|Deficit                                                                                                                                                          |                                                                                                         |              | (201,592
|                                                                                                                                                                 |                                                                                                         |              |         
|                                                                                                                                                                 | Total stockholders' equity (deficiency in assets)                                                       |              |         
|                                                                                                                                                                 |                                                                                                         |              |         
|Total Liabilities and Stockholders' Equity (Deficiency in Assets)                                                                                                |                                                                                                         | $            | 672,717 
|                                                                                                                                                                 |                                                                                                         |              |         

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

53

---



PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Dollar amounts in thousands, except for per share amounts)

|                                                                          |                                                                                                                          |                          |         |         |         | February 9
December 31, |         |         |         | January 1
February 8, |        
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------ | ------- | ------- | ------- | ------------------------ | ------- | ------- | ------- | ---------------------- | -------
|
|
|Revenue:                                                                  |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Monitoring and related services                                                                                          |                          | $       | 313,330 |         | $                        | 247,370 |         | $       | 219,475                |        
|                                                                          | Installation and other                                                                                                   |                          |         | 34,541  |         |                          | 23,182  |         |         | 15,006                 |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Total revenue                                                                                                            |                          |         | 347,871 |         |                          | 270,552 |         |         | 234,481                |        
|Cost of revenue (exclusive of amortization and depreciation shown below): |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Monitoring and related services                                                                                          |                          |         | 99,835  |         |                          | 71,823  |         |         | 62,243                 |        
|                                                                          | Installation and other                                                                                                   |                          |         | 40,870  |         |                          | 29,564  |         |         | 18,816                 |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Total cost of revenue (exclusive of amortization and depreciation shown below)                                           |                          |         | 140,705 |         |                          | 101,387 |         |         | 81,059                 |        
|Operating expenses:                                                       |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Selling                                                                                                                  |                          |         | 47,552  |         |                          | 41,003  |         |         | 28,856                 |        
|                                                                          | General and administrative (exclusive of $3.2 million of compensation costs included in recapitalization costs for 2006) |                          |         | 77,846  |         |                          | 62,913  |         |         | 57,158                 |        
|                                                                          | Merger-related costs                                                                                                     |                          |         | 4,344   |         |                          |        |         |         |                       |        
|                                                                          | Change in control and debt restructuring costs                                                                           |                          |         |        |         |                          |        |         |         |                       |        
|                                                                          | Corporate consolidation costs                                                                                            |                          |         |        |         |                          | 20      |         |         | 2,339                  |        
|                                                                          | Recapitalization costs                                                                                                   |                          |         |        |         |                          | 4,452   |         |         |                       |        
|                                                                          | Amortization and depreciation                                                                                            |                          |         | 62,064  |         |                          | 41,667  |         |         | 43,742                 |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|Total operating expenses                                                  |                                                                                                                          |                          | 191,806 |         |         | 150,055                  |         |         | 132,095 |                        |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Operating income (loss)                                                                                                  |                          |         | 15,360  |         |                          | 19,110  |         |         | 21,327                 |        
|Other expense (income):                                                   |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Interest expense                                                                                                         |                          |         | 49,486  |         |                          | 37,412  |         |         | 29,260                 |        
|                                                                          | Related party interest                                                                                                   |                          |         |        |         |                          |        |         |         | 1,951                  |        
|                                                                          | Interest income                                                                                                          |                          |         | (2,509  | )       |                          | (1,512  | )       |         | (577                   | )      
|                                                                          | Loss on retirement of debt                                                                                               |                          |         |        |         |                          |        |         |         | 6,657                  |        
|                                                                          | Other                                                                                                                    |                          |         | (90     | )       |                          | (52     | )       |         | (688                   | )      
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Total other expenses                                                                                                     |                          |         | 46,887  |         |                          | 35,848  |         |         | 36,603                 |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          |                                                                                                                          | Loss before income taxes |         |         | (31,527 | )                        |         | (16,738 | )       |                        | (15,276
|Income tax expense                                                        |                                                                                                                          |                          | 713     |         |         | 667                      |         |         | 312     |                        |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Net loss                                                                                                                 |                          | $       | (32,240 | )       | $                        | (17,405 | )       | $       | (15,588                | )      
|Other comprehensive income (loss), net of tax:                            |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|                                                                          | Reclassification adjustment for realized gain on marketable securities                                                   |                          |         |        |         |                          |        |         |         | (162                   | )      
|                                                                          | Unrealized loss on interest rate cap                                                                                     |                          |         | (212    | )       |                          | (211    | )       |         | (107                   | )      
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|Comprehensive loss                                                        |                                                                                                                          | $                        | (32,452 | )       | $       | (17,616                  | )       | $       | (15,857 | )                      |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|Basic and diluted per share information:                                  |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|Net loss per common share                                                 |                                                                                                                          | $                        | (1.37   | )       | $       | (0.95                    | )       | $       | (0.86   | )                      |        
|                                                                          |                                                                                                                          |                          |         |         |         |                          |         |         |         |                        |        
|Weighted average common shares outstanding (in thousands)                 |                                                                                                                          |                          | 23,525  |         |         | 18,233                   |         |         | 18,199  |                        |        

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

54

---



PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)

|                                                                                    |                                                                                                   |   |         |         |   | February 9
December 31, |         |   |         | January 1
February 8, |  
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | - | ------- | ------- | - | ------------------------ | ------- | - | ------- | ---------------------- | -
|
|
|Cash flows from operating activities:                                               |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|Net loss                                                                            |                                                                                                   | $ | (32,240 | )       | $ | (17,405                  | )       | $ | (15,588 | )                      |  
|Adjustments to reconcile net loss to net cash provided by operating activities:     |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Loss on retirement of debt                                                                        |   |         |        |   |                          |        |   |         | 6,657                  |  
|                                                                                    | (Gain) loss on sale of assets                                                                     |   |         | (224    | ) |                          | (244    | ) |         | (766                   | )
|                                                                                    | Amortization and depreciation                                                                     |   |         | 62,064  |   |                          | 41,667  |   |         | 43,742                 |  
|                                                                                    | Amortization of debt costs, discounts and premium                                                 |   |         | 6,878   |   |                          | 6,496   |   |         | 7,524                  |  
|                                                                                    | Amortization of deferred customer acquisition costs in excess of amortization of deferred revenue |   |         | 24,175  |   |                          | 17,573  |   |         | 8,489                  |  
|                                                                                    | Amortization of stock based compensation                                                          |   |         | 1,469   |   |                          | 1,408   |   |         |                       |  
|                                                                                    | Deferred income taxes                                                                             |   |         | (8      | ) |                          | 251     |   |         |                       |  
|                                                                                    | Provision for doubtful accounts                                                                   |   |         | 3,455   |   |                          | 3,099   |   |         | 1,664                  |  
|                                                                                    | Other                                                                                             |   |         | (90     | ) |                          | (135    | ) |         | (119                   | )
|Changes in assets and liabilities, net of effects of acquisitions and dispositions: |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Accounts receivable                                                                               |   |         | (8,307  | ) |                          | (2,256  | ) |         | (6,868                 | )
|                                                                                    | Notes receivable, net                                                                             |   |         | 2,817   |   |                          |        |   |         |                       |  
|                                                                                    | Other assets                                                                                      |   |         | 1,268   |   |                          | (3,363  | ) |         | 6,050                  |  
|                                                                                    | Accounts payable                                                                                  |   |         | (1,019  | ) |                          | 836     |   |         | (4,359                 | )
|                                                                                    | Deferred revenue                                                                                  |   |         | 5,204   |   |                          | 308     |   |         | 1,007                  |  
|                                                                                    | Other liabilities                                                                                 |   |         | (7,778  | ) |                          | 1,292   |   |         | (7,020                 | )
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Net cash provided by operating activities                                                         |   |         | 57,664  |   |                          | 49,527  |   |         | 40,413                 |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|Cash flows from investing activities:                                               |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Deferred customer acquisition costs                                                               |   |         | (59,953 | ) |                          | (58,495 | ) |         | (46,862                | )
|                                                                                    | Deferred customer acquisition revenue                                                             |   |         | 29,810  |   |                          | 29,073  |   |         | 24,360                 |  
|                                                                                    | Purchase of rental equipment                                                                      |   |         | (4,440  | ) |                          | (2,776  | ) |         | (772                   | )
|                                                                                    | Purchase of property and equipment                                                                |   |         | (8,064  | ) |                          | (4,557  | ) |         | (5,680                 | )
|                                                                                    | Purchases of new accounts                                                                         |   |         | (952    | ) |                          | (27     | ) |         |                       |  
|                                                                                    | Reduction of (additional investment in) restricted cash                                           |   |         | 257     |   |                          | (212    | ) |         | (631                   | )
|                                                                                    | Proceeds from disposition of assets and other                                                     |   |         | 5,751   |   |                          | 307     |   |         | 375                    |  
|                                                                                    | Net cash acquired in merger with IASG                                                             |   |         | 2,921   |   |                          |        |   |         |                       |  
|                                                                                    | Proceeds from disposition of marketable securities                                                |   |         |        |   |                          |        |   |         | 660                    |  
|                                                                                    | Proceeds from redemption of preferred stock                                                       |   |         |        |   |                          |        |   |         | 4,399                  |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Net cash used in investing activities                                                             |   |         | (34,670 | ) |                          | (36,687 | ) |         | (24,151                | )
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|Cash flows from financing activities:                                               |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Payments on long-term debt and capital leases                                                     |   |         | (4,790  | ) |                          | (2,839  | ) |         | (212,714               | )
|                                                                                    | Payments on credit facility                                                                       |   |         |        |   |                          |        |   |         | (81,000                | )
|                                                                                    | Distribution to shareholders                                                                      |   |         |        |   |                          | (70,490 | ) |         |                       |  
|                                                                                    | Make-whole payment to vested option holders                                                       |   |         |        |   |                          | (1,312  | ) |         |                       |  
|                                                                                    | Proceeds from long-term debt                                                                      |   |         |        |   |                          | 66,767  |   |         | 250,000                |  
|                                                                                    | Proceeds from sale of common stock                                                                |   |         |        |   |                          |        |   |         | 1,750                  |  
|                                                                                    | Payment for interest rate caps                                                                    |   |         |        |   |                          |        |   |         | (922                   | )
|                                                                                    | Debt and stock issue costs                                                                        |   |         | (1,805  | ) |                          | (259    | ) |         | (7,248                 | )
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Net cash used in financing activities                                                             |   |         | (6,595  | ) |                          | (8,133  | ) |         | (50,134                | )
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Net increase (decrease) in cash and cash equivalents                                              |   |         | 16,399  |   |                          | 4,707   |   |         | (33,872                | )
|Cash and cash equivalents:                                                          |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Beginning of period                                                                               |   |         | 24,600  |   |                          | 19,893  |   |         | 53,765                 |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | End of period                                                                                     |   | $       | 40,999  |   | $                        | 24,600  |   | $       | 19,893                 |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|Cash paid for interest                                                              |                                                                                                   | $ | 47,087  |         | $ | 30,949                   |         | $ | 25,209  |                        |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|Cash paid for taxes                                                                 |                                                                                                   | $ | 590     |         | $ | 295                      |         | $ | 438     |                        |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|Non-cash investing and financing activity:                                          |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  
|                                                                                    | Vehicle additions under capital leases                                                            |   | $       | 3,843   |   | $                        | 3,261   |   | $       |                       |  
|                                                                                    |                                                                                                   |   |         |         |   |                          |         |   |         |                        |  

Refer to Note 3, "IASG Acquisition," for discussion of non-cash activities related to acquisition.

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

55

---



PROTECTION ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
(Dollar amounts in thousands, except for share amounts)

|                                                       |  |            |  |   |     |   |   |         |   |   |            |   |   | Total
Stockholders'
Equity
(Deficiency in
Assets) |  
|------------------------------------------------------ |  | ---------- |  | - | --- | - | - | ------- | - | - | ---------- | - | - | ------------------------------------------------- | -
|
|
|
|January 1, 2005                                        |  | 1,965,654  |  | $ | 26  |   | $ | (34,612 | ) | $ | 1,380,728  |   | $ | (1,523,913                                        | )
|Net loss                                               |  |           |  |   |    |   |   |        |   |   |           |   |   | (11,405                                           | )
|                                                       |  |            |  |   |     |   |   |         |   |   |            |   |   |                                                   |  
|February 8, 2005                                       |  | 1,965,654  |  | $ | 26  |   | $ | (34,612 | ) | $ | 1,380,728  |   | $ | (1,535,318                                        | )
|Debt for equity exchange                               |  | 16,000,000 |  |   | 160 |   |   |        |   |   | 119,840    |   |   |                                                  |  
|Stock purchased                                        |  | 232,917    |  |   | 2   |   |   |        |   |   | 1,748      |   |   |                                                  |  
|Partial shares adjustment from reverse stock split     |  |           |  |   | (6  | ) |   |        |   |   | 6          |   |   |                                                  |  
|Push down accounting adjustments                       |  |           |  |   |    |   |   | 34,612  |   |   | (1,342,113 | ) |   | 1,398,959                                         |  
|Stock issuance costs                                   |  |           |  |   |    |   |   |        |   |   | (270       | ) |   |                                                  |  
|Unrealized lossmarketable securities, net of tax      |  |           |  |   |    |   |   |        |   |   |           |   |   |                                                  |  
|Unrealized lossinterest rate caps, net of tax         |  |           |  |   |    |   |   |        |   |   |           |   |   |                                                  |  
|Net loss                                               |  |           |  |   |    |   |   |        |   |   |           |   |   | (15,588                                           | )
|                                                       |  |            |  |   |     |   |   |         |   |   |            |   |   |                                                   |  
|December 31, 2005                                      |  | 18,198,571 |  | $ | 182 |   | $ |        |   | $ | 159,939    |   | $ | (151,947                                          | )
|Exercise of options                                    |  | 40,882     |  |   |    |   |   |        |   |   |           |   |   |                                                  |  
|Vesting of restricted stock units                      |  | 500        |  |   |    |   |   |        |   |   |           |   |   |                                                  |  
|Distribution to shareholders and vested option holders |  |           |  |   |    |   |   |        |   |   | (71,802    | ) |   |                                                  |  
|Amortization of stock compensation expense             |  |           |  |   |    |   |   |        |   |   | 1,408      |   |   |                                                  |  
|Unrealized lossinterest rate caps, net of tax         |  |           |  |   |    |   |   |        |   |   |           |   |   |                                                  |  
|Net loss                                               |  |           |  |   |    |   |   |        |   |   |           |   |   | (17,405                                           | )
|                                                       |  |            |  |   |     |   |   |         |   |   |            |   |   |                                                   |  
|December 31, 2006                                      |  | 18,239,953 |  | $ | 182 |   | $ |        |   | $ | 89,545     |   | $ | (169,352                                          | )
|Equity issued in Merger                                |  | 7,066,960  |  |   | 71  |   |   |        |   |   | 88,479     |   |   |                                                  |  
|Amortization of stock compensation expense             |  |           |  |   |    |   |   |        |   |   | 1,469      |   |   |                                                  |  
|Stock issue costs                                      |  |           |  |   |    |   |   |        |   |   | (141       | ) |   |                                                  |  
|Unrealized lossinterest rate caps, net of tax         |  |           |  |   |    |   |   |        |   |   |           |   |   |                                                  |  
|Net loss                                               |  |           |  |   |    |   |   |        |   |   |           |   |   | (32,240                                           | )
|                                                       |  |            |  |   |     |   |   |         |   |   |            |   |   |                                                   |  
|December 31, 2007                                      |  | 25,306,913 |  | $ | 253 |   | $ |        |   | $ | 179,352    |   | $ | (201,592                                          | )
|                                                       |  |            |  |   |     |   |   |         |   |   |            |   |   |                                                   |  

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

56

---





PROTECTION ONE, INC. AND SUBSIDIARIES    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The Company:

Protection One, Inc. (the "Company"), which is publicly-traded, is principally engaged in the business of providing security alarm monitoring services,
including sales, installation and related servicing of security alarm systems for residential and business customers. The Company also provides monitoring and support services to independent security
alarm dealers on a wholesale basis. On February 17, 2004, the Company's former majority owner, Westar Industries, Inc., a Delaware corporation, referred to as Westar Industries, a wholly
owned subsidiary of Westar Energy, Inc., which together with Westar Industries is referred to as Westar, sold approximately 87% of the issued and outstanding shares of the Company's common
stock, par value $0.01 per share, to POI Acquisition I, Inc., a subsidiary of POI Acquisition, L.L.C., Monarch Debt Recovery Master Fund Ltd and Monarch Opportunities Master Fund Ltd. POI
Acquisition, L.L.C. Quadrangle Capital Partners LP, Quadrangle Select Partners LP and Quadrangle Capital Partners-A LP are collectively referred to as Quadrangle.
Monarch Debt Recovery Master Fund Ltd and Monarch Opportunities Master Fund Ltd are collectively referred to as Monarch, and together with Quadrangle referred to as the Principal Stockholders. On
February 8, 2005, the Company completed a debt-for-equity exchange agreement with the Principal Stockholders that provided for the principal balance outstanding under
the credit facility, which the Principal Stockholders acquired in the sale from Westar, to be reduced by $120.0 million in exchange for the issuance to the Principal Stockholders of
16 million shares of the Company's common stock. The newly issued shares, together with shares already owned by the Principal Stockholders, resulted in the Principal Stockholders owning
approximately 97.3% of the Company's common stock.

As
a result of the Principal Stockholders' increased ownership interest, the Company "pushed down" the Principal Stockholders' basis to a proportionate amount of the Company's underlying
assets and liabilities acquired based on the estimated fair market values of the assets and liabilities as of February 8, 2005. The "push down" accounting adjustments did not impact cash flows.
The primary changes to the income statement included (1) the reduction in installation and other revenue due to a lower level of amortization from the reduced amortizable base of deferred
customer acquisition revenue; (2) the reduction in installation and other costs of revenue and selling expenses due to lower
level of amortization from the reduced amortizable base of deferred customer acquisition costs; (3) an increase in interest expense due to amortization of debt discounts arising from
differences in fair values and carrying values of the Company's debt instruments; and (4) the reduction in amortization related to the reduction in the amortizable base of customer accounts.
Due to the impact of the changes resulting from the push down accounting adjustments described above, the 2005 statement of operations and cash flow presentations separate the Company's results into
two periods: (1) the period ending February 8, 2005, the day the exchange transaction was consummated, and (2) the period beginning after that date utilizing the new basis of
accounting. The results are further separated by a heavy black line to indicate the effective date of the new basis of accounting.

On
May 12, 2006, the Company completed a recapitalization of its balance sheet by increasing its debt in order to pay a cash dividend of $70.5 million, or $3.86 per share,
to all holders of record of its common stock on May 8, 2006, including the Principal Stockholders, which owned approximately 97.1% of the outstanding shares of the Company's common stock at
that date. This cash dividend is referred to as the May 2006 dividend. The payment of the May 2006 dividend was financed, in large part, by the April 2006 financing described in Note 7, "Debt
and Capital Leases." Approximately $1.2 million of expense paid to third party consultants related to the financing were reflected as recapitalization costs in the second quarter of 2006.

As
part of the recapitalization, the Company's board of directors also approved a cash payment of $4.5 million or $2.89 for each vested and unvested option awarded in February
2005 under the 2004

57

---



Stock
Option Plan, including to members of senior management. This payment is referred to as the compensatory make-whole payment. Approximately $3.2 million of this compensatory
make-whole payment related to options that had not yet vested and accordingly this amount plus related taxes was recorded as compensation expense in the second quarter of 2006 and is
reflected as recapitalization costs in the Consolidated Statement of Operations and Comprehensive Loss. Approximately $1.3 million of the compensatory make-whole payment related to
vested options and was recorded to additional paid in capital. The Company also reduced the exercise price of each vested and unvested option by $0.98. The Company's board decided to pay the
compensatory make-whole payment and reduce the option exercise price because the payment of the May 2006 dividend decreased the value of the equity interests of holders of options, as
these holders were not otherwise entitled to receive the dividend. Accordingly, the Company's board awarded the same amount to the option holders, on a per share basis, in the form of the compensatory
make-whole payment and the reduced option exercise price.

The
Company acquired all of the outstanding common stock of Integrated Alarm Services Group, Inc. ("IASG") on April 2, 2007 (the "Merger"). Holders of IASG common stock
received 0.29 shares of Protection One, Inc. common stock for each share of IASG common stock held. Cash was paid in lieu of fractional shares. IASG financial results subsequent to
April 2, 2007 are consolidated with the Company's financial results. Upon consummation of the Merger, the Principal Stockholders' ownership percentage decreased to 70.0% and former IASG
stockholders were issued 27.9% of the Company's common stock. See Note 3, "IASG Acquisition," for additional discussion of the Merger and a pro forma presentation of financial results of the
combined entity.

Prior
to the Merger, the Company managed its operations in two business segments: Protection One Monitoring, which included Retail and Wholesale operations, and Network Multifamily.
Subsequent to the Merger, the Company separated the management of its Wholesale operations from its Retail operations and now organizes its operations into three business segments: Retail, Wholesale,
and Multifamily. See Note 15, "Segment Reporting," for additional information on the operating results of the Company's segments.

On
March 14, 2008, Protection One Alarm Monitoring, Inc. ("POAMI") borrowed approximately $110.3 million under a new unsecured term loan facility (the "Unsecured
Term Loan") to allow it to redeem all of the Senior Subordinated Notes. Using the proceeds from the Unsecured Term Loan and available cash on hand, POAMI deposited with the Trustee an amount
sufficient to redeem all of the Senior Subordinated Notes. Accordingly, POAMI's and the guarantors' obligations under the Senior Subordinated Notes Indenture were satisfied and discharged effective
March 14, 2008. The Senior Subordinated Notes were called for redemption on March 14, 2008 and will be redeemed effective April 14, 2008, as provided by the Senior Subordinated
Notes Indenture. The senior credit facility would have been subject to an early maturity date of June 30, 2008 had the Senior Subordinated Notes not been refinanced.

The
Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements include the accounts of Protection
One's wholly owned subsidiaries. Inter-company balances have been eliminated in consolidation.

58

---



2. Summary of Significant Accounting Policies:

(a)   Revenue Recognition

Revenue is recognized when security services are provided. System installation revenue, sales revenue on equipment upgrades and direct and incremental costs of
installations and sales are deferred for
residential Retail customers with monitoring service contracts. For commercial Retail customers and our national account customers, revenue recognition is dependent upon each specific customer
contract. In instances when the Company passes title to a system, the Company recognizes the associated revenue and costs related to the sale of the equipment in the period incurred regardless of
whether the sale is accompanied by a service agreement. In cases where the Company retains title to the system, the Company defers and amortizes revenue and direct costs.

The
Company follows Staff Accounting Bulletin 104 ("SAB 104") which requires the Company to defer certain system sales and installation revenue and expenses, primarily equipment,
direct labor and direct and incremental sales commissions incurred. Deferred system and upgrade installation revenue is recognized over the expected life of the customer utilizing an accelerated
method for residential and commercial Retail customers and a straight-line method for Multifamily customers. Deferred costs in excess of deferred revenue are recognized over the initial
contract term, utilizing a straight-line method, typically three to five years for Retail and five to ten years for Multifamily systems. To the extent deferred costs are less than deferred
revenues, such costs are recognized over the estimated life of the customer.

The
Company follows Statement of Financial Accounting Standards 13, "Accounting for Leases," for its arrangements whereby security equipment that does not require monitoring is leased to
customers, typically over a five year initial lease term. This equipment typically consists of closed circuit television equipment and card access control equipment. The Company records these
arrangements as operating leases and records revenue on a straight line basis over the life of the lease.

Deferred
revenue also results from customers who are billed for monitoring and extended service protection in advance of the period in which such services are provided, on a monthly,
quarterly or annual basis. Revenue from monitoring activities are recognized in the period such services are provided.

(b)   Inventories

Inventories, primarily comprised of alarm systems and parts, are stated at the lower of average cost or market. Inventory is shown net of an obsolescence reserve
of $0.7 million and $0.9 million at December 31, 2007 and 2006, respectively. This reserve is determined based primarily upon current usage of the individual parts included in
inventory.

(c)   Property and Equipment

Property and equipment are stated at cost or at the fair value at February 8, 2005 to reflect the new basis of accounting and are depreciated using the
straight-line method over estimated useful lives. Gains or losses from retirements and dispositions of property and equipment are recognized in income in the period realized. Repair and
maintenance costs are expensed as incurred. The Company is required to perform impairment tests for long-lived assets when the Company determines that indicators of impairment are present.

59

---



Estimated
useful lives of property and equipment are as follows:

Furniture and fixtures

4-7 yearsData processing and telecommunication equipment and software

1-5 yearsRental equipment

estimated customer life;
generally 7 yearsLeasehold improvements

lesser of lease term or useful life; generally 5-10 yearsVehicles

2-5 yearsBuildings

19-40 years


(d)   Income Taxes

The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when reported amounts of the assets or liabilities are recovered
or settled. The deferred tax assets are periodically reviewed for recoverability and a valuation allowance is recorded to reduce the deferred tax assets to an amount that is more likely than not
realizable.

The
Company currently does not have any federal taxable earnings and does not expect to have taxable earnings in the foreseeable future. Income tax expense shown on the statements of
operations represents primarily state taxes paid by the Company's subsidiaries.

(e)   Comprehensive Loss

Comprehensive loss comprises net loss and other comprehensive income (loss). Other comprehensive income (loss) includes the unrealized gains and losses associated
with interest rate caps.

(f)    Customer Accounts and Dealer Relationships

Additions to customer accounts and dealer relationships are stated at cost and are amortized over the estimated customer and dealer life, respectively. Internal
costs incurred in support of acquiring customer accounts and dealer relationships are expensed as incurred. Upon adoption of push down accounting as a result of the Principal Stockholders' increased
ownership in the Company, new values for customer accounts were recorded as of February 8, 2005 to reflect the estimated fair value of these accounts.

The
choice of an amortization life is based on estimates and judgments about the amounts and timing of expected future revenue from customer accounts and dealer relationships and average
account life. Selected periods were determined because, in management's opinion, they would adequately match amortization cost with anticipated revenue. The Company evaluates the appropriateness of
the amortization life and method of each of its account pools based on the actual historical attrition experience of each pool and, when deemed necessary, performs a lifing study to assist in
determining appropriate lives of its customer accounts and dealer relationships. These analyses are needed in light of the inherent declining revenue curve over the life of a pool of customer accounts
and dealer relationships. The Company has identified three distinct pools of customer accounts for Retail and Multifamily, each of which had distinct attributes that effect differing attrition
characteristics. For the Retail customer account pool, the results of lifing studies indicated that the Company can expect attrition to be greatest in years one through five of asset life and that a
declining balance (accelerated) method would therefore best match the future amortization costs with the estimated revenue stream from these customer pools. The Company switches from the declining

60

---



balance
method to the straight-line method in the year the straight-line method results in greater amortization expense. Dealer relationships are also amortized using an
accelerated method, which is consistent with the Retail pool, to match the future amortization costs with the estimated revenue stream from these dealer accounts.

The
amortization rates consider the average estimated remaining life and historical and projected attrition rates. The amortization method for each pool is as follows:

Pool

MethodCustomer Accounts:Retail-Protection One

Ten-year 135% declining balanceRetail-IASG

Nine-year 150% declining balanceMultifamily

Nine-year straight-lineDealer Relationships:Wholesale

Fifteen year 150% declining balance


The
Company is required to perform impairment tests for long-lived assets prospectively when the Company determines that indicators of impairment are present. Declines in
market value of its business or the value of its customer accounts that may be incurred prospectively may also require additional impairment charges. No impairment charges were recorded in the periods
presented herein.

(g)   Goodwill, Trade Name and Other Intangible Assets

The new basis of accounting resulted in new recorded values for trade names and for goodwill as of February 8, 2005 to reflect their estimated fair values.
Additional goodwill and trade name values as well as non-competition agreements were recorded with the Merger. Non-competition agreements are recorded within other intangible
assets. The Company's goodwill is recorded in its Retail, Wholesale and Multifamily operating segments, which are also the reporting units for purposes of evaluating recorded goodwill for impairment.

The
Company is not required to amortize goodwill or trade name values, rather is required to conduct an annual impairment test and at other times when impairment indicators are present.
The Company has established July 1 as its annual impairment testing date and completed its annual impairment testing and determined that no impairment of its non-amortizable
intangible assets was required in the periods presented herein. An impairment test is also completed if events or changes in circumstances indicate that the assets might be impaired. The Company
determines fair value by considering a discounted cash flow approach or valuation report.

(h)   Cash and Cash Equivalents

All highly liquid investments purchased with a remaining maturity of three months or less at the date acquired are cash equivalents. These investments, consisting
of money market funds and 30-day, 60-day or 90-day commercial paper or certificates of deposit, are stated at cost, which approximates market.

(i)    Restricted Cash

Restricted cash on the accompanying balance sheet represents a trust account established as collateral for the benefit of the former insurer of the Company's
workers' compensation claims and collateral for the Company's surety bonding requirements. The workers' compensation collateral is required to support reserves established on claims filed during the
period covered by the former insurer. The Company receives interest income earned by the trust. The surety bond collateral is required by the Company's liability insurance carrier. The funds have been
deposited into a money market account which earns interest income. Bond collateral acquired in the Merger represents $0.9 million of the restricted cash balance at December 31, 2007. The
collateral requirements for those bonds have been reviewed, with collateral funds liberated as the bonds are cancelled.

61

---





(j)    Receivables

Gross receivables, which consist primarily of trade accounts receivable, of $43.5 million at December 31, 2007 and $36.3 million at
December 31, 2006 have been reduced by allowances for doubtful accounts of $5.9 million and $7.3 million, respectively.

The
Company's policy for Retail and Wholesale is to establish a reserve for a percentage of a customer's total receivable balance when any portion of that receivable balance is greater
than 30 days past due. This percentage, which is based on the Company's historical collections experience, is increased as any portion of the receivable ages until it is fully reserved and
written off when it is 120 days past due and the account is disconnected and turned over to a collection agency. Additionally, once the customer's balance is greater than 120 days past
due, all other receivable balances associated with that customer, irrespective of how many days past due, are deemed to be 120 days past due and fully reserved. In certain instances, based upon
the discretion of the local general manager, credit can be extended and the account may remain active. The Company's policy for Wholesale's reserve also includes a specific identification approach in
assessing the collectability of balances with large dealer accounts.

The
Company's policy for Multifamily's reserve is based on the specific identification approach.

(k)   Notes Receivable

Notes receivable on the balance sheet represent loans to dealers, which are carried at the lower of the principal amount outstanding or the net realizable value.
Loans are generally considered non-performing if they are 120 days in arrears of contractual terms. At December 31, 2007, the Company had $0.2 million in
non-performing loans. Interest income is not accrued on non-performing loans. Loan impairment is identified when a portfolio's cash flow is materially below the minimum necessary to
service the loan. In most cases, loans will be foreclosed and valued at the lower of cost (loan carrying value) or fair value of customer contracts using recent transaction prices and industry
benchmarks.

The
Company provides billing and remittance services for most of the dealers in their loan program, whereby the Company bills the dealers' customers and collects funds from those
customers. Cash collected in excess of fees and loan payments is then remitted to the dealer.

(l)    Advertising Costs

Printed materials are expensed as incurred. Broadcast advertising costs are expensed upon the first broadcast of the respective advertisement. Total advertising
expense was $3.5 million and $3.4 million for the years ended December 31, 2007 and 2006, respectively. Total advertising expense was $2.3 million and $0.1 million
for the periods February 9, 2005 through December 31, 2005, and January 1, 2005 through February 8, 2005, respectively.

(m)  Derivative Financial Instruments

The Company's interest rate caps are recorded in the consolidated balance sheet at fair value and have been designated as cash flow hedges. Changes in the fair
value are recognized in other comprehensive income (loss) until the hedge transaction is recognized in earnings. The unamortized costs of the cap agreements are included in other assets. The Company
amortizes the costs of the interest rate caps to interest expense over the respective lives of the agreements with any ineffectiveness in the hedging relationship recognized immediately in earnings.
Payments to be received as a result of the cap agreements, if any, are accrued as a reduction of interest expense.

62

---



(n)   Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables from a large number of
customers, including both residential and commercial Retail customers as well as Wholesale dealers, dispersed across a wide geographic base. The Company extends credit to its customers in the normal
course of business, performs periodic credit evaluations and maintains allowances for the potential credit losses. The Company has customers and dealers located throughout the United States with
almost 44% of its recurring monthly revenue derived from customers located in California, Florida and Texas. A major earthquake, hurricane or other
environmental disaster in an area of high account concentration could disrupt the Company's ability to serve those customers or render those customers uninterested in continuing alarm monitoring
services.

(o)   Stock Based Compensation

The Company accounts for stock based compensation using the provisions of Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
"Share-Based Payment," and Staff Accounting Bulletin ("SAB") No.107, "Share-Based Payment," which require the measurement and recognition of compensation expense for all share-based payment awards to
employees and directors based on estimated fair values. The Company values its stock options using the Black-Scholes model to determine fair value. SFAS 123R supersedes the Company's previous
accounting methodology using the intrinsic value method under Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." With respect to stock
option awards granted under the plans that had an exercise price equal to or greater than the market value of the Common Stock on the date of the grant, the Company, under the intrinsic value method
used in connection with APB 25, has not recognized any share-based compensation expense related to stock option awards granted to employees in the Company's Consolidated Statements of
Operations and Comprehensive Loss.

See
Note 8, "Share-Based Employee Compensation" for additional information.



Prior to January 1, 2006, the Company accounted for share-based employee compensation arrangements in accordance with the provisions and related
interpretations of APB 25. Had compensation cost for share-based awards been determined consistent with SFAS No. 123R, the net loss and loss per share would have been adjusted to the
following pro forma amounts:

2005February 9
December 31



January 1
February 8(dollar amounts in thousands
except per share amounts)Loss available for common stock, as reported

$
(15,588
)


$
(11,405
)Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects







Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects


(2,169
)



(16
)Loss available for common stock, pro forma

$
(17,757
)


$
(11,421
)Net loss per common share (basic and diluted):As reported

$
(0.86
)


$
(5.80
)Pro forma

$
(0.98
)


$
(5.81
)


63

---



(p)   Loss Per Share

Loss per share is presented in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Weighted average shares
outstanding were as follows:

February 9
December 31,

January 1
February 8,December 31,
2007

December 31,
2006

2005Weighted average shares outstanding

23,525,652

18,233,221

18,198,571

1,965,654


For
the each of the years ended December 31, 2007 and 2006, the Company had outstanding stock options that represented 0.8 million dilutive potential common shares. For the
period February 9, 2005 through December 31, 2005, the Company had outstanding stock options that represented 1.0 million dilutive potential common shares. No outstanding stock
options and warrants represented dilutive potential common shares for the period January 1, 2005 through February 8, 2005. These securities were not included in the computation of
diluted earnings per share since to do so would have been anti-dilutive for all periods presented.

(q)   New Accounting Standards

In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. SFAS 159 permits the measurement of specified financial instruments and warranty and insurance contracts at fair value on a
contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The Company adopted the guidance in this standard on January 1, 2008
and it did not have a material impact on the consolidated financial statements.

In
September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. The FASB issued FASB Staff Position No. FAS 157-1, Application of FASB Statement No.157 to FASB
Statement No.13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13, ("FSP FAS 157-1").
FSP FAS 157-1 excludes FASB Statement No.13 as well as other accounting pronouncements that address fair value measurement on lease classification or measurement from the scope of
SFAS 157. During February 2008, the FASB also issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.157, ("FSP FAS 157-2"), which
delays the effective date of FAS 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. The Company
does not anticipate that adoption of FAS 157, FSP FAS 157-1 or FSP FAS 157-2 will have a material impact on its consolidated financial statements.

In
June 2006, the FASB issued FASB Interpretation 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109." This
interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements. The interpretation prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For the benefits of a tax position taken to be recognized, the tax
position must be more likely than not to be sustained upon examination by taxing authorities. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company's
adoption of FIN 48 on January 1, 2007 did not have any impact on its consolidated financial statements.

64

---



In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statementsan
amendment of ARB No.51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards that require non-controlling interests in a subsidiary to be reported as a
component of equity, changes in a parent's ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained non-controlling
equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. The Statement also establishes reporting requirements that clearly identify and distinguish between
the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective as of the beginning of the first fiscal year beginning on or after
December 15, 2008. The Company does not anticipate that adoption of this statement will have a material impact on the consolidated financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R establishes the
principles and requirements
for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree; 2) in a business combination achieved in stages, sometimes referred to as a step acquisition, recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair values; 3) recognizes and measures the goodwill acquired in the business combination or a gain from a
bargain purchase. SFAS 141R establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This
Statement is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008.
The adoption of SFAS 141R will have an impact on the Company's accounting for future business combinations on a prospective basis once adopted; however, the materiality of that impact cannot be
determined.

In
December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 110 ("SAB 110") which allows companies that do not have sufficient historical
experience for estimating the expected term of "plain vanilla" share option grants to provide a reasonable estimate and to continue use of the "simplified" method after December 31, 2007.
SAB 110 extends the opportunity to use the "simplified" method beyond December 31, 2007, as was allowed by Staff Accounting Bulletin No. 107 ("SAB 107"). Adoption of
SAB 110 will not impact the consolidated financial statements as the Company did not use the "simplified" method to estimate lives of share-based awards.

(r)   Presentation

Certain amounts have been reclassified from prior period consolidated financial statements to conform with the current year presentation.

3. IASG Acquisition:

On April 2, 2007, the Company completed its acquisition of IASG. The Company issued 7,066,960 shares of its common stock and 713,104 stock options in
exchange for the outstanding IASG common stock and IASG stock options, respectively. The consideration associated with the common stock and stock options was based on $12.125 per share, the average
closing price of the Company's common stock for the two trading days immediately prior and subsequent to December 20, 2006, the announcement date of the Merger. In connection with the Merger,
the Company's common stock was approved for listing on the NASDAQ Global Market LLC and now trades under the symbol "PONE."

Also
in connection with the Merger, the Company completed an exchange offer (the "Exchange Offer") for up to $125 million aggregate principal amount of the IASG 12% Senior Secured
Notes due

65

---



2011
(the "IASG Notes"). Pursuant to the terms of the Exchange Offer, validly tendered IASG Notes were exchanged for newly issued 12% Senior Secured Notes due 2011 of the Company (the "Senior Secured
Notes"). Of the $125 million aggregate principal amount of IASG Notes outstanding, approximately $115.3 million were tendered for exchange.

Upon
the completion of the Exchange Offer, IASG Notes that were not tendered for exchange were redeemed effective as of May 2, 2007. On April 2, 2007, IASG deposited
sufficient funds with the trustee to redeem the outstanding IASG Notes and thereby satisfied and discharged its and the guarantors' obligations under the indenture governing the IASG Notes, as
supplemented (the "IASG Indenture").

With
the completion of the Merger, the Company assumed ownership of Criticom International, which combined with the Company's Wholesale monitoring provider, CMS, operates under a new
name, Criticom Monitoring Services (also known as CMS).

The
Company remains one of the nation's largest providers of security alarm monitoring services to residential, commercial and national account customers, which will continue operating
under the name Protection One®, as well as the largest provider to the multifamily market, operating under the name Network Multifamily®. In total, the merged company,
which will remain based in Lawrence, Kansas, has 66 branches across the country, six monitoring response centers, and a dedicated disaster recovery center.

The
Merger was accounted for using the purchase method of accounting under FASB Statement of Financial Accounting Standards No. 141 ("FAS 141"), "Business Combinations."
Under the purchase method of accounting, the Company is considered the acquirer of IASG for accounting purposes and the total purchase price is allocated to the assets acquired and liabilities assumed
from IASG based on their fair values as of April 2, 2007. Under the purchase method of accounting, the net consideration was approximately $96.7 million, comprised of the Company's
common stock of $85.7 million, the assumption of IASG stock options that were converted into the Company's stock options with a value of $2.9 million, and approximately
$8.1 million in transaction costs, including investment banker fees, consulting fees and professional fees.

The
Company recorded a liability of $1.0 million related to duplicate facilities acquired and closed in connection with the Merger. The Company also recorded a liability of
$1.0 million related to one-time termination benefits in connection with the Merger as a part of the purchase price allocation. These one-time termination benefits were
paid during the year ended December 31, 2007. In addition, the Company recorded $3.8 million of expense during the year ended
December 31, 2007, related to severance and retention payments with future service requirements. Total cash payments for severance and retention during the year ended December 31, 2007
were $3.4 million.



Under purchase accounting, the total purchase price was allocated to IASG's net tangible and intangible assets and liabilities based on their estimated fair
values as of April 2, 2007. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The following allocation of the purchase price is
based on management's estimate of the fair value of assets and liabilities acquired, including a valuation that was performed. During the year ended December 31, 2007, the Company recorded fair
value adjustments of approximately $6.2 million to its preliminary allocation of purchase price related to property and equipment, customer accounts, dealer relationships, trade names and other
intangibles, which had the effect of increasing goodwill.

66

---



Assets Acquired and Liabilities Assumed as of April 2, 2007  (dollars in thousands)

Current assets

$
20,513Property and equipment


6,144Customer accounts


130,300
(a)Dealer relationships


41,500
(a)Trade names


2,800Non-competition agreements


4,000Goodwill


29,444Other assets


15,589
(c)Total assets acquired


250,290Current liabilities


24,864Long-term debt


125,605
(b)Other liabilities


3,162
(c)Total liabilities assumed


153,631Net assets acquired


96,659




67

---





IASG Notes

$
125,000Notes redeemed


(9,655
)Exchanged notes


115,345Premium on exchanged notes


10,260Fair value of exchanged notes

$
125,605






The results of operations of IASG from April 2, 2007 through December 31, 2007 have been included in the Company's condensed consolidated statement
of operations for the year ended December 31, 2007. The financial information in the table below summarizes the combined results of operations of the Company and IASG, on a pro forma basis, as
though the companies had been combined as of the beginning of each of the periods presented. These results have been prepared by adjusting the historical results of the Company to include the
historical results of IASG and the impact of the purchase price allocation discussed above. The pro forma combined results of operations for the year ended December 31, 2007 exclude
Merger-related costs of $3.9 million, which primarily consist of investment banker fees and debt redemption costs incurred by IASG prior to completion of the Merger. The pro forma combined
results of operations for the year ended December 31, 2006 include a goodwill impairment charge of $65 million recorded by IASG during 2006.

The
following pro forma combined results of operations have been provided for illustrative purposes only and do not purport to be indicative of the actual results that would have been
achieved by the combined companies for the periods presented or that will be achieved by the combined company in the future.

Year ended
December 31,
2007

Year ended
December 31,
2006(unaudited)Pro forma:Revenue

$
371,178

$
363,702Net loss

$
(34,317
)
$
(35,667
)Basic and diluted earnings per share

$
(1.12
)
$
(1.41
)




At the time of the Merger, the Company acquired outstanding notes receivable with an estimated fair value of $8.7 million as of April 2, 2007. The
Company makes loans to dealers which are collateralized by the dealers' portfolios of customer monitoring contracts. Loans to dealers are carried at the lower of the principal amount outstanding or
the net realizable value of the portfolio underlying the loan. Loans are generally considered non-performing if they are 120 days in arrears of contractual terms. Interest income is
not accrued on non-performing loans. Management periodically evaluates the loan portfolio to assess the collectibility of dealer notes and adequacy of the allowance for loan losses
including IASG's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying
collateral and current economic conditions. Loan impairment is identified when a portfolio's cash flow is materially below the minimum necessary to service the loan. In most cases, loans will be
foreclosed and valued at

68

---



the
lower of cost (loan carrying value) or fair value of customer contracts using recent transaction prices and industry benchmarks. At December 31, 2007, the Company had outstanding notes
receivable of $5.9 million. The Company had no notes receivable as of December 31, 2006. The short-term portion of notes receivable is calculated in accordance with the terms
of the agreements. As part of the Merger, the Company assumed obligations to provide open lines of credit to dealers, subject to the terms of the agreements with the dealers. At December 31,
2007, the amount available to dealers under these lines of credit was $0.5 million.

4. Property and Equipment:

The following reflects the Company's carrying value in property and equipment as of the following periods (dollar amounts in thousands):

December 31,
2007

December 31,
2006Furniture, fixtures and equipment

$
6,294

$
4,685Data processing and telecommunication


34,126


26,576Leasehold improvements


6,447


3,102Vehicles


6,832


7,290Vehicles under capital leases


7,798


3,261Buildings and other


6,314


5,583Rental equipment


7,989


3,54975,800


54,046Less accumulated depreciation


(42,030
)

(31,616
)Property and equipment, net

$
33,770

$
22,430


Depreciation
expense was $11.0 million and $9.1 million for the years ended December 31, 2007 and 2006, respectively. Depreciation expense was $11.1 million
for the period February 9, 2005 through December 31, 2005 and $1.0 million for the period January 1, 2005 through February 8, 2005.

The
amount of fixed asset additions included in accounts payable as of December 31, 2007, 2006 and 2005 was $0.4 million, $0.6 million and $0.3 million,
respectively.

Fixed Assets under Operating Leases

Rental equipment is comprised of commercial security equipment that does not require monitoring services by the Company and is leased to customers, typically over
a 5-year initial lease term. Accumulated depreciation of approximately $1.1 million and $0.3 million was recorded on these assets as of December 31, 2007 and 2006,
respectively. The following is a schedule by year of minimum future rental receipts on non-cancelable operating leases as of December 31, 2007 and does not include payments received
at the inception of the lease (dollar amounts in thousands):

2008

$
1,1382009


1,1382010


1,1202011


7252012


236Total minimum future rentals

$
4,357


69

---



5. Intangible Assets:

In connection with the Merger, the Company recorded approximately $29.4 million of goodwill. The Company has also recorded intangible assets for Customer
Accounts, Dealer Relationships, Trade Name and Other Intangibles acquired in connection with the Merger. Customer Accounts represents the Company's investment in Retail customers acquired through
purchase, which are being amortized using an accelerated amortization method. Dealer Relationships is the result of the Company's arrangement to provide alarm monitoring services to customers of
independent alarm dealers and acquisitions of such relationships from other monitoring companies. The Company amortizes the cost of Dealer Relationships using an accelerated amortization method,
primarily 150% declining balance
over 15 years. Other Intangibles represents non-competition agreements that are being amortized over their remaining lives ranging from 1 to 3 years. Amounts recorded for
goodwill and trade name have indefinite lives and are not subject to amortization. Goodwill and trade name acquired in the Merger have been allocated to the Company's Retail and Wholesale segments
based on the fair value of the assets and liabilities acquired. Goodwill is not expected to be deductible for income tax purposes.

A
roll-forward of the Company's unamortizable intangible assets is presented by segment and in total in the following table (dollars amounts in thousands):

|                      |  | Retail |        | Wholesale |   | Multifamily |  | Total Company
|--------------------- |  | ------ | ------ | --------- | - | ----------- |  | -------------
|Goodwill(a)           |  |        |        |           |   |             |  |              
|January 1, 2007       |  | $      | 6,142  |           | $ | 1,288       |  | $            
|Additions from Merger |  |        | 13,534 |           |   | 15,910      |  |              
|                      |  |        |        |           |   |             |  |              
|December 31, 2007     |  | $      | 19,676 |           | $ | 17,198      |  | $            
|                      |  |        |        |           |   |             |  |              
|Trade Name            |  |        |        |           |   |             |  |              
|January 1, 2007       |  | $      | 22,987 |           | $ |            |  | $            
|Additions from Merger |  |        |       |           |   | 2,800       |  |              
|                      |  |        |        |           |   |             |  |              
|December 31, 2007     |  | $      | 22,987 |           | $ | 2,800       |  | $            
|                      |  |        |        |           |   |             |  |              

---

70

---



A
roll-forward of the Company's amortizable intangible assets is presented by segment and in total in the following table (dollars amounts in thousands):

Retail

Wholesale

Multifamily

Total CompanyCustomer AccountsNet customer accounts at January 1, 2007

$
161,386

$


$
35,289

$
196,675Additions from Merger


130,300








130,300Purchase of customer accounts


952








9522007 Amortization expense


(39,860
)




(5,671
)

(45,531
)Net customer accounts at December 31, 2007

$
252,778

$


$
29,618

$
282,396Dealer Relationships(a)Net dealer relationships at January 1, 2007

$


$
3,696

$


$
3,696Additions from Merger





41,500





41,5002007 Amortization expense





(3,631
)




(3,631
)Net dealer relationships at December 31, 2007

$


$
41,565

$


$
41,565Other IntangiblesTotal other intangibles at January 1, 2007

$


$


$


$
Additions from Merger


1,508


2,492





4,0002007 Amortization expense


(740
)

(1,161
)




(1,901
)Net other intangibles at December 31, 2007

$
768

$
1,331

$


$
2,099




Amortization
expense was $51.1 million and $32.5 million for the years ended December 31, 2007 and 2006, respectively, $32.6 million for the period
February 9, 2005 through December 31, 2005 and $5.6 million for the period January 1, 2005 through February 8, 2005. The table below reflects the estimated aggregate
intangible amortization expense for each of the five succeeding fiscal years on the existing customer account base as of December 31, 2007 (dollar amounts in thousands):

|                               |  | 2008 |        | 2009 |   | 2010   |  | 2011 |        | 2012
|------------------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----
|Estimated amortization expense |  | $    | 53,539 |      | $ | 47,870 |  | $    | 44,615 |     

71

---



6. Accrued Liabilities:

The following reflects the components of accrued liabilities as of the periods indicated (dollar amounts in thousands):

December 31,2007

2006Accrued interest

$
6,874

$
5,452Accrued vacation pay


4,528


3,504Accrued salaries, bonuses and employee benefits


9,560


6,103Other accrued liabilities


12,579


10,142Total accrued liabilities

$
33,541

$
25,201


7. Debt and Capital Leases:

Long-term debt and the fixed or weighted average interest rates and capital leases are as follows (dollar amounts in thousands):

|                                                                                                               |  | December 31,
2007 |         | December 31,
2006 |  
|-------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | -
|Senior Credit Agreement, maturing March 31, 2012, variable 7.21%(a)                                            |  | $                 | 294,750 |                   | $
|Senior Secured Notes, maturing November 2011, fixed 12.0%, face value(c)                                       |  |                   | 115,345 |                   |  
|Unamortized premium on Senior Secured Notes(d)                                                                 |  |                   | 8,783   |                   |  
|Senior Subordinated Notes, maturing January 2009, fixed 8.125%, face value(b)                                  |  |                   | 110,340 |                   |  
|Unamortized discount on Senior Subordinated Notes(b)                                                           |  |                   | (8,458  | )                 |  
|Capital leases                                                                                                 |  |                   | 5,599   |                   |  
|                                                                                                               |  |                   |         |                   |  
|                                                                                                               |  |                   | 526,359 |                   |  
|Less current portion (including $2,179 and $861 in capital leases at December 31, 2007 and 2006, respectively) |  |                   | (5,179  | )                 |  
|                                                                                                               |  |                   |         |                   |  
|Total long-term debt and capital leases                                                                        |  | $                 | 521,180 |                   | $
|                                                                                                               |  |                   |         |                   |  

---

72

---



Refinancing

On March 14, 2008, the Company borrowed approximately $110.3 million under a new unsecured term loan facility to allow it to redeem all of the
Senior Subordinated Notes. The Unsecured Term Loan bears interest at the prime rate plus 11.5% per annum and matures in 2013. Using the proceeds from the Unsecured Term Loan and available cash on
hand, the Company deposited with the Trustee an amount sufficient to redeem all of the Senior Subordinated Notes. Accordingly, the Company's
obligations under the Senior Subordinated Notes Indenture were satisfied and discharged effective March 14, 2008. The Senior Subordinated Notes were called for redemption on March 14,
2008 and will be redeemed effective April 14, 2008, as provided by the Senior Subordinated Notes Indenture. The senior credit facility would have been subject to an early maturity date of
June 30, 2008 had the Senior Subordinated Notes not been refinanced. The Unsecured Term Loan lenders include, among others, entities affiliated with the Principal Stockholders and Arlon Group.
Affiliates of the Principal Stockholders collectively owned over 70% of our common stock as of December 31, 2007 and one of our directors is affiliated with Arlon Group.

Senior Credit Agreement

On April 26, 2006, the Company entered into an amended and restated senior credit agreement ("Senior Credit Agreement") increasing the outstanding term
loan borrowings by approximately $66.8 million to $300.0 million. The applicable margin with respect to the amended term loan was reduced by 0.5% to 1.5% for base rate borrowing and 2.5%
for Eurodollar borrowing. In the first quarter of 2007, the applicable margin was further reduced by 0.25% to 1.25% for base rate borrowing and 2.25% for Eurodollar borrowing. Depending on the
Company's leverage ratio at the time of borrowing, the applicable margin with respect to a revolving loan may range from 1.25% to 2.25% for a base rate borrowing and 2.25% to 3.25% for a Eurodollar
borrowing. The incremental proceeds from the amended term loan, together with approximately $10 million of excess cash were used to make an aggregate special cash distribution in May 2006 of
approximately $75 million, including a dividend to holders of the Company's common stock and to make related payments to members of management of the Company who hold options for the Company's
common stock. The senior credit facility continues to include a $25.0 million revolving credit facility, of which approximately $22.2 million remains available as of December 31,
2007 after reducing total availability by approximately $2.8 million for an outstanding letter of credit. The revolving credit facility matures in 2010 and the term loan matures
March 31, 2012.

The
bank credit agreement required the Company to enter into a hedge agreement to provide interest rate protection on at least $70.0 million of the term loans for not less than
two years. The hedging requirement under the amended and restated bank credit agreement did not change. To satisfy this requirement and to further limit its exposure to interest rate risk on the
variable rate senior credit facility, the Company entered into two separate interest rate cap agreements in May 2005 for a one-time aggregate cost of approximately $0.9 million. The
Company's objective is to protect against increases in interest expense caused by fluctuation in the LIBOR interest rate. One interest rate cap provides protection on $75 million of the
Company's long term debt over a five-year period ending May 24, 2010 if LIBOR exceeds 6%. A second interest rate cap provides protection on $75 million of the Company's long
term debt over a three-year period ending May 23, 2008 if LIBOR exceeds 5%.

73

---



The
unamortized cost of the cap agreements at December 31, 2007 and 2006 was $0.6 million and $0.8 million, respectively. The fair market value of the cap agreements
was $0.04 million and $0.5 million at December 31, 2007 and 2006, respectively, which is included in other assets. The fair market value of the cap agreements decreased
$0.5 million, $0.3 million and $0.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. The Company amortizes the costs of the interest rate caps to
interest expense over the respective lives of the agreements. In 2007, the Company amortized approximately $0.3 million to interest expense and was entitled to receive approximately
$0.3 million as a result of the cap agreements with no net impact to interest expense. In 2006, the Company amortized approximately $76,000 to interest expense and was entitled to receive
approximately $143,000 as a result of the cap agreements for a net reduction to interest expense of approximately $67,000. In 2005, the Company recorded no amortization to interest expense as a result
of the cap agreements. There was no ineffectiveness in the hedging relationship of the interest rate caps.

Exchanged Notes

On April 2, 2007, POAMI completed the Exchange Offer for up to $125 million aggregate principal amount of the IASG Notes. Pursuant to the terms of
the Exchange Offer, validly tendered IASG Notes were exchanged for the Senior Secured Notes. Of the $125 million aggregate principal amount of IASG Notes outstanding, approximately
$115.3 million were tendered for exchange. Upon the completion of the Exchange Offer, approximately $9.7 million principal amount of IASG Notes was redeemed effective as of May 2,
2007. The redemption price was approximately $11.9 million, including accrued interest and a make-whole adjustment. To effect the redemption on April 2, 2007, IASG deposited
sufficient funds with the trustee to redeem the outstanding IASG Notes and thereby satisfied and discharged its and the guarantors' obligations under the IASG Indenture.

The
Senior Secured Notes, which rank equally with POAMI's existing and future senior secured indebtedness and any indebtedness incurred under the senior credit facility, are jointly and
severally guaranteed by Protection One, Inc. and its subsidiaries and secured by second priority liens granted to the trustee for the benefit of the holders of the Senior Secured Notes on
substantially all of the Company's and its subsidiaries' tangible and intangible property.

The
Senior Secured Notes mature on November 15, 2011, the same date as the IASG Notes. The Senior Secured Notes initially bore interest at the rate of 13% per annum, payable
semiannually on May 15 and November 15 of each year, commencing on May 15, 2007. Pursuant to the terms of a Registration Rights Agreement entered into at the time the Senior
Secured Notes were issued, following the consummation of a registered exchange offer pursuant to which the Senior Secured Notes were exchanged for notes that were registered with the SEC, the Senior
Secured Notes bear interest at the rate of 12% per annum. POAMI completed the registered exchange offer pursuant to the Registration Rights Agreement on June 12, 2007.

POAMI
may redeem the Senior Secured Notes at any time prior to November 15, 2008 at its option, in whole or in part, at a redemption price equal to the greater of: 100% of the
principal amount of the Senior Secured Notes being redeemed or the sum of the present values of the remaining scheduled
payments to November 15, 2008 of principal and interest on the Senior Secured Notes being redeemed on the redemption date (not including any portion of any payments of interest accrued to the
redemption date) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at a discount rate equal to
the treasury rate plus 50 basis points. POAMI may also redeem the Senior Secured Notes at any time on and after November 15, 2008, in whole or in part, at certain specified redemption prices,
plus accrued and unpaid interest and additional interest, if any, to the date of the redemption.

74

---



Upon
the occurrence of certain change of control events, each holder of Senior Secured Notes will have the right to require POAMI to repurchase all or any part of that holder's Senior
Secured Notes for a cash payment equal to 101% of the aggregate principal amount of the Senior Secured Notes repurchased plus accrued and unpaid interest and additional interest, if any, to the date
of purchase, subject to certain restrictions in the Senior Credit Agreement.

The
indenture governing the Senior Secured Notes contains covenants which restrict POAMI's ability and the ability of the guarantors (subject to certain exceptions) to, among other
things: borrow additional money; pay dividends on or redeem capital stock, or make other restricted payments or investments; sell assets; merge or consolidate with any other person; effect a
consolidation or merger; or enter into affiliated transactions.

Senior Subordinated Notes

On March 14, 2008, POAMI deposited with the Trustee an amount sufficient to redeem all of the Senior Subordinated Notes and its obligations and the
guarantors' obligations were satisfied and discharged. See Note 1, "The Company," for additional information regarding the redemption.

Unsecured Term Loan

On March 14, 2008, POAMI borrowed approximately $110.3 million under a new unsecured term loan facility to allow it to redeem all of the Senior
Subordinated Notes. See Note 1, "The Company," for additional information regarding the redemption. The Unsecured Term Loan bears interest at the prime rate plus 11.5% per annum and matures in
2013.

Capital Leases

The Company has acquired vehicles since 2006 under a capital lease arrangement whereby it leases vehicles over a 4-year lease term. Accumulated
depreciation on these assets at December 31, 2007 and 2006 was approximately $1.8 million and $0.4 million respectively. The following is a schedule of future minimum lease
payments under capital leases together with the present value of net minimum lease payments as of December 31, 2007 (dollar amounts in thousands):

2008

$
2,5232009


2,2432010


1,4492011


460Total minimum lease payments


6,675Less: Estimated executory costs


(579
)Net minimum lease payments


6,096Less: Amount representing interest


(497
)Present value of net minimum lease payments(a)

$
5,599




75

---





Debt Maturities

Excluding capital lease agreements described above, debt maturities over the succeeding five years and thereafter are as follows (dollar amounts in thousands):

2008

$
3,0002009


113,340
(a)2010


3,0002011


118,345
(b)2012


282,750Thereafter


Total

$
520,435




Debt Covenants

The Unsecured Term Loan Agreement, Senior Secured Notes Indenture and the Senior Credit Agreement contain certain covenants and restrictions, including with
respect to the Company's ability to incur debt and pay dividends, based on earnings before interest, taxes, depreciation and amortization, or EBITDA. The definition of EBITDA varies between the
Unsecured Term Loan Agreement, Senior Secured Notes Indenture and Senior Credit Agreement. EBITDA is generally derived by adding to income (loss) before income taxes, the sum of interest expense,
depreciation and amortization expense, including amortization of deferred customer acquisition costs less amortization of deferred customer acquisition revenue. However, under the varying definitions,
additional adjustments are sometimes required.

The
Company's amended and restated Senior Credit Agreement, the Senior Secured Notes Indenture and the Unsecured Term Loan Agreement contain the financial covenants and current tests,
respectively, summarized below:

Debt Instrument

Financial Covenant and Current TestSenior credit facility

Consolidated total debt on last day of period/consolidated EBITDA for most recent four fiscal quarters less than 6.0 to 1.0 andConsolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters greater than 1.75 to 1.0Senior Secured Notes

Current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0Unsecured Term Loan

Consolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters greater than 2.25 to 1.0


At
December 31, 2007, the Company was in compliance with the financial covenants and other maintenance tests for the senior credit facility and the Senior Secured Notes. The
interest coverage

76

---



ratio
incurrence test under each of the Senior Secured Notes Indentures and Unsecured Term Loan is an incurrence based test (not a maintenance test), and the Company cannot be deemed to be in default
solely due to failure to meet the interest coverage ratio test. Failure to meet the interest coverage ratio test could result in restriction on our ability to incur additional ratio indebtedness;
however, we may borrow additional funds under other permitted indebtedness provisions of the Senior Secured Notes Indentures, including all amounts currently available under the revolving credit
facility.

The
Company's obligations under the Senior Subordinated Notes Indenture were satisfied and discharged effective March 14, 2008. The Senior Subordinated Notes were subject to a
financial covenant of current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0.

These
debt instruments also restrict our ability to pay dividends to stockholders, but do not otherwise restrict our ability to fund cash obligations.

8. Share-Based Employee Compensation:

The Company accounts for stock based compensation using the provisions of Statement of Financial Accounting Standards No. 123R ("SFAS 123R"),
"Share-Based Payment," and Staff Accounting Bulletin No. 107 ("SAB 107"), "Share-Based Payment," which require the measurement and recognition of compensation expense for all share-based
payment awards to employees and directors based on estimated fair values. SFAS 123R supersedes the Company's previous accounting methodology using the intrinsic value method under Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." With respect to stock option awards granted under the plans that had an exercise price equal to or
greater than the market value of the Common Stock on the date of the grant, the Company, under the intrinsic value method used in connection with APB 25, had not recognized any share-based
compensation expense related to stock option awards granted to employees in the Company's Consolidated Statements of Operations and Comprehensive Loss.

In
connection with the Merger, options to acquire shares of IASG common stock were converted into options to acquire a number of shares of Protection One, Inc. common stock equal
to the number of shares of IASG common stock that were issuable upon exercise of the options multiplied by 0.29, rounded down to the nearest whole share, at an exercise price per share equal to the
exercise price per share under the options before the completion of the Merger divided by 0.29, rounded up to the nearest whole cent.

The
fair value of the converted options, net of the fair value of unvested options, represents additional purchase consideration. Substantially all outstanding options issued to IASG
employees vested prior to the Merger. A total of 713,104 options for the Company's common stock were issued in exchange for 2,459,001 outstanding IASG options. The fair value of these options was
calculated as of December 20, 2006, the announcement date of the Merger, using the Black-Scholes option pricing model. The Company's historical data, among other factors, were used to estimate
the expected price volatility and the expected option life. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the
option. The table below reflects the assumption

77

---



used
for each of the exchanged option awards (dollars in thousands, except per share amounts, ratios, number of options and percentages):

|Expiration
Date |  | # of
Options(1) |  | Exercise
Price/Option |       | Award
Value/Option |   | Expected
Life (yrs) |  | Expected
Volatility |  | Risk-free
Rate |   | Total Fair
Value
|--------------- |  | --------------- |  | --------------------- | ----- | ------------------ | - | ------------------- |  | ------------------- |  | -------------- | - | ----------------
|July 23, 2013   |  | 591,594         |  | $                     | 31.90 |                    | $ | 4.22                |  | 3.28                |  | 81.4           | % | 4.55            
|July 24, 2013   |  | 13,920          |  | $                     | 31.90 |                    | $ | 4.22                |  | 3.28                |  | 81.4           | % | 4.55            
|June 15, 2014   |  | 33,785          |  | $                     | 19.83 |                    | $ | 5.67                |  | 3.73                |  | 77.2           | % | 4.53            
|April 4, 2015   |  | 7,250           |  | $                     | 16.76 |                    | $ | 6.31                |  | 4.13                |  | 74.9           | % | 4.52            
|May 2, 2014     |  | 725             |  | $                     | 12.93 |                    | $ | 6.80                |  | 3.67                |  | 77.2           | % | 4.53            
|Dec. 31, 2010   |  | 580             |  | $                     | 19.31 |                    | $ | 2.10                |  | 2.00                |  | 53.3           | % | 4.69            
|April 23, 2009  |  | 43,500          |  | $                     | 18.10 |                    | $ | 1.30                |  | 1.16                |  | 52.4           | % | 4.85            
|April 23, 2009  |  | 21,750          |  | $                     | 14.66 |                    | $ | 2.07                |  | 1.16                |  | 52.4           | % | 4.85            
|                |  |                 |  |                       |       |                    |   |                     |  |                     |  |                |   |                 
|Totals          |  | 713,104         |  |                       |       |                    |   |                     |  |                     |  |                |   |                 
|                |  |                 |  |                       |       |                    |   |                     |  |                     |  |                |   |                 

---

In
accordance with SFAS 123R, an additional fair value measurement of both the IASG vested options immediately prior to their conversion into options to acquire the Company's
common stock and the options to acquire the Company's common stock which replaced the IASG options held by employees was made as of the closing date of the Merger. The fair value of the Company's
common stock options exceeded the fair value of the IASG options held by employees by approximately $0.2 million and such excess is reflected as compensation expense in the Statement of
Operations in 2007.

The
Company had the following stock option plans under which shares were available for grant at December 31, 2007: the 2004 Stock Option Plan (the "2004 Plan") and the 1997
Long-Term Incentive Plan (the "LTIP"). The 1994 Stock Option Plan is no longer active.



The 2004 Plan was approved by the Protection One stockholders and became effective upon the consummation of the debt-for-equity exchange
on February 8, 2005. Under the 2004 Plan, certain executive officers and selected management employees were granted options in 2005, which are subject to vesting, exercise and delivery
restriction described below, to purchase an aggregate of 1,782,947 shares of common stock. A total of 1,996,184 shares are reserved for issuance under the 2004 Plan subject to such adjustment as may
be necessary to reflect changes in the number or kinds of shares of common stock or other securities of the Company. To the extent an option expires or is canceled, forfeited, settled in cash or
otherwise terminated or concluded without a delivery of shares to which the option related, the undelivered shares will again be available for options. The options initially granted under the 2004
Plan will vest ratably each month during the 48 months after the date of grant, subject to accelerated vesting, in the case of certain senior executive officers, under certain circumstances
following a qualified sale. Under the option agreements applicable to the options granted, any shares of stock purchased through the exercise of options generally will be issued and delivered to the
option holder, and any net payment that may be due to such holder in accordance with the 2004 Plan, will be paid to such holder upon the earlier of: (1) specified dates following the occurrence
of certain permissible distribution events (as defined in the Company's Stock Appreciation Rights Plan) and (2) February 8, 2011, provided that if an option holder's right to receive
stock is converted pursuant to the 2004 Plan into a right to receive cash, the amount of cash payable
will be credited with interest at 6% per annum, compounded annually, from the date such conversion is effective until the applicable payment date.

78

---



On July 25, 2006 an additional 42,500 options were granted under the 2004 Plan with an exercise price of $14.02 per share. On May 7, 2007, an additional 100,000 options
were granted under the 2004 Stock Option Plan with an exercise price of $14.50 per share.



The 1997 LTIP, approved by the Company's stockholders on November 24, 1997, provides for the award of incentive stock options to directors, officers and
key employees. Under the LTIP, 114,000 shares are reserved for issuance, subject to such adjustment as may be necessary to reflect changes in the number or kinds of shares of common stock or other
securities of Protection One. The LTIP provides for the granting of options that qualify as incentive stock options under the Internal Revenue Code and options that do not so qualify.

Each
option has a term of ten years and typically vests ratably over three years. The purchase price of the shares issuable pursuant to the options is equal to (or greater than) the fair
market value of the common stock at the date of the option grant.

The
vesting of options granted to our senior management was previously accelerated because of the change in control of the Company when Westar sold its interest in the Company to the
Principal Stockholders.



The Company adopted SFAS 123R using the modified prospective transition method. Under this transition method, compensation costs are recognized for awards
that are issued beginning in 2006 and for awards that have been granted prior to December 31, 2005 but have yet to reach the end of the requisite service period. In accordance with the modified
prospective transition method, the Company's
Consolidated Financial Statements for prior periods have not been restated to reflect the impact of SFAS 123R.

Exclusive
of the impact of the modification to the options granted in 2005 discussed in Note 1, "The Company," share-based compensation related to stock options granted to
employees of approximately $1.5 million, or $0.06 per share, and $1.4 million, or $0.08 per share (basic and fully diluted), was recorded in general and administrative expense for the
years ended December 31, 2007 and 2006, respectively. No tax benefit was recorded since the Company does not have taxable income and is currently reserving for its federal tax assets. There
were no amounts capitalized relating to share-based employee compensation for the either of the years ended December 31, 2007 and 2006.

The
amount of expense to be recognized over the remaining service period of the modified 2005 options, the 2006 options and the 2007 options as of December 31, 2007 is expected to
be approximately $2.3 million through May 2011.

79

---



The
table below summarizes stock options and warrants for the Company's common stock outstanding as of December 31, 2007. All non-vested options at December 31,
2007 are expected to vest in the future.

|Description            |  | Exercise
Price/Range of
Exercise Prices |  | Number of
Shares of
Common Stock |  | Weighted-
Average
Remaining
Contractual
Life in years |  | Weighted
Average
Exercise
Price |        | Aggregate
Intrinsic
Value
|---------------------- |  | --------------------------------------- |  | -------------------------------- |  | ----------------------------------------------------- |  | ------------------------------- | ------ | -------------------------
|
|Exercisable            |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          
|1998 Options           |  | $       550.00                          |  | 3,860                            |  |                                                       |  | $                               | 550.00 |                          
|1999 Options           |  | 262.50-446.375                          |  | 1,670                            |  |                                                       |  |                                 | 433.16 |                          
|2000 Options           |  | 65.625-71.875                           |  | 2,232                            |  |                                                       |  |                                 | 71.54  |                          
|2001 Options           |  | 60.30-71.00                             |  | 24,550                           |  |                                                       |  |                                 | 65.00  |                          
|2001 Warrants          |  | 65.825                                  |  | 5,000                            |  |                                                       |  |                                 | 65.83  |                          
|2002 Options           |  | 103.50-137.50                           |  | 6,800                            |  |                                                       |  |                                 | 115.82 |                          
|2005 Options           |  | 6.52                                    |  | 1,104,165                        |  |                                                       |  |                                 | 6.52   |                          
|2006 Options           |  | 14.02                                   |  | 15,054                           |  |                                                       |  |                                 | 14.02  |                          
|2007 Options           |  | 14.50                                   |  | 14,583                           |  |                                                       |  |                                 | 14.50  |                          
|IASG converted Options |  | 14.66-31.90                             |  | 692,224                          |  |                                                       |  |                                 | 31.12  |                          
|                       |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          
|                       |  |                                         |  | 1,870,138                        |  | 2.2 years                                             |  |                                 | 18.65  |                          
|                       |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          
|Not exercisable        |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          
|2005 Options           |  | 6.52                                    |  | 454,664                          |  |                                                       |  |                                 | 6.52   |                          
|2006 Options           |  | 14.02                                   |  | 27,446                           |  |                                                       |  |                                 | 14.02  |                          
|2007 Options           |  | 14.50                                   |  | 85,417                           |  |                                                       |  |                                 | 14.50  |                          
|                       |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          
|                       |  |                                         |  | 567,527                          |  | 3.6 years                                             |  |                                 | 8.08   |                          
|                       |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          
|Outstanding            |  |                                         |  | 2,437,665                        |  | 2.5 years                                             |  | $                               | 16.19  |                          
|                       |  |                                         |  |                                  |  |                                                       |  |                                 |        |                          

80

---



A
summary of the Company's nonvested stock options activity for the year ended December 31, 2007 follows:

Shares

Weighted-
Average
Grant-Date Fair Value

Total
Grant-Date
Fair Value(Dollars in
Thousands)Nonvested at January 1, 2006

1,234,339

$
5.40

$
6,662Granted

42,500


9.52


405Vested2003 options

(266
)

40.00


(10
)Vested2005 options

(129,903
)

5.39


(700
)Cash paid on nonvested options(a)







(3,183
)Vestedmodified 2005 options(a)

(259,805
)

2.51


(653
)Vested2006 options

(4,427
)

9.52


(42
)Forfeited







Nonvested at December 31, 2006

882,438

$
2.81

$
2,479Granted

100,000


9.88


988Vestedmodified 2005 options(a)

(389,701
)

2.51


(978
)Vested2006 options

(10,627
)

9.52


(101
)Vested2007 options

(14,583
)

9.88


(144
)Forfeited







Nonvested at December 31, 2007

567,527

$
3.96

$
2,244




The
Company estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses
historical data, among other factors, to estimate the expected stock price volatility, the expected option life and the expected forfeiture rate. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following assumptions were used to estimate the fair value of options granted including the
May 12, 2006 modification of the options granted in 2005:

|                                |  | May 7, 2007 |  | July 25, 2006 |  | May 12, 2006 |  | February 8, 2005
|------------------------------- |  | ----------- |  | ------------- |  | ------------ |  | ----------------
|Expected stock price volatility |  | 73.9%       |  | 72.7%         |  | 75.1%        |  | 82.1%           
|Risk free interest rate         |  | 4.52%       |  | 4.96%         |  | 5.08%        |  | 3.8%            
|Expected option life            |  | 6 years     |  | 6 years       |  | 4.75 years   |  | 6 years         
|Expected dividend yield         |  |            |  |              |  |             |  |                

81

---



The
following table summarizes the Company's activities with respect to its stock option plans for the years presented:

Warrants
And Options

Weighted
Average
Exercise
Price

Weighted
Average
Grant Date
Fair Value(Dollars in
Thousands)Outstanding at December 31, 2004

85,484

$
147.95Granted

1,782,947


7.50

$
9,610Forfeited

(175,030
)

29.47Outstanding at December 31, 2005

1,693,401


12.32Granted

42,500


14.02

$
405Exercised (intrinsic value of $428,928)

(40,882
)

7.50Forfeited

(39,144
)

60.06Outstanding at December 31, 2006

1,655,875


10.41Granted

100,000


14.50

$
988IASG options converted

713,104


29.77

$
2,900Forfeited

(31,314
)

27.95Outstanding at December 31, 2007

2,437,665


16.19


No
cash was received for the option exercises in 2006 as the option holders elected to utilize a cashless exercise in which they surrendered vested options in lieu of a cash payment for
the exercise price.



Annual grants of RSUs are awarded to the Company's independent board members as part of the Company's independent director compensation plan approved in April
2007. An award of 40,570 RSUs was granted on August 23, 2007 with a per unit fair value of $12.94. An award of 1,000 RSUs was granted on April 15, 2006 with a per unit fair value
of $17.25. An award of 2,000 RSUs was granted on March 28, 2005 with a per unit fair value of $7.50. The RSUs vest ratably over a 4-year period, provided, however, that any
and all unvested RSUs shall be immediately forfeited in the event the board member ceases to serve on the Company's board. A total of 750 and 500 RSUs vested during the years ended
December 31, 2007 and 2006, respectively, and 42,320 RSUs remained unvested as of December 31, 2007.



On February 8, 2005, pursuant to a management incentive plan, the Company's senior management team received an aggregate of 1,996,183 Stock Appreciation
Rights, or SARs. The SARs vest and become payable upon the earlier of (1) a qualified sale as defined in the SAR Plan, which generally means the Principal Stockholders' sale of at least 60% of
their equity interest in the Company, provided that if the qualified sale is not a permissible distribution event (as defined in the SAR Plan) the payment will be made, with interest, in connection
with a subsequent permissible distribution event, and (2) February 8, 2011. The exercise price of the SARs was $4.50 on the grant date and increases by 9% per annum, which is referred to
as the fixed return, compounded annually, beginning on February 8, 2006. If the Principal Stockholders sell less than 60% of their equity interest in the Company, the exercise price applicable
to an equivalent percentage of management's SARs would be based on the fixed return through the date of such sale. Each SAR that vests and becomes payable in connection with a qualified sale will
generally entitle the holder of a SAR to receive the difference between the exercise price and the lesser of (1) the value of the consideration paid for one

82

---



share
of stock in such qualified sale, or the fair market value of one share of stock if the qualified sale is not a sale to a third party and (2) $7.50, provided that if a SAR holder's right
to receive stock is converted pursuant to the SAR Plan into a right to receive cash from a grantor trust that the Company may establish, the amount of cash payable will be credited with interest at 6%
per annum, compounded annually, from the date such conversion is effective until the applicable payment date.

The
SAR Plan provides that the exercise price of the SARs shall be equitably adjusted or modified as necessary to preserve the intended economic benefit of the original grant in the
event there is, among other things, a recapitalization, and the SAR Plan provides that the exercise price of the SARs may be adjusted or modified upon the occurrence of any event that makes adjustment
or modification appropriate and equitable to prevent inappropriate penalties or windfalls with respect to the terms of the SAR Plan and the holders of the SARs. On May 12, 2006, after
determining that the $70.5 million cash dividend declared on April 27, 2006 would adversely impact the SARs granted in 2005, the Company's board of directors agreed to amend the SARs
agreements by effectively fixing the exercise price on 439,160 outstanding SARs (the modified SARs) at $5.02. Therefore, if there is not a qualified sale prior to February 8, 2011, the holders
of these modified SARs will be entitled to receive the difference between $7.50 and $5.02 per SAR, or $2.48, from the Company for a total cash outlay of approximately $1.1 million on
February 8, 2011.

In
November 2006, the Company's board of directors approved the reallocation of SARs forfeited by a former executive officer to the other SAR Plan participants, Messrs. Ginsburg,
Nevin and Pefanis. As proposed by the Company's Chief Executive Officer and approved by its board of directors, the SARs were reallocated to the applicable named executive officers in proportion to
the number of SARs that they held immediately before the reallocation. Except for a reallocation upon any forfeiture by a former executive officer, the SAR Plan does not allow for any grant of
additional SARs.

As
of December 31, 2007 and 2006, respectively, the Company had established a liability of approximately $0.3 million and $0.1 million to reflect the portion of the
modified SARs that have been earned since the date of the modification with the associated expense reflected in general and administrative expense. Assuming there is no qualified sale prior to
February 8, 2011, the Company expects to record approximately $0.2 million in expense per year through February 8, 2011 related to these SARs. As of December 31, 2007 and
2006, no value has been ascribed to the SARs that have not been modified and no value will be allocated to those SARs unless and until it becomes probable that a qualified sale will occur.

9. Leases

The Company leases office facilities and equipment for lease terms maturing through 2014. Future minimum lease payments under non-cancelable operating
leases are as follows (dollar amounts in thousands):

Year ended December 31,2008

$
6,5802009


4,9382010


4,1572011


3,4512012


2,117Thereafter


900$
22,143


Total
rent expense for the years ended December 31, 2007 and 2006, the period February 9, 2005 through December 31, 2005, and the period January 1, 2005
through February 8, 2005, was $7.1 million, $5.3 million, $4.9 million and $0.6 million, respectively.

83

---



10. Income Taxes

Components of income tax (expense) benefit are as follows (dollar amounts in thousands):

|        |          |  |   |      |   | February 9
December 31, |      |   |   | January 1
February 8, |  
|------- | -------- |  | - | ---- | - | ------------------------ | ---- | - | - | ---------------------- | -
|
|
|Federal |          |  |   |      |   |                          |      |   |   |                        |  
|        | Current  |  | $ |     |   | $                        |     |   | $ |                       |  
|        | Deferred |  |   |     |   |                          |     |   |   |                       |  
|State   |          |  |   |      |   |                          |      |   |   |                        |  
|        | Current  |  |   | (721 | ) |                          | (416 | ) |   | (312                   | )
|        | Deferred |  |   | 8    |   |                          | (251 | ) |   |                       |  
|        |          |  |   |      |   |                          |      |   |   |                        |  
|        | Total    |  | $ | (713 | ) | $                        | (667 | ) | $ | (312                   | )
|        |          |  |   |      |   |                          |      |   |   |                        |  

The
difference between the income tax (expense) benefit at the federal statutory rate and income tax (expense) benefit in the accompanying statements of operations is as follows:

|                                                                     |  |     |    |     |    | February 9
December 31, |    |  |  | January 1
February 8, |  
|-------------------------------------------------------------------- |  | --- | -- | --- | -- | ------------------------ | -- |  |  | ---------------------- | -
|
|
|Federal statutory tax rate                                           |  | 35  | %  | 35  | %  | 35                       | %  |  |  | 35                     | %
|State income tax benefit, net of federal expense                     |  | 4   |    | 4   |    | 1                        |    |  |  | 2                      |  
|Non-deductible change in control, debt restructuring costs and other |  | (2  | )  | (4  | )  | (2                       | )  |  |  | (20                    | )
|State tax credits                                                    |  | 10  |    |    |    |                         |    |  |  |                       |  
|Valuation allowance                                                  |  | (49 | )  | (39 | )  | (36                      | )  |  |  | (17                    | )
|                                                                     |  |     |    |     |    |                          |    |  |  |                        |  
|                                                                     |  | (2  | )% | (4  | )% | (2                       | )% |  |  | 0                      | %
|                                                                     |  |     |    |     |    |                          |    |  |  |                        |  

Management
believes the Company's net federal deferred tax assets, including those related to net operating losses, are not likely realizable and therefore its federal deferred tax
assets are fully reserved. The Company has $0.2 million of state deferred tax assets recorded as of December 31, 2007, which relate to benefits expected to be received for state tax
credits. In assessing whether deferred taxes are realizable, management considers whether it is more likely than not that some portion or all deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this assessment. The Company also has a state deferred tax liability of approximately $1.3 million and $0.3 million
at December 31, 2007 and 2006, respectively, related to states that tax on a separate company basis.

84

---



Deferred
income tax assets and liabilities were composed of the following (dollar amounts in thousands):

2007

2006Deferred taxes, current:Accrued liabilities

$
4,253

$
3,632Accounts receivable, due to allowance


1,974


2,792Other


(576
)

373Valuation allowance


(5,651
)

(6,797
)$


$
Deferred taxes, noncurrent:Net operating loss carry-forwards

$
50,346

$
26,652State tax credits


3,188


Property & equipment


11,870


11,115Deferred customer acquisition costs (net of revenue)


(18,026
)

(17,306
)Customer accounts


10,627


(5,924
)Dealer relationships


(7,702
)

Goodwill


4,919


6,087Other intangibles


(2,807
)

(641
)Debt


1,691


(5,118
)Other


1,527


919Valuation allowance


(56,754
)

(16,035
)$
(1,121
)
$
(251
)Less: Separate state deferred tax asset


172


$
(1,293
)
$
(251
)


At
December 31, 2007, the Company has approximately $142 million of net operating loss carry-forwards which begin to expire in 2020. Total state net operating losses of
approximately the same amount have various expiration dates.

As
a result of ownership changes related to the merger with IASG and previous IASG acquisitions, approximately $53 million of these net operating losses are subject to Internal
Revenue Code ("IRC") Section 382 limitations, which limit the Company's ability to utilize these net operating losses on an annual basis. As a result of IRC Section 382 limitations
approximately $10 million of the net operating loss can not be utilized. Approximately $4 million of these net operating losses are currently available and approximately
$39 million of the carry-forwards, subject to certain limitations will become available in future years.

If
any portion of the approximately $24.2 million valuation allowance associated with the acquisitions is reversed in the future, the benefit of any reversal would
(i) first be applied to reduce to zero any goodwill related to the acquisitions, (ii) second to reduce other non-current intangible assets related to the acquisitions and
(iii) third to reduce income tax expense.

As
a result of certain realization requirements of SFAS 123(R), the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets at
December 31, 2007 and 2006 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. Equity will be increased by
approximately $0.6 million if and when such deferred tax assets are ultimately realized.

In
June 2006, the FASB issued FASB Interpretation ("FIN") 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109." This
interpretation clarifies the

85

---



accounting
for uncertainty in income taxes recognized in an entity's financial statements. The interpretation prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in a tax return. For the benefits of a tax position taken to be recognized, the tax position must be
more-likely-than-not to be sustained upon examination by taxing authorities. This interpretation was effective for fiscal years beginning after December 15,
2006. The cumulative effect, if any, of applying FIN 48 is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. The Company's adoption of this
statement on January 1, 2007 did not have any impact on its consolidated financial statements. The Company had no unrecognized tax benefits at either January 1, 2007 or at
December 31, 2007.

The
Company is subject to U.S. Federal income tax as well as income tax of multiple state jurisdictions. For periods prior to February 17, 2004, the Company's federal income tax
return was included as part of a consolidated income tax return of its then parent company, Westar Energy, Inc. The Company's income tax return for the 2006 tax year is currently under
examination by the Internal Revenue Service. The Company does not expect that the results of this examination will have a material effect on our financial condition or results of operations. Federal
income tax returns for the periods after February 17, 2004 remain open to examination by the Internal Revenue Service.

The
Company is also potentially entitled to certain contingent payments from its former parent. See Note 12, "Commitments and ContingenciesTax Sharing Agreement" for
additional information.

11. Related Party Transactions

Principal Stockholders Management Agreements

On April 18, 2005, the Company entered into management agreements with each of Quadrangle Advisors LLC ("QA") and Quadrangle Debt Recovery
Advisors LLC ("QDRA," and together with QA, the "Advisors"), pursuant to which the Advisors, affiliates of the Principal Stockholders, provided business and financial advisory and consulting
services to the Company in exchange for annual fees of $1.0 million (in the case of QA) and $0.5 million (in the case of QDRA), payable in advance in quarterly installments. The the
Principal Stockholders management agreements also provided that when and if
the Advisors advised or consulted with the Company's board of directors or senior executive officers with respect to an acquisition by the Company, divesture (if the Company did not engage a financial
advisor with respect to such divesture) or financing transaction, they could require the Company to pay additional fees in connection with any such transaction in an amount not to exceed 0.667% (in
the case of QA) and 0.333% (in the case of QDRA) of the aggregate value of such transaction. The Principal Stockholders management agreements were terminated as of April 2, 2007 in connection
with the completion of the Merger. The Company's board of directors concluded that it was in the best interests of the Company to terminate these arrangements with the Advisors upon completion of the
Merger due, in part, to the Principal Stockholders' ownership interest in the Company decreasing to 70.0% from 97.1% and eliminating the Advisors' role providing business and financial advisory and
consulting services to the Company.

The
Company paid the Advisors aggregate management fees of $2.7 million and $1.5 million in 2007 and 2006, respectively, pursuant to the terms of the management agreements.
The 2007 amounts include $375,000 paid in connection with the termination of the management agreements, representing the second quarterly installments of the 2007 annual fees due to the Advisors under
the management agreements, and approximately $1.9 million for services rendered in connection with the Merger, or 1% of the aggregate value of the Merger. The $1.9 million fee was
capitalized as a direct cost of the Merger. See Note 3, "IASG Acquisition," for additional information related to transaction fees included in the net consideration for the Merger.

86

---



Administrative Services and Management Services Agreements

Westar Energy provided administrative services at its fully loaded cost to the Company pursuant to an agreement which is referred to as the administrative
services agreement, that included accounting, tax, audit, human resources, legal, purchasing and facilities services. The agreement terminated effective February 17, 2005. The Company expensed
approximately $0.1 million for the period February 9, 2005 through February 17, 2005 and $0.1 million for the period January 1, 2005 through February 8, 2005
for these services.

Westar
Energy has claimed that the Company should reimburse Westar Energy for as much as $1.2 million for an allocation of the costs incurred by Westar in the development of the
application systems shared with the Company under the administrative service agreement. See Note 12, "Commitments and ContingenciesAdministrative Services Agreement," for further
discussion related to the claim.

Credit Facility

The Principal Stockholders credit facility was repaid in full on April 18, 2005 in connection with the consummation of the Senior Credit Agreement. The
following table indicates the amount of interest accrued and paid on the credit facility for the periods listed (dollar amounts in millions).

February 9
April 18, 2005

January 1
February 8, 2005Interest Accrued

$
1.5

$
1.9Interest Paid

$
1.5

$
1.9


The
Company also paid the Principal Stockholders a one-time fee of $1.15 million in April 2005 upon consummation of the debt-for-equity
exchange in connection with the amendment to the credit facility.

Principal Stockholders Debt Restructuring Reimbursement

In addition to interest accrued and paid under the Principal Stockholders credit facility, discussed above, the Company expensed $0.2 million for legal
expenses incurred by the Principal Stockholders for the period January 1, 2005 through February 8, 2005. Pursuant to contractual requirements, the Company also paid the costs for the
financial and legal advisors for both the senior and subordinated debt holders relating to the restructuring of the Company's indebtedness.

Board of Directors and Amended Bylaws

If and for so long as POI Acquisition, L.L.C. owns at least 40% of the outstanding shares of the Company's common stock, it shall have the right to elect to
increase the size of the board by two directors, which it shall be entitled to designate.

In
accordance with the stockholders agreement, the Company amended its bylaws following the restructuring in 2005. The stockholders agreement also includes voting agreements, certain
restrictions on the transfer of the Company's common stock, drag-along rights in favor of POI Acquisition, L.L.C. and tag-along rights in favor of Monarch, all upon customary
terms
and subject to certain customary exceptions (including exceptions for certain transfers among affiliates). In addition, the stockholders agreement provides the Principal Stockholders with the right to
participate on a proportional basis in any future equity issuance by the Company, except for issuances pursuant to registered public offerings, business combination transactions or officer, employee,
director or consultant arrangements.

87

---



Registration Rights Agreement

As a condition to the consummation of the debt-for-equity exchange, the Company entered into a registration rights agreement with POI
Acquisition, L.L.C. and Monarch. The registration rights agreement provides, among other things, that the Company will register, upon notice, shares of its common stock owned by such parties. Under
the registration rights agreement, POI Acquisition, L.L.C. is permitted up to four demand registrations and Monarch is permitted up to two demand registrations, subject to certain conditions described
in the agreement. POI Acquisition, L.L.C. and Monarch also received piggyback registration rights whereby they shall have the opportunity to register their securities pursuant to any registration
statement the Company may file in the future, subject to certain conditions. The Company is also obligated to pay certain of their expenses pursuant to the registration of their securities under the
registration rights agreement.

12. Commitments and Contingencies:

The Company is a defendant in a number of pending legal proceedings incidental to the normal course of its business and operations. Unless otherwise noted below,
the Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on the Company's financial condition, results of operations or
liquidity.

Scardino Litigation

On April 17, 2006, the Company was named a defendant in a litigation proceeding brought by Frank and Anne Scardino arising out of a June 2005 fire at their
home in Villanova, Pennsylvania (Frank and Anne Scardino v. Eagle Systems, Inc., Eagle Monitoring, Inc. and Protection One Alarm Monitoring, Inc. d/b/a
Dynawatch, Delaware County, Pennsylvania Court of Common Pleas, Cause No. 06-4485). The complaint alleges that the defendants failed to provide contracted
fire
detection and monitoring services, breaching their contractual and warranty obligations in violation of Pennsylvania Unfair Trade Practices and Consumer Protection Law, resulting in alleged damages to
plaintiffs in excess of $3.0 million. Under the Unfair Trade Practices and Consumer Protection Law, claimants may be entitled to seek treble damages, attorneys' fees and costs. The complaint
also asserted claims based on alleged negligence and gross negligence; however, the Company's preliminary objections to these counts were granted by the court, and these claims were accordingly
dismissed.

The
Company has notified its liability insurance carriers of the claim and has answered the remaining counts. Discovery has commenced in the matter. At the request of the plaintiffs,
trial date was moved from February 2008 to June 2008. All intervening discovery deadlines were extended for all parties.

The
Company does not believe that it breached its contractual obligations or otherwise violated its duties in connection with this matter. In the opinion of management, the final outcome
of such litigation is not expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity.

Few Litigation

On June 26, 2006, Thomas J. Few, Sr., the former president of IASG, initiated litigation against IASG in connection with his employment, seeking a monetary
award for amounts allegedly due to him under an employment agreement. The claim was filed in the Superior Court of New Jersey, in the Bergen County Law Division. (Thomas J.
Few, Sr. v. Integrated Alarm Service Group, Inc.,Superior Court of the State of New Jersey, Bergen County Division, Docket
No. BER-L-4573-06.) Mr. Few alleged that he was owed up to 36 months of pay as well as an amount representing accrued but unused vacation as a
result of his resignation following the alleged breach of the employment agreement. IASG denies various allegations in the complaint and has asserted various affirmative defenses and counterclaims

88

---



against
Mr. Few, including breach of the terms of his employment agreement, violation of various restrictive covenants and breach of fiduciary duty.

Discovery
proceedings have commenced as ordered by the Bergen County Law Division. Mr. Few died on July 18, 2007, and on October 3, 2007, his estate was formally
substituted as the plaintiff in the proceeding. Discovery will continue as directed by the Court.

The
Company does not believe that IASG breached its contractual obligations or otherwise violated its duties in connection with this matter and intends to vigorously defend the matter.
In the opinion of
management, the final outcome of such litigation is not expected to have a material adverse effect on the Company's financial condition, results of operations or liquidity.

By the Carat, Inc. Litigation

On April 30, 2007, IASG and its subsidiaries Criticom International Corporation and Monital Signal Corporation were served in a lawsuit brought by By the
Carat, Inc. and John P. Humbert, Jr. and his wife, Valery Humbert, its owners, in connection with a December 2004 armed robbery of their jewelry business. (By the
Carat, Inc., John P. Humbert, Jr. and Valery Humbert v. Knightwatch Security Systems, Criticom International Corporation, Monital Signal Corporation, Integrated Alarm Services
Group, Inc., et al, Superior Court of New Jersey, Monmouth County Law Division, Docket No.: MON-L-5830-06). The
complaint seeks unspecified damages for alleged bodily injury and property losses based on various causes of action including breach of contract, breach of the covenant of good faith and fair dealing,
consumer fraud, intentional and negligent infliction of emotional distress, breach of warranty and gross negligence.

The
Company has notified its insurance carriers of the matter and has engaged counsel to defend the Company. The Company filed a motion which resulted in the dismissal of the plaintiff's
claims for breach of the covenant of good faith and fair dealing, consumer fraud, and breach of warranty. The material claims which remain are breach of contract (as to By the Carat, Inc. only)
and gross negligence and negligent/intentional infliction of emotional distress (as to John and Valery Humbert, as individuals).

As
to the remaining claims, the Company has filed an answer including various affirmative defenses. In addition, the Company has asserted a contractual counterclaim against By the Carat
(for indemnification as to the claims made by John P. Humbert, Jr. and his wife), contractual cross claims against co-defendant Knightwatch Security Systems, Inc. (for
indemnification as to the claims made by all plaintiffs), and a third-party complaint against the robbers (which will allow for apportionment of fault under New Jersey statutory law).

In
the opinion of management, the final outcome of such litigation is not expected to have a material adverse effect on the Company's financial condition, results of operations or
liquidity.

Consumer Complaints

The Company occasionally receives notices of consumer complaints filed with various state agencies. The Company has developed a dispute resolution process for
addressing these administrative complaints. The ultimate outcome of such matters cannot presently be determined; however, in the
opinion of management, the resolution of such matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

Tax Sharing Agreement

The Company is potentially entitled to certain contingent payments, depending on whether Westar claims and receives certain additional tax benefits in the future
with respect to the February 17, 2004 sale transaction. While these potential contingent payments, if any, could be significant, the Company is

89

---



unable
to determine at this time whether Westar will claim any such benefits or, if Westar were to claim any such benefits, the amount of the benefits that Westar would claim or when or whether Westar
would actually receive any such benefits. Due to this uncertainty, the Company has not recorded any tax benefit with respect to any such potential contingent payments.

Termination of the AT&T Agreement

Through June 30, 2008 the Company expects to remain a partner through its Retail segment in a marketing alliance with AT&T (through AT&T's acquisition of
BellSouth) that offers monitored security services to the residential, single-family market and to businesses in 17 of the larger metropolitan markets in a nine-state AT&T region of the
southeastern United States. The Company pays AT&T a commission for each new contract generated in the nine-state region, regardless of whether the new contract came directly from an AT&T
lead, as well as a recurring royalty based on a percentage of recurring charges. Upon termination of the agreement and for a period of three years following termination of the marketing alliance,
unless a one-time payment is agreed to by the parties, the Company is required to continue to pay a recurring royalty to AT&T for active customers added during the term of the existing
agreement. The Company will, however, no longer be required to pay AT&T a commission for new contracts added in the nine-state region. The Company expects out of pocket costs for the
re-branding will approximate $1.0 million, all of which are expected to be incurred during 2008.

13. Employee Benefit Plans:

401(k) Plans

The Company maintains a tax-qualified, defined contribution plan that meets the requirements of Section 401(k) of the Internal Revenue Code.

Protection One 401(k) Plan.The Company makes contributions to the Protection One 401(k) Plan, that are allocated among
participants based upon the respective contributions made by the participants through salary reductions during the applicable plan year. The Company's matching contribution is made in cash. For the
years ended December 31, 2007 and 2006, and for the periods February 9, 2005 through December 31, 2005 and January 1, 2005 through February 8, 2005, the Company made
matching cash contributions to the plan of $1.9 million, $1.3 million, $0.9 million, $0.1 million, respectively. The funds of the plan are deposited with a trustee and at
each participant's option in one or more investment funds, including a Company stock fund. Contributions to the Company stock fund were suspended during 2003, and have not resumed as of
March 10, 2008. The plan was amended and restated effective January 1, 2007.

Network Multifamily 401(k) Plan.The Network Multifamily 401(k) plan was merged with the Protection One 401(k) plan as of
March 1, 2006. For the period February 9, 2005 through December 31, 2005, the Company made matching cash contributions to the plan of $0.2 million. The funds of the plan
were deposited with a trustee and at each participant's option in one or more investment funds.

IASG 401(k) Plan.Effective September 1, 2004 IASG's parent company and its subsidiaries merged three 401(k) plans
into one plan which provided benefits to all IASG employees meeting customary eligibility requirements. IASG matched 50% of the employees' contribution up to 6% of employee compensation. Upon
consummation of the Merger, contributions to the plan ceased and the plan was terminated. Termination of the plan resulted in the freezing of the assets until a "Letter of Determination" is obtained
from the Internal Revenue Service ("IRS"). On October 29, 2007, an application to obtain a "Letter of Determination" for the terminated plan was submitted to the IRS.

90

---



The
Company is currently awaiting receipt of the "Letter of Determination," which will allow participants of the plan to take action with their accounts.

Management Employment Agreements and Key Employee Retention Plan

In July and August 2004, the Company's senior executives entered into new employment agreements. These employment agreements provide for, among other things,
minimum annual base salaries, bonus awards, payable in cash or otherwise, and participation in all of the Company's employee benefit plans
and programs in effect for the benefit of senior executives, including stock option, 401(k) and insurance plans, and reimbursement for all reasonable expenses incurred in connection with the conduct
of the business of the Company, provided the executive officers properly account for any such expenses in accordance with Company policies. The employment agreements also contain provisions providing
for compensation to the senior executives under certain circumstances after a change in control of the Company and in certain other circumstances.

14. Fair Market Value of Financial Instruments:

For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, the
carrying amounts approximate fair market value due to their short maturities. Notes receivable approximate fair market value as they were recorded at fair value in connection with the Merger.

The
fair value of the Company's debt instruments are estimated based on quoted market prices except for the senior credit facility at December 31, 2006, which had no available
quote and was estimated by the Company based on the terms of the facility and comparison to similar debt. At December 31, the fair value and carrying amount of the Company's debt for the years
indicated were as follows (dollar amounts in thousands):

Fair Value

Carrying Value2007

2006

2007

2006Senior credit facility

$
282,223

$
297,750

$
294,750

$
297,750Senior Secured Notes (12.0%)


125,911





124,128


Senior Subordinated Notes (8.125%)


109,650


107,582


101,882


95,343$
517,784

$
405,332

$
520,760

$
393,093


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

15. Segment Reporting:

In connection with the Merger, the Company modified its segment disclosures. Prior to the Merger, the Company managed its operations in two business segments:
Protection One Monitoring, which included Retail and Wholesale operations, and Network Multifamily. Subsequent to the Merger, the Company separated the management of its Wholesale operations from its
Retail operations and now organizes its operations into three business segments: Retail, Wholesale and Multifamily. The Company's operating segments are defined as components for which separate
financial information is available that is evaluated regularly by the chief operating decision maker. The operating segments are managed separately because each operating segment represents a
strategic business unit that serves different markets. All of the Company's reportable segments operate in the United States of America. The segment presentation for periods prior to the Merger has
been recast in accordance with GAAP to conform to the current segment classification.

91

---



The
Company's Retail segment provides security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and business
customers. The Company's Wholesale segment provides monitoring, financing and business support services to independent security alarm dealers. The Company's Multifamily segment provides security alarm
services to apartments, condominiums and other multi-family dwellings.

The
accounting policies of the operating segments are the same as those described in Note 2, "Summary of Significant Accounting Policies." The Company manages its business
segments based on earnings before interest, income taxes, depreciation, amortization (including amortization of deferred customer acquisition costs and revenue) and other items, referred to as
Adjusted EBITDA.

Reportable
segments (dollar amounts in thousands):

|                                                                             |  | For the year ended December 31, 2007
|---------------------------------------------------------------------------- |  | ------------------------------------
|
|Revenue                                                                      |  | $                                   
|Adjusted EBITDA(2)                                                           |  |                                     
|Amortization of intangibles and depreciation expense                         |  |                                     
|Amortization of deferred costs in excess of amortization of deferred revenue |  |                                     
|Merger-related costs                                                         |  |                                     
|Segment assets                                                               |  |                                     
|Expenditures for property, exclusive of rental equipment                     |  |                                     
|Investment in new accounts and rental equipment, net                         |  |                                     

|
|

|                                                                             |  | For the year ended December 31, 2006
|---------------------------------------------------------------------------- |  | ------------------------------------
|
|Revenue                                                                      |  | $                                   
|Adjusted EBITDA(2)                                                           |  |                                     
|Amortization of intangibles and depreciation expense                         |  |                                     
|Amortization of deferred costs in excess of amortization of deferred revenue |  |                                     
|Corporate consolidation costs                                                |  |                                     
|Recapitalization costs                                                       |  |                                     
|Segment assets                                                               |  |                                     
|Expenditures for property, exclusive of rental equipment                     |  |                                     
|Investment in new accounts and rental equipment, net                         |  |                                     

92

---



|
|

|                                                                             |  | 2005
|---------------------------------------------------------------------------- |  | ----
|
|
|Revenue                                                                      |  | $   
|Adjusted EBITDA(2)                                                           |  |     
|Amortization of intangibles and depreciation expense                         |  |     
|Amortization of deferred costs in excess of amortization of deferred revenue |  |     
|Change of control and debt restructuring costs                               |  |     
|Corporate consolidation costs                                                |  |     
|Key employee retention plan expense                                          |  |     
|Segment assets                                                               |  |     
|Expenditures for property, exclusive of rental equipment                     |  |     
|Investment in new accounts and rental equipment, net                         |  |     

---

93

---





|                                                                             |  |   |         |   |   | Consolidated |  
|---------------------------------------------------------------------------- |  | - | ------- | - | - | ------------ | -
|
|
|
|
|Loss before income taxes                                                     |  | $ | (31,527 | ) | $ | (16,738      | )
|Plus:                                                                        |  |   |         |   |   |              |  
|Interest expense, net                                                        |  |   | 46,977  |   |   | 35,900       |  
|Amortization of intangibles and depreciation expense                         |  |   | 62,064  |   |   | 41,667       |  
|Amortization of deferred costs in excess of amortization of deferred revenue |  |   | 24,175  |   |   | 17,573       |  
|Amortization of stock based compensation costs                               |  |   | 1,469   |   |   | 1,408        |  
|Merger-related costs                                                         |  |   | 4,344   |   |   |              |  
|Recapitalization costs                                                       |  |   |        |   |   | 4,452        |  
|Change in control and debt restructuring costs                               |  |   |        |   |   |             |  
|Key employee retention plan expense(a)                                       |  |   |        |   |   |             |  
|Corporate consolidation costs(b)                                             |  |   |        |   |   | 20           |  
|Loss on retirement of debt                                                   |  |   |        |   |   |             |  
|Less:                                                                        |  |   |         |   |   |              |  
|Other income                                                                 |  |   | (90     | ) |   | (52          | )
|                                                                             |  |   |         |   |   |              |  
|Adjusted EBITDA                                                              |  | $ | 107,412 |   | $ | 84,230       |  
|                                                                             |  |   |         |   |   |              |  

---

16. Summarized Combined Financial Information of the Subsidiary Guarantors of Debt:

Protection One Alarm Monitoring, Inc., a wholly-owned subsidiary of the Company, is the primary obligor for all outstanding debt securities (see
Note 7, "Debt and Capital Leases"). These debt securities are fully and unconditionally guaranteed by the Company and wholly owned subsidiaries of Protection One Alarm Monitoring, Inc.
The following tables present condensed consolidating financial information for Protection One, Inc., Protection One Alarm Monitoring, Inc., and all other subsidiaries. Condensed
financial information for Protection One, Inc. and Protection One Alarm Monitoring, Inc. on a stand-alone basis is presented using the equity method of accounting for subsidiaries in
which they own or control twenty percent or more of the voting shares.

94

---



Condensed Consolidating Balance Sheet (Deficiency in Assets)
December 31, 2007
(dollar amounts in thousands)

|                                                                  |  | Protection One, Inc. |          | Protection One Alarm Monitoring |   | Subsidiary Guarantors |   | Eliminations |          | Consolidated |  
|----------------------------------------------------------------- |  | -------------------- | -------- | ------------------------------- | - | --------------------- | - | ------------ | -------- | ------------ | -
|Assets                                                            |  |                      |          |                                 |   |                       |   |              |          |              |  
|Current Assets                                                    |  |                      |          |                                 |   |                       |   |              |          |              |  
|Cash and cash equivalents                                         |  | $                    |         |                                 | $ | 40,607                |   | $            | 392      |              | $
|Accounts receivables, net                                         |  |                      |         |                                 |   | 18,707                |   |              | 18,904   |              |  
|Notes receivables                                                 |  |                      |         |                                 |   |                      |   |              | 2,600    |              |  
|Inventories, net                                                  |  |                      |         |                                 |   | 3,518                 |   |              | 1,033    |              |  
|Prepaid expenses                                                  |  |                      |         |                                 |   | 3,739                 |   |              | 538      |              |  
|Other                                                             |  |                      |         |                                 |   | 6,646                 |   |              | 711      |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total current assets                                              |  |                      |         |                                 |   | 73,217                |   |              | 24,178   |              |  
|Restricted cash                                                   |  |                      |         |                                 |   | 1,928                 |   |              | 851      |              |  
|Property and equipment, net                                       |  |                      |         |                                 |   | 25,970                |   |              | 7,800    |              |  
|Customer accounts, net                                            |  |                      |         |                                 |   | 138,267               |   |              | 144,129  |              |  
|Dealer relationships, net                                         |  |                      |         |                                 |   |                      |   |              | 41,565   |              |  
|Other intangibles, net                                            |  |                      |         |                                 |   |                      |   |              | 2,099    |              |  
|Goodwill                                                          |  |                      |         |                                 |   | 6,142                 |   |              | 35,462   |              |  
|Trade name                                                        |  |                      |         |                                 |   | 22,987                |   |              | 5,625    |              |  
|Notes receivables, net                                            |  |                      |         |                                 |   | 115,345               |   |              | 3,267    |              |  
|Deferred customer acquisition costs                               |  |                      |         |                                 |   | 121,243               |   |              | 9,638    |              |  
|Other                                                             |  |                      |         |                                 |   | 8,147                 |   |              | 1,932    |              |  
|Accounts receivable (payable) from (to) associated companies      |  |                      | (73,714  | )                               |   | 69,068                |   |              | 4,646    |              |  
|Investment in POAMI                                               |  |                      | 52,287   |                                 |   |                      |   |              |         |              |  
|Investment in subsidiary guarantors                               |  |                      |         |                                 |   | 135,071               |   |              |         |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total assets                                                      |  | $                    | (21,427  | )                               | $ | 717,385               |   | $            | 281,192  |              | $
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Liabilities and Stockholder Equity (Deficiency in Assets)         |  |                      |          |                                 |   |                       |   |              |          |              |  
|Current liabilities:                                              |  |                      |          |                                 |   |                       |   |              |          |              |  
|Current portion of long-term debt and capital leases              |  | $                    |         |                                 | $ | 5,122                 |   | $            | 57       |              | $
|Accounts payable                                                  |  |                      |         |                                 |   | 3,606                 |   |              | 443      |              |  
|Accrued liabilities                                               |  |                      | 1,090    |                                 |   | 28,031                |   |              | 6,150    |              |  
|Deferred revenue                                                  |  |                      |         |                                 |   | 36,350                |   |              | 10,991   |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total current liabilities                                         |  |                      | 1,090    |                                 |   | 73,109                |   |              | 17,641   |              |  
|Long-term debt and capital leases, net of current portion         |  |                      |         |                                 |   | 512,397               |   |              | 124,128  |              |  
|Deferred customer acquisition revenue                             |  |                      |         |                                 |   | 78,836                |   |              | 906      |              |  
|Deferred tax liability                                            |  |                      |         |                                 |   |                      |   |              | 1,293    |              |  
|Other                                                             |  |                      |         |                                 |   | 756                   |   |              | 2,153    |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total Liabilities                                                 |  |                      | 1,090    |                                 |   | 665,098               |   |              | 146,121  |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Stockholders' Equity (Deficiency in Assets)                       |  |                      |          |                                 |   |                       |   |              |          |              |  
|Common stock                                                      |  |                      | 253      |                                 |   | 2                     |   |              | 1        |              |  
|Additional paid in capital                                        |  |                      | 179,352  |                                 |   | 1,511,014             |   |              | 278,293  |              |  
|Accumulated other comprehensive loss                              |  |                      | (530     | )                               |   | (530                  | ) |              |         |              |  
|Deficit                                                           |  |                      | (201,592 | )                               |   | (1,458,199            | ) |              | (143,223 | )            |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total stockholders' equity (deficiency in assets)                 |  |                      | (22,517  | )                               |   | 52,287                |   |              | 135,071  |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total liabilities and stockholders' equity (deficiency in assets) |  | $                    | (21,427  | )                               | $ | 717,385               |   | $            | 281,192  |              | $
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  

95

---



Condensed Consolidating Balance Sheet (Deficiency in Assets)
December 31, 2006
(dollar amounts in thousands)

|                                                                  |  | Protection
One, Inc. |          | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |          | Consolidated |  
|----------------------------------------------------------------- |  | -------------------- | -------- | ------------------------------- | - | --------------------- | - | ------------ | -------- | ------------ | -
|Assets                                                            |  |                      |          |                                 |   |                       |   |              |          |              |  
|Current Assets                                                    |  |                      |          |                                 |   |                       |   |              |          |              |  
|Cash and cash equivalents                                         |  | $                    |         |                                 | $ | 24,569                |   | $            | 31       |              | $
|Receivables, net                                                  |  |                      |         |                                 |   | 22,848                |   |              | 6,170    |              |  
|Inventories, net                                                  |  |                      |         |                                 |   | 3,115                 |   |              | 1,438    |              |  
|Prepaid expenses                                                  |  |                      | 33       |                                 |   | 3,185                 |   |              | 98       |              |  
|Other                                                             |  |                      |         |                                 |   | 2,701                 |   |              | 459      |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total current assets                                              |  |                      | 33       |                                 |   | 56,418                |   |              | 8,196    |              |  
|Restricted cash                                                   |  |                      |         |                                 |   | 1,900                 |   |              |         |              |  
|Property and equipment, net                                       |  |                      | 4        |                                 |   | 20,991                |   |              | 1,435    |              |  
|Customer accounts, net                                            |  |                      |         |                                 |   | 161,386               |   |              | 35,289   |              |  
|Dealer Relationships, net                                         |  |                      |         |                                 |   |                      |   |              | 3,696    |              |  
|Goodwill                                                          |  |                      |         |                                 |   | 6,142                 |   |              | 6,018    |              |  
|Trade name                                                        |  |                      |         |                                 |   | 22,987                |   |              | 2,825    |              |  
|Deferred customer acquisition costs                               |  |                      |         |                                 |   | 97,948                |   |              | 8,006    |              |  
|Other                                                             |  |                      |         |                                 |   | 8,809                 |   |              | 1,870    |              |  
|Accounts receivable (payable) from (to) associated companies      |  |                      | (67,580  | )                               |   | 70,316                |   |              | (2,736   | )            |  
|Investment in POAMI                                               |  |                      | (11,697  | )                               |   |                      |   |              |         |              |  
|Investment in subsidiary guarantors                               |  |                      |         |                                 |   | 58,238                |   |              |         |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total assets                                                      |  | $                    | (79,240  | )                               | $ | 505,135               |   | $            | 64,599   |              | $
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Liabilities and Stockholder Equity (Deficiency in Assets)         |  |                      |          |                                 |   |                       |   |              |          |              |  
|Current liabilities:                                              |  |                      |          |                                 |   |                       |   |              |          |              |  
|Current portion of long-term debt and capital leases              |  | $                    |         |                                 | $ | 3,861                 |   | $            |         |              | $
|Accounts payable                                                  |  |                      |         |                                 |   | 3,172                 |   |              | 389      |              |  
|Accrued liabilities                                               |  |                      | 703      |                                 |   | 23,518                |   |              | 980      |              |  
|Deferred revenue                                                  |  |                      |         |                                 |   | 33,538                |   |              | 3,476    |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total current liabilities                                         |  |                      | 703      |                                 |   | 64,089                |   |              | 4,845    |              |  
|Long-term debt, net of current portion                            |  |                      |         |                                 |   | 391,991               |   |              |         |              |  
|Deferred customer acquisition revenue                             |  |                      |         |                                 |   | 59,850                |   |              | 931      |              |  
|Deferred tax liability                                            |  |                      |         |                                 |   |                      |   |              | 251      |              |  
|Other                                                             |  |                      |         |                                 |   | 902                   |   |              | 334      |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total Liabilities                                                 |  |                      | 703      |                                 |   | 516,832               |   |              | 6,361    |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Stockholders' Equity (Deficiency in Assets)                       |  |                      |          |                                 |   |                       |   |              |          |              |  
|Common stock                                                      |  |                      | 182      |                                 |   | 2                     |   |              | 1        |              |  
|Additional paid in capital                                        |  |                      | 89,545   |                                 |   | 1,416,051             |   |              | 194,913  |              |  
|Accumulated other comprehensive loss                              |  |                      | (318     | )                               |   | (318                  | ) |              |         |              |  
|Deficit                                                           |  |                      | (169,352 | )                               |   | (1,427,432            | ) |              | (136,676 | )            |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total stockholders' equity (deficiency in assets)                 |  |                      | (79,943  | )                               |   | (11,697               | ) |              | 58,238   |              |  
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  
|Total liabilities and stockholders' equity (deficiency in assets) |  | $                    | (79,240  | )                               | $ | 505,135               |   | $            | 64,599   |              | $
|                                                                  |  |                      |          |                                 |   |                       |   |              |          |              |  

96

---



Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2007
(amounts in thousands)

|                                                             |  | Protection
One, Inc. |         | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |         | Consolidated |  
|------------------------------------------------------------ |  | -------------------- | ------- | ------------------------------- | - | --------------------- | - | ------------ | ------- | ------------ | -
|Revenue:                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|Monitoring and related services                              |  | $                    |        |                                 | $ | 206,303               |   | $            | 107,027 |              | $
|Installation and other                                       |  |                      |        |                                 |   | 30,548                |   |              | 3,993   |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Total revenue                                                |  |                      |        |                                 |   | 236,851               |   |              | 111,020 |              |  
|Cost of revenue                                              |  |                      |         |                                 |   |                       |   |              |         |              |  
|Monitoring and related services                              |  |                      |        |                                 |   | 62,220                |   |              | 37,615  |              |  
|Installation and other                                       |  |                      |        |                                 |   | 36,030                |   |              | 4,840   |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Total cost of revenue                                        |  |                      |        |                                 |   | 98,250                |   |              | 42,455  |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Operating expenses                                           |  |                      |         |                                 |   |                       |   |              |         |              |  
|Selling                                                      |  |                      |        |                                 |   | 43,338                |   |              | 4,214   |              |  
|General and administrative                                   |  |                      | 6,146   |                                 |   | 57,977                |   |              | 13,723  |              |  
|Merger-related costs                                         |  |                      |        |                                 |   | 821                   |   |              | 3,523   |              |  
|Amortization and depreciation                                |  |                      | 4       |                                 |   | 31,370                |   |              | 30,690  |              |  
|Holding company allocation                                   |  |                      | (4,677  | )                               |   | 3,742                 |   |              | 935     |              |  
|Corporate overhead allocation                                |  |                      |        |                                 |   | (6,092                | ) |              | 6,092   |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Total operating expenses                                     |  |                      | 1,473   |                                 |   | 131,156               |   |              | 59,177  |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Operating income (loss)                                      |  |                      | (1,473  | )                               |   | 7,445                 |   |              | 9,388   |              |  
|Other expense (income)                                       |  |                      |         |                                 |   |                       |   |              |         |              |  
|Interest expense(a)                                          |  |                      |        |                                 |   | 50,491                |   |              | 9,603   |              |  
|Interest income                                              |  |                      |        |                                 |   | (12,454               | ) |              | (663    | )            |  
|Other                                                        |  |                      |        |                                 |   | (90                   | ) |              |        |              |  
|Equity loss in subsidiary                                    |  |                      | 30,767  |                                 |   | 260                   |   |              |        |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Total other expense                                          |  |                      | 30,767  |                                 |   | 38,207                |   |              | 8,940   |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Income (loss) from continuing operations before income taxes |  |                      | (32,240 | )                               |   | (30,762               | ) |              | 448     |              |  
|Income tax expense                                           |  |                      |        |                                 |   | 5                     |   |              | 708     |              |  
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  
|Net income (loss)                                            |  | $                    | (32,240 | )                               | $ | (30,767               | ) | $            | (260    | )            | $
|                                                             |  |                      |         |                                 |   |                       |   |              |         |              |  

---

97

---



Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2006
(amounts in thousands)

|                                                                                                                                         |  | Protection
One, Inc. |         | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |        | Consolidated |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ------------------------------- | - | --------------------- | - | ------------ | ------ | ------------ | -
|Revenue:                                                                                                                                 |  |                      |         |                                 |   |                       |   |              |        |              |  
|Monitoring and related services                                                                                                          |  | $                    |        |                                 | $ | 202,393               |   | $            | 44,977 |              | $
|Installation and other                                                                                                                   |  |                      |        |                                 |   | 22,684                |   |              | 498    |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Total revenue                                                                                                                            |  |                      |        |                                 |   | 225,077               |   |              | 45,475 |              |  
|Cost of revenue                                                                                                                          |  |                      |         |                                 |   |                       |   |              |        |              |  
|Monitoring and related services                                                                                                          |  |                      |        |                                 |   | 58,804                |   |              | 13,019 |              |  
|Installation and other                                                                                                                   |  |                      |        |                                 |   | 27,954                |   |              | 1,610  |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Total cost of revenue                                                                                                                    |  |                      |        |                                 |   | 86,758                |   |              | 14,629 |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Operating expenses                                                                                                                       |  |                      |         |                                 |   |                       |   |              |        |              |  
|Selling                                                                                                                                  |  |                      |        |                                 |   | 38,683                |   |              | 2,320  |              |  
|General and administrative (exclusive of $3.2 million of compensation costs included in Recapitalization costs for Protection One, Inc.) |  |                      | 6,003   |                                 |   | 53,056                |   |              | 3,854  |              |  
|Corporate consolidation costs                                                                                                            |  |                      |        |                                 |   |                      |   |              | 20     |              |  
|Recapitalization costs                                                                                                                   |  |                      | 3,267   |                                 |   | 1,185                 |   |              |       |              |  
|Amortization and depreciation                                                                                                            |  |                      | 7       |                                 |   | 34,436                |   |              | 7,224  |              |  
|Holding company allocation                                                                                                               |  |                      | (4,595  | )                               |   | 3,676                 |   |              | 919    |              |  
|Corporate overhead allocation                                                                                                            |  |                      |        |                                 |   | (4,523                | ) |              | 4,523  |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Total operating expenses                                                                                                                 |  |                      | 4,682   |                                 |   | 126,513               |   |              | 18,860 |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Operating income (loss)                                                                                                                  |  |                      | (4,682  | )                               |   | 11,806                |   |              | 11,986 |              |  
|Other expense (income)                                                                                                                   |  |                      |         |                                 |   |                       |   |              |        |              |  
|Interest expense(a)                                                                                                                      |  |                      |        |                                 |   | 36,557                |   |              | 855    |              |  
|Interest income                                                                                                                          |  |                      |        |                                 |   | (1,508                | ) |              | (4     | )            |  
|Other                                                                                                                                    |  |                      |        |                                 |   | (134                  | ) |              | 82     |              |  
|Equity (earnings) loss in subsidiary                                                                                                     |  |                      | 12,723  |                                 |   | (10,386               | ) |              |       |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Total other expense                                                                                                                      |  |                      | 12,723  |                                 |   | 24,529                |   |              | 933    |              |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Income (loss) from continuing operations before income taxes                                                                             |  |                      | (17,405 | )                               |   | (12,723               | ) |              | 11,053 |              |  
|Income tax expense                                                                                                                       |  |                      |        |                                 |   |                      |   |              | (667   | )            |  
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  
|Net income (loss)                                                                                                                        |  | $                    | (17,405 | )                               | $ | (12,723               | ) | $            | 10,386 |              | $
|                                                                                                                                         |  |                      |         |                                 |   |                       |   |              |        |              |  

---

98

---



Condensed Consolidating Statement of Operations
For the Period February 9, 2005 through December 31, 2005
(dollar amounts in thousands)

|                                                             |                                 | Protection
One, Inc.     |         | Protection
One Alarm
Monitoring |     | Subsidiary
Guarantors |         | Eliminations |       | Consolidated |       
|------------------------------------------------------------ | ------------------------------- | ------------------------ | ------- | ------------------------------- | --- | --------------------- | ------- | ------------ | ----- | ------------ | ------
|Revenue:                                                     |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             | Monitoring and related services |                          | $       |                                |     | $                     | 178,346 |              | $     | 41,129       |       
|                                                             | Installation and other          |                          |         |                                |     |                       | 14,918  |              |       | 88           |       
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             |                                 | Total revenue            |         |                                 |    |                       |         | 193,264      |       |              | 41,217
|Cost of revenue:                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             | Monitoring and related services |                          |         |                                |     |                       | 51,401  |              |       | 10,842       |       
|                                                             | Installation and other          |                          |         |                                |     |                       | 18,145  |              |       | 671          |       
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             |                                 | Total cost of revenue    |         |                                 |    |                       |         | 69,546       |       |              | 11,513
|Operating expenses                                           |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             | Selling                         |                          |         |                                |     |                       | 26,690  |              |       | 2,166        |       
|                                                             | General and administrative      |                          |         | 4,590                           |     |                       | 43,822  |              |       | 8,746        |       
|                                                             | Corporate consolidation costs   |                          |         |                                |     |                       |        |              |       | 2,339        |       
|                                                             | Amortization and depreciation   |                          |         | 4                               |     |                       | 37,140  |              |       | 6,598        |       
|                                                             | Holding company allocation      |                          |         | (4,371                          | )   |                       | 3,497   |              |       | 874          |       
|                                                             | Corporate overhead allocation   |                          |         |                                |     |                       | (897    | )            |       | 897          |       
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             |                                 | Total operating expenses |         |                                 | 223 |                       |         | 110,252      |       |              | 21,620
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|Operating income (loss)                                      |                                 |                          | (223    | )                               |     | 13,466                |         |              | 8,084 |              |       
|Other expense (income)                                       |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|                                                             | Interest expense(a)             |                          |         |                                |     |                       | 28,520  |              |       | 740          |       
|                                                             | Related party interest          |                          |         |                                |     |                       | 1,951   |              |       |             |       
|                                                             | Interest income                 |                          |         |                                |     |                       | (570    | )            |       | (7           | )     
|                                                             | Loss on retirement of debt      |                          |         |                                |     |                       | 6,657   |              |       |             |       
|                                                             | Other                           |                          |         | 19,566                          |     |                       | (20,288 | )            |       | 34           |       
|                                                             | Equity earnings in subsidiary   |                          |         | (4,201                          | )   |                       | (7,005  | )            |       |             |       
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|Total other expense                                          |                                 |                          | 15,365  |                                 |     | 9,265                 |         |              | 767   |              |       
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|Income (loss) from continuing operations before income taxes |                                 |                          | (15,588 | )                               |     | 4,201                 |         |              | 7,317 |              |       
|Income tax expense                                           |                                 |                          |        |                                 |     |                      |         |              | (312  | )            |       
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       
|Net income (loss)                                            |                                 | $                        | (15,588 | )                               | $   | 4,201                 |         | $            | 7,005 |              | $     
|                                                             |                                 |                          |         |                                 |     |                       |         |              |       |              |       

---

99

---



Condensed Consolidating Statement of Operations
For the Period January 1, 2005 through February 8, 2005
(dollar amounts in thousands)

|                                                             |                                                | Protection
One, Inc.     |         | Protection
One Alarm
Monitoring |       | Subsidiary
Guarantors |        | Eliminations |     | Consolidated |      
|------------------------------------------------------------ | ---------------------------------------------- | ------------------------ | ------- | ------------------------------- | ----- | --------------------- | ------ | ------------ | --- | ------------ | -----
|Revenue:                                                     |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             | Monitoring and related services                |                          | $       |                                |       | $                     | 21,455 |              | $   | 5,000        |      
|                                                             | Installation and other                         |                          |         |                                |       |                       | 1,916  |              |     | 172          |      
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             |                                                | Total revenue            |         |                                 |      |                       |        | 23,371       |     |              | 5,172
|Cost of revenue:                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             | Monitoring and related services                |                          |         |                                |       |                       | 6,151  |              |     | 1,249        |      
|                                                             | Installation and other                         |                          |         |                                |       |                       | 2,571  |              |     | 743          |      
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             |                                                | Total cost of revenue    |         |                                 |      |                       |        | 8,722        |     |              | 1,992
|Operating expenses                                           |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             | Selling                                        |                          |         |                                |       |                       | 3,699  |              |     | 290          |      
|                                                             | General and administrative                     |                          |         | 792                             |       |                       | 6,054  |              |     | 1,258        |      
|                                                             | Change of control and debt restructuring costs |                          |         | 5,939                           |       |                       |       |              |     |             |      
|                                                             | Amortization and depreciation                  |                          |         |                                |       |                       | 6,058  |              |     | 580          |      
|                                                             | Holding company allocation                     |                          |         | (437                            | )     |                       | 350    |              |     | 87           |      
|                                                             | Corporate overhead allocation                  |                          |         |                                |       |                       | (110   | )            |     | 110          |      
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             |                                                | Total operating expenses |         |                                 | 6,294 |                       |        | 16,051       |     |              | 2,325
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|Operating income (loss)                                      |                                                |                          | (6,294  | )                               |       | (1,402                | )      |              | 855 |              |      
|Other expense (income)                                       |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             | Interest expense(a)                            |                          |         |                                |       |                       | 2,619  |              |     | 103          |      
|                                                             | Related party interest                         |                          |         |                                |       |                       | 1,942  |              |     |             |      
|                                                             | Interest income                                |                          |         |                                |       |                       | (120   | )            |     |             |      
|                                                             | Other                                          |                          |         |                                |       |                       | (15    | )            |     |             |      
|                                                             | Equity (earnings) loss in subsidiary           |                          |         | 5,111                           |       |                       | (717   | )            |     |             |      
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|                                                             | Total other expense                            |                          |         | 5,111                           |       |                       | 3,709  |              |     | 103          |      
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|Income (loss) from continuing operations before income taxes |                                                |                          | (11,405 | )                               |       | (5,111                | )      |              | 752 |              |      
|Income tax expense                                           |                                                |                          |        |                                 |       |                      |        |              | (35 | )            |      
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      
|Net income (loss)                                            |                                                | $                        | (11,405 | )                               | $     | (5,111                | )      | $            | 717 |              | $    
|                                                             |                                                |                          |         |                                 |       |                       |        |              |     |              |      

---

100

---



Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2007
(amounts in thousands)

|                                                    |  | Protection
One, Inc. |        | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |         | Consolidated |  
|--------------------------------------------------- |  | -------------------- | ------ | ------------------------------- | - | --------------------- | - | ------------ | ------- | ------------ | -
|Net cash provided by operating activities           |  | $                    | 419    |                                 | $ | 38,296                |   | $            | 18,949  |              | $
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Cash flows from investing activities:               |  |                      |        |                                 |   |                       |   |              |         |              |  
|Deferred customer acquisition costs                 |  |                      |       |                                 |   | (56,132               | ) |              | (3,821  | )            |  
|Deferred customer acquisition revenue               |  |                      |       |                                 |   | 29,638                |   |              | 172     |              |  
|Purchase of rental equipment                        |  |                      |       |                                 |   | (4,440                | ) |              |        |              |  
|Purchase of property and equipment                  |  |                      |       |                                 |   | (3,994                | ) |              | (4,070  | )            |  
|Purchases of new accounts                           |  |                      |       |                                 |   | (396                  | ) |              | (556    | )            |  
|Reduction of restricted cash                        |  |                      |       |                                 |   |                      |   |              | 257     |              |  
|Proceeds from disposition of assets                 |  |                      |       |                                 |   | 293                   |   |              | 5,458   |              |  
|Net cash acquired in merger with IASG               |  |                      | (6,413 | )                               |   | (1,696                | ) |              | 11,030  |              |  
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Net cash (used in) provided by investing activities |  |                      | (6,413 | )                               |   | (36,727               | ) |              | 8,470   |              |  
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Cash flows from financing activities:               |  |                      |        |                                 |   |                       |   |              |         |              |  
|Payments on long-term debt                          |  |                      |       |                                 |   | (4,676                | ) |              | (114    | )            |  
|Debt and stock issue costs                          |  |                      | (140   | )                               |   | (1,665                | ) |              |        |              |  
|To (from) related companies                         |  |                      | 6,134  |                                 |   | 20,810                |   |              | (26,944 | )            |  
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Net cash provided by (used in) financing activities |  |                      | 5,994  |                                 |   | 14,469                |   |              | (27,058 | )            |  
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Net increase in cash and cash equivalents           |  |                      |       |                                 |   | 16,038                |   |              | 361     |              |  
|Cash and cash equivalents:                          |  |                      |        |                                 |   |                       |   |              |         |              |  
|Beginning of period                                 |  |                      |       |                                 |   | 24,569                |   |              | 31      |              |  
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|End of period                                       |  | $                    |       |                                 | $ | 40,607                |   | $            | 392     |              | $
|                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  

101

---



Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2006
(amounts in thousands)

|                                                     |  | Protection
One, Inc. |         | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |         | Consolidated |  
|---------------------------------------------------- |  | -------------------- | ------- | ------------------------------- | - | --------------------- | - | ------------ | ------- | ------------ | -
|Net cash provided by (used in) operating activities  |  | $                    | (3,530  | )                               | $ | 36,128                |   | $            | 16,929  |              | $
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|Cash flows from investing activities:                |  |                      |         |                                 |   |                       |   |              |         |              |  
|Purchases of new accounts                            |  |                      |        |                                 |   |                      |   |              | (27     | )            |  
|Deferred customer acquisition costs                  |  |                      |        |                                 |   | (56,303               | ) |              | (2,192  | )            |  
|Deferred customer acquisition revenue                |  |                      |        |                                 |   | 29,092                |   |              | (19     | )            |  
|Purchase of property and equipment                   |  |                      |        |                                 |   | (3,957                | ) |              | (600    | )            |  
|Purchase of rental equipment                         |  |                      |        |                                 |   | (2,776                | ) |              |        |              |  
|Additional investment in restricted cash             |  |                      |        |                                 |   | (212                  | ) |              |        |              |  
|Proceeds from disposition of assets                  |  |                      |        |                                 |   | 295                   |   |              | 12      |              |  
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|Net cash used in investing activities                |  |                      |        |                                 |   | (33,861               | ) |              | (2,826  | )            |  
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|Cash flows from financing activities:                |  |                      |         |                                 |   |                       |   |              |         |              |  
|Payments on long-term debt                           |  |                      |        |                                 |   | (2,839                | ) |              |        |              |  
|Distribution to shareholders                         |  |                      | (70,490 | )                               |   |                      |   |              |        |              |  
|Make-whole payment to vested option holders          |  |                      | (1,312  | )                               |   |                      |   |              |        |              |  
|Proceeds from borrowings                             |  |                      |        |                                 |   | 66,767                |   |              |        |              |  
|Debt issue costs                                     |  |                      |        |                                 |   | (259                  | ) |              |        |              |  
|To (from) related companies                          |  |                      | 75,332  |                                 |   | (60,835               | ) |              | (14,497 | )            |  
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|Net cash provided by (used in) financing activities  |  |                      | 3,530   |                                 |   | 2,834                 |   |              | (14,497 | )            |  
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|Net increase (decrease) in cash and cash equivalents |  |                      |        |                                 |   | 5,101                 |   |              | (394    | )            |  
|Cash and cash equivalents:                           |  |                      |         |                                 |   |                       |   |              |         |              |  
|Beginning of period                                  |  |                      |        |                                 |   | 19,468                |   |              | 425     |              |  
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  
|End of period                                        |  | $                    |        |                                 | $ | 24,569                |   | $            | 31      |              | $
|                                                     |  |                      |         |                                 |   |                       |   |              |         |              |  

102

---



Condensed Consolidating Statement of Cash Flows
For the Period February 9, 2005 through December 31, 2005
(dollar amounts in thousands)

|                                                                    |  | Protection
One, Inc. |        | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |         | Consolidated |  
|------------------------------------------------------------------- |  | -------------------- | ------ | ------------------------------- | - | --------------------- | - | ------------ | ------- | ------------ | -
|Net cash provided by (used in) operating activities                 |  | $                    | (1,853 | )                               | $ | 29,541                |   | $            | 12,725  |              | $
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Cash flows from investing activities:                               |  |                      |        |                                 |   |                       |   |              |         |              |  
|Deferred customer acquisition costs                                 |  |                      |       |                                 |   | (45,257               | ) |              | (1,605  | )            |  
|Deferred customer acquisition revenue                               |  |                      |       |                                 |   | 24,193                |   |              | 167     |              |  
|Investment in non-monitored leased equipment                        |  |                      |       |                                 |   | (772                  | ) |              |        |              |  
|Purchase of property and equipment                                  |  |                      |       |                                 |   | (5,400                | ) |              | (280    | )            |  
|Increase in restricted cash                                         |  |                      |       |                                 |   | (631                  | ) |              |        |              |  
|Proceeds from redemption of preferred stock                         |  |                      |       |                                 |   | 4,399                 |   |              |        |              |  
|Proceeds from disposition of marketable securities and other assets |  |                      |       |                                 |   | 946                   |   |              | 89      |              |  
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Net cash used in investing activities                               |  |                      |       |                                 |   | (22,522               | ) |              | (1,629  | )            |  
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Cash flows from financing activities:                               |  |                      |        |                                 |   |                       |   |              |         |              |  
|Payments on long-term debt                                          |  |                      |       |                                 |   | (212,714              | ) |              |        |              |  
|Payment on credit facility                                          |  |                      |       |                                 |   | (81,000               | ) |              |        |              |  
|Proceeds from borrowings                                            |  |                      |       |                                 |   | 250,000               |   |              |        |              |  
|Proceeds from sale of common stock                                  |  |                      | 1,750  |                                 |   |                      |   |              |        |              |  
|Debt issue costs                                                    |  |                      |       |                                 |   | (6,978                | ) |              |        |              |  
|Stock issue costs                                                   |  |                      | (270   | )                               |   |                      |   |              |        |              |  
|Payment for interest rate cap                                       |  |                      |       |                                 |   | (922                  | ) |              |        |              |  
|To (from) related companies                                         |  |                      | 373    |                                 |   | 10,806                |   |              | (11,179 | )            |  
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Net cash provided by (used in) financing activities                 |  |                      | 1,853  |                                 |   | (40,808               | ) |              | (11,179 | )            |  
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|Net decrease in cash and cash equivalents                           |  |                      |       |                                 |   | (33,789               | ) |              | (83     | )            |  
|Cash and cash equivalents:                                          |  |                      |        |                                 |   |                       |   |              |         |              |  
|Beginning of period                                                 |  |                      |       |                                 |   | 53,257                |   |              | 508     |              |  
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  
|End of period                                                       |  | $                    |       |                                 | $ | 19,468                |   | $            | 425     |              | $
|                                                                    |  |                      |        |                                 |   |                       |   |              |         |              |  

103

---



Condensed Consolidating Statement of Cash Flows
For the Period January 1, 2005 through February 8, 2005
(dollar amounts in thousands)

|                                                                  |  | Protection
One, Inc. |        | Protection
One Alarm
Monitoring |   | Subsidiary
Guarantors |   | Eliminations |        | Consolidated |  
|----------------------------------------------------------------- |  | -------------------- | ------ | ------------------------------- | - | --------------------- | - | ------------ | ------ | ------------ | -
|Net cash provided by (used in) operating activities               |  | $                    | (6,787 | )                               | $ | 8,265                 |   | $            | 2,232  |              | $
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  
|Cash flows from investing activities:                             |  |                      |        |                                 |   |                       |   |              |        |              |  
|Deferred customer acquisition costs                               |  |                      |       |                                 |   | (4,049                | ) |              | (169   | )            |  
|Deferred customer acquisition revenue                             |  |                      |       |                                 |   | 2,147                 |   |              | (156   | )            |  
|Purchase of property and equipment                                |  |                      |       |                                 |   | (249                  | ) |              | (1     | )            |  
|Proceeds from disposition of assets and sale of customer accounts |  |                      |       |                                 |   |                      |   |              | 4      |              |  
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  
|Net cash used in investing activities                             |  |                      |       |                                 |   | (2,151                | ) |              | (322   | )            |  
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  
|Cash flows from financing activities:                             |  |                      |        |                                 |   |                       |   |              |        |              |  
|To (from) related companies                                       |  |                      | 6,787  |                                 |   | (4,801                | ) |              | (1,986 | )            |  
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  
|Net cash provided by (used in) financing activities               |  |                      | 6,787  |                                 |   | (4,801                | ) |              | (1,986 | )            |  
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  
|Net increase (decrease) in cash and cash equivalents              |  |                      |       |                                 |   | 1,313                 |   |              | (76    | )            |  
|Cash and cash equivalents:                                        |  |                      |        |                                 |   |                       |   |              |        |              |  
|Beginning of period                                               |  |                      |       |                                 |   | 51,944                |   |              | 584    |              |  
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  
|End of period                                                     |  | $                    |       |                                 | $ | 53,257                |   | $            | 508    |              | $
|                                                                  |  |                      |        |                                 |   |                       |   |              |        |              |  

104

---



17. Unaudited Quarterly Financial Information:

The following is a summary of the unaudited quarterly financial information for 2007 and 2006, respectively (in thousands, except per share amounts):

|                                                              |  | Quarter Ended |       
|------------------------------------------------------------- |  | ------------- | ------
|
|2007                                                          |  |               |       
|Revenue                                                       |  | $             | 68,683
|Net loss                                                      |  | $             | (5,295
|Basic and diluted loss per share                              |  | $             | (0.29 
|Weighted average number of shares of common stock outstanding |  |               | 18,240

|
|

|                                                              |  | Quarter Ended |       
|------------------------------------------------------------- |  | ------------- | ------
|
|2006                                                          |  |               |       
|Revenue                                                       |  | $             | 66,676
|Net loss                                                      |  | $             | (2,507
|Basic and diluted loss per share                              |  | $             | (0.14 
|Weighted average number of shares of common stock outstanding |  |               | 18,213

105

---





PROTECTION ONE, INC. AND SUBSIDIARIES    SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS    (Dollar amounts in thousands)

|Description                                           |  | Balance at
Beginning
of period |       | Charged to
costs and
expenses |   | Deductions(a) |  | Balance at
End of Period
|----------------------------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | ------------- |  | ------------------------
|Year ended December 31, 2005                          |  |                                |       |                               |   |               |  |                         
|Allowances deducted from assets for doubtful accounts |  | $                              | 5,576 |                               | $ | 1,936         |  | $                       
|Year ended December 31, 2006                          |  |                                |       |                               |   |               |  |                         
|Allowances deducted from assets for doubtful accounts |  | $                              | 4,979 |                               | $ | 3,099         |  | $                       
|Year ended December 31, 2007                          |  |                                |       |                               |   |               |  |                         
|Allowances deducted from assets for doubtful accounts |  | $                              | 7,258 |                               | $ | 3,455         |  | $                       

---

106

---



ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no changes in or disagreements with our accountants on any matter of accounting principles or practices, financial statement disclosure, or
auditing scope of procedure during the two most recent fiscal years.

ITEM 9A.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.As of December 31, 2007, the end of the period covered by
this report, the Company's management, under the supervision and with the participation of our chief executive officer and our chief financial officer, concluded that its disclosure controls and
procedures are effective (a) to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the "Exchange
Act") is recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure within the time periods specified in Securities and Exchange Commission rules and forms. Our
management, including our chief executive officer and chief financial officer, recognize that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving management's control objectives.

Management's Report on Internal Control over Financial Reporting.The Company's management is
responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision
and with the participation of the Company's management, including our chief executive officer and our chief financial officer, the Company conducted an evaluation of the effectiveness of its internal
control over financial reporting based upon the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO
Framework").

Based
on the evaluation under the COSO Framework, the Company's management concluded that the Company's internal control over financial reporting is effective as of December 31,
2007. The Company excluded from its assessment any changes in internal control over financial reporting at IASG, which was acquired on April 2, 2007, and whose financial statements reflect
total assets and revenues constituting 33.7% and 19.1%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2007. The Company will
include IASG in its evaluation of the design and effectiveness of internal control over financial reporting as of December 31, 2008. The Company's independent registered public accounting firm
has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their attestation report on the effectiveness
of the Company's internal controls over financial reporting herein as of December 31, 2007. The attestation report is included herein.

Changes in Internal Control over Financial Reporting.There were no changes in the Company's internal
control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting during the fourth fiscal quarter of 2007.

107

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of
Protection One, Inc
Lawrence, Kansas

We
have audited the internal control over financial reporting of Protection One, Inc and subsidiaries (the "Company") as of December 31, 2007, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management's Report on Internal Control over Financial
Reporting, management excluded from its assessment the internal control over financial reporting at Integrated Alarm Services Group, Inc. ("IASG"), which was acquired on April 2, 2007
and whose financial statements constitute 33.7% of total assets and 19.1% of revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2007.
Accordingly, our audit did not include the internal control over financial reporting of IASG. The Company's management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

108

---



We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2007 of the Company and our report dated March 17, 2008, expressed an unqualified opinion (and includes an explanatory paragraph
relating to a change in accounting for share-based compensation in 2006) on those financial statements and financial statement schedule.

/s/ DELOITTE & TOUCHE LLP

Kansas City, Missouri
March 17, 2008

ITEM 9B.    OTHER INFORMATION

There were no items required to be disclosed in a report on Form 8-K during the fourth quarter that were not reported.

109

---





PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Information relating to our directors, nominees for directors and executive officers is set forth under the heading "Election of Directors" in the Proxy Statement
or Information Statement relating to the Annual Meeting of Stockholders to be held in 2008, which will be filed with the Securities and Exchange Commission no later than April 29, 2008, and
which is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION

Information relating to our executive officers and executive compensation is set forth under the heading "Executive Officers; Executive Compensation and Related
Information" in the Proxy Statement or Information Statement relating to the Annual Meeting of Stockholders to be held in 2008, which will be filed with the Securities and Exchange Commission no later
than April 29, 2008, and which is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information relating to the security ownership of certain beneficial owners and management is set forth under the heading "Security Ownership of Certain
Beneficial Owners," "Security Ownership of Management and Directors" and "Equity Compensation Plan Information" in the Proxy Statement or Information Statement relating to the Annual Meeting of
Stockholders to be held in 2008, which will be filed with the Securities and Exchange Commission no later than April 29, 2008, and which is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information relating to certain relationships and related transactions concerning directors and executive officers is set forth under the heading "Certain
Relationships and Related Transactions" and information related to director independence is set forth under the heading "Information About the Board of Directors" in the Proxy Statement or Information
Statement relating to the Annual Meeting of Stockholders to be held in 2008, which will be filed with the Securities and Exchange Commission no later than April 29, 2008, and which is
incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information relating to our principal accountant fees and services is set forth under the heading "Relationship with Independent Public Accountants" in the Proxy
Statement or Information Statement relating to the Annual Meeting of Stockholders to be held in 2008, which will be filed with the Securities and Exchange Commission no later than April 29,
2008, and which is incorporated herein by reference.

110

---





PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)   1.  The
following financial statements are included in Item 8, "Financial Statements and Supplementary Data."

Consolidated Balance SheetsConsolidated Statements of Operations and Comprehensive LossConsolidated Statements of Cash FlowsConsolidated Statements of Stockholders' Equity (Deficiency in Assets)


2.  The
following financial statement schedule is included in Item 8, "Financial Statements and Supplementary Data."

Schedule IIValuation and Qualifying Accounts.


All
other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable and,
therefore, have been omitted.

3.  The
following documents are filed or furnished as a part of this report:

|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                                                                                                                 
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Agreement and Plan of Merger, dated as of December 20, 2006 by and among the Company, IASG and Tara Acquisition Corp. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated
December 21, 2006).                                                                                                         
|3.1         |  | Amended and Restated Certificate of Incorporation of the Company, effective as of February 8, 2005 (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by the Company and POAMI for the year ended
December 31, 2004, as amended (the "Fiscal 2004 Form 10-K, as amended")).                          
|3.2         |  | Certificate of Incorporation of POAMI, as amended (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 (Registration Number 333-09401) originally filed by POAMI and, inter alia, the Company on
August 1, 1996 (the "August 1996 Form S-3")).                                                       
|3.3         |  | By-laws of the Company, as amended and restated March 17, 2005 (incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K dated March 17, 2005).                                                                                                                                                                   
|3.4         |  | By-laws of POAMI, as amended and restated June 24, 2004 (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by the Company and POAMI for the quarter ended June 30, 2004).                                                                                                                         
|4.1         |  | Indenture, dated as of December 21, 1998, among POAMI, as issuer, the Company, the other guarantors named therein, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K filed
by POI and Monitoring for the year ended December 31, 1998 (the "Fiscal 1998 Form 10-K")).
|4.2         |  | First Supplemental Indenture, dated April 2, 2007, among IASG, the other guarantors named therein and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K dated April 2, 2007).                                                                                            

111

---



|4.3   |  | Indenture, dated as of April 2, 2007, among POAMI, the Company the other guarantors named therein and Wells Fargo Bank, N.A., as trustee (the "Trustee"), (incorporated by reference to Exhibit 4.2 of the Current Report on Form 8-K dated April 2,
2007).             
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.4   |  | Registration Rights Agreement, dated April 2, 2007, among POAMI and certain holders of the Senior Secured Notes (incorporated by reference to Exhibit 4.3 of the Current Report on Form 8-K dated April 2, 2007).                                                       
|4.5   |  | Second Supplemental Indenture, dated as of May 10, 2007, by and among IASG, the other guarantors named therein and The Bank of New York Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of the Current Report on
Form 8-K dated May 10, 2007).
|10.1  |  | 1997 Long-Term Incentive Plan of the Company, as amended (incorporated by reference to Exhibit 10.3 to the Fiscal 2004 Form 10-K, as amended).*                                                                                                                         
|10.2  |  | 2004 Stock Option Plan (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K filed by the Company and POAMI dated February 8, 2005).*                                                                                                            
|10.3  |  | Form of Award Agreement for Named Executive Officers under 2004 Stock Option Plan (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K dated February 8, 2005).*                                                                                
|10.4  |  | Form of Award Agreement for Non-Named Executive Officers under 2004 Stock Option Plan (incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K dated February 8, 2005).*                                                                            
|10.5  |  | Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.6 of the Current Report on Form 8-K dated February 8, 2005).*                                                                                                                                   
|10.6  |  | Form of Award Agreement under Stock Appreciation Rights Plan (incorporated by reference to Exhibit 10.7 of the Current Report on Form 8-K dated February 8, 2005).*                                                                                                     
|10.7  |  | Employment Agreement dated July 23, 2004 between Protection One, Inc., Protection One Alarm Monitoring, Inc and Richard Ginsburg (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring dated August 16, 2004).*   
|10.8  |  | Employment Agreement dated July 23, 2004 between Protection One, Inc., Protection One Alarm Monitoring, Inc and Darius G. Nevin (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring dated August 16, 2004).*    
|10.9  |  | Employment Agreement dated July 23, 2004 between Protection One, Inc., Protection One Alarm Monitoring, Inc and Peter J. Pefanis (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring dated August 16, 2004).*   
|10.10 |  | Employment Agreement dated July 23, 2004 between Protection One, Inc., Protection One Alarm Monitoring, Inc and J. Eric Griffin (incorporated by reference to Exhibit 10.58 to the Fiscal 2004 Form 10-K, as
amended).*                                                 
|10.11 |  | First Amendment to Employment Agreement dated February 8, 2005 between Protection One, Inc., Protection One Alarm Monitoring, Inc and J. Eric Griffin (incorporated by reference to Exhibit 10.59 to the Fiscal 2004 Form 10-K,
as amended).*                           
|10.12 |  | Employment Agreement dated July 23, 2004 between Protection One, Inc., Protection One Alarm Monitoring, Inc and Joseph Sanchez (incorporated by reference to Exhibit 10.12 to the Fiscal 2006 Form 10-K).*                                                              

112

---



|10.13 |  | First Amendment to Employment Agreement dated February 8, 2005 between Protection One, Inc., Protection One Alarm Monitoring, Inc and Joseph Sanchez (incorporated by reference to Exhibit 10.13 to the Fiscal 2006 Form
10-K).*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14 |  | Exchange Agreement dated as of November 12, 2004 by and among the Company, POI Acquisition L.L.C., POI Acquisition I, Inc. and Quadrangle Master Limited Funding Ltd (incorporated by reference to Exhibit 10.5 to the Quarterly
Report on Form 10-Q filed by POI and Monitoring for the quarter ended September 30, 2004).                                                                                                                                                                                                                                                                                                                                                                                             
|10.15 |  | Stockholders Agreement, dated as of February 8, 2005, by and between the Company and Quadrangle (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated February 8, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.16 |  | Registration Rights Agreement, dated as of February 8, 2005, by and between the Company and Quadrangle (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated February 8, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.17 |  | Form of Management Stockholder Agreement, dated as of February 8, 2005 (incorporated by reference to Exhibit 10.8 of the Current Report on Form 8-K dated February 8, 2005).*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.18 |  | Amended and Restated Credit Agreement, dated as of April 26, 2006, by and among Protection One Alarm Monitoring, Inc., Protection One, Inc., the several banks and other financial institutions or entities from time to time parties to
the Amended and Restated Credit Agreement, Bear, Stearns & Co. Inc., as sole lead arranger and sole bookrunner, LaSalle Bank National Association, as syndication agent, Harris Nesbitt Financing, Inc., LaSalle Bank National
Association and U.S. Bank National Association, as co-documentation agents, and Bear Stearns Corporate Lending Inc., as administrative agent (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated
April 26, 2006).
|10.19 |  | Stockholders Agreement, dated as of December 20, 2006, by and among Protection One, Inc., Tara Acquisition Corp. and the stockholders named therein (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated
December 21, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.20 |  | Lock Up and Consent Agreement, dated as of December 18, 2006, by an among Protection One Alarm Monitoring, Inc., Integrated Alarm Services Group, Inc. and the noteholders named therein (incorporated by reference to Exhibit 10.2 of
the Current Report on Form 8-K dated December 21, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.21 |  | Credit Facilities Commitment Letter, dated as of December 17, 2006, by and among Protection One, Inc., Protection One Alarm Monitoring, Inc., Bear, Stearns & Co. Inc. and Bear Stearns Corporate Lending Inc.
(incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated December 21, 2006).                                                                                                                                                                                                                                                                                                                                                                                                   
|10.22 |  | Reorganization Agreement, dated as of December 18, 2006, by and among Protection One, Inc., POI Acquisition I, Inc. and the other affiliates of Quadrangle Group LLC named therein (incorporated by reference to Exhibit 10.4 of
the Current Report on Form 8-K dated December 21, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.23 |  | Employment Agreement dated March 8, 2007, by and among the Company, Protection One Alarm Monitoring, Inc. and Kimberly Lessner (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated March 8, 2007).*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

113

---



|10.24 |  | First Amendment dated March 13, 2007, by and among Protection One Alarm Monitoring, Inc., Protection One, Inc., the lenders party thereto and Bear Stearns Corporate Lending Inc., as administrative agent (incorporated by reference to Exhibit 10.1 of
the Current Report on Form 8-K dated March 13, 2007).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.25 |  | Amended and Restated Stockholders Agreement dated April 2, 2007, among Quadrangle Master Funding Ltd., POI Acquisition, LLC and the Company (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated April 2, 2007).                                                                
|10.26 |  | Notes Security Agreement dated April 2, 2007, among the Company, the Trustee and other parties named therein (incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated April 2, 2007).                                                                                               
|10.27 |  | Pledge Agreement dated April 2, 2007, among the Company, the Trustee and other parties named therein (incorporated by reference to Exhibit 10.3 of the Current Report on Form 8-K dated April 2, 2007).                                                                                                       
|10.28 |  | Intercreditor Agreement dated April 2, 2007, among Bear Stearns Corporate Lending Inc., as administrative agent, the Trustee, POAMI and the Company (incorporated by reference to Exhibit 10.4 of the Current Report on Form 8-K dated April 2,
2007).                                                        
|10.29 |  | 2007 Senior Management Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated August 29, 2007)*                                                                                                                                                         
|21.1  |  | Subsidiaries of the Company and POAMI.+                                                                                                                                                                                                                                                                       
|23.1  |  | Consent of Deloitte & Touche LLP.+                                                                                                                                                                                                                                                                            
|31.1  |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                     
|31.2  |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                                                     
|32.1  |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                       
|32.2  |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                       

---

(b)   The
exhibits required by Item 601 of Regulation S-K are filed or furnished herewith.

114

---





SIGNATURES

Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on
their behalf by the undersigned, thereunto duly authorized.

|                     |  | PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
|-------------------- |  | ----------------------------------------------------------
|Date: March 17, 2008 |  | By:                                                       

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants and in the capacities and on
the dates indicated.

|Signature                               |  | Title                                                                              |  | Date          
|--------------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|                                        |  |                                                                                    |  |               
|/s/RICHARD GINSBURGRichard Ginsburg     |  | President, Chief Executive Officer and Director (Principal Executive Officer)      |  | March 17, 2008
|/s/DARIUS G. NEVINDarius G. Nevin       |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |  | March 17, 2008
|/s/SARAH STRAHMSarah Strahm             |  | Chief Accounting Officer (Principal Accounting Officer)                            |  | March 17, 2008
|/s/RAYMOND C. KUBACKIRaymond C. Kubacki |  | Director                                                                           |  | March 17, 2008
|/s/ROBERT J. MCGUIRERobert J. McGuire   |  | Director                                                                           |  | March 17, 2008
|/s/HENRY ORMONDHenry Ormond             |  | Director                                                                           |  | March 17, 2008
|/s/STEVEN RATTNERSteven Rattner         |  | Director                                                                           |  | March 17, 2008
|/s/THOMAS J. RUSSOThomas J. Russo       |  | Director                                                                           |  | March 17, 2008
|/s/DAVID A. TANNERDavid A. Tanner       |  | Director                                                                           |  | March 17, 2008
|/s/MICHAEL WEINSTOCKMichael Weinstock   |  | Director                                                                           |  | March 17, 2008
|/s/ARLENE M. YOCUMArlene M. Yocum       |  | Director                                                                           |  | March 17, 2008

114

---



QuickLinks