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

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FORM 10-K/A-2

|/x/ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 1999

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the transition period from  to

|0-24780                                                        |  | 33-73002-01                                                   
|-------------------------------------------------------------- |  | --------------------------------------------------------------
|(Commission File Number)                                       |  | (Commission File Number)                                      
|Protection One, Inc.                                           |  | Protection One Alarm Monitoring, Inc.                         
|(Exact Name of Registrant as Specified in Charter)             |  | Exact Name of Registrant as Specified in Charter)             
|Delaware                                                       |  | Delaware                                                      
|(State of Other Jurisdiction of Incorporation or Organization) |  | (State or Other Jurisdiction of Incorporation or Organization)
|93-1063818                                                     |  | 93-1064579                                                    
|(I.R.S. Employer Identification No.)                           |  | (I.R.S. Employer Identification No.)                          
|6011 Bristol Parkway, Culver City, California, 90230           |  | 6011 Bristol Parkway, Culver City, California, 90230          
|(Address of Principal Executive Offices, Including Zip Code)   |  | (Address of Principal Executive Offices, Including Zip Code)  
|(310) 342-6300                                                 |  | (310) 342-6300                                                
|(Registrant's Telephone Number, Including Area Code)           |  | (Registrant's Telephone Number, Including Area Code)          

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

|Title of Each Class                                                                                                               |  | Name of Each Exchange On Which Registered
|--------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Common Stock, par value $.01 per share, of Protection One, Inc.                                                                   |  | New York Stock Exchange                  
|63/4% Convertible Senior Subordinated Notes Due 2003 of Protection One Alarm Monitoring, Inc., Guaranteed by Protection One, Inc. |  |                                          

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

(None)(Title of Class)

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Indicate
by check mark whether each of the registrants (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 such registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes /x/ No / /

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
each 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. /x/

The
aggregate market value of common stock of Protection One, Inc. held by nonaffiliates on March 24, 2000 (based on the last sale price of such shares on the New York
Stock Exchange) was $32,213,180.

As
of March 24, 2000, Protection One, Inc. had 126,945,337 shares of Common Stock outstanding, par value $0.01 per share. As of such date, Protection One Alarm
Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc. Protection One Alarm
Monitoring, Inc. meets the conditions set forth in General Instructions I (1)(a) and (b) for Form 10-K and is therefore filing this form with the reduced disclosure
format set forth therein.

DOCUMENTS
INCORPORATED BY REFERENCE:

Portions
of Protection One, Inc.'s proxy statement on Schedule 14A to be furnished to stockholders in connection with its Annual Meeting of Stockholders are incorporated
by reference in Part III of the Form 10-K. Such proxy statement is expected to be filed with the Commission prior to April 29, 2000.

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TABLE OF CONTENTS

|                                                                                              |  | Page
|--------------------------------------------------------------------------------------------- |  | ----
|PART I                                                                                       
|Item 1. Business                                                                              |  | 3   
|Item 2. Properties                                                                            |  | 24  
|Item 3. Legal Proceedings                                                                     |  | 24  
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 25  
|PART II                                                                                      
|Item 5. Market for Registrants' Common Equity and Related Stockholder Matters                 |  | 26  
|Item 6. Selected Financial Data                                                               |  | 27  
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 29  
|Item 7A. Qualitative and Quantitative Disclosure About Market Risk                            |  | 43  
|Item 8. Financial Statements and Supplementary Data                                           |  | 43  
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure  |  | 43  
|PART III                                                                                     
|Item 10. Directors and Executive Officers of the Registrants                                  |  | 44  
|Item 11. Executive Compensation                                                               |  | 44  
|Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  | 44  
|Item 13. Certain Relationships and Related Transactions                                       |  | 44  
|PART IV                                                                                      
|Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  | 45  

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PART I    FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K/A-2 (this "Report") 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. These forward-looking statements generally can be identified as
such because the context of the statement includes words such as we "believe," "expect," "anticipate" or other words of similar import. Similarly, statements herein that describe our objectives, plans
or goals also are forward-looking statements. All such 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. Important factors that could cause actual results to differ materially from our expectations include, among others, the factors discussed in the section entitled "Risk
Factors." 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.

INTRODUCTORY NOTERESTATEMENT

Following extensive conversations with the Staff of the SEC which have been previously disclosed, we have restated our Consolidated Financial Statements as of
December 31, 1999, 1998 and 1997 and for the years then ended and for each of the three fiscal quarters ended March 31, 2000, June 30, 2000, and September 30, 2000. This
restatement primarily relates to the amortization of customer accounts acquired and amounts allocated to obligations assumed in the Westinghouse Security Systems (WSS) acquisition. A description of
the adjustments which comprise the restatement is disclosed in Note 2 of the Consolidated Financial Statements filed with this Form 10-K/A-2. A summary of the
restated unaudited quarterly financial information for 1999, 1998, and 1997 is disclosed in Note 19 of such Consolidated Financial Statements.

For
the purpose of this Form 10-K/A-2, we have amended and restated in its entirety the 1999 Form 10-K/A. In order to preserve the
nature and the character of the disclosures as of the date of the original 1999 Form 10-K, no attempt has been made in this Form 10-K/A-2 to modify or
update such disclosures except as required to reflect the results of the restatement.

ITEM 1. BUSINESS

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. ("Protection One Alarm Monitoring") and Protection One's other wholly owned subsidiaries.
Protection One's sole asset is, and Protection One operates solely through, its investment in Protection One Alarm Monitoring and Protection One's other wholly owned subsidiaries. Each of Protection
One and Protection One Alarm Monitoring is a Delaware corporation organized in September 1991.

Overview

Protection One is one of the leading providers of life safety and property monitoring services, providing electronic monitoring and maintenance of its alarm
systems in 1999 to nearly 1.6 million customers in North America and Europe. We also provide our customers with enhanced services that include:



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Approximately
85% of our revenues are contractually recurring for monitoring alarm security systems and other related services. We have grown rapidly by participating in the organic
growth in the alarm industry and by acquiring other alarm companies.

Our
European operations were sold on February 29, 2000. See "Recent DevelopmentsSale of European Assets and Other Transactions" below.

Business

Our principal activity is responding to the security and safety needs of our customers. Our revenues are generated primarily from recurring monthly payments
for monitoring and maintaining the alarm systems that are installed in our customers' homes and businesses. Security systems are designed to detect burglaries, fires and other events. Through a
network of 57 service branches and 13 satellite offices in North America and 65 service branches in continental Europe and the United Kingdom, we provide maintenance service of security systems and,
in certain markets, armed response to verify that an actual emergency has occurred.

We
provide our services to the residential (both single family and multifamily residences), commercial and wholesale customers. At December 31, 1999, our customer base
composition was as follows:

Market Segment

Percentage of TotalSingle family and commercial

72
%Multifamily/Apartment

18
%Wholesale

10
%Total

100
%


Wholesale
customers represent those customers that are served by smaller independent alarm dealers that do not have a monitoring station and therefore subcontract monitoring services
from us.

Our
company was divided into three business segments in 1999:

Protection One North America("North America") generated approximately $403.3 million, or 66.6%, of our revenues in 1999 and is
comprised of Protection One Alarm Monitoring-our core alarm monitoring business based in Culver City, California.

Network Multifamily("Multifamily") generated approximately $38.9 million, or 6.4%, of our revenues in 1999 and is comprised of
our alarm monitored business servicing the multifamily/apartment market based in Addison, Texas.

Protection One Europe("Europe") generated approximately $163.0 million, or 27.0%, of our revenues in 1999 and is comprised of:



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Our
European operations were sold on February 29, 2000. See "Recent DevelopmentsSale of European Assets and Other Transactions" below.

Overview of 1999 Activities

Dealer Program.In 1998, we expanded our dealer program (Dealer Program) for the North American single family
residential market. As part of the Dealer Program, we entered into contracts with dealers, typically independent alarm companies, providing for the purchase of customer accounts generated by the
dealer on an ongoing basis. We maintained a limited internal sales staff and relied on the Dealer Program for the generation of substantially all new customer accounts in 1999.

In
1999, we began identifying steps that could be taken to reduce the cost of acquired accounts and reduce attrition by acquiring higher quality accounts. As part of this process, we
began notifying dealers that we did not intend to renew their contracts under their current terms and conditions when they expire. The terms of dealer contracts ranges from one to five years and
automatically renews unless notice of non-renewal is given by either party as provided in the contracts. In many cases, we entered into new contracts with existing dealers, as well as
entered into contracts with new dealers, with terms providing for a lower cost for acquired customer accounts based upon the multiple of monthly recurring revenue and other revised terms that improve
the quality of the acquired customer accounts. In other cases, the existing contracts were terminated with settlements deducted from established reserves and therefore having no impact on earnings.
These actions have resulted in a loss of dealers and therefore fewer customer accounts available for purchase. The failure to replace customer accounts could have a material adverse impact on our
financial condition. The number of accounts being purchased decreased significantly from 25,000 in March 1999 to approximately 3,500 in January 2000. See "Item 3Legal
Proceedings."

Our
new focus is on diversifying our customer acquisition strategy to include a more balanced mix of dealers, internal sales, "tuck-in" acquisitions and direct marketing,
thereby placing less reliance on account generation through the Dealer Program. See further discussion in Strategy section below.

Impairment Test.During the fourth quarter, we performed an impairment test of our customer accounts and related
goodwill under the guidance of Statement of Financial Accounting Standards No. 121,Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of(SFAS 121). Paragraph 6 of SFAS 121 indicates that an impairment loss should be recognized only if the sum
of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets grouped at the lowest level of identifiable cash flows. After performing
the test, management determined that there currently is not an impairment of the customer accounts.

Change in Accounting Principle.In 1999, we announced a change in accounting principle relating to the amortization of
customer accounts. Historically, we amortized the costs allocated to customer accounts by using the straight-line method over a 10-year life for all customer accounts, except
WSS customer accounts which utilize an eight-year accelerated amortization method. The straight-line method, indicated in Accounting Principles Board Opinion No. 17 as
an appropriate method for such assets, has been the predominant method used to amortize customer accounts in the monitored services industry.
Management is not aware of whether the economic life or the rate of realization for our customer accounts differs materially from other monitored services companies.

The
choice of a ten-year life was based on management's estimates and judgments about the amounts and timing of expected future revenues from these assets, the rate of
attrition of such revenue over customer life, and average customer account life. Ten years was used because, in management's opinion, it would adequately match amortization cost with anticipated
revenue from those assets even though many accounts were expected to produce revenue over periods substantially longer than ten years. Effectively, it expensed the asset costs ratably over an
"expected average customer life" that was

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shorter than the expected life of the revenue stream, thus implicitly giving recognition to projected revenues for a period beyond ten years.

We
concluded a comprehensive review of our amortization policy that was undertaken during the third quarter of 1999. This review was performed specifically to evaluate the historic
amortization policy in light of the inherent declining revenue curve over the life of a pool of customer accounts, and our historical attrition experience. After completing the review, management
identified three distinct pools, each of which has distinct attributes that effect differing attrition characteristics. The pools correspond to our North America, Multifamily and the former Europe
business segments. Separate pools for North America and Multifamily will be used going forward. The pool for Europe will no longer be relevant to us in light of the sale of the European operations.
For the North America and Europe pools, the analyzed data indicated to management that we can expect attrition to be greatest in years one through five of asset life and that a change from a
straight-line to a 10-year declining balance (accelerated) method would more closely match future amortization cost with the estimated revenue stream from these assets.
Management initially elected to change to that method for all customer accounts in the North America and Europe pools, except for the WSS accounts which utilize an eight-year accelerated
amortization method. No change was made in the method used for the Multifamily pool. See Notes 2 and 3 of "Notes to Consolidated Financial Statements" for further discussion.

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

Customer Pool

Amortization
MethodNorth AmericaAcquired Westinghouse Customers

Eight-year 120% declining balanceOther Customers

Ten-year 130% declining balanceEurope

Ten-year 125% declining balanceMultifamily

Ten-year straight-line


Adoption
of the declining balance method effectively shortens the estimated expected average customer life for these customer pools. It is not possible to distinguish the effect of a
change in method (straight-line to declining balance) from the change in estimated lives.

Sale of Mobile Services Group.The sale of our Mobile Services Group to ATX Technologies ("ATX") was announced on
June 28, 1999 and consummated on August 25, 1999. The sales price was approximately $20 million in cash plus a note and a preferred stock investment in ATX. We recorded a gain on
the sale of approximately $11.2 million, net of tax.

Recent Developments

Sale of European Assets and Other Transactions.On February 29, 2000, we sold our European operations and
certain investments to Westar Capital, Inc. ("Westar Capital"), a wholly owned subsidiary of Western Resources, Inc. ("Western Resources"), that owns approximately 85% of our common
stock. We received consideration of approximately $244 million, comprised of approximately $183 million in cash and certain of the outstanding debt securities of Protection One Alarm
Monitoring that Westar Capital had acquired with a market value of approximately $61 million. As part of this transaction, Westar Capital agreed to pay us a portion of the net gain, if any, on
a subsequent sale of the European business on a declining basis over the four years following the closing. The cash proceeds of the sale were used to reduce the $240 million outstanding balance
under the $250 million Senior Credit Facility provided by Westar Capital to Protection One Alarm Monitoring.

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Westar Capital also transferred to us debt securities of Protection One Alarm Monitoring and a note for payment of certain intercompany amounts owed by Westar Capital to us.

The
aggregate carrying value of debt securities received in these transactions was approximately $134.6 million. Upon the receipt of these securities, we recorded an
extraordinary gain from the cancellation of debt of approximately $27 million, net of tax. See Note 20 of "Notes to Consolidated Financial Statements" for a description of the debt
transferred.

A
special committee of the Protection One Board of Directors approved these transactions after obtaining a "fairness opinion" from an investment banker. The special committee also
approved the amendment to our Senior Credit Facility described below.

Amendment to Credit Agreement with Westar Capital.On December 17, 1999, Westar Capital became the lender under
our Senior Credit Facility. Concurrent with the sale of our European operations discussed above, the Senior Credit Facility was amended to, among other things, (1) reduce the commitment to
$115 million (resulting in availability of approximately $58 million after application of proceeds from the sale of the European operations), (2) increase the leverage ratio
covenant to 5.75 to 1.0, (3) reduce the interest coverage ratio to 2.10 to 1.0, (4) change the termination date to January 2, 2001, (5) change the loan pricing grid to one
based on leverage ratio rather than credit rating, (6) allow for the inclusion of certain add-backs to the calculation of EBITDA, (7) eliminate as an Event of Default Western
Resources' failure to own more than 50% of our outstanding common stock, (8) waive compliance with the leverage ratio and interest coverage ratio covenants for the fiscal quarters ended
September 30, 1999 and December 31, 1999, and (9) provide for an increase in the amount of the commitment by up to $40 million for the purpose of consummating acquisitions
approved by Westar Capital.

Change in Estimate of Useful Life of Goodwill.In conjunction with the impairment test for customer accounts, we
re-evaluated the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful life of goodwill. Management concluded that due to continued
losses and increased levels of attrition experienced in 1999, the estimated useful life of goodwill should be reduced from 40 years to 20 years. As of January 1, 2000, the
remaining goodwill, net of accumulated amortization, will be amortized over its remaining useful life based on a 20-year life. On our existing account base, we anticipate that this will
result in an increase in annual goodwill amortization of approximately $23 million for North America and $6 million for Multifamily. The additional goodwill recorded for Europe prior to
its sale on February 29, 2000 was approximately $1 million.

Attrition

Subscriber attrition has a direct impact on our results of operations since it affects both our revenues and amortization expense. We define attrition as a
ratio, the numerator of which is the number of lost customer accounts for a given period, net of certain adjustments, and the denominator of which is the average number of accounts for a given period.
In some instances, we use estimates to derive attrition data. The adjustments made to lost accounts are primarily related to those accounts which are covered under a purchase price holdback and are
"put" back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in the purchase agreements with sellers. In some cases, the amount of the
purchase holdback may be less than actual attrition experience.

Our
actual attrition experience shows that the relationship period with any individual customer can vary significantly and may be substantially shorter or longer than ten years.
Customers discontinue service with us for a variety of reasons, including relocation, service issues and cost. A portion of the acquired 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.

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We monitor attrition each quarter based on an annualized and trailing twelve-month basis. This method utilizes each segment's average customer account base for the applicable period
in measuring attrition. Therefore, in periods of customer account growth, customer attrition may be understated and in periods of customer account decline, customer attrition may be overstated. When
appropriate, we will adjust amortization of the cost of customer accounts.

Customer
attrition by business segment for the years ended December 31, 1999 and 1998 is summarized below:

|              |  | Customer Account Attrition
|------------- |  | --------------------------
|
|
|North America |  | 16.3%                     
|Europe        |  | 15.6%                     
|Multifamily   |  | 8.0%                      
|Total Company |  | 14.7%                     

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As
the result of the attrition rates for the North America pool, we engaged an appraiser to perform a current lifing study to assess the impact of our 1999 customer service issues on
the estimated long-term revenues to be received from the current North America account base. Based on the results of this study, we determined that the current amortization rates remain
appropriate.We also reduced the period over which we amortize goodwill from 40 years to 20 years as discussed above.

See
"StrategyFocusing on Customer Service and Reducing Attrition" for a discussion of our efforts to reduce attrition.

Strategy

In prior years, our strategy was focused primarily on growing our customer base to achieve critical mass. We believe we have reached this objective and our
strategic focus has now shifted to the following areas:



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The
primary goals with this strategy are to increase cash flow to reinvest in the business and to reduce customer attrition. The principal components of our strategy are as follows:



Our customer care centers are located in our service centers and answer non-emergency customer inquiries. Operators answer inbound calls to our
help desk and assist customers with understanding and resolving operating issues related to their security systems. If an operator is unable to resolve an issue over the phone, a technician is
typically dispatched through a repair order that is entered into our centralized field scheduling system.

Our
commitment to quality customer service intensified with the addition of 150 service representatives late in the second quarter of 1999. We also increased training and technology
investments. As a result of these initiatives, there were improvements in the third and fourth quarters of 1999 in measurements of key performance metrics such as abandonment rates, acknowledgement
time, average speed of answer and service repair backlog. Additional customer service initiatives are under way with a goal of reducing attrition rates. These include, but are not limited to, special
retention teams, new billing system implementation, proactive customer interaction, and focusing the organization on customer service. We have also started converting our multiple monitoring and
billing systems to one integrated system which management believes will further enhance customer service. However, no assurance can be given that these efforts will be successful in reducing customer
attrition.

We
expect that significant investments in our customer service response systems and training will be required as part of our ongoing effort to become the highest quality service
provider in the industry.



Despite the amount of significant consolidation activity that has occurred in the alarm industry over the last several years, the industry in North America and
Europe remains highly fragmented. SDM Magazine (formerly Security Distribution Magazine) estimates that there are over 16,000 alarm companies in North America alone. The top 100 companies in the North
American industry represent only 25% of the total revenue in that industry. The remaining 75% are comprised of small, local alarm companies with annual revenues typically less than $1 million.
Management estimates that the combined customer base of these small alarm companies exceeds eight million customers, indicating that the consolidation trend in the alarm industry will likely continue.

From
November 1997 through December 1998, we completed in excess of 30 transactions, adding approximately one million new customers and establishing our market position.
In 1998, we also expanded the Dealer Program for the North American single family residential market. While we relied primarily on the Dealer Program for our growth in 1999, we shifted our focus to a
more diverse customer acquisition strategy including a more balanced mix of dealers, internal sales, "tuck-in" acquisitions and direct marketing, thereby placing less reliance on account
generation through the Dealer Program.

In
February 2000, we started a commission only internal sales program, with a goal of acquiring accounts at a cost lower than our external programs. This program utilizes our
existing branch infrastructure in 11 markets. We are also pursuing alignments with strategic partners in an effort to further diversify our marketing distribution channels.

To
enhance our direct marketing efforts, we entered into an agreement with Paradigm Direct LLC ("Paradigm"). As part of this agreement, our marketing department moved to Paradigm with
the goal to improve the return on investment of marketing dollars. Westar Capital has a 40% ownership interest in Paradigm.

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Multifamily
markets its services and products primarily to developers, owners and managers of apartment complexes and other multifamily dwellings. Multifamily grows its business
through national and regional advertising, a nationwide professional field sales force and affiliations with professional industry-related associations. We believe this targeted internal sales effort
is an effective means of generating sales in the multifamily market, which is comprised primarily of developers and professionals that can be identified and contacted with relative ease.



During 2000, the technology infrastructure of our North America segment will be integrated into common customer service, monitoring, billing, collection and
financial systems. Our primary objective is to standardize operations nationwide. We believe the operational efficiencies from these initiatives will improve gross profit margins and reduce attrition.



As a means to increase revenues and margins, we provide our new and existing customers with an array of additional value-added services to help broaden our
customer relationships. Our enhanced services include extended service protection, several different types of alarm verification, commercial open/close reports, patrol services, and wireless backup
services. These enhanced services also position us as a full service provider and provides us more features to sell in our solicitation of new customers.



We believe there is a unique opportunity to build a preeminent consumer brand name in the security industry which would enable us to add new customers at a
lower cost than our competitors and improve customer retention. We plan to target our growth to areas near existing branches thereby increasing customer density in those locations. Our service and
response vehicles, dealer marketing efforts, yard signs, and internet affinity advertising serve as a base from which to launch further brand development efforts. We believe that a well recognized
brand supports our goal of becoming the industry leader and broadening our customer relationships.



During the fourth quarter of 1999, we conducted a strategic evaluation of our commercial business and decided to renew our focus on this business segment.
Through our Cranford, New Jersey and Lenexa, Kansas branches we install commercial systems ranging from large industrial to storefront retail. Products range from serving as an installation
subcontractor, often receiving ongoing monitoring and/or service, to a more all-inclusive role in designing, installing, servicing and monitoring a system. These branches integrate
multiple systems, usually intrusion detection, CCTV and access control allowing the customer to control multiple systems through one interface.

The Security Alarm Industry

The North American alarm industry is large, growing rapidly and characterized by a high degree of fragmentation, low residential penetration and a continuing
trend towards consolidation. Over the last several years, many of the largest security alarm companies in North America and Europe have been acquired leaving few large national and
Pan-European alarm companies. Potential new entrants into the alarm industry are now faced with few, if any, large alarm companies available for purchase. We believe that the larger, more
cost efficient alarm companies with access to capital will continue to grow faster than the industry average. According to SDM Magazine, we were the third largest electronic security systems and
services company based on 1998 gross revenue. SDM Magazine further reports that the

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largest 100 companies in the U.S. alarm industry experienced growth of 23% and 14.8% in 1999 and 1998 respectively, compared to industry growth rates of 6.8% and 8.6% in 1999 and 1998 respectively.

We
believe that several favorable demographic trends, including the aging population, two-income families, home officing as well as a strong economy and the increased
perception of crime have all contributed to an increased demand for security alarm services. Due to our size and density in key markets and our technology infrastructure, assuming successful
completion of the enhancements in progress, we believe we will be well positioned to take advantage of the continued growth of the industry.

Operations

Our operations consist principally of alarm monitoring, customer service functions and branch operations.



Customer Security Alarm Systems.Security alarm systems include many different types of devices installed at customers'
premises designed to detect or react to various occurrences or conditions, such as intrusion or the presence of fire or smoke. In general, systems for multi-family and residential applications tend to
be smaller in size than those used by commercial customers, and also tend to generate a lower level of alarm signals than in commercial applications. These devices are connected to a computerized
control panel that communicates through the phone lines to a service center. In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was
activated, and can transmit that information to a central monitoring station.

The
basic system includes monitoring of the front and back doors of a home, one keypad, an interior motion detection device, a central processing unit with the ability to communicate
signals to our central monitoring station, a siren, window decals and a yard sign. This basic system often will be offered for little or no up-front price, but will be sold to a customer
with additional equipment customized to a customer's specific needs. Such equipment add-ons include additional perimeter and interior protection, fire protection devices (heat and smoke
detectors), environmental protection devices (freeze sensors and water detectors), panic buttons and home automation devices (lighting or appliance controls).

Customer Contracts.Our alarm monitoring customer contracts generally have initial terms ranging from one to five years
in duration, and 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. Typically, customers sign alarm
monitoring contracts that include a bundled monthly charge for monitoring, extended service protection and a rebate against the homeowners' insurance deductibles in the event of a loss. Extended
service protection covers the normal costs of repair of the security system after the expiration of the security system's initial warranty period. Although a customer may elect to sign an alarm
monitoring contract that excludes extended service protection, few customers choose to do so, and we believe the bundling of monitoring and extended service protection provides additional value to
customers and allows us to provide more efficient field repair services.

Service Centers.We maintain eight major service centers in North America to provide monitoring services to the
majority of our customer base. In the United Kingdom, our service center was based in metropolitan London. In Continental Europe, our service centers were based in Paris and in

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metropolitan Marseilles, France. The table below provides additional detail about the North American monitoring centers:

Location

Current Number of Customers Monitored

Primary MarketsBeaverton, OR

305,000

Residential/CommercialAddison, TX

295,000

Multi-FamilyHagerstown, MD

80,000

Residential/WholesaleIrving, TX

430,000

Residential/CommercialOrlando, FL

125,000

WholesaleWichita, KS

210,000

Residential/CommercialOttawa, Ontario

20,000

ResidentialVancouver, B.C.

20,000

Residential


Each
service center incorporates the use of communications and computer systems that route incoming alarm signals and telephone calls to operators. Each service center currently
monitors signals largely on a geographic basis. We are currently standardizing our operating platforms so that the centers will be effectively integrated with signals routed to the centers on a
capacity basis, rather than on a geographic basis. We expect that the use of a single operating platform in North America will enable us to realize overall operating efficiencies through the ability
to monitor more effectively alarm signal patterns and adjust service center staffing levels accordingly.

Depending
upon the type of service for which the customer has contracted, service center personnel respond to alarms by relaying information to the local fire or police departments,
notifying the subscriber, or taking other appropriate action, such as dispatching alarm response personnel to the customer's premises where this service is available. We also provide customers with
remote audio verification capability that enables the central monitoring station to listen and speak directly into the customer's premises in the event of an alarm activation. This feature allows our
personnel to verify that an emergency exists, to reassure the subscriber, and to expedite emergency response, even if the customer is unable to reach a telephone. Remote audio verification capability
also assists us in quickly determining if the alarm was activated inadvertently, and thus whether a response is required.

Our
service centers operate 24 hours per day, seven days a week, including all holidays. Each operator within a service center monitors a computer screen that presents
information concerning the nature of the alarm signal, the customer whose alarm has been activated, and the premises on which such alarm is located. Other non-emergency administrative
signals are generated by low battery status, deactivation and reactivation of the alarm monitoring system, and test signals, and are processed automatically by computer.

All
of our primary service centers in North America are listed by Underwriters Laboratories, Inc. ("UL") as protective signaling services stations. UL
specifications for service centers include building integrity, back-up computer and power systems, staffing and standard operating procedures. In many jurisdictions, applicable law
requires that security 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.

Wholesale Monitoring.Through our service centers in Orlando, Florida, Hagerstown, Maryland, and Vancouver, British
Columbia, we provide wholesale monitoring services to independent alarm companies. Under the typical arrangement, alarm companies subcontract monitoring services to us, primarily because such
companies do not have their own monitoring capabilities. We may also provide billing and other services. Dealers retain ownership of monitoring contracts and are responsible for every other aspect of
the relationship with customers, including field repair service.

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Customer Care Services.Our customer care centers are co-located in our service centers and process
non-emergency communications. Operators receive inbound customer calls and the customer service group addresses customer questions and concerns about billing, service, credit and alarm
activation issues. The help desk staff assists customers in understanding and resolving mechanical and operating issues related to security systems. A field repair scheduling function sets up
technician appointments.
We also operate a dedicated customer service call center in Chatsworth, CA to address questions that customers or potential customers have about our services, as well as outbound sales and marketing
activities and collections.

Enhanced Services.As a means to increase revenues and to enhance customer satisfaction, we offer customers an array of
enhanced security services, including extended service protection and several different types of alarm verification. These services position us as a full service provider and give dealers more
features to sell in their solicitation of new customers. We actively solicit our customers for interest in these services. The following provides additional detail on enhanced services:





We maintain approximately 57 service branches in North America from which we provide field repair, customer care, alarm response and sales services and
approximately 13 satellite locations from which we provide field repair services. Our branch infrastructure plays an important role in enhancing customer satisfaction, reducing customer loss and
building brand awareness.

Field Repair.Field repair personnel are trained by Protection One to provide repair services for the various types of
security systems utilized by our customers. We strive to execute prompt service scheduling and first call repair for customers. Field personnel also provide quality and related compliance inspections
for new installations performed by our dealers.

Repair
services generate revenues primarily through billable field service calls and recurring payments under our extended service protection program. The increasing density of our
customer base permits more effective scheduling and routing of field service technicians and results in economies of scale.

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Alarm Response and Patrol.We offer our customers in Southern California and Las Vegas alarm response and patrol
enhanced services in addition to our other services. These armed officers supplement our alarm monitoring service by providing "alarm response service" to alarm system activations, "patrol service"
consisting of routine patrol of customers' premises and neighborhoods and, in a few cases, "special watch" services, such as picking up mail and newspapers and increased surveillance when the customer
is traveling. Our patrol officers observe and report potential criminal activity at a customer's home.

We
believe that demand for alarm response and patrol services is likely to increase as a result of a trend on the part of local police departments to limit their response to alarm
activations and other factors that may lead to a decrease of police presence. The Private Sector Liaison Committee of the International Association of Chiefs of Police has established
Non-Sworn Alarm Responder Guidelines to provide standards for private alarm response officers. We believe that further demand for such services should enable us to further increase
customer density in our routes, thereby increasing margins. In addition, our offer of patrol and alarm response services is a sales method used to attract customers of other alarm monitoring companies
that do not provide such services. To the extent that further demand develops for patrol and alarm response services, we believe that our current presence will enable us to increase our conversions of
customers to our services. No assurance can be given that demand for such services will increase.

Sales and Marketing

As discussed above, we entered into an agreement with Paradigm concerning a three year marketing relationship. As part of this arrangement, Paradigm will
conduct marketing activities under the name Protection One Marketing Services ("POMS"). Certain marketing personnel were reallocated from Protection One to POMS. For the first year under the
agreement, we agreed to reimburse POMS on a monthly basis for an amount estimated to approximate the current salary plus benefits of the reallocated employees, plus a 10% mark-up.

During
the last two years, we have concentrated our advertising and marketing efforts to support the Dealer Program. Our advertising and marketing efforts are now implemented through
POMS. POMS intends to utilize television, radio, newspaper, direct mail, and internet channels for promotional messages to create sales leads and to increase awareness of the Protection One brand. In
addition, POMS intends to use both inbound and outbound telemarketing to generate leads. POMS will install all new customer systems they sell over the telephone and then sell the account to Protection
One. Leads will be sold to us if the prospective customer requests direct involvement with a company representative.

Multifamily
sales and marketing activities consist of national and regional advertising, nationwide professional field sales efforts, centralized inbound and outbound sales functions,
prospective acquisition marketing efforts and professional industry-related association affiliation. Services are sold directly to the property owner, and payment is based on a lease price on a
per-unit basis. Ongoing service for the duration of the lease includes equipment, maintenance, 24-hour monitoring from our central monitoring station, customer service and
individual market support. Property owner contracts generally have initial terms ranging from five to ten years in duration, and provide for automatic renewal for a fixed period (typically five years)
unless Multifamily or the subscriber elects to cancel the contract at the end of its term.



The dealer marketing program provides support services to dealers as they grow their independent businesses. On behalf of the Dealer Program participants, we
obtain purchase discounts on security

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systems, coordinate cooperative dealer advertising and provide assistance in marketing and employee training support services.

Dealer
contracts provide for the purchase of the dealers' customer accounts by us on an ongoing basis. The dealers install specified alarm systems (which have a Protection One logo on
the keypad), arrange for customers to enter into Protection One alarm monitoring agreements, and install Protection One yard signs and window decals. In addition, we require dealers to qualify
prospective customers by meeting a minimum credit standard. See "Overview of 1999 DevelopmentsDealer Program" above.



The Telesales department, located at the Chatsworth, California service center, focuses on selling new systems to inbound residential callers over the
telephone. Along with sales professionals at our branch offices, the Telesales department also tracks previous customers' homes to sign up new owners when they move into such homes. The sales
professionals also generate revenue from selling equipment upgrades and add-ons to existing customers and by attracting competitors' customers to our services. In 2000, we anticipate
increasing our sales force in our branch offices in an effort to create more internally generated customers.

We
operate a significant commercial sales and installation effort for security and related monitored services. Our commercial products range from basic intrusion and fire detection
equipment to fully integrated systems with card access, closed circuit television and voice/video monitoring.

Acquisition Solicitation and Integration

We actively seek to identify prospective "tuck-in" acquisitions of companies and dealers with targeted direct mail, trade magazine advertising,
trade show participation, telemarketing, membership in key alarm industry trade organizations, and contacts through various prominent vendors and other industry participants.

Acquisitions
are integrated through a specific program developed in conjunction with each seller. Integration efforts typically include a letter from the seller to our customers,
explaining the sale and transition, followed by one or more letters and packages that include our customer service brochures, field service and monitoring phone number stickers. Thereafter, each new
customer is contacted individually by telephone by a member of our customer service group for the purpose of addressing the
customer's questions or concerns and soliciting certain information. Finally, the customer receives a follow-up telephone call after six months and periodically thereafter.

Competition

The security alarm industry is highly competitive and highly fragmented. In North America, there are only five alarm companies that offer services across the
U.S. and Canada with the remainder being either large regional or small, privately held alarm companies. Based on number of residential customers, we believe the top five alarm companies in North
America are:



Other
alarm service companies have adopted a strategy similar to ours that entails the purchase of alarm monitoring accounts both through acquisitions of account portfolios and
through dealer

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programs. Some competitors have greater financial resources than us, or may be willing to offer higher prices than we are prepared to offer to purchase customer accounts. The effect of such
competition may be to reduce the purchase opportunities available to us, thus reducing our rate of growth, or to increase the price paid by us for customer accounts, which would adversely affect our
return on investment in such accounts and our results of operations.

Competition
in the security alarm industry is based primarily on reliability of equipment, market visibility, services offered, reputation for quality of service, price and the
ability to identify and to solicit prospective customers as they move into homes. We believe that we compete effectively with other national, regional and local security alarm companies due to our
reputation for reliable equipment and services, our prominent presence in the areas surrounding our branch offices and dealers, our ability to offer combined monitoring, repair and enhanced services,
our low cost structure and our marketing alliance with Paradigm.

Intellectual Property

We own trademarks related to the name and logo for each of Protection One, Network Multifamily Security as well as a variety of trade and service marks related
to individual services we provide. We own certain proprietary software applications, which we use to provide services to our customers.

Regulatory Matters

A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms. Such measures
include:



Our
operations are subject to a variety of other laws, regulations and licensing requirements of both domestic and foreign 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. Many
jurisdictions also require certain of our employees to obtain licenses or permits. Those employees who serve as patrol officers are often subject to additional licensing requirements, including
firearm licensing and training requirements in jurisdictions in which they carry firearms.

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 the applicable local governmental jurisdiction, adherence to the 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 foreign 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

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systems, the obligation to provide purchasers of our alarm systems with certain rescission rights and certain foreign jurisdictions' restrictions on a company's freedom to contract.

Our
alarm monitoring business utilizes telephone lines and radio frequencies to transmit alarm signals. The cost of telephone lines, and the type of equipment, which may be used in
telephone line transmission, 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. In addition, the laws of certain of the foreign jurisdictions in which we operate regulate the telephone communications with the local authorities.

Risk Management

The nature of the services provided by Protection One 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.

Our
alarm response and patrol services require our employees to respond to emergencies that may entail risk of harm to such employees and to others. We employ over 100 patrol and
alarm response officers who are subject to pre-employment screening and training. Officers are subject to local and federal background checks and drug screening before being hired, and are
required to have gun and baton permits and state and city guard licenses. Officers also must be licensed by states to carry firearms and to provide patrol services. We are one of a few companies to
have an in-house training academy that prepares officer candidates for employment. Our training program includes arrest procedures, criminal law, weaponless defense, firearms and baton
usage, patrol tactics, and first-aid and CPR. After graduating from the Protection One Patrol Academy, a new officer rides along with a field training officer for two weeks to gain
experience. In total, an officer candidate undergoes approximately five weeks of specific training, which amount exceeds all state requirements. Although we conduct extensive screening and training of
our employees, the nature of patrol and alarm response service subjects us to greater risks related to accidents or employee behavior than other types of businesses.

We
carry insurance of various types, including general liability and errors and omissions insurance in amounts management considers adequate and customary for our industry and
business. Our loss experience, and the loss experiences at other security service companies, may affect the availability and cost of such insurance. Certain 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, 1999, we employed approximately 4,600 individuals on a full-time basis, including approximately 1,500 employees in Europe.
Approximately 970 of the employees in France were covered by a collective bargaining agreement. We believe that we have good relations with our employees.

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RISK FACTORS

Cautionary Statements Regarding Future Results of Operations

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. Like other businesses, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate
and our performance or that of our customers. Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, differences in our results of operations
from estimates and projections generated by the investment community and other factors beyond our control.

We have had a history of losses.

We incurred net losses of $80.7 million in 1999 (a net loss of $91.9 million excluding the effect of the Mobile Services Group gain, net),
$17.8 million in 1998, and $42.3 million in 1997. These losses reflect, among other factors:



The
charges identified above will increase as we continue to purchase customer accounts or increase indebtedness, or if interest rates on our indebtedness increases. There can be no
assurance that we will attain profitable operations on an annual basis or at all.

The competitive market for the acquisition and creation of accounts may affect our future profitability.

In the past, we have grown very rapidly by acquiring portfolios of alarm monitoring accounts through acquisitions and dealer purchases. Our current strategy is
to reduce the cost of acquiring such accounts and to utilize other customer account acquisition channels such as an internal sales force and direct marketing to complement our existing channels of
acquiring customer accounts. We compete with major firms, some of whom have greater financial resources than we do, or may be willing to offer higher prices than we are prepared to offer to purchase
subscriber accounts. The effect of competition may be to reduce the purchase opportunities available to us, or to increase the price we pay for subscriber accounts, which could have a material adverse
effect on our return on investment in such accounts on our business, and results of operations, financial condition, prospects and ability to service debt.

The integration of acquired businesses requires substantial management time and effort.

Significant acquisitions, including the 1997 business combination with the security businesses of Western Resources, place very significant demands on us with
respect to management, operational resources and the integration of financial and internal control systems. Our future operating results will depend, in part, on our ability to continue to implement
and to improve our operating and financial systems and to expand, to train and to manage our employee base. Significant risks also exist in the consolidation of our systems, operations and
administrative functions. Significant changes in quarterly revenues and costs may result from the execution of this business strategy, resulting in fluctuating financial results.

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We could discover problems with acquired businesses after their acquisition.

Acquisitions of subscriber account portfolios involve a number of uncertainties. Sellers in smaller transactions typically do not have audited historical
financial information with respect to the acquired accounts. Therefore, in making acquisition decisions, we have generally relied on management's
knowledge of the industry, due diligence procedures and representations and warranties of the sellers. There can be no assurance that these representations and warranties are or will be true and
complete or, if these representations and warranties are inaccurate, that we will be able to uncover any inaccuracies in the course of its due diligence or recover damages from the seller in an amount
sufficient to fully compensate it for any resulting losses. Risks associated with these uncertainties include, without limitation, the following:



Also,
because the primary consideration in acquiring a portfolio of subscriber accounts is the monthly recurring revenue associated with the purchased accounts, the price we have paid
has customarily been directly tied to such monthly recurring revenue. This price varies based on the number and quality of accounts being purchased from the seller, the historical activity of these
acquired accounts, the anticipated profit margins and other factors.

An
important aspect of our acquisition program is the integration of customer accounts into our operations after purchase. We have consummated well over 200 acquisitions since 1992
and have experienced nearly all of the problems and challenges described in varying degrees. We have experienced acquisitions in which the quality of the accounts purchased, as defined by monthly
recurring revenue, were not commensurate with our expectations. We have also experienced circumstances where the integration of an acquisition required more time than expected, often related to
differences in, or the inadequacy of, software and accounting systems of the seller. On these occasions, circumstances have arisen whereby we were unable to accurately track the loss of customer
accounts purchased. We have also experienced integration challenges where the servicing of newly acquired customer accounts suffered due to lack of coordination and systems. Depending upon the size,
frequency and location of acquisitions, the integration of customers may adversely affect our provision of field repair services to existing customers, which may cause customer losses to increase and
monthly recurring revenue to decline. In addition, if corporate or branch operations fail to integrate a
substantial portion of or do not adequately service acquired customer accounts, we may experience higher rates of customer loss in the future.

We will need additional funding to finance our future growth.

Our purchases of customer accounts through the Dealer Program and acquisitions of portfolios of customer accounts and new lines of business have historically
generated cash needs that exceed the net cash provided by our operating activities. We intend to continue to pursue customer account growth through the Dealer Program, "tuck-in"
acquisitions, Paradigm and internal sales, even though our principal focus will shift from growth to improving our service, reducing attrition of current customers and integrating and building
infrastructure. As a result, our cash requirements will be less in 2000 than those in 1998 and 1999, but nonetheless are expected to exceed cash flows from operations. As a result, additional funding
from additional borrowings under our credit facility or through the sale of additional securities is expected to be required in the future. Our credit ratings have recently been downgraded

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which may make obtaining additional funding more difficult or costly. Depending on the price at which new equity, if any, is sold, the issuance of additional equity securities may dilute voting power,
percentage ownership and earnings per common share realized by then current stockholders.

Any
inability to obtain funding through external financing could adversely affect our ability to increase our customers, revenues and cash flows from operations. There can be no
assurance that we will be able to obtain external funding on favorable terms or at all.

We have a substantial amount of debt, which could constrain our growth or otherwise disadvantage stockholders.

We have, and will likely continue to have, a large amount of consolidated indebtedness when compared to the equity of our stockholders. The terms of various
indentures and credit agreements governing our indebtedness, limit the incurrence of additional indebtedness. We may incur additional indebtedness in the future in order to fund future acquisitions of
subscriber accounts.

Additionally,
please be aware that:



A
large amount of indebtedness could have negative consequences, including, without limitation:



The
indentures governing our debt securities require that we offer to repurchase the securities in certain circumstances following a change of control.

Our
ability to satisfy any payment obligations will depend, in large part, on our performance, which will ultimately be affected by general economic and business factors, many of
which will be outside management's control. We believe that the cash flow from operations combined with borrowings under
the Senior Credit Facility will be enough to meet our expenses and interest obligations. However, if these payment obligations cannot be satisfied, we will be forced to find alternative sources of
funds by selling assets, restructuring, refinancing debt or seeking additional equity

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capital. There can be no assurance that any of these alternative sources would be available on satisfactory terms or at all.

We lose some of our customers over time.

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



In
addition, we experience the loss of newly acquired accounts to the extent we do not integrate or adequately service those accounts. Because some acquired accounts are prepaid on an
annual, semiannual or quarterly basis, customer loss may not become evident for some time after an acquisition is consummated. An increase in this rate of customer loss could have a material adverse
effect on our revenues and earnings.

We
have not historically observed that the rate of customer loss is correlated with the terms of the customer contracts; however, contracts with shorter terms give rise to more
instances in which a customer may choose to terminate the relationship. Although the contract term varies due to the variety and number of sources from which we acquired them, based on our standard
form of contract and the due diligence procedures we undertake in connection with account acquisitions, management
believes that substantially all of our customer contracts provide for an initial term of one to five years. During the initial term, customers may not cancel the agreement without fulfilling their
payment obligations, so customers that request cancellation during the initial term are billed for the balance of the initial term. Similarly, we believe that substantially all of our customer
contracts include an "evergreen" provision, whereby the contract automatically renews for one to five year periods unless either party gives prior notice of cancellation, usually 30 to 90 days
prior to expiration of the initial or any renewal term. Therefore, customers may only cancel their agreements by providing the required notice prior to expiration of the initial or a renewal term.

When
acquiring accounts, we seek under terms of the purchase agreement to withhold a portion of the purchase price as a partial reserve against a greater than expected loss of
customers. If the actual rate of customer loss for the accounts acquired is greater than the assumed rate at the time of the acquisition, and damages can not be recouped from the portion of the
purchase price held back from the seller, this loss of customers could have a material adverse effect on our business, financial condition, results of operations, prospects or ability to service our
debt obligations. Moreover, there can be no assurance that we will be able to obtain purchase price holdbacks in future acquisitions, particularly acquisitions of large portfolios. We have no
assurance that actual rates of customer losses for acquired accounts will not be greater than the rate we have assumed or historically incurred. Moreover, we are not able to predict accurately the
impact that acquired accounts will have on the overall rate of customer losses.

As
of December 31, 1999, our cost of intangible assets, net of accumulated amortization, was approximately $2.2 billion, which constituted approximately 87% of the book
value of our total assets. As a result of discussions with the SEC staff in the third quarter, we reviewed our methodology for amortizing customer accounts. A discussion of the results of this review
is set forth in the caption "Overview of 1999 ActivitiesChange in Accounting Principle," above. See Note 2 to the Consolidated Financial Statements.

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The effects of the gross number of lost customers have historically been offset by a combination of factors that has resulted in an overall increase in the number of customers and/or
revenue, including:



There
can be no assurance that actual future experience will be consistent with our past experiences and assumptions based on these experiences. There could be a material adverse
effect on our business, financial condition, results of operations, prospects or ability to service debt obligations if actual account attrition significantly exceeds assumed attrition and the period
over which the cost of purchased subscriber accounts is amortized is shortened.

Our debt agreements impose operational restrictions on us.

The indentures governing our public indebtedness require us to satisfy certain financial covenants in order to borrow additional funds. The most restrictive of
these covenants are set forth below:



In
each case, the ratio should reflect the impact of acquisitions and other capital investments for the entire period covered by the calculation. Other financial covenants are also
described under "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesMaterial Commitments." Our ability to
comply with the ratios and the tests will be affected by events outside our control and there can be no assurance that we will meet those tests. A breach of any of the covenants or failure to meet the
tests could result in an event of default which would allow the lenders to declare all amounts outstanding immediately due and payable. In the case of the Senior Credit Facility, if we are unable to
pay the amounts due, the lender could accelerate the indebtedness under the Senior Credit Facility, which would in turn be an event of default under our various indentures governing our publicly held
indebtedness. There can be no assurance that our assets would be sufficient to repay our indebtedness in full. We have had to obtain waivers of compliance with certain covenants and provisions under
the Senior Credit Facility in the past. There can be no assurance we can obtain any such waivers if they are required in the future.

Certain
restrictions contained in our credit agreement with Westar Capital are discussed under the caption "Recent DevelopmentsAmendment to Credit Agreement with Westar
Capital," above.

Diversification of our customer acquisition strategy.

During the period 1995 through 1997, we increasingly began to rely on independent dealers as a source for new accounts. Our reliance on the Dealer Program is
being reduced, however it remains an avenue of growth for the company. Our Dealer Program competes with other major alarm monitoring firms that also acquire accounts through these independent dealers.
Some of these firms with competitive dealer programs have substantial financial resources, including ADT and the security subsidiaries of the Ameritech Corporation. We are also aware of other national
firms with competitive dealer programs including Monitronics International, Inc., DMAC, as well as several large regional dealer programs. There can be no assurance that we will be able to
retain or expand our current dealer

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base or that competitive offers to dealers will not require us to pay higher prices to dealers for subscriber accounts than have previously been paid. Such events could reduce our growth rate and
increase our use of cash to fund growth. A lower growth rate or higher use of cash could have a material adverse effect on our business, financial condition, results of operations, prospects and
ability to service debt obligations.

We
plan to diversify our customer account acquisition strategy to include greater reliance on an internal sales force and our marketing agreement with Paradigm. There can be no
assurance that such a strategy will be successful, or profitable and such events could reduce our rate of growth and increase our use of cash. A lower growth rate or increased cash needs could have a
material adverse effect on our business, financial condition, results of operations, prospects and ability to service debt obligations.

Declines in new construction of multi-family dwellings may affect our sales in this marketplace.

Demand for alarm monitoring services in the multi-family alarm monitoring market is tied to the construction of new multi-family structures. We believe that
developers of multi-family dwellings view the provision of alarm monitoring services as an added feature that can be used in marketing newly developed condominiums, apartments and other multi-family
structures. Accordingly, we anticipate that the growth in the multi-family alarm monitoring market will continue so long as there is a demand for new multi-family dwellings. However, the real estate
market in general is cyclical and, in the event of a
decline in the market for new multi-family dwellings, it is likely that demand for our alarm monitoring services to multi-family dwellings would also decline, which could negatively impact our results
of operations.

Westar Capital is our principal stockholder.

Westar Capital owned approximately 85% of the outstanding common stock of Protection One as of December 31, 1999. As long as Westar Capital continues to
beneficially own in excess of 50% of the shares of Protection One common stock outstanding, Westar Capital will be able to direct the election of all directors of Protection One and exercise a
controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving Protection One, our acquisition or disposition of
material assets and our incurrence of indebtedness and the payment of dividends on Protection One common stock. Similarly, Westar Capital will continue to have the power to determine matters submitted
to a vote of Protection One's stockholders without the consent of other stockholders, to prevent or cause a change in control of Protection One and could take other actions that might be favorable to
Western Resources and Westar Capital, whether or not these actions would be favorable to Protection One or its stockholders generally.

We face challenges associated with our operational reorganization.

In December 1998, we announced that we had reorganized our operating structure into new divisions in order to better manage the increased scale and
scope of operations. We also created a non-operating Executive Division with the intent to focus senior management's time on key strategic and capital formation initiatives. In 1999, we
replaced several key management personnel and moved the accounting and finance functions to Topeka, Kansas. In 1999, we also entered into a service agreement with Western Resources pursuant to which
Western Resources provides us certain administrative services including accounting, human resources, legal, facilities and technology. There can be no assurance that we will be able to realize the
intended benefits of our new operating structure. Moreover, we face certain risks and uncertainties associated with management and operational reorganizations, including those relating to:



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If
we are unable to manage successfully these risks and uncertainties, there can be no assurance that the new operating structure will not have a material adverse affect upon our
business, financial condition, results of operations, prospects and ability to service debt obligations.

ITEM 2: PROPERTIES

We maintain our executive offices at 6011 Bristol Parkway, Culver City, California 90230 and our main financial and administrative offices at 818 S. Kansas
Avenue, Topeka, Kansas 66612. We operate primarily from the following facilities, although we lease office space for our approximately 57 service branch offices and 13 satellite branches in North
America.

|Location                   |  | Size (sq. ft.) |  | Lease/Own |  | Principal Purpose                                   
|-------------------------- |  | -------------- |  | --------- |  | ----------------------------------------------------
|United States              |  |                |  |           |  |                                                     
|Addison, TX                |  | 28,512         |  | Lease     |  | Service center/administrative headquarters          
|Beaverton, OR              |  | 44,600         |  | Lease     |  | Service center                                      
|Chatsworth, CA             |  | 43,472         |  | Lease     |  | Marketing call center                               
|Culver City, CA            |  | 23,520         |  | Lease     |  | Former Corporate headquarters(1)                    
|Culver City, CA            |  | 8,029          |  | Lease     |  | Current Corporate headquarters                      
|Hagerstown, MD             |  | 21,370         |  | Lease     |  | Service center                                      
|Irving, TX                 |  | 53,750         |  | Lease     |  | Service center                                      
|Irving, TX                 |  | 54,394         |  | Lease     |  | Administrative functions                            
|Orlando, FL                |  | 11,020         |  | Lease     |  | Wholesale service center                            
|Topeka, KS                 |  | 6,996          |  | Lease     |  | Financial/administrative headquarters               
|Wichita, KS                |  | 50,000         |  | Own       |  | Service center/administrative functions             
|Canada                     |  |                |  |           |  |                                                     
|Ottawa, ON                 |  | 7,937          |  | Lease     |  | Service center/administrative headquarters          
|Vancouver, BC              |  | 5,177          |  | Lease     |  | Service center                                      
|Europe (2)                 |  |                |  |           |  |                                                     
|Basingstoke (London), UK   |  | 3,500          |  | Lease     |  | Financial/administrative headquarters/service center
|Paris, FR                  |  | 3,498          |  | Lease     |  | Financial/administrative headquarters/service center
|Vitrolles (Marseilles), FR |  | 13,003         |  | Lease     |  | Administrative/service center                       

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ITEM 3: LEGAL PROCEEDINGS

We and certain of our present and former officers and directors, are defendants in a purported class action litigation pending in the United States District
Court for the Central District of California,Ronald Cats, et al v. Protection One, Inc., et al.,No CV 99-3755 DT (RCx). Pursuant to
an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. In March 2000, plaintiffs filed a Second Consolidated Amended Class Action
Complaint ("Amended
Complaint"). Plaintiffs purport to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of Protection One, including common stock and notes, during the
period of

24

---

February 10, 1998 through November 12, 1999. The Amended Complaint asserts claims under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934 against us, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection One's financial results and
operations for 1997 and 1998 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs allege, among other things, that former employees of Protection
One, have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management in order to avoid disclosure of
accurate information. The Amended Complaint further asserts claims against Western Resources and Westar Capital as controlling persons under Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also asserted under Section 11 of the Securities Act of 1933 against Protection One's auditor, Arthur Andersen LLP.
The Amended Complaint seeks an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. We believe that all the claims asserted in the Amended Complaint
are without merit and intends to defend against them vigorously. We cannot currently predict the impact of this litigation which could be material.

Six
Protection One dealers have filed a class action lawsuit in the U. S. District Court for the Western District of Kentucky alleging breach of contract because of the our
interpretation of their dealer contracts. The action is styledTotal Security Solutions, Inc., et al. v. Protection One Alarm
Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). In September 1999, the Court granted Protection One's
motion to stay the proceeding pending the individual plaintiff's pursuit of arbitration as required by the terms of their agreements. As of March 17, 2000, none of these dealers have commenced
arbitration.

Other
Protection One dealers have threatened litigation or arbitration based upon a variety of theories surrounding calculations of holdback and other payments. We believe we have
complied with the terms of these contracts and intend to vigorously defend our position. Although we believe that no individual such claim will have a material adverse effect, we cannot currently
predict the aggregate impact of these disputes with dealers which could be material.

We
are party to claims and matters of litigation incidental to the normal course of business. 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 upon our financial position or results of operations.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

No matters were submitted to Protection One's stockholders following our annual meeting in 1999.

25

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PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price Information

Our common stock has been listed on the New York Stock Exchange since November 6, 1998 under the symbol "POI" and was previously quoted on the National
Market System of the Nasdaq Stock Market under the symbol "ALRM". 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 New York Stock Exchange or the Nasdaq Stock Market, as applicable, and the dividends per share declared on our common stock. All prices are as reported by the National Quotation
Bureau, Incorporated.

Protection One Common StockHigh

Low

Dividends1997:First Quarter

$
11
1/8
$
7
3/8

Second Quarter


14
1/8

9
1/4

Third Quarter


21
3/4

13
3/8

Fourth Quarter


20
1/8

10
3/4
$
7.001998:First Quarter

$
13
1/2
$
10
1/16

Second Quarter


13
7/8

9
7/16

Third Quarter


12
1/8

5
7/8

Fourth Quarter


12
1/4

7
7/8

1999:First Quarter

$
9
3/8
$
6
1/4

Second Quarter


5
5/8

3
7/8

Third Quarter


6
1/4

2
3/4

Fourth Quarter


4


1
7/16




Dividend Information

Holders of Protection One common stock are entitled to receive only dividends declared by the board of directors from funds legally available for dividends to
stockholders.

Other
than a $7.00 cash distribution paid to holders of record of Protection One common stock as of November 24, 1997, to holders of outstanding options to purchase Protection
One common stock and to holders of warrants exercisable for Protection One common stock, all in connection with the combination of the Protection One and Western Resources security businesses in
November 1997, Protection One has never paid any cash dividends on its common stock and does not intend to pay any cash dividends in the foreseeable future. The indenture governing the
135/8% Senior Subordinated Discount Notes due 2005 of Protection One Alarm Monitoring, and the credit agreement relating to its Senior Credit Facility restrict Protection One Alarm
Monitoring's ability to pay dividends or 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.

Number of Stockholders

As of December 31, 1999, there were approximately 104 stockholders of record who held shares of our common stock, as shown on the records of Protection
One's transfer agent.

26

---

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. All amounts are in thousands, except per share and customer data,
unless otherwise noted. Prior to November 24, 1997, Protection One was a stand-alone security business. On November 24, 1997, pursuant to a contribution agreement dated July 30,
1997, between Protection One and Western Resources, Protection One acquired WestSec and Westar Capital, which together were the Western Resources security businesses ("WRSB"), and Centennial Security
Holdings, Inc. ("Centennial"). As a result of the November 1997 business combination, Western Resources, through its wholly owned subsidiary Westar Capital owned approximately 85% of
Protection One at December 31, 1997.

The
November 1997 business combination was accounted for as a reverse purchase acquisition which treats WRSB as the accounting acquiror. Accordingly, the results of operations
of Protection One and Centennial have been included in the consolidated financial data only since November 24, 1997.

The
1996 historical financial data of Protection One are those of WRSB, the accounting acquiror. On December 30, 1996, Western Resources, through its indirect wholly owned
subsidiary, WestSec, purchased the assets and assumed certain liabilities comprising the security business of Westinghouse Security Systems from Westinghouse Electric Corporation. Westinghouse
Security Systems is deemed to be a predecessor of Protection One.

Selected
financial data for 1995 and 1996 were derived from the financial statements of Westinghouse Security Systems for those years. Per share data is omitted because Westinghouse
Security Systems was wholly owned by Westinghouse Electric Corporation.

27

---

SELECTED CONSOLIDATED FINANCIAL DATA

|                                                                      |                                |   |           |       |   |           |       |   |           | Predecessor |  
|--------------------------------------------------------------------- | ------------------------------ | - | --------- | ----- | - | --------- | ----- | - | --------- | ----------- | -
|
|
|
|
|
|Statements of operations data                                         |                                |   |           |       |   |           |       |   |           |             |  
|Revenues                                                              |                                | $ | 605,176   |       | $ | 421,095   |       | $ | 144,773   |             | $
|Cost of revenues                                                      |                                |   | 184,006   |       |   | 129,083   |       |   | 35,669    |             |  
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Gross profit                                                          |                                |   | 421,170   |       |   | 292,012   |       |   | 109,104   |             |  
|Selling, general and administrative expenses                          |                                |   | 185,989   |       |   | 114,506   |       |   | 80,755    |             |  
|Acquisition and transition expense                                    |                                |   | 27,451    |       |   | 20,298    |       |   | 2,108     |             |  
|Amortization of intangibles and depreciation expense                  |                                |   | 233,906   |       |   | 126,664   |       |   | 51,936    |             |  
|Other charges:                                                        |                                |   |           |       |   |           |       |   |           |             |  
|                                                                      | Merger related costs           |   |           |      |   |           |      |   |           | 11,542      |  
|                                                                      | Severance and relocation costs |   |           | 5,809 |   |           | 3,400 |   |           |            |  
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Operating income (loss)                                               |                                |   | (31,985   | )     |   | 27,144    |       |   | (37,237   | )           |  
|Interest expense, net                                                 |                                |   | 87,037    |       |   | 55,990    |       |   | 33,483    |             |  
|Other non-recurring (income) expense                                  |                                |   | (12,869   | )     |   | (5,733    | )     |   |          |             |  
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Income (loss) before income taxes and extraordinary gainnet of taxes |                                |   | (106,153  | )     |   | (23,113   | )     |   | (70,720   | )           |  
|Income tax (expense) benefit                                          |                                |   | 27,108    |       |   | 3,689     |       |   | 28,405    |             |  
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Income (loss) before extraordinary gain                               |                                |   | (79,045   | )     |   | (19,424   | )     |   | (42,315   | )           |  
|Extraordinary gain, net of tax                                        |                                |   | (1,691    | )     |   | 1,591     |       |   |          |             |  
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Net income (loss)                                                     |                                | $ | (80,736   | )     | $ | (17,833   | )     | $ | (42,315   | )           | $
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Net income (loss) per share                                           |                                | $ | (.64      | )     | $ | (.17      | )     | $ | (.60      | )           | $
|                                                                      |                                |   |           |       |   |           |       |   |           |             |  
|Consolidated balance sheet data                                       |                                |   |           |       |   |           |       |   |           |             |  
|Working capital (deficit)                                             |                                | $ | (27,933   | )     | $ | (90,568   | )     | $ | 40,231    |             | $
|Customer accounts, net                                                |                                |   | 1,132,095 |       |   | 1,022,863 |       |   | 529,886   |             |  
|Goodwill and trademarks, net                                          |                                |   | 1,056,671 |       |   | 1,128,819 |       |   | 625,228   |             |  
|Total assets                                                          |                                |   | 2,512,558 |       |   | 2,462,590 |       |   | 1,366,371 |             |  
|Long term debt, including capital lease                               |                                |   | 1,077,152 |       |   | 884,554   |       |   | 327,797   |             |  
|Total stockholders' equity                                            |                                |   | 1,216,920 |       |   | 1,296,390 |       |   | 907,191   |             |  
|Other operating data                                                  |                                |   |           |       |   |           |       |   |           |             |  
|Number of customers at end of period                                  |                                |   | 1,623,201 |       |   | 1,557,996 |       |   | 756,818   |             |  
|EBITDA (a)                                                            |                                | $ | 207,730   |       | $ | 162,491   |       | $ | 26,241    |             | $
|Cash flows from operations                                            |                                | $ | 91,268    |       | $ | 85,150    |       |   | (4,928    | )           |  
|Cash flows used in investment activities                              |                                |   | (272,225  | )     |   | (893,947  | )     |   | (156,684  | )           |  
|Cash flows from financing activities                                  |                                |   | 177,674   |       |   | 744,479   |       |   | 237,000   |             |  

---

28

---





EBITDA
does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to operating income and is
indicative neither of operating performance nor cash flows available to fund the cash needs of Protection One. Items excluded from EBITDA are significant components in understanding and assessing the
financial performance of Protection One. Protection One believes presentation of EBITDA enhances an understanding of financial condition, results of operations and cash flows because EBITDA is used by
Protection One to satisfy its debt service obligations and its capital expenditure and other operational needs, as well as to provide funds for growth. In addition, EBITDA is used by senior lenders
and subordinated creditors and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from
operations. Protection One's computation of EBITDA may not be comparable to other similarly titled measures of other companies.

The
following table provides a calculation of EBITDA for each of the periods presented above:

|                                                |                                                      | Protection One |          | Predecessor |  
|----------------------------------------------- | ---------------------------------------------------- | -------------- | -------- | ----------- | -
|
|
|
|
|Loss before income taxes and extraordinary item |                                                      | $              | (106,153 | )           | $
|Plus:                                           |                                                      |                |          |             |  
|                                                | Interest expense, net                                |                |          | 87,037      |  
|                                                | Other charges                                        |                |          | 5,809       |  
|                                                | Amortization of intangibles and depreciation expense |                |          | 233,906     |  
|Less:                                           |                                                      |                |          |             |  
|                                                | Other non-recurring income                           |                |          | (12,869     | )
|                                                |                                                      |                |          |             |  
|EBITDA                                          |                                                      | $              | 207,730  |             | $
|                                                |                                                      |                |          |             |  

Other
charges in 1999 represents severance charges of $3.2 million and transition costs of $2.6 million relating to the move of the finance and accounting offices from
Irving, Texas to Topeka, Kansas. Other charges in 1998 represents severance and relocation payments of $3.4 million related to our 1998 reorganization and costs of $5.3 million incurred
to replace signage for WRSB after the merger of WRSB with Protection One in 1998. Other charges in 1997 represent merger costs.

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

Introduction

In Management's Discussion and Analysis we explain our general financial condition and operating results, including:



29

---



As
you read Management's Discussion and Analysis, please refer to our Consolidated Statements of Income. These statements show our operating results for 1999, 1998, and 1997. In
Management's Discussion and Analysis, we analyze and explain the significant annual changes of specific line items in the Consolidated Statements of Income.

Overview of 1999 Activities

General.Approximately 85% of our revenues in 1999 came from monitoring and servicing security systems located in
single family homes, apartments and condominiums and businesses. We had over 1.6 million customers at December 31, 1999, most of whom pay us under contracts for our monitoring and other
security services. We also bill customers on a time and material basis for service visits if they do not have extended service contracts. While we typically require payment for monitoring services in
advance, we recognize monitoring and related services revenues only as we provide the service. The remainder of our revenue is from the sale and installation of security systems, add-ons
and upgrades. We recognize revenues from these other activities in the period of installation.

During
1999, we experienced significant levels of attrition which had a direct impact on our results of operations since it affects both our revenues and amortization expense. We
believe the high levels of attrition were caused by customer service deficiencies and operational difficulties relating to the integration of acquired customers into our operations. We hired an
additional 150 service representatives late in the second quarter of the year and increased our training and technology investments in an effort to address the customer service concerns. We have also
scaled back our growth rate which allows us to focus more attention on the current customer base and the integration of new customers.

Accounting Change.Historically we amortized our customer accounts using a 10-year
straight-line amortization method for all customer accounts except for WSS accounts which use an eight-year accelerated amortization method. In the third quarter of 1999, we
performed a review of our amortization policy relating to customer accounts and identified three distinct pools, each of which has distinct attributes that effect differing attrition characteristics.
The pools correspond to our North America and Multifamily business segments and our former European business segment. For the North America and Europe pools, the analyzed data indicated that a change
from a straight-line to a declining balance (accelerated) method would more closely match future amortization cost with the estimated revenue stream from these assets. Management elected
to change to that method for customer accounts in the North America and Europe pools, except for the WSS accounts which use an eight-year accelerated amortization method. No change was
made in the method used for the Multifamily pool. See Notes 2 and 3 of "Notes to Consolidated Financial Statements" for further discussion.

Impairment Test.We also performed an impairment test of our customer accounts and related goodwill under the guidance
of the Statement of Financial Accounting Standards No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of(SFAS 121). Paragraph 6 of SFAS 121 indicates that an impairment loss should be recognized only if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of the asset(s) grouped at the lowest level of identifiable cash flows. After performing the test, management determined
that the customer accounts currently are not impaired.

Sale of Non-Strategic Assets.The sale of our Mobile Services Group to ATX Technologies ("ATX") was
announced on June 28, 1999 and consummated on August 25, 1999. The sales price was

30

---

approximately $20 million in cash plus a note and a preferred stock investment in ATX. We recorded a pre-tax gain on the sale of approximately $17.2 million.

Monthly recurring revenue.At various times during the 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. We had approximately $39.7 million ($32.6 million excluding our European operations) of monthly recurring
revenue as of December 31, 1999. Historically, we have grown rapidly, often by acquiring security alarm companies and portfolios of customer accounts. The impact of this increase in customer
accounts is included in results of operations only from the date of acquisition, therefore, our revenues are not necessarily proportional to the level of our investment of capital reported at the end
of the period upon which a return must be earned. We believe monthly recurring revenue enhances an investor's understanding of our financial condition, results of operations and cash flows because it
provides a measure of the revenue that can be used to derive estimates of annual revenue acquired in the acquisitions for a full year of operations. As a result, monthly recurring revenue can be
compared to
the level of investment in the statement of financial condition. Further, we believe an investor's consideration of monthly recurring revenue, relative to our customer base, helps identify trends in
monthly recurring revenue per customer. Monthly recurring revenue does not measure profitability or performance, and does not include any allowance for future customer losses or allowance for doubtful
accounts.

We
do not have sufficient information as to the losses of acquired accounts to predict with absolute certainty the amount of acquired monthly recurring revenue that will be realized
in future periods or the impact of the losses of acquired accounts on our overall rate of customer loss. Our computation of monthly recurring revenue may not be comparable to other similarly titled
measures of other companies and monthly recurring revenue should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting
principles.

Our
monthly recurring revenue includes amounts to be recognized as a result of ongoing reductions in the liability under our recourse financing agreements. Also included are billable
amounts to customers with past due balances. 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 customer 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. After we have made every reasonable effort to collect past due balances, we will disconnect the customer and include the loss in our customer loss
calculations described below.

Customer and revenue losses.Like most monitored security companies, we invest significant amounts to generate new
customers, and we seek to maintain long-term relationships with our customers by providing excellent service. We measure the loss of our customers to verify that our investment in new
customers is generating a satisfactory rate of return and that our amortization policy is reasonable.

We
define attrition as a ratio, the numerator of which is the number of lost customer accounts for a given period, net of certain adjustments, and the denominator of which is the
average number of accounts for a given period. In some instances the company uses estimates to derive attrition data. The adjustments made to lost accounts are primarily related to those accounts
which are covered under a purchase price holdback and are "put" back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in the purchase
agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience.

Our
actual attrition experience shows that the relationship period with any individual customer can vary significantly and may be substantially shorter or longer than ten years.
Customers discontinue service for a variety of reasons, including relocation, service issues and cost. A portion of the acquired

31

---

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.

We
monitor attrition each quarter based on an annualized and trailing twelve-month basis. This method utilizes each segment's average customer account base for the applicable period
in measuring attrition. Therefore, in periods of customer account growth, customer attrition may be understated and in periods of customer account decline, customer attrition may be overstated. When
necessary we will adjust amortization of the cost of customer accounts.

For
the period ended December 31, 1999, our total company quarterly annualized and trailing twelve month attrition rates were 14.7% and 14.0%, respectively. The table below
shows the change in our total company customer base and the increase in attrition from 1997 to 1999:

Year Ended December 31,1999

1998

1997Beginning Balance, January 1,

1,557,996

937,480

424,100Additions, net of holdback put backs

288,581

738,163

390,620Customer losses, net of holdback put backs

(223,376
)
(117,647
)
(57,902
)Ending Balance, December 31,

1,623,201

1,557,996

756,818


The
January 1, 1998 balance increased for customers acquired in the Network Multifamily Security acquisition, which was completed effective January 1, 1998.

Recent Developments

Sale of European Assets and Other Transactions.On February 29, 2000, we sold our European operations and
certain investments to Westar Capital. We received consideration of approximately $244 million, comprised of approximately $183 million in cash and certain of the outstanding debt
securities of Protection One Alarm Monitoring that Westar Capital had acquired with a market value of approximately $61 million. As part of this transaction, Westar Capital agreed to pay us a
portion of the net gain, if any, on a subsequent sale of the European business on a declining basis over the four years following the closing. The cash proceeds of the sale were used to reduce the
$240 million outstanding balance under the $250 million Senior Credit Facility provided by Westar Capital to Protection One Alarm Monitoring.

Westar
Capital also transferred to us debt securities of Protection One Alarm Monitoring and a note for payment of certain intercompany amounts owed by Westar Capital to us.

The
aggregate carrying value of debt securities received in these transactions was approximately $134.6 million. Upon the receipt of these securities, we recorded an
extraordinary gain from the cancellation of debt of approximately $27 million, net of tax. See Note 19 of "Notes to Consolidated Financial Statements" for a description of the debt
transferred.

A
special committee of the Protection One Board of Directors approved these transactions after obtaining a "fairness opinion" from an investment banker. The special committee also
approved the amendment to our Senior Credit Facility as discussed below.

Senior Credit Facility.At the beginning of 1999, we had a $500 million Senior Credit Facility from a group of
lenders. The amount of the credit facility was reduced to $250 million at the end of the third quarter in connection with obtaining a waiver of compliance with the then applicable leverage and
interest ratio coverage covenants. We attempted to renegotiate the terms of the Senior Credit Facility during the fourth quarter but were unsuccessful. As a result, Westar Capital purchased the
outstanding loans from our lenders and became the lender under the Senior Credit Facility.

32

---

Concurrently with the sale of our European operations to Westar Capital on February 29, 2000, the outstanding principal balance of the facility was reduced to
$57 million and the facility was amended to, among other things, (1) reduce the commitment to $115 million (resulting in availability of approximately $58 million after
application of proceeds from the sale of the European operations), (2) increase the leverage ratio covenant to 5.75 to 1.0, (3) reduce the interest coverage ratio to 2.10 to 1.0,
(4) change the termination date to January 2, 2001, (5) change the loan pricing grid to one based on leverage ratio rather than credit rating, (6) allow for the inclusion
of certain add-backs to the calculation of EBITDA, (7) eliminate as an Event of Default Western Resources' failure to own more than 50% of our outstanding common stock,
(8) waive compliance with the leverage ratio and interest coverage ratio covenants for the fiscal quarters ended September 30, 1999 and December 31, 1999, and (9) provide
for an increase in the amount of the commitment by up to $40 million for the purpose of consummating acquisitions approved by Westar Capital.

Change in Estimate of Useful Life of Goodwill.In conjunction with the impairment test for customer accounts, we
re-evaluated the original assumptions and rationale utilized in the establishment of the carrying value and estimated useful life of goodwill. Management concluded that due to continued
losses and increased levels of attrition experienced in 1999, the estimated useful life of goodwill should be reduced from 40 years to 20 years. As of January 1, 2000, the
remaining goodwill, net of accumulated amortization, will be amortized over its remaining useful life based on a 20-year life. On our existing account base, we anticipate that this will
result in an increase in annual goodwill amortization of approximately $23 million for North America and $6 million for Multifamily. The additional goodwill recorded for Europe prior to
its sale on February 29, 2000, was approximately $1 million.

Results of Operations

We separate our business into three reportable segments: North America, Multifamily and Europe. North America provides security alarm monitoring services,
which include sales, installation and related servicing of security alarm systems in the United States and Canada. Multifamily provides security alarm services to apartments, condominiums and other
multi-family dwellings. The Europe segment provides security alarm services in Europe and was sold in February 2000.



We present the table below to show how the North America operating results have changed over the past three years. Next to each year's results of operations,
we provide the relevant percentage of total revenues so that you can make comparisons about the relative change in revenues and expenses. The 1997 results reflect WRSB for the entire year, and one
month of the operations of Protection One

33

---

and Centennial Security each, while 1998 results reflect an entire year of WRSB, Protection One, Centennial Security and all of the acquisitions since their respective closing dates.

|                                                     |                                 | Year Ended December 31, |        
|---------------------------------------------------- | ------------------------------- | ----------------------- | -------
|
|
|
|Revenues:                                            |                                 |                         |        
|                                                     | Monitoring and related services |                         | $      
|                                                     | Installation and rental         |                         |        
|                                                     |                                 |                         |        
|                                                     | Total revenues                  |                         |        
|Cost of revenues:                                    |                                 |                         | `      
|                                                     | Monitoring and related services |                         |        
|                                                     | Installation and rental         |                         |        
|                                                     |                                 |                         |        
|                                                     | Total cost of revenues          |                         |        
|                                                     |                                 |                         |        
|                                                     | Gross profit                    |                         |        
|Selling, general and administrative expenses         |                                 |                         | 106,482
|Acquisition and transition expense                   |                                 |                         | 26,405 
|Amortization of intangibles and depreciation expense |                                 |                         | 194,927
|Other charges                                        |                                 |                         | 5,809  
|                                                     |                                 |                         |        
|Operating income (loss)                              |                                 | $                       | (51,875
|                                                     |                                 |                         |        

1999 Compared to 1998.We had a net increase of 8,595 customers in 1999 as compared to a net
increase of 445,156 customers in 1998. Accordingly, results for 1999 include a full year of operations with the customers added throughout 1998. We believe this to be the primary reason for our
increase in revenues and associated cost of revenues in 1999 as compared to 1998. Further analysis between the two years is discussed below.

Year Ended December 31,1999

1998Beginning Balance, January 1,

1,196,047

750,891Additions, net of holdback put backs

200,407

552,015Customer losses, net of holdback put backs

(191,812
)
(106,859
)Ending Balance, December 31,

1,204,642

1,196,047Twelve month trailing attrition

16.0
%
11.0
%


Monitoring and related service revenuesfor 1999 increased by $66.9 million, or 20.8%, to
$388.0 million from $321.1 million for 1998. The primary reason for the increase in 1999 revenues is because we had a full year of revenues from the additional customers added throughout
1998. An increase in our base monitoring and service fees also increased revenue in 1999.

Installation and rental revenues,which consist primarily of revenues generated from our internal installations
of new alarm systems, decreased by 33.2% to $15.3 million in 1999, compared to $22.9 million in 1998. This decrease in revenues is due primarily to the reduction of our internal sales
and installation activities that resulted from our reliance on the Dealer Program for residential customers in 1999. We continued our internal sales program and recorded installation revenues through
the first half of 1998, but then relied almost entirely on the Dealer Program to acquire new customers for the balance of 1998 and all of 1999.

34

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Cost of monitoring and related services revenuesfor 1999 increased by $15.3 million, or 16.3%, to
$108.9 million from $93.6 million for 1998. Cost of monitoring and related services revenues as a percentage of the related revenues decreased from 29.1% during 1998 to 28.0% during
1999. Monitoring and related services expense for 1999 increased primarily due to a full year of operations of the three major service centers and three smaller satellite monitoring facilities
acquired in 1998. We also incurred additional expense in 1999 relating to the addition of customer service representatives in the second quarter.

Cost of installation and rental revenuesfor 1999 decreased by $1.4 million, or 9.9%, to
$12.6 million from $14.0 million in 1998. This decrease corresponds with the decrease in the internal installations in 1999. Installation and other cost of revenues as a percentage of
installation and other revenues increased to 82.6% in 1999 from 61.4% in 1998.

Gross profitfor 1999 increased by $45.3 million, or 19.2%, to $281.7 million from
$236.4 million in 1998. Contribution of new customers by the Dealer Program and acquisitions produced the increase in gross profit. As a percentage of total revenues, gross profit was 69.9% for
1999 compared to 68.7% for 1998. The increase in gross profit as a percentage of total revenues reflects cost savings from the consolidation of some of our monitoring operations, offset by a partial
year of expense associated with additional customer service representatives. Gross margin will be negatively impacted in the future by the full year impact of additional customer service
representatives reflected in cost of monitoring and related service revenues.

Selling, general and administrative expensesfor 1999 increased by $19.6 million, or 22.6%, to
$106.5 million from $86.8 million in 1998. The increase is attributable to costs associated with the overall increase in the average number of customers billed, additional bad debt
expense of approximately $10.5 million resulting from higher attrition, costs associated with Year 2000 compliance, professional fees and salary increases.

Acquisition expensesfor 1999 increased by $6.1 million, or 30.2%, to $26.4 million from
$20.3 million in 1998. We aggregate expenses incurred in the acquisition and integration of customers in this line item. These expenses include yard signs, the cost of monitoring acquired
accounts by a third party, and the reprogramming of alarm panels for new customers. The increase in 1999 is primarily attributable to costs of $4.0 million associated with the restructuring of
the Dealer Program and $3.7 million of costs related to the unsuccessful merger with Lifeline, offset by reduced transition expenses associated with acquisitions. In 1998 we incurred
$5.3 million in additional customer transition expenses, primarily yard signs for WRSB customers related to the merger of WRSB and Protection One. We incurred expenses
to develop and manage our Dealer Program, as well as to contact, assimilate and solicit acquired and new customers for new services.

Amortization of intangibles and depreciation expensefor 1999 increased by $79.9 million, or 69.5%, to
$194.9 million from $115.0 million in 1998. As discussed above in "Overview of 1999 Activities", we changed our amortization method for most of our North American customers from a
10-year straight line method to a 10-year declining balance method which substantially increased amortization expense in 1999. Another primary factor resulting in the increase
is the full year of amortization expense on subscribers acquired during 1998. These increases were partially offset by a $1.9 million decrease in the amortization of the Westinghouse customers
under the 8-year accelerated amortization method.

Other chargesfor 1999 increased by $2.4 million, to $5.8 million from $3.4 million in
1998. We incurred $5.8 million for severance and relocation expenses associated with a reorganization of our operations in 1999 and $3.4 million for such expenses in late 1998.

35

---

Interest expense, netfor 1999 increased by $23.7 million, or 45.2%, to $76.1 million from
$52.4 million in 1998, reflecting our use of debt to finance a substantial portion of our customer account growth.

Other non-recurring (income) expensein 1999 totaled $12.7 million of income compared to
$5.7 million of income in 1998. In 1999, other income consisted primarily of a gain on the sale of our Mobile Services Group of $17.2 million and dividend income reduced by losses on
sales of marketable securities of $7.7 million. In 1998, we recognized a non-recurring gain on the repurchase of customer contracts covered by a financing arrangement with New York
Life Secured Asset Management Company, Ltd. (SAMCO), a third party, of approximately $1.5 million. Also during 1998, we restructured our investment in a security monitoring company and
recognized a non-recurring gain of approximately $3.0 million.

1998 Compared to 1997.The 1997 results reflect WRSB for the entire year, and one month of the operations of
Protection One and Centennial Security each, while 1998 results reflect an entire year of WRSB, Protection One, Centennial Security and all of the acquisitions since their respective closing dates.
The 1998 results also include a partial year of operations resulting from the additions of customers throughout the year from various acquisitions and the dealer program.

Monitoring and related service revenuesfor 1998 increased by $194.4 million, or 153.6%, to
$321.1 million from $126.6 million for 1997. Monitoring and related service revenues increased due to our acquisitions and new customers purchased through our dealer program. The
majority of additional revenues in 1998 were attributable to North America's dealer program and acquisitions. We added approximately $5.3 million of monthly recurring revenue from our dealer
program and approximately $7.3 million of monthly recurring revenue from our acquisitions. Because purchases from the dealer program and acquisitions occurred throughout the year, not all of
the $12.6 million of acquired monthly recurring revenue is reflected in 1998 results.

Installation and rental revenues,which consist primarily of revenues generated from installing new alarm
systems, increased by $4.8 million, or 26.0% to $22.9 million in 1998, compared to $18.1 million in 1997. At the time of the combination of WRSB with Protection One, we committed
to a plan to wind down internal sales activities and increase reliance on the Dealer Program as a source of new customers. The scaling back of these activities took place through the first half of
1998.

Cost of monitoring and related services revenuesfor 1998 increased by $60.9 million, or 186.5% to
$93.6 million from $32.7 million for 1997. Total cost of revenues as a percentage of total revenues increased to 31.3% during 1998 from 24.6% during 1997. Monitoring and related services
expenses for 1998 increased due to the acquisition of three major service centers and three smaller satellite monitoring facilities in the U.S. Monitoring and service activities at our existing
facilities increased as well, due to new customers generated by our Dealer Program. Monitoring and related services expenses as a percentage of monitoring and related services revenues increased to
29.1% in 1998 from 25.8% during 1997. The percentage increased due to the expenses of the acquired facilities, as well as expenses from several higher cost subcontract monitoring agreements.

Cost of installation and rental revenuesfor 1998 increased by $11.0 million, or 365.6%, to
$14.0 million from $3.0 million in 1997. The increase in expense reflects the cost of equipment, installation labor and other expenses incurred in the installation of security alarm
systems. Installation and other cost of revenues as a percentage of installation and other revenues increased to 61.4% in 1998 from 16.6% in 1997. Acquired commercial installation activities generated
lower profit margins due to declining installation revenues and the selling outright, rather than leasing, of security alarm systems.

36

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Gross profitfor 1998 increased by $127.3 million, or 116.6%, to $236.4 million from
$109.1 million in 1997. Contribution of new customers by the Dealer Program and acquisitions produced the increase in gross profit. As a percentage of total revenues, gross profit was 68.7% for
1998 compared to 75.4% for 1997. The decline in gross profit as a percentage of total revenues reflects the higher monitoring, field service and installation expenses noted above.

Selling, general and administrative expensesfor 1998 increased by $6.1 million, or 7.5%, to
$86.8 million from $80.8 million in 1997. The increase in expenses resulted primarily from acquisitions, partially offset by a reduction in sales and related expenses. The transition of
our primary distribution channel from an internal sales force to the Dealer Program resulted in sales commissions declining by approximately $9.0 million. We also reduced advertising and
telemarketing activities that formerly supported the internal sales force.

Acquisition expensesfor 1998 increased by $18.2 million, or 861.8%, to $20.3 million from
$2.1 million in 1997. We aggregate expenses incurred in the acquisition and integration of customers in this line item. These expenses include the replacement of yard signs and the
reprogramming of alarm panels for new customers. In 1998, we incurred $5.3 million in additional customer transition costs, primarily yard signs for WRSB customers related to the merger of WRSB
and Protection One. We incurred expenses to develop and manage our Dealer Program, as well as to contact, assimilate and solicit acquired and new customers for new services. Other acquisition expenses
were incurred in connection with our dealer program and the costs related to maintaining an acquisition department.

Amortization of intangibles and depreciation expensefor 1998 increased by $63.1 million, or 121.6%, to
$115.0 million from $51.9 million in 1997. We spent approximately $442.6 million to purchase customer accounts and incurred $211.0 million in cost allocated to goodwill
during 1998 from our purchases of security alarm companies, portfolios of customer accounts, and individual new customers through our Dealer Program. In 1998, we amortized most customer accounts over
a 10-year straight-line method and goodwill over 40 years using a straight-line method. These increases were partially offset by a $5.9 million
decrease in amortization of the Westinghouse customers under the 8-year accelerated amortization method. Additional considerations relating to our treatment of customer accounts are
discussed under the heading "Risk Factors-We lose some of our customers over time."

Other chargesfor 1998 decreased by $8.1 million, or 70.4% to $3.4 million from $11.5 `million in
1997. We incurred $3.4 million for severance and relocation expenses associated with a reorganization of our operations in 1998. Other charges for 1997 consisted of $11.5 million of
merger related costs. The merger related costs consisted of $3.6 million for inventory and other asset losses, $4.1 million for disposition of fixed assets, $2.0 million for
closure of duplicate facilities and approximately $1.9 million for severance compensation and benefits.

Interest expense, netfor 1998 increased by $18.9 million, or 56.4%, to $52.4 million from
$33.5 million in 1997, reflecting our use of debt to finance a substantial portion of our customer account growth.

Other non-recurring (income) expensein 1998 totaled $5.7 million of income compared to zero
in 1997. In 1998, we recognized a non-recurring gain on the repurchase of customer contracts covered by a financing arrangement with New York Life Secured Asset Management
Company, Ltd. (SAMCO), a third party, in the amount of $1.5 million. Also during 1998, we restructured our investment in a security monitoring company and recognized a
non-recurring gain of approximately $3.0 million.

37

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Our Multifamily segment was created when we acquired Multifamily effective January 1, 1998 under the terms of a purchase option granted to us by Western
Resources. We paid approximately $180 million for what we believe to be the leading provider of security alarm monitoring services to apartment complexes and other multifamily dwellings. The
change in Multifamily's customer base for 1998 and 1999 is shown below:

Year Ended December 31,1999

1998Beginning Balance, January 1,

285,954

186,590Additions, net of holdback put backs

30,973

110,152Customer losses, net of holdback put backs

(21,967
)
(10,788
)Ending Balance, December 31,

294,960

285,954Twelve month trailing attrition

7.6
%
4.6
%


We
present the table below to show how the 1999 Multifamily operating results compare with the 1998 operating results. During 1998, over 80,000 accounts were acquired in two
acquisitions that increased monthly recurring revenues by approximately $550,000, or $6.6 million per year. About 39,000 of these accounts were acquired in May with the balance acquired in
September. The 1999 results reflect a full year of operations with these acquired accounts which is the primary reason that revenues and associated expenses are higher in 1999.

|                                                     |                                 | Year Ended December 31, |       
|---------------------------------------------------- | ------------------------------- | ----------------------- | ------
|
|
|Revenues:                                            |                                 |                         |       
|                                                     | Monitoring and related services |                         | $     
|                                                     | Installation and rental         |                         |       
|                                                     |                                 |                         |       
|                                                     | Total revenues                  |                         |       
|Cost of revenues:                                    |                                 |                         |       
|                                                     | Monitoring and related services |                         |       
|                                                     | Installation and rental         |                         |       
|                                                     |                                 |                         |       
|                                                     | Total cost of revenues          |                         |       
|                                                     |                                 |                         |       
|                                                     | Gross profit                    |                         |       
|Selling, general and administrative expenses         |                                 |                         | 11,339
|Acquisition and transition expense                   |                                 |                         | 313   
|Amortization of intangibles and depreciation expense |                                 |                         | 9,507 
|                                                     |                                 |                         |       
|Operating income                                     |                                 | $                       | 6,729 
|                                                     |                                 |                         |       

Monitoring and related services revenuesfor 1999 increased by $5.0 million, or 16.9%, to $34.3 million from
$29.4 million for 1998. Multifamily's additional revenues in 1999 were primarily attributable to the 1998 acquisitions.

Cost of monitoring and related revenuesfor 1999 increased by $1.7 million, or 29.3%, to $7.6 million from
$5.9 million for 1998. Monitoring and related services expenses as a percentage of monitoring and related services revenues increased to 22.0% in 1999 from 19.9% during 1998. The percentage
increase is due primarily to the lower contracted recurring revenues on the accounts acquired in 1998.

38

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Selling, general and administrative expensesfor 1999 increased by $1.5 million, or 15.3%, to $11.3 million from
$9.8 million in 1998. The increase resulted primarily from increased selling expense attributable to a 20% increase in contract sales and increased general and administrative expenses
principally associated with the 1998 acquisitions.

Acquisition expensesfor 1999 was $0.3 million and zero in 1998. We aggregate expenses incurred in the acquisition and
integration of customers in this line item. These expenses principally relate to the conversion of customer account data into Multifamily's monitoring database from the 1998 acquisitions.

Amortization of intangibles and depreciation expensefor 1999 increased by $1.8 million, or 23.1%, to $9.5 million from
$7.7 million in 1998. We amortize customer accounts over 10 years using a straight-line
method and goodwill over 40 years using a straight-line method. Additional considerations relating to our treatment of customer accounts are discussed under the heading "Risk
FactorsWe lose some of our customers over time."



On May 18, 1998, we acquired all of the capital stock of Hambro Countrywide Security, the fifth largest security company in the United Kingdom with
operations throughout the United Kingdom, for approximately $18 million. On September 30, 1998, we established a major presence in Western Europe by purchasing the common stock of
Compagnie Europeenne de Telesecurite ("CET"), a public company with 60,000 customers for approximately $140 million. We also assumed liabilities for recourse financing contracts sold to a third
party financing company in the acquisition.

In
1999, we acquired approximately 34,000 additional customers through four acquisitions in the United Kingdom. These additional customers produced an increase in monthly recurring
revenues of approximately $1.0 million. The change in our customer base for 1999 is shown below:

1999Beginning Balance, January 1,

75,995Additions, net of holdback put backs

57,201Customer losses, net of holdback put backs

(9,597
)Ending Balance, December 31,

123,599Twelve month trailing attrition

9.6
%


The
results of operations for 1999 include a full year of operations for the 1998 acquisitions as well as a partial year of operations for the 1999 acquisitions. We experienced a net
increase of 47,604 customers in 1999 or a 62.6% increase over the ending 1998 amount of 75,995. The operating results

39

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below reflect the partial year of operations reported in 1998 and the significant increase in customers during 1999.

|                                                     |                                 | Year Ended
December 31, 1999 |        | Period Ended
December 31, 1998 |     
|---------------------------------------------------- | ------------------------------- | ---------------------------- | ------ | ------------------------------ | ----
|
|
|Revenues:                                            |                                 |                              |        |                                |     
|                                                     | Monitoring and related services |                              | $      | 92,793                         |     
|                                                     | Installation and rental         |                              |        | 70,213                         |     
|                                                     |                                 |                              |        |                                |     
|                                                     | Total revenues                  |                              |        | 163,006                        |     
|Cost of revenues:                                    |                                 |                              |        |                                |     
|                                                     | Monitoring and related services |                              |        | 21,110                         |     
|                                                     | Installation and rental         |                              |        | 30,361                         |     
|                                                     |                                 |                              |        |                                |     
|                                                     | Total cost of revenues          |                              |        | 51,471                         |     
|                                                     |                                 |                              |        |                                |     
|                                                     | Gross profit                    |                              |        | 111,535                        |     
|Selling, general and administrative expenses         |                                 |                              | 68,169 |                                | 41.8
|Acquisition and transition expense                   |                                 |                              | 733    |                                | 0.4 
|Amortization of intangibles and depreciation expense |                                 |                              | 29,472 |                                | 18.1
|                                                     |                                 |                              |        |                                |     
|Operating income                                     |                                 | $                            | 13,161 |                                | 8.1 
|                                                     |                                 |                              |        |                                |     

CET
has recognized as a financing transaction, cash received through the sale of security equipment and future cash flows to be received under security equipment operating lease
agreements with customers to a third-party financing company. A liability has been recorded for the proceeds of these sales as the finance company has recourse to CET in the event of nonpayment by
customers of their equipment rental obligations. The average implicit interest rate in the financing is approximately 18%. Accordingly, the liability is reduced, rental revenue is recognized, and
interest expense is being recorded as these recourse obligations are reduced through the cash receipts paid to the financing company over the term of the related equipment rental agreements which
average four years. The liability is increased as new security monitoring equipment and equipment rental agreements are sold to the finance company that have recourse provisions.

Revenues
of approximately $33.8 million in 1999 and 10.2 million in 1998 were recognized as revenue as a result of ongoing reductions in the liability under these
recourse obligations. In relation to this revenue, we have also recognized interest expense of approximately $8.9 million and $3.0 million and depreciation expense of approximately
$5.8 million and $1.8 million for 1999 and 1998 respectively.

As
discussed above in "Overview of 1999 Activities", we changed our amortization method from a 10-year straight line method to a 10-year declining balance
method which resulted in an increase in amortization expense in 1999 of approximately $2.5 million. The balance of the increase is primarily attributed to a full year of amortization expense on
subscribers acquired during 1998. In 1999 and 1998, we amortized goodwill over 40 years using a straight-line method. Goodwill amortization expense increased $2.3 million to
$3.7 million in 1999.

Year 2000 issue.

We experienced no business disruptions as a result of the transition from December 31, 1999 to January 1, 2000, or as a result of "leap day" on
February 29, 2000. As of December 31, 1999, we expensed $4.3 million to complete remediation and testing of mission critical systems necessary to continue to provide monitored
services to its customers. We expect to incur minimal costs in 2000 to complete remediation of less important systems as we expect no Year 2000 issues to arise in 2000.

40

---



Liquidity and Capital Resources

We believe we currently maintain the ability to generate sufficient cash to fund future operations of the business. Generally, cash will be generated from a
combination of our existing $115 million Senior Credit Facility, which had approximately $58 million of availability at February 29, 2000, subject to compliance with the
provisions of the debt covenants in the agreement, as well as revenue from our security monitoring customer base which generated $207.7 million of positive EBITDA in 1999. Cash flow from
operations reflected in the statement of cash flows was $91.3 million. EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be
construed as an alternative to operating income and is indicative neither of operating performance nor cash flows available to fund our cash needs. Items excluded from EBITDA are significant
components in understanding and assessing our financial performance. We believe that presentation of EBITDA enhances an understanding of our financial condition, results of operations and cash flows
because EBITDA is used to satisfy our debt service obligations and our capital expenditure and other operational needs as well as to provide funds for growth. In addition, EBITDA is used by senior
lenders and subordinated creditors and the investment community to determine the current borrowing capacity and to estimate the long-term value of companies with recurring cash flows from
operations. Our computation of EBITDA may not be comparable to other similarly titled measures of other companies.

Operating Cash Flows for the Year Ended December 31, 1999.Our operating activities
provided net cash flows of $91.3 million, an increase of $6.1 million from 1998. We believe this improvement is due to increased recurring revenue generated from the customer accounts
added in 1998 primarily through business combinations and the Dealer Program, as well as the net additions in customers during 1999.

Investing Cash Flows During 1999.We used a net $272.2 million in investing activities,
primarily to purchase new customer accounts from our external dealers. This was significantly less than the prior year use of $893.9 million. This decrease was primarily due to a decline in
acquisitions of alarm companies of approximately $521.8 million.

Financing Cash Flows During 1999.We increased our borrowings under our credit facility by
$183.0 million, primarily to fund purchases of new customer accounts. During 1999, borrowings under the facility were at interest rates based on either the Prime Rate or a Eurodollar Rate. At
December 31, 1999 the facility had a weighted average interest rate of 7.9% and an outstanding balance of $225 million. This credit facility was amended on February 29, 2000. See
"Recent Developments" above.

Material Commitments.We have future, material, long-term commitments made in the
past several years in connection with our growth. We believe these commitments will be met through a combination of borrowings under our Senior Credit Facility, refinancings and positive operating
cash flows. The

41

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following reflects these commitments as of December 31, 1999 and as of February 29, 2000 (after the completion of the sale of the European operations):

|Debt Security                            |  | Maturity Date  |  | December 31, 1999 |           | February 29, 2000
|---------------------------------------- |  | -------------- |  | ----------------- | --------- | -----------------
|Convertible Senior Subordinated Notes(a) |  | September 2003 |  | $                 | 103,500   |                  
|Senior Subordinated Discount Notes       |  | June 2005      |  |                   | 107,900   |                  
|Senior Unsecured Notes                   |  | August 2005    |  |                   | 250,000   |                  
|Senior Subordinated Notes                |  | January 2009   |  |                   | 350,000   |                  
|Senior Credit Facility                   |  | January 2001   |  |                   | 225,000   |                  
|                                         |  |                |  |                   |           |                  
|                                         |  |                |  | $                 | 1,036,400 |                  
|                                         |  |                |  |                   |           |                  

---

All
of these debt instruments contain restrictions based on "EBITDA". The definition of EBITDA varies among the various indentures and the Senior Credit Facility. EBITDA is generally
derived by adding to income (loss) before income taxes, the sum of interest expense and depreciation and amortization expense. However, under the varying definitions of the indentures, various and
numerous additional adjustments are sometimes required.

Our
Senior Credit Facility and the indentures relating to our public notes contain the financial covenants summarized below:

Debt Instrument

Financial CovenantSenior Credit Facility (as amended on February 29, 2000)

Total consolidated debt/annualized most recent quarter EBITDA
less than 5.75 to 1.0.
Consolidated annualized most recent quarter EBITDA/latest four fiscal quarters interest expense
greater than 2.10 to 1.0Senior Subordinated Notes

Current fiscal quarter EBITDA/current fiscal quarter interest expense
greater than 2.25 to 1.0Senior Subordinated Discount Notes

Total debt/annualized fourth quarter EBITDA less than 6.0 to 1.0
Senior debt/annualized fourth quarter EBITDA less than 4.0 to 1.0


From
September 30, 1999 through February 29, 2000, we received waivers from compliance with the then-applicable leverage and interest coverage ratio
covenants under the Senior Credit Facility. At December 31, 1999, we were in compliance with the covenants under the Senior Credit Facility and the indentures relating to our public debt. See
further discussion in "Recent Developments" below.

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

Credit Ratings.In November 1999, in response to liquidity and operational issues and
the announcement by Western Resources that it is exploring strategic alternatives for Protection One, Moody's, S & P and Fitch downgraded their ratings on our credit facility and outstanding
securities.

42

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S & P and Fitch currently have the our ratings on negative watch. On March 24, 2000, Moody's further downgraded their ratings on our outstanding securities with outlook remaining
negative. As of March 24, 2000, these ratings were as follows:

Senior
Unsecured
Debt

Senior
Subordinated
Unsecured DebtS & P

BB-

BMoody's

B2

Caa1Fitch

BB

B+


Capital Expenditures.We anticipate making capital expenditures of approximately
$85 million in 2000. Of such amount, we believe we will invest approximately $65 million to acquire customer accounts, $10 million to complete the development and installation of
our new software platforms, $5 million for replacement of vehicles, and $5 million for other capital items. Capital expenditures for 2001 and 2002 are expected to be approximately
$123 million each year of which approximately $108 million would be to acquire accounts and $15 million for vehicles and other capital items. These estimates are prepared for
planning purposes and may be revised. Actual expenditures for these and possibly other items not presently anticipated may vary from these estimates during the course of the years presented.

ITEM 7A. MARKET RISK DISCLOSURE

We are exposed to market risk, including changes in the market price, foreign currency exchange rates, equity instrument investment prices, as well as interest
rates.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and supplementary data, together with the reports of Arthur Andersen LLP, independent public accountants, are included
elsewhere herein. See "Index to Financial Statements" on page F-1.

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

None.

43

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Information relating to our directors and nominees for directors is set forth under the heading "Election of Directors" in the Proxy Statement relating to the
Annual Meeting of Stockholders to be held May 23, 2000, which will be filed with the Securities and Exchange Commission prior to April 29, 2000, 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 relating to the Annual Meeting of Stockholders to be held May 23, 2000, which will be filed with the Securities and Exchange Commission prior to
April 29, 2000, and which is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to the security ownership of certain beneficial owners and management is set forth under the headings "Security Ownership of certain
Beneficial Owners" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 23, 2000 which will be filed with the Securities and Exchange Commission prior to
April 29, 2000, and which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to certain relationships and related transactions concerning directors and executive officers is set forth under the heading "Certain
Relationships and Related Transactions" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 23, 2000, which will be filed with the Securities and Exchange
Commission prior to April 29, 2000, and which is incorporated herein by reference.

44

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PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

|Exhibit No. |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1         |  | Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"), between Western Resources and Protection One, Inc. ("POI") (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed
by POI(1) and Protection One Alarm Monitoring, Inc. ("Monitoring")(2) dated July 30, 1997 (the "July 1997 Form 8-K")).                                                             
|2.2         |  | Amendment No. 1 dated October 2, 1997, to the Contribution Agreement (incorporated by reference to Exhibit 99.1 to the Current Report of Form 8-K filed by POI and Monitoring dated October 2, 1997).                                                                                                                                                                                                            
|2.3         |  | Conditional Purchase Agreement, dated as of August 6, 1998, between certain directors and/or officers of Compagnie Européenne de Télésécurité and Monitoring.                                                                                                                                                                                                                                                    
|2.4         |  | Amended and Restated Agreement and Plan of Contribution and Merger dated as of October 21, 1998 by and among POI, Protection  Acquisition Holding Corporation, P-1 Merger Sub, Inc. (Mass.), P-1 Merger Sub, Inc. (Del.) and
Lifeline Systems, Inc. (incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 of Petroleum One Acquisition Holding Corporation filed on December 10, 1998).
|2.5         |  | Amendment No. 2 dated February 29, 2000 to the Contribution Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by POI and Monitoring dated February 29, 2000).                                                                                                                                                                                                         
|3.1         |  | Fifth Amended and Restated Certificate of Incorporation of POI, as amended (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended September 30, 1997 (the
"Fiscal 1997 Form 10-K")).                                                                                                                                                         
|3.2         |  | Amendment dated as of November 24, 1997 to Fifth Amended and Restated Certificate of Incorporation of Protection One.                                                                                                                                                                                                                                                                                            
|3.3         |  | By-laws of POI (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by POI and Monitoring for the quarter ended March 31, 1996).                                                                                                                                                                                                                                                 
|3.4         |  | Certificate of Incorporation of Monitoring, as amended (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 (Registration Number 333-09401) originally filed by Monitoring and, inter alia,
POI on August 1, 1996 (the "August 1996 Form S-3")).                                                                                                                                  
|3.5         |  | Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by POI and, inter alia, Monitoring for the year ended September 30, 1994).                                                                                                                                                                                                                                
|4.1         |  | Indenture dated as of May 17, 1995, among Monitoring, as Issuer, POI, inter alia, as Guarantor, and The First National Bank of Boston ("FNBB"), as Trustee (incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 (Registration No. 33-94684) originally filed by POI and, inter alia, Monitoring on July 18, 1995 (the "1995 Form S-4")).                                          

45

---

|4.2  |  | First Supplemental Indenture dated as of July 26, 1996, among Monitoring, as Issuer, POI, inter alia, as Guarantor and State Street Bank and Trust Company ("SSBTC") as successor to FNBB as Trustee (incorporated by
reference to Exhibit 4.2 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended September 30, 1996 (the "Fiscal 1996 Form 10-K")).   
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3  |  | Second Supplemental Indenture dated as of October 28, 1996, among Monitoring as Issuer, POI inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.3 to the Fiscal 1996 Form 10-K)
).                                                                                                                                                                 
|4.4  |  | Subordinated Debt Shelf Indenture dated as of August 29, 1996, among Monitoring as Issuer, POI as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.3 to the August 1996 Form S-3).                                                                                                                                                                             
|4.5  |  | Supplemental Indenture No. 1 dated as of September 20, 1996, among Monitoring as Issuer, POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form
 8-K filed by POI and Monitoring and dated September 20, 1996 (the "September 1996 Form 8-K")).                                                                  
|4.6  |  | Supplemental Indenture No. 2 dated as of October 28, 1996, among Monitoring as Issuer, POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.6 to the Fiscal 1996 Form
10-K).                                                                                                                                                                   
|4.7  |  | Indenture, dated as of August 17, 1998, among Monitoring, as issuer, POI as guarantor, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 9-4 filed by POI
and Monitoring on September 22, 1998).                                                                                                                  
|4.8  |  | Indenture, dated as of December 21, 1998, among Monitoring, as issuer, POI, as guarantor, 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"))                                                                           
|10.1 |  | Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Merita Bank, Ltd. (formerly Kansallis-Osake-Pankki) (incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q filed by POI and,
 inter alia, Monitoring for the quarter ended March 31, 1994).                                                                                        
|10.2 |  | Warrant Agreement dated as of November 3, 1993, between Monitoring and United States Trust Company of New York, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4
(Registration Statement 33-73002) originally filed by POI, Monitoring and certain former subsidiaries of Monitoring on December 15, 1993 (the "1993 Form S-4")).
|10.3 |  | Registration Rights Agreement dated as of November 3, 1993, among Monitoring, POI, certain former subsidiaries of Monitoring and Bear, Stearns & Co., Inc. (incorporated by reference to Exhibit 4.4 to the 1993 Form
S-4).                                                                                                                                                          
|10.4 |  | Warrant Agreement dated as of May 17, 1995, between POI and The First National Bank of Boston, as Warrant Agent (incorporated by reference to Exhibit 10.40 to the 1995 Form S-4).                                                                                                                                                                                                   
|10.5 |  | Employment Agreement dated as of November 24, 1997, between Protection One and John E. Mack, III (incorporated by reference to Exhibit 10.6 to the November 1997 Form 8-K).*                                                                                                                                                                                                         
|10.6 |  | Consulting Agreement dated as of February 19, 1996, between POI and Dr. Ben Enis (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q filed by POI and Monitoring for the
quarter ended June 30, 1996).*                                                                                                                                                  

46

---

|10.7  |  | 1994 Stock Option Plan of POI, as amended (incorporated by reference to Exhibit 10.23 to the Fiscal 1996 Form 10-K).*                                                                                                                                                                                                                                              
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.8  |  | 1997 Long-Term Incentive Plan of POI (incorporated by reference to Appendix F to POI's proxy statement dated November 7, 1997).*                                                                                                                                                                                                                                   
|10.9  |  | Notes Registration Rights Agreement dated as of May 17, 1995, among POI, Monitoring, Morgan Stanley & Co., Incorporated and Montgomery Securities (incorporated by reference to Exhibit 4.2 to the 1995 Form
S-4).                                                                                                                                                 
|10.10 |  | Credit Facility Agreement between Westar Capital, Inc., as Lender, and Monitoring, as borrower, dated as of April 1, 1998 (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by POI and
Monitoring on May 15, 1998).                                                                                                               
|10.11 |  | Revolving Credit Agreement among Monitoring, borrower, NationsBank, N.A., administrative agent, First Union National Bank, syndication agent, Toronto Dominion (Texas), Inc., documentation agent, and Lenders named therein,
dated December 21, 1998 (the "Revolving Credit Agreement") (incorporated by reference to Exhibit 10.11 to the Fiscal 1998 Form 10-K).
|10.12 |  | First Amendment to the Revolving Credit Agreement, dated as of February 26, 1999 (incorporated by reference to Exhibit 10.12 to the Fiscal 1998 Form 10-K).                                                                                                                                                                                                        
|10.13 |  | Agreement, dated as of February 29, 2000, by and among POI, Monitoring, and Westar Capital, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring dated February 29,
2000).                                                                                                                                
|10.14 |  | Second Amendment of Credit Agreement, effective as of February 29, 2000, between Monitoring and Westar Capital, Inc., as Administrative Agent and a Lender (incorporated by reference to Exhibit 10.3 to the Current Report
on Form 8-K filed by POI and Monitoring dated February 29, 2000).                                                                      
|10.15 |  | Registration Rights Agreement, dated December 21, 1998, among Monitoring, POI and various subsidiary guarantors and Morgan Stanley & Co. Incorporated, Chase Securities Inc; First Union Capital Markets, NationsBanc
Montgomery Securities LLC and TD Securities (USA), Inc. (the "Placement Agents").                                                            
|10.16 |  | Form of Change of Control Agreement with Annette M. Beck and Anthony Somma.                                                                                                                                                                                                                                                                                       
|12.1  |  | Restated Statement regarding Computation of Earnings to Fixed Charges.                                                                                                                                                                                                                                                                                            
|16.1  |  | Letter from Coopers & Lybrand to the Securities and Exchange Commission re: Change in Certifying Accountant (incorporated by reference to Exhibit 16 to Amendment No. 1 to the Current Report on Form 8-K filed by POI
and Monitoring dated February 5, 1998).                                                                                                     
|21.1  |  | Subsidiaries of POI and Monitoring.                                                                                                                                                                                                                                                                                                                               
|23.1  |  | Consent of Arthur Andersen LLP.                                                                                                                                                                                                                                                                                                                                   
|27    |  | Restated Financial Data Schedule.                                                                                                                                                                                                                                                                                                                                 

---

47

---

48

---



PROTECTION ONE, INC. AND SUBSIDIARIES        INDEX TO FINANCIAL STATEMENTS

|                                      |                                                                                                                   | Page
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ----
|PROTECTION ONE, INC. AND SUBSIDIARIES |                                                                                                                   |     
|                                      | Report of Independent Public Accountants                                                                          |     
|                                      | Consolidated Balance Sheets as of December 31, 1999, 1998 and 1997                                                |     
|                                      | Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 1999, 1998 and 1997 |     
|                                      | Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997                        |     
|                                      | Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997              |     
|                                      | Notes to Consolidated Financial Statements                                                                        |     
|FINANCIAL SCHEDULES                   |                                                                                                                   |     
|                                      | Protection One, Inc. and SubsidiariesSchedule IIValuation and Qualifying Accounts                               |     

F-1

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Protection One, Inc.:

We
have audited the accompanying consolidated balance sheets of Protection One, Inc. and subsidiaries as of December 31, 1999, 1998 and 1997 and the related consolidated
statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999 (1999, 1998 and 1997 as restated, see
Note 2). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the 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, the financial statements referred to above present fairly, in all material respects, the financial position of Protection One, Inc. and subsidiaries as of
December 31, 1999, 1998 and 1997 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.

As
explained in Note 3(f) to the financial statements, effective September 1, 1999, the Company changed its method of amortization for customer accounts for most of its
North America and Europe segments from the straight-line method to a declining balance (accelerated) method.

Our
audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule IIValuation and Qualifying Accounts is
presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

Arthur
Andersen, LLP

Kansas
City, Missouri

March 10,
2000, except with respect to the matter discussed in Note 2, as to which the date is February 1, 2001.

F-2

---



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

|                                                                                                                                                                                                    |                                   | 1999 |           | 1998      |   | 1997      |          
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- | ---- | --------- | --------- | - | --------- | ---------
|
|ASSETS                                                                                                                                                                                              |                                   |      |           |          
|Current assets:                                                                                                                                                                                     |                                   |      |           |           |   |           |          
|                                                                                                                                                                                                    | Cash and cash equivalents         |      | $         | 7,658     |   | $         | 10,025   
|                                                                                                                                                                                                    | Restricted cash                   |      |           | 11,175    |   |           | 11,987   
|                                                                                                                                                                                                    | Marketable securities             |      |           | 6,664     |   |           | 17,770   
|                                                                                                                                                                                                    | Receivables, net                  |      |           | 71,716    |   |           | 61,262   
|                                                                                                                                                                                                    | Inventories                       |      |           | 12,908    |   |           | 7,895    
|                                                                                                                                                                                                    | Prepaid expenses                  |      |           | 3,471     |   |           | 3,867    
|                                                                                                                                                                                                    | Related party tax receivable      |      |           | 31,056    |   |           | 5,886    
|                                                                                                                                                                                                    | Deferred tax assets, current      |      |           | 28,400    |   |           | 49,543   
|                                                                                                                                                                                                    | Other                             |      |           | 13,332    |   |           | 19,605   
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|                                                                                                                                                                                                    | Total current assets              |      |           | 186,380   |   |           | 187,840  
|Property and equipment, net                                                                                                                                                                         |                                   |      | 60,912    |           |   | 46,959    |          
|Customer accounts, net                                                                                                                                                                              |                                   |      | 1,132,095 |           |   | 1,022,863 |          
|Goodwill, net                                                                                                                                                                                       |                                   |      | 1,056,671 |           |   | 1,128,819 |          
|Deferred tax assets                                                                                                                                                                                 |                                   |      | 37,182    |           |   | 45,907    |          
|Other                                                                                                                                                                                               |                                   |      | 39,318    |           |   | 30,202    |          
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|Total Assets                                                                                                                                                                                        |                                   | $    | 2,512,558 |           | $ | 2,462,590 |          
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                |                                   |      |           |          
|Current liabilities:                                                                                                                                                                                |                                   |      |           |           |   |           |          
|                                                                                                                                                                                                    | Current portion of long-term debt |      | $         | 35,498    |   | $         | 84,616   
|                                                                                                                                                                                                    | Accounts payable                  |      |           | 23,205    |   |           | 16,374   
|                                                                                                                                                                                                    | Accrued liabilities               |      |           | 74,248    |   |           | 77,412   
|                                                                                                                                                                                                    | Purchase holdbacks                |      |           | 20,213    |   |           | 42,303   
|                                                                                                                                                                                                    | Deferred revenue                  |      |           | 61,149    |   |           | 57,703   
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|                                                                                                                                                                                                    | Total current liabilities         |      |           | 214,313   |   |           | 278,408  
|Long-term debt, net of current portion                                                                                                                                                              |                                   |      | 1,077,152 |           |   | 884,554   |          
|Other liabilities                                                                                                                                                                                   |                                   |      | 4,173     |           |   | 3,238     |          
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|Total Liabilities                                                                                                                                                                                   |                                   |      | 1,295,638 |           |   | 1,166,200 |          
|Commitments and contingencies (see Note 17)                                                                                                                                                         |                                   |      |           |           |   |           |          
|Stockholders' equity:                                                                                                                                                                               |                                   |      |           |           |   |           |          
|Preferred stock, $.10 par value, 5,000,000 shares authorized                                                                                                                                        |                                   |      |          |           |   |          |          
|Common Stock, $.01 par value, 150,000,000 shares authorized, 126,945,337 shares, 126,838,741 shares and 83,362,938 shares issued and outstanding at December 31, 1999, 1998, and 1997, respectively |                                   |      | 1,269     |           |   | 1,268     |          
|Additional paid-in capital                                                                                                                                                                          |                                   |      | 1,358,978 |           |   | 1,358,484 |          
|Unrealized loss on marketable securities, net of tax                                                                                                                                                |                                   |      | (995      | )         |   | (1,848    | )        
|Unrealized loss on currency translation, net of tax                                                                                                                                                 |                                   |      | (810      | )         |   | (728      | )        
|Retained losses                                                                                                                                                                                     |                                   |      | (141,522  | )         |   | (60,786   | )        
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|                                                                                                                                                                                                    | Total stockholders' equity        |      |           | 1,216,920 |   |           | 1,296,390
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          
|Total Liabilities and Stockholders' Equity                                                                                                                                                          |                                   | $    | 2,512,558 |           | $ | 2,462,590 |          
|                                                                                                                                                                                                    |                                   |      |           |           |   |           |          

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

F-3

---

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

|                                                                |                                                                                | Year Ended December 31, |         
|--------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------- | --------
|
|
|Revenues:                                                       |                                                                                |                         |         
|                                                                | Monitoring and related services                                                |                         | $       
|                                                                | Installation and rental                                                        |                         |         
|                                                                |                                                                                |                         |         
|                                                                | Total revenues                                                                 |                         |         
|Cost of revenues:                                               |                                                                                |                         |         
|                                                                | Monitoring and related services                                                |                         |         
|                                                                | Installation and rental                                                        |                         |         
|                                                                |                                                                                |                         |         
|                                                                | Total cost of revenues                                                         |                         |         
|                                                                |                                                                                |                         |         
|                                                                | Gross profit                                                                   |                         |         
|                                                                |                                                                                |                         |         
|Operating Expenses:                                             |                                                                                |                         |         
|                                                                | Selling, general and administrative expenses                                   |                         |         
|                                                                | Acquisition expense                                                            |                         |         
|                                                                | Amortization of intangibles and depreciation expense                           |                         |         
|Other charges:                                                  |                                                                                |                         |         
|                                                                | Merger related costs                                                           |                         |         
|                                                                | Severance and relocation costs                                                 |                         |         
|                                                                |                                                                                |                         |         
|Total operating expenses                                        |                                                                                |                         | 453,155 
|                                                                |                                                                                |                         |         
|                                                                | Operating income (loss)                                                        |                         |         
|Interest expense:                                               |                                                                                |                         |         
|                                                                | Interest expense, net                                                          |                         |         
|                                                                | Related party interest expense, net                                            |                         |         
|Other (income) expense:                                         |                                                                                |                         |         
|                                                                | Non-recurring gain on contract repurchase                                      |                         |         
|                                                                | Gain on sale of Mobile Services Group                                          |                         |         
|                                                                | Other                                                                          |                         |         
|                                                                |                                                                                |                         |         
|Loss before income taxes and extraordinary gain                 |                                                                                |                         | (106,153
|Income tax (expense) benefit                                    |                                                                                |                         | 27,108  
|                                                                |                                                                                |                         |         
|Loss before extraordinary gain                                  |                                                                                |                         | (79,045 
|Extraordinary gain (loss), net of tax effect of $911 and $2,730 |                                                                                |                         | (1,691  
|                                                                |                                                                                |                         |         
|                                                                | Net loss                                                                       |                         | $       
|                                                                |                                                                                |                         |         
|Other comprehensive loss:                                       |                                                                                |                         |         
|                                                                | Unrealized loss on marketable securities, net of tax effect of $664 and $1,107 |                         | $       
|                                                                | Unrealized loss on currency translation, net of tax effect of $540 and $485    |                         |         
|                                                                |                                                                                |                         |         
|Comprehensive loss                                              |                                                                                | $                       | (82,541 
|                                                                |                                                                                |                         |         
|Net loss per common share (basic and diluted):                  |                                                                                |                         |         
|                                                                | Loss before extraordinary gain per common share                                |                         | $       
|                                                                | Extraordinary gain (loss) per common share                                     |                         |         
|                                                                |                                                                                |                         |         
|                                                                | Net loss per common share                                                      |                         | $       
|                                                                |                                                                                |                         |         

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

F-4

---



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

|                                                                                          |                                                               | Year Ended December 31, |        
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------------- | -------
|
|
|Cash flows from operating activities:                                                     |                                                               |                         |        
|Net loss                                                                                  |                                                               | $                       | (80,736
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                               |                         |        
|                                                                                          | Extraordinary loss (gain)                                     |                         |        
|                                                                                          | Gain on sale of Mobile Services Group                         |                         |        
|                                                                                          | Gain on exchange transaction                                  |                         |        
|                                                                                          | Gain on contract repurchase                                   |                         |        
|                                                                                          | Amortization of intangibles and depreciation                  |                         |        
|                                                                                          | Accretion of debt premium                                     |                         |        
|                                                                                          | Net deferred taxes                                            |                         |        
|                                                                                          | Provision for doubtful accounts                               |                         |        
|                                                                                          | Loss (gain) on sale of marketable securities                  |                         |        
|                                                                                          | Other                                                         |                         |        
|Changes in assets and liabilities, net of effects of acquisitions:                        |                                                               |                         |        
|                                                                                          | Receivables                                                   |                         |        
|                                                                                          | Inventories                                                   |                         |        
|                                                                                          | Prepaid expenses                                              |                         |        
|                                                                                          | Other current assets                                          |                         |        
|                                                                                          | Accounts payable                                              |                         |        
|                                                                                          | Accrued liabilities                                           |                         |        
|                                                                                          | Deferred revenue                                              |                         |        
|                                                                                          |                                                               |                         |        
|                                                                                          | Net cash provided by (used in) operating activities           |                         |        
|Cash flows from investing activities:                                                     |                                                               |                         |        
|                                                                                          | Purchase of property and equipment, net                       |                         |        
|                                                                                          | Purchase of installed security systems                        |                         |        
|                                                                                          | Sale (purchase) of equity securities                          |                         |        
|                                                                                          | Distribution to equityholders in acquisition transaction      |                         |        
|                                                                                          | Proceeds from sale of Mobile Services Group, net of cash paid |                         |        
|                                                                                          | Acquisition of alarm companies, net of cash received          |                         |        
|                                                                                          | Other investments                                             |                         |        
|                                                                                          |                                                               |                         |        
|                                                                                          | Net cash used in investing activities                         |                         |        
|Cash flows from financing activities:                                                     |                                                               |                         |        
|                                                                                          | Proceeds from equity offering                                 |                         |        
|                                                                                          | Payments on long-term debt                                    |                         |        
|                                                                                          | Proceeds from long-term debt issuances                        |                         |        
|                                                                                          | Issuance costs and other                                      |                         |        
|                                                                                          | Proceeds from related party debt                              |                         |        
|                                                                                          |                                                               |                         |        
|                                                                                          | Net cash provided by financing activities                     |                         |        
|                                                                                          |                                                               |                         |        
|Effect of exchange rate changes on cash and cash equivalents                              |                                                               |                         | 916    
|                                                                                          |                                                               |                         |        
|                                                                                          | Net (decrease) increase in cash and cash equivalents          |                         |        
|Cash and cash equivalents:                                                                |                                                               |                         |        
|                                                                                          | Beginning of period                                           |                         |        
|                                                                                          |                                                               |                         |        
|                                                                                          | End of period                                                 |                         | $      
|                                                                                          |                                                               |                         |        
|Cash paid for interest                                                                    |                                                               | $                       | 68,420 
|                                                                                          |                                                               |                         |        
|Cash paid for taxes                                                                       |                                                               | $                       | 783    
|                                                                                          |                                                               |                         |        
|                                                                                          | Non-cash financing:                                           |                         |        
|Contribution of net assets from Parent                                                    |                                                               | $                       |       
|                                                                                          |                                                               |                         |        

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

F-5

---

PROTECTION ONE, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (Dollar amounts in thousands)

|                                                   |  | Shares      |  | Amount |       | Contributed
Capital |   | Additional
Paid-In
Capital |   | Retained
Losses |           | Accumulated
other
comprehensive
loss |   | Total
Stockholders'
Equity |  
|-------------------------------------------------- |  | ----------- |  | ------ | ----- | ------------------- | - | -------------------------- | - | --------------- | --------- | ------------------------------------ | - | -------------------------- | -
|Common Stock                                       |  |             |  |        |       |                     |   |                            |   |                 |           |                                      |   |                            |  
|December 31, 1996                                  |  | -           |  | $      | -     |                     | $ | 377,296                    |   | $               | -         |                                      | $ | (638                       | )
|Net investment and advances from Western Resources |  | -           |  |        | -     |                     |   | 43,827                     |   |                 | -         |                                      |   | -                          |  
|Recapitalization                                   |  | 68,673,402  |  |        | 687   |                     |   | (421,123                   | ) |                 | 420,436   |                                      |   | -                          |  
|Shares issued-reverse purchase acquisition         |  | 14,689,230  |  |        | 147   |                     |   | -                          |   |                 | 528,874   |                                      |   | -                          |  
|Exercise of options                                |  | 306         |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | -                          |  
|Net loss                                           |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | (42,315                    | )
|                                                   |  |             |  |        |       |                     |   |                            |   |                 |           |                                      |   |                            |  
|December 31, 1997 (As RestatedNote 2)             |  | 83,362,938  |  | $      | 834   |                     |   | -                          |   | $               | 949,310   |                                      | $ | (42,953                    | )
|Equity offerings, net of cost                      |  | 42,764,644  |  |        | 427   |                     |   | -                          |   |                 | 401,397   |                                      |   | -                          |  
|Shares issued-acquisitions                         |  | 539,584     |  |        | 5     |                     |   | -                          |   |                 | 6,716     |                                      |   | -                          |  
|Shares issued-ESPP                                 |  | 61,980      |  |        | 1     |                     |   | -                          |   |                 | 532       |                                      |   | -                          |  
|Exercise of options and warrants                   |  | 109,595     |  |        | 1     |                     |   | -                          |   |                 | 529       |                                      |   | -                          |  
|Unrealized loss-marketable securities              |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | -                          |  
|Unrealized loss-currency translation               |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | -                          |  
|Net loss                                           |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | (17,833                    | )
|                                                   |  |             |  |        |       |                     |   |                            |   |                 |           |                                      |   |                            |  
|December 31, 1998 (As RestatedNote 2)             |  | 126,838,741 |  | $      | 1,268 |                     | $ | -                          |   | $               | 1,358,484 |                                      | $ | (60,786                    | )
|Shares issued-acquisitions                         |  | 3,613       |  |        | -     |                     |   | -                          |   |                 | 39        |                                      |   | -                          |  
|Shares issued-ESPP                                 |  | 102,983     |  |        | 1     |                     |   | -                          |   |                 | 455       |                                      |   | -                          |  
|Unrealized loss-marketable securities              |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | -                          |  
|Unrealized loss-currency translation               |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | -                          |  
|Net loss                                           |  | -           |  |        | -     |                     |   | -                          |   |                 | -         |                                      |   | (80,736                    | )
|                                                   |  |             |  |        |       |                     |   |                            |   |                 |           |                                      |   |                            |  
|December 31, 1999 (As RestatedNote 2)             |  | 126,945,337 |  | $      | 1,269 |                     | $ | -                          |   | $               | 1,358,978 |                                      | $ | (141,522                   | )
|                                                   |  |             |  |        |       |                     |   |                            |   |                 |           |                                      |   |                            |  

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

F-6

---



PROTECTION ONE, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (Dollar amounts in thousands, except for per share amounts)

1. The Company:

Protection One, Inc. ("Protection One", a Delaware corporation; the "Company") is a publicly traded security alarm monitoring company. Protection One is
principally engaged in the business of providing security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and small
business customers in North America, and until February 29, 2000, the United Kingdom and Continental Europe. Westar Capital, Inc. ("Westar Capital"), a wholly-owned subsidiary of Western
Resources, Inc. ("Western Resources"), owns approximately 85% of the Company's common stock.

Prior
to November 24, 1997, Protection One was a stand-alone security business. On November 24, 1997, Protection One acquired Western Resources security business
("WRSB") and Centennial Security Holdings, Inc. ("Centennial"), which was accounted for as a reverse purchase acquisition. Accordingly, the results of operations of Protection One and
Centennial are not included in the consolidated financial statements prior to November 24, 1997.

The
Company prepares its financial statements in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires 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 revenues 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. The Company's principal subsidiaries include Protection One Alarm
Monitoring, Inc. ("Monitoring"), Network Multifamily Security Corporation ("Multifamily"), and Compagnie Europeenne de Telesecurite ("CET"). All significant intercompany balances have been
eliminated in consolidation.

2. Restatement of Financial Statements:

Following extensive conversations with the staff of the SEC which have previously been disclosed, the Company has restated its Consolidated Financial
Statements as of December 31, 1999, 1998 and 1997
and for the years then ended and for each of the three fiscal quarters ended March 31, 2000, June 30, 2000, and September 30, 2000. This restatement primarily relates to the
amortization of customer accounts acquired and amounts allocated to obligations assumed in the Westinghouse Security Systems (WSS) acquisition. A description of the principal adjustments which
comprise the restatement are as follows:

The
first adjustment reflects a change in the historical amortization expense recorded for customer accounts acquired in the WSS acquisition. The life of the acquired WSS customers
was initially estimated at ten years. Straight-line amortization had originally been implemented. With the restatement, an eight-year estimated life and an accelerated
amortization method will be used for customers acquired from WSS as of the acquisition date.

The
second adjustment reverses a special charge of $12,750 for excess customer attrition that was recorded in the fourth quarter of 1997. This charge had been recorded for attrition
experienced in the WSS customer account base in 1997.

The
third adjustment reduces a repurchase obligation (SAMCO contract financing) to more closely match the estimated fair value of the obligation to the estimated fair value of WSS
customer accounts

F-7

---

on a per account basis. This change in valuation has the effect of reducing the obligation and goodwill and eliminating $14,837 of a non-recurring $16,348 pre-tax gain that was
reported in 1998 when this obligation was repaid.

The
fourth adjustment reduces goodwill as a result of a purchase price adjustment related to the WSS acquisition. Goodwill has been reduced by the amount of the claim made by our
parent company of $33,772. A receivable had not originally been recorded for this claim. The change was made to establish this receivable by our parent which reduces recorded goodwill at the Company.
Our parent entered into a comprehensive settlement agreement with Westinghouse in November 2000 and received $37,500.

A
summary of the significant effects of the restatement is as follows:

|                                                     |  |   |           | Restatement Adjustments |   |         |  
|---------------------------------------------------- |  | - | --------- | ----------------------- | - | ------- | -
|
|
|At December 31, 1999                                 |  |   |           |                         |   |         |  
|Customer accounts, net                               |  | $ | 1,139,066 |                         | $ | (19,721 | )
|Goodwill, net                                        |  |   | 1,101,788 |                         |   |        |  
|Deferred tax asset, noncurrent                       |  |   | 30,771    |                         |   | 6,902   |  
|Retained losses                                      |  |   | (129,617  | )                       |   | (12,819 | )
|Additional paid-in-capital                           |  |   | 1,392,750 |                         |   |        |  
|For the year ended December 31, 1999                 |  |   |           |                         |   |         |  
|Amortization of intangibles and depreciation expense |  | $ | 237,243   |                         | $ | (2,122  | )
|Loss before extraordinary item                       |  |   | (81,214   | )                       |   | 1,379   |  
|Income tax (expense) benefit                         |  |   | 28,276    |                         |   | (743    | )
|Net loss                                             |  |   | (82,905   | )                       |   | 1,379   |  
|Net Loss per common share                            |  |   | (0.65     | )                       |   | .01     |  

|                                                     |  |   |           | Restatement Adjustments |   |         |  
|---------------------------------------------------- |  | - | --------- | ----------------------- | - | ------- | -
|
|
|At December 31, 1998                                 |  |   |           |                         |   |         |  
|Customer accounts, net                               |  | $ | 1,031,956 |                         | $ | (21,843 | )
|Goodwill, net                                        |  |   | 1,175,153 |                         |   |        |  
|Deferred tax asset, noncurrent                       |  |   | 38,326    |                         |   | 7,645   |  
|Retained Losses                                      |  |   | (46,712   | )                       |   | (14,198 | )
|Additional paid-in-capital                           |  |   | 1,392,256 |                         |   |        |  
|For the year ended December 31, 1998                 |  |   |           |                         |   |         |  
|Amortization of intangibles and depreciation expense |  | $ | 119,211   |                         |   | 8,668   |  
|Non-recurring gain on contract repurchase            |  |   | (16,348   | )                       |   |        |  
|Loss before extraordinary item                       |  |   | (4,937    | )                       |   | (5,634  | )
|Income tax (expense) benefit                         |  |   | (4,114    | )                       |   | 3,034   |  
|Net loss                                             |  |   | (3,346    | )                       |   | (5,634  | )
|Net Loss per common share                            |  |   | (0.03     | )                       |   | (.05    | )

F-8

---

|                                                     |  |   |         | Restatement Adjustments |   |         |  
|---------------------------------------------------- |  | - | ------- | ----------------------- | - | ------- | -
|
|
|At December 31, 1997                                 |  |   |         |                         |   |         |  
|Customer accounts, net                               |  | $ | 530,312 |                         | $ | (13,176 | )
|Goodwill, net                                        |  |   | 672,776 |                         |   |        |  
|Deferred tax asset, noncurrent                       |  |   | 16,383  |                         |   | 4,611   |  
|Current portion of long-term debt                    |  |   | 21,707  |                         |   |        |  
|Long term portion of long-term debt                  |  |   | 343,942 |                         |   |        |  
|Retained Losses                                      |  |   | (43,366 | )                       |   | (8,564  | )
|Additional paid-in-capital                           |  |   | 983,082 |                         |   |        |  
|For the year ended December 31, 1997                 |  |   |         |                         |   |         |  
|Amortization of intangibles and depreciation expense |  | $ | 39,822  |                         | $ | 13,175  |  
|Impairment of customer accounts                      |  |   | (12,750 | )                       |   |        |  
|Loss before extraordinary item                       |  |   | (42,728 | )                       |   | (8,564  | )
|Income tax (expense) benefit                         |  |   | 28,628  |                         |   | 4,611   |  
|Net loss                                             |  |   | (42,728 | )                       |   | (8,564  | )
|Net Loss per common share                            |  |   | (0.60   | )                       |   | (.12    | )

The net effect of adjustments made to the 1999, 1998 and 1997 quarterly reported results is disclosed in Note 19.

Prior
to this restatement, during the third quarter of 1999 the Company changed its amortization method for its customer account intangible assets from a straight-line to
an accelerated method to more closely match future amortization cost with the estimated revenue stream from these assets.  The effect of the change in accounting principle increased
amortization expense reported in the third quarter of 1999 by $47,000. The change in the WSS customer account amortization method restates the results of 1997, 1998 and 1999 and thereby reduces the
cumulative charge recorded in the third quarter of 1999.

F-9

---

3. Summary of Significant Accounting Policies:

(a) Revenue Recognition

Revenues are recognized when monitoring, extended service protection, patrol, repair and other services are provided. Deferred revenues result from customers
who are billed for monitoring, extended service protection and patrol and alarm response services in advance of the period in which such services are provided, on a monthly, quarterly or annual basis.

(b) Inventories

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

(c) Property and Equipment

Property and equipment are stated at cost and 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.

Estimated
useful lives of property and equipment are as follows:

Furniture, fixtures and equipment

5 - 10 yearsData processing and telecommunication

8 mos - 5 yearsLeasehold improvements

5 - 10 yearsVehicles

5 yearsBuildings

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.

The
Company has a tax sharing agreement with Western Resources. This pro rata tax sharing agreement enables the Company to be reimbursed for tax benefits utilized by Western
Resources. The Company has recorded an income tax receivable for amounts due from Western Resources pursuant to this agreement. If the Company did not file its taxes on a consolidated basis with
Western Resources, the Company's deferred tax assets may not be realizable and the Company may not be in a position to record a tax benefit for losses incurred.

(e) Comprehensive Loss

During 1998, the Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive Income".
Comprehensive loss comprises net loss plus the unrealized gains and losses associated with foreign currency translations and available-for-sale investment securities.

F-10

---

(f) Customer Accounts

Customer accounts are stated at cost. The cost includes amounts paid to dealers and the estimated fair value of accounts acquired in business acquisitions.
Internal costs incurred in support of acquiring customer accounts are expensed as incurred.

The
Company historically amortized the costs it allocated to its customer accounts by using the straight-line method over a ten-year life for all customer
accounts, except WSS customer accounts which utilize an eight-year accelerated amortization method. The straight-line method, indicated in Accounting Principles Board Opinion
No. 17 as the appropriate method for such assets, has been the predominant method used to amortize customer accounts in the monitored services industry. Management is not aware of whether the
economic life or the rate of realization for the Company's customer accounts differs materially from other monitored services companies.

The
choice of a ten-year life was based on management's estimates and judgments about the amounts and timing of expected future revenues from these assets, the rate of
attrition of such revenue over customer life, and average customer account life. Ten years was used because, in management's opinion, it would adequately match amortization cost with anticipated
revenue from those assets even though many accounts were expected to produce revenue over periods substantially longer than ten years. Effectively, it expensed the asset ratably over an "expected
average customer life" that was shorter than the expected life of the revenue stream, thus implicitly giving recognition to projected revenues for a period beyond ten years.

The
Company conducted a comprehensive review of its amortization policy during the third quarter of 1999. This review was performed specifically to evaluate the historic amortization
policy in light of the inherent declining revenue curve over the life of a pool of customer accounts, and the Company's historical attrition experience. After completing the review, management
identified three distinct pools, each of which has distinct attributes that effect differing attrition characteristics. The pools correspond to the Company's North America, Multifamily and Europe
business segments. Separate pools for North America and Multifamily will be used going forward. For the North America and Europe pools, the analyzed data indicated to management that the Company can
expect attrition to be greatest in years one through five of asset life and that a change from a straight-line to a declining balance (accelerated) method would more closely match future
amortization cost with the estimated revenue stream from these assets. Management has elected to change to that method for all customer accounts in the North America and Europe pools, except for
accounts acquired in the Westinghouse acquisition which are utilizing an accelerated method. No change was made in the method used for the Multifamily pool. See Note 2 for additional
information.

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

Pool

MethodNorth AmericaAcquired Westinghouse Customers

Eight-year 120% declining balanceOther Customers

Ten year 130% declining balanceEurope

Ten-year 125% declining balanceMultifamily

Ten-year straight-line


Adoption
of the declining balance method effectively shortens the estimated expected average customer life for these two customer pools, and does so in a way that does not make it
possible to distinguish the effect of a change in method (straight-line to declining balance) from the change in

F-11

---

estimated lives. In such cases, generally accepted accounting principles require that the effect of such a change be recognized in operations in the period of the change, rather than as a cumulative
effect of a change in accounting principle. We changed to the declining balance method in the third quarter of 1999 for European and North American customers which had been amortized on a
straight-line basis. Accordingly, the effect of the change in accounting principle increased amortization expense reported in the third quarter of 1999 by $40,000. Accumulated amortization
recorded on the balance sheet would have been approximately $34,000 higher through the end of the second quarter of 1999 if the Company had historically used the declining balance method.

In
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
long-lived assets held and used by Protection One are evaluated for recoverability on a periodic basis or as circumstances warrant. An impairment would be recognized when the undiscounted
expected future operating cash flows by customer pool derived from customer accounts is less than the carrying value of capitalized customer accounts and goodwill.

Due
to the high level of customer attrition experienced in 1999 and the decline in market value of the Company's publicly traded equity and debt securities, management performed an
impairment test on its customer account asset in the fourth quarter and concluded that no impairment has occurred. The Company also reevaluated its amortization estimates and concluded no change was
needed.

(g) Goodwill

The excess of the cost over the fair value of net assets of businesses acquired is recorded as goodwill. The Company has historically amortized goodwill on a
straight-line basis over 40 years. The carrying value of goodwill was included in the Company's evaluation of recoverability of customer accounts. No reduction in the carrying value
was necessary at December 31, 1999.

In
conjunction with the impairment test for customer accounts, the Company re-evaluated the original assumptions and rationale utilized in the establishment of the
carrying value and estimated useful life of goodwill. The Company concluded that due to continued losses and increased levels of attrition experienced in 1999, the estimated useful life of goodwill
should be reduced from 40 years to 20 years. As of January 1, 2000, the remaining goodwill, net of accumulated amortization, will be amortized over its remaining useful life based
on a 20-year life. The resulting increase in annual goodwill amortization on the Company's existing account base will be approximately $23,000 for North America and $6,000 for Multifamily.
The additional goodwill recorded for Europe prior to its sale on February 29, 2000, was approximately $1,000.

Amortization
expense was $28,745, $22,816 and $5,483 for the years ended December 31, 1999, 1998, 1997 respectively. Accumulated amortization was $59,195, $29,015 and $5,998 at
December 31, 1999, 1998 and 1997 respectively.

(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, are stated at cost, which approximates market.

(i) Restricted Cash

Restricted cash primarily consists of cash held in escrow pursuant to one of the Company's 1998 acquisitions.

F-12

---

(j) Receivables

Gross receivables, which consist primarily of trade accounts receivable, of $102,405 at December 31, 1999, $78,255 at December 31, 1998 and
$25,509 at December 31, 1997 have been reduced by allowances for doubtful accounts of $30,689, $16,993 and $5,207, respectively.

(k) Marketable Securities

Management classifies its marketable securities as "Available-for-Sale" in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Accordingly, any unrealized gains and losses are reported as a component of Other Comprehensive Income (Loss) in accordance with SFAS No. 130
"Reporting Comprehensive Income". Gains or losses on securities sold are calculated based on the specific identification method.

(l) Advertising Costs

Printed materials are generally expensed as incurred. Broadcast advertising costs are generally expensed upon the first broadcast of the respective
advertisement. Total advertising expense was $3,005, $3,659, and $9,906 during the years ended December 31, 1999, 1998, and 1997, respectively.

(m) 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, 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 potential credit losses. The Company has customers located throughout the United States and Canada. The Company does not believe a significant risk of loss
from a concentration of credit risk exists.

(n) Accounting Pronouncements

SFAS No. 133 and No. 137 "Accounting for Derivative Instruments and Hedging Activities" establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The statements require that an
entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. Changes in the derivative's fair value will be
required to be recognized currently in earnings unless specific hedge accounting criteria are met. In addition, the Statements will require the Company to formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company has not traditionally been required to utilize derivative instruments in managing its business. Therefore, management has not
yet determined what, if any, the impact these pronouncements will have upon adoption. These Statements are effective for all fiscal years, beginning after June 15, 2000. The Company expects to
adopt these statements on January 1, 2001.

F-13

---

(o) Loss Per Share

Loss per share is presented in accordance with SFAS No. 128 "Earnings Per Share". Weighted average shares outstanding were as follows:

|                                    |  | December 31,
|----------------------------------- |  | ------------
|
|Weighted average shares outstanding |  | 126,889,802 

(p) Prior Year Reclassifications

Certain reclassifications have been made to prior year information to conform with current year presentation.

4. Acquisition Transactions:

The Company acquired a significant number of security companies in 1998 and 1997. The largest acquisitions included Protection One in November 1997,
Multifamily in January 1998, Multimedia Security Services, Inc. in March 1998, and CET in September 1998. All companies acquired have been accounted for using the purchase
method. The principal assets acquired in the acquisitions are customer accounts. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. The
resulted operations have been included in the consolidated results of operations of the Company from the date of the acquisition.

The
following unaudited pro forma consolidated results of operations for the years ended December 31, 1998 and 1997, assume all material business combinations occurred at
January 1, of the year acquired:

Years ended
December 311998(A)

1997(A)Restated Note 2Revenues

$
562,130

$
449,957Loss before extraordinary items


(37,729
)

(20,007
)Net loss


(37,626
)

(20,007
)Per common share, basic and dilutedLoss before extraordinary items


(.35
)

(.28
)Net loss


(.35
)

(.28
)


---

The
pro forma financial information is not necessarily indicative of the results of operations had the entities been combined for the entire period nor do they purport to be
indicative of results which will be obtained in the future.

During
1999, the Company completed four acquisitions, all in the United Kingdom, for a combined purchase price of approximately $32,000. The Company's purchase price allocations for
the 1999 acquisitions are preliminary and may be adjusted as additional information is obtained.

F-14

---

5. Equity Securities:

Marketable Securities

At December 31, 1999, 1998 and 1997, respectively, the Company has equity security investments classified as available-for-sale.
The cost, unrealized holding gains and losses, and fair value of the available-for-sale securities were as follows:

December 31,1999

1998

1997Cost

$
8,292

$
20,725

$
5,701Unrealized loss


(1,628
)

(2,955
)

Aggregate fair value

$
6,664

$
17,770

$
5,701Proceeds

$
4,737

$
2,584

$
Realized gain (loss)

$
(7,666
)
$
185

$



Other Investments

The Company owns preferred stock in a security monitoring company. The total amount invested approximates $26,517, $26,397 and $9,173 at December 31,
1999, 1998 and 1997, respectively. The Company accounts for this investment using the cost method.

6. Property and Equipment:

Property and equipment are summarized as follows:

|                                      |  | December 31, |        
|------------------------------------- |  | ------------ | -------
|
|Furniture, fixtures and equipment     |  | $            | 16,401 
|Data processing and telecommunication |  |              | 60,548 
|Leasehold improvements                |  |              | 2,219  
|Vehicles                              |  |              | 7,019  
|Buildings and other                   |  |              | 3,732  
|                                      |  |              |        
|                                      |  |              | 89,919 
|Less accumulated depreciation         |  |              | (29,007
|                                      |  |              |        
|Property and equipment, net           |  | $            | 60,912 
|                                      |  |              |        

Depreciation
expense was $19,187, $7,221, and $1,938 for the years ended December 31, 1999, December 31, 1998 and December 31, 1997 respectively.

F-15

---

7. Customer Accounts:

The following is a rollforward of the investment in customer accounts (at cost) for the following years:

|                                            |  | December 31, |          
|------------------------------------------- |  | ------------ | ---------
|
|
|Beginning customer accounts, net            |  | $            | 1,022,863
|Acquisition of customer accounts            |  |              | 333,195  
|Amortization of customer accounts           |  |              | (187,092 
|Non-cash charges against purchase holdbacks |  |              | (36,871  
|                                            |  |              |          
|Ending customer accounts, net               |  | $            | 1,132,095
|                                            |  |              |          

Accumulated
amortization of the investment in customer accounts at December 31, 1999, 1998 and 1997 was $328,787, $141,695 and $43,134, respectively.

In
conjunction with certain purchases of customer accounts, the Company withholds a portion of the purchase price as a reserve to offset qualifying losses of the acquired customer
accounts for a specified period as provided for in the purchase agreements, and as a reserve for purchase price settlements of assets acquired and liabilities assumed. The estimated expected amount to
be paid at the end of the holdback period is capitalized and an equivalent current liability established at the time of purchase.

The
following is a rollforward of purchase holdbacks for the following years:

|                    |                                            | December 31, |  
|------------------- | ------------------------------------------ | ------------ | -
|
|Purchase Holdbacks: |                                            |              |  
|                    | Balance, beginning of year                 |              | $
|                    | Purchase holdbacks acquired in acquisition |              |  
|                    | Additions                                  |              |  
|                    | Non-cash charges against customer accounts |              |  
|                    | Cash payments to sellers                   |              |  
|                    |                                            |              |  
|                    | Balance, end of year                       |              | $
|                    |                                            |              |  

Purchase
holdback periods are negotiated between Protection One and sellers or dealers, but typically range from zero to 12 months. At the end of the period prescribed by the
purchase holdback, Protection One verifies customer losses experienced during the period and calculates a final payment to the seller or dealer. The purchase holdback is extinguished at the time of
final payment and a corresponding adjustment is made in the customer intangible to the extent the final payment varies from the estimated liability established at the time of purchase.

F-16

---

8. Long-Term Debt:

Long-term debt and the fixed or weighted average interest rates are as follows:

|                                                                                                     |  | December 31 |          
|---------------------------------------------------------------------------------------------------- |  | ----------- | ---------
|
|
|Senior Credit Facility with Westar Capital, maturing January 2001, variable rate 7.9%(a)             |  | $           | 225,000  
|Senior Credit Facility, maturing December 2001, variable rate 6.8%(a)                                |  |             |         
|Senior Subordinated Notes, maturing January 2009, fixed rate 8.125%                                  |  |             | 350,000  
|Senior Unsecured Notes, maturing August 2005, fixed 7.375%                                           |  |             | 250,000  
|Senior Subordinated Discount Notes, maturing June 2005, effective rate of 6.4%                       |  |             | 118,791  
|Convertible Senior Subordinated Notes, maturing September 2003, fixed 6.75%                          |  |             | 103,500  
|CET Recourse Financing Agreements, average effective rate 18% and 15%, in 1999 and 1998 respectively |  |             | 60,838   
|SAMCO Contract Financing                                                                             |  |             |         
|Other, including capital leases                                                                      |  |             | 4,521    
|                                                                                                     |  |             |          
|                                                                                                     |  |             | 1,112,650
|Less current portion                                                                                 |  |             | (35,498  
|                                                                                                     |  |             |          
|Total long-term debt                                                                                 |  | $           | 1,077,152
|                                                                                                     |  |             |          

---

Senior Credit Facility With Westar Capital

In December 1999, the Company obtained a Senior Credit Facility with Westar Capital. The facility originally provided for revolving borrowings of up to
$250,000 and was to expire in December 2001. This facility has been subsequently amended to (1) reduce the facility to $115,000, (2) revise certain financial covenants, and
(3) change the maturity date to January 2, 2001. The interest rate on this facility will be variable. At February 29, 2000, the average rate on borrowings from this facility was
8.2%.

Senior Credit Facility

During 1999, Westar Capital acquired the Senior Credit Facility from Protection One's lenders. Accordingly, the Company recognized an extraordinary loss of
$1,691, net of tax on this transaction.

Senior Subordinated Notes

In 1998, the Company issued $350,000 of unsecured Senior Subordinated Notes. The notes are redeemable at the Company's option, in whole or in part, at a
predefined price.

The
Company did not complete a required exchange offer during 1999. As a result, the interest rate on this facility increased to 85/8% in June, 1999. If the exchange
offer is completed, the interest rate will revert back to 81/8%. Interest on this facility is payable semi-annually on January 15 and July 15.

F-17

---

Senior Unsecured Notes

In 1998, the Company issued $250,000 of Senior Unsecured Notes. Interest is payable semi-annually on February 15 and August 15. The
notes are redeemable at the Company's option, in whole or in part, at a predefined price.

Senior Subordinated Discount Notes

In 1995, the Company issued $166,000 of unsecured Senior Subordinated Discount Notes with a fixed interest rate of 135/8%. Interest payments
began in 1999 and are payable semi-annually on June 30 and December 31. In connection with the acquisition of Protection One in 1997, these notes were restated to fair value
reflecting a current market yield of approximately 6.4%. This resulted in bond premium being recorded to reflect the increase in value of the notes as a result of the decline in interest rates since
the note issuance. The revaluation had no impact on the expected cash flow to existing noteholders.

In
1998, the Company redeemed notes with a book value of $69,370 and recorded an extraordinary gain on the extinguishment of $1,591, net of tax. The remaining notes are redeemable at
the Company's option, in whole or in part, at anytime on or after June 30, 2000, at a predefined price.

Convertible Senior Subordinated Notes

In 1996, the Company issued $103,500 of Convertible Senior Subordinated Notes. Interest is payable semi-annually on March 15 and
September 15. The notes are convertible at any time at a conversion price of $11.19 per share. The notes are redeemable, at the Company's option, at a specified redemption price, beginning
September 19, 1999.

CET Recourse Financing Agreements

The Company's subsidiary CET has recognized as a financing transaction cash received through the sale of security equipment and future cash flows to be
received under security equipment operating lease agreements with customers to a third-party financing company. A liability has been recorded for the proceeds of these sales as the finance company has
recourse to CET in the event of nonpayment by
customers of their equipment rental obligations. The average implicit interest rate in the financing is 18% at December 31, 1999. Accordingly, the liability is reduced, rental revenue is
recognized, and interest expense is being recorded as these recourse obligations are reduced through the cash receipts paid to the financing company over the term of the related equipment rental
agreements which average four years. The liability is increased as new security monitoring equipment and equipment rental agreements are sold to the finance company that have recourse provisions.

F-18

---

Debt Maturities

Debt maturities over the next five years are as follows:

2000

$35,4982001

247,6762002

5,5742003

105,1112004

2005 and thereafter

718,791Total

$1,112,650


Extinguishment of debt in 2000

Subsequent to year end and in connection with the sale of its European operations and certain other assets, the Company acquired its bonds held by Westar
Capital with a book value of $134,552. The acquisition of these bonds will be accounted for as an extinguishment of debt in the first quarter of 2000. See Note 19 for additional information.

Financial and operating covenants

All of these debt instruments contain restrictions based on "EBITDA". The definition of EBITDA varies among the various indentures and the Senior Credit
Facility. EBITDA is generally derived by adding to income (loss) before income taxes, the sum of interest expense and depreciation and amortization expense. However, under the varying definitions of
the indentures, various and numerous additional adjustments are sometimes required.

The
Company's credit facilities contain financial and operating covenants which may restrict the Company's ability to incur additional debt, pay dividends, make loans or advances and
sell assets. The financial covenants as of December 31, 1999 unless noted otherwise, are summarized as follows:

Debt Instrument

Financial CovenantSenior Credit Facility (as amended on February 29, 2000)

Total consolidated debt/annualized most recent quarter EBITDAless than 5.75 to 1.0 Consolidated annualized most recent quarter EBITDA/latest four fiscal quarters interest expensegreater than
2.10 to 1.0Senior Subordinated Notes

Current fiscal quarter EBITDA/current fiscal quarter interest expensegreater than 2.25 to 1.0Senior Subordinated Discount Notes

Total debt/annualized fourth quarter EBITDAless than 6.0 to 1.0
Senior debt/annualized fourth quarter EBITDAless than 4.0 to 1.0


From
September 30, 1999 through February 29, 2000, the Company received waivers from compliance with the then-applicable leverage and interest coverage ratio
covenants under the Senior Credit Facility. At December 31, 1999, the Company was in compliance with the covenants under the

F-19

---

8. Long-Term Debt: (Continued)

Senior
Credit Facility and the indentures relating to the Company's public debt. See Note 19 for additional information.

The
indentures governing the Company's debt securities require that the Company offer to repurchase the securities in certain circumstances following a change of control.

9. Related Party Transactions

The Company entered into a three year marketing agreement with Paradigm Direct LLC ("Paradigm") during 1999. Westar Capital has a 40% ownership interest in
Paradigm. Under the arrangement, the Company will purchase a targeted number of accounts from Paradigm during each year of the agreement following an initial pilot program. During 1999, the Company
expensed $1,000 paid to Paradigm in the third quarter in connection with start up costs relative to this program and has prepaid approximately $1,000 for anticipated account purchases.

The
Company also entered into a service agreement with Western Resources during the third quarter of 1999. Pursuant to this agreement, Western Resources provides administrative
services including accounting, human resources, legal, facilities and technology. Since entering into the agreement, the
Company incurred charges of approximately $2,000, which were based upon various hourly charges, negotiated fees and out of pocket expenses.

Debt
repayments of $512,190 in 1998 were primarily paid to Westar Capital after obtaining proceeds from the issuance of the Senior Subordinated Notes.

See
Note 12 Income Taxes for information with respect to the tax sharing agreement with Western Resources and Note 19 Subsequent Events for information with respect to
the sale to Westar Capital of our European operations.

10. Sale of Mobile Services Group

During the third quarter of 1999, the Company sold the assets which comprised its Mobile Services Group. Cash proceeds of this sale approximated $20,000 and
the Company recorded a pre-tax gain of approximately $17,000.

11. Other Charges:

In December 1997, Protection One incurred charges of $11,542 to reflect the closing of business activities of WRSB that were no longer of continuing
value to the combined operations.

12. Stock Warrants and Options:

The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for stock
issued to Employees." Under ABP No. 25, the Company recognizes no compensation expense related to employee stock options, as no options are granted at a price below the market price on the day
of grant.

F-20

---

A summary of warrant and option activity for Protection One from November 1997 through December 31, 1999 is as follows:

|                                                     |  | Warrants
And Options |   | Weighted
Average
Exercise
Price
|---------------------------------------------------- |  | -------------------- | - | -------------------------------
|Outstanding and exercisable at November 24, 1997 (1) |  | 2,366,741            |   | $                              
|Granted                                              |  |                     |   |                                
|Exercised                                            |  | (306                 | ) |                                
|Surrendered                                          |  |                     |   |                                
|                                                     |  |                      |   |                                
|Outstanding and exercisable at December 31, 1997     |  | 2,366,435            |   | $                              
|Granted                                              |  | 1,246,500            |   |                                
|Exercised                                            |  | (109,595             | ) |                                
|Surrendered                                          |  | (117,438             | ) |                                
|Adjustment to May 1995 warrants                      |  | 36,837               |   |                                
|Outstanding at December 31, 1998                     |  | 3,422,739            |   | $                              
|                                                     |  |                      |   |                                
|Exercisable at December 31, 1998                     |  | 2,263,239            |   | $                              
|                                                     |  |                      |   |                                
|Outstanding and exercisable at December 31, 1998     |  | 3,422,739            |   | $                              
|                                                     |  |                      |   |                                
|Granted                                              |  | 1,092,908            |   |                                
|Exercised                                            |  | 0                    |   |                                
|Surrendered                                          |  | (956,511             | ) |                                
|                                                     |  |                      |   |                                
|Outstanding at December 31, 1999                     |  | 3,559,136            |   | $                              
|                                                     |  |                      |   |                                
|Exercisable at December 31, 1999                     |  | 2,313,309            |   | $                              
|                                                     |  |                      |   |                                

---

F-21

---

The
table below summarizes stock options and warrants outstanding as of December 31, 1999:

|Description        |  | Range of
Exercise Price |                | Number
Of
Shares Of
Common Stock |           | Weighted-
Average
Remaining
Contractual
Life in Years |         | Weighted
Average
Exercise
Price
|------------------ |  | ----------------------- | -------------- | -------------------------------- | --------- | ----------------------------------------------------- | ------- | -------------------------------
|Exercisable        |  |                         |                |                                  |           |                                                       |         |                                
|Fiscal 1995        |  | $                       | 6.375 - $9.125 |                                  | 64,800    |                                                       | 5 years |                                
|Fiscal 1996        |  |                         | 8.00 - 10.313  |                                  | 178,400   |                                                       | 6 years |                                
|Fiscal 1996        |  |                         | 13.750 - 15.5  |                                  | 69,000    |                                                       | 6 years |                                
|Fiscal 1997        |  |                         | 9.500          |                                  | 136,000   |                                                       | 7 years |                                
|Fiscal 1997        |  |                         | 15.000         |                                  | 25,000    |                                                       | 7 years |                                
|Fiscal 1997        |  |                         | 14.268         |                                  | 50,000    |                                                       | 2 years |                                
|Fiscal 1998        |  |                         | 11.000         |                                  | 367,499   |                                                       | 8 years |                                
|Fiscal 1998        |  |                         | 8.5625         |                                  | 16,331    |                                                       | 8 years |                                
|Fiscal 1999        |  |                         | 8.9275         |                                  | 87,600    |                                                       | 9 years |                                
|KOP Warrants       |  |                         | 3.633          |                                  | 103,697   |                                                       | 1 years |                                
|1993 Warrants      |  |                         | 0.167          |                                  | 428,400   |                                                       | 4 years |                                
|1995 Note Warrants |  |                         | 3.890          |                                  | 786,277   |                                                       | 5 years |                                
|Other              |  |                         | 0.050          |                                  | 305       |                                                       | 7 years |                                
|                   |  |                         |                |                                  | 2,313,309 |                                                       |         |                                
|Not exercisable    |  |                         |                |                                  |           |                                                       |         |                                
|1998 options       |  | $                       | 11.000         |                                  | 333,001   |                                                       | 8 years |                                
|1998 options       |  |                         | 8.5625         |                                  | 32,660    |                                                       | 8 years |                                
|1999 options       |  |                         | 8.9275         |                                  | 686,500   |                                                       | 9 years |                                
|1999 options       |  |                         | 3.875 - 6.125  |                                  | 193,666   |                                                       | 9 years |                                
|                   |  |                         |                |                                  | 1,245,827 |                                                       |         |                                
|Outstanding        |  |                         |                |                                  | 3,559,136 |                                                       |         |                                

On
July 9, 1997, Protection One granted an option to purchase an aggregate of 50,000 shares of common stock in connection with an acquisition. The option has a term of four
years. The purchase price of the shares issuable pursuant to the option is greater than the fair market value of the common stock at the date of the option grant.

1994 Stock Option Plan

The 1994 Stock Option Plan (the "Plan"), approved by the Protection One stockholders in June 1994, provides for the award of incentive stock options to
directors, officers and key employees under the Plan. 1,300,000 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 Plan provides for the granting of options that qualify as incentive stock options under the Internal Revenue Code and options that do not so
qualify.

F-22

---

12. Stock Warrants and Options: (Continued)

A summary of options issued under the Plan by fiscal year are as follows:

Shares Grantd
To Officers

Total Shares
Granted1995

132,000

266,0001996

400,000

638,8001997

100,000

375,444


The
purchase price of the shares issuable pursuant to the options is equal to (or greater than) the fair market value of common stock at the date of option grant. The vesting period
was accelerated on November 24, 1997 and all remaining options are currently exercisable.

1997 Long-Term Incentive Plan

The 1997 Long-Term Incentive Plan (the "LTIP"), approved by the Protection One stockholders on November 24, 1997, provides for the award of
incentive stock options to directors, officers and key employees. Under the LTIP, 4,200,000 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.

A
summary of options issued under the LTIP by fiscal year are as follows:

Shares Granted
To Officers

Total Shares
Granted1998

690,000

1,246,5001999

399,700

1,092,908


Each
option has a term of 10 years and vests ratably over 3 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
weighted average fair value of options granted during 1999 and 1998 estimated on the date of grant were $6.87 and $5.41, respectively. The fair value was calculated for the
respective year using the following assumptions:

Year Ended
December 31,1999

1998Dividend yield

0.00
%
0.00
%Expected stock price volatility

64.06
%
61.72
%Risk free interest rate

6.76
%
5.50
%Expected option life

6 years

6 years


No
compensation cost has been recognized for issuance under the plans in 1999 and 1998. Had compensation cost for the plan been determined based on the fair value at the grant date
consistent

F-23

---

with SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net income and income per share would have been as follows:

Year ended December 31,1999

1998RESTATED
NOTE 2

RESTATED
NOTE 2Net loss:As reported

$
(80,736
)
$
(17,833
)Pro forma


(83,668
)

(19,303
)Net loss per common share (basic and diluted):As reported

$
(.64
)
$
(.17
)Pro forma


(.66
)

(.18
)


As
there were no options granted by the Company during 1997, there is no related compensation expense.

13. Income Taxes:

Components of income tax (expense) benefit are as follows:

|                             |          | Year ended December 31,
|---------------------------- | -------- | -----------------------
|
|
|Federal                      |          |                        
|                             | Current  |                        
|                             | Deferred |                        
|State                        |          |                        
|                             | Current  |                        
|                             | Deferred |                        
|Foreign tax expense, current |          |                        
|                             |          |                        
|                             |          |                        
|Tax on extraordinary item    |          |                        
|                             |          |                        
|                             | Total    |                        
|                             |          |                        

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:

|                                           |  | Year ended December 31, |   
|------------------------------------------ |  | ----------------------- | --
|
|
|Federal statutory tax rate                 |  | 35                      | % 
|State income taxes, net of Federal benefit |  |                        |   
|Non-deductible goodwill                    |  | (9                      | )%
|                                           |  |                         |   
|                                           |  | 26                      | % 
|                                           |  |                         |   

A
tax sharing agreement between Protection One and Western Resources provides for payments to Protection One for tax benefits utilized by Western Resources. Accordingly, the
receivable of $31,100 at

F-24

---

December 31, 1999 reflects a receivable of $20,300 for the tax benefit Western Resources utilized in its 1998 consolidated income tax return, and $10,800 for the estimated tax benefit to be
utilized by Western Resources in its 1999 consolidated income tax return. In February 2000, Protection One received payment from Western Resources for the 1998 tax receivable.

Prior
to the November 24, 1997 transaction with Western Resources, Protection One had net operating loss carryforwards for federal income tax return purposes. Current tax
regulations limit the use of these
NOL carryforwards first to 1) the taxable income earned by Protection One and consolidated subsidiaries subsequent to November 24, 1997, and 2) as a result of an ownership change
of Protection One, as defined in Section 382 of the Internal Revenue Code, realization of these amounts is subject to further certain annual limitations for total taxable income generated. As a
result, management has determined that it is more likely than not that the NOL carryforwards will not be utilized and that a valuation allowance of $27,327 is appropriate in accordance with Statements
of Financial Accounting Standards No. 109 "Accounting for Income Taxes".

Deferred
income tax assets and liabilities were composed of the following:

|                                |                                       | December 31, |       
|------------------------------- | ------------------------------------- | ------------ | ------
|
|
|Deferred tax asset, current:    |                                       |              |       
|                                | Accrued liabilities                   |              | $     
|                                | Accounts receivable, due to allowance |              |       
|                                | Acquisition and dealer                |              |       
|                                | Other                                 |              |       
|                                |                                       |              |       
|                                |                                       | $            | 28,400
|                                |                                       |              |       
|Deferred tax asset, noncurrent: |                                       |              |       
|                                | Recourse financing contracts          |              | $     
|                                | Customer accounts                     |              |       
|                                | Property & equipment                  |              |       
|                                | OID amortization                      |              |       
|                                | Other                                 |              |       
|                                |                                       |              |       
|                                |                                       | $            | 37,182
|                                |                                       |              |       

14. Employee Benefit Plans:

401(k) Plan

The Company maintains a tax-qualified, defined contribution plan that meets the requirements of Section 401(k) of the Internal Revenue Code
(the "Protection One 401(k) Plan"). The Company, at its election, also may make contributions to the Protection One 401(k) Plan, which contributions will be 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 may be made in Common Stock, in cash or in a
combination of both stock and cash. For the years ended December 31, 1999, 1998, and 1997, Protection One made a matching contribution to the plan of $944, $992, and $34, respectively.

F-25

---

WRSB also maintained a savings plan which qualified under Section 401(k). The savings plan allowed eligible employees to contribute up to 15% of their income on a pretax basis,
with a discretionary employer match of 50% of the employee's contribution up to the first 6% of the employee's compensation. During the year ended December 31, 1997, matching contributions
equal to $721 were made. The plan sponsor merged this plan into the Protection One 401(k) Plan on July 1, 1998.

Through
Protection One's 1998 acquisitions, a number of defined contribution plans have been acquired. These plans either have been merged or will be merged into the Protection One
401(k) Plan.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan is designed to qualify as an "Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal Revenue
Code, and will allow eligible employees to acquire shares of common stock at periodic intervals through their accumulated payroll deductions. A total of 650,000 shares of common stock have been
reserved for issuance under the Employee Stock Purchase Plan.

The
purchase price of shares of common stock purchased under the Employee Stock Purchase Plan during any purchase period will be the lower of 85% of the fair market value of the
common stock on the first day of that purchase period and 85% of the fair market value of the common stock on the purchase date.

Termination
of a participant's employment for any reason (including death, disability or retirement) cancels participation in the Employee Stock Purchase Plan immediately. The
Employee Stock Purchase Plan will in all events terminate upon the earliest to occur of



15. Leases:

The Company leases office facilities for lease terms maturing through 2012. Future minimum lease payments under non-cancelable operating leases are
as follows:

Year ended December 31,2000

$
10,0682001


9,0812002


7,6702003


5,6532004


3,838Thereafter


4,496$
40,806


Total
rent expense for the years ended December 31, 1999, 1998 and 1997, was $10,635, $7,220, and $4,654, respectively.

F-26

---

PROTECTION ONE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands, except for per share amounts)

16. 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.

The
carrying value of the Company's marketable securities were approximately $1,628 greater than their fair value, based on quoted market prices.

Because
of the related party nature of the Company's Senior Credit Facility, it is not possible to estimate the fair value of this obligation.

The
fair value of the Company's publicly traded and other long-term debt are estimated based on quoted market prices for the issues. Fair value of other
long-term debt is estimated at carrying value. At December 31, 1999, the fair value and carrying amount of the Company's other long-term debt was as follows:

Fair Value

Carrying
ValuePublicly Traded Debt:Senior Subordinated Notes (8.125%)

$
178,500

$
350,000Senior Unsecured Notes (7.375%)


182,500


250,000Senior Subordinated Discount Notes (13.625%)


69,056


118,791Convertible Senior Subordinated Notes (6.75%)


51,750


103,500Total Publicly Traded Debt

$
481,806

$
822,291Other Long-Term Debt:CET Recourse Financing Agreements

$
28,606

$
28,606Other CET Debt


988


988Other Debt


267


267Total Other Long-Term Debt:


29,861


29,861$
511,667

$
852,152


At
December 31, 1998, the fair value of the Company's long-term debt was $841,209, compared to a carrying value of $831,664. 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.

17. Commitments and Contingencies

The Company, Monitoring, and certain present and former officers and directors of Protection One are defendants in a purported class action litigation pending
in the United States District Court for the Central District of California,Ronald Cats, et al v. Protection One, Inc., et al.,No CV
99-3755 DT (RCx). Pursuant to an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. In March 2000, plaintiffs filed a
Second Consolidated Amended Class Action Complaint ("Amended Complaint"). Plaintiffs purport to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of
Protection One, including common stock and notes, during the period of February 10, 1998 through November 12, 1999. The Amended Complaint asserts claims under Section 11 of the
Securities Act of 1933 and Section 10(b) of the Securities

F-27

---

Exchange Act of 1934 against Protection One, Monitoring, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection
One's financial results and operations for 1997 and 1998 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs allege, among other things, that
former employees of Protection One, have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management
in order to avoid disclosure of accurate information. The Amended Complaint further asserts claims against Western Resources and Westar Capital as controlling persons under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim is also asserted under Section 11 of the Securities Act of 1933 against Protection One's
auditor, Arthur Andersen LLP. The Amended Complaint seeks an unspecified amount of compensatory damages and an award of fees and expenses, including attorneys' fees. The Company believes that all the
claims asserted in the Amended Complaint are without merit and intends to defend against them vigorously. We cannot currently predict the impact of this litigation which could be material.

Six
Protection One dealers have filed a class action lawsuit in the U. S. District Court for the Western District of Kentucky alleging breach of contract because of the Company's
interpretation of their dealer contracts. The action is styledTotal Security Solutions, Inc., et al. v. Protection One Alarm
Monitoring, Inc., Civil Action No. 3:99CV-326-H (filed May 21, 1999). In September 1999, the Court granted Protection One's
motion to stay the proceeding pending the individual plaintiff's pursuit of arbitration as required by the terms of their agreements. As of March 17, 2000, none of these dealers have commenced
arbitration.

Other
Protection One dealers have threatened litigation or arbitration based upon a variety of theories surrounding calculations of holdback and other payments. The Company believes
it has complied with the terms of these contracts and intends to vigorously defend its position. Although the Company believes that no individual such claim will have a material adverse effect, the
Company cannot currently predict the aggregate impact of these disputes with dealers which could be material.

The
Company is a party to claims and matters of litigation incidental to the normal course of its business. The ultimate outcome of such matters cannot presently be determined;
however, in the opinion of management of the Company, the resolution of such matters will not have a material adverse effect upon the Company's consolidated financial position or results of
operations.

Under
the Company's agreements with dealers, the Company may be required to purchase customer accounts on an ongoing basis. The Company is currently spending less than $5,000 per
month to purchase these customer accounts.

18. Segment Reporting

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.

Protection
One's reportable segments include North America, Multifamily, and Europe. North America provides residential, commercial, and wholesale security alarm monitoring services,
which

F-28

---

include sales, installation and related servicing of security alarm systems for residential and business customers in the United States and Canada. Multifamily provides security alarm services to
apartments, condominiums and other multi-family dwellings. Europe provides security alarm services to residential and business customers in Europe.

The
accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company manages its business segments based on
earnings before interest, income taxes, depreciation and amortization (EBITDA).

Reportable
segments (in thousands):

|                                                     |  | For the year ended December 31, 1999 |          
|---------------------------------------------------- |  | ------------------------------------ | ---------
|
|
|Revenue                                              |  | $                                    | 403,269  
|EBITDA                                               |  |                                      | 148,861  
|Amortization of intangibles and depreciation expense |  |                                      | 194,927  
|Operating income (loss)                              |  |                                      | (51,875  
|Segment assets                                       |  |                                      | 1,945,534
|Expenditures for property, net                       |  |                                      | 27,008   
|Expenditures for subscriber accounts, net            |  |                                      | 224,855  

|                                                     |  | For the year ended December 31, 1998
|---------------------------------------------------- |  | ------------------------------------
|
|
|Revenue                                              |  | $                                   
|EBITDA                                               |  |                                     
|Amortization of intangibles and depreciation expense |  |                                     
|Operating Income                                     |  |                                     
|Segment assets                                       |  |                                     
|Expenditures for property, net                       |  |                                     
|Expenditures for subscriber accounts, net            |  |                                     

Protection
One currently has international operations. International data for these locations for 1999 and 1998 respectively, is as follows:

1999

1998Europe

Canada

Europe

CanadaTotal Revenues

$
163,006

$
8,073

$
43,724

$
3,756Total Assets


341,474


26,854


301,084


30,129


In
1997, Protection One operated under a single reportable segment providing alarm monitoring services to over 750,000 residential and small business customers located in North
America.

F-29

---



PROTECTION ONE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands, except for per share amounts)

18.  Segment Reporting (Continued)

See
Note 20 Subsequent Events for information with respect to the sale to Western Resources of the Company's European operations on February 29, 2000.

19.  Unaudited Quarterly Financial Information

The following is a summary of the restated unaudited quarterly financial information for 1999, 1998 and 1997, respectively:

|                                            |                                         | March 31 |         | June 30 |   | September 30 |      | December 31 |         | Total |  
|------------------------------------------- | --------------------------------------- | -------- | ------- | ------- | - | ------------ | ---- | ----------- | ------- | ----- | -
|
|1999                                        |                                         |          |         |         |   |              |      |             |         |       |  
|Revenues                                    |                                         | $        | 148,547 |         | $ | 150,801      |      | $           | 153,131 |       | $
|Gross profit                                |                                         |          | 107,273 |         |   | 108,919      |      |             | 103,319 |       |  
|Loss before extraordinary loss              |                                         |          | (5,693  | )       |   | (8,581       | )    |             | (36,029 | )     |  
|Net loss                                    |                                         |          | (5,693  | )       |   | (8,581       | )    |             | (36,029 | )     |  
|Basic and diluted loss per share:           |                                         |          |         |         |   |              |      |             |         |       |  
|                                            | Loss before extraordinary loss          |          |         | (.04    | ) |              | (.07 | )           |         | (.28  | )
|                                            | Net loss                                |          |         | (.04    | ) |              | (.07 | )           |         | (.28  | )
|1998                                        |                                         |          |         |         |   |              |      |             |         |       |  
|Revenues                                    |                                         | $        | 76,795  |         | $ | 97,041       |      | $           | 103,261 |       | $
|Gross profit                                |                                         |          | 52,802  |         |   | 65,561       |      |             | 70,706  |       |  
|Net income (loss) before extraordinary gain |                                         |          | (2,125  | )       |   | (8,123       | )    |             | (3,693  | )     |  
|Net income (loss)                           |                                         |          | (2,125  | )       |   | (6,532       | )    |             | (3,693  | )     |  
|                                            | Income (loss) before extraordinary gain |          |         | (.03    | ) |              | (.09 | )           |         | (.03  | )
|                                            | Net income (loss)                       |          |         | (.03    | ) |              | (.07 | )           |         | (.03  | )
|1997                                        |                                         |          |         |         |   |              |      |             |         |       |  
|Revenues                                    |                                         | $        | 32,576  |         | $ | 31,338       |      | $           | 32,814  |       | $
|Gross profit                                |                                         |          | 23,981  |         |   | 22,256       |      |             | 21,867  |       |  
|Net loss before extraordinary gain          |                                         |          | (7,497  | )       |   | (8,217       | )    |             | (7,857  | )     |  
|Net loss                                    |                                         |          | (7,497  | )       |   | (8,217       | )    |             | (7,857  | )     |  
|                                            | Loss before extraordinary gain          |          |         | (.11    | ) |              | (.12 | )           |         | (.11  | )
|                                            | Net loss                                |          |         | (.11    | ) |              | (.12 | )           |         | (.11  | )

F-30

---

In
addition, the net effect of the restatement discussed in Note 2 has been reflected in the appropriate quarterly results as follows:

|                                     |              | As Previously Reported |         | Restatement |   | As Restated |     
|------------------------------------ | ------------ | ---------------------- | ------- | ----------- | - | ----------- | ----
|
|
|Loss before extraordinary gain       |              |                        |         |             |   |             |     
|1999Quarter Ended:                  |              |                        |         |             |   |             |     
|                                     | March 31     |                        | $       | (4,785      | ) | $           | (.04
|                                     | June 30      |                        |         | (7,673      | ) |             | (.06
|                                     | September 30 |                        |         | (40,986     | ) |             | (.32
|                                     | December 31  |                        |         | (27,770     | ) |             | (.22
|                                     |              |                        |         |             |   |             |     
|For the Year Ended December 31, 1999 |              | $                      | (81,214 | )           | $ | (.64        | )   
|                                     |              |                        |         |             |   |             |     
|Net loss                             |              |                        |         |             |   |             |     
|1999Quarter Ended:                  |              |                        |         |             |   |             |     
|                                     | March 31     |                        |         | (4,785      | ) |             | (.04
|                                     | June 30      |                        |         | (7,673      | ) |             | (.06
|                                     | September 30 |                        |         | (40,986     | ) |             | (.32
|                                     | December 31  |                        |         | (29,461     | ) |             | (.23
|                                     |              |                        |         |             |   |             |     
|For the Year Ended December 31, 1999 |              | $                      | (82,905 | )           | $ | (.65        | )   
|                                     |              |                        |         |             |   |             |     

|                                        |              | As Previously Reported |        | Restatement |   | As Restated |     
|--------------------------------------- | ------------ | ---------------------- | ------ | ----------- | - | ----------- | ----
|
|
|Income (loss) before extraordinary gain |              |                        |        |             |   |             |     
|1998Quarter Ended:                     |              |                        |        |             |   |             |     
|                                        | March 31     |                        | $      | 194         |   | $           |    
|                                        | June 30      |                        |        | (420        | ) |             | (.01
|                                        | September 30 |                        |        | 977         |   |             | .01 
|                                        | December 31  |                        |        | (5,688      | ) |             | (.05
|                                        |              |                        |        |             |   |             |     
|For the Year Ended December 31, 1998    |              | $                      | (4,937 | )           | $ | (.05        | )   
|                                        |              |                        |        |             |   |             |     
|Net income (loss)                       |              |                        |        |             |   |             |     
|1998Quarter Ended:                     |              |                        |        |             |   |             |     
|                                        | March 31     |                        |        | 194         |   |             |    
|                                        | June 30      |                        |        | 1,171       |   |             | .01 
|                                        | September 30 |                        |        | 977         |   |             | .01 
|                                        | December 31  |                        |        | (5,688      | ) |             | (.05
|                                        |              |                        |        |             |   |             |     
|For the Year Ended December 31, 1998    |              | $                      | (3,346 | )           | $ | (.03        | )   
|                                        |              |                        |        |             |   |             |     

F-31

---

|                                     |              | As Previously Reported |         | Restatement |   | As Restated |     
|------------------------------------ | ------------ | ---------------------- | ------- | ----------- | - | ----------- | ----
|
|
|Loss before extraordinary gain       |              |                        |         |             |   |             |     
|1997Quarter Ended:                  |              |                        |         |             |   |             |     
|                                     | March 31     |                        | $       | (4,269      | ) | $           | (.06
|                                     | June 30      |                        |         | (6,619      | ) |             | (.09
|                                     | September 30 |                        |         | (6,777      | ) |             | (.10
|                                     | December 31  |                        |         | (25,063     | ) |             | (.35
|                                     |              |                        |         |             |   |             |     
|For the Year Ended December 31, 1997 |              | $                      | (42,728 | )           | $ | (.60        | )   
|                                     |              |                        |         |             |   |             |     
|Net loss                             |              |                        |         |             |   |             |     
|1997Quarter Ended:                  |              |                        |         |             |   |             |     
|                                     | March 31     |                        |         | (4,269      | ) |             | (.06
|                                     | June 30      |                        |         | (6,619      | ) |             | (.09
|                                     | September 30 |                        |         | (6,777      | ) |             | (.10
|                                     | December 31  |                        |         | (25,063     | ) |             | (.35
|                                     |              |                        |         |             |   |             |     
|For the Year Ended December 31, 1997 |              | $                      | (42,728 | )           | $ | (.60        | )   
|                                     |              |                        |         |             |   |             |     

The
restatements did not impact previously reported revenues or gross profits.

20.  Subsequent Events:

Related Party Sale and Amendment to Revolving Credit Agreement.On February 29, 2000 the Company sold its
European operations and certain investments to Westar Capital. The consideration received was approximately $244,000, comprised of approximately $183,000 in cash and certain of the Company's
outstanding debt securities Westar Capital had acquired in open market purchases for approximately $61,000. As part of the agreement, Westar Capital agreed to pay Protection One a portion of the net
gain, if any, on a subsequent sale of the business on a declining basis over the four years following the closing. The cash proceeds of the sale were used to reduce the $240,000 outstanding balance
under the $250,000 Senior Credit Facility between the Company and Westar Capital.

Concurrently,
the Senior Credit Facility was amended to, among other things, (1) reduce the commitment to $115,000 (resulting in availability of approximately $58,000 after the
sale of the European operations), (2) increase the leverage ratio covenant to 5.75 to 1.0, (3) reduce the interest coverage ratio to 2.10 to 1.0, (4) change the termination date
to January 2, 2001, (5) change the loan pricing grid to one based on leverage ratio rather than credit rating, (6) allow for the inclusion of certain add-backs to the
calculation of EBITDA, (7) eliminate as an Event of Default Western Resources' failure to own more than 50% of the Company, (8) waive compliance with the leverage ratio and interest
coverage ratio covenants for the fiscal quarters ended September 30, 1999 and December 31, 1999, and (9) provide for an increase in the amount of the commitment by up to $40,000
for the purpose of consummating acquisitions approved by Westar Capital.

F-32

---

Westar Capital also transferred to Protection One certain outstanding debt securities of the Company and a note for payment of certain intercompany amounts owed by Westar Capital to
the Company. The carrying amount for the respective debt securities received were as follows:

Debt Security (Coupon)

Carrying
AmountSenior Subordinated Discount Notes (13.625%)

$
38,892Convertible Senior Subordinated Notes (6.75%)

$
49,550Senior Subordinated Notes (8.125%)

$
46,110Total

$
134,552


The
Company will record an extraordinary gain of approximately $27,000 (net of tax effect) in the first quarter of 2000 for the difference between the carrying value of the debt and
the basis of the debt securities acquired by the Company. No gain or loss was recognized on the related party sale of the European operations. Those transactions were approved by a special committee
of the Protection One Board of Directors. The special committee obtained a "fairness opinion" from an investment banker.

Pro Forma Financial Information:

The following unaudited pro forma consolidated results of operations for the year ended December 31, 1999, assume the sale of the Company's European
operations occurred at January 1, 1999.

Year Ended
December 31, 1999(in thousands, except
per share amounts)
RESTATED
NOTE 2Revenues

$
442,170Loss before extraordinary item


(50,971
)Net loss


(52,662
)Net loss per common share (basic and diluted):Loss before extraordinary item


(.40
)Net loss


(.42
)


The
pro forma financial information is not necessarily indicative of the results of operations had the sale of the European operations to Westar Capital been reflected for the entire
period, nor do they purport to be indicative of results which will be obtained in the future.

F-33

---

The following unaudited proforma consolidated assets and liabilities as of December 31, 1999 assume the sale occurred on December 31, 1999.

December 31, 1999(in thousands)
RESTATED
NOTE 2Total assets

$
2,201,802Total liabilities


1,078,570


F-34

---



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 |   | Charged to
Other
Accounts(a) |  | Deductions(b) |       | Balance at
End of period
|------------------------------------------------------------------ |  | ------------------------------ | ------ | ----------------------------- | - | ---------------------------- |  | ------------- | ----- | ------------------------
|Year ended December 31, 1997                                       |  |                                |        |                               |   |                              |  |               |       |                         
|Allowances deducted from assets for doubtful accounts              |  | $                              | 4,413  |                               | $ | 3,657                        |  | $             | 4,578 |                         
|Year ended December 31, 1998                                       |  |                                |        |                               |   |                              |  |               |       |                         
|Allowances deducted from assets for doubtful accounts, as restated |  |                                | 5,207  |                               |   | 10,567                       |  |               | 2,289 |                         
|Year ended December 31, 1999                                       |  |                                |        |                               |   |                              |  |               |       |                         
|Allowances deducted from assets for doubtful accounts              |  |                                | 16,993 |                               |   | 21,641                       |  |               |      |                         

---



S-1

---



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.
|---------------- |  | ----------------------------------------------------------
|February 1, 2001 |  | 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/ANNETTE M. BECKAnnette M. Beck             |  | Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)   |  | February 1, 2001
|/s/ANTHONY D. SOMMAAnthony D. Somma           |  | Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |  | February 1, 2001
|/s/HOWARD A. CHRISTENSENHoward A. Christensen |  | Director                                                                                      |  | February 1, 2001
|/s/JOHN B. DICUSJohn B. Dicus                 |  | Director                                                                                      |  | February 1, 2001
|/s/MARIA DE LOURDES DUKEMaria de Lourdes Duke |  | Director                                                                                      |  | February 1, 2001
|/s/BEN M. ENISBen M. Enis                     |  | Director                                                                                      |  | February 1, 2001
|/s/DONALD A. JOHNSTONDonald A. Johnston       |  | Director                                                                                      |  | February 1, 2001
|                                              |  |                                                                                               |  |                 

---

|/s/CARL M. KOUPAL, JR.Carl M. Koupal, Jr. |  | Director |  | February 1, 2001
|----------------------------------------- |  | -------- |  | ----------------
|/s/JOHN H. ROBINSONJohn H. Robinson       |  | Director |  | February 1, 2001
|/s/RITA A. SHARPERita A. Sharpe           |  | Director |  | February 1, 2001
|/s/STEVEN V. WILLIAMSSteven V. Williams   |  | Director |  | February 1, 2001
|/s/JAMES Q. WILSONJames Q. Wilson         |  | Director |  | February 1, 2001

---

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