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

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FORM 10-K

|ý                                                                    |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2002                         
|o                                                                    |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                    to

|1-12181-01                                                     |  | 1-12181                                                       
|-------------------------------------------------------------- |  | --------------------------------------------------------------
|(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.)                          
|818 S. Kansas Avenue, Topeka, Kansas 66612                     |  | 818 S. Kansas Avenue, Topeka, Kansas 66612                    
|(Address of Principal Executive Offices,
Including Zip Code)   |  | (Address of Principal Executive Offices,
Including Zip Code)  
|(785) 575-1707                                                 |  | (785) 575-1707                                                
|(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)

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 ý No o

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

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes o No ý.

The
aggregate market value of common stock of Protection One, Inc. held by nonaffiliates on June 28, 2002 (based on the last sale price of such shares on the New York Stock
Exchange) was $32,625,956.

As
of April 3, 2003, Protection One, Inc. had 98,107,084 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. Protection One's sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring's wholly owned subsidiaries, as such there are no separate financial
statements for Protection One Alarm Monitoring, Inc.

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 no later than April 30, 2003.

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TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                              |  | 3   
|Item 2.  |  | Properties                                                                            |  | 20  
|Item 3.  |  | Legal Proceedings                                                                     |  | 20  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 20  
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 21  
|Item 6.  |  | Selected Financial Data                                                               |  | 22  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 23  
|Item 7A. |  | Qualitative and Quantitative Disclosure About Market Risk                             |  | 44  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 44  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 44  
|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                        |  | 45  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 45  
|Item 14. |  | Controls and Procedures                                                               |  | 45  
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 46  

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PART I        FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (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. Such statements include those made on matters such as our earnings and financial condition, litigation, accounting matters, our business, our efforts to
consolidate and reduce costs, the impact on us of recent orders of the Kansas Corporation Commission including those requiring the financial and corporate restructuring of Westar Energy, the impact of
the proposed sale by Westar Energy of its ownership interests in us, our customer account acquisition strategy and attrition, our liquidity and sources of funding and our capital expenditures. 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.

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 Alarm Monitoring's wholly owned subsidiaries.
Protection One's sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring's wholly owned subsidiaries, as such there are no separate financial statements for Protection One
Alarm Monitoring, Inc. Each of Protection One and Protection One Alarm Monitoring is a Delaware corporation organized in September 1991.

Westar Energy's Proposed Disposition of Our Stock

Westar Energy Inc. ("Westar Energy") is a public electric utility and is regulated by the Kansas Corporation Commission ("KCC"). Westar Energy, through its
wholly owned subsidiary Westar Industries, Inc., owns approximately 88% of Protection One. On November 8, 2002 the KCC issued an Order, that among many findings and directives, requested
Westar Energy consider selling its investment in Protection One.

Westar
Energy subsequently announced that it intends to dispose of its investment in Protection One. We expect to work closely with Westar Energy's management to identify alternatives
that are in the best interest of all of our shareholders.

See
further discussion relating to this and additional Orders issued by the KCC and their impact on us in "Significant Business DevelopmentsKansas
Corporation Commission Orders."

Matters to Consider

We have reported losses for the past several years, working capital has decreased and Westar Energy has announced that it intends to sell its investment in us.
Additionally, our current primary financing source is through a credit facility with Westar Energy and credit available under such facility has been limited. We have evaluated these conditions and
events in establishing our operating plans. In

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addition to the plans and strategies noted under "Overview" below, we plan to carefully monitor the level of investment in new customer accounts, continue control of operating expenses, curtail other
capital expenditures, if necessary, and continue efforts to extend or replace the credit facility upon its expiration in January 2004. We believe that the funds provided from operations and
from the Westar Credit Facility, coupled with receipts under the tax sharing agreement (see "Management's Discussion and Analysis of Financial Condition and Results of
Operations""Liquidity and Capital Resources") will be sufficient throughout 2003. See "Risk Factors" for a further discussion of these and other important matters.

Overview

Protection One is a leading provider of property monitoring services, providing electronic monitoring and maintenance of alarm systems to approximately
1.1 million customers as of December 31, 2002. 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. We provide our services to
single family residential, commercial, wholesale and multifamily residential customers. At December 31, 2002, our customer base composition was as follows:

Market Segment

Percentage of TotalSingle family and commercial

55.4
%Wholesale

13.9Protection One North America Total

69.3Multifamily/Apartment

30.7Total

100.0
%


Our
company is divided into two business segments:

Protection One North America("North America") generated approximately $252.5 million, or 86.9%, of our revenues in 2002 and is
comprised of Protection One Alarm Monitoring, our core alarm monitoring business, and our wholesale monitoring business, which provides alarm monitoring services to independent alarm companies.

Network Multifamily("Multifamily") generated approximately $38.1 million, or 13.1%, of our revenues in 2002 and is comprised of
our alarm monitoring business servicing apartments, condominiums and other multifamily dwellings.

Our
strategy continues to be to improve returns on invested capital by realizing economies of scale from increasing customer density in the largest urban markets in North America. We
plan to accomplish this goal by: (i) retaining our customers by providing superior customer service from our monitoring facilities and our branches; and (ii) using our national presence,
strategic alliances such as our alliance with BellSouth Telecommunications, as discussed in "Sales and Marketing" below, and strong local operations to persuade the most desirable residential and
commercial prospects to enter into long term agreements with us on terms that permit us to achieve appropriate returns on capital. When we have adequate capital, we would like to resume acquiring
alarm companies and portfolios of alarm accounts.

Significant Business Developments

Kansas Corporation Commission Orders.On November 8, 2002, the Kansas Corporation Commission issued Order
No. 51 which required Westar Energy to initiate a corporate and financial restructuring, reverse specified accounting transactions described in the Order, review, improve and/or develop, where
necessary, methods and procedures for allocating costs between utility and non-utility businesses for KCC approval, refrain from any action that would result in its electric businesses

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subsidizing non-utility businesses, reduce outstanding debt giving priority to reducing utility debt and, pending the corporate and financial restructuring, imposed standstill limitations
on Westar Energy's ability to finance non-utility businesses including ours. These standstill protections require that Westar Energy seek KCC approval before it takes actions such as
making any loan to, investment in or transfer of cash in excess of $100,000 to us or another non-utility affiliate, entering into any agreement with us or another non-utility
affiliate where the value of goods or services exchanged exceeds $100,000, investing, by Westar Energy or Westar Energy's affiliate, of more than $100,000 in an existing or new non-utility
business and transferring any non-cash assets or intellectual property to us or another non-utility affiliate. In addition, Westar Energy must charge interest to us and other
non-utility affiliates at the incremental cost of our or their debt on outstanding balances of any existing or future inter-affiliate loans, receivables or other cash advances due Westar
Energy. The Order also suggested that the sale by Westar Energy of our stock should be explored, along with other alternatives, as a possible source of cash to be used to reduce Westar Energy debt. An
additional provision affecting us includes a requirement that we not sell assets having a value of $100,000 or more without prior KCC approval.

On
December 23, 2002, the Kansas Corporation Commission issued Order No. 55 clarifying and modifying the November 8, 2002 Order. One such clarification was that
Westar Energy and Westar Industries would be prohibited from making payments to us under our tax sharing agreement with Westar Energy ("Tax Sharing Agreement"see Note 2(d),"Summary
of Significant Accounting PoliciesIncome Taxes") until certain requirements were met by Westar Energy regarding their debt.

On
January 10, 2003, we filed a petition with the KCC seeking reconsideration of certain aspects of Order No. 55. Specifically, we requested that the Commission reconsider
and revise Order No. 55 so that it clearly does not interfere with our contractual arrangements with Westar Energy and Westar Industries, including, but not limited to the Tax Sharing Agreement
and the Westar Credit Facility.

On
February 11, 2003, the parties to the KCC proceeding filed a Limited Stipulation and Agreement, which sought the KCC's approval for us to sell all of our Westar Energy stock to
Westar Energy. The KCC approved the Limited Stipulation and Agreement on February 14, 2003. We sold all of our Westar Energy stock to Westar Energy on February 14, 2003 for
$11.6 million.

On
February 25, 2003, we entered into a Partial Stipulation and Agreement (the Reconsideration Agreement) with the Staff of the KCC, Westar Energy, Westar Industries and an
intervenor. The Reconsideration Agreement requested that the KCC issue an order granting limited reconsideration and clarification to its order issued December 23, 2002. The Reconsideration
Agreement also requested that the KCC authorize Westar Energy and Westar Industries to perform their respective obligations to us under the Tax Sharing Agreement and the Westar Credit Facility.
Additionally, the Reconsideration Agreement provided that, among other things; (a) the maximum borrowing capacity under the Westar Credit Facility will be reduced to $228.4 million and
the maturity date may be extended one year to January 5, 2005; (b) Westar Energy may provide funds to Westar Industries to the extent necessary to perform its obligations to us under the
Westar Credit Facility; (c) Westar Energy will reimburse us approximately $4.4 million for expenses incurred in connection with services provided by Protection One Data Services and AV
One, Inc. to Westar Energy and Westar Industries, and for the sale of AV One, Inc. to Westar Energy; and (d) the Management Services Agreement (see Note 6, "Related Party
Transactions") between us and Westar Industries is cancelled.

On
March 11, 2003, the KCC issued Order No. 65 conditionally approving the Reconsideration Agreement. The KCC imposed the following on the terms of the Reconsideration
Agreement: (a) the Westar Credit Facility must be paid off upon the sale of all or a majority of our common stock held by Westar Industries, and this pay-off must be a condition of
any sale by Westar Industries of our stock; (b) Westar Energy must provide advance notice to the KCC if the payment due from Westar Energy for the 2002 tax year under the Tax Sharing Agreement
exceeds approximately $20 million; (c) we must receive KCC approval prior to selling any assets exceeding $100,000 and Westar Energy and Westar

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Industries must receive KCC approval prior to selling their investment in our stock; and (d) we must waive potential claims against Westar Energy and Westar Industries relating to certain
inter-company agreements. In addition, the KCC reserved the right to impose a deadline for the sale by Westar Industries of its investment in our stock. Westar Energy is precluded from extending any
credit to us except for borrowings we may make under the Westar Credit Facility.

In
addition, on March 19, 2003, we submitted two letters to the KCC in response to KCC Order No. 65, one of which was addressed to the KCC and the other of which was
addressed to Westar Energy. As described in the letters, we agreed to (i) release Westar Energy from certain claims relating to Protection One Data Services, Inc ("PODS"), AV
One, Inc. and the Management Services Agreement and (ii) accept the conditions set forth in Order No. 65 relating to matters other than PODS, AV One, Inc. and the
Management Services Agreement. We do not intend to seek reconsideration of Order No. 65.

Reference
is made to Westar Energy's Annual Report on Form 10-K for the year ended December 31, 2002 and its previous Form 10-K and Forms
10-Q filed with the Securities and Exchange Commission (File No. 1-3523) for further information on these orders and proceedings, which may adversely impact us.
Reference is also made to the Kansas Corporation Commission Orders dated November 8, 2002, December 23, 2002, February 10, 2003 and March 11, 2003 and the Reconsideration
Agreement filed as Exhibits to this Annual Report on Form 10-K and incorporated herein by reference.

Attrition and Customer Creation.In 2002, we had a net loss of 59,625 customers in our customer base. Our North America
segment had a net loss of 62,988 customers while our Multifamily segment had a net increase of 3,363 customers. This decline resulted from attrition, the decision to add new customers at reasonable
costs through our internal sales force and to focus on operational efficiencies, and the disposition of certain accounts. Our customer acquisition strategy for our North America segment relies
primarily on our internal sales force, which generated 45,642 accounts in 2002 compared to 41,856 accounts in 2001, and our marketing alliance with BellSouth Telecommunications, Inc. See "Sales
and Marketing," "Attrition."

Operational Efficiencies.In January 2002, we completed the installation of our common technology platform for
customer service, monitoring, billing and collection functions in our Wichita, Kansas and Portland, Maine facilities. See "Centralized Monitoring, Common Technology Platform and Customer Service."

Impairment Charge.In the first quarter of 2002, we recorded an impairment charge to write-down goodwill and
customer accounts to their estimated fair values. The amount of this charge net of tax was approximately $765.2 million, of which approximately $543.6 million was related to goodwill and
approximately $221.6 million was related to customer accounts. In addition, we recorded a $90.7 million impairment charge, net of $13.3 million tax, in the fourth quarter of 2002
to reflect the impairment of all remaining goodwill of our North America segment. We still have $41.8 million of goodwill at December 31, 2002 associated with our Multifamily reporting
unit. For further information, see "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations-Impairment Charges Pursuant to New Accounting Rules" and Note 14
of the "Notes to Consolidated Financial Statements."

Discontinued Operations.During the second quarter of 2002 we entered into negotiations for the sale of our Canadian business
which was included in our North American segment. The sale was consummated on July 9, 2002. We recorded a pretax impairment loss of approximately $2.0 million and an after tax loss of
approximately $1.3 million in the second quarter of 2002 as a result of the sale.

The
net operating losses of the Canadian operations are included in the consolidated statements of operations under "discontinued operations." The net operating loss for the year ended
December 31, 2002 of $1.6 million includes an impairment loss on customer accounts of approximately $1.9 million.

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An impairment charge of $2.3 million relating to the Canadian operations' goodwill is reflected in the consolidated statement of operations as a cumulative effect of accounting change on
discontinued operations. Revenues from these operations were $4.2 million for the six months ended June 30, 2002, compared to $4.1 million for the six months ended June 30,
2001 and $4.2 million compared to $8.2 million for the year ended December 31, 2002 and 2001 respectively.

The
major classes of assets and liabilities of the Canadian operations were as follows (in thousands):

December 31, 2001Assets:Current

$
478Property and equipment


571Customer accounts, net


16,992Goodwill


4,842Other


55Total assets

$
22,938Current liabilities

$
1,364


In
June 2002, we formed a wholly owned subsidiary named Protection One Data Services, Inc. and on July 1, 2002 transferred to it approximately 42 of our Information
Technology employees. Effective July 1, 2002, PODS entered into an outsourcing agreement with Westar Energy pursuant to which PODS provided Westar Energy information technology services. As a
condition of the agreement, PODS offered employment to approximately 100 Westar Energy Information Technology employees. Operation of the subsidiary and the supply of such services to Westar Energy
was discontinued as of December 31, 2002. The approximately 142 Information Technology employees that had accepted employment with PODS returned to their respective companies as of the end of
the year. The net income of PODS operations of approximately $0.3 million is included in the consolidated statements of operations under "discontinued operations." Revenues from these
operations totaled $11.2 million for the six months of their operation ending December 31, 2002. PODS had $1.1 million in receivables from Westar Energy and $0.4 million in
accounts payable as of December 31, 2002.

Operations

Our operations consist principally of installing, servicing and monitoring premise intrusion and fire alarms.

Centralized Monitoring, Common Technology Platform and Customer Service

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 multifamily 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 monitoring facility. 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.

Customer Contracts.Our existing alarm monitoring customer contracts generally have initial terms ranging from two to ten
years in duration, and, in most states, provide for automatic renewals for a fixed period (typically one year) unless we or the customer elect to cancel the contract at the end of its term. Since
2002, most new single family residential customers have been entering into contracts with

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an initial term of three years and, for most new commercial customers, the initial term is five years. Typically, customers sign alarm monitoring contracts that include a bundled monthly charge for
monitoring and extended service protection. Extended service protection covers the normal costs of repair of the security system after the expiration of the security system's initial warranty period.
Customers may elect to sign an alarm monitoring contract that excludes extended service protection. A significant percentage of new residential and commercial customers are also electing to include
line security based on cellular technology in their service bundle.

Monitoring Facilities.We provide monitoring services to our customer base from four monitoring facilities. The table below
provides additional detail about our monitoring centers:

Location

Approximate Number of
Customers Monitored

Primary MarketsIrving, TX

330,000

MultifamilyLongwood, FL

135,000

Wholesale/ResidentialWichita, KS

575,000

Residential/Commercial/WholesalePortland, ME

35,000

Commercial/Residential


Our
monitoring facilities operate 24 hours per day, seven days a week, including all holidays. Each monitoring facility incorporates the use of communications and computer systems
that route incoming alarm signals and telephone calls to operators. Each operator within a monitoring facility monitors a computer screen that presents information concerning the nature of the alarm
signal, the customer whose alarm has been activated, and the premises on which such alarm is located. Other non-emergency administrative signals are generated by low battery status, arming
and disarming of the alarm monitoring system, and test signals, and are processed automatically by computer. Depending upon the type of service for which the customer has contracted, monitoring
facility personnel respond to alarms by relaying information to 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.

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

Common Technology Platform.In recognition of the strategic importance of serving all our customers on a common database
running on an industry standard monitoring automation application, in 2000 we adopted MAS®, from Monitored Automation Systems, of Irvine, California, as the technology platform for our
monitoring facilities. MAS® combines customer service, monitoring, billing and collection functions into a single system and is used, to varying extents, by other large companies in the
security monitoring industry including ADT Security Services and Brink's Home Security (see Competition, below).

In
2001, we completed the consolidation of several monitoring facilities into our Wichita monitoring facility and completed Wichita's conversion to MAS®. With the conversion
to MAS® of the Portland, Maine facility in January 2002, we serve approximately 98.5% of our North America residential and commercial customer base by utilizing one common database.
Our new commercial customers, whose requirements often exceed those of typical residential customers, are being monitored in our Portland, Maine facility. We also completed the installation of a new
financial system which we began using in January 2001 that can be accessed in all of our locations.

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Wholesale Monitoring.Through our monitoring facilities in Longwood and Wichita, we provide wholesale monitoring services to
independent alarm companies. Under the typical arrangement, alarm companies subcontract monitoring services to us, primarily because they cannot cost-effectively provide their own
monitoring service. We may also provide billing and other services. These independent alarm companies retain ownership of monitoring contracts and are responsible for every other aspect of the
relationship with customers, including field repair service.

Customer Care Services.Customer care personnel answer non-emergency telephone calls typically regarding service,
billing and alarm activation issues. Until late 2001, all customer care personnel were located exclusively in our monitoring facilities. During the last quarter of 2001, we began shifting some
business-hours customer care functions to our branches, including responding to routine billing and service inquiries. In 2002, we completed the shifting of most business-hours customer care functions
to our branches. During business hours, monitoring facility personnel receive inbound customer calls forwarded from branches when the latter are unable to answer within a specified number of rings.
After-hours, all customer calls are forwarded to the monitoring facilities.

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

Enhanced Services.As a means of increasing revenues and enhancing customer satisfaction, we offer customers an array of
enhanced security services, including extended service protection, supervised monitoring services, and telephone line security based on wireless technology. These services position us as a full
service provider and give our sales representatives more features to sell in their solicitation of new customers. Enhanced services include:



Branch Operations

We maintain approximately sixty service branches in North America from which we provide field repair, customer care, alarm response and sales services, and seven
satellite locations from which we provide field repair services. In 2002, we completed the shifting of most business-hours customer care functions to our branches by expanding the range of functions
provided at our branches to include billing set-up and some collection functions. Our nationwide network of branches operates in some of the largest cities in the United States and plays a
critical role in enhancing customer satisfaction, reducing customer loss and building brand awareness. Repair services generate revenues primarily through billable field service calls and recurring
payments under our extended service protection program. By focusing growth in targeted areas we hope to increase the density of our customer base which will permit more effective scheduling and
routing of field service technicians and will create economies of scale.

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Sales and Marketing

Our current customer acquisition strategy for our North America segment relies primarily on internally generated sales. In June 2001, we notified most of
our remaining domestic dealers that we were terminating our dealer arrangement with them and therefore would not be extending or renewing their contracts. The number of accounts being purchased
through our dealer program decreased to 1,135 accounts in 2002 from 7,501 accounts in 2001.

Our
internal sales program for our North America segment was started in February 2000 on a commission only basis with a goal of creating accounts at a cost lower than our external
programs. In 2001, we revised and enhanced our internal sales program, and in 2002, enhanced the benefits package for our sales force. This program utilizes our existing branch infrastructure in
approximately sixty
markets. The internal sales program for our North America segment generated 45,642 accounts and 41,856 accounts in 2002 and 2001, respectively.

We
are a partner in a marketing alliance with BellSouth Telecommunications, Inc. ("BellSouth") to offer monitored security services to the residential, single family market and to
small businesses in seventeen of the larger metropolitan markets in the nine-state BellSouth region. The term of the marketing alliance will renew for a two-year period on
December 31, 2003, unless terminated by either party. Under this agreement, we operate as "BellSouth Security Systems from Protection One" from our branches in the nine-state
BellSouth region. BellSouth provides us with leads of new owners of single family residences in its territory and of transfers of existing BellSouth customers within its territory. We follow up on the
leads and attempt to persuade them to become customers of our monitored security services. We also market directly to small businesses. We pay BellSouth an upfront royalty for each new contract and a
recurring royalty based on a percentage of recurring charges. Approximately one-fourth of our new accounts created in 2002 were produced from this arrangement. Termination of this
agreement could have an adverse affect on our ability to generate new customers in this territory.

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

We
operate a dedicated telesales center ("Telesales") in Wichita from which we respond to questions that customers or potential customers have about our services, support the alliance
with BellSouth, and provide quality control follow-up calls to customers for whom we recently provided installation or maintenance services.

Our
Multifamily segment utilizes a salaried and commissioned sales force to produce new accounts. Multifamily markets its services and products primarily to developers, owners and
managers of apartment complexes and other multifamily dwellings. Multifamily sales and marketing activities consist of national and regional advertising, nationwide professional field sales efforts,
prospective acquisition marketing efforts and professional industry-related association affiliation. Services are sold directly to the property owner, and payment is based on a monthly 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.

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

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Attrition

Subscriber attrition has a direct impact on our results of operations since it affects our revenues, amortization expense and cash flow. We define attrition as a
ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of the adjustments described below, 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. We make adjustments to lost accounts primarily for the net change, either positive or negative, in our wholesale base
and for 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. Adjustments to lost accounts for purchase holdbacks have been
decreasing because we are purchasing fewer accounts in the types of transactions that create holdbacks. We do not reduce the gross accounts lost during a period by "move in" accounts, which are
accounts where a new customer moves into the premises equipped with the Company's security system and vacated by a prior customer, or "competitive takeover" accounts, which are accounts where the
owner of a premise monitored by a competitor requests that we provide monitoring services.

Our
actual attrition experience shows that the relationship period with any individual customer can vary significantly. Customers' service can be discontinued for a variety of reasons,
including relocation, non-payment, customers' perception of value and competition. 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.

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.

Customer
attrition by business segment for the years ended December 31, 2002, 2001 and 2000 is summarized below:

|                 |  | Customer Account Attrition |  
|---------------- |  | -------------------------- | -
|
|
|North America    |  | 14.0                       | %
|Multifamily      |  | 7.2                        | %
|Total Company(a) |  | 11.9                       | %

---

Attrition
decreased in our North America Segment in 2002 compared to 2001 for a variety of reasons including:



11

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Competition

The security alarm industry is highly competitive. In North America, there are only four alarm companies that offer services across the United States with the
remainder being either large regional or small, privately held alarm companies. Based on total annual revenues in 2001, we believe the top four alarm companies in North America are:



Competition
in the security alarm industry is based primarily on market visibility, price, reputation for quality of services and systems, services offered, and the ability to identify
and to solicit prospective customers as they move into homes and businesses. We believe that we compete effectively with other national, regional and local security alarm companies due to our ability
to offer integrated alarm system installation, monitoring, repair and enhanced services, our reputation for reliable equipment and
services, our affinity alliance with BellSouth, and our prominent presence in the areas surrounding our branch offices.

Intellectual Property

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

Regulatory Matters

A number of local governmental authorities have adopted or are considering various measures aimed at reducing the number of false alarms (see "Risk Factors").
Such measures include:



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

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

12

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

Our
alarm monitoring business utilizes wireline and wireless 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.

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.

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. Some of our insurance policies, and the laws of some states,
may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence.

Employees

At December 31, 2002, we had approximately 2,800 full-time employees. Our workforce is not unionized.

Access to Company Information

We electronically file our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K with the Securities and Exchange Commission (SEC). The public may read and copy any of the reports that are filed with the SEC at the SEC's Public Reference Room at 450
Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

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

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.

13

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Introduction

We have reported losses for the past several years, working capital has decreased and Westar Energy has announced that it intends to sell its investment in us.
Additionally, our current primary financing source is through a credit facility with Westar Energy and credit available under such facility has been limited. We have evaluated these conditions and
events in establishing our operating plans. In addition to the plans and strategies noted below, we plan to carefully monitor the level of investment in new customer accounts, continue control of
operating expenses, curtail other capital expenditures, if necessary, and continue efforts to extend or replace the credit facility upon its expiration in January 2004. We believe that the
funds provided from operations and from the Westar Credit Facility, coupled with receipts under the tax sharing agreement (see "Management's Discussion and Analysis of Financial Condition and Results
of Operations""Liquidity and Capital Resources") will be sufficient throughout 2003. See further discussion of these and other important matters below.

We have had a history of losses which are likely to continue.

We incurred net losses of $880.9 million in 2002, $86.0 million in 2001 and $57.2 million in 2000. These losses reflect, among other factors:



We
will continue to incur substantial interest expense unless we significantly reduce our debt which is unlikely given our expected cash flow. We do not expect to attain profitable
operations in the foreseeable future.

Westar Industries is our principal stockholder and can exercise a controlling influence over us.

Westar Industries owned approximately 88% of the outstanding common stock of Protection One as of December 31, 2002. As long as Westar Industries continues
to beneficially own in excess of 50% of the shares of Protection One common stock outstanding, Westar Industries will be able to direct the election of all of our directors and exercise a controlling
influence over our business and affairs, including any determinations with respect to mergers or other business combinations involving us, appointment of our officers, our acquisition or disposition
of material assets and our incurrence of indebtedness. Similarly, Westar Industries will continue to have the power to determine matters submitted to a vote of our stockholders without the consent of
other stockholders, to prevent or cause a change in control of Protection One and to take other actions that might be favorable to Westar Energy and Westar Industries, whether or not these actions
would be favorable to us or our stockholders generally. In addition, Westar Industries is also our sole lender under the Westar Credit Facility as discussed below.

14

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Westar Energy's announcement that it intends to sell its investment in us may cause us to focus on short-term business alternatives instead of long-term
business alternatives.

Westar Energy has announced that it intends to sell its investment in Protection One. This may cause Westar Energy, as our controlling stockholder, to focus on
business strategies that are in the short-term best interest of the company and our stockholders but not necessarily in the long-term best interest of the company and our
stockholders. This could mean, for example, that a substantial amount of management time may be spent pursuing a sale strategy instead of building the company, its business and its assets for the
long-term. As a result, during the sale process, we may experience difficulty developing new long-term customers and maintaining relationships with companies with which we do
business who may feel uncertain about the future ownership, management and direction of the
company. In addition, while we have recently entered into new employment contracts with our key employees to provide incentives for such employees to remain with the company through a sales process,
we may be unable to retain the services of some of our key employees who may also feel uncertain about the future ownership, management and direction of the company.

Westar Energy is engaged in regulatory proceedings which could adversely affect us.

The Kansas Corporation Commission has issued orders that may directly impact transactions between us, Westar Industries and Westar Energy. See further discussion
relating to these orders issued by the KCC and their impact on us in "Significant Business DevelopmentsKansas Corporation Commission
Orders" (some of which orders are filed as exhibits hereto and are incorporated by reference herein). Reference is also made to the Westar Energy Forms 10-K
(including its Form 10-K for the year ended December 31, 2002), Forms 10-Q and Forms 8-K filed with the Securities and Exchange Commission (File
No. 1-3523) for further information on these orders and proceedings, which may adversely impact us.

We obtain administrative services from and share information technology systems with Westar Energy through our shared services agreement which, if terminated, may result in
increased costs.

Westar Energy provides us certain administrative services pursuant to a services agreement (the "Administrative Services Agreement"see Note 6,
"Related Party Transactions") including accounting, tax, audit, human resources, legal, purchasing and facilities services. Westar Energy and we have entered into an amended service agreement that
stipulates if Westar Energy sells its interest in us, Westar Energy and we will negotiate in good faith to agree upon the terms and conditions for continuation of the services during an
agreed-upon transition period. This agreement would have to be approved by the KCC. If the services agreement is terminated, our cost of obtaining such services from either a third party
or by hiring sufficient staff to perform those services internally may increase and we may incur costs to procure and to develop replacement information technology systems.

We have deferred tax assets we may not utilize.

Westar Energy makes payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return pursuant to a tax sharing agreement, which is
an important source of liquidity for us. If Westar Energy completes its intended disposition of its investment in us, our net deferred tax assets, which were $294.9 million at
December 31, 2002, might not be realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a non-cash charge against
income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and
results of operations. The amount of our deferred taxes increased by approximately $190.7 million upon our recording of an impairment charge in the first quarter of 2002 and
$13.3 million in the last quarter of 2002 as discussed below. In addition, as a result of a sale, we would no longer receive payments from Westar Energy for current tax benefits utilized by
Westar Energy. In

15

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2002 and 2001, we received aggregate payments from Westar Energy of $1.7 million and $19.1 million, respectively. The loss of these payments would have a material adverse effect on our
cash flow.

We will need to extend or refinance our Westar Credit Facility to maintain liquidity.

Our ability to refinance our Westar Credit Facility and 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 our cash flow from operations, tax payments from Westar Energy, borrowings under
the Westar Credit Facility and asset sales (we may not sell assets in excess of $100,000 without KCC approval) will be enough to meet our expenses and interest obligations through January 5,
2004. Our ability to operate beyond that date will depend on the renewal or refinancing of the Westar Credit Facility. The KCC has authorized Westar Energy to extend its Westar Credit Facility to
January 5, 2005, and has stated that the Westar Credit Facility must be terminated upon any sale by Westar Energy of its investment in us. Any extension beyond January 5, 2005, would
require further approval of the KCC. Westar Energy is prohibited from extending any credit to us except under the Westar Credit Facility. The KCC has authorized the extension of the Westar Credit
Facility to January 5, 2005 and Westar Energy has indicated that it is willing to extend the January 5, 2004 maturity date of the facility. Westar Energy has also indicated it may
require some form of collateral, either upon the execution of an extension or upon the occurrence of events to be determined, to secure all or a portion of our obligation under the Westar Credit
Facility. The indentures governing our 135/8% senior subordinated discount notes and 63/4% convertible senior subordinated notes prohibit us from securing any of our
senior debt unless all other senior debt is secured; and our 73/8% senior notes prohibit us from securing senior debt without providing security for the 73/8% senior
notes, subject to certain permitted carve outs as defined in the indenture. We are currently in discussions with Westar Energy regarding the terms of an extension of the Westar Credit Facility. Westar
Energy has provided assurance that it presently intends to renew the Westar Credit Facility through January 5, 2005 should such renewal be necessary to provide us continued liquidity at
January 5, 2004 when the facility is currently scheduled to terminate. In the event our Westar Credit Facility is not extended on its present terms and we are required to seek such financing
from unaffiliated third parties, we may not be able to do so on terms as economically favorable as those under our present Westar Credit Facility or at all.

We
would face significant liquidity issues if Westar Industries were unable to fund its obligations under the Westar Credit Facility. We were unsuccessful in refinancing our Westar
Credit Facility with unaffiliated third parties on satisfactory terms in 2000 and 2001. If 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 capital. There can be no assurance that any of these alternative sources would be available on satisfactory terms or at all.

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 reflects the impact of acquisitions and other capital investments for the entire period covered by the calculation. These debt instruments contain restrictions
based on "EBITDA". The definition of EBITDA varies among the various indentures. EBITDA is generally derived by adding to income (loss) before income taxes, the sum of interest expense and
depreciation

16

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and amortization expense. However, under the varying definitions of the indentures, additional adjustments are required. Below are the ratios for the quarter ended December 31, 2002:



The
indentures contain other covenants that impose operational restrictions on us which are not as burdensome to us as those listed above and none are based on credit ratings. A
violation of these restrictions would result in an event of default which would allow the lenders to declare all amounts outstanding immediately due and payable.

We have a substantial amount of debt, which could constrain our growth.

We have, and will likely continue to have, a large amount of consolidated indebtedness. The terms of various indentures and credit agreements discussed above
governing our indebtedness limit our ability to incur additional indebtedness that we might need in the future in order to fund creation of subscriber accounts.

Additionally,
please be aware that:



Our
present high level of indebtedness could have negative consequences on, without limitation:



As
discussed in "Significant Business Developments," our Westar Credit Facility must be paid off upon a sale by Westar Energy of its investment in us. Furthermore, the indentures
governing our debt
securities require that we offer to repurchase the securities in certain circumstances following a change of control:



17

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As
of December 31, 2002, we had $29.9 million principal amount of the Senior Subordinated Discount notes, $9.7 million principal amount of the Convertible Notes,
$190.9 million principal amount of the Senior Notes and $110.3 million principal amount of the Senior Subordinated Notes.

Should
a change in control occur in connection with Westar Energy's disposition of its investment in our common stock, we anticipate that a purchaser of Westar Energy's interest in us
would negotiate the amendment of the terms of our outstanding debt requiring its repurchase, or assist us in finding sufficient sources of funds to meet our repurchase obligations. We also anticipate
that a purchaser would assist us in arranging for new credit facilities or provide us needed credit. However, we can give no assurance that any such arrangements will or could be made or any needed
funds otherwise be provided.

We recorded impairment charges in 2002 and additional charges may be recorded in the future.

In the first quarter of 2002, we recorded an impairment charge to write-down goodwill and customer accounts to their estimated fair values. The amount
of this charge net of tax was approximately $765.2 million, of which approximately $543.6 million was related to goodwill and approximately $221.6 million was related to customer
accounts. In addition, we recorded a $90.7 million impairment charge, net of $13.3 million tax, in the fourth quarter of 2002 to reflect the impairment of all remaining goodwill of our
North America segment. For further information on the impairment charge, see Note 14 of the "Notes to Consolidated Financial Statements." We still have $41.8 million of goodwill
associated with our Multifamily segment and $312.8 million in customer accounts recorded on our December 31, 2002 balance sheet. The remaining amount of goodwill will be required to be
tested annually for impairment. We established July 1 as our annual impairment testing date. We completed this testing during the third quarter of 2002 and determined that no additional
impairment was required as of July 1, 2002. Goodwill is required to be tested upon certain triggering events, which include recurring
operating losses, adverse business conditions, adverse regulatory rulings, and other matters that negatively impact value. After regulatory actions (see Note 6, "Related Party Transactions"),
including Kansas Corporation Commission Order No. 55, which prompted our parent company to advise us that it intended to dispose of its investment in us, we retained the independent appraisal
firm to perform an additional valuation of our reporting units, so we could perform an impairment test as of December 31, 2002. The order limited the amount of capital the parent could provide
to us and increased our risk profile. Therefore, we reevaluated our forecast, reducing the amount of capital invested over our forecast horizon and lowered our base monthly recurring revenue to
incorporate actual 2002 results, which resulted in a lower valuation than our July 1, 2002 valuation. As a result, we recorded an additional impairment charge in the fourth quarter as discussed
above. If we fail future impairment tests for either goodwill or customer accounts, we will be required to recognize additional impairment charges on these assets in the future. Any such impairment
charges could be material.

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

Prior to 2000, we grew very rapidly by acquiring portfolios of alarm monitoring accounts through acquisitions and dealer purchases. Our current strategy is to
reduce the cost of acquiring new accounts by utilizing other customer account acquisition channels such as our internal sales force augmented by traditional marketing support. We would like to resume
acquiring alarm account portfolios or alarm companies on a limited basis at some time during 2004 if we have adequate capital. We compete with major companies, some of which have greater financial
resources than we do, or may be willing to offer higher prices than we might be prepared or able to offer to purchase subscriber accounts or increase the amount of investment to create a new
subscriber. The effect of competition may be to reduce the purchase opportunities available to us, or to increase the price we pay for or invest in subscriber

18

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accounts, which could have a material adverse effect on our return on investment in such accounts, and on our results of operations, financial condition, and ability to service debt.

We lose some of our customers over time.

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



We
may experience the loss of newly acquired or created accounts to the extent we do not integrate or adequately service those accounts. 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 the rate of customer loss could have a material adverse
effect on our results of operations and financial condition.

During
2002 our change in focus from growth to strengthening our operations resulted in a net loss of 59,625 customers or a 5.3% decrease in our customer base from January 1,
2002. During 2001, attrition, our change in focus from growth to strengthening our operations, the disposition of certain accounts and adjustments related to the conversion of our customer base to our
common technology platform resulted in a net loss of 197,657 customers or a 14.9% decrease in our customer base from January 1, 2001. While our attrition rate is decreasing, we continue to lose
customers at a faster rate than our rate of adding customers. Some of the reasons for the decrease in attrition in 2002 are discussed in "ITEM 1, BusinessAttrition," above. The net loss
of customers was the primary cause of our decline in monitoring and related service revenues in the North America segment of $47.5 million in 2002 and $59.9 million in 2001. We expect
this trend will continue until the efforts we are making to acquire new accounts and further reduce our rate of attrition become more successful than they have been to date. Until we are able to
reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations.

Our customer acquisition strategies may not be successful which would adversely affect our business.

The customer account acquisition strategy we are now employing relies primarily on our internal sales force and making alliances such as our strategic alliance
with BellSouth. We have changed our acquisition strategy several times over the past few years attempting to decrease the cost of adding customers and to decrease the rate of attrition from new
accounts. While our present strategy has resulted in some improvement in 2002, there can be no assurance that this strategy will be successful. If the strategy is not successful, our customer base
could continue to decline. If successful, the selling costs related to this strategy will increase our expenses and use of cash. Failure to economically replace customers lost through attrition or
increased cash needs could have a material adverse effect on our business, financial condition, results of operations, and ability to service debt obligations.

Increased adoption of non-response or verification-required policies by police departments may adversely affect our business.

As noted under "Regulatory Matters" above, an increasing number of local governmental authorities have adopted or are considering the adoption of laws,
regulations or policies aimed at reducing the
perceived costs to municipalities of responding to false alarm signals. Such initiatives could increase the costs of providing our services, and consequently lead to less demand for alarm monitoring

19

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services in general and increase our attrition. Additionally, we will incur greater costs in monitoring, evaluating and attempting to effect the outcome of these initiatives.

One
of these initiatives involves the City of Los Angeles where the Police Commission of the City of Los Angeles is attempting to institute a citywide verified response policy for
residential and commercial burglar alarms. Approximately 6% of our residential and commercial recurring monthly revenue is derived from customers in the City of Los Angeles, and the adoption of such a
policy could have a particularly adverse effect on us due to the significant concentration of our customer base in that city.

Declines in new construction of multifamily dwellings may affect our sales in this marketplace.

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

We are susceptible to macroeconomic downturns which may negatively impact our results of operations.

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.

ITEM 2.    PROPERTIES

We maintain our executive offices at 818 S. Kansas Avenue, Topeka, Kansas 66612. We operate primarily from the following facilities, although we also lease office
space for our approximate 60 service branch offices and 7 satellite branches.

|Location     |  | Size (sq. ft.) |  | Lease/Own |  | Principal Purpose                                          
|------------ |  | -------------- |  | --------- |  | -----------------------------------------------------------
|Irving, TX   |  | 53,750         |  | Lease     |  | Multifamily monitoring facility/administrative headquarters
|Longwood, FL |  | 11,020         |  | Lease     |  | Monitoring facility/administrative functions               
|Portland, ME |  | 9,000          |  | Lease     |  | Monitoring facility/local branch                           
|Topeka, KS   |  | 17,703         |  | Lease     |  | Financial/administrative headquarters                      
|Wichita, KS  |  | 50,000         |  | Own       |  | Monitoring facility/administrative functions               
|Wichita, KS  |  | 140,000        |  | Own       |  | Backup monitoring center/administrative functions          

ITEM 3.    LEGAL PROCEEDINGS

Information on our legal proceedings is set forth in Notes 12 and 15 of the Notes to Consolidated Financial Statements, which are incorporated herein by
reference.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

No matters were submitted to Protection One's stockholders during the fourth quarter of 2002.

20

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PART II

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

Market Price Information

Our common stock is listed on the New York Stock Exchange under the symbol "POI", and continued listing on the New York Stock Exchange is subject to meeting its
requirements. 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. All
prices are as reported by the National Quotation Bureau, Incorporated.

High

Low2001:First Quarter

$
1.5100

$
0.8125Second Quarter


2.1400


1.0500Third Quarter


2.0000


1.1000Fourth Quarter


2.7800


1.60002002:First Quarter

$
2.8000

$
2.0500Second Quarter


3.3200


2.2500Third Quarter


3.1000


2.4600Fourth Quarter


2.8200


1.9400


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 Westar Energy' 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 indentures governing the
81/8% Senior Subordinated Notes due 2009, the 135/8% Senior Subordinated Discount Notes due 2005, and the credit agreement relating to its Westar Credit Facility restrict
Protection One Alarm Monitoring's ability to pay dividends or to
make other distributions to its corporate parent. Consequently, these agreements restrict our ability to declare or pay any dividend on, or make any other distribution in respect of, our capital
stock.

Number of Stockholders

As of April 3, 2003, there were approximately 133 stockholders of record who held shares of our common stock.

Securities Authorized for Issuance Under Equity Compensation Plans

The information called for by the item relating to "Securities Authorized for Issuance Under Equity Compensation Plans" will be set forth under that heading in
the Proxy Statement relating to the Annual Meeting of Stockholders to be held May 28, 2003 which will be filed with the Securities and Exchange Commission no later than April 30, 2003
and which is incorporated herein by reference. See also "Item 12. Security Ownership of Certain Beneficial Owners and Management."

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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 Operation" 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.

|                                                                 |                                            | SELECTED CONSOLIDATED FINANCIAL DATA |           
|---------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ----------
|
|
|Statements of operations data                                    |                                            |                                      |           
|Revenues                                                         |                                            | $                                    | 290,580   
|Cost of revenues                                                 |                                            |                                      | 113,158   
|                                                                 |                                            |                                      |           
|Gross profit                                                     |                                            |                                      | 177,422   
|Selling, general and administrative expenses                     |                                            |                                      | 112,984   
|Amortization of intangibles and depreciation expense(b)          |                                            |                                      | 82,440    
|Other charges:                                                   |                                            |                                      |           
|                                                                 | Loss on impairment of customer accounts(b) |                                      |           
|                                                                 | Loss on impairment of goodwill(b)          |                                      |           
|                                                                 |                                            |                                      |           
|Operating income (loss)(b)                                       |                                            |                                      | (460,043  
|Interest expense                                                 |                                            |                                      | (43,023   
|Gain (loss) on retirement of debt                                |                                            |                                      | 19,337    
|Other income                                                     |                                            |                                      | 602       
|                                                                 |                                            |                                      |           
|Loss from continuing operations before income taxes(b)           |                                            |                                      | (483,127  
|Income tax benefit(b)                                            |                                            |                                      | 148,852   
|                                                                 |                                            |                                      |           
|Loss from continuing operations before accounting change(b)      |                                            |                                      | (334,275  
|Loss from discontinued operations, net of taxes                  |                                            |                                      | (2,967    
|Cumulative Effect of Accounting Change, net of taxes             |                                            |                                      |           
|                                                                 | Continuing operations(b)                   |                                      |           
|                                                                 | Discontinued operations(b)                 |                                      |           
|                                                                 |                                            |                                      |           
|Net loss(b)                                                      |                                            |                                      | (880,855  
|                                                                 |                                            |                                      |           
|Net loss per share of common stock                               |                                            | $                                    | (8.98     
|                                                                 |                                            |                                      |           
|Weighted average number of shares of common stock outstanding    |                                            |                                      | 98,071,206
|Consolidated balance sheet data                                  |                                            |                                      |           
|Working capital (deficit)                                        |                                            | $                                    | (12,071   
|Customer accounts, net                                           |                                            |                                      | 312,785   
|Goodwill and trademarks, net(b)                                  |                                            |                                      | 41,847    
|Total assets                                                     |                                            |                                      | 837,572   
|Long term debt, including capital leases, net of current portion |                                            |                                      | 547,798   
|Total stockholders' equity                                       |                                            |                                      | 168,147   
|Other operating data                                             |                                            |                                      |           
|Number of customers at end of period                             |                                            |                                      | 1,073,698 
|Cash flows provided by operations                                |                                            |                                      | 43,391    
|Cash flows provided by (used in) investment activities           |                                            |                                      | (20,943   
|Cash flows provided by (used in) financing activities            |                                            |                                      | (24,950   

---

22

---

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:



As
you read Management's Discussion and Analysis, please refer to our Consolidated Statements of Operations and Comprehensive Loss. These statements show our operating results for 2002,
2001 and 2000. In Management's Discussion and Analysis, we analyze and explain the significant annual changes of specific line items in the Consolidated Statements of Operations and Comprehensive
Loss. We also suggest you read "Risk Factors" which will help your understanding of our financial condition, liquidity and operations, including our concerns over the impact of the intended
disposition by Westar Energy of its ownership interest in us.

Important Matters

We have reported losses for the past several years, working capital has decreased and Westar Energy has announced that it intends to sell its investment in us.
Additionally, our current primary financing source is through a credit facility with Westar Energy and credit available under such facility has been limited. We have evaluated these conditions and
events in establishing our operating plans. In addition to the plans and strategies noted under "Overview," we plan to carefully monitor the level of investment in new customer accounts, continue
control of operating expenses, curtail other capital expenditures, if necessary, and continue efforts to extend or replace the credit facility upon its expiration in January 2004. We believe
that the funds provided from operations and from the Westar Credit Facility, coupled with receipts under the tax sharing agreement (see "Liquidity and Capital Resources" below) will be sufficient
throughout 2003.

Summary of Significant Activities

Net Loss.We incurred a net loss of $880.9 million in 2002. This net loss includes $855.9 million in impairment
charges, net of tax, discussed below. The remaining net loss of $25.0 million is a result of the continuing decline in our revenues caused by our declining North America account base, expansion
of our efforts to create new customer accounts through internal efforts which increase our selling expense, substantial charges incurred by us for amortization of customer accounts and interest
incurred on indebtedness. We do not expect to have earnings in the foreseeable future.

Impairment Charges Pursuant to New Accounting Rules.Effective January 1, 2002, we adopted the new accounting
standards SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets." SFAS
No. 142 establishes new standards for accounting for goodwill. SFAS No. 142 continues to require the recognition of goodwill as an asset, but discontinues amortization of goodwill. In
addition, annual

23

---

impairment tests must be performed using a fair-value based approach as opposed to an undiscounted cash flow approach required under prior standards. The completion of the impairment test
by us, based
upon a valuation performed by an independent appraisal firm, as of January 1, 2002, indicated that the carrying value of goodwill had been impaired and an impairment charge was recorded as
discussed below.

SFAS
No. 144 establishes a new approach to determining whether our customer account asset is impaired. The approach no longer permits us to evaluate our customer account asset for
impairment based on the net undiscounted cash flow stream obtained over the remaining life of goodwill associated with the customer accounts being evaluated. Rather, the cash flow stream used under
SFAS No. 144 is limited to future estimated undiscounted cash flows from assets in the asset group, which include customer accounts, the primary asset of the reporting unit, plus an estimated
amount for the sale of the remaining assets within the asset group (including goodwill). If the undiscounted cash flow stream from the asset group is less than the combined book value of the asset
group, then we are required to mark the customer account asset down to fair value, by way of recording an impairment, to the extent fair value is less than our book value. To the extent net book value
is less than fair value, no impairment would be recorded.

The
new rule substantially reduces the net undiscounted cash flows used for customer account impairment evaluation purposes as compared to the previous accounting rules. The undiscounted
cash flow stream has been reduced from the 16 year remaining life of the goodwill to the 9 year remaining life of customer accounts for impairment evaluation purposes. Using these new
guidelines, we determined that there was an indication of impairment of the carrying value of the customer accounts and an impairment charge was recorded as discussed below.

To
implement the new standards, we engaged an appraisal firm to help us estimate the fair values of goodwill and customer accounts. Based on this analysis, we recorded a net charge of
approximately $765.2 million in the first quarter of 2002. The charge is detailed as follows:

Goodwill

Customer
Accounts

Total(in millions)North America Segment:Impairment chargecontinuing operations

$
509.4

$
338.1

$
847.5Impairment chargediscontinued operations


2.3


1.9


4.2Estimated income tax benefit


(65.1
)

(118.4
)

(183.5
)Net charge

$
446.6

$
221.6

$
668.2Multifamily Segment:Impairment charge

$
104.2

$


$
104.2Estimated income tax benefit


(7.2
)




(7.2
)Net charge

$
97.0

$


$
97.0Total Company:Impairment charge

$
615.9

$
340.0

$
955.9Estimated income tax benefit


(72.3
)

(118.4
)

(190.7
)Net charge

$
543.6

$
221.6

$
765.2


The
impairment charge for goodwill is reflected in the consolidated statements of operations as a cumulative effect of a change in accounting principle. The impairment charge for
customer accounts is reflected in the consolidated statements of operations as an operating cost. These impairment charges reduced the recorded value of these assets to their estimated fair values at
January 1, 2002.

24

---

Another
impairment test was completed by us as of July 1, 2002 (the date selected for our annual impairment test), with the independent appraisal firm providing the valuation of
the estimated fair value of our reporting units, and no impairment was indicated. After regulatory actions (see Note 6, "Related Party Transactions"), including Kansas Corporation Commission
Order No. 55, which prompted our parent company to advise us that it intended to dispose of its investment in us, we
retained the independent appraisal firm to perform an additional valuation of our reporting units, so we could perform an impairment test as of December 31, 2002. The order limited the amount
of capital the parent could provide to us and increased our risk profile. Therefore, we reevaluated our forecast, reducing the amount of capital invested over our forecast horizon and lowered our base
monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower valuation than our July 1, 2002 valuation. We recorded an additional $90.7 million impairment
charge, net of $13.3 million tax, to reflect the impairment of all remaining goodwill of our North America segment.

A
deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit estimated above and an additional deferred tax benefit of
$13.3 million was recorded with the fourth quarter impairment charge. However, if Westar Energy completes its intended disposal of its investment in us, our net deferred tax assets of
$294.9 million at December 31, 2002 might not be realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a
non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on
our business, financial condition and results of operations.

In
2001, we recorded approximately $48.9 million of goodwill amortization, including $0.3 million related to the discontinued Canadian operations. Because we have adopted
the new rule for goodwill, we will no longer be permitted to amortize goodwill to income. In 2001, we recorded approximately $132.0 million of customer account amortization expense. After the
customer impairment charge, customer account amortization expense in 2002 decreased to approximately $68.9 million.

Because
we adopted the new rule for goodwill, we are no longer amortizing goodwill to income. The following table reflects our results for the year ended December 31, 2001 and
2000, calculated using the new accounting treatment discussed above, as compared to our results for the year ended December 31, 2002.

|                                      |                                 | Year ended December 31, |  
|------------------------------------- | ------------------------------- | ----------------------- | -
|
|
|                                      | Reported net loss               |                         | $
|                                      | Add back: Goodwill amortization |                         |  
|                                      |                                 |                         |  
|                                      | Adjusted net loss               |                         | $
|                                      |                                 |                         |  
|Basic and diluted earnings per share: |                                 |                         |  
|                                      | Reported net loss               |                         | $
|                                      | Add back: Goodwill amortization |                         |  
|                                      |                                 |                         |  
|                                      | Adjusted net loss               |                         | $
|                                      |                                 |                         |  

We
are required to perform impairment tests for long-lived assets prospectively when we determine that indicators of potential impairment are present. Goodwill is required to
be tested at least annually for impairment. Declines in market values of our business or the value of our customer accounts that may occur in the future may require additional write-downs of these
assets in the future.

Restatement of Unaudited Quarterly Financial Information.We have restated our quarterly financial information for each of
the first three quarters of 2002. Please refer to Note 17, Unaudited Quarterly Financial Information for the results of such restatement. Since adopting Staff Accounting

25

---

Bulletin 101 on January 1, 2000, we have capitalized as property and equipment the direct and incremental costs of the electronic security systems (equipment and associated labor) that we
install in homes or businesses and for which we retain title. We have amortized this equipment to depreciation expense over the expected life of the customer. Our North America segment utilized a
10-year accelerated amortization method and our Multifamily segment utilized a 9-year straight line amortization method. Direct and incremental selling costs incurred in
connection with the installation of these systems were capitalized as deferred customer acquisition costs and amortized as discussed in Note 2, Summary of Significant Accounting
Policies(a) Revenue Recognition.

In
connection with most security system installations, we also incur costs related to system enhancements for which title passes to the customer and which are capitalized as deferred
customer acquisition costs.

We
determined that the costs capitalized as property and equipment should have been capitalized as deferred customer acquisition costs and included with other such costs and amortized as
discussed in Note 2, "Summary of Significant Accounting Policies(a) Revenue Recognition." For the North America segment the initial contract term is typically 3-years
for residential customers and 5-years for commercial
customers and for the Multifamily segment the initial contract term typically ranges from 5 to 10 years. The impact of this change on the financial results of 2001 and 2000 was not significant
and is reflected in the first quarter results of 2002.

Estimated Lives of Customer Accounts Changed Based on Customer Account Lifing Study Results.The results of a lifing study
performed by a third party appraisal firm in the first quarter of 2002 showed a deterioration in the average remaining life of customer accounts. The report showed our North America customer pool can
expect a declining revenue stream over the next 30 years with an estimated average remaining life of 9 years. Our Multifamily pool can expect a declining revenue stream over the next
30 years with an estimated average remaining life of 10 years. Taking into account the results of the lifing study and the inherent expected declining revenue streams for North America
and Multifamily, in particular during the first five years, we adjusted the amortization of customer accounts for our North America and Multifamily customer pools to better match the rate and period
of amortization expense with the expected decline in revenues. In the first quarter of 2002, we changed the amortization rate for our North America pool to a 10-year 135% declining balance
method from a 10-year 130% declining balance method. The change to this 10 year 135% accelerated method, provides for a better matching to the declining revenue stream, in
particular during the first five years, when the year over year decline is greatest and a significant portion of the revenue stream is expected to be received. For the Multifamily pool we will
continue to amortize on a straight-line basis, utilizing a shorter nine year life. The change to the nine year life straight-line method provides for a better matching to the
declining revenue stream, in particular during the first five years, when the decline is greatest and a significant portion of the revenue stream is expected to be received. We accounted for these
amortization changes prospectively beginning January 1, 2002, as a change in estimate. These changes in estimates increased amortization expense for the year ended December 31, 2002 on a
pre-tax basis by approximately $1.3 million and on an after tax basis by approximately $0.8 million. The change in estimate had no significant impact on reported earnings per
share.

Streamlining of Operations.With the goal of reducing our variable and fixed costs as our North American account base
declined, we streamlined our business operations and improved operating efficiencies. During 2001, we merged our Hagerstown, Maryland, our Beaverton, Oregon and our Irving, Texas monitoring operations
into our Wichita, Kansas customer service center. The Wichita customer service center now monitors approximately 575,000 customers. Additionally, we discontinued our National Accounts and Patrol
divisions and sold certain customer accounts which we believed were not part of our core business. In June 2001, we eliminated 180 positions from a variety of departments. In September, we
consolidated additional operational and administrative facilities. These consolidations

26

---

and other cost cutting measures resulted in a total reduction of nearly 600 positions in 2001. We incurred $9.7 million in severance and facility closure costs relating primarily to these
actions in 2001.

Gain on Extinguishment of Debt.During 2002, we acquired $103.2 million of our bonds for $83.2 million
resulting in a gain of $19.3 million. During 2001, we acquired $146.0 million of our bonds for $91.7 million resulting in a gain of $53.0 million. See Note 6,
"Related Party Transactions" for further discussion.

Amendment to Credit Agreement with Westar Industries.During 2002, our Westar Credit Facility with Westar Industries was
amended to increase the capacity from $155 million to $280 million. On August 26, 2002 the Westar Credit Facility was further amended to extend the maturity date to
January 5, 2004. We incurred amendment fees totaling $2.4 million for these amendments. On March 11, 2003, the KCC issued Order No. 65 approving the agreement between us
and Westar Energy to decrease the capacity of the Westar Credit Facility to $228.4 million and to authorize the further extension of the maturity date to January 5, 2005. The KCC has
authorized the extension of the Westar Credit Facility to January 5, 2005 and Westar Energy has indicated that it is willing to extend the January 5, 2004 maturity date of the facility.
Westar Energy has also indicated it may require some form of collateral, either upon the execution of an extension or upon the occurrence of events to be determined, to secure all or a portion of our
obligations under the Westar Credit Facility. The indentures governing our 135/8% senior subordinated discount notes and 63/4% convertible senior subordinated notes
prohibit us from securing any of our senior debt unless all other senior debt is secured; and our 73/8% senior notes prohibit us from securing senior debt without providing security for
the 73/8% senior notes, subject to certain permitted carve outs as defined in the indenture. We are currently in discussions with Westar Energy regarding the terms of the extension of
the Westar Credit Facility. Westar Energy has provided assurance that it presently intends to renew the Westar Credit Facility through January 5, 2005 should such renewal be necessary to
provide us continued liquidity at January 5, 2004 when the facility is currently scheduled to terminate. At April 3, 2003, we had outstanding borrowings of $215.5 million and
$12.9 million of remaining capacity.

Share Repurchases.During 2002, we purchased 1,000,000 shares of our common stock in the open market for $2.2 million.
From January 1, 2003 through April 3, 2003, we purchased 2,500 shares of our common stock in the open market for $3,400.

Recurring Monthly Revenue.At various times during each year, we measure all of the monthly revenue we are entitled to
receive under contracts with customers in effect at the end of the period. Our computation of recurring monthly revenue may not be comparable to other similarly titled measures of other companies and
recurring monthly revenue should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles. We had approximately
$21.0 million, $22.9 million and $29.0 million of recurring monthly revenue as of December 31, 2002, 2001, and 2000 respectively. The decrease is primarily a result of our
net loss of 59,625 customers during 2002 and 197,657 customers during 2001. We expect this trend will continue until the efforts we are making to acquire new accounts and to reduce our rate of
attrition become more successful than they have been to date. Until we are able to reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial
condition and results of operations.

We
believe the presentation of recurring monthly revenue is useful to investors because the measure is used by investors and lenders to value companies such as ours with recurring
revenue

27

---

streams. The table below reconciles our recurring monthly revenue to revenues reflected on our consolidated statements of operations.

Years Ended December 31,2002

2001

2000(in millions)Recurring Monthly Revenue at 12/31 ("RMR")

$
21.0

$
22.9

$
29.0Amounts excluded from RMR:Amortization of deferred revenue


0.4


0.1


Other revenues(a)


2.6


3.0


2.5Revenues (GAAP basis):December


24.0


26.0


31.5JanuaryNovember


266.6


306.8


392.0JanuaryDecember

$
290.6

$
332.8

$
423.5


---

Our
recurring monthly revenue includes amounts billable to customers with past due balances which we believe are collectible. We seek to preserve the revenue stream associated with each
customer contract, primarily to maximize our return on the investment we made to generate each contract. As a result, we actively work to collect amounts owed to us and to retain the 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 attrition calculations.

Customer Creation and Marketing.For the year ended December 31, 2002, our North America segment added 46,777 accounts
and approximately $1.7 million of recurring monthly revenue although its net number of accounts decreased by 62,988 accounts and its recurring monthly revenue decreased by $1.8 million.
For the year ended December 31, 2001, our North America segment added 46,400 accounts and our net number of accounts decreased by 216,249 accounts. Multifamily added 24,929 accounts and
approximately $0.3 million of recurring monthly revenue for the year ended December 31, 2002, with its net number of accounts increasing by 3,363 accounts although its recurring monthly
revenue decreased by approximately $40,000. For the year ended December 31, 2001, Multifamily added 38,492 accounts, with its net number increasing by 18,592 accounts. We are susceptible to
macroeconomic downturns that may affect our ability to attract new customers.

Our
current customer acquisition strategy for our North America segment relies primarily on internally generated sales. In June 2001, we notified most of our remaining domestic
dealers that we were terminating our dealer arrangements with them and therefore would not be extending or renewing their contracts. The number of accounts purchased through our dealer program
decreased to 1,135 in 2002 from 7,501 in 2001. We currently have a salaried and commissioned sales force that utilizes our existing branch infrastructure in approximately 60 markets. The internal
sales program generated 45,642 accounts and 41,856 accounts in 2002 and 2001, respectively. Our Multifamily segment also utilizes a salaried and commissioned sales force to produce new accounts.

We
are a partner in a marketing alliance with BellSouth Telecommunications, Inc. ("BellSouth") to offer monitored security services to the residential, single family market and to
small businesses in seventeen of the larger metropolitan markets in the nine-state BellSouth region. The term of the marketing alliance will renew for a two-year period on
December 31, 2003 unless terminated by either party. At this time, we believe that BellSouth intends to renew this marketing alliance. Under this agreement, we operate as "BellSouth Security
Systems from Protection One" from our branches in the nine-state BellSouth region. BellSouth provides us with leads of new owners of single family residences

28

---

in its territory and of transfers of existing BellSouth customers within its territory. We follow up on the leads and attempt to persuade them to become customers of our monitored security services.
We also market directly to small businesses. We pay BellSouth an upfront royalty for each new contract and a recurring royalty based on a percentage of recurring charges. Approximately
one-fourth of our new accounts created in 2002 were from this arrangement.

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

Attrition.Subscriber attrition has a direct impact on our results of operations since it affects our revenues, amortization
expense and cash flow. We define attrition as a ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of the adjustments described below, 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. We make adjustments to lost accounts primarily for the net
change, either positive or negative, in our wholesale base and for 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. We do not reduce the gross accounts lost during a period by "move in" accounts, which are accounts where a new
customer moves into a home installed with our security system and vacated by a prior customer, or "competitive takeover" accounts, which are accounts where the owner of a residence monitored by a
competitor requests that we provide monitoring services.

Our
actual attrition experience shows that the relationship period with any individual customer can vary significantly. Customers' service can be discontinued for a variety of reasons,
including relocation, non-payment, customers' perception of value and competition. A portion of the acquired customer base can be expected to discontinue service every year. We are
susceptible to macroeconomic downturns that may affect our ability to retain our customers. 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 a quarterly 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.

For
the period ended December 31, 2002, our total company quarterly annualized and trailing twelve month attrition rates were 11.9% and 11.2%, respectively. The table below shows
the change in our total company customer base including customer additions and attrited customers from 2002 to 2000. The "Conversion adjustments" line item reflects the impact on the calculation of
our customer base from the conversion of our Wichita, Hagerstown, Beaverton and Irving monitoring and billing systems to our new technology platform, MAS®. These conversion adjustments
relate to how a

29

---

customer is defined and the transition of that definition from one system to another as described under "Customer Creation and Marketing" above.

Year Ended December 31,2002(2)

2001(2)

2000(1)(2)Beginning Balance, January 1,

1,133,323

1,330,980

1,460,846Additions

71,706

84,892

102,195Conversion adjustments



(62,443
)
Customer losses from dispositions

(1,362
)
(12,612
)
Customer losses not guaranteed with holdback put backs

(123,426
)
(190,723
)
(198,036
)Customer losses guaranteed with holdback put backs and other

(6,543
)
(16,771
)
(34,025
)Ending Balance, December 31,

1,073,698

1,133,323

1,330,980


---

Critical Accounting Policies

Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles
generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to bad
debts, inventories, investments, customer accounts, goodwill, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Note 2
of the "Notes to Consolidated Financial Statements" includes a summary of the significant accounting policies and methods used in the preparation of our consolidated
financial statements. The following is a brief description of the more significant accounting policies and methods we use.

Revenue and Expense Recognition.Revenues are recognized when security services are provided. System installation revenues,
sales revenues on equipment upgrades and direct and incremental costs of installations and sales are deferred for residential customers with monitoring service contracts. For commercial customers and
our national account customers, revenue recognition is dependent upon each specific customer contract. In instances when we pass title to a system unaccompanied by a service agreement or we pass title
at a price that we believe is unaffected by an accompanying but undelivered service, we recognize revenues and costs in the period incurred. In cases where we retain title to the system or we price
the system lower than we otherwise would because of an accompanying service agreement, we defer and amortize revenues and direct costs.

Deferred
system and upgrade installation revenues are recognized over the estimated life of the customer utilizing an accelerated method for our residential and commercial customers and
a straight-line method for our Multifamily customers. Deferred costs in excess of deferred revenue are recognized utilizing a straight-line method over the initial contract
term, typically two to three years for residential systems, five years for commercial systems and five to ten years for Multifamily systems. To the extent deferred costs are less than deferred
revenues, such costs are recognized over the estimated life of the customer.

30

---



The table below reflects the impact of this accounting policy on the respective line items of the Statement of Operations for the years ended December 31, 2002 and 2001. The
"Total Amount Incurred" column represents the current amount of billings that were made and the current costs that were incurred for the period. We then subtract the deferral amount and add back the
amortization of previous deferral amounts to determine the amount we report in the Statement of Operations.

|                       |  | For the year ended December 31, 2002
|---------------------- |  | ------------------------------------
|
|
|
|RevenuesOther         |  | $                                   
|Cost of RevenuesOther |  | $                                   
|Selling Expense        |  | $                                   

|                       |  | For the year ended December 31, 2001
|---------------------- |  | ------------------------------------
|
|
|
|RevenuesOther         |  | $                                   
|Cost of RevenuesOther |  | $                                   
|Selling Expense        |  | $                                   

Valuation of Customer Accounts and Goodwill.Customer accounts are stated at cost. Goodwill represents the excess of the
purchase price over the fair value of net assets acquired by us. Goodwill is tested for impairment on at least an annual basis or as circumstances warrant. Customer accounts are tested on a periodic
basis or as circumstances warrant. For purposes of this impairment testing, goodwill is considered to be directly related to the acquired customer accounts. Factors we consider important that could
trigger an impairment review include the following:



An
impairment test of customer accounts would have to be performed when the undiscounted expected future operating cash flows by asset group, which consists primarily of capitalized
customer accounts and related goodwill, is less than the carrying value of that asset group. An impairment would be recognized if the fair value of the customer accounts is less than the net book
value of the customer accounts. See "Summary of Significant ActivitiesImpairment Charge Pursuant to New Accounting Rules" for a discussion of the impairment recorded on these assets in
the first quarter of 2002 pursuant to the adoption of new accounting rules.

We
established July 1 as our annual impairment testing date for goodwill. We completed this testing during the third quarter of 2002 and determined that no additional impairment
was required as of July 1, 2002. After regulatory actions (see Note 6, "Related Party Transactions"), including Kansas Corporation Commission Order No. 55, which prompted our
parent company to advise us that it intended to dispose of its investment in us, we retained the independent appraisal firm to perform an additional valuation of our reporting units, so we could
perform an impairment test as of December 31, 2002. The order limited the amount of capital the parent could provide to us and increased our risk profile. Therefore, we reevaluated our
forecast, reducing the amount of capital invested over our forecast horizon and lowered our base monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower valuation than
our July 1, 2002 valuation. We recorded an additional

31

---

$90.7 million impairment charge, net of $13.3 million tax, to reflect the impairment of all remaining goodwill of our North America segment.

Prior
to the adoption of these new rules, customer accounts and goodwill were tested for impairment pursuant to SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." At December 31, 2001 and 2000, these tests indicated that future estimated undiscounted cash flows
exceeded the sum of the recorded balances for customer accounts and goodwill.

Customer Account Amortization.The choice of an amortization life is based on our estimates and judgments about the amounts
and timing of expected future revenues from customer accounts and average customer account life. Selected periods were determined because, in our opinion, they would adequately match amortization cost
with anticipated revenue. We periodically use an independent appraisal firm to perform lifing studies on our customer accounts to assist us in determining appropriate lives of our customer accounts.
These reviews are performed specifically to evaluate our 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. We have identified the following four distinct pools of customer accounts, each of which has distinct attributes that effect differing attrition characteristics. For the North
America and Europe pools, the results of the lifing studies indicated to us that we can expect attrition to be greatest in years one through five of asset life and that a declining balance
(accelerated) method would therefore best match the future amortization cost with the estimated revenue stream from these customer pools.

Our
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 135% declining balanceEurope(*)

Ten-year 125% declining balanceMultifamily

Nine-year straight-line


---

The
results of a lifing study performed by a third party appraisal firm in the first quarter of 2002 showed a deterioration in the average remaining life of customer accounts. The report
showed our North America customer pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of 9 years. Our Multifamily pool can expect a
declining revenue stream
over the next 30 years with an estimated average remaining life of 10 years. Taking into account the results of the lifing study and the inherent expected declining revenue streams for
North America and Multifamily, in particular during the first five years, we adjusted the amortization of customer accounts for our North America and Multifamily customer pools to better match the
rate and period of amortization expense with the expected decline in revenues. In the first quarter of 2002, we changed the amortization rate for our North America pool to a 10-year 135%
declining balance method from a 10-year 130% declining balance method. The change to this ten year 135% accelerated method, provides for a better matching to the declining revenue stream,
in particular during the first five years, where the year over year decline is greatest and a significant portion of the revenue stream is expected to be received. For the Multifamily pool we will
continue to amortize on a straight-line basis, utilizing a shorter nine year life. The change to the nine year life straight-line method provides for a better matching to the
declining revenue stream, in particular during the first five years, where the decline is greatest and a significant portion of the revenue stream is expected to be received. We accounted for

32

---

these amortization changes prospectively beginning January 1, 2002, as a change in estimate. These changes in estimates increased amortization expense for the year ended December 31,
2002 on a pre-tax basis by approximately $1.3 million and on an after tax basis by approximately $0.8 million. The change in estimate had no significant impact on reported
earnings per share.

We
recorded approximately $68.9 million and $132.0 million of customer account amortization expense in 2002 and 2001, respectively. This amount would change if we changed
the estimated life or amortization rate for customer accounts. See "Estimated Lives of Customer Accounts Changed Based on Customer Account Lifing Study Results."

Income Taxes.As part of the process of preparing our consolidated financial statements we are required to estimate our
income taxes in each of the jurisdictions in which we operate. Significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities.
This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization,
for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our
deferred tax assets will be recovered. To the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. No valuation allowance has been established as we
follow a parent company down approach in the allocation of income tax expense between our parent and others included in the consolidated income tax return and no valuation allowance is necessary at
our parent company level.

Westar
Energy makes payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return pursuant to a tax sharing agreement, which is an important source of
liquidity for us. If Westar Energy completes its intended disposition of its investment in us, our net deferred tax assets, which were $294.9 million at December 31, 2002, might not be
realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a non-cash charge against income for the portion of our net
deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations. The amount
of our deferred taxes increased by approximately $204.0 million upon our recording of impairment charges in the first and fourth quarters of 2002 as discussed above.
In addition, as a result of a sale, we would no longer receive payments from Westar Energy for current tax benefits utilized by Westar Energy. In 2002 and 2001, we received aggregate payments from
Westar Energy of $1.7 million and $19.1 million, respectively. The loss of these payments would have a material adverse effect on our cash flow.

Results of Operation

For the years ended December 31, 2002, 2001 and 2000, we incurred consolidated net losses of $880.9 million, $86.0 million and
$57.2 million, respectively, or losses per share of common stock of $(8.98), $(0.82) and $(0.45), respectively. From May 2000 through December 2002 we purchased 29,840,405 of our
shares which resulted in a decrease in our weighted average shares outstanding used in calculating our consolidated loss per share. Our weighted average shares outstanding for the years ended
December 31, 2002, 2001 and 2000 were 98,071,206 shares, 105,458,601 shares, and 126,550,059 shares. Since February 2000, we have also purchased and retired $470.5 million face
value of our notes at discounted prices resulting in gains from retirement of debt of $19.3 million, $53.0 million and $75.8 million for the years ended December 31, 2002,
2001 and 2000. Primarily due to this reduction of outstanding debt, our interest expense has decreased from $60.4 million in 2000 to $51.7 million in 2001 and $43.0 million in
2002.

We
separate our business into two reportable segments: North America and Multifamily. North America provides security alarm monitoring services, which include sales, installation and
related

33

---

servicing of security alarm systems in the United States. Multifamily provides security alarm services to apartments, condominiums and other multifamily dwellings. During the third quarter of 2002,
we identified a new segment, Data Services, with the creation of PODS. As discussed in Note 6, the operations of this segment were discontinued in the fourth quarter of 2002.

North America Segment

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.

|                                                     |                                 | Year Ended December 31, |         
|---------------------------------------------------- | ------------------------------- | ----------------------- | --------
|
|
|Revenues:                                            |                                 |                         |         
|                                                     | Monitoring and related services |                         | $       
|                                                     | Other                           |                         |         
|                                                     |                                 |                         |         
|                                                     | Total revenues                  |                         |         
|Cost of revenues:                                    |                                 |                         |         
|                                                     | Monitoring and related services |                         |         
|                                                     | Other                           |                         |         
|                                                     |                                 |                         |         
|                                                     | Total cost of revenues          |                         |         
|                                                     |                                 |                         |         
|                                                     | Gross profit                    |                         |         
|Selling expenses                                     |                                 |                         | 26,342  
|General and administrative expenses(a)               |                                 |                         | 73,149  
|Amortization of intangibles and depreciation expense |                                 |                         | 77,173  
|Loss on impairment of customer accounts(b)           |                                 |                         | 338,104 
|Loss on impairment of goodwill(b)                    |                                 |                         | 103,937 
|                                                     |                                 |                         |         
|Operating loss                                       |                                 | $                       | (464,873
|                                                     |                                 |                         |         

---

2002 Compared to 2001.We had a net decrease of 62,988 customers in 2002, as compared to a net
decrease of 216,249 customers, including 75,055 customers related to dispositions and conversions in 2001. This decline is the primary reason for the $43.9 million decline in revenues in 2002.
The average customer base was 775,280 for 2002 compared to 914,899 for 2001. Although our net customers decreased for the year, attrition decreased in 2002 compared to 2001 for a variety of reasons
including:



34

---



We
expect that the decline in our customer base will continue until the efforts we are making to acquire new accounts and reduce attrition become more successful than they have been to
date. Until we are able to reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations. We are currently
focused on reducing attrition, development of cost effective marketing programs to replace revenue decline from attrition, improving margins, as well as the generation of positive cash flow. We are
also susceptible to macroeconomic downturns that may affect our ability to retain our customers.

Further
analysis of the change in the North American account base between the two years is shown in the table below. The "Conversion adjustments" line item reflects the impact on the
calculation of our customer base from the conversion of our Wichita, Hagerstown, Beaverton and Irving monitoring and billing systems to our new technology platform, MAS® discussed under
"Customer Creation and Marketing" above.

2002

2001

2000Beginning Balance, January 1,

806,774

1,023,023

1,165,886Additions

46,777

46,400

62,340Conversion adjustments



(62,443
)
Customer losses from dispositions

(1,362
)
(12,612
)
Customer losses not guaranteed with holdback put backs

(101,860
)
(170,823
)
(171,178
)Customer losses guaranteed with holdback put backs and other

(6,543
)
(16,771
)
(34,025
)Ending Balance, December 31,

743,786

806,774

1,023,023Twelve month trailing attrition

13.1
%
18.7
%
15.6
%


Monitoring and related service revenuesfor 2002 decreased by $47.5 million, or 16.9%, to $234.0 million from
$281.5 million for 2001. The decrease is primarily due to the decline in our customer base which decreased for the reasons discussed above. These revenues consist primarily of contractual
revenue derived from providing monitoring and maintenance service.

Other revenuesincreased $3.6 million, or 24.3%, to $18.5 million in 2002, compared to $14.9 million in 2001
primarily due to an increase in the size of our commercial sales force and an emphasis on selling larger systems in 2002. These revenues consist primarily of sales of burglar alarms, closed circuit
television systems, fire alarms and card access control systems to commercial customers.

Cost of monitoring and related services revenuesfor 2002 decreased by $22.0 million, or 23.8%, to $70.3 million from
$92.3 million for 2001. These costs generally relate to the cost of providing monitoring service and include the costs of monitoring, billing, customer service and field operations. The
decrease is primarily due to a reduction of telecommunication costs and consolidation of monitoring functions. Costs of monitoring and related services revenues as a percentage of the related revenues
decreased from 32.8% in 2001 to 30.0% in 2002.

Cost of other revenuesfor 2002 increased by $12.9 million, or 83.7%, to $28.3 million from $15.4 million in 2001
reflecting the increase in Other Revenues. These costs consist primarily of equipment and labor charges to install alarm systems, closed circuit televisions, fire alarms and card access control
systems sold to our customers. Increased amortization of deferred customer acquisition costs of $9.8 million is the primary reason for the increase in costs of other revenues. These costs as a
percentage of other revenues were approximately 153.4% in 2002 compared to approximately 103.8% in 2001.

Selling expensesfor 2002 increased by $11.1 million, or 73.0%, to $26.3 million from $15.2 million in 2001. The
increase is due to our increased efforts to generate new customers through an internal

35

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sales force by increasing the number of sales representatives and building the necessary sales support. As our internal sales force increases their generation of new customers, the amount of direct
and incremental selling costs that are deferred also increases. These deferred selling costs are amortized to selling expense over the customer's initial contract term, typically a two to five year
period, which result in increased amortization to selling expense.

General and administrative expensesfor 2002 decreased by $25.5 million, or 25.8%, to $73.1 million from
$98.6 million in 2001. This decrease is generally comprised of reductions in professional fees and outside services of $10.9 million primarily due to completion of system integration
projects and lower litigation costs, $5.8 million decrease in wage expense primarily due to consolidation efforts, $2.4 million decrease in bad debt expense primarily due to increased
collection efforts and a decline in revenues, and $1.0 million decrease in telecommunications expense. Severance and relocation costs decreased $5.1 million primarily due to fewer
facility closures in 2002. These decreases were partially offset by an increase of $1.2 million in insurance premiums for our director and officer liability insurance. As a percentage of total
revenues, general and administrative expenses decreased from 33.3% in 2001 to 29.0% in 2002.

Amortization of intangibles and depreciation expensefor 2002 decreased by $105.1 million, or 57.7%, to $77.2 million from
$182.3 million in 2001. This decrease reflects a reduction in subscriber amortization of $63.6 million primarily related to the impairment charge, a decrease in goodwill amortization of
$39.4 million due to implementation of SFAS No. 142 and a decrease in depreciation expense of $2.1 million.

2001 Compared to 2000.We had a net decrease of 216,249 customers in 2001, including 75,055 customers
related to dispositions and conversions, as compared to a net decrease of 142,863 customers (net of
17,342 customers acquired in the acquisition of PowerCall) in 2000. This decline is the primary reason for the $59.9 million decline in revenues in 2001. The average customer base was 914,899
for 2001 compared to 1,094,455 for 2000. Attrition increased in 2001 compared to 2000 for a variety of reasons including:



Monitoring and related service revenuesfor 2001 decreased by $59.9 million, or 17.5%, to $281.5 million from
$341.4 million for 2000. The decrease is primarily due to the decline in our customer base. These revenues consist primarily of contractual revenue derived from providing monitoring and
maintenance service.

Other revenuesincreased slightly to $14.9 million in 2001, compared to $14.8 million in 2000. These revenues consist
primarily of sales of burglar alarms, closed circuit television systems, fire alarms and card access control systems to commercial customers.

Cost of monitoring and related services revenuesfor 2001 decreased by $21.1 million, or 18.6%, to $92.3 million from
$113.4 million for 2000. These costs generally relate to the cost of providing

36

---

monitoring service and include the costs of monitoring, billing, customer service and field operations. The decrease is primarily due to discontinuation of our Patrol services in May of 2001, the
decline in our customer base, a reduction of telecommunication costs, and consolidation of monitoring and customer service functions. Costs of monitoring and related services revenues as a percentage
of the related revenues decreased from 33.2% in 2000 to 32.8% in 2001.

Cost of other revenuesfor 2001 increased by $4.4 million, or 40.6%, to $15.4 million from $11.0 million in 2000.
These costs consist primarily of equipment and labor charges to install alarm systems, closed circuit televisions, fire alarms and card access control systems sold to our customers. This increase is
primarily related to costs incurred by our PowerCall branches which were acquired in December 2000. These costs as a percentage of other revenues were approximately 103.8% in 2001 compared to
approximately 74.2% in 2000.

Selling expensesfor 2001 increased by $6.7 million, or 78.8%, to $15.2 million from $8.5 million in 2000. The
increase in selling expense is due to our increased efforts to generate new customers through an internal sales force and the associated expenses. We believe our selling costs will continue to
increase as we continue to grow our internal sales force.

General and administrative expensesfor 2001 decreased by $10.9 million, or 9.9%, to $98.6 million from $109.5 million in
2000. This decrease is generally comprised of reductions in bad debt expense and collection costs of approximately $9.2 million primarily due to increased collection efforts,
$2.9 million decrease in corporate marketing expense, $2.7 million decrease in corporate expenses, $2.1 million decrease in wage expense, $1.9 million reduction in
professional fees and outside services, and $2.5 million decrease in other general expense. These decreases were partially offset by increases in system processing charges of
$2.8 million, and premiums to insurance companies of $1.4 million. Severance and relocation costs increased $4.8 million for costs related to the closure of our Irving, Texas,
Beaverton, Oregon, and Hagerstown, Maryland monitoring facilities as well as expenses related to the elimination of certain business lines, such as our national accounts and patrol divisions.
Additionally, lease expense relating to computer equipment and software increased $2.0 million. Our prior practice was to purchase our computer equipment and software and depreciate and
amortize accordingly. In 2001, we procured most new computer equipment and certain software with lease financing and, as a result, incur lease charges. As a percentage of total revenues, general and
administrative expenses increased from 30.7% in 2000 to 33.3% in 2001 because the decrease in expenses was proportionately less than the decrease in revenues.

Amortization of intangibles and depreciation expensefor 2001 decreased by $16.3 million, or 8.2%, to $182.3 million from
$198.6 million in 2000. This decrease reflects a reduction in depreciation expense of $7.0 million primarily related to the accelerated depreciation of the billing and general ledger
system used in 2000, a reduction in subscriber amortization expense of $7.6 million related to the declining balance method of amortization utilized, and a $1.7 million decrease from
goodwill amortization due to adjustments made to goodwill in 2000 to reflect utilization of tax net operating losses.

37

---



The following table provides information for comparison of the Multifamily operating results for the periods presented. Next to each period's results of
operations, we provide the relevant percentage of total revenues so that comparisons about the relative change in revenues and expenses can be made.

|                                                     |                                 | Year Ended December 31, |       
|---------------------------------------------------- | ------------------------------- | ----------------------- | ------
|
|
|Revenues:                                            |                                 |                         |       
|                                                     | Monitoring and related services |                         | $     
|                                                     | Other                           |                         |       
|                                                     |                                 |                         |       
|                                                     | Total revenues                  |                         |       
|Cost of revenues:                                    |                                 |                         |       
|                                                     | Monitoring and related services |                         |       
|                                                     | Other                           |                         |       
|                                                     |                                 |                         |       
|                                                     | Total cost of revenues          |                         |       
|                                                     |                                 |                         |       
|                                                     | Gross profit                    |                         |       
|Selling expense                                      |                                 |                         | 2,265 
|General and administrative expense                   |                                 |                         | 11,228
|Amortization of intangibles and depreciation expense |                                 |                         | 5,267 
|                                                     |                                 |                         |       
|Operating income (loss)                              |                                 | $                       | 4,830 
|                                                     |                                 |                         |       

2002 Compared to 2001.We had a net increase of 3,363 customers in 2002 as compared to a net increase
of 18,592 customers in 2001. The average customer base was 328,231 for 2002 compared to 317,253 for 2001. The change in Multifamily's customer base for the period is shown below

Year ended December 31,2002

2001

2000Beginning Balance, January 1,

326,549

307,957

294,960Additions

24,929

38,492

39,855Customer losses

(21,566
)
(19,900
)
(26,858
)Ending Balance, December 31,

329,912

326,549

307,957Twelve month trailing attrition

6.6
%
6.3
%
8.9
%


The
attrition rate for Multifamily in 2000 reflects approximately 7,000 subscribers related to one developer cancelled due to nonpayment. Had these accounts not attrited, the annualized
attrition would have been approximately 6.6%. We received payment from contractual remedies for cancellation of these accounts in 2002.

Monitoring and related services revenuewas $36.8 million for 2002 compared to $35.9 million in 2001. This increase is
primarily due to the increase in the average customer base of 3.5% and increased contract buyouts totaling $0.5 million. The increase was partially offset by a decline in our recurring monthly
revenue ("RMR") per customer due primarily to an increasing number of renewals, which provide for significant contract extensions at a reduced RMR.

Other revenueincreased by $0.7 million or 101.0% to $1.3 million in 2002 from $0.6 million in 2001 primarily due to
an increase in deferred revenue amortization of $1.0 million pursuant to Staff Accounting Bulletin (SAB) 101, which requires deferral of revenue over the life of the customer along

38

---

with deferral of associated direct and incremental costs offset by a $0.4 million decline in outright sales of access control systems.

Cost of monitoring and related service revenuesfor 2002 remained consistent with costs for 2001. Cost of monitoring and related services
revenues as a percentage of related revenues decreased slightly to 22.6% in 2002 from 23.2% in 2001 primarily as a result of increased contract buyout revenue.

Cost of other revenuesincreased by $3.2 million or 103.4% to $6.2 million in 2002 from $3.0 million in 2001 due to
the increased amortization of deferred costs totaling $3.5 million related to the revenue amortization increase of $1.0 million pursuant to SAB 101, discussed above, offset by a
$0.3 million decline in access control installation costs.

Selling expenseincreased to $2.3 million in 2002 from $1.9 million in 2001 due to higher selling expense amortization of
$0.2 million associated with the increase in other revenue and cost of other revenue amortization pursuant to SAB 101 and a slight increase in the sales force creating $0.1 million
additional cost.

General and administrative expensefor 2002 increased $1.0 million to $11.2 million in 2002 from $10.2 million in
2001. This 10.0% increase is primarily the result of increased management fees of $0.5 million allocated from Protection One, increased facility costs totaling $0.5 million and increased
insurance costs of $0.5 million offset by a $0.5 million reduction in relocation expenses associated with Multifamily's corporate office relocation to the Protection One Irving facility
in 2001.

Amortization of intangibles and depreciation expensefor 2002 decreased by $8.2 million, or 61.0% to $5.3 million from
$13.5 million in 2001. This decrease is due to the elimination of goodwill amortization totaling $9.2 million resulting from a change in accounting principle. This decrease was offset by
an increase in subscriber amortization resulting from a change in estimate of the subscriber life from 10 years to 9 years and the increasing customer base being amortized.

2001 Compared to 2000.We had a net increase of 18,592 customers in 2001 as compared to a net
increase of 12,997 customers in 2000. The average customer base was 317,253 for 2001 compared to 301,459 for 2000.

Monitoring and related services revenuewas $35.9 million for 2001 compared to $35.2 million in 2000. The average customer
base increase of 5.2% was offset by a decrease in our recurring monthly revenue ("RMR") per customer. The decrease in RMR per customer is partly due to an increase in the number of our customers added
during 2000 and 2001 through outright sales of security systems with lower
RMR than our standard contracts, which include an additional monthly charge for equipment. The remaining decline in RMR per customer is primarily related to an increasing number of contract renewals,
which provide for significant contract term extensions at a reduced RMR, and contract cancellations, which are terminating at higher RMR rates due to annual rate escalations.

Other revenuedecreased by $3.5 million, or 84.9%, to $0.6 million in 2001 from $4.1 million in 2000 primarily due to
a $2.3 million decrease in revenue resulting from fewer outright sales. We also deferred $1.2 million in installation revenues pursuant to Staff Accounting Bulletin (SAB) 101, which
requires deferral of revenue over the life of the customer along with deferral of associated direct and incremental costs.

Cost of monitoring and related service revenuesfor 2001 was $8.3 million in 2001 compared with $8.2 million in 2000. Cost
of monitoring and related services revenues as a percentage of related revenues decreased slightly to 23.2% in 2001 from 23.3% in 2000.

Cost of other revenuesdecreased by $2.3 million or 42.2% to $3.0 million in 2001 from $5.3 million in 2000 due to
the decline in the number of outright sales and $1.6 million in deferrals of costs related to the $1.2 million in revenue deferrals pursuant to SAB 101.

39

---

Selling expensedecreased $0.5 million or 19.1% to $1.9 million in 2001 from $2.4 million in 2000 due to the deferral
of $0.4 million in sales expense related to the installation of new accounts pursuant to SAB 101.

General and administrative expensesfor 2001 increased $2.7 million to $10.2 million from $7.5 million in 2000. This
36.0% increase is primarily the result of management fees allocated from Protection One totaling $0.7 million and increased legal fees and relocation expense of $0.6 million and
$0.5 million, respectively.

Amortization of intangibles and depreciation expensefor 2001 decreased by $0.5 million, or 3.3% to $13.5 million from
$14.0 million in 2000. This decrease is primarily the result of lower goodwill amortization.

Liquidity and Capital Resources

Westar Energy, which owns 88% of our common stock, is also our principal source of the external capital we need to operate our business. We obtain most of our
external cash requirements under the Westar Credit Facility in the amount of $228.4 million which expires January 5, 2004. As of April 3, 2003, we had $12.9 million
available to us under the Westar Credit Facility. We also have obtained funds from a tax sharing agreement with Westar Energy. The KCC authorized Westar Energy to pay approximately $20 million
owed us under this agreement with respect to amounts due for the 2002 fiscal year. Westar Energy has filed a plan with the KCC in response to an order issued by it to restructure and reduce debt. In
that plan, Westar Energy announced its intention to sell its investment in us. The KCC has ordered Westar Energy not to extend any credit to us except under the Westar Credit Facility, and has
authorized Westar Energy to provide funds to meet its obligations under the Westar Credit Facility and to extend the term of the Westar Credit Facility for one year to January 5, 2005.
Additionally, the Westar Credit Facility must be paid in full upon the sale of all or a majority of our common stock to a new owner. The KCC has authorized the extension of the Westar Credit Facility
to January 5, 2005 and Westar Energy has indicated that it is willing to extend the January 5, 2004 maturity date of the facility. Westar Energy has also indicated it may require some
form of collateral, either upon the execution of an extension or upon the occurrence of events to be determined, to secure all or a portion of our obligations under the Westar Credit Facility. The
indentures governing our 135/8% senior subordinated discount notes and 63/4% convertible senior subordinated notes prohibit us from securing any of our senior debt unless
all other senior debt is secured; and our 73/8% senior notes prohibit us from securing senior debt without providing security for the 73/8% senior notes, subject to
certain permitted carve outs as defined in the indenture. We are currently in discussions with Westar Energy regarding the terms of the extension of the Westar Credit Facility. Westar Energy has
provided assurance that it presently intends to renew the Westar Credit Facility through January 5, 2005 should such renewal be necessary to provide us continued liquidity at January 5,
2004 when the facility is currently scheduled to terminate. In the event our Westar Credit Facility is not extended on its present terms and we are required to seek such financing from unaffiliated
third parties, we may not be able to do so on terms as economically favorable as those under our present Westar Credit Facility or at all. KCC orders also preclude us from raising monies through the
sale of assets in excess of $100,000 without prior KCC approval. Please refer to "BusinessOverview" for information on standstill provisions which also impact on Westar Energy's dealings
with us. We have in the past few years tried to obtain a line of credit from third party sources, but have been unable to do so.

We
have $10.2 million in debt maturing in 2003, including $9.7 million principal amount of our Convertible Senior Subordinated Notes due in September 2003. We
believe the required capital will be provided by a combination of cash flow from our security monitoring customer base and tax payments from Westar Energy which generated $43.4 million of
positive cash flow from operations in 2002. While we believe we will have adequate funds in 2003 from internally generated sources, the Westar Credit Facility, payments made under the tax sharing
agreement and from assets sales, factors such as

40

---

economic conditions, the inability to receive required KCC approvals, and a decision by Westar Energy not to extend the Westar Credit Facility could impair our liquidity in 2004.

As
discussed below, we have obligations under which our outstanding notes have been issued which could require us to offer to purchase such debt in connection with a change of control
such as a
disposition by Westar Energy of its investment in our common stock. Should a change in control occur, we anticipate that a purchaser of Westar Energy's interest in us would negotiate the amendment of
the terms of our outstanding debt requiring its repurchase, or assist us in finding sufficient sources of funds to meet our repurchase obligations. We also anticipate that a purchaser would assist us
in arranging for new credit facilities or provide us needed credit. However, we can give no assurance that any such arrangements will or could be made or any needed funds otherwise be provided.

Our
ability to borrow under the Westar Credit Facility is subject to compliance with certain financial covenants described under "Material Commitments" below.

The
Westar Credit Facility must be paid in full upon any sale by Westar Energy of our common stock. Furthermore, the indentures governing all of our debt securities require that we offer
to repurchase the securities in certain circumstances following a change of control such as would occur if Westar Energy completes the sale of its investment in us.



As
of December 31, 2002, we had outstanding $29.9 million principal amount of the Senior Subordinated Discount notes, $9.7 million principal amount of the
Convertible Notes, $190.9 million principal amount of the Senior Notes and $110.3 million principal amount of the Senior Subordinated Notes.

Operating Cash Flows for the Year Ended December 31, 2002.Our operating activities provided
net cash flows of $43.4 million in 2002 compared to $36.8 million in 2001, an increase of $6.6 million.

Investing Cash Flows for the Year Ended December 31, 2002.We used a net $20.9 million
for our investing activities in 2002. Proceeds from the sale of customer accounts and our Canadian operations provided cash of $18.6 million. We invested a net $30.2 million in cash to
install and acquire new accounts, $8.1 million to acquire fixed assets and invested $1.4 million in the purchase of AV ONE, an aviation company, from Westar Energy. In 2001, we invested
a net $21.6 million in cash to install and acquire new accounts and $7.0 million to acquire fixed assets.

Financing Cash Flows for the Year Ended December 31, 2002.We used a net $25.0 million
in cash for financing activities in 2002. We increased our borrowings under the Westar Credit Facility by $78.0 million. We used cash to purchase $103.2 million in face value of our
outstanding debt for $83.2 million, $2.2 million to acquire 1,000,000 shares of our outstanding stock, and $13.5 million to purchase equity securities of our parent. At
December 31, 2002, the Westar Credit Facility had a weighted average annual interest rate before fees of 5.2% and an outstanding balance of $215.5 million. In 2001, we used a net
$27.9 million in financing activities. Borrowings under our Westar Credit Facility increased by $93.5 million. We used cash to purchase $146.0 million in face value of our
outstanding debt for $91.7 million, to make principal payments of $0.5 million on capital leases and to acquire 22,013,592 shares of our outstanding stock for $27.1 million. We
also invested $1.4 million in Westar

41

---

Energy securities. At December 31, 2001 our Westar Credit Facility had a weighted average annual interest rate of 5.8% and an outstanding balance of $137.5 million.

Capital Expenditures.We anticipate making capital expenditures of approximately $35 million
in 2003. Of such amount, we plan to expend approximately $22 million in customer acquisition costs and $13 million for fixed assets. Assuming we have available funds, capital
expenditures for 2004 and 2005 are expected to be approximately $36 million and $40 million, respectively. Of these amounts approximately $26 million and $30 million would
be used for customer acquisition costs with the balance for fixed assets. These estimates are prepared for planning purposes and are revised from time to time. Actual expenditures for these and
possibly other items not presently anticipated will vary from these estimates during the course of the years presented. See "Liquidity and Capital Resources" above for information with respect to how
we believe we can obtain funds for capital requirements.

Material Commitments.We have future, material, long-term commitments made in the past
several years in connection with our growth. The following reflects our commitments as of December 31, 2002:

Payment Due by PeriodAt December 31, 2002:
Contractual Cash Obligations

2003

2004 - 2005

2006 - 2007

Thereafter

Total(Dollars in thousands)Long-term debt

$
9,725

$
220,797

$


$
110,340

$
340,862Capital lease obligations


434











434Operating leases


8,936


10,694


3,808


1,925


25,363Unconditional purchase obligations(a)


4,060


2,030








6,090Other long-term obligations














Total contractual cash obligations

$
23,155

$
233,521

$
3,808

$
112,265

$
372,749


---

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

Amount of Commitment Expiration Per PeriodAt December 31, 2002:
Other Commercial Commitments

2003

2004 - 2005

2006 - 2007

Thereafter

Total(Dollars in thousands)Line of credit

$


$
215,500

$


$


$
215,500Standby letters of credit


2,000











2,000Total commercial commitments

$
2,000

$
215,500

$


$


$
217,500


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

42

---

Our
Westar Credit Facility and the indentures relating to our other indebtedness contain the financial covenants summarized below:

|Debt Instrument                    |  | Financial Covenant                                                                                                       |  | Ratio as of 12/31/02
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------------------
|Westar Credit Facility             |  | Total consolidated debt/annualized most recent quarter EBITDA
less than 5.75 to 1.0                                      |  | 4.6                 
|                                   |  | Consolidated annualized most recent quarter EBITDA/latest four fiscal quarters interest expense
greater than 2.10 to 1.0 |  | 2.8                 
|Senior Subordinated Notes          |  | Current fiscal quarter EBITDA/current fiscal quarter interest expense
greater than 2.25 to 1.0                           |  | 3.1                 
|Senior Subordinated Discount Notes |  | Total debt/annualized current quarter EBITDA less than 6.0 to 1.0                                                        |  | 4.0                 
|                                   |  | Senior debt/annualized current quarter EBITDA less than 4.0 to 1.0                                                       |  | 2.9                 

These
debt instruments also restrict our ability to pay dividends to stockholders, but do not otherwise restrict our ability to fund cash obligations. 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 continue to meet those tests. Failure to meet the tests would place additional
restrictions on our ability to incur indebtedness. A violation of these restrictions would result in an event of default which would allow the lenders to declare all amounts outstanding immediately
due and payable.

Credit Ratings.As of April 3, 2003, our public debt was rated as follows:

Senior
Unsecured
Debt

Senior
Subordinated
Unsecured Debt

OutlookS & P

B

CCC+

NegativeMoody's

Caa1

Caa3

NegativeFitch Ratings

CCC+

CCC-

Negative


There
are no covenants or restrictions in our indentures or other agreements that would be affected by a change in these ratings unless coupled with a change in control. Upon a change in
control and two ratings downgrades, the holders of our Senior Notes and Senior Subordinated Notes have the option to redeem the respective notes at a price of 101% of par as discussed above.

In
general, revenue declines and reductions in operating margin leave our credit ratings susceptible to further downgrades which make debt financing more costly and more difficult to
obtain on terms which are economically favorable to us.

Debt and Equity Repurchases.We may from time to time purchase our debt and equity securities in the
open market or through negotiated transactions if we have adequate capital. The timing and terms of purchases, and the amount of debt or equity actually purchased, will be determined based on market
conditions, the availability of funds and other factors. From January 1, 2003 through April 3, 2003, we purchased 2,500 shares of our common stock for $3,400. As of April 3, 2003,
we had authority from our board of directors to purchase an additional approximately 8.2 million shares of our common stock.

In
2002, we purchased in the open market, approximately $1.8 million in Westar Energy preferred stock, approximately $67.4 million of Westar Energy notes, approximately
$0.1 million in ONEOK

43

---

common stock and approximately $12.6 million of Westar Energy common stock. In 2002, we received dividends of $0.6 million on Westar Energy Securities and sold $0.3 million of
Westar Energy preferred stock at cost. The dividends received were recorded as a reduction in the investment in parent. On March 25, 2002, we sold our investments in the ONEOK stock and the
Westar Energy 6.25% notes to Westar Energy for approximately $9.8 million. On that same date, we purchased from Westar Industries approximately $8.3 million (face amount) of our Senior
Subordinated Discount Notes for approximately $7.5 million and $6.5 million (face amount) of our Senior Subordinated Notes for approximately $4.5 million. In May and
June 2002, we sold the remaining investment in Westar Energy notes to Westar Energy at cost.

At
December 31, 2002, our total investment in the remaining Westar Energy securities was approximately $15.0 million. These securities were sold to Westar Energy on
February 14, 2003 for $11.6 million. The difference between our cost and the proceeds we received will be treated as a reduction in contributed capital from Westar Energy in the first
quarter of 2003.

ITEM 7A.    QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risk relating to interest rates.

Interest Rate Exposure.We have approximately $215.5 million of long-term variable rate debt as of
December 31, 2002. A 100 basis point change in the debt benchmark rate would impact pre tax income by approximately $2.2 million.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and supplementary data, together with the report of Deloitte & Touche 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

Effective May 30, 2002, the Audit and Finance Committee of our board of directors decided not to retain Arthur Andersen LLP as our public accountants and
engaged Deloitte & Touche LLP to serve as our principal accountants for fiscal year 2002. This matter was previously reported by us in our Form 8-K dated May 30, 2002
filed with the SEC.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Information relating to our directors, nominees for directors and executive officers is set forth under the heading "Election of Directors" in the Proxy Statement
relating to the Annual Meeting of Stockholders to be held May 28, 2003, which will be filed with the Securities and Exchange Commission no later than April 30, 2003, 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 28, 2003, which will be filed with the Securities and Exchange Commission no later than
April 30, 2003, and which is incorporated herein by reference.

44

---

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", "Security Ownership of Management and Directors" and "Equity Compensation Plan Information" in the Proxy Statement relating to the Annual Meeting of Stockholders to be held
May 28, 2003 which will be filed with the Securities and Exchange Commission no later than April 30, 2003, 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 28, 2003, which will be filed with the Securities and Exchange
Commission no later than April 30, 2003, and which is incorporated herein by reference.

ITEM 14.    CONTROLS AND PROCEDURES

Within the 90-day period prior to the filing date of this report, an evaluation was carried out, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective, in all material respects, with respect to the recordings, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, of
information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There
have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation described
above.

45

---



PART IV

ITEM 15.    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 Westar Energy and Protection One, Inc. ("POI") (incorporated by reference to Exhibit 2.1 to the Current Report on
Form 8-K filed by POI and Protection One Alarm Monitoring, Inc. ("Monitoring") dated July 30, 1997 (the "July 1997 Form 8-K")). The Common File Number of POI is 0-24780. The Common File Number of Monitoring is 33-73002-01.
|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         |  | 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).                                                                                                                                                                                                                                 
|2.4         |  | Amendment No. 3 dated June 21, 2001 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 August 14, 2001).                                                                                                                                                                                                                                       
|2.5         |  | Amendment No. 4 dated October 25, 2001 to the Contribution Agreement. ( incorporated by reference to Exhibit 2.5 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended
December 31, 2001 (the "Fiscal 2001 Form 10-K"))                                                                                                                                                                                       
|2.6         |  | Consent and Limited Waiver Agreement dated March 18, 2002 to the Contribution Agreement (incorporated by reference to Exhibit 2.6 to the Fiscal 2001 Form 10-K).                                                                                                                                                                                                                                                                         
|2.7         |  | Consent and Limited Waiver Agreement dated July 1, 2002 to the Contribution Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by POI and Monitoring dated
November 14, 2002).                                                                                                                                                                                                              
|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 POI.                                                                                                                                                                                                                                                                                                                               
|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).                                                                                                                                                                                                                                                        

46

---

|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")).              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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  |  | Third Supplemental Indenture dated as of February 14, 2000 among Monitoring as Issuer, POI inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.4 to the Annual Report on
Form 10-K filed by POI and Monitoring for the year ended December 31, 2000 (the "Fiscal 2000 Form 10-K")).                                                                
|4.5  |  | 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).                                                                                                                                                                             
|4.6  |  | 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")).                                                                    
|4.7  |  | 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).                                                                                                                                                                   
|4.8  |  | Supplemental Indenture No. 3 dated as of February 14, 2000, among Monitoring as Issuer, POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.8 to the Fiscal 2000
Form 10-K).                                                                                                                                                                  
|4.9  |  | 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 S-4 filed by POI and Monitoring on September 22, 1998).                                                                                                                  
|4.10 |  | 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).                                                                                                                                                          

47

---

|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  |  | 1994 Stock Option Plan of POI, as amended (incorporated by reference to Exhibit 10.23 to the Fiscal 1996 Form 10-K).*                                                                                                                                                                                                                                              
|10.6  |  | 1997 Long-Term Incentive Plan of POI (incorporated by reference to Appendix F to POI's proxy statement dated November 7, 1997).*                                                                                                                                                                                                                                   
|10.7  |  | 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).                                                                                                                                                 
|10.8  |  | 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).
|10.9  |  | 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).                                                                                                                                                                                                        
|10.10 |  | Agreement, dated as of February 29, 2000, by and among POI, Monitoring, and Westar Industries, 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).                                                                                                                             
|10.11 |  | Second Amendment of Credit Agreement, effective as of February 29, 2000, between Monitoring and Westar Industries, 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).                                                                   
|10.12 |  | 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").                                                            
|10.13 |  | Form of Change of Control Agreement with Anthony Somma (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended December 31, 1999 (the
"Fiscal 1999 Form 10-K")).*                                                                                                                             
|10.14 |  | Third Amendment to the Revolving Credit Agreement, dated as of January 2, 2001, between Monitoring and Westar Industries, Inc., as Administrative Agent and as a Lender (incorporated by reference to Exhibit 10.15
to the Fiscal 2000 Form 10-K.                                                                                                                  
|10.15 |  | Fourth Amendment to the Revolving Credit Agreement, dated as of February 28, 2001, between Monitoring and Westar Industries, Inc., as Administrative Agent and as a Lender (incorporated by reference to
Exhibit 10.16 to the Fiscal 2000 Form 10-K).                                                                                                              
|10.16 |  | Fifth Amendment of Credit Agreement effective as of June 30, 2001 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by POI and Monitoring dated August 15, 2001).                                                                                       
|10.17 |  | Sixth Amendment of Credit Agreement effective as of November 1, 2001 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by POI and Monitoring dated November 14, 2001).                                                                                  
|10.18 |  | Seventh Amendment to Credit Agreement effective March 25, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.19 to the Fiscal 2001
Form 10-K).                                                                                                                                                

48

---

|10.19 |  | Eighth Amendment of Credit Agreement effective as of June 3, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring dated August 13, 2002).         
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20 |  | Ninth Amendment of Credit Agreement effective as of June 26, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring dated August 13, 2002).         
|10.21 |  | Tenth Amendment of Credit Agreement effective as of July 25, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring dated November 14, 2002).       
|10.22 |  | Eleventh Amendment of Credit Agreement effective as of August 26, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report
on Form 10-Q filed by POI and Monitoring dated November 14, 2002).  
|10.23 |  | Twelfth Amendment of Credit Agreement effective as of September 11, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly
Report on Form 10-Q filed by POI and Monitoring dated November 14, 2002).
|10.24 |  | Employment Agreement dated as of April 16, 2001 between Protection One, Inc. and Richard Ginsburg (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring
dated May 15, 2001).*                                                        
|10.25 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Richard Ginsburg.+*                                                                                                                                                                                          
|10.26 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Darius G. Nevin.+*                                                                                                                                                                                           
|10.27 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Peter J. Pefanis.+*                                                                                                                                                                                          
|10.28 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Mack Sands.+*                                                                                                                                                                                                
|10.29 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Steve V. Williams.+*                                                                                                                                                                                         
|10.30 |  | Letter Agreement dated November 1, 2001 between Westar Industries, Inc. and POI regarding management fee and financial advisory services.                                                                                                                                               
|10.31 |  | Outsourcing Agreement between Westar Energy, Inc. and Protection One Data Services, Inc. dated July 1, 2002 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring dated August 13, 2002).                                         
|10.32 |  | Westar Aviation, Inc. Stock Purchase Agreement dated as of June 5, 2002 by and between Westar Industries, Inc. and Protection One, Inc. (incorporated by reference to Exhibit 10.5 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring dated August 13, 2002).             
|10.33 |  | Aircraft Reimbursement Agreement dated as of June 5, 2002 between AV ONE, Inc. (f/k/a Westar Aviation, Inc.) and Westar Industries (incorporated by reference to Exhibit 10.6 to the Quarterly Report on
Form 10-Q filed by POI and Monitoring dated August 13, 2002).                  
|10.34 |  | Kansas Corporation Commission Order dated November 8, 2002 (incorporated by reference to Exhibit 99.2 to our Quarterly Report on Form 10-Q dated November 14, 2002).                                                                                                                    
|10.35 |  | Kansas Corporation Commission Order No. 55 dated December 23, 2002 (filed as Exhibit 99.1 to our December 30, 2002 Form 8-K).                                                                                                                                                           

49

---

|10.36 |  | Limited Stipulation and Agreement dated February 11, 2003, with the Staff of the Kansas Corporation Commission, Westar Energy, Inc., Westar Industries, Inc., Citizens' Utility Ratepayer Board, MBIA Insurance
Corporation and the Kansas Industrial Consumers (filed as Exhibit 99.1 to our February 11, 2003 Form 8-K).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.37 |  | Kansas Corporation Commission Order dated February 10, 2003 (filed as Exhibit 99.1 to our February 14, 2003 Form 8-K).                                                                                                                                                                                                    
|10.38 |  | Partial Stipulation and Agreement dated February 25, 2003, with the Staff of the Kansas Corporation Commission, Westar Energy, Inc., Westar Industries, Inc. and MBIA Insurance Corporation (filed as Exhibit 99.1
to our February 25, 2003 Form 8-K).                                                                    
|10.39 |  | Kansas Corporation Commission Order No. 62 approving Limited Stipulation and Agreement dated February 14, 2003.+                                                                                                                                                                                                          
|10.40 |  | Kansas Corporation Commission Order No. 65 dated March 11, 2003 (filed as Exhibit 99.1 to our March 14, 2003 Form 8-K).                                                                                                                                                                                                   
|10.41 |  | Letter dated March 19, 2003 from J. Eric Griffin of Protection One, Inc. to the Kansas Corporation Commission accepting the conditions of Kansas Corporation Commission Order No. 65.+                                                                                                                                    
|10.42 |  | Letter dated March 19, 2003 from J. Eric Griffin of Protection One, Inc. to Martin J. Bregman of Westar Energy pursuant to Kansas Corporation Commission Order No. 65.+                                                                                                                                                   
|12.1  |  | Statement regarding Computation of Earnings to Fixed Charges.+                                                                                                                                                                                                                                                            
|16.1  |  | Letter from Arthur Andersen LLP to the Securities and Exchange Commission re: Change in Certifying Accountant (incorporated by reference to Exhibit 16 to our Current Report on Form 8-K dated May 30,
2002).                                                                                                             
|21.1  |  | Subsidiaries of POI and Monitoring.+                                                                                                                                                                                                                                                                                      
|23.1  |  | Consent of Deloitte & Touche LLP.+                                                                                                                                                                                                                                                                                        
|99.1  |  | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 certifying the annual report provided for the year ended December 31, 2002 (furnished and not to be considered filed as part of the
Form 10-K).                                                                                                  

---

50

---



PROTECTION ONE, INC. AND SUBSIDIARIES    INDEX TO FINANCIAL STATEMENTS

|                                      |                                                                                                                    | Page
|------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ----
|PROTECTION ONE, INC. AND SUBSIDIARIES |                                                                                                                    |     
|                                      | Independent Auditors' Report                                                                                       |     
|                                      | Consolidated Balance Sheets as of December 31, 2002 and 2001                                                       |     
|                                      | Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2002, 2001, and 2000 |     
|                                      | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001, and 2000                        |     
|                                      | Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001, and 2000              |     
|                                      | Notes to Consolidated Financial Statements                                                                         |     
|FINANCIAL SCHEDULE                    |                                                                                                                    |     
|                                      | Protection One, Inc. and Subsidiaries-Schedule II-Valuation and Qualifying Accounts                                |     

F-1

---



INDEPENDENT AUDITORS' REPORT

To
the Stockholders of Protection One, Inc.:

We
have audited the accompanying consolidated balance sheets of Protection One, Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001 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, 2002. Our audits also included
the financial statement schedule listed in the Index to Financial Statements at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Protection One, Inc. and subsidiaries as of
December 31, 2002 and 2001 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the information set forth therein.

As
described in Note 14 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets with the adoption of Statements
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in 2002.

Deloitte &
Touche LLP
Kansas City, Missouri
April 11, 2003

F-2

---



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

|                                                                                                                                                          |                                        | December 31, |           
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------ | ----------
|
|ASSETS                                                                                                                                                    |                                       
|Current assets:                                                                                                                                           |                                        |              |           
|                                                                                                                                                          | Cash and cash equivalents              |              | $         
|                                                                                                                                                          | Restricted cash                        |              |           
|                                                                                                                                                          | Receivables, net                       |              |           
|                                                                                                                                                          | Inventories, net                       |              |           
|                                                                                                                                                          | Prepaid expenses                       |              |           
|                                                                                                                                                          | Related party tax receivable           |              |           
|                                                                                                                                                          | Deferred tax assets                    |              |           
|                                                                                                                                                          | Other                                  |              |           
|                                                                                                                                                          | Assets of discontinued operations      |              |           
|                                                                                                                                                          |                                        |              |           
|                                                                                                                                                          | Total current assets                   |              |           
|Property and equipment, net                                                                                                                               |                                        |              | 37,754    
|Customer accounts, net                                                                                                                                    |                                        |              | 312,785   
|Goodwill                                                                                                                                                  |                                        |              | 41,847    
|Deferred tax assets, net of current portion                                                                                                               |                                        |              | 286,645   
|Deferred customer acquisition costs                                                                                                                       |                                        |              | 75,403    
|Other                                                                                                                                                     |                                        |              | 6,796     
|                                                                                                                                                          |                                        |              |           
|Total Assets                                                                                                                                              |                                        | $            | 837,572   
|                                                                                                                                                          |                                        |              |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                      |                                       
|Current liabilities:                                                                                                                                      |                                        |              |           
|                                                                                                                                                          | Current portion of long-term debt      |              | $         
|                                                                                                                                                          | Accounts payable                       |              |           
|                                                                                                                                                          | Accrued liabilities                    |              |           
|                                                                                                                                                          | Due to related parties                 |              |           
|                                                                                                                                                          | Deferred revenue                       |              |           
|                                                                                                                                                          | Liabilities of discontinued operations |              |           
|                                                                                                                                                          |                                        |              |           
|                                                                                                                                                          | Total current liabilities              |              |           
|Long-term debt, net of current portion                                                                                                                    |                                        |              | 547,798   
|Deferred customer acquisition revenue                                                                                                                     |                                        |              | 31,662    
|Other liabilities                                                                                                                                         |                                        |              | 1,552     
|                                                                                                                                                          |                                        |              |           
|Total Liabilities                                                                                                                                         |                                        |              | 669,425   
|                                                                                                                                                          |                                        |              |           
|Commitments and contingencies (see Note 12)                                                                                                               |                                        |              |           
|Stockholders' equity:                                                                                                                                     |                                        |              |           
|Preferred stock, $.10 par value, 5,000,000 shares authorized                                                                                              |                                        |              |          
|Common Stock, $.01 par value, 150,000,000 shares authorized, 127,796,745 shares and 127,245,891 shares issued at December 31, 2002 and 2001, respectively |                                        |              | 1,278     
|Additional paid-in Capital                                                                                                                                |                                        |              | 1,382,024 
|Unrealized loss on currency translation                                                                                                                   |                                        |              |          
|Deficit                                                                                                                                                   |                                        |              | (1,165,596
|Investment in Parent                                                                                                                                      |                                        |              | (14,950   
|Treasury stock, at cost, 29,840,405 and 28,840,405 shares at December 31, 2002 and 2001, respectively                                                     |                                        |              | (34,609   
|                                                                                                                                                          |                                        |              |           
|                                                                                                                                                          | Total stockholders' equity             |              |           
|                                                                                                                                                          |                                        |              |           
|Total Liabilities and Stockholders' Equity                                                                                                                |                                        | $            | 837,572   
|                                                                                                                                                          |                                        |              |           

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                                                    |                                                          | $       
|                                                                           | Other                                                                              |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|                                                                           | Total revenues                                                                     |                                                          |         
|Cost of revenues (exclusive of amortization and depreciation shown below): |                                                                                    |                                                          |         
|                                                                           | Monitoring and related services                                                    |                                                          |         
|                                                                           | Other                                                                              |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|                                                                           | Total cost of revenues                                                             |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|                                                                           | Gross profit (exclusive of amortization and depreciation shown below)              |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|Operating Expenses:                                                        |                                                                                    |                                                          |         
|                                                                           | Selling                                                                            |                                                          |         
|                                                                           | General and administrative                                                         |                                                          |         
|                                                                           | Amortization and depreciation                                                      |                                                          |         
|                                                                           | Loss on impairment of customer accounts                                            |                                                          |         
|                                                                           | Loss on impairment of goodwill                                                     |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|Total operating expenses                                                   |                                                                                    |                                                          | 637,465 
|                                                                           |                                                                                    |                                                          |         
|                                                                           | Operating loss                                                                     |                                                          |         
|Other (income) expense:                                                    |                                                                                    |                                                          |         
|                                                                           | Interest expense                                                                   |                                                          |         
|                                                                           | Related party interest                                                             |                                                          |         
|                                                                           | Gain on retirement of debt                                                         |                                                          |         
|                                                                           | Other                                                                              |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|                                                                           |                                                                                    | Loss from continuing operations before income taxes      |         
|Income tax benefit                                                         |                                                                                    |                                                          | 148,852 
|                                                                           |                                                                                    |                                                          |         
|                                                                           |                                                                                    | Loss from continuing operations before accounting change |         
|Loss from discontinued operations, net of taxes                            |                                                                                    |                                                          | (2,967  
|Cumulative effect of accounting change, net of taxes                       |                                                                                    |                                                          |         
|                                                                           | Continuing operations                                                              |                                                          |         
|                                                                           | Discontinued operations                                                            |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|                                                                           | Net loss                                                                           |                                                          | $       
|                                                                           |                                                                                    |                                                          |         
|Other comprehensive loss:                                                  |                                                                                    |                                                          |         
|                                                                           | Unrealized loss on marketable securities                                           |                                                          |         
|                                                                           | Unrealized gain (loss) on currency translation                                     |                                                          |         
|                                                                           | Reclassification adjustment for losses included in sales of foreign operations     |                                                          |         
|                                                                           | Income tax expense                                                                 |                                                          |         
|                                                                           |                                                                                    |                                                          |         
|Comprehensive loss                                                         |                                                                                    | $                                                        | (878,493
|                                                                           |                                                                                    |                                                          |         
|Net loss per common share, basic and diluted:                              |                                                                                    |                                                          |         
|                                                                           | Loss from continuing operations per common share                                   |                                                          | $       
|                                                                           | Loss from discontinued operations per common share                                 |                                                          |         
|                                                                           | Cumulative effect of accounting change on continuing operations per common share   |                                                          |         
|                                                                           | Cumulative effect of accounting change on discontinued operations 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                                                                            |                                                                                    | $                       | (880,855
|Adjustments to reconcile net loss to net cash provided by operating activities:     |                                                                                    |                         |         
|                                                                                    | Gain on retirement of debt                                                         |                         |         
|                                                                                    | Loss on discontinued operations, net of taxes                                      |                         |         
|                                                                                    | Cumulative effect of accounting change, net of taxes                               |                         |         
|                                                                                    | Loss on impairment of customer accounts                                            |                         |         
|                                                                                    | Loss on impairment of goodwill                                                     |                         |         
|                                                                                    | (Gain) loss on sale of branch assets                                               |                         |         
|                                                                                    | Amortization and depreciation                                                      |                         |         
|                                                                                    | Amortization of debt costs and premium                                             |                         |         
|                                                                                    | Amortization of deferred customer acquisition costs in excess of deferred revenues |                         |         
|                                                                                    | Deferred income taxes                                                              |                         |         
|                                                                                    | Provision for doubtful accounts                                                    |                         |         
|                                                                                    | Other                                                                              |                         |         
|Changes in assets and liabilities, net of effects of acquisitions and dispositions: |                                                                                    |                         |         
|                                                                                    | Receivables, net                                                                   |                         |         
|                                                                                    | Related party tax receivable                                                       |                         |         
|                                                                                    | Other assets                                                                       |                         |         
|                                                                                    | Accounts payable                                                                   |                         |         
|                                                                                    | Deferred revenue                                                                   |                         |         
|                                                                                    | Other liabilities                                                                  |                         |         
|                                                                                    |                                                                                    |                         |         
|                                                                                    | Net cash provided by operating activities                                          |                         |         
|Cash flows from investing activities:                                               |                                                                                    |                         |         
|                                                                                    | Installations and purchases of new accounts                                        |                         |         
|                                                                                    | Deferred customer acquisition costs                                                |                         |         
|                                                                                    | Deferred customer acquisition revenue                                              |                         |         
|                                                                                    | Purchase of property and equipment                                                 |                         |         
|                                                                                    | Purchase of parent company bonds                                                   |                         |         
|                                                                                    | Proceeds from sale of parent company bonds                                         |                         |         
|                                                                                    | Purchase of AV One, Inc.                                                           |                         |         
|                                                                                    | Purchase of Powercall                                                              |                         |         
|                                                                                    | Proceeds from disposition of assets and sale of customer accounts                  |                         |         
|                                                                                    |                                                                                    |                         |         
|                                                                                    | Net cash provided by (used in) investing activities                                |                         |         
|Cash flows from financing activities:                                               |                                                                                    |                         |         
|                                                                                    | Payments on long-term debt                                                         |                         |         
|                                                                                    | Proceeds from long-term debt                                                       |                         |         
|                                                                                    | Borrowings from (repayments on) Westar Credit Facility                             |                         |         
|                                                                                    | Purchase of parent company stock-held as treasury                                  |                         |         
|                                                                                    | Purchase of Treasury Stock                                                         |                         |         
|                                                                                    | Issuance costs and other                                                           |                         |         
|                                                                                    | Funding from parent                                                                |                         |         
|                                                                                    |                                                                                    |                         |         
|                                                                                    | Net cash used in financing activities                                              |                         |         
|                                                                                    |                                                                                    |                         |         
|Net cash provided by (used in) discontinued operations                              |                                                                                    |                         | 376     
|                                                                                    |                                                                                    |                         |         
|                                                                                    | Net increase (decrease) in cash and cash equivalents                               |                         |         
|Cash and cash equivalents:                                                          |                                                                                    |                         |         
|                                                                                    | Beginning of period                                                                |                         |         
|                                                                                    |                                                                                    |                         |         
|                                                                                    | End of period                                                                      |                         | $       
|                                                                                    |                                                                                    |                         |         
|Cash paid for interest                                                              |                                                                                    | $                       | 45,202  
|                                                                                    |                                                                                    |                         |         
|Cash paid for taxes                                                                 |                                                                                    | $                       | 231     
|                                                                                    |                                                                                    |                         |         

F-5

---



SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In the first quarter of 2000, the Company sold its European operations for $225.0 million and certain investments for $19.0 million to Westar
Industries, Inc. In exchange, the Company received $183.0 million in cash and $61.0 million market value of its outstanding bonds. Also in the first quarter of 2000, the Company
received $15.0 million market value of its bonds and a $14.2 million note receivable from Westar Industries for payment of the Company's 1998 income tax receivable of
$20.3 million and an intercompany receivable of $8.9 million. Westar Industries repaid all but $0.2 million of the note by delivering $14.0 million in market value of the
Company's debt securities in March and April of 2000. The balance of the note was repaid in April 2000.

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

F-6

---



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

|                                     |  | Common Stock |   |   |       |  |   |         |   |   |           | Accumulated
other
comprehensive
loss |   |         |  
|------------------------------------ |  | ------------ | - | - | ----- |  | - | ------- | - | - | --------- | ------------------------------------ | - | ------- | -
|
|
|Common Stock                         |  |              |   |   |       |  |   |         |   |   |           |                                      |   |         |  
|December 31, 1999                    |  | 126,945,337  |   | $ | 1,269 |  | $ |        |   | $ | 1,358,978 |                                      | $ |        |  
|Exercise of options and warrants     |  | 5,440        |   |   |      |  |   |        |   |   | 21        |                                      |   |        |  
|Shares issued-ESPP                   |  | 84,023       |   |   | 1     |  |   |        |   |   | 139       |                                      |   |        |  
|Intercompany transactions (Note 6)   |  |             |   |   |      |  |   |        |   |   | 21,636    |                                      |   |        |  
|Realized gain-marketable securities  |  |             |   |   |      |  |   |        |   |   |          |                                      |   |        |  
|Unrealized loss-currency translation |  |             |   |   |      |  |   |        |   |   |          |                                      |   |        |  
|Acquisition of treasury stock        |  | (6,826,813   | ) |   |      |  |   | (5,332  | ) |   |          |                                      |   |        |  
|Net loss                             |  |             |   |   |      |  |   |        |   |   |          |                                      |   |        |  
|                                     |  |              |   |   |       |  |   |         |   |   |           |                                      |   |         |  
|December 31, 2000                    |  | 120,207,987  |   | $ | 1,270 |  | $ | (5,332  | ) | $ | 1,380,774 |                                      |   |         |  
|Exercise of options and warrants     |  | 65,568       |   |   | 1     |  |   |        |   |   | 612       |                                      |   |        |  
|Shares issued-ESPP                   |  | 145,523      |   |   | 1     |  |   |        |   |   | 99        |                                      |   |        |  
|Intercompany transactions            |  |             |   |   |      |  |   |        |   |   | (35       | )                                    |   |        |  
|Unrealized loss-currency translation |  |             |   |   |      |  |   |        |   |   |          |                                      |   |        |  
|Acquisition of treasury stock        |  | (22,013,592  | ) |   |      |  |   | (27,099 | ) |   |          |                                      |   |        |  
|Investment in parent securities      |  |             |   |   |      |  |   |        |   |   |          |                                      |   | (1,413  | )
|Net loss                             |  |             |   |   |      |  |   |        |   |   |          |                                      |   |         |  
|                                     |  |              |   |   |       |  |   |         |   |   |           |                                      |   |         |  
|December 31, 2001                    |  | 98,405,486   |   | $ | 1,272 |  | $ | (32,431 | ) | $ | 1,381,450 |                                      |   | (1,413  | )
|Exercise of options and warrants     |  | 61,063       |   |   | 1     |  |   |        |   |   | 224       |                                      |   |        |  
|Shares issued-ESPP                   |  | 489,791      |   |   | 5     |  |   |        |   |   | 372       |                                      |   |        |  
|Intercompany transactions            |  |             |   |   |      |  |   |        |   |   | (22       | )                                    |   |        |  
|Unrealized loss-currency translation |  |             |   |   |      |  |   |        |   |   |          |                                      |   |        |  
|Acquisition of treasury stock        |  | (1,000,000   | ) |   |      |  |   | (2,178  | ) |   |          |                                      |   |        |  
|Investment in parent securities      |  |             |   |   |      |  |   |        |   |   |          |                                      |   | (13,537 | )
|Net loss                             |  |             |   |   |      |  |   |        |   |   |          |                                      |   |        |  
|                                     |  |              |   |   |       |  |   |         |   |   |           |                                      |   |         |  
|December 31, 2002                    |  | 97,956,340   |   | $ | 1,278 |  | $ | (34,609 | ) | $ | 1,382,024 |                                      | $ | (14,950 | )
|                                     |  |              |   |   |       |  |   |         |   |   |           |                                      |   |         |  

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

F-7

---



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

1.    The Company:

Protection One, Inc. ("Protection One" or the "Company"), a Delaware corporation, 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 business
customers. Westar Industries, Inc. ("Westar Industries"), a wholly owned subsidiary of Westar Energy, Inc. ("Westar Energy"), owns approximately 88% of the Company's common stock. Westar
Energy is a public electric utility and is regulated by the Kansas Corporation Commission ("KCC"). On November 8, 2002 the KCC issued an Order that among many findings and directives, requested
Westar Energy consider selling its investment in Protection One. In early 2003, Westar Energy announced that it intends to sell its investment in Protection One stock.

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 of America 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. All significant intercompany balances have been eliminated in
consolidation.

The
Company's strategy is to improve returns on invested capital by realizing economies of scale from increasing customer density in the largest urban markets in North America. The
Company plans to accomplish this goal by: (i) retaining its customers by providing quality customer service from its monitoring facilities and its branches; and (ii) using its national
presence, strategic alliances and strong local operations to persuade the most desirable residential and commercial prospects to enter into long term agreements with the Company on terms that permit
it to achieve appropriate returns on capital.
When adequate capital becomes available, the Company would like to resume acquiring alarm companies and portfolios of alarm accounts pursuant to transactions that meet the Company's strategic and
financial requirements.

The
Company has reported losses for the past several years, working capital has decreased and Westar Energy has announced that it intends to sell its investment in Company stock.
Additionally, the Company's current primary financing source is through a credit facility with Westar Energy and credit available under such facility has been reduced (see Notes 5 and 6). Management
of the Company has evaluated these conditions and events in establishing its operating plans for the Company. In addition to the plans and strategies noted in the paragraph above, management plans to
carefully monitor the level of investment in new customer accounts, continue control of operating expenses, curtail other capital expenditures, if necessary, and continue efforts to extend or replace
the credit facility upon its expiration in January 2004. Management believes that the funds provided from operations and from the Westar Credit Facility, coupled with receipts under the tax
sharing agreement (see Note 8) will be sufficient throughout 2003.

2.    Summary of Significant Accounting Policies:

(a)    Revenue Recognition

Revenues are recognized when security services are provided. System installation revenues, sales revenues on equipment upgrades and direct and incremental costs
of installations and sales are

F-8

---

deferred for residential customers with monitoring service contracts. For commercial customers and our national account customers, revenue recognition is dependent upon each specific customer
contract. In instances when the Company passes title to a system unaccompanied by a service agreement or the Company passes title at a price that it believes is unaffected by an accompanying but
undelivered service, the Company recognizes revenues and costs in the period incurred. In cases where the Company retains title to the system or it prices the system lower than it otherwise would
because of an accompanying service agreement, the Company defers and amortizes revenues and direct costs.

Deferred
system and upgrade installation revenues are recognized over the expected life of the customer utilizing an accelerated method for residential and commercial customers and a
straight-line method for our Multifamily customers. Deferred costs in excess of deferred revenue are recognized over the initial contract term, utilizing a straight-line
method, typically two to three years for residential systems, five years for commercial systems and five to ten years for Multifamily systems. To the extent deferred costs are less than deferred
revenues, such costs are recognized over the estimated life of the customer.

In
2000, the Company adopted Staff Accounting Bulletin ("SAB") 101 which requires the Company to defer certain system sales and installation revenues and expenses, primarily equipment,
direct labor and direct and incremental sales commissions incurred. Historically, the Company has acquired most of its customer accounts by acquisition or through an independent dealer program. In the
dealer program, dealers billed and retained all installation revenues. The impact of SAB 101 for 2000 was not significant because the Company began its internal sales program that year. In 2001, the
Company deferred approximately $12.2 million in revenues and approximately $28.8 million of associated direct and incremental selling and installation costs. In 2002, the Company
deferred approximately $17.1 million in revenues and approximately $45.5 million of associated direct and incremental selling and installation costs in the same manner as deferred
revenues.

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

(b)    Inventories

Inventories, primarily comprised of alarm systems and parts, are stated at the lower of average cost or market. Inventory is shown net of an obsolescence reserve
of $3.6 million and $3.3 million at December 31, 2002 and 2001, respectively. This reserve is determined based primarily upon current usage of the individual parts included in
inventory.

(c)    Property and Equipment

Property and equipment are stated at cost 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.

F-9

---

Estimated
useful lives of property and equipment are as follows:

Furniture, fixtures and equipment

5-10 yearsData processing and telecommunication

8 mos-7 yearsLeasehold improvements

lease term; generally 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 pro-rata tax sharing agreement with Westar Energy (the "Tax Sharing Agreement"). Pursuant to this agreement Westar Energy makes payments to the Company for
current tax benefits utilized by Westar Energy in its consolidated tax return irrespective of whether the Company would realize these current benefits on a separate return basis. No valuation
allowance has been established since the Tax Sharing Agreement utilizes a parent company down approach in the allocation of income tax expense among members of the consolidated tax group and no
valuation allowance is necessary at the Westar Energy level. If Westar Energy completes its intended disposition of Protection One payment for such benefits would no longer be made and the Company's
net deferred tax assets of $294.9 million at December 31, 2002 might not be realizable and the Company might not be in a position to record a tax benefit for losses incurred. The Company
would be required to record a non-cash charge against income for the portion of its net deferred tax assets determined not to be realizable. This charge could be material and could have a
material adverse effect on its business, financial condition and results of operations.

(e)    Comprehensive Loss

Comprehensive loss comprises net loss plus the unrealized gains and losses associated with foreign currency translations and
available-for-sale investment securities.

(f)    Customer Accounts

Customer accounts are stated at cost and are amortized over the estimated customer life. 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
choice of an amortization life is based on estimates and judgments about the amounts and timing of expected future revenues from customer accounts and average customer account life.
Selected periods were determined because, in management's opinion, they would adequately match amortization cost with anticipated revenue. The Company periodically uses an independent appraisal firm
to perform lifing studies on its customer accounts in order to assist management in determining appropriate lives

F-10

---

of its customer accounts. These reviews are performed specifically to evaluate the Company's 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. The Company has identified four distinct pools of customer accounts, each of which has distinct attributes that effect differing
attrition characteristics. For the North America and Europe pools, the results of the lifing studies indicated to the Company that it can expect attrition to be greatest in years one through five of
asset life and that a declining balance (accelerated) method would therefore best match the future amortization cost with the estimated revenue stream from these customer pools.

Our
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 135% declining balanceEurope(*)

Ten-year 125% declining balanceMultifamily

Nine-year straight-line


---

The
results of a lifing study performed by a third party appraisal firm in the first quarter of 2002 showed a deterioration in the average remaining life of customer accounts. The report
showed the Company's North America customer pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of 9 years. The Company's
Multifamily pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of 10 years. Taking into account the results of the lifing study
and the inherent expected declining revenue streams for North America and Multifamily, in particular during the first five years, the Company adjusted the amortization of customer accounts for its
North America and Multifamily customer pools to better match the rate and period of amortization expense with the expected decline in revenues. In the first quarter of 2002, the Company changed its
amortization rate for its North America pool to a 10-year 135% declining balance method from a 10-year 130% declining balance method. The change to this 10 year 135%
accelerated method, provides for a better matching to the declining revenue stream, in particular during the first five years, when the year over year decline is greatest and a significant portion of
the revenue stream is expected to be received. For the Multifamily pool the Company will continue to amortize on a straight-line basis, utilizing a shorter nine year life. The change to
the 9 year life straight-line method provides for a better matching to the declining revenue stream, in particular during the first five years, when the decline is greatest and a
significant portion of the revenue stream is expected to be received. The Company accounted for these amortization changes prospectively beginning January 1, 2002, as a change in estimate.
These changes in estimates increased amortization expense for the year ended December 31, 2002 on a pre-tax basis by approximately $1.3 million and on an after tax basis by
approximately $0.8 million. The change in estimate had no significant impact on reported earnings per share.

Effective
January 1, 2002, we adopted SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment and
Disposal of Long-Lived

F-11

---

Assets." To implement the new standards, an independent appraisal firm was engaged to help management estimate the fair values of goodwill and customer accounts. Based on this analysis completed
during 2002, we recorded a net charge of approximately $765.2 million, net of tax, of which $543.6 million was related to goodwill and $221.6 million was related to customer
accounts. These accounting standards, the related charge and other related information are detailed in Note 14 of the Notes to Consolidated Financial Statements, "Impairment Charges Pursuant to
New Accounting Rules."

Due
to the levels of customer attrition experienced in 2001 and 2000 and because of recurring losses, management performed an impairment test on its customer account asset and goodwill
in both 2001 and 2000. These tests indicated that future estimated undiscounted cash flows exceeded the sum of the recorded balances for customer accounts and goodwill.

(g)    Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. The Company changed its estimate of goodwill life
from 40 years to 20 years as of January 1, 2000. For 2000 and 2001, remaining goodwill, net of accumulated amortization, was amortized over its remaining useful life based on a
20-year life.

Beginning
January 1, 2002, goodwill is no longer amortized. New accounting rules adopted on January 1, 2002 do not permit amortization and require an annual impairment
test. See Note 14 of the "Notes to Consolidated Financial Statements" for information regarding an impairment recorded in 2002 pursuant to new accounting rules. The Company established
July 1 as its annual impairment testing date. The Company completed this testing during the third quarter of 2002 and determined that no additional impairment was required as of July 1,
2002. The Company is required to perform impairment tests for long-lived assets prospectively when the Company determines that indicators of impairment are present. Declines in market
value of its business or the value of its customer accounts that may be incurred prospectively may also require additional impairment charges. Any such impairment charges could be material.

After
regulatory actions, including Kansas Corporation Commission Order No. 55, which prompted Westar Energy to advise the Company that it intended to dispose of its investment in
the Company, the independent appraisal firm was again retained to perform an additional valuation so that the Company could perform an impairment test as of December 31, 2002. The Order limited
the amount of capital Westar Energy could provide to the Company which increased the Company's risk profile. Therefore, the Company reevaluated its corporate forecast, reducing the amount of capital
invested over its forecast horizon and lowered its base monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower valuation than the July 1, 2002 valuation. The
Company recorded an additional $90.7 million impairment charge, net of $13.3 million tax, to reflect the impairment of all remaining goodwill of its North America segment in the fourth
quarter of 2002.

Goodwill
amortization expense was $48.6 million and $50.6 million, excluding $0.3 million and $0.3 million related to the discontinued Canadian operations for
the years ended December 31, 2001 and 2000, respectively. Accumulated amortization was $150.1 million at December 31, 2001.

F-12

---

(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 on the accompanying balance sheet represents a trust account established as collateral for the benefit of the insurer of the Company's workers'
compensation claims. The Company receives interest income earned by the trust.

(j)    Receivables

Gross receivables, which consist primarily of trade accounts receivable, of $32.4 million at December 31, 2002 and $42.6 million at
December 31, 2001 have been reduced by allowances for doubtful accounts of $6.3 million and $6.6 million, respectively. As part of the transition to its new billing system,
MAS®, the Company wrote-off approximately $33.7 million of old receivables in 2001 that had previously been fully reserved.

The
company's policy is to establish a reserve for a percentage of the receivable when it is greater than 30 days past due. This percentage is increased as the receivable ages
until it is fully reserved and written off when it is 120 days past due and the account is disconnected and turned over to a collection agency. In certain instances, based upon the discretion
of the local general manager, credit can be extended and the account may remain active.

(k)    Advertising Costs

Printed materials are expensed as incurred. Broadcast advertising costs are expensed upon the first broadcast of the respective advertisement. Total advertising
expense was $3.9 million, $3.4 million and $4.8 million, during the years ended December 31, 2002, 2001, and 2000, respectively.

(l)    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. The Company does not believe a significant risk of loss from a
concentration of credit risk exists.

F-13

---

(m)    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 31,2002

2001

2000Weighted average shares outstanding

98,071,206

105,458,601

126,550,059


The
Company has outstanding stock options and warrants of which approximately 1.7 million, 0.6 million and 0.5 million represent dilutive potential common shares for
the years ended December 31, 2002, 2001 and 2000. These securities were not included in the computation of diluted earnings per share since to do so would have been antidilutive for all periods
presented.

(n)    New Accounting Standards

Gains and Losses from Extinguishment of Debt.Effective July 1, 2002, the Company adopted SFAS No. 145. This
standard limits the income statement classification of gains and losses from extinguishment of debt as extraordinary to those transactions meeting the criteria of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." SFAS No. 145 prohibits treating gains and losses associated with extinguishments resulting from a company's risk management strategy as extraordinary. Under SFAS 145,
current gains and losses from the extinguishment of debt are reported as other income. Gains or losses in prior periods that were previously classified as extraordinary that do not meet the APB
Opinion No. 30 criteria have been reclassified to other income. The adoption of this standard did not impact our net income or financial condition.

Costs Associated with Exit or Disposal Activities.In June 2002, Financial Accounting Standards Board (FASB) issued
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The principal difference between this Statement and Issue
94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit
plan. This Statement is effective for exit or disposal activities initiated after December 31, 2002.

Stock Based Compensation.In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement
requires that companies follow the prescribed format and provide the additional disclosures in their annual reports

F-14

---

for fiscal years ending after December 15, 2002. The Company applies the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," as
allowed by SFAS Nos. 123 and 148, and related interpretations in accounting for our stock-based compensation plans, as described in Note 7. The Company has adopted the disclosure requirements
of SFAS No. 148.

For
purposes of the pro forma disclosures required by SFAS No. 148, the estimated fair value of the options is amortized to expense on a straight-line method over the
options' vesting period. Under SFAS No. 123, compensation expense would have been $0.9 million in 2002 and $2.8 million in 2001 and $1.0 million in 2000. Information
related to the pro forma impact on our earnings and earnings per share follows.

Year ended December 31,2002

2001

2000Earnings (loss) available for common stock, as reported

$
(880,855
)
$
(86,048
)
$
(57,171
)Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects


880


2,808


992Earnings (loss) available for common stock, pro forma

$
(881,735
)
$
(88,856
)
$
(58,163
)Net loss per common share (basic and diluted):As reported

$
(8.98
)
$
(0.82
)
$
(0.45
)Pro forma

$
(8.99
)

(0.84
)

(0.46
)


Accounting for Guarantees.In November 2002, FASB issued Interpretation (FIN) No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which provides guidance for accounting for guarantees. For any guarantee entered into after
November 2002, a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Management does not
believe the Company has any such guarantees; however, any future guarantee that it enters into will be accounted for as a liability.

Consolidation of Variable Interest Entities.In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entitiesan Interpretation of ARB No. 51." This interpretation provides guidance
related to identifying variable interest entities (previously known generally as special purpose entities or SPEs) and determining whether such entities should be consolidated. Certain disclosures are
required when FIN No. 46 becomes effective if it is reasonably possible that a company will consolidate or disclose information about a variable interest entity when it initially applies FIN
No. 46. This interpretation must be applied immediately to variable interest entities created or obtained after January 31, 2003. For those variable interest entities created or obtained
on or before January 31, 2003, the Company must apply the provisions of FIN No. 46 in the third quarter of 2003. The Company does not have any variable interest entities and therefore
expects no impact from this interpretation.

F-15

---

(o)    Prior Year Reclassifications

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

3.    Property and Equipment:

Property and equipment are summarized as follows (in thousands):

December 31,2002

2001Furniture, fixtures and equipment

$
7,199

$
8,177Data processing and telecommunication


65,836


63,675Leasehold improvements


5,085


2,802Vehicles


13,892


10,685Buildings and other


6,654


19,66698,666


105,005Less accumulated depreciation


(60,912
)

(49,761
)Property and equipment, net

$
37,754

$
55,244


Depreciation
expense was $13.5 million, $15.3 million and $22.9 million for the years ended December 31, 2002, 2001 and 2000 respectively.

4.    Intangible AssetsCustomer Accounts and Goodwill:

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

December 31,2002

2001Beginning customer accounts, net

$
719,679

$
858,404Acquisition of customer accounts


1,195


4,554Amortization of customer accounts


(68,929
)

(131,957
)Impairment charge (Note 14)


(338,104
)

Sale of accounts


(398
)

(8,769
)Purchase holdbacks and other


(658
)

(2,553
)Ending customer accounts, net

$
312,785

$
719,679


Accumulated
amortization of the investment in customer accounts at December 31, 2002 and 2001 was $632.3 million and $564.1 million, respectively.

F-16

---



4.    Intangible AssetsCustomer Accounts and Goodwill: (Continued)

The table below reflects the estimated aggregate customer account amortization for each of the five succeeding years on the Company's existing customer account
base as of December 31, 2002.

|                               |  | 2003 |        | 2004 |   | 2005   |  | 2006 |        | 2007
|------------------------------ |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----
|
|Estimated amortization expense |  | $    | 68,679 |      | $ | 68,572 |  | $    | 52,288 |     

The
changes in the carrying amounts of goodwill for the year ended December 31, 2002 and 2001, are as follows (in thousands):

North
America
Segment

Multifamily
Segment

TotalBalance as of January 1, 2001

$
664,426

$
159,237

$
823,663Amortization expense


(39,352
)

(9,202
)

(48,554
)Reallocation of previous purchase price


(475
)




(475
)Reduction from sale of Sonitrol business


(11,185
)




(11,185
)Balance as of December 31, 2001


613,414


150,035


763,449Impairment losses (Note 14)


(613,414
)

(104,188
)

(717,602
)Realization of purchased tax assets





(4,000
)

(4,000
)Balance as of December 31, 2002

$


$
41,847

$
41,847


5.    Long-Term Debt:

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

December 31,2002

2001Westar Credit Facility with Westar Industries, maturing January 5, 2004, variable 5.2%(a)

$
215,500

$
137,500Senior Subordinated Notes, maturing January 2009, fixed 8.125%


110,340


176,840Senior Unsecured Notes, maturing August 2005, fixed 7.375%


190,925


203,650Senior Subordinated Discount Notes, maturing June 2005, effective rate 11.8%


31,033


41,809Convertible Senior Subordinated Notes, maturing September 2003, fixed 6.75%


9,725


23,785Other debt obligations, including capital leases


434


1,219557,957


584,803Less current portion


(10,159
)

(688
)Total long-term debt

$
547,798

$
584,115


---

F-17

---

During
2002 the Company acquired $103.2 million of its bonds for $83.2 million resulting in a gain of $19.3 million. During 2001 the Company acquired
$146.0 million of its bonds for $91.7 million resulting in a gain of $53.0 million and during 2000 the Company acquired $221.3 million of its bonds for
$136.2 million resulting in a gain of $75.8 million. In some cases these debt securities were acquired from
Westar Industries limiting the amount of gain. See Note 6, "Related Party Transactions" for further discussion.

Westar Credit Facility With Westar Industries

In accordance with the Partial Stipulation and Agreement approved by the KCC, the Westar Credit Facility with Westar Industries provides for borrowings up to
$228.4 million with a variable interest rate and currently expires on January 5, 2004. Under KCC Order No. 65, Westar Energy may extend the expiration date to January 5,
2005. The KCC has authorized the extension of the Westar Credit Facility to January 5, 2005 and Westar Energy has indicated that it is willing to extend the January 5, 2004 maturity date
of the facility. Westar Energy has also indicated it may require some form of collateral, either upon the execution of an extension or upon the occurrence of events to be determined, to secure all or
a portion of the Company's obligations under the Westar Credit Facility. The indentures governing the Company's 135/8% senior subordinated discount notes and 63/4%
convertible senior subordinated notes prohibit the Company from securing any of its senior debt unless all other senior debt is secured; and the Company's 73/8% senior notes prohibit it
from securing senior debt without providing security for the 73/8% senior notes, subject to certain permitted carve outs as defined in the indenture. Additionally, the Westar Credit
Facility must be paid in full upon the sale of all or a majority of Westar Energy's investment in the Company's common stock to a new owner. The Company is currently in discussions with Westar Energy
regarding the terms of the extension of the Westar Credit Facility. Westar Energy has provided assurance that it presently intends to renew the Westar Credit Facility through January 5, 2005
should such renewal be necessary to provide the Company continued liquidity at January 5, 2004 when the facility is currently scheduled to terminate.

The
weighted-average annual interest rate after fees on all borrowings under the facility was 7.0%, 9.0% and 9.3% for the years ended December 31, 2002, 2001, and 2000
respectively.

Senior Subordinated Notes

In 1998, the Company issued $350 million of unsecured Senior Subordinated Notes. As a result of the completion of a registered offer to exchange a new
series of 81/8% Series B Senior Subordinated Notes for a like amount of the Company's outstanding 81/8% Senior Subordinated Notes, effective June 1, 2001
the annual interest rate on all of such outstanding notes decreased from 85/8% to 81/8%. At the time of the exchange, the resulting annual interest savings was
$1.2 million. Interest on this facility is payable semi-annually on January 15 and July 15. The notes are redeemable at the Company's option, in whole or in part, at a
predefined price.

Senior Unsecured Notes

In 1998, the Company issued $250 million 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.

F-18

---

Senior Subordinated Discount Notes

In 1995, a predecessor to the Company issued $166 million of unsecured Senior Subordinated Discount Notes with a fixed interest rate of
135/8% which were revalued to reflect an 11.8% effective interest rate in connection with a 1997 business combination. Interest payments began in 1999 and are payable
semi-annually on June 30 and December 31. As of June 30, 2000 the notes became redeemable, at the Company's option, at a specified redemption price.

Convertible Senior Subordinated Notes

In 1996, the Company issued $103.5 million 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. As of September 19, 1999 the notes became redeemable, at the Company's option, at a
specified redemption price.

Other

Represents debt obligations for software leases. The weighted average interest rate on these obligations approximates 6.92%.

Debt Maturities

Debt maturities other than under the Company's Westar Credit Facility over the next five years are as follows (in thousands):

2003

$
10,1592004


2005


220,797
(a)2006


2007


2008 and thereafter


110,340Total

$
341,296


---

Financial and operating covenants

Most of these debt instruments contain restrictions based on earnings before interest, taxes, depreciation, and amortization (EBITDA). The definition of EBITDA
varies among the various indentures and the Westar Credit Facility. EBITDA is generally derived by adding to income (loss) before income taxes, the sum of interest expense and depreciation and
amortization expense, including amortization of deferred customer acquisition costs and deducting amortization of deferred revenues. However, under the varying definitions of the indentures,
additional adjustments are sometimes required.

F-19

---

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, 2002 are summarized as follows:

Debt Instrument

Financial CovenantWestar Credit Facility

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


At
December 31, 2002, the Company was in compliance with the covenants under the Westar Credit Facility and the indentures relating to the Company's other indebtedness.

The
Company's ability to comply with the ratios and the tests will be affected by events outside its control and there can be no assurance that the Company will continue to meet those
tests. Failure to meet the tests would place additional restrictions on the Company's ability to incur indebtedness. A violation of these restrictions would result in an event of default which would
allow the lenders to declare all amounts outstanding immediately due and payable.

Following
a change of control the Westar Credit Facility becomes due in full, the Company is required to make an offer to the holders of the Company's Senior Subordinated Discount Notes
and Convertible Notes to purchase the notes at approximately 101% of par and the Company is required to make an offer to the holders of the Company's Senior Notes and Senior Subordinated Notes to
purchase the notes at 101% of par if a change in control is coupled with two ratings downgrades.

6.    Related Party Transactions:

On November 8, 2002, the Kansas Corporation Commission issued Order No. 51 which required Westar Energy to initiate a corporate and financial
restructuring, reverse specified accounting transactions described in the Order, review, improve and/or develop, where necessary, methods and procedures for allocating costs between utility and
non-utility businesses for KCC approval, refrain from any action that would result in its electric businesses subsidizing non-utility businesses, reduce outstanding debt giving
priority to reducing utility debt and, pending the corporate and financial restructuring, imposed standstill limitations on Westar Energy's ability to finance non-utility businesses
including the Company. These standstill protections require that Westar Energy seek KCC approval before it takes actions such as making any loan to, investment in or transfer of cash in excess of

F-20

---

$100,000 to the Company or another non-utility affiliate, entering into any agreement with the Company or another non-utility affiliate where the value of goods or services
exchanged exceeds $100,000, investing, by Westar Energy or Westar Energy's affiliate, of more than $100,000 in an existing or new non-utility business and transferring any
non-cash assets or intellectual property to the Company or another non-utility affiliate. In addition, Westar Energy must charge interest to the Company and other
non-utility affiliates at the incremental cost of their debt on outstanding balances of any existing or future inter-affiliate loans, receivables or other cash advances due Westar Energy.
The Order also suggested that the sale by Westar Energy of the Company's stock should be explored, along with other alternatives, as a possible source of cash to be used to reduce Westar Energy debt.
An additional provision affecting the Company includes a requirement that it cannot sell assets having a value of $100,000 or more without prior KCC approval.

On
December 23, 2002, the Kansas Corporation Commission issued Order No. 55 clarifying and modifying the November 8, 2002 Order. One such clarification was that
Westar Energy and Westar Industries would be prohibited from making payments to the Company under the Tax Sharing Agreement until certain requirements were met by Westar Energy regarding their debt.

On
January 10, 2003, Protection One filed a petition seeking reconsideration of certain aspects of Order No. 55. Specifically, the Company requested that the Commission
reconsider and revise Order No. 55 so that it clearly does not interfere with the Company's contractual arrangements with Westar Energy and Westar Industries, including, but not limited to the
Tax Sharing Agreement and the Westar Credit Facility.

On
February 11, 2003, the parties to the KCC proceeding filed a Limited Stipulation and Agreement, which sought the KCC's approval for Protection One to sell all of its Westar
Energy stock to Westar Energy. The KCC approved the Limited Stipulation and Agreement on February 14, 2003. Protection One sold its Westar Energy stock to Westar Energy on February 14,
2003 for $11.6 million. At December 31, 2002 this Westar Energy stock is recorded as a reduction of stockholders' equity, similar to treasury stock, in the amount of
$15.0 million.

On
February 25, 2003, the Company entered into a Partial Stipulation and Agreement (the Reconsideration Agreement) with the Staff of the KCC, Westar Energy, Westar Industries and
an intervenor. The Reconsideration Agreement requested that the KCC issue an order granting limited reconsideration and clarification to its order issued December 23, 2002. The Reconsideration
Agreement also requests that the KCC authorize Westar Energy and Westar Industries to perform their respective obligations to the Company under the Tax Sharing Agreement and the Westar Credit
Facility. Additionally, the Reconsideration Agreement provides that, among other things: (a) the maximum borrowing capacity under the Westar Credit Facility will be reduced to
$228.4 million and the maturity date may be extended one year to January 5, 2005; (b) Westar Energy may provide funds to Westar Industries to the extent necessary to perform its
obligations to the Company under the Westar Credit Facility; (c) Westar Energy will reimburse the Company approximately $4.4 million for expenses incurred in connection with services
provided by Protection One Data Services and AV One, Inc. to Westar
Energy and Westar Industries, and for the sale of AV One, Inc. to Westar Energy; and (d) the Management Services Agreement between the Company and Westar Industries is cancelled.

On
March 11, 2003, the KCC issued Order No. 65 conditionally approving the Reconsideration Agreement. The KCC imposed the following on the terms of the Reconsideration
Agreement: (a) the Westar Credit Facility must be paid off upon the sale of all or a majority of Protection One common

F-21

---

stock held by Westar Industries, and this pay-off must be a condition of any sale by Westar Industries of Protection One's stock; (b) Westar Energy must provide advance notice to
the KCC if the payment to the Company under the Tax Sharing Agreement exceeds approximately $20 million; (c) Protection One must receive KCC approval prior to selling any assets
exceeding $100,000 and Westar Energy and Westar Industries must receive KCC approval prior to selling their stock in Protection One; and (d) Protection One must waive potential claims against
Westar Energy and Westar Industries relating to certain inter-company agreements. In addition, the KCC reserved the right to impose a deadline for the sale by Westar Industries of its Protection One
stock. Westar Energy is precluded from extending any credit to the Company except for borrowings the Company may make under the Westar Credit Facility.

The
Company, Westar Energy and Westar Industries also agreed that they will provide the Kansas Corporation Commission with periodic reports on the progress of their efforts to sell
Westar Energy's equity investment in Protection One.

In
addition, on March 19, 2003, the Company submitted two letters to the KCC in response to KCC Order No. 65, one of which was addressed to the KCC and the other of which
was addressed to Westar Energy. As described in the letters, the Company agreed to (i) release Westar Energy from certain claims relating to Protection One Data Services, Inc ("PODS"), AV
One, Inc. and the Management Services Agreement and (ii) accept the conditions set forth in Order No. 65 relating to matters other than PODS, AV One, Inc. and the
Management Services Agreement. The Company does not intend to seek reconsideration of Order No. 65.

The
Company had outstanding borrowings under the Westar Credit Facility with Westar Industries of $215.5 million and $137.5 million at December 31, 2002 and
December 31, 2001, respectively. The Company accrued interest expense of $12.3 million, $10.5 million and $7.6 million and made interest payments of $12.4 million,
$10.4 million and $8.1 million on borrowings under the facility for the years ended December 31, 2002, 2001 and 2000, respectively.

During
2002, 2001, and 2000, respectively, the Company acquired from Westar Industries $83.9 million, $93.7 million, and $190.9 million face value of the Company's
bonds for $66.8 million, $61.8 million, and $114.8 million, respectively. These bonds were purchased (or exchanged in the case of the February 29, 2000 exchange transaction
for the European operations discussed below) at Westar Industries' cost which generally approximated fair value. As a result of these transactions, a gain of $16.6 million,
$31.6 million, and $65.3 million was recognized in 2002, 2001, and 2000, respectively.

During
2002 the Company acquired approximately $41.2 million of Westar Energy 6.25% notes, approximately $21.6 million of Westar Energy 6.875% notes, approximately
$4.6 million of Westar Energy 7.125% notes and $0.1 million of ONEOK common stock. All of these investments were subsequently sold at cost to Westar Energy prior to September 30,
2002. During 2002 the Company acquired in open market purchases approximately $12.6 million of Westar Energy common stock and approximately $1.8 million of Westar Energy preferred stock.
During 2002, the Company received dividends of approximately $0.1 million and $0.5 million on Westar Energy preferred stock and common stock, respectively. The dividends are recorded as
a reduction in basis in Westar Energy equity securities. At December 31, 2002, the Company held 850,000 shares of Westar Energy common stock at a cost of approximately $13.0 million and
34,213 shares of Westar Energy preferred stock at a cost of approximately $2.0 million for a combined cost of approximately $15.0 million which is reflected in the equity section of the
Company's balance sheet. These securities were sold to Westar Energy on February 14, 2003 for approximately $11.6 million. The difference between the cost and proceeds

F-22

---

received from Westar Energy will be reflected as a reduction of contributed capital from Westar Energy in the first quarter of 2003.

In
the second quarter of 2002, the Company exercised its option to buy an office building located in downtown Wichita, Kansas, from Kansas Gas and Electric Company, a wholly owned
subsidiary of Westar Energy, for the appraised fair market value of approximately $0.5 million.

The
Company acquired 16,101,892 shares of its common stock at market prices from Westar Industries during the year ended December 31, 2001 for $19.5 million. The Company
reports these shares as treasury stock, at cost, in the equity section of the accompanying balance sheet. As of December 31, 2002, the Company's shares of common stock owned by Westar Energy
and Westar Industries represented approximately 88% of the total outstanding shares.

On
June 21, 2001, the Company entered into an amendment to the Contribution Agreement dated as of July 30, 1997 between the Company and Westar Energy. This amendment
permitted Westar Energy's beneficial ownership of the Company's outstanding common stock to exceed 85% provided that its beneficial ownership on a fully diluted basis does not exceed 81% of the
outstanding shares. In March, 2002 the Company and Westar Energy entered into a Consent and Limited Waiver Agreement whereby the Company consented to Westar Energy's ownership interest in the Company
exceeding the ceiling set forth in the amended Contribution Agreement for the period commencing on March 11, 2002 and ending on July 1, 2002. On July 1, 2002, the Company and
Westar Energy entered into a second Consent and Limited Waiver Agreement whereby the Company consented to Westar Energy's ownership interest in the Company exceeding the ceiling for the period
commencing on July 1, 2002 and ending on March 31, 2003. The Company and Westar Energy are currently discussing the effectuation of a new limited waiver whereby the Company would consent
to Westar Energy's current ownership interest in the Company, which exceeds the ceiling set forth in the amended Contribution Agreement, for a period extending beyond March 31, 2003. The
amendment to the Contribution Agreement and the Consent and Limited Waiver Agreements were each approved by the Company's continuing directors as required by the terms of the Contribution Agreement.

The
Company had a receivable balance of $20.7 million and $1.7 million at December 31, 2002 and December 31, 2001, respectively, relating to a tax sharing
agreement with Westar Energy. In February 2002, the Company received $1.7 million from Westar Energy for payment of the tax receivable at December 31, 2001. During 2000, the
Company received $28.6 million and $20.3 million from Western Resources under the tax sharing agreement for the tax years 1999 and 1998, respectively. In October 2001, the Company
received $7.3 million and $11.8 million from Westar Energy under the tax sharing agreement for tax year 2000 and the estimated tax benefit through September 30, 2001. See
Note 8 for further discussion relating to income taxes.

Westar
Energy provides administrative services at cost to the Company pursuant to an agreement (the "Administrative Services Agreement"), which includes accounting, tax, audit, human
resources, legal, purchasing and facilities services. Charges of approximately $3.9 million were incurred for the year ended December 31, 2002, compared to charges of approximately
$8.1 million and $7.3 million for the year ended December 31, 2001 and 2000, respectively. The Company had a net balance due to Westar Energy primarily for these services of
$1.0 million and $1.9 million at December 31, 2002 and December 31, 2001, respectively.

F-23

---

In
November 2001, the Company entered into an agreement (the "Management Services Agreement") pursuant to which it pays to Westar Industries, beginning with the quarter ended
March 31, 2002, a financial advisory fee, payable quarterly, equal to 0.125% of the Company's consolidated total assets at the end of each quarter. The Company incurred $3.6 million of
expense for the year ended December 31, 2002 for the financial advisory fee which is included in general and administrative expenses on the income statement. During the fourth quarter of 2002,
the management fee was suspended and no additional cost was incurred in the fourth quarter. This agreement was terminated in accordance with the Reconsideration Agreement. There was no balance due
under this agreement at December 31, 2002.

On
June 5, 2002, the Company acquired the stock of a wholly owned subsidiary of Westar Industries named Westar Aviation, Inc. for approximately $1.4 million. The
Company subsequently changed the name of the newly acquired corporation to AV ONE, Inc. ("AV ONE") and entered into an Aircraft Reimbursement Agreement with Westar Industries. Under this
agreement, Westar Industries agrees to reimburse AV ONE for certain costs and expenses relating to its operations. Through September 30, 2002, AV ONE incurred approximately $1.4 million
in expenses for which the Company received reimbursement from Westar Industries in October 2002. In accordance with the Reconsideration Agreement, Westar Energy will reimburse the Company for
all costs incurred relating to the services provided to Westar Energy and Westar Industries and on March 21, 2003, repurchased the stock of AV ONE at book value. The Company did not incur any
gain or loss on the transaction since the sale was transacted at book value.

On
September 17, 2002, Westar Energy, was served with a federal grand jury subpoena by the United States Attorney's Office concerning, among other things, the use of aircraft
leased by Westar Industries, and by AV ONE. Since that date, the United States Attorney's Office has served additional information requests on Westar Energy, its subsidiaries, including AV ONE, and
certain employees of Westar Energy and AV ONE. The Company is cooperating with the grand jury and Westar Energy in connection with such requests.

In
June 2002, the Company formed a wholly owned subsidiary named Protection One Data Services, Inc. and on July 1, 2002 transferred to it approximately 42 of its
Information Technology employees. Effective July 1, 2002, PODS entered into an outsourcing agreement with Westar Energy pursuant to which PODS provides Westar Energy information technology
services. As a condition of the agreement, PODS offered employment to approximately 100 Westar Energy Information Technology employees. Operation of the subsidiary and the provision of such services
were discontinued as of December 31, 2002. Revenues from these operations totaled $11.2 million for the six months of their operation ending December 31, 2002 and net income of
$0.3 million for that period are included in the consolidated statements of operations under "discontinued operations." The approximately 142 Information Technology employees that had accepted
employment with PODS were transferred back to their respective companies as of the end of the year. PODS had a $1.1 million receivable from Westar Energy as of December 31, 2002. On
March 21, 2003, in accordance with the Reconsideration Agreement, Westar Energy paid the Company $1.1 million for the balance due under the outsourcing agreement as of
December 31, 2002.

The
Company's chief executive officer, Richard Ginsburg, and its chief financial officer, Darius Nevin, held similar positions with Guardian International, Inc. (Guardian) prior
to taking their current positions with the Company. The Company granted Guardian an option to purchase an aggregate of

F-24

---

250,000 shares of the Company's common stock in connection with the Company's hiring of Mr. Ginsburg. See Note 7, "Stock Warrants and Options" for additional discussion regarding these
options. In November 2001, the Company sold a portfolio of customer accounts for approximately $0.1 million to Mutual Central Alarm Services, Inc. (Mutual), a wholly owned
subsidiary of Guardian International, Inc. (Guardian). In December 2001, the Company purchased a portfolio of customer accounts from Mutual for approximately $0.4 million. Westar
Energy is a significant holder of Guardian's preferred stock.

On
February 29, 2000, the Company sold its European operations and certain investments to Westar Industries. The consideration received was approximately $244.0 million,
comprised of approximately $183.0 million in cash and the market value of certain outstanding debt securities of the Company acquired by Westar Industries in open market purchases.

Since
Westar Industries is a related party, no gain or loss was recorded on the sale of the Company's European operations and investments. The Company increased Additional
Paid-In Capital $25.6 million to reflect the excess of the transaction price over book value on the sale of the European operations. The Company reduced Additional
Paid-In Capital $16.7 million to reflect the excess of book value of the investments over the transaction price.

Recognition
of gain or loss on the acquisition and retirement of the Company's debt securities from Westar Industries was also limited because the parties were related. The Company
recorded gains of $41.7 million on these retirements which reflects the difference between the Company's carrying value of the debt and Westar Industries' cost basis in the debt which it
acquired in open market purchases. The Company increased Additional Paid-In Capital $12.8 million in 2000 to reflect the additional amount that would have been considered a gain had
the parties not been related and the gain recorded based on the transaction price.

Pro Forma Financial Information:

The following unaudited pro forma consolidated results of operations for the year ended December 31, 2000 assumes the sale of the Company's European
operations to Westar Industries occurred on January 1 (in thousands, except per share amounts):

December 31,
2000Revenues

$
395,585Loss from continuing operations


(52,938
)Net loss


(53,674
)Net loss per common share:Loss from continuing operations


(.42
)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 Industries been reflected for the entire
period, nor do they purport to be indicative of results which will be obtained in the future.

F-25

---



7.    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 that are granted with an exercise price at or greater than the market
price on the day of grant.

A
summary of warrant and option activity for the Company's common stock from December 31, 1999 through December 31, 2002 is as follows:

Warrants
And Options

Weighted
Average
Exercise
PriceOutstanding at December 31, 1999

4,048,118

$
7.426Granted

922,500


1.437Exercised

(5,440
)

3.890Surrendered

(300,645
)

6.670Outstanding at December 31, 2000

4,664,533

$
6.294Granted

2,045,541


1.329Exercised

(65,568
)

1.438Surrendered

(974,394
)

4.658Outstanding at December 31, 2001

5,670,112

$
4.840Granted

797,500


2.201Exercised

(60,621
)

1.422Surrendered

(1,144,138
)

10.063Outstanding at December 31, 2002

5,262,853

$
3.344


F-26

---

The
table below summarizes stock options and warrants for the Company's common stock outstanding as of December 31, 2002:

|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-$6.50            |  | 46,800                           |  | 2 years                                               |  | $                              
|Fiscal 1996        |  | 8.00-15.00              |  | 130,000                          |  | 3 years                                               |  |                                
|Fiscal 1997        |  | 9.50-15.00              |  | 75,000                           |  | 4 years                                               |  |                                
|Fiscal 1998        |  | 11.000                  |  | 348,000                          |  | 5 years                                               |  |                                
|Fiscal 1999        |  | 5.250-8.9275            |  | 414,414                          |  | 6 years                                               |  |                                
|Fiscal 2000        |  | 1.4375                  |  | 270,232                          |  | 7 years                                               |  |                                
|Fiscal 2001        |  | 0.875-1.4800            |  | 621,850                          |  | 8 years                                               |  |                                
|1993 Warrants      |  | 0.167                   |  | 428,400                          |  | 1 year                                                |  |                                
|1995 Note Warrants |  | 3.890                   |  | 780,837                          |  | 2 years                                               |  |                                
|                   |  |                         |  |                                  |  |                                                       |  |                                
|                   |  |                         |  | 3,115,533                        |  |                                                       |  |                                
|                   |  |                         |  |                                  |  |                                                       |  |                                
|Not exercisable    |  |                         |  |                                  |  |                                                       |  |                                
|2000 options       |  | 1.4375                  |  | 102,796                          |  | 7 years                                               |  |                                
|2001 options       |  | 0.8750-1.480            |  | 1,247,024                        |  | 8 years                                               |  |                                
|2002 options       |  | 2.07-2.75               |  | 797,500                          |  | 9 years                                               |  |                                
|                   |  |                         |  |                                  |  |                                                       |  |                                
|                   |  |                         |  | 2,147,320                        |  |                                                       |  |                                
|                   |  |                         |  |                                  |  |                                                       |  |                                
|Outstanding        |  |                         |  | 5,262,853                        |  |                                                       |  |                                
|                   |  |                         |  |                                  |  |                                                       |  |                                

On
April 16, 2001, the Company granted an option to purchase an aggregate of 875,000 shares of its common stock to Richard Ginsburg as part of his employment agreement with the
Company. The option has a term of ten years and vests ratably over the next three years. The purchase price of the shares issuable pursuant to the option is $1.32 per share while the fair market value
of the common stock at the date of the option grant was $1.79 per share resulting in $0.4 million in deferred compensation expense amortized over three years. The expense amounts were
$0.1 million and $0.1 million respectively for 2001 and 2002.

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. A total of 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.

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.

F-27

---

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.

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 2002, 2001 and 2000 estimated on the date of grant using the Black-Scholes Option Pricing Model were $1.95 $0.98 and $1.13,
respectively. The fair value was calculated for the respective year using the following assumptions:

Year Ended December 31,2002

2001

2000Expected stock price volatility

91.30
%
83.92
%
92.97
%Risk free interest rate

5.12
%
4.95
%
4.88
%Expected option life

7 years

7 years

6 years


On
April 16, 2001, the Company granted an option to purchase an aggregate of 250,000 shares of its common stock to Guardian International, Inc. (Guardian) in connection
with the hiring of Richard Ginsburg as the Company's new chief executive officer, who was formerly the chief executive officer of Guardian. The option has a term of ten years and vests ratably over
the next three years. The purchase price of the shares issuable pursuant to the option is $1.32 per share while the fair market value of the common stock at the date of the option grant was $1.79 per
share resulting in $0.4 million expense in 2001. On December 31, 2001, all shares were outstanding and none were exercisable. On December 31, 2002, all shares were outstanding and
83,334 shares are exercisable. The shares issued to Guardian are not included in the outstanding options listed in the above tables.

F-28

---

8.    Income Taxes:

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

Year Ended December 31,2002

2001

2000FederalCurrent

$
20,745

$
19,564

$
2,061Deferred


127,886


2,301


8,847StateCurrent


264


(266
)

(130
)Deferred


(43
)

(27
)

(615
)Foreign tax expense, current








(596
)148,852

$
21,572


9,567Tax on discontinued operations


674


(41
)

(226
)Tax on cumulative effect of accounting change


72,335





Total

$
221,861

$
21,531

$
9,341


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:

2002

2001

2000Federal statutory tax rate

35
%
35
%
35
%Non-deductible goodwill

(16
)
(15
)
(19
)Foreign tax expense





(1
)Other

1



20
%
20
%
15
%


A
tax sharing agreement between Protection One and Westar Energy provides for payments to Protection One for tax benefits utilized by Westar Energy. Accordingly, in 2002 and 2001, the
Company received aggregate payments from Westar Energy of $1.7 million and $19.1 million, respectively. The receivable balance of $20.7 million at December 31, 2002
reflects the balance of the estimated tax benefit to be utilized by Westar Energy in its 2002 consolidated income tax return less an estimated amount for alternative minimum tax carryforwards. This
tax benefit would not be available if we could no longer file consolidated tax returns with Westar Energy. See Note 2 (d) of the "Notes to Consolidated Financial Statements".

F-29

---

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

2002

2001Deferred tax asset, current:Accrued liabilities

$
5,454

$
5,562Accounts receivable, due to allowance


1,248


2,027Other


1,554


1,194$
8,256

$
8,783Deferred tax asset, noncurrent:AMT credit carryforwards

$
27,196

$
6,090Net operating loss carryforwards


8,307


5,437Valuation allowance


(8,307
)

(5,437
)Customer accounts


146,094


60,023Installed systems


40,147


18,623Property & equipment


(14,343
)

(9,896
)Goodwill


76,680


374OID amortization


3,343


4,450Other


7,528


(52
)$
286,645

$
79,612


9.    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 makes contributions to its Protection One 401(k) Plan, which contributions are allocated among participants based upon the respective contributions made
by the participants through salary reductions during the applicable plan year. The Company's matching contribution may be made in Common Stock, in cash or in a combination of both stock and cash. For
the years ended December 31, 2002, 2001, and 2000, Protection One made a matching cash contribution to the plan of $1.1 million, $1.1 million and $0.7 million respectively.
The funds of the plan are deposited with a trustee and at each participant's option in one or more investment funds, including a company stock fund. The plan was amended effective January 1,
2001 requiring the Company to match employees' contributions up to specified maximum limits.

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 4,650,000 shares of common stock have been
reserved for issuance under the Employee Stock
Purchase Plan and a total of 1,063,430 shares have been issued including the issuance of 151,244 shares in January 2003.

F-30

---

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



10.    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 31,2003

$
8,9362004


6,2592005


4,4352006


2,1392007


1,669Thereafter


1,925$
25,363


Total
rent expense for the years ended December 31, 2002, 2001 and 2000, was $11.7 million, $11.8 million and $11.7 million respectively.

11.    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
fair value of the Company's debt instruments are estimated based on quoted market prices except for the Westar Credit Facility and the Convertible Senior Subordinated Notes which had
no available quotes and were estimated by the Company. The Company's estimate of fair value for the Westar Credit Facility was determined by adding one basis point to the quoted price on the Senior
Unsecured Notes because of its earlier maturity date. Fair value of other long-term debt is estimated at

F-31

---

carrying value. At December 31, 2002, the fair value and carrying amount of the Company's debt was as follows (in thousands):

Fair Value

Carrying Value2002

2001

2002

2001Westar Credit Facility

$
178,865

$
114,125

$
215,500

$
137,500Senior Subordinated Notes (8.125%)


82,755


123,788


110,340


176,840Senior Unsecured Notes (7.375%)


156,559


166,993


190,925


203,650Senior Subordinated Discount Notes (13.625%)


30,320


33,002


31,033


41,809Convertible Senior Subordinated Notes (6.75%)


9,725


19,415


9,725


23,785$
458,224

$
457,323

$
557,523

$
583,584


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.

F-32

---



12.    Commitments and Contingencies:

The Company, its subsidiary Protection One Alarm Monitoring, Inc. ("Monitoring") and certain present and former officers and directors of the Company were
defendants in a purported class action litigation pending in the United States District Court for the Central District of California, Alec Garbini, et al. v. Protection One, Inc., et al., No CV
99-3755 DT (RCx). On August 20, 2002, the parties filed a Stipulation of Settlement which provides for, among other things, no finding of wrongdoing on the part of any of the
defendants, or any other finding that the claims alleged had merit, and a $7.5 million payment to the plaintiffs, which has been fully funded by the Company's existing insurance. On
November 4, 2002, the District Court approved the settlement and entered an Order and Final Judgment. The court certified a class for settlement purposes consisting of all persons and entities
who purchased or otherwise acquired the common stock of the Company during the time period beginning and including February 10, 1998 through February 2, 2001. The Order and Final
Judgment provides for, among other things, dismissal with prejudice and release of all Class members' claims against the Company, Monitoring, and the present and former officers and directors of the
Company.

In
1999, six former Protection One dealers filed a class action lawsuit against Monitoring in the U.S. District Court for the Western District of Kentucky alleging breach of contract
arising out of a disagreement over the interpretation of certain provisions of their dealer contracts. The action is styled Total 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 Monitoring's motion to stay the
proceeding pending the individual plaintiffs' pursuit of arbitration as required by the terms of their agreements. On June 23, 2000, the Court denied plaintiffs' motion for collective
arbitration. On or about October 4, 2000, notwithstanding the Court's denial of plaintiffs' motion for collective arbitration, the six former dealers filed a Motion to Compel Consolidation
Arbitration with the American Arbitration Association ("AAA"). On November 21, 2000, the AAA denied the dealers' motion and advised they would proceed on only one matter at a time. Initially,
only Masterguard Alarms proceeded with arbitration. On March 8, 2002, Masterguard's claims against the Company were settled by the mutual agreement of the parties. On July 25, 2002,
Complete Security, Inc., a dealer which was among the original plaintiffs in the Total Security Solutions court proceeding, initiated arbitration proceedings against Monitoring, alleging breach
of contract, misrepresentation, consumer fraud and franchise law violations.

On
May 8, 2002, Sentralarms, Inc., a dealer which was not among the original plaintiffs in the Total Security Solutions court proceeding, initiated arbitration proceedings
against Monitoring, alleging breach of contract, misrepresentation and violations of the Oregon Consumer Protection Act. On February 21, 2003, Sentralarm's claims against the Company were
settled by the mutual agreement of the parties. Two other dealers, not plaintiffs in the original Total Security Solutions litigationSecurity Response Network, Inc. and Homesafe
Security, Inc. have similar claims in arbitration pending against the Company. The Company believes it has complied with the terms of its contracts with these former dealers, and intends to
aggressively defend against these claims. In the opinion of management, none of these pending dealer claims, either alone or in the aggregate, will have a material adverse effect upon the Company's
consolidated financial position or results of operations.

Other
Protection One dealers have threatened, and may bring, claims against the Company based upon a variety of theories surrounding calculations of holdback and other payments, or based
on other theories of liability. The Company believes it has materially complied with the terms of its contracts

F-33

---

with dealers. The Company cannot predict the aggregate impact of these potential disputes with dealers which could be material.

On
August 2, 2002, Monitoring, Westar Energy, Inc. and certain former employees of Monitoring, as well as certain third parties, were sued in the District Court of
Jefferson County, Texas, by Regina Rogers, a resident of Beaumont, Texas (Case No. D167654). Ms. Rogers has asserted various claims due to casualty losses and property damage she allegedly
suffered as a result of a fire to her residence. In her complaint, Ms. Rogers alleges that Protection One and certain of its employees were negligent, grossly negligent and malicious in
allegedly failing to properly service and monitor the alarm system at the residence. The complaint also alleges various violations of the Texas Deceptive Trade Practices Act ("DTPA"), fraud and breach
of contract. Relief sought under the complaint includes actual, exemplary and treble damages under the DTPA, plus attorneys' fees. Although the complaint does not specify the amount of damages sought,
counsel for the plaintiff has previously alleged actual damages of approximately $7.5 million. The Company believes it has adequate insurance coverage with respect to any potential liability.
The Company's primary insurance carrier is providing defense of the action, and the excess carrier is proceeding under a reservation of rights. In the opinion of management the outcome will not have a
material adverse effect upon the Company's consolidated financial position or results of operations.

The
Company is a party to claims and matters of litigation incidental to the normal course of its business. Additionally, the Company receives notices of consumer complaints filed with
various state agencies. The Company has developed a dispute resolution process for addressing these administrative complaints. The ultimate outcome of such matters cannot presently be determined;
however, in the opinion of management 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.

The
Company, Westar Energy and their former independent auditor, Arthur Andersen LLP, have been advised by the Staff of the Securities and Exchange Commission that the Staff will be
inquiring into the practices of the Company and Westar Energy with respect to the restatement of their first and second
quarter 2002 financial statements announced in November 2002 and the related announcement that the 2000 and 2001 financial statements of the Company and Westar Energy will be reaudited. The
Company intends to cooperate with the Staff in connection with such inquiry.

13.    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 until February 29, 2000, Europe. North America provides residential, commercial, and wholesale
security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and business customers in the United States of America.
Multifamily provides security alarm services to apartments, condominiums and other multifamily dwellings. Europe provided security alarm services to residential and business customers in Europe.
During the third quarter of 2002, the Company identified a new reportable segment, Data Services, with the creation of PODS. As discussed

F-34

---

in Note 6, the operations of this segment were discontinued in the fourth quarter of 2002, and accordingly, they are not included in the amounts reported below.

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, amortization (including amortization of deferred customer acquisition costs and revenues) and other income and expense ("Adjusted EBITDA").

Reportable
segments (in thousands):

|                                                              |  | For the year ended December 31, 2002 |         
|------------------------------------------------------------- |  | ------------------------------------ | --------
|
|Revenue                                                       |  | $                                    | 252,504 
|Adjusted EBITDA(4)                                            |  |                                      | 68,985  
|Amortization of intangibles and depreciation expense          |  |                                      | 77,173  
|Amortization of deferred costs in excess of deferred revenues |  |                                      | 14,644  
|Impairment charge                                             |  |                                      | 442,041 
|Operating income (loss)                                       |  |                                      | (464,873
|Segment assets                                                |  |                                      | 791,593 
|Expenditures for property                                     |  |                                      | 7,046   
|Investment in new accounts, net                               |  |                                      | 24,373  

|                                                              |  | For the year ended December 31, 2001 |          
|------------------------------------------------------------- |  | ------------------------------------ | ---------
|
|Revenue                                                       |  | $                                    | 296,373  
|Adjusted EBITDA(4)                                            |  |                                      | 76,331   
|Amortization of intangibles and depreciation expense          |  |                                      | 182,261  
|Amortization of deferred costs in excess of deferred revenues |  |                                      | 1,558    
|Operating loss                                                |  |                                      | (107,488 
|Segment assets                                                |  |                                      | 1,588,263
|Expenditures for property                                     |  |                                      | 6,655    
|Investment in new accounts, net                               |  |                                      | 15,019   

---

F-35

---



2002

2001(amounts in thousands)Income (loss) from continuing operations before income taxes

$
(483,127
)
$
(106,582
)Plus:Interest expense


43,023


51,737Amortization of intangibles and depreciation expense


82,440


195,773Amortization of deferred costs in excess of deferred revenues


19,714


3,859Loss on Impairment


442,041


Less:Gain on retirement of debt


(19,337
)

(53,043
)Other non-recurring income


(602
)

(125
)Adjusted EBITDA

$
84,152

$
91,619


14.    Impairment Charge Pursuant to New Accounting Rules:

Effective January 1, 2002, the Company adopted the new accounting standards SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," and
SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets." SFAS No. 142 establishes new standards for accounting for goodwill. SFAS No. 142
continues to require the recognition of goodwill as an asset, but discontinues amortization of goodwill. In addition, annual impairment tests must be performed using a fair-value based
approach as opposed to an undiscounted cash flow approach required under prior standards. The completion of the impairment test by the Company, based upon a valuation performed by an independent
appraisal firm, as of January 1, 2002, indicated that the carrying value of goodwill had been impaired and an impairment charge was recorded as discussed below.

SFAS
No. 144 establishes a new approach to determining whether the Company's customer account asset is impaired. The approach no longer permits the Company to evaluate its
customer account asset for impairment based on the net undiscounted cash flow stream obtained over the remaining life of goodwill associated with the customer accounts being evaluated. Rather, the
cash flow stream used under SFAS No. 144 is limited to future estimated undiscounted cash flows from assets in the asset group, which include customer accounts, the primary asset of the
reporting unit, plus an

F-36

---

estimated amount for the sale of the remaining assets within the asset group (including goodwill). If the undiscounted cash flow stream from the asset group is less than the combined book value of
the asset group, then the Company is required to mark the customer account asset down to fair value, by way of recording an impairment, to the extent fair value is less than our book value. To the
extent net book value is less than fair value, no impairment would be recorded.

The
new rule substantially reduces the net undiscounted cash flows used for customer account impairment evaluation purposes as compared to the previous accounting rules. The undiscounted
cash flow stream has been reduced from the 16 year remaining life of the goodwill to the 9 year remaining life of customer accounts for impairment evaluation purposes. Using these new
guidelines, the Company determined that there was an indication of impairment of the carrying value of the customer accounts and an impairment charge was recorded as discussed below.

To
implement the new standards, the Company engaged an appraisal firm to help us estimate the fair values of goodwill and customer accounts. Based on this analysis, the Company recorded
a net charge of approximately $765.2 million in the first quarter of 2002. The charge is detailed as follows:

Goodwill

Customer
Accounts

Total(in millions)North America Segment:Impairment chargecontinuing operations

$
509.4

$
338.1

$
847.5Impairment chargediscontinued operations


2.3


1.9


4.2Estimated income tax benefit


(65.1
)

(118.4
)

(183.5
)Net charge

$
446.6

$
221.6

$
668.2Multifamily Segment:Impairment charge

$
104.2

$


$
104.2Estimated income tax benefit


(7.2
)




(7.2
)Net charge

$
97.0

$


$
97.0Total Company:Impairment charge

$
615.9

$
340.0

$
955.9Estimated income tax benefit


(72.3
)

(118.4
)

(190.7
)Net charge

$
543.6

$
221.6

$
765.2


The
impairment charge for goodwill is reflected in the consolidated statement of income as a cumulative effect of a change in accounting principle. The impairment charge for customer
accounts is reflected in the consolidated statement of income as an operating cost. These impairment charges reduced the recorded value of these assets to their estimated fair values at
January 1, 2002.

Another
impairment test was completed by the Company as of July 1, 2002 (the date selected for its annual impairment test), with the independent appraisal firm providing the
valuation of the estimated fair value of the Company's reporting units, and no impairment was indicated. After regulatory actions (see Note 6, "Related Party Transactions"), including Kansas
Corporation Commission Order No. 55, which prompted Westar Energy to advise the Company that it intended to

F-37

---

dispose of its investment in the Company, the independent appraisal firm was again retained to perform an additional valuation so that the Company could perform an impairment test as of
December 31, 2002. The Order limited the amount of capital Westar Energy could provide to the Company which increased the Company's risk profile. Therefore, the Company reevaluated its
corporate forecast, reducing the amount of capital invested over its forecast horizon and lowered its base monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower
valuation than the July 1, 2002 valuation. The Company recorded an additional $90.7 million impairment charge, net of $13.3 million tax, to reflect the impairment of all remaining
goodwill of its North America segment.

A
deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit estimated above and an additional deferred tax benefit of
$13.3 million was recorded with the fourth quarter impairment charge. However, if Westar Energy completes its intended disposal of Protection One, the Company's net deferred tax assets of
$294.9 million at December 31, 2002 might not be realizable and the Company might not be in a position to record a tax benefit for losses incurred. The Company would be required to
record a charge against income for the portion of its net deferred tax assets determined not to be realizable. This charge could be material and could have a material adverse effect on the Company's
business, financial condition and results of operations.

In
2001, the Company recorded approximately $48.9 million of goodwill amortization from continuing operations, including $0.3 million from discontinued operations. Because
the Company adopted the new rule for goodwill, it will no longer be permitted to amortize goodwill to income. In 2001, the Company recorded approximately $132.0 million of customer account
amortization expense. As a result of the
customer impairment charge, customer account amortization expense in 2002 decreased to approximately $68.9 million.

Because
the Company adopted the new rule for goodwill, it is no longer amortizing goodwill to income. The following table reflect the Company's results for the year ended
December 31, 2001 and 2000, calculated using the new accounting treatment discussed above, as compared to the Company's results for the year ended December 31, 2002.

Year ended December 31,2002

2001

2000(in thousands, except per share amounts)Reported net loss

$
(880,855
)
$
(86,048
)
$
(57,171
)Add back: Goodwill amortization





48,554


50,638Adjusted net loss

$
(880,855
)
$
(37,494
)
$
(6,533
)Basic and diluted earnings per share:Reported net loss

$
(8.98
)
$
(0.82
)
$
(0.45
)Add back: Goodwill amortization





0.46


0.40Adjusted net loss

$
(8.98
)
$
(0.36
)
$
(0.05
)


The
Company is required to perform impairment tests for long-lived assets prospectively when the Company determines that indicators of potential impairment are present.
Goodwill is required to be tested at least annually for impairment. Declines in market value of the Company's business or the

F-38

---

value of its customer accounts that may occur in the future may require additional write-down of these assets in the future.

15.    Subsequent Events:

Westar Energy's Proposed Sale of our Stock.On January 13, 2003, Westar Energy, Inc. ("Westar Energy")
announced that its board of directors has authorized management to explore strategic alternatives for divesting its investment in Protection One with a view to maximizing the value it receives. Westar
Energy, through its wholly owned subsidiary Westar Industries, Inc., owns approximately 88% of Protection One. We expect to work closely with Westar Energy's management to identify alternatives
that are in the best interest of all of our shareholders.

Kansas Corporation Commission Orders.On November 8, 2002, the Kansas Corporation Commission issued Order
No. 51 which required Westar Energy to initiate a corporate and financial restructuring, reverse specified accounting transactions described in the Order, review, improve and/or develop, where
necessary, methods and procedures for allocating costs between utility and non-utility businesses for KCC approval, refrain from any action that would result in its electric businesses
subsidizing non-utility businesses, reduce outstanding debt giving priority to reducing utility debt and, pending the corporate and financial restructuring, imposed standstill limitations
on Westar Energy's ability to finance non-utility businesses including the Company. These standstill protections require that Westar Energy seek KCC approval before it takes actions such
as making any loan to, investment in or transfer of cash in excess of $100,000 to the Company or another non-utility affiliate, entering into any agreement with the Company or another
non-utility affiliate where the value of goods or services exchanged exceeds $100,000, investing, by Westar Energy or Westar Energy's affiliate, of more than $100,000 in an existing or new
non-utility business and transferring any non-cash assets or intellectual property to the Company or another non-utility affiliate. In addition, Westar Energy must
charge interest to the Company and other non-utility affiliates at the incremental cost of our or their debt on outstanding balances of any existing or future inter-affiliate loans,
receivables or other cash advances due Westar Energy. The Order also suggested that the sale by Westar Energy of the Company's stock should be explored, along with other alternatives, as a possible
source of cash to be used to reduce Westar Energy debt. An additional provision affecting the Company includes a requirement that it cannot sell assets having a value of $100,000 or more without prior
KCC approval.

On
December 23, 2002, the Kansas Corporation Commission issued Order No. 55 clarifying and modifying the November 8, 2002 Order. One such clarification was that
Westar Energy and Westar Industries would be prohibited from making payments to the Company under the Tax Sharing Agreement until certain requirements were met by Westar Energy regarding their debt.

On
January 10, 2003, Protection One filed a petition seeking reconsideration of certain aspects of Order No. 55. Specifically, the Company requested that the Commission
reconsider and revise Order No. 55 so that it clearly does not interfere with the Company's contractual arrangements with Westar Energy and Westar Industries, including, but not limited to the
Tax Sharing Agreement and the Westar Credit Facility.

On
February 12, 2003, the parties to the KCC proceeding filed a Limited Stipulation and Agreement, which sought the KCC's approval for Protection One to sell all of its Westar
Energy stock to Westar Energy. The KCC approved the Limited Stipulation and Agreement on February 14, 2003.

F-39

---

Protection One sold its Westar Energy stock to Westar Energy on February 14, 2003 for $11.6 million. At December 31, 2002 this Westar Energy stock is recorded as a reduction of
stockholders' equity, similar to treasury stock, in the amount of $15.0 million.

On
February 25, 2003, the Company entered into a Partial Stipulation and Agreement (the Reconsideration Agreement) with the Staff of the KCC, Westar Energy, Westar Industries and
an intervenor. The Reconsideration Agreement requested that the KCC issue an order granting limited reconsideration and clarification to its order issued December 23, 2002. The Reconsideration
Agreement also requests that the KCC authorize Westar Energy and Westar Industries to perform their respective obligations to the Company under the Tax Sharing Agreement and the Westar Credit
Facility. Additionally, the Reconsideration Agreement provides that, among other things, (a) the maximum borrowing capacity under the Westar Credit Facility will be reduced to
$228.4 million and the maturity date may be extended one year to January 5, 2005, (b) Westar Energy may provide funds to Westar Industries to the extent necessary to perform its
obligations to the Company under the Westar Credit Facility, (c) Westar Energy will reimburse the Company approximately $4.4 million for expenses incurred in connection with services
provided by Protection One Data Services and AV One, Inc. to Westar Energy and Westar Industries, and for the sale of AV One, Inc. to Westar Energy, and (d) the Management
Services Agreement between the Company and Westar Industries is cancelled.

On
March 11, 2003, the KCC issued Order No. 65 conditionally approving the Reconsideration Agreement. The KCC imposed the following on the terms of the Reconsideration
Agreement: (a) the Westar Credit Facility must be paid off upon the sale of all or a majority of Protection One common stock held by Westar Industries, and this pay-off must be a
condition of any sale by Westar Industries of Protection One's stock; (b) Westar Energy must provide advance notice to the KCC if the payment to the Company under the Tax Sharing Agreement
exceeds approximately $20 million; (c) Protection One must receive KCC approval prior to selling any assets exceeding $100,000 and Westar Energy and Westar Industries must receive KCC
approval prior to selling their stock in Protection One; and (d) Protection One must waive potential claims against Westar Energy and Westar Industries relating to certain inter-company
agreements. In addition, the KCC reserved the right to impose a deadline for the sale by Westar Industries of its Protection One stock. Westar Energy is precluded from extending any credit to the
Company except for borrowings the Company may make under the Westar Credit Facility.

The
Company, Westar Energy and Westar Industries also agreed that they will provide the Kansas Corporation Commission with periodic reports on the progress of their efforts to sell
Westar Energy's equity investment in Protection One.

In
addition, on March 19, 2003, the Company submitted two letters to the KCC in response to KCC Order No. 65, one of which was addressed to the KCC and the other of which
was addressed to Westar Energy. As described in the letters, the Company agreed to (i) release Westar Energy from certain claims relating to Protection One Data Services, Inc ("PODS"), AV
One, Inc. and the Management Services Agreement and (ii) accept the conditions set forth in Order No. 65 relating to matters other than PODS, AV One, Inc. and the
Management Services Agreement. The Company does not intend to seek reconsideration of Order No. 65.

Sale of Westar Energy stock to Westar Energy.At December 31, 2002, the Company held 850,000 shares of Westar Energy
common stock at a cost of approximately $13.0 million and 34,213 shares of Westar Energy preferred stock at a cost of approximately $2.0 million for a combined cost of

F-40

---

approximately $15.0 million which is reflected in the equity section of the Company's balance sheet. These securities were sold to Westar Energy on February 14, 2003 for approximately
$11.6 million. The difference between the cost and proceeds received from Westar Energy will be reflected as a reduction of contributed capital from Westar Energy in the first quarter of 2003.

Sale of AV One, Inc. to Westar Energy and Settlement of Receivables.On March 21, 2003, pursuant to the
Reconsideration Agreement, the Company received $4.6 million for expenses incurred in connection with services provided by PODS ($1.0 million) and AV One, Inc.
($2.2 million) to Westar Energy and Westar Industries, and consummation of the sale of AV One, Inc. ($1.4 million) to Westar Energy. At December 31, 2002, the Company had a
receivable from Westar Energy in the amount of approximately $1.1 million relating to services provided by PODS and approximately $1.6 million relating to aviation services provided by
AV One, Inc.

Share Repurchases.From January 1, 2003 through April 3, 2003, the Company purchased 2,500 shares of treasury
stock for approximately $3,400.

16.    Discontinued Operations:

During the second quarter of 2002 the Company entered into negotiations for the sale of its Canadian business which was included in its North American segment.
The sale was consummated on July 9, 2002. The Company recorded a pretax impairment loss of approximately $2.0 million and an after tax loss of approximately $1.3 million in the
second quarter of 2002 as a result of the sale.

The
net operating losses of the Canadian operations are included in the consolidated statements of operations under "discontinued operations." The net operating loss for the year ended
December 31, 2002 of $1.6 million includes an impairment loss on customer accounts of approximately $1.9 million. An impairment charge of $2.3 million relating to the
Canadian operations' goodwill is reflected in the consolidated statement of operations as a cumulative effect of accounting change on discontinued operations. Revenues from these operations were
$4.2 million for the six months ended June 30, 2002, compared to $4.1 million for the six months ended June 30, 2001 and $4.2 million compared to $8.2 million
for the year ended December 31, 2002 and 2001 respectively.

The
major classes of assets and liabilities of the Canadian operations were as follows (in thousands):

December 31, 2001Assets:Current

$
478Property and equipment


571Customer accounts, net


16,992Goodwill


4,842Other


55Total assets

$
22,938Current liabilities

$
1,364


F-41

---

In
June 2002, the Company formed a wholly owned subsidiary named Protection One Data Services, Inc. ("PODS") and on July 1, 2002 transferred to it approximately 42
of its Information Technology employees. Effective July 1, 2002, PODS entered into an outsourcing agreement with Westar Energy pursuant to which PODS provided Westar Energy information
technology services. As a condition of the agreement, PODS offered employment to approximately 100 Westar Energy Information Technology employees. Operation of the subsidiary and the supply of such
services to Westar Energy was discontinued as of December 31, 2002. The approximately 142 Information Technology employees that had accepted employment with PODS returned to their respective
companies as of the end of the year. The net income of PODS operations of approximately $0.3 million is included in the consolidated statements of operations under "discontinued operations."
Revenues from these operations totaled
$11.2 million for the six months of their operation ending December 31, 2002. PODS had $1.1 million in receivables from Westar Energy and $0.4 million in accounts payable
as of December 31, 2002.

17.    Unaudited Quarterly Financial Information:

Subsequent to the Company's filing its Form 10-Q on November 14, 2002, the Company determined it would restate its quarterly financial
information for each of the first three quarters of 2002. Since adopting Staff Accounting Bulletin 101 on January 1, 2000, the Company has capitalized as property and equipment the direct and
incremental costs of the electronic security systems (equipment and associated labor) that it installs in homes or businesses and for which the Company retains title. The Company has amortized this
equipment to depreciation expense over the expected life of the customer. The Company's North America segment utilized a 10-year accelerated amortization method and its Multifamily segment
utilized a 9-year straight line amortization method. Direct and incremental selling costs incurred in connection with the installation of these systems were capitalized as deferred
customer acquisition cost and amortized as discussed in Note 2, "Summary of Significant Accounting Policies(a) Revenue Recognition."

In
connection with most security system installations, the Company also incurs costs related to system enhancements for which title passes to the customer and which are capitalized as
deferred customer acquisition costs.

Management
of the Company determined that the costs capitalized as property and equipment should have been capitalized as a deferred customer acquisition cost and included with other
such costs and amortized as discussed in Note 2, "Summary of Significant Accounting Policies(a) Revenue Recognition." For the North America segment the initial contract term is
typically 3-years for residential customers and 5-years for commercial customers and for the Multifamily segment the initial contract term typically ranges from 5 to
10 years. The impact of this change on the financial results of 2001 and 2000 was not significant and is reflected in the first quarter results of 2002.

F-42

---

The
following is a summary of the unaudited quarterly financial information for 2002 and 2001 respectively, and includes the restated amounts for the first three quarters of 2002.

|                                                                  |                                                               | March 31 |          | June 30 |   | September 30 |         | December 31 |        
|----------------------------------------------------------------- | ------------------------------------------------------------- | -------- | -------- | ------- | - | ------------ | ------- | ----------- | -------
|2002                                                              |                                                               |          |          |         |   |              |         |             |        
|Revenues                                                          |                                                               | $        | 73,927   |         | $ | 73,289       |         | $           | 72,365 
|Gross profit                                                      |                                                               |          | 41,610   |         |   | 46,442       |         |             | 44,773 
|Income (loss) from continuing operations before accounting change |                                                               |          | (230,473 | )       |   | 3,910        |         |             | (7,341 
|Loss from discontinued operations                                 |                                                               |          | (1,669   | )       |   | (1,343       | )       |             | 85     
|Cumulative effect of accounting change, net of taxes              |                                                               |          | (543,613 | )       |   |             |         |             |       
|Net income (loss)                                                 |                                                               |          | (775,754 | )       |   | 2,566        |         |             | (7,256 
|Basic and diluted loss per share:                                 |                                                               |          |          |         |   |              |         |             |        
|                                                                  | Loss from continuing operations before accounting change      |          |          | (2.34   | ) |              | 0.04    |             |        
|                                                                  | Loss from discontinued operations before accounting change    |          |          | (0.02   | ) |              | (0.01   | )           |        
|                                                                  | Cumulative effect of accounting change                        |          |          | (5.52   | ) |              |        |             |        
|                                                                  | Net income (loss)                                             |          |          | (7.88   | ) |              | 0.03    |             |        
|                                                                  | Weighted average number of shares of common stock outstanding |          |          | 98,451  |   |              | 97,935  |             |        
|2001                                                              |                                                               |          |          |         |   |              |         |             |        
|Revenues                                                          |                                                               | $        | 89,764   |         | $ | 86,050       |         | $           | 80,101 
|Gross profit                                                      |                                                               |          | 58,215   |         |   | 55,274       |         |             | 53,760 
|Loss from continuing operations before accounting change          |                                                               |          | (8,294   | )       |   | (31,061      | )       |             | (24,986
|Loss from discontinued operations                                 |                                                               |          | (182     | )       |   | (54          | )       |             | (168   
|Net loss                                                          |                                                               |          | (8,476   | )       |   | (31,115      | )       |             | (25,154
|Basic and diluted loss per share:                                 |                                                               |          |          |         |   |              |         |             |        
|                                                                  | Loss from continuing operations before accounting change      |          |          | (0.07   | ) |              | (0.29   | )           |        
|                                                                  | Loss from discontinued operations before accounting change    |          |          |        |   |              |        |             |        
|                                                                  | Net income (loss)                                             |          |          | (0.07   | ) |              | (0.29   | )           |        
|                                                                  | Weighted average number of shares of common stock outstanding |          |          | 116,281 |   |              | 105,907 |             |        

F-43

---

In
addition, the net effect of the restatements discussed above has been reflected in the appropriate quarterly results as follows:

|                                                                  |              | As Previously Reported* |   | Restatement |   | As Restated |      
|----------------------------------------------------------------- | ------------ | ----------------------- | - | ----------- | - | ----------- | -----
|
|
|Revenues                                                          |              |                         |   |             |   |             |      
|2002Quarter Ended:                                               |              |                         |   |             |   |             |      
|                                                                  | March 31     |                         | $ | 74,045      |   |             |      
|                                                                  | June 30      |                         |   | 72,943      |   |             |      
|                                                                  | September 30 |                         |   | 72,019      |   |             |      
|Gross Profit                                                      |              |                         |   |             |   |             |      
|2002Quarter Ended:                                               |              |                         |   |             |   |             |      
|                                                                  | March 31     |                         | $ | 48,999      |   |             |      
|                                                                  | June 30      |                         |   | 49,134      |   |             |      
|                                                                  | September 30 |                         |   | 47,525      |   |             |      
|Income (loss) from continuing operations before accounting change |              |                         |   |             |   |             |      
|2002Quarter Ended:                                               |              |                         |   |             |   |             |      
|                                                                  | March 31     |                         | $ | (225,662    | ) | $           | (2.29
|                                                                  | June 30      |                         |   | 5,059       |   |             | .05  
|                                                                  | September 30 |                         |   | (6,147      | ) |             | (.07 
|Net income (loss)                                                 |              |                         |   |             |   |             |      
|2002Quarter Ended:                                               |              |                         |   |             |   |             |      
|                                                                  | March 31     |                         | $ | (770,943    | ) | $           | (7.83
|                                                                  | June 30      |                         |   | 3,715       |   |             | .04  
|                                                                  | September 30 |                         |   | (6,062      | ) |             | (.06 

---

The
restatements described above did not impact previously reported cumulative effect of accounting change, net of tax.

F-44

---



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

|Description                                           |  | Balance at Beginning of period |  | Charged to costs and expenses |  | Deductions(a) |   | Balance at End of period
|----------------------------------------------------- |  | ------------------------------ |  | ----------------------------- |  | ------------- | - | ------------------------
|Year ended December 31, 2000                          |  |                                |  |                               |  |               |   |                         
|Allowances deducted from assets for doubtful accounts |  | 30,486                         |  | 12,206                        |  | (8,470        | ) | 34,222                  
|Year ended December 31, 2001                          |  |                                |  |                               |  |               |   |                         
|Allowances deducted from assets for doubtful accounts |  | 34,222                         |  | 5,889                         |  | (33,539       | ) | 6,572                   
|Year ended December 31, 2002                          |  |                                |  |                               |  |               |   |                         
|Allowances deducted from assets for doubtful accounts |  | 6,572                          |  | 4,566                         |  | (4,868        | ) | 6,270                   

---

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.
|-------------- |  | ----------------------------------------------------------
|April 11, 2003 |  | By:                                                       

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

|Signature                               |  | Title                                                                                                    |  | Date          
|--------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------------
|                                        |  |                                                                                                          |  |               
|/s/RICHARD GINSBURGRichard Ginsburg     |  | President, Chief Executive Officer and Director (Principal Executive Officer)                            |  | April 11, 2003
|/s/DARIUS G. NEVINDarius G. Nevin       |  | Executive Vice President, Chief Financial Officer (Principal Financial and Accounting Officer), Director |  | April 11, 2003
|/s/BRUCE AKINBruce Akin                 |  | Director                                                                                                 |  | April 11, 2003
|/s/GENE A. BUDIGGene A. Budig           |  | Director                                                                                                 |  | April 11, 2003
|/s/BEN M. ENISBen M. Enis               |  | Director                                                                                                 |  | April 11, 2003
|/s/LARRY D. IRICKLarry D. Irick         |  | Director                                                                                                 |  | April 11, 2003
|/s/DONALD A. JOHNSTONDonald A. Johnston |  | Director                                                                                                 |  | April 11, 2003
|/s/WILLIAM MOOREWilliam Moore           |  | Director                                                                                                 |  | April 11, 2003
|/s/JAMES Q. WILSONJames Q. Wilson       |  | Director                                                                                                 |  | April 11, 2003

---

CERTIFICATION PURSUANT TO  RULE 13a-14 UNDER THE  SECURITIES EXCHANGE ACT OF 1934

I,
Richard Ginsburg, certify that:



|Date: |  | April 11, 2003 |  | By: |  | /s/RICHARD GINSBURGRichard Ginsburg
President and Chief Executive Officer
|----- |  | -------------- |  | --- |  | -------------------------------------------------------------------------

---

CERTIFICATION PURSUANT TO  RULE 13a-14 UNDER THE  SECURITIES EXCHANGE ACT OF 1934

I, Darius G. Nevin, certify that:



|Date: |  | April 11, 2003 |  | By: |  | /s/DARIUS G. NEVINDarius G. Nevin
Executive Vice President and Chief Financial Officer
|----- |  | -------------- |  | --- |  | --------------------------------------------------------------------------------------

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