SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                  FORM 10-K

             [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934

                For the fiscal year ended December 31, 1997

           [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

            For the transition period from ________ to _________

        0-24780                                   33-73002-01
(Commission File Number)                   (Commission File Number)

  Protection One, Inc.                 Protection One Alarm Monitoring, Inc.
(Exact Name of Registrant              (Exact Name of Registrant
 as Specified in Charter                as Specified in Charter)

        Delaware                                 Delaware
(State or Other Jurisdiction           (State or Other Jurisdiction
 of Incorporation or Organization)      of Incorporation or Organization)

       93-1063818                                93-1064579
(I.R.S. Employer Identification No.)   (I.R.S. Employer Identification No.)

6011 Bristol Parkway, Culver City,     6011 Bristol Parkway, Culver City,
     California, 90230                        California, 90230
(Address of Principal Executive        (Address of Principal Executive
 Offices, Including Zip Code)           Offices, Including Zip Code)

       (310) 342-6300                          (310) 342-6300
(Registrant's Telephone Number,         (Registrant's Telephone Number,
    Including Area Code)                       Including Area Code)

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

                                              Name of Each Exchange
     Title of Each Class                       On Which Registered

6 3/4%  Convertible  Senior  Subordinated
Notes  Due  2003 of Protection One Alarm
Monitoring, Inc.
Guaranteed by Protection One, Inc.           New York Stock Exchange

        Securities  registered  pursuant to Section 12(g) of the Act:
     Common  Stock,  par value  $.01 per share of Protection One, Inc.
                             (Title of Class)

         Indicate  by check  mark  whether  each  registrant  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the  preceding  12 months (or such  shorter  period that such
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of each registrant's  knowledge,  in definitive proxy or information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The aggregate  market value of the common stock of Protection One, Inc.
held by  nonaffiliates  on March 25,  1998 (based on the last sale price of such
shares on the Nasdaq National Market) was approximately $155,379,253.

         As of March 25, 1998, Protection One, Inc. had outstanding 83,766,369
shares of Common Stock, par value $0.01 per share.  As of such date, Protection
One Alarm Monitoring, Inc. had outstanding 110 shares of Common Stock,
par value $0.10 per share, all of which shares were owned by Protection One,
Inc.. Protection One Alarm Monitoring, Inc. meets the conditions set forth in
General Instructions I (1)(a) and (b) for Form 10-K and is therefore filing
this form with the reduced disclosure format set forth therein.

                       DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Protection One, Inc.'s Proxy Statement  furnished to stockholders in
connection  with its Annual Meeting of  Stockholders  to be held April 23, 1998,
are  incorporated  by  reference  in Part  III of this  Form  10-K.  Such  proxy
statement will be filed with the Commission on or about April 2, 1998.

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<PAGE>




                              Introductory Notes



         Company Structure.  Unless the context otherwise indicates, all
references in this Annual Report on Form 10-K (this "Report") to "the Company"
or "Protection One" are to Protection One, Inc. ("POI") and its direct wholly
owned subsidiaries, Protection One Alarm Monitoring, Inc. ("Monitoring"), Westar
Security, Inc. ("Westar") and WestSec, Inc. ("WestSec").  POI operates solely
through and maintains no other assets than its investment in its subsidiaries.

         MRR,  EBITDA and  Adjusted  EBITDA.  As used in this  Report,  "MRR" is
monthly  recurring  revenue  (excluding  revenues from patrol services) that the
Company is  entitled  to  receive  under  contracts  in effect at the end of the
period,  "EBITDA"  means  earnings  before  interest,  taxes,  depreciation  and
amortization (excluding nonrecurring charges) and "Adjusted EBITDA" means EBITDA
adjusted by adding selling and marketing expenses, net of revenues, arising from
installation  activities.  MRR is a term  commonly  used in the  security  alarm
industry  as a  measure  of the  size  of a  company,  but not as a  measure  of
profitability  or  performance,  and does not include any  allowance  for future
attrition or allowance  for  doubtful  accounts.  EBITDA is derived by adding to
loss  before  income  taxes,  the  sum  of  (i)  interest  expense,   net,  (ii)
nonrecurring  charges,  and (iii)  amortization of intangibles and  depreciation
expense.  Adjusted  EBITDA is derived by adding to EBITDA  selling and marketing
expenses  related  to  installations  and  deducting  from  EBITDA  installation
revenues.  EBITDA and Adjusted EBITDA do not represent cash flow from operations
as defined by generally accepted accounting principles,  should not be construed
as  alternatives  to net income  and are  indicative  neither  of the  Company's
operating  performance  nor of cash flows  available to fund the Company's  cash
needs. Items excluded from EBITDA and Adjusted EBITDA are significant components
in understanding and assessing the Company's financial  performance.  Management
believes presentation of EBITDA and Adjusted EBITDA enhances an understanding of
the Company's financial condition,  results of operations and cash flows because
EBITDA and  Adjusted  EBITDA are used by the Company to satisfy its debt service
obligations and its capital  expenditure and other  operational needs as well as
to provide funds for growth.  In addition,  EBITDA and Adjusted EBITDA have been
used by senior lenders and subordinated  creditors and the investment  community
to determine the current borrowing  capacity and to estimate the long-term value
of companies with recurring cash flows from operations and net losses.

         Forward-Looking  Statements. 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 the Company
or its management "believes," "expects," "anticipates" or other words of similar
import.  Similarly,  statements  herein that describe the Company's  objectives,
plans or goals also are  forward-looking  statements.  All such  forward-looking
statements  are  subject to certain  risks and  uncertainties  that could  cause
actual  results  to  differ   materially  from  those  in  the   forward-looking
statements.  Important  factors  that  could  cause  actual  results  to  differ
materially  from the  expectations  of  Protection  One include,  among  others:
Protection  One's need for additional  capital and history of losses;  the risks
and  uncertainties  related to  acquisitions  of  subscriber  accounts and alarm
account  portfolios and the Protection One dealer  program;  subscriber  account
attrition;  the impact of accounting  differences for account  purchases and new
installations; its high degree of leverage; the possible adverse effect of false
alarm  ordinances  and future  government  regulations;  risks of liability from
operations;  and  competition  in the  security  alarm  industry.  Stockholders,
potential  investors  and other  readers  are urged to  consider  these  factors
carefully in evaluating  the  forward-looking  statements.  The  forward-looking
statements  included  herein are made only as of the date of this Report and the
Company  undertakes  no  obligation  to  publicly  update  such  forward-looking
statements to reflect subsequent events or circumstances.

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                                     PART I

ITEM 1.           BUSINESS

Overview

         Protection  One(R) is a leading  provider of security alarm  monitoring
and  related  services  in the United  States  with  approximately  1.1  million
subscribers  as of March 1998. The Company has grown rapidly since its inception
by  participating  in both the growth and  consolidation  of the security  alarm
monitoring  industry.  Protection  One has focused its customer  growth in major
metropolitan   areas   demonstrating   strong   demand  for   security   alarms.
Approximately 50% of the Company's direct  subscribers are located in the states
of California,  Florida and Texas.  The Company also has significant  numbers of
direct subscribers in the states of Arizona, Georgia, Kansas, Missouri,  Nevada,
New York, North Carolina, Oregon, Tennessee and Washington.

         The Company  provides its services to the  residential,  commercial and
wholesale  segments of the alarm  monitoring  market.  The Company  believes the
residential segment,  which represents in excess of 80% of its customer base, is
the most  attractive  because of its growth  prospects,  gross margins and size.
Within the  residential  segment,  62% of the  Company's  customer  base  occupy
single-family  households and approximately 19% reside in multi-family complexes
such as apartments  and  condominiums.  The remainder of the Company's  customer
base is split  between  commercial  subscribers  (12% of the customer  base) and
subscribers  served by  independent  alarm dealers that  subcontract  monitoring
services to the Company.  Protection One intends to grow its presence in each of
these key market  segments,  although the  residential  market  remains the most
important for the Company's growth strategy.

         Protection  One's  objectives  are to become the  largest  and  fastest
growing provider of high quality alarm monitoring services in the United States,
to expand customer  relationships by offering additional services and to build a
preeminent  brand  name  in the  security  industry.  To  accomplish  its  first
objective,  the Company is pursuing a growth  strategy  consisting of new system
sales through its Dealer Program, supplemented by the acquisition of subscribers
from other alarm companies.  Through its Dealer Program,  independent  companies
with residential sales,  marketing and installation  skills enter into exclusive
dealer contracts with Protection One to provide it with new monitoring customers
for purchase.  To supplement this internally  controlled marketing  distribution
channel,  Protection  One has  been an  aggressive  acquirer  of  portfolios  of
security alarm subscribers and believes  acquisitions remain an important source
of  subscriber  growth  due to the  high  industry  fragmentation.  Once  it has
acquired a new  customer,  the  Company  provides  monitoring  and field  repair
services and strives to expand the customer relationship by offering an array of
enhanced services, such as extended service protection.  The Company adds to its
list of services as and when its new product development area creates, tests and
refines  new  service  offerings.  Finally,  the  Company  believes  there is an
opportunity to create a well-recognized consumer brand due to a lack of consumer
awareness  about the  security  industry.  The  Company's  service and  response
vehicles,  yard signs,  window  decals,  dealer  marketing  efforts and affinity
relationships serve as a platform from which to launch further brand development
efforts.  The Company  believes its  development of a focused  message about the
Protection One brand will enhance its efforts to broaden customer  relationships
and will establish and reinforce Protection One's position as an industry leader
to consumers.

         The Company's  revenues  consist  primarily of  subscribers'  recurring
payments for  monitoring  and related  services.  The Company  monitors  digital
signals  communicated by security  systems  installed at subscribers'  premises.
Security  systems are  designed to detect  burglaries,  fires and other  events.
Through a network of  approximately  60 service  branches,  the Company provides
repair of security systems and, in select markets, armed response to verify that
an actual emergency, rather than a false alarm, has occurred.

         Protection  One believes it has a  competitive  cost  structure  and is
focused on achieving high operating margins by maintaining  monitoring and field
service efficiencies and a streamlined  corporate staff. To that end, Protection
One seeks to grow its subscriber base in concentrated  geographic areas, thereby
enhancing  field  service  efficiency,  increasing  sales  referrals  and  brand
visibility and reducing attrition.  This targeted growth also is consistent with
the  Company's  belief  that  a  growing  trend  of   municipalities   requiring
verification and private response to security alarm emergencies will necessitate
subscriber concentration. To further maintain low operating expenses, Protection
One is consolidating its monitoring function into five state-of-the-art  service
centers, each of which uses sophisticated and redundant communications, computer
and power equipment.

                                                       3


<PAGE>




         To enhance customer satisfaction, Protection One maintains two customer
care  centers,  open 24 hours per day and seven days per week,  to  address  all
non-emergency  communications with customers. Each center utilizes sophisticated
technology such as advanced telephone  switches,  computer-telephone  interfaces
(CTI),  auto-dialing and voice response units. Protection One pursues a one-call
resolution   policy  in  its  customer   service   centers.   Customer   service
representatives  are trained to answer a wide  variety of  anticipated  customer
questions about products and services and are vested with appropriate  authority
to resolve  billing  issues.  Each customer  service center also has a help desk
that answers  technical  questions about operation and repair of security system
equipment in an effort to reduce the requirement for field service.

         Historically, Protection One has offered an array of monitoring-related
services to its customer base,  including  extended service protection and alarm
verification  services such as two-way voice  communication and patrol and alarm
response services. The Company has solicited customer interest in these enhanced
services and executed a systematic price adjustment  program through an internal
outbound  marketing  function.  In the last several  years,  Protection  One has
developed an inbound  calling  function  housed in its customer  care centers to
qualify and  process  prospective  customer  inquiries  arising  from an ongoing
advertising   program   utilizing  print,   radio  and  television  media.  Such
advertising has been offered as part of several of the Company's joint marketing
arrangements with the dual purpose of generating prospective new subscribers and
communicating the Protection One brand.

         Recently,  Protection One entered into a significant  transaction  that
substantially increased its size and scope of operations.  On November 24, 1997,
Protection One issued approximately 68.7 million shares of its common stock, par
value $.01 per share ("Common Stock"), constituting an 82.4% ownership position,
to Western Resources,  Inc. ("Western Resources"),  in exchange for the security
businesses  of  Western  Resources,  consisting  of Westar and  WestSec,  and an
aggregate of $367.4 million in cash and  securities  (the  "Contribution").  The
Contribution immediately increased the size of Protection One from approximately
250,000  subscribers  to  740,000  subscribers,  and  increased  its  geographic
coverage from the western United States to the entire country.  The Contribution
also strengthened the Company's balance sheet and enhanced its access to capital
to fund its growth strategy.

         Subsequent  to the end of  fiscal  year  1997,  on  February  4,  1998,
Protection One announced its decision to exercise its option to purchase Network
Multi-Family Security Corporation ("Network"),  the leading provider of security
alarm   monitoring  to  multi-family   dwellings  with   approximately   200,000
subscribers.  Pursuant  to the  terms of the  option,  Protection  Onewill  give
Western Resources cash consideration of approximately $180 million.

         On March 2, 1998,  Protection One completed the  acquisition of 147,000
subscribers   and  related  assets  of  Multimedia   Security   Services,   Inc.
("Multimedia")  for  a  purchase  price  of  approximately  $233  million.   The
Multimedia  purchase  added to the  Company's  market  positions in  California,
Florida and Texas and added  substantial  numbers of  subscribers  in Kansas and
Oklahoma. In addition,  Protection One will maintain Multimedia's monitoring and
customer service center in Wichita, Kansas.

         On March 17, 1998,  Protection One completed the  acquisition of Comsec
Narragansett   Security,   Inc.   ("Comsec")   for  a  cash  purchase  price  of
approximately  $45 million and the  assumption of $15 million of debt.  Comsec's
30,000  subscribers are located primarily in Connecticut,  Maine,  Massachusetts
and New Hampshire.

Industry and Markets

         SDM  Magazine  reports that the security  alarm  industry  grew 5.2% in
1997,  reaching total  revenues of  approximately  $14 billion.  Of the industry
total, SDM Magazine  estimates that alarm monitoring  revenue  comprised 20%, or
approximately  $2.8  billion,  an  increase  of 7.7% from $2.6  billion in 1996.
According to the results of a survey,  SDM Magazine reports that the largest 100
companies in the industry  experienced growth of 14.8% in 1997,  compared to the
industry growth rate of 5.2%. This disparity reflects a continuing consolidation
of the security alarm industry,  as larger firms are actively  acquiring smaller
ones. Despite the consolidation  activity,  however, the security alarm industry
remains highly fragmented.  For instance,  SDM Magazine estimates that there are
16,000 businesses in the security alarm industry.  In addition,  the most recent
ranking of security  alarm  companies  by SDM  Magazine  indicates  that only 25
security companies generated revenues in excess of $20 million in 1996; eight of
the 25 companies have been acquired since the date of the survey.

         Protection  One  believes   larger  alarm   companies  with  internally
generated cash flow and access to

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capital will continue to grow faster than the industry  average.  In most cases,
the installation of security systems requires alarm companies to fund the excess
of installation-related costs over installation revenues, a trend that continues
to be prevalent in both the  residential and commercial  segments.  In addition,
the Company  believes the growth in false alarms is causing some  municipalities
to consider  alternatives  to response by municipal  police.  To the extent that
municipalities  elect to require some form of private  verification  of an alarm
prior to police  dispatch,  such policies  could impose  additional  expenses on
alarm monitoring companies.  Due to Protection One's size and access to capital,
the Company believes it is well positioned to compete in the industry.

Strategy

         Protection  One's  objectives  are to become the  largest  and  fastest
growing provider of high quality alarm monitoring services in the United States,
to expand customer  relationships by offering additional services and to build a
preeminent  brand name in the  security  industry.  The  Company  has  developed
strategies to meet each of these objectives, as described below.

         Establish Leadership Position

         From its inception through 1995,  Protection One grew primarily through
the  acquisition  of  portfolios  of  subscribers  from other  alarm  companies.
Beginning in 1995, the Company's  Dealer  Program became an important  source of
growth and the  Company's  sole means for  capturing  a portion of new  security
system installations.  Through this dual approach, Protection One believes it is
well positioned to benefit from market growth and industry consolidation. Growth
has enabled  the Company to achieve  economies  of scale in its  monitoring  and
field service operations.  As the number of monitored subscribers has increased,
the  fixed  costs of  service  centers  have  been  spread  over a larger  base,
improving  monitoring  gross  margins.  Protection  One has targeted  subscriber
growth in concentrated areas surrounding branch offices. Subscriber proximity to
branch  offices  positions  the Company to provide  responsive  field repair and
alarm response services,  allows the Company to spread branch office fixed costs
over a larger base and increases the  productivity of field service  technicians
through more efficient scheduling and dispatching.

         The Company  continues to pursue subscriber and MRR growth in excess of
the  industry  average.  The Company  believes  growth will enable it to achieve
further  economies  of scale,  particularly  with  respect to the fixed costs of
general and administrative  functions.  In addition,  achieving its growth goals
assists the Company's  efforts in meeting its other goals of expanding  customer
relationships  and  establishing a well-known brand name.  Finally,  the Company
believes  increased  market share offers an  opportunity  to reduce the costs to
identify and procure new subscribers.

         The Dealer Program  consists of independent  companies with residential
and small commercial  sales,  marketing and installation  skills that enter into
exclusive  contracts  with  Protection  One to  provide  it with new  monitoring
customers  for  purchase  on an  ongoing  basis.  This  program  has  become  an
increasingly  important  source  of  growth  for  Protection  One.  The  Company
anticipates a significant increase in the number of new subscribers generated by
the Dealer  Program in the twelve  months  ended  December  31,  1998 due to its
increased  size and scope of  operation  from its  combination  with  Westar and
WestSec.  During the twelve months ended  December 31, 1997,  Westar and WestSec
installed  approximately  50,000 new security  systems through an internal sales
force.  Protection One has substantially  completed the conversion of the Westar
and  WestSec  sales  forces  to  Dealer  Program  participants,   and  therefore
anticipates an increase in Dealer  Program  productivity  commensurate  with the
previous installation activity.

         Protection One believes the Dealer Program is an advantageous marketing
distribution  channel because of its high sales productivity,  lower acquisition
prices and geographic flexibility.  First, as independent companies, dealers are
responsible  for the number of new security system  installations  they complete
each  month,  and  ultimately,  the  success of their  businesses.  The  Company
believes such financial  motivation leads dealers to continuously  seek improved
sales and marketing methods. The Company believes a sales function consisting of
salaried Company employees may not have the same financial  motivation.  Second,
because purchase multiples paid for alarm monitoring  contracts tend to increase
with the size of the  portfolio,  multiples in the Dealer  Program are typically
lower than those paid by  Protection  One for  acquisitions.  In addition,  cash
outlays for new  subscribers  are entirely  variable,  changing as the number of
monitoring contracts presented for purchase change each month. Lowering the cost
to generate new  subscribers is an important  component of the Company's  growth
strategy  and the Dealer  Program's  increased  contribution  relative  to other
growth channels is consistent with such effort.  Third,  Protection One supports
the expansion of successful dealers to other areas

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of the country. Protection One may assist the dealer financially to fund startup
costs associated with new office openings.  Protection One guides Dealer Program
participants  to the  geographic  areas that are the  highest  priority  for the
Company.  Finally,  because  dealers  are  responsible  for sales and  marketing
activities,  as  well  as  equipment  and  installation  costs,  Protection  One
maintains a minimal sales staff and infrastructure.

         Strategic  Alliances  provide  the Dealer  Program  with a  proprietary
source  of  prospective  customers.  Protection  One  has  aggressively  pursued
alliances with other companies that have significant residential customer bases.
In  particular,  Protection  One  has  targeted  metropolitan  electric  and gas
utilities and telephone  companies that have strong market positions and receive
inbound phone calls from prospective customers moving into homes. Protection One
believes  this  inbound  lead flow will enable it to reduce its cost to generate
new subscribers in the future,  and represents a valuable source of new security
system installations for Dealer Program participants.  In turn, electric and gas
utilities  facing  deregulation  have expressed to Protection One an interest in
offering  security  alarm services to develop more  comprehensive  relationships
with their customers.  Protection One has entered into marketing  alliances with
PacifiCorp, Salt River Project, Kansas City Power & Light, Oklahoma Natural Gas,
Kansas Power & Light and Kansas Gas and Electric. In addition, Southwestern Bell
Corporation serves as a sales agent for Protection One in its markets.

         Protection   One  currently  has   additional   utility   alliances  in
development.  The Company  continues  to believe  that the  deregulation  of the
electric utility industry offers opportunities for mutually beneficial marketing
alliances that will hasten growth in new subscribers and awareness of Protection
One.

         In addition to utility  alliances,  Protection One enjoys  partnerships
with leading  companies in the  insurance,  banking,  credit card,  mortgage and
retail industries. Protection One also has marketing alliances with leading home
builders  around the country,  through  which  Protection  One has the exclusive
right to market its security systems to new home buyers.

         Acquisitions  have played an important role in Protection One's growth.
Since  the  combination  with  Westar  and  WestSec,  acquisition  activity  has
increased  significantly,  as Protection One has acquired  approximately 375,000
subscribers  through the  acquisitions  of Network,  Multimedia and Comsec.  The
Company  believes that it has been an effective  competitor  in the  acquisition
market  because of the  substantial  experience  of its  management in acquiring
alarm companies and subscriber accounts and the Company's industry reputation as
an active purchaser of subscriber accounts.  Although the Company approaches all
acquisitions  with consistent due diligence,  pricing and integration  policies,
there are several differences between small and large acquisitions.

         The Company typically  pursues small  acquisitions in existing areas of
operation and believes  there are  approximately  16,000 alarm  companies in its
markets.  The  Company  has  focused on  acquisitions  that allow it to increase
subscriber density in areas surrounding  branch operations,  which in turn leads
to greater field service and armed response efficiencies. In small acquisitions,
the  Company  typically  acquires  only  the  subscriber  accounts,  and not the
facilities or liabilities, of such companies.

         Because the Company's primary consideration in making an acquisition is
the amount of cash flow that can be  derived  from the MRR  associated  with the
purchased accounts, the price paid by the Company is customarily based upon such
MRR.  To protect  the  Company  against  the loss of  acquired  accounts  and to
encourage the seller of such accounts to facilitate the transfer of subscribers,
management  typically  requires the seller to provide guarantees against account
cancellations for a period following the acquisition.  The Company usually holds
back from the seller a portion of the acquisition price, and has the contractual
right to utilize  such  holdback to  recapture a portion of the  purchase  price
based on the lost MRR arising from the cancellation of acquired accounts.

         In evaluating the quality of the accounts acquired,  the Company relies
primarily  on  management's   knowledge  of  the  industry,  its  due  diligence
procedures,   its  experience  in   integrating   accounts  into  the  Company's
operations,  its determination as to attrition rates for the acquired  accounts,
and the representations

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and warranties of the sellers.

         In large acquisitions,  the Company strives to purchase subscribers and
related  assets  but often is  required  to  purchase  the stock of large  alarm
companies.  In such cases,  the price paid by the Company  reflects not only the
MRR associated with the purchase accounts, but also other assets and liabilities
that  impact  the  value of the  customer  base.  Purchase  multiples  typically
increase with the size and strategic value of a prospective acquisition.

         Expand Customer Relationships

         As a means to increase  revenues,  Protection  One offers  customers an
array of enhanced security  services,  including extended service protection and
several levels of alarm verification.  These services position Protection One as
a full  service  provider  and  give  dealers  more  features  to sell in  their
solicitation of new customers.  The Company actively  solicits its customers for
interest  in these  services.  In the Las Vegas area,  the  Company  through its
dealers offers a bundle of services  consisting of monitoring,  extended service
protection  and alarm  response.  The following  provides  additional  detail on
enhanced services:

         Extended Service Protection, which covers the normal costs of repair of
the system during normal  business  hours,  after the  expiration of the initial
warranty period.

         Two-Way Voice Communication (Remote Audio Verification), which consists
of the  ability,  in the event of an alarm  activation,  to  listen  and talk to
persons at the monitored  premises from the service center through  speakers and
microphones  located within the premises.  Among other things, such remote audio
verification  helps the Company to determine  whether an alarm  activation  is a
false alarm.

         Supervised  Monitoring  Service,  which allows the alarm system to send
various types of signals containing  information on the use of the system,  such
as which users armed or  disarmed  the system and at what time of the day.  This
information is supplied to subscribers for use in connection with the management
of their households or businesses.
Supervised monitoring service can also include a daily automatic test feature.

         Pager  Service,  which  provides the  subscriber  with  standard  pager
services that also enable the Company to reach the subscriber in the event of an
alarm activation.

         Medical  Identification  Card,  which enables medical  personnel in the
event of a medical emergency to access a subscriber's medical information (e.g.,
allergies,  medications  and family  medical  history),  emergency  contacts and
doctors by calling Protection One's service center.

         Wireless Back-Up, which permits the alarm system to send signals over a
cellular  telephone  or  dedicated  radio  system,  in the  event  that  regular
telephone service is interrupted.

         Protection One's new product development function continually seeks new
services to offer customers.

         Brand Development

         Based on primary market  research,  Protection One believes there is an
opportunity  to build a  preeminent  consumer  brand in the  security  industry.
Currently,  consumers are unable to name any security industry  competitor on an
unaided  basis to a  significant  degree.  The  Company's  service and  response
vehicles,  yard signs,  window  decals,  dealer  marketing  efforts and affinity
relationships  serve as a base from which to launch  further  brand  development
efforts. The Company has developed a branding strategy to assist it in achieving
its other  strategic  objectives  by  positioning  it as an industry  leader and
establishing  a  platform  for the  sale of  additional  services.  The  Company
believes  a  nationally  recognized  brand  supports  its goals of  becoming  an
industry  leader and  broadening  its  customer  relationships.  The Company has
recently completed the first phase of a significant  research effort to define a
unique selling proposition for the Protection One

                                                       7


<PAGE>



brand.  The Company will create sales and marketing  materials that reflect this
positioning and will coordinate internal and external communications vehicles to
offer a single focused message about the Protection One brand. In addition,  the
Company will evaluate all future opportunities for marketing alliances and joint
ventures in the context of the brand strategy,  selecting those that enhance its
positioning and accelerate the growth in public awareness of the brand. Finally,
the  Company  intends  to  test  the  use  of  brand  awareness  advertising  in
conjunction with direct response marketing,  in an effort to quantify the extent
to which increased  consumer  awareness of the brand enhances  direct  marketing
activities.  The Company expects to invest  gradually in brand  advertising over
time as the security market matures.

Operations

         Protection One's operations consist principally of its service centers,
which  provide  alarm   monitoring  and  customer  care  services,   its  branch
operations,  which conduct field repair and patrol and alarm  response  services
and its  subscriber  acquisition  and  transition  functions,  which provide due
diligence and assimilation services to dealers and others.

                                                       8


<PAGE>




         Service Centers

         Subscriber  Security  Alarm  Systems.  Security  alarm systems  include
devices  installed at the subscribers'  premises  designed to detect or react to
various occurrences or conditions,  such as intrusion or the presence of fire or
smoke.  These  devices  are  connected  to a  computerized  control  panel  that
communicates  through telephone lines to a service center.  Subscribers may also
initiate an  emergency  signal  from a device such as a "panic  button." 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 the central monitoring station.

         Monitoring.  The  Company  maintains  four  service  centers to provide
monitoring  services to its customer  base,  and recently added a fifth with the
Multimedia  acquisition.  The table below provides  additional detail about each
service center:

<TABLE>
<CAPTION>

                                   Number of                 Current                  Primary
         Location                 Subscribers               Capacity                  Market Segment
<S>      <C>                      <C>                       <C>              <C>

Beaverton, OR                        250,000                 500,000         Residential/Commercial
Dallas, TX                           200,000                 500,000         Multi-Family
Irving, TX                           340,000                1,000,000        Residential/Commercial
Orlando, FL                          100,000                 500,000         Wholesale
Wichita, KS                          147,000                 200,000         Residential/Commercial
</TABLE>

         With  the  exception  of  some  specialized  commercial  accounts,  the
remainder of the  Company's  subscriber  accounts is monitored at other  service
centers and is scheduled to be  consolidated  into one of the  facilities  noted
above in 1998.

         Each service center incorporates the use of advanced communications and
computer  systems  that route  incoming  alarm  signals and  telephone  calls to
operators.   Substantially   all  service   center   personnel  are  subject  to
pre-employment  screening  and  background  checks.  Each  operator  monitors  a
computer screen that provides immediate information concerning the nature of the
alarm signal, the subscriber whose alarm has been activated, and the premises on
which such alarm is  located.  All  telephone  conversations  are  automatically
recorded.

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

         The Company's  service  centers  operate 24 hours per day, seven days a
week,  including all holidays.  Each  operator  receives  training that includes
familiarization  with substantially  every type of alarm system in the Company's
subscriber  base. This enables the operator to tell  subscribers how to turn off
their  systems in the event of a false alarm,  thus  reducing  the  instances in
which  a  field  service   person  must  be  dispatched.   Other   non-emergency
administrative  signals are generated by low battery  status,  deactivation  and
reactivation of the alarm monitoring system, and test signals, and are processed
automatically by computer.

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

         Wholesale Monitoring.  The Company's service center in Orlando, Florida
is a leading provider of wholesale

                                                       9


<PAGE>



monitoring services to independent dealers. The Orlando service center is one of
only a few wholesale monitoring  facilities to offer two-way voice communication
on a  widespread  basis.  Under the  typical  arrangement,  dealers  subcontract
monitoring  services to the Company,  primarily because such dealers do not have
their own  monitoring  capabilities.  The Company may also  provide  billing and
other  services.  Dealers  retain  ownership  of  monitoring  contracts  and are
responsible for every other aspect of the relationship with customers, including
field repair service.

         The Company's presence in the wholesale  monitoring segment provides it
with another source of prospective acquisition targets.  Independent dealers who
subcontract  monitoring  services to the Company are familiar with the Company's
high quality monitoring and related capabilities, an important consideration for
a prospective seller of a portfolio of security alarm subscribers.

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

         Customer Care  Services.  The Company's  customer care centers  process
non-emergency  communications  with the Company's  customers.  A dedicated group
receives inbound customer calls and routes them to the most appropriate customer
care area. The customer service group addresses  customer questions and concerns
about billing,  service,  credit and alarm activation issues, arising from calls
forwarded by the inbound group and customer  letters.  A help desk staff assists
customers in understanding and resolving mechanical and operating issues related
to security  systems.  A centralized  field repair  scheduling  function sets up
technician appointments.  In the Company's Irving, Texas facility, customer care
representatives   also  are  available  to  monitor  emergency  signals  if  the
monitoring  function requires  additional staffing on a short-term basis. As the
Company  continues to add  geographic  areas in which it offers armed  response,
call centers also will serve as centralized dispatchers of response vehicles.

         Branch Operations

         The Company maintains  approximately 60 branches  nationwide from which
it provides field repair,  customer care, alarm response and sales services. The
Company's branch  infrastructure  plays an important role in enhancing  customer
satisfaction, reducing attrition and building the Company's brand awareness.

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

         Repair services  generate  revenues  primarily  through  billable field
service  calls and  recurring  payments  under the  Company's  extended  service
protection program. The increasing density of the Company's subscriber base, the
result of continuing  efforts to acquire new  subscribers  in areas  surrounding
branch  operations,  permits  more  effective  scheduling  and  routing of field
service  technicians  and  results in  economies  of scale at the branch  level.
Increased  efficiency in scheduling  and routing also allows  Protection  One to
provide faster field service response and support, which leads to a higher level
of customer  satisfaction.  The Company  continually reviews available automated
work management and scheduling  programs to maximize  employee  resources in the
field repair function.

         Alarm  Response and Patrol.  Protection  One offers its  subscribers in
southern California and Las Vegas alarm response and patrol enhanced services in
addition to the Company's other  services,  and employs over 100 patrol officers
operating in 25 regular patrol "beats," or designated neighborhoods,  to provide
such services. These armed officers supplement Protection One's alarm monitoring
service by  providing  "alarm  response  service" to alarm  system  activations,
"patrol  service"  consisting  of routine  patrol of  subscribers'  premises and
neighborhoods and, in a few cases, "special watch" services,  such as picking up
mail  and  newspapers  and  increased   surveillance   when  the  subscriber  is
travelling. Alarm response service requires

                                                       10


<PAGE>



Protection  One's patrol  officers to observe and report any potential  criminal
activity at a subscriber's home.

         Protection  One offers a bundle of services in Las Vegas  consisting of
alarm  monitoring,  field  repair  and  alarm  response  services  billed to the
subscriber as a consistent  monthly  charge  regardless of the number of service
calls or responses to alarm  activations.  Protection  One believes this service
package is attractive to current and prospective subscribers because the package
(i)  enables  Protection  One to offer a  reliable  and  timely  alarm  response
service, and (ii) eliminates subscriber  uncertainty arising from "per response"
charges.  The Company will use this bundled service offering in other markets to
the extent private verification of alarms is required.

         Patrol and alarm response  officers are  dispatched by 24-hour  central
radio dispatch offices located in Chatsworth,  California and Las Vegas, Nevada.
If the patrol officer  dispatched  observes  potential  criminal  activity,  the
officer  will report the  activity to the  dispatch  office,  which will in turn
notify local law enforcement. The patrol officer will then maintain surveillance
until law  enforcement  officers  arrive.  If a patrol  officer  does not detect
criminal  activity,  he will report his conclusion to the dispatch  office,  and
police response will not be initiated.

         The  Company  also offers  "dedicated"  patrol  service to  homeowners'
associations   in  selected   markets,   for  which  the   Company   provides  a
Company-marked car for patrol exclusively in such association's neighborhood.  A
significant  percentage  of the  homeowners  in such  associations  purchase the
Company's alarm monitoring services.

         The  Company's  patrol  and alarm  response  officers  are  subject  to
extensive pre-employment  screening and training.  Officers are subject to local
and federal  background  checks and drug screening  before being hired,  and are
required  to have gun and  baton  permits  and state  and city  guard  licenses.
Officers also must be licensed by states to carry firearms and to provide patrol
services.  Protection One is one of a few companies to have an in-house training
academy which prepares officer candidates for employment. The Company's training
program includes arrest procedures,  criminal law, weaponless defense,  firearms
and baton usage,  patrol tactics,  and first-aid and CPR. After  graduating from
the  Protection  One patrol  academy,  a new  officer  rides  along with a field
training  officer  for two  weeks  to gain  experience.  In  total,  an  officer
candidate  undergoes five weeks of specific  training,  which amount exceeds all
state requirements. Despite extensive training, however, the provision of patrol
and alarm response  services  subjects the Company to greater risk,  relating to
accidents  or employee  behavior,  than other types of  businesses.  See "--Risk
Management."

         The Company believes that demand for alarm response and patrol services
is  likely  to  increase  as a result  of a trend  on the  part of local  police
departments to limit their response to alarm  activations and other factors that
may lead to a decrease of police presence.  The Private Sector Liaison Committee
of the International  Association of Chiefs of Police has established  Non-Sworn
Alarm  Responder  Guidelines to provide  standards  for private  alarm  response
officers.  Although the Company  currently incurs a loss in its patrol and alarm
response operations,  the Company believes further demand for such services will
enable the  Company  to  increase  subscriber  density  in its  routes,  thereby
reducing losses.  In addition,  the Company's offer of patrol and alarm response
services is a sales method used to attract subscribers of other alarm monitoring
companies that do not provide such  services.  To the extent that further demand
develops  for patrol and alarm  response  services,  the  Company  believes  its
current  presence will enable it to increase its  conversions  of subscribers to
the Company's services.  Additionally, the Company believes such services are an
effective impediment to subscriber attrition.

         Acquisition and Transition

         The Company's  acquisition and transition  functions  manage  important
aspects of the Company's Dealer Program and acquisition activity.


                                                       11


<PAGE>



         The Dealer Program offers dealers a wide variety of support services to
assist  them  as they  grow  their  businesses.  On  behalf  of  Dealer  Program
participants,  Protection One obtains  purchase  discounts on security  systems,
coordinates   cooperative  dealer   advertising  and  provides   administrative,
marketing and employee  training  support  services.  The Company believes these
cost savings and services would not be available to Dealer Program  participants
on an individual basis. In addition,  Protection One supplies its dealers with a
proprietary  flow of  prospective  customers,  supplementing  the  dealers'  own
efforts and increasing their chances for success. See "--Sales and Marketing."

         Dealer  contracts  provide  for  the  purchase  by the  Company  of the
dealers'  subscriber  accounts on an ongoing  basis.  A dedicated  group  within
Protection  One  works  with  dealers  on a daily  basis  to  provide  a  smooth
transition  from the  installation  of a security  system to the  purchase  of a
monitoring contract.  The dealers install Company specified alarm systems (which
have a Protection One logo on the keypad), arrange for subscribers to enter into
Protection  One alarm  monitoring  agreements,  and install  Protection One yard
signs and window decals. Protection One operators receive inbound calls and test
signals  from  dealer  installation  technicians  to  ensure  that  systems  are
communicating  properly.  Substantially  all of these  subscribers are contacted
individually  by Company  personnel  at the time of the purchase of the accounts
from the dealers, to facilitate subscriber  satisfaction and quality control. In
addition,  the Company  requires dealers to qualify  prospective  subscribers by
meeting a minimum credit standard.  Once Protection One has purchased a contract
from a dealer,  the Company  becomes  the sole  provider  of  monitoring,  field
service and customer  service;  the dealer is  prohibited  from  contacting  the
customer.

         Acquisitions also require dedicated personnel from multiple disciplines
of the  Company.  In both small and large  acquisitions,  the Company  employs a
comprehensive acquisition management system to identify, evaluate, and integrate
acquisitions of new subscriber accounts that includes three components:  (i) the
identification  and negotiation  stage;  (ii) the due diligence stage; and (iii)
the integration stage.

         The  Company  actively  seeks to  identify  prospective  companies  and
dealers  with  targeted  direct mail,  trade  magazine  advertising,  trade show
participation,  membership  in  key  alarm  industry  trade  organizations,  and
contacts  through  various  prominent  vendors and other industry  participants.
Management's  extensive  experience  in  identifying  and  negotiating  previous
acquisitions  helps to facilitate  the successful  negotiation  and execution of
acquisitions in a timely manner.

         The Company conducts a pre-closing  review and analysis of the seller's
operations.  The process  includes a combination  of selective  field  equipment
inspections,  review of certain of the  subscriber  contracts and other types of
verification of the seller's operations.

         The Company  develops a specific  integration  program,  in conjunction
with the seller, for each acquisition.  Integration  efforts typically include a
letter from the seller to its  subscribers,  explaining the sale and transition,
followed  by one or  more  letters  and  packages  that  include  the  Company's
subscriber  service  brochures,   field  service  and  monitoring  phone  number
stickers,  yard signs and window  decals.  Thereafter,  each new  subscriber  is
contacted  individually  by  telephone  by a member  of the  Company's  customer
service  group for the  purpose of  addressing  the  subscriber's  questions  or
concerns and soliciting certain information.  Finally, the subscriber receives a
follow-up   telephone  call  after  six  months  and  periodically   thereafter.
Management's  goal is to enhance new subscriber  identification  with Protection
One as the service provider and to maintain subscriber satisfaction.

         Mobile Services

         The Company's  mobile  services group provides  leading edge technology
and  professional  response  for  the  delivery  of  emergency,  navigation  and
information services in mobile applications. The Company became a pioneer in the
mobile security  industry when it teamed with Ford Motor Company and Motorola in
1995 to develop  Lincoln  RESCU.  This program  offered the first vehicle safety
system to integrate cellular

                                                       12


<PAGE>



phone and  global  positioning  technology  to assist  motorists  when they need
emergency help or roadside or routing assistance.

Sales and Marketing

         Protection One's sales and marketing  activities consist of a corporate
advertising  and  marketing  function,  centralized  inbound and outbound  sales
functions, a branch sales function and dealer marketing efforts.

         The  Company   believes  that  increasing   density  of  the  Company's
subscriber base (i.e., increasing concentration of subscribers in certain areas)
has increased the overall  presence and  visibility of the Company.  Both in the
Dealer Program and in Company sales,  new  subscribers  are provided with highly
visible  reflective  yard signs  placed  prominently  in front of their homes or
businesses.  The  presence  of  these  signs  develops  greater  awareness  in a
neighborhood  and leads to more  inbound  and  referral  business.  The  Company
encourages  referrals  from existing  subscribers  through an incentive  program
promoted  through  newsletters,  billing  inserts and employee  contacts.  Alarm
response and service  vehicles,  which  display the  Protection  One logo,  also
increase the Company's visibility.

         Corporate Advertising and Marketing

         In the last two years,  Protection One has substantially  increased its
advertising  and marketing  efforts to support the Dealer  Program.  The Company
uses television,  radio,  newspaper and direct mail with promotional messages to
create sales leads and  increase  awareness of the  Protection  One brand.  Such
sales leads are distributed to dealers based on their financial  contribution to
support  cooperative  advertising  efforts.  The Company  also has  specifically
tailored  regional  advertising  and promotional  programs to utilize  marketing
alliances where appropriate.

         Protection  One has marketing  alliances  with  PacifiCorp,  Salt River
Project,  Kansas City Power & Light,  Oklahoma Natural Gas, Kansas Power & Light
and Kansas Gas and Electric.  Southwestern  Bell  Corporation  serves as a sales
agent on behalf of Protection  One in its markets.  Protection  One has numerous
additional   utility  alliances  in  development.   The  Company  currently  has
partnerships  with other leading  companies in the  insurance,  banking,  credit
card,  mortgage  and  retail  industries.  Protection  One also has a number  of
exclusive arrangements with homebuilders, which agreements enable the Company to
market home security systems to new home buyers through the builders.

         Protection  One has an inbound  telemarketing  function  in each of its
customer  service  centers to  receive  and  qualify  responses  to  advertising
programs and telephone leads  transferred from marketing  partners.  The Company
maintains  an outbound  calling  function  in its  Beaverton  service  center to
solicit interest in enhanced  services and to welcome acquired  customers to the
Company. Based on expected activity, Protection One supplements both inbound and
outbound efforts with subcontract providers from time to time.

         Based on primary market  research,  Protection One believes there is an
opportunity  to build a  preeminent  consumer  brand in the  security  industry.
Currently,  consumers are unable to name any security industry  competitor on an
unaided basis to a significant degree. The Company has established a coordinated
branding  strategy to assist it in achieving its other  strategic  objectives by
positioning  it as an  industry  leader and to build a platform  for the sale of
additional services. The Company believes a nationally recognized brand supports
its  goals  of  becoming  the  industry   leader  and  broadening  its  customer
relationships.  The  Company  has  recently  completed  the  first  phase  of  a
significant  research  effort to  define a unique  selling  proposition  for the
Protection One brand. The Company will create sales and marketing materials that
reflect this positioning and will coordinate internal and external communication
vehicles to offer a single focused  message about the  Protection One brand.  In
addition,  the Company will  evaluate  all future  opportunities  for  marketing
alliances  and joint  ventures in the context of the brand  strategy,  selecting
those that  enhance its  positioning  and that  accelerate  the growth in public
awareness of the brand.  Finally,  the Company  intends to test the use of brand
awareness  advertising  in conjunction  with direct  response  marketing,  in an
effort to

                                                       13


<PAGE>



quantify the extent to which increased  consumer awareness of the brand enhances
direct  marketing  activities.  The Company expects to invest gradually in brand
advertising over time as the security market matures.

         Branch Sales

          The most common reason for customer  attrition is customers moving out
of their homes and  businesses.  Sales  professionals  at the  Company's  branch
offices are responsible for tracking previous  Protection One subscribers' homes
to sign up new owners when they move into such homes.  The branch sales function
also generates revenue from selling  equipment  upgrades and add-ons to existing
subscribers,  and  by  attracting  competitors'  subscribers  to  the  Company's
services.

         Through  acquisitions,  the Company now owns and operates a significant
commercial  sales and  installation  effort for security  and related  monitored
services.  At  present,  the  primary  commercial  sales  effort  occurs  in the
midwestern and northeastern  United States.  The Company's  commercial  products
range from basic  intrusion  and fire  detection  equipment to fully  integrated
systems with card access, closed circuit television and voice/video  monitoring.
The Company intends to grow its presence in the commercial markets in the future
and will seek  opportunities  to expand its commercial  presence in other market
areas.  The Company also is  organizing a national  accounts  sales and customer
service  function  to address  the  special  needs of chain  customers,  such as
restaurants and retailers.

         Dealer Marketing

         The Company's dealers employ a variety of marketing methods to identify
and create sales leads, including  telemarketing,  direct mail, local networking
and  door-to-door  solicitation.  A majority of the  Company's  dealers sell and
install a  hard-wired,  low-cost  security  system  manufactured  by  Ademco,  a
subsidiary of Pittway  Corporation.  The basic system includes protection of the
front and back doors of a home, one interior motion detection  device, a central
processing unit with the ability to communicate signals to the Company's central
monitoring station, a panic button, a siren, window decals and a lawn sign. This
basic system often will be offered for little or no up-front price,  but will be
sold to a subscriber  with  additional  equipment  customized to a  subscriber's
specific needs. Such equipment add-ons include additional perimeter and interior
protection,  fire protection  devices (heat and smoke detectors),  environmental
protection devices (freeze sensors and water detectors),  panic buttons and home
automation  devices (lighting or appliance  controls).  Typically,  dealers sign
subscribers to 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.  Although a customer may elect to
sign an alarm monitoring contract that excludes extended service protection, few
customers  choose to do so, and the Company  believes the bundling of monitoring
and extended  service  protection  provides  additional value to subscribers and
allows the Company to more efficiently provide field repair services.

Competition

         The  security   alarm  industry  is  highly   competitive   and  highly
fragmented.  The Company  competes with major firms with  substantial  financial
resources,  including ADT Operations  Inc., a subsidiary of Tyco  International,
Inc.; the security  subsidiaries of the Ameritech  Corporation;  and Brinks Home
Security Inc., a subsidiary of The Pittston  Service Group.  Other alarm service
companies  have  adopted a strategy  similar to the  Company's  that entails the
aggressive  purchase of alarm monitoring  accounts both through  acquisitions of
account  portfolios and through dealer  programs.  Some competitors have greater
financial  resources than the Company,  or may be willing to offer higher prices
than the Company is prepared to offer to purchase subscriber accounts.

         Competition  in the  security  alarm  industry  is based  primarily  on
reliability of equipment,  market visibility,  services offered,  reputation for
quality of service,  price and the ability to identify  and solicit  prospective
subscribers  as  they  move  into  homes.   The  Company  believes  it  competes
effectively with other national, regional and local security alarm companies due
to the Company's  reputation for reliable equipment and services,  its prominent
presence  in the areas  surrounding  its branch  offices,  its  ability to offer
combined  monitoring,  repair and enhanced services,  its low cost structure and
its marketing alliances.


                                                       14


<PAGE>



Intellectual Property

         The Company owns trademarks related to the name and logo for Protection
One,  as well as a variety of trade and  service  marks  related  to  individual
services the Company  provides.  The Company owns certain  proprietary  software
applications  which the Company uses to provide  services to its customers.  The
Company also licenses software provided by various software vendors.

Regulatory Matters

         A  number  of  local  governmental  authorities  have  adopted  or  are
considering  various measures aimed at reducing the number of false alarms. Such
measures  include:  (i)  subjecting  alarm  monitoring  companies  to  fines  or
penalties for  transmitting  false alarms,  (ii) permitting of individual  alarm
systems and the revocation of such permits following a specified number of false
alarms,  (iii)  imposing  fines on alarm  subscribers  for  false  alarms,  (iv)
imposing limitations on the number of times the police will respond to alarms at
a  particular  location  after a  specified  number  of  false  alarms,  and (v)
requiring  further  verification  of an alarm  signal  before  the  police  will
respond.

         The  Company's  operations  are  subject  to a variety  of other  laws,
regulations and licensing requirements of federal, state, and local authorities.
In certain jurisdictions, the Company is required to obtain licenses or permits,
to comply with standards governing employee selection and training,  and to meet
certain  standards  in the  conduct of its  business.  Many  jurisdictions  also
require certain of the Company's employees to obtain licenses or permits.  Those
employees who serve as patrol officers are often subject to additional licensing
requirements,   including  firearm   licensing  and  training   requirements  in
jurisdictions in which they carry firearms.

         The alarm industry is also subject to  requirements  imposed by various
insurance,  approval,  listing, and standards organizations.  Depending upon the
type of  subscriber  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.

         The Company's advertising and sales practices are regulated by both the
Federal Trade  Commission  and state  consumer  protection  laws.  Such laws and
regulations include restrictions on the manner in which the Company promotes the
sale of its security  alarm systems and the obligation of the Company to provide
purchasers of its alarm systems with certain recision rights.

         The Company's alarm monitoring  business  utilizes  telephone lines and
radio  frequencies to transmit alarm signals.  The cost of telephone  lines, and
the type of equipment  which may be used in  telephone  line  transmission,  are
currently  regulated by both federal and state  governments.  The  operation and
utilization  of radio  frequencies  are regulated by the Federal  Communications
Commission and state public utilities commissions.

Risk Management

         The nature of the services provided by the Company  potentially exposes
it to greater  risks of liability  for  employee  acts or  omissions,  or system
failure,  than may be inherent  in other  businesses.  Substantially  all of the
Company's alarm monitoring agreements, and other agreements pursuant to which it
sells its  products  and  services,  contain  provisions  limiting  liability to
subscribers in an attempt to reduce this risk.

         The  Company's  alarm  response  and patrol  services  require  Company
personnel  to  respond  to  emergencies  that  may  entail  risk of harm to such
employees  and to others.  In most  cities in which the  Company  provides  such
services, the Company's patrol officers carry firearms,  which may increase such
risk.  Although the Company  conducts  extensive  screening  and training of its
employees,  the provision of patrol and alarm  response  service  subjects it to
greater  risks  related to  accidents or employee  behavior  than other types of
businesses.

         The Company  carries  insurance  of various  types,  including  general
liability  and  errors  and  omissions  insurance.  The loss  experience  of the
Company,  and other security service companies,  may affect the availability and
cost of such insurance.  Certain of the Company's  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.

Year 2000 Issue

                                                       15


<PAGE>




         The Company is reviewing its computer and signal processing to identify
and correct any  components  that could be affected by the change of the date to
January 1, 2000 (the "Y2K Issue").  Results of the review thus far indicate that
key infrastructure components including processing systems, application software
and telecommunications systems are unaffected by the Y2K Issue. The Company will
continue  its  review  until  January  1,  2000,  particularly  with  respect to
acquisitions of security businesses that include additional computer systems and
equipment.  In  addition,  changes in the state of  compliance  or  preparedness
within  companies that provide services or equipment to the Company will require
the Company to continue its evaluation.  Based on its ongoing review, Management
believes the Y2K Issue does not pose material operational problems and the costs
associated  with the  assessment of risk and the execution of corrective  action
will not be material.

Employees

         At December 31,  1997,  the Company  employed  3,136  individuals  on a
full-time basis. Currently,  none of the Company's employees is represented by a
labor union or covered by a collective bargaining agreement.

ITEM 2.           FACILITIES

         The Company  maintains its executive  offices at 6011 Bristol  Parkway,
Culver City,  California,  and its main financial and administrative  offices in
Irving,  Texas.  The  Company  leases its service  centers in Orlando,  Florida,
Portland,  Oregon, and Addison and Irving,  Texas and owns its service center in
Wichita,  Kansas. The service centers in aggregate comprise 188,600 square feet.
The  Company  also  currently  leases 64  facilities  in 31 states that serve as
branch offices.

ITEM 3.           LEGAL PROCEEDINGS

         On January 8, 1997,  Innovative  Business  Systems,  Ltd. ("IBS") filed
suit against  Western  Resources,  Westinghouse  Electric  Corporation  ("WEC"),
Westinghouse  Security Systems, Inc. ("WSS") and WestSec in Dallas County, Texas
district  court (Cause No.  97-00184)  alleging,  among other things,  breach of
contract  against WEC and interference  with contract against Western  Resources
and WestSec in  connection  with the sale by WEC of the assets of WSS to Western
Resources and WestSec. IBS claims that WEC improperly transferred software owned
by IBS to Western  Resources and WestSec and that Western  Resources and WestSec
are not entitled to its use.  Western  Resources  and WestSec have demanded that
WEC defend and indemnify  them. WEC,  Western  Resources and WestSec have denied
IBS' allegations and are vigorously defending against them.  Management does not
believe the  ultimate  disposition  of the matter  will have a material  adverse
effect upon the Company's overall financial condition or results of operations.

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     On November 24, 1997, Protection One held a special meeting of stockholders
to vote upon a proposal to increase the  authorized  shares of Common Stock from
40,000,000  shares to 150,000,000  shares and to approve the issuance to Western
Resources  of  68,673,402   shares  of  Common  Stock  in  connection  with  the
Contribution (the "Stock Acquisition Proposal"). In addition,  stockholders were
asked  to  approve  the  1997  Long-Term  Incentive  Plan as a  replacement  for
Protection One's 1994 stock option plan. Out of a total of 14,493,722  shares of
Common Stock outstanding and entitled to vote,  9,807,358 shares were present in
person or by proxy,  representing  approximately  68% of the total. On the Stock
Acquisition Proposal, the results were as follows:


                                                       16


<PAGE>


For                                         9,807,358
Against                                            --
Abstain                                            --

     On the  proposal  to  replace  the 1994  stock  option  plan  with the 1997
Long-Term Incentive Plan, the results were as follows:

For                                         8,904,764
Against                                       886,094
Abstain                                        16,500

     There were no broker non-votes for the matters voted on by the stockholders
at the special meeting.

                                                       17


<PAGE>



                                                      PART II


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

     The  following  table  sets  forth the  range of high and low sales  prices
reported  on the Nasdaq  National  Market  for the  Common  Stock for the fiscal
periods indicated:
<TABLE>
<CAPTION>

                                                            High               Low
<S>                                                       <C>              <C>
Fiscal Year Ended December 31, 1996
         First Quarter...............................     $14 3/4          $  9
         Second Quarter..............................       17 7/8           13 1/4
         Third Quarter...............................       16 7/8           11 3/4
         Fourth Quarter..............................       15                 8 3/4
Fiscal Year Ended December 31, 1997
         First Quarter...............................     $11 1/8          $  7 3/8
         Second Quarter..............................       14 1/8             9 1/4
         Third Quarter...............................       21 3/4           13 3/8
         Fourth Quarter..............................       20 1/8           10 3/4
</TABLE>


         As of March 24,  1998,  there  were 83  holders of record of the Common
Stock. The Company believes there are in excess of 400 beneficial  owners of the
Common Stock.

         Other  than the cash  distribution  paid to holders of record of Common
Stock as of November 24, 1997, holders of outstanding options to purchase Common
Stock and  holders of certain  warrants  exercisable  for Common  Stock,  all in
connection with the  Contribution by Western  Resources,  POI has never paid any
cash dividends on the Common Stock and does not intend to pay any cash dividends
in the foreseeable  future. The Company intends to retain its cash flows for the
operation and  expansion of its business.  The  indenture  (the  "Discount  Note
Indenture")  pursuant to which Monitoring's 135/8% Senior Subordinated  Discount
Notes due 2005  (the  "Discount  Notes")  were  issued  and the  indenture  (the
"Convertible Note Indenture")  pursuant to which Monitoring's 6 3/4% Convertible
Notes due 2003 were issued restrict POI's ability to declare or pay any dividend
on, or make any other distribution in respect of, POI's capital stock.

         The Discount Note Indenture contains  restrictions on dividends paid by
Monitoring that are similar to the restrictions  summarized above. During fiscal
1995,  Monitoring  paid  dividends  to POI of  approximately  $0.2  million.  No
dividends were paid by Monitoring to POI in fiscal 1996 or fiscal 1997.

                                                       18


<PAGE>



ITEM 6.           SELECTED CONSOLIDATED FINANCIAL DATA

         The  selected  financial  data  set  forth  below  should  be  read  in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations"  and the  consolidated  financial  statements and the
related  notes  thereto of the  Company  and the  financial  statements  and the
related  notes  thereto of  Westinghouse  Security,  included  elsewhere in this
report.  All amounts are in  thousands,  except per share and  subscriber  data,
unless otherwise noted.

<TABLE>
<CAPTION>

                                     The Company (a)                  Westinghouse Security (Predecessor)(b)

                                 Year Ended  December  31,    53  Weeks  Ended  52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
                                                               December 30,     December 20,   December 20,   December 16,
                                    1997         1996             1996              1995            1994          1993
                                  --------     --------         --------          --------        --------       ------

<S>                             <C>          <C>                <C>             <C>            <C>             <C>
Statement of operations data:
  Revenues                      $  144,773   $    8,097         $110,881        $  88,710      $  67,253       $  47,985
  Cost of revenues                  35,669        3,348           25,960           17,280         15,224          11,615

  Gross profit                     109,104       4 ,749           84,921           71,430         52,029          36,370
  Selling, general and
    administrative expenses         77,203        5,091           60,166           50,919         27,448          30,674
  Acquisition and transition
    expense                          1,308         -                 101              101           -               -
  Amortization of intangibles and
    depreciation expense            39,822          609           21,613           17,804         13,959          13,009
  Nonrecurring charges              40,144         -                -                -              -               -

  Operating income (loss)          (49,373)        (951)           3,041            2,606         10,622          (7,313)
  Interest expense, net             32,900           15           10,879           12,159         13,467           7,511

  Loss before income taxes         (82,273)        (966)          (7,838)          (9,553)        (2,845)        (14,824)
  Income tax benefit                32,970          310            2,978            3,630          1,081           5,633

       Net loss                 $  (49,303)  $     (656)        $ (4,860)       $  (5,923)     $  (1,764)      $  (9,191)
                                ============  ===========      ==========       ==========     ==========      ==========

       Net loss per share       $    (0.70)  $    (0.01)              (b)              (b)            (b)             (b)


Consolidated balance sheet data:

  Working capital (deficit)     $    11,925  $  (19,447)        $(19,515)       $ (13,035)     $ (11,551)      $  (2,550)
  Subscriber accounts, net          538,318     265,530          157,969          138,620        114,236          94,148
  Goodwill and trademarks           682,180     218,991           11,102           11,397         11,691            -
  Total assets                    1,446,644     506,647          187,456          170,907        145,062         109,593
  Long-term debt, including
    capital leases                  337,763      60,505           47,931           52,511         58,475          35,883
  Total stockholders' equity    $   933,975  $  410,430        $ 106,140        $  89,120        $  60,108     $  55,803

Other operating data:
  MRR (c)                       $     19,137  $    8,974    $    7,870      $    6,437       $    5,231      $    4,288
  Number of subscribers net, at
    end of period                    756,818     424,100       313,784         265,839          214,785         224,960
  EBITDA (d)                    $     30,593  $     (342)   $   24,654       $  20,410        $  24,581       $   5,696
  Adjusted EBITDA (d)           $     50,462  $      (22)   $   37,327       $  31,918        $  27,559       $   4,228



(a)  Prior to  November  24,  1997,  Protection  One was a  standalone  security
business. On November 24, 1997, pursuant to a Contribution  Agreement dated July
30, 1997, between Protection One and Western Resources,  Protection One acquired
WestSec and Westar  (together  the  "Western  Resources  Security  Business"  or
"WRSB") and Centennial Security Holdings,  Inc.  ("Centennial").  As a result of
the transaction  Western  Resources owns  approximately 82% of Protection One at
December 31, 1997.

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

The 1996 historical financial data of Protection One are those of the accounting
acquiror, WRSB.
</TABLE>

                                                       19


<PAGE>




(a) (cont.)The  operating  results of WRSB for the year ended December 31, 1995,
can  be  considered  nominal  in  relation  to  the  accompanying   consolidated
statements of  operations.  The 1995 results are comprised of only two months of
start-up activity.
Summarized operating results are as follows:

         Revenue                                 $344
         Gross Profit                             189
         Net Income                                18

(b) On December 30, 1996,  WRI,  through its indirect  wholly owned  subsidiary,
WestSec,  purchased the assets and assumed  certain  liabilities  comprising the
security  business of Westinghouse  Security  Systems ("WSS") from  Westinghouse
Electric  Corporation  ("WEC").  WSS is deemed to be a predecessor of Protection
One.

Selected  financial  data for 1993 through 1996 were derived from the  financial
statements  of WSS for those  years.  Per share data is omitted  because WSS was
wholly owned by WEC.

(c) MRR is  monthly  recurring  revenue  (excluding  patrol  services)  that the
Company is  entitled  to  receive  under  contracts  in effect at the end of the
period. MRR is a term commonly used in the security alarm business, but not as a
measure of profitability or performance, and does not allow for future attrition
or  allowance  for  doubtful  accounts.  The  Company  does not have  sufficient
information as to the attrition of acquired  subscriber  accounts to predict the
amount of acquired MRR that will be realized in future  periods or the impact of
the attrition of acquired accounts on the Company's overall rate of attrition.

(d) EBITDA is  derived by adding to loss  before  income  taxes,  the sum of (i)
interest expense,  net, (ii)  nonrecurring  charges,  and (iii)  amortization of
intangibles and depreciation  expense.  EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles, should not be
construed  as an  alternative  to net  income and is  indicative  neither of the
Company's  operating  performance  nor of cash flows  available  to fund all the
Company's cash needs.  Items excluded from EBITDA are significant  components in
understanding  and  assessing the Company's  financial  performance.  Management
believes  presentation  of EBITDA  enhances an  understanding  of the  Company's
financial condition, results of operations and cash flows because EBITDA is used
by the  Company  to  satisfy  its  debt  service  obligations  and  its  capital
expenditure and other  operational needs as well as to provide funds for growth.
In addition,  EBITDA has been used by senior lenders and subordinated  creditors
and the investment  community to determine the current borrowing capacity and to
estimate the  long-term  value of companies  with  recurring  cash flows and net
losses.

Adjusted  EBITDA is derived by adding to EBITDA selling and marketing  expenses,
net of  revenues,  arising  from  installation  activities  during  the  period.
Adjusted  EBITDA  does not  represent  cash flow from  operations  as defined by
generally  accepted  accounting  principles,  should  not  be  construed  as  an
alternative to net income and is indicative  neither of the Company's  operating
performance  nor of cash flows  available to fund the Company's cash needs.  The
Company  presents  Adjusted  EBITDA as a  measure  which  the  Company  believes
provides a more  appropriate  comparison to EBITDA  presented by companies  that
grow through a dealer program or acquisitions.
         The  following  table  provides a  calculation  of EBITDA and  Adjusted
EBITDA for each of the periods presented above:
<TABLE>
<CAPTION>


                                       The Company                      Westinghouse Security (Predecessor)
                                 Year Ended  December  31,  53  Weeks  Ended  52 Weeks Ended   52 Weeks Ended   52 Weeks Ended
                                                               December 30,    December 20,    December 20,     December 16,
                                   1997         1996             1996             1995             1994             1993
                                 --------     --------         --------         --------         --------          ------
<S>                             <C>           <C>            <C>               <C>             <C>                <C>
Loss before income taxes        $(82,273)     $  (966)       $   (7,838)       $   (9,553)     $   (2,845)       $ (14,824)
Plus:
  Interest expense, net           32,900           15            10,879            12,159          13,467            7,511
  Nonrecurring charges            40,144         -                 -                 -               -                -
  Amortization of intangibles and
    depreciation expense          39,822          609            21,613            17,804          13,959           13,009
                              ----------    ---------        ----------        ----------      ----------       ----------
EBITDA                            30,593         (342)           24,654            20,410          24,581            5,696
Plus:
  Selling and marketing expenses
    related to installations      34,998        2,156            29,074            24,633           9,493              324
  Less:                          (15,129)      (1,836)          (16,401)          (13,125)         (6,515)          (1,792)
                              ----------    ---------        ----------       -----------     -----------       -----------
 Installation revenues
 Adjusted EBITDA               $  50,462    $     (22)       $  37,327        $    31,918       $  27,559       $    4,228
                              ==========    =========         =========         =========      ==========       ==========

</TABLE>
                                                       20


<PAGE>



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

         Except where the context indicates otherwise, the information contained
in this Item 7 is based on the  Company's  business,  operations  and  financial
condition as of and for the year ended December 31, 1997.
Note that all numbers presented are in thousands unless otherwise indicated.

Background

         The Company is  principally  engaged in the business of monitoring  and
servicing security systems.


         On November 24, 1997,  pursuant to a Contribution  Agreement dated July
30,  1997,  between  Protection  One and  Western  Resources  (as  amended,  the
"Contribution Agreement"),  Protection One acquired all of the outstanding stock
of WestSec and Westar which  represented the security alarm monitoring  business
of Western Resources (such business the "Western Resources Security Business" or
"WRSB"),  and certain cash and securities.  Under the terms of the  Contribution
Agreement,  Western  Resources was issued an aggregate of  68,673,402  shares of
Common Stock of Protection  One, which  represented  approximately  82.4% of the
shares of Common Stock outstanding immediately after such issuance. Accordingly,
although  Protection  One is the  legal  parent  of WRSB,  the  transaction  was
accounted for as a recapitalization of WRSB and a purchase by WRSB of Protection
One (a  reverse  acquisition  in  which  WRSB is  considered  the  acquiror  for
accounting  purposes).  The  Company  recorded  approximately  $464  million  of
goodwill related to this  transaction.  The financial  statements of the Company
for the  periods  prior  to  November  24,  1997,  are  those  of  WRSB  and its
predecessor  entity,  Westinghouse  Security  Systems  ("WSS").  The  assets and
liabilities  of Protection  One are recorded at their  estimated fair values and
the  accounts  of  Protection  One are  included in the  consolidated  financial
statements from the date of acquisition.

         On December 30, 1996, WestSec purchased 310,000 subscribers and assets,
and  assumed  certain  liabilities  and  obligations,  of WSS from  Westinghouse
Electric  Corporation  ("WEC") for $358 million in cash, subject to adjustments.
WRSB initially  recorded  approximately  $275 million of goodwill as a result of
this  transaction.  Westar,  formed in 1995,  acquired six  security  businesses
and/or portfolios of subscriber  accounts from November 1995,  through September
1996.  In  aggregate,   such  acquisitions  represented   approximately  100,000
subscribers,  and a  purchase  price of $25  million  paid in cash  and  Western
Resources stock. Goodwill recorded by WRSB related to these acquisitions totaled
approximately $23 million.

Overview

         A  majority  of the  Company's  revenues  are  derived  from  recurring
payments for the  monitoring  and servicing of security  systems and  additional
security services,  pursuant to contracts with an initial  noncancellable  term.
Service revenues are derived from payments under extended service  contracts and
for service calls performed on a time and materials  basis. The remainder of the
Company's  revenues  are  derived  primarily  from  revenues  from  the sale and
installation  by Company  personnel of security  systems,  add-ons and upgrades.
Payment for monitoring services is typically required in advance. Monitoring and
service revenues are recognized as the service is provided. Installation, add-on
and upgrade revenue is recognized in the period of installation.

         Alarm monitoring services generate a significantly  higher gross margin
than do the  other  services  provided  by the  Company.  In  fact,  the cost of
providing patrol and alarm response services exceeds revenues  generated by such
services,  and  although  sales  and  installation  services  contribute  to the
Company's  gross  profits,  the total  expenses  associated  with  alarm  system
installations also exceed the revenues generated by such services. The Company's
strategy,  however,  is to provide  patrol and alarm  response  services  and to
invest in system sales and  installation  because the Company believes that such
services and products contribute

                                                       21


<PAGE>



to the generation  and retention of alarm  monitoring  subscribers.  The Company
expects that system sales and  installation  activity will decline in 1998, as a
result  of  converting  substantially  all of  WRSB's  internal  sale  force  to
participants in the Dealer Program..

         Accounting Differences for New Installations and Account Purchases.  In
the past,  Protection  One,  which sold systems  outright,  and WRSB,  which has
primarily  leased  systems,  have accounted for expenses  associated  with alarm
system  installations  differently.  Protection One's direct installation costs,
which include materials,  labor and installation  overhead,  and related selling
and  marketing  costs  were  expensed  in the  period  incurred.  WRSB's  direct
installation  costs were  capitalized  while  selling  and  marketing  costs and
indirect  overhead were expensed in the period incurred.  Such capitalized costs
were  amortized  over  the  average  estimated  subscriber  life  of ten  years.
Subsequent to November 24, 1997,  Protection  One has adopted WRSB's policy with
respect to installation.  Due to the Company's strategy to rely primarily on the
Dealer  Program  and  acquisitions  to meet its growth  objectives,  the Company
anticipates a substantial reduction in installation activities in 1998.

         A difference between accounting treatment of the purchase of subscriber
accounts and the accounting  treatment of the generation of subscriber  accounts
through direct sales by the Company's sales force impacts the Company's  results
of operations. All direct external costs associated with purchases of subscriber
accounts  (either  through  the  Dealer  Program  or  through   acquisitions  of
subscriber account portfolios) are capitalized and amortized over ten years on a
straight-line  basis.  Company personnel and related support and duplicate costs
incurred  solely  in  connection  with  subscriber   account   acquisitions  and
transitions are expensed as incurred.  Other  acquisition  transition costs that
reflect  the  Company's  estimate of costs  associated  with  incorporating  the
purchased  subscriber accounts into its operations,  including costs incurred by
the Company in fulfilling the seller's  pre-acquisition  warranty repair service
and other  obligations  to the acquired  subscribers  are also  capitalized  and
amortized  over a ten year period as described  above.  Direct costs  related to
alarm system installations are capitalized and amortized over a ten year period.
Indirect costs related to alarm system  installations are expensed in the period
incurred.

         Subscriber  Attrition.  Subscriber attrition has a direct impact on the
Company's  results of operations,  since it affects both the Company's  revenues
and its amortization of intangibles expense.  Attrition can be measured in terms
of canceled  subscriber  accounts and in terms of decreased MRR  resulting  from
canceled  subscriber  accounts.  Gross  subscriber  attrition  is defined by the
Company for a particular  period as a quotient,  the numerator of which is equal
to the number of subscribers  who disconnect  service during such period and the
denominator  of  which is the  average  of the  number  of  subscribers  at each
month-end during such period.  Net MRR attrition is defined by the Company for a
particular  period as a quotient,  the  numerator of which is an amount equal to
gross MRR lost as the result of canceled  subscriber accounts or services during
such  period,  net of (i)  MRR  generated  during  such  period  by the  sale of
additional  services and  increases in rates to existing  subscribers,  (ii) MRR
generated  during such period from the connection of  subscribers  who move into
premises  previously  occupied by subscribers and in which existing  systems are
installed  and from  conversion of accounts  that were  previously  monitored by
other  companies to the Company's  monitoring  service (i.e.,  "reconnects"  and
"conversions");  and (iii) MRR attributable to canceled accounts that, by virtue
of a purchase  holdback,  are "put" back to the seller of such  accounts  during
such period (i.e.,  "guaranteed accounts");  and the denominator of which is the
average  month-end MRR in effect during such period.  While the Company  reduces
the gross MRR lost during a period by the amount of guaranteed accounts provided
for in  purchase  agreements  with  sellers,  in some cases the  Company may not
collect all or any of the reimbursement due it from the seller. During 1997, the
Company experienced gross subscriber attrition of 15.4% and net MRR attrition of
13.0%. As the Company has no economic  investment in wholesale  accounts,  these
accounts are excluded from the calculation.

         Management has established target ranges for gross subscriber attrition
and net MRR attrition of 16%- 18% and 7%-9%, respectively. Fluctuations in gross
subscriber attrition reflect changes in levels of acquisition activity, the rate
at which subscribers move, the number of subscribers that the Company

                                                       22


<PAGE>



disconnects  for  non-payment and customer  satisfaction  with Protection  One's
customer  service and field repair  functions.  Changes in net MRR attrition are
caused  by the  factors  impacting  gross  subscriber  attrition,  as well as by
changes in Protection One's ability to generate  reconnects and conversions,  to
create MRR through the sale of  additional  services and price  increases and to
obtain purchase holdbacks covering the loss of acquired subscribers.

         Because the Company determines payments to sellers under purchase price
holdbacks  subsequent to the periods to which such holdbacks  apply, and because
holdbacks are not allocated to specific  guaranteed  accounts or specific fiscal
periods,  the  Company  reduces  gross MRR lost during a period by the amount of
guaranteed accounts provided for in purchase  agreements with sellers.  However,
in some cases,  the Company has not retained the full amount of such holdback to
which the Company is contractually  entitled.  If guaranteed  accounts for which
the  Company  was not  compensated  by the seller  were  taken  into  account in
calculating net MRR attrition,  net MRR attrition would have been higher in each
period presented above.

         MRR represents the monthly recurring revenue Protection One is entitled
to  receive  under  subscriber  contracts  in effect  at the end of the  period.
Included  in MRR and the  number of  subscribers  are  amounts  associated  with
subscribers with past due balances.  It is the policy and practice of Protection
One that every effort be made to preserve  the revenue  stream  associated  with
these  contractual  obligations.  To this end,  Protection One actively works to
both collect  amounts owed and to retain the subscriber.  In certain  instances,
this collection and evaluation period may exceed six months in length.  When, in
the judgment of Protection One's collection  personnel,  all reasonable  efforts
have been made to  collect  balances  due,  subscribers  are  disconnected  from
Protection  One's service  centers and are included in the  calculation of gross
subscriber and net MRR attrition.

         Generally,   net  MRR  attrition  is  less  than  actual  "net  account
attrition,"  which the Company  defines as canceled  subscriber  accounts net of
reconnects, conversions and guaranteed accounts. Estimated net account attrition
is the  basis  upon  which the  Company  determines  the  period  over  which it
amortizes its  investment in subscriber  accounts.  The Company  amortizes  such
investment  over ten years  based on  current  estimates.  If actual  subscriber
account attrition were to exceed such estimated attrition,  the Company could be
required  to amortize  its  investment  in  subscriber  accounts  over a shorter
period,  thus  increasing  amortization  expense  in the  period  in which  such
adjustment  is made and future  periods.  Since the  majority of the  subscriber
accounts  acquired by the Company since its formation were  purchased  recently,
there can be no assurance that the actual attrition rates for such accounts will
not be greater than the rate assumed by the Company.  See-"Results of Operations
- 1997 Compared to Fiscal 1996 - Amortization  of intangibles  and  depreciation
expense" below.

         The table below sets forth the change in the Company's  subscriber base
over fiscal years 1995-1997.

                                                       23


<PAGE>




         The changes for 1995 and 1996 are  changes  for WSS as  predecessor  of
WestSec.  The results  for WSS and WRSB are  combined  in the 1996  column.  The
changes for 1997  reflect  changes for WRSB through  November 24, 1997,  and the
Company for the remainder of 1997. All  residential,  commercial,  and wholesale
accounts are reflected in the numbers:



                                                   Year Ended December 31,

                             1997                   1996                  1995
Beginning of period        424,100                 265,839               214,785
Internal installations      61,765                  75,232                69,866
Account acquisitions        25,072                   9,129                10,264
WRSB                          -                    110,316                  -
Protection
  One/Centennial           303,783                    -                     -
Account attrition          (57,902)               (36,416)              (29,076)
                          --------               --------               -------
End of period              756,818                424,100               265,839
                          ========               ========               =======

Results of Operations

         The following table sets forth certain operating data as dollar amounts
and as a percentage of total revenues for the periods indicated. The amounts and
percentages for 1997 represent WRSB operations through November 24, 1997 and the
operations  of the Company from  November  24, 1997  through  December 31, 1997.
Amounts and percentages are presented for WRSB's operations in 1996. Amounts and
percentages  are also presented for 1995 and 1996 related to WSS, as predecessor
of Protection One.
<TABLE>
<CAPTION>


                                                 Fiscal Year                              Fiscal Year

                                                                                     1996                 1995
                                         1997                   1996             Westinghouse         Westinghouse
                                      The Company           The Company          (Predecessor)        (Predecessor)

<S>                                <C>           <C>      <C>          <C>    <C>          <C>       <C>         <C>
Revenues:
  Monitoring and related services  $126,630      87.5%    $6,382       78.8%  $  93,765     84.6%    $74,911      84.4%
  Other                              18,143      12.5      1,715       21.2      17,116     15.4      13,799      15.6

      Total revenues               $144,773     100.0%    $8,097      100.0%   $110,881    100.0%    $88,710     100.0%
Cost of revenues:
  Monitoring and related services  $ 32,656      22.5%    $1,761       21.7%  $  24,987     22.5%    $16,843      19.0%
  Other                               3,013       2.1      1,587       19.6         973      0.9         437       0.5

      Total cost of revenues         35,669      24.6      3,348       41.3      25,960     23.4      17,280      19.5
      Gross profit                  109,104      75.4      4,749       58.7      84,921     76.6      71,430      80.5
  Selling, general and administrative
      expenses                       77,203      53.3      5,091       62.9      60,166     54.3      50,919      57.4

  Acquisition and transition expense  1,308       0.9       -            -          101      0.1         101       0.1
  Amortization of intangibles and
      depreciation expense           39,822      27.5        609        7.5      21,613     19.5      17,804      20.1
  Nonrecurring charges               40,144      27.8       -            -         -          -         -           -

      Operating income (loss)      $(49,373)    (34.1)%  $  (951)     (11.7)% $   3,041      2.7%    $ 2,606       2.9%
                                   ========     =====     =======     =====    =========    =====    =========    ====
</TABLE>

1997 Compared to 1996

         Revenues for 1997 were $144.8  million with $131.3  million  related to
the WRSB entities, $2.7 million related to Centennial, and $10.8 million related
to Protection  One.  WRSB's revenues for 1996 were $8.1 million and WSS revenues
for 1996 were  $110.9  million  for a total of $119.0  million.  Monitoring  and
related services revenues for the WRSB entities  increased by $14.0 million,  or
14.0%,  substantially  all of which  resulted from average  account base growth.
Other revenues related to the WRSB entities decreased by $1.7 million,  or 9.0%.
The  decrease is related  primarily  to a reduction  of 25% in total  internally
placed  accounts  added,  offset  partially by an increase in average  placement
revenue

                                                       24


<PAGE>



per account of 14%. The significant decrease in internally placed accounts added
is due to a sales force transition related to the transactions involving WSS and
WRSB and WRSB and Protection One.

         Cost of revenues for 1997 was $35.7 million with $31.4 million  related
to the WRSB  entities,  $1.0  million  related to  Centennial,  and $3.3 million
related to  Protection  One. Cost of revenues for 1996 was $3.3 million for WRSB
and $26.0 million for WSS for a total of $29.3  million.  Monitoring and related
services  expenses for the WRSB  entities  increased by $2.2  million,  or 8.2%,
primarily due to the  additional  personnel  required to provide  service to the
larger account base.

         Gross profit for 1997 was $109.1 million with $99.9 million  related to
the WRSB entities, $1.6 million related to Centennial,  and $7.5 million related
to  Protection  One.  Gross  profit for 1996 was $4.7 million for WRSB and $84.9
million  for WSS  for a total  of  $89.6  million.  Gross  profit  for the  WRSB
increased $10.3 million, or 11.5%,  reflecting the growth in the average account
base.

         Selling, general and administrative expense ("SG&A") for 1997 was $77.2
million with $74.1 million related to the WRSB entities, $0.8 million related to
Centennial,  and $2.3 million  related to Protection One. SG&A for 1996 was $5.1
million for WRSB and $60.2  million for WSS for a total of $65.3  million.  SG&A
increased $8.8 million, or 13.5%, for the WRSB entities primarily because of the
new advertising  efforts  required to establish  market awareness of the "Westar
Security Services" business name in support of placement activities.

         Amortization  of intangibles  and  depreciation  expenses for 1997 were
$39.8  million with $35.5  million  related to the WRSB  entities,  $0.6 million
related to Centennial,  and $3.7 million related to Protection One. Amortization
and depreciation  expenses for 1996 were $0.6 million for WRSB and $21.6 million
for WSS for a total of $22.2 million.  Depreciation and  amortization  increased
$13.3  million,  or 59.9%  for the WRSB  entities.  The  increase  is due to the
amortization of the $196 million of goodwill arising from WestSec's  acquisition
of the WSS business  from WEC. The  goodwill is being  amortized  over a 40 year
life.  Related to the  acquisition  of WSS by WRSB on  December  30,  1996,  the
subscriber  accounts  purchased  were  written up to fair  market  value.  These
amounts  are  being  amortized  over 10 years  and have  consequently  increased
amortization expense in 1997 compared to 1996.

         The  non-recurring  charges were taken in connection  with the November
24, 1997, acquisition transaction.  The Company incurred nonrecurring charges of
$40.1  million,  in order  to  reflect  business  activities  of the  accounting
acquiror,  WRSB,  that are no longer of continuing  value to the combined entity
and that will be phased out in conjunction  with the merger.  These charges have
been  separately   identified  as  a  component  of  operating   income  in  the
accompanying statements of operations.

         Generally,  management  intends to bring all security  operations under
the  Protection  One brand and to eliminate  redundant  facilities,  systems and
activities in specific locations where such exist.  Additionally,  costs will be
incurred to transition  individual  customer  accounts  from the former  service
providers with respect to operations,  billing and network  systems and to close
down these operations.  Management  intends to complete these exit activities by
the fourth quarter of 1998.

                                                       25


<PAGE>



         Charges for the year ended December 31, 1997, are as follows:

Inventory and other asset losses                                        $17,697
Customer account transition                                              12,337
Disposition of excess fixed assets                                        4,128
Closure of duplicate facilities                                           1,991
Severance compensation and benefits                                       1,865
Other                                                                     2,126
                                                                      ---------
                                                                        $40,144

1996 Compared to 1995 - Westinghouse Security (Predecessor to WestSec)

         WSS revenues for 1996 increased by $22.2 million,  or 25.0%,  to $110.9
million from $88.7 million for 1995.  Monitoring and related  services  revenues
increased by $18.9 million,  or 25.2%,  substantially all of which resulted from
the  addition  of  approximately  75,000  subscribers  from  internal  sales and
installations  of  subscriber   accounts  and  approximately  7,000  subscribers
purchased from dealers.  Other  revenues  increased by 24.0% to $17.1 million in
1996 from $13.8  million in 1995.  The  increase in other  revenues  reflects an
increase in installation  revenues as a result of additional  installed accounts
and the sale of equipment upgrades.

         Costs of revenues for 1996  increased  by $8.7  million,  or 50.3%,  to
$26.0 million. Costs and expenses as a percentage of total revenues increased to
23.4%  during 1996 from 19.5%  during  1995.  Monitoring  and  related  services
expenses increased by $8.1 million, or 48.4% from 1995 to 1996, primarily due to
increased  activity  at WSS'  central  monitoring  station and an  expansion  in
service  activities  in the field  branches.  Monitoring  and  related  services
expenses as a percentage of monitoring and related services  revenues  increased
to 26.6% in 1996 from 22.5% during 1995. Such increase  reflects a high level of
staffing at WSS' central monitoring station.

         Gross profit for 1996 was $84.9 million,  which  represents an increase
of $13.5 million, or 18.9%, over the $71.4 million of gross profit recognized in
1995.  Such increase was due primarily to an increase in monitoring  activities,
which reflected the increase in WSS' subscriber base from approximately  265,000
at December 20, 1995 to 314,000 at December 30, 1996.

         Selling,  general and  administrative  expenses  ("SG&A") rose to $60.3
million in 1996,  an increase of $9.2 million,  or 18.1%,  over such expenses in
1995, but declined as a percentage of total revenues from 57.5% in 1995 to 54.4%
in 1996.  The  increase in general  and  administrative  expenses  was caused by
increases in corporate and branch  overhead  expenses  associated  with a larger
customer base and higher  numbers of  installations.  Advertising  and marketing
expenses comprised approximately 2% of revenues in both 1995 and 1996.

         Amortization of intangibles and depreciation expense for 1996 increased
by $3.8 million, or 21.4%, to $21.6 million.  This increase was partially due to
the 75,000 new  internally  placed  accounts and 7,000 dealer  program  accounts
purchased during 1996. WSS amortized subscriber accounts over 10 years.

         Operating  income  for 1996 was $3.0  million,  compared  to  operating
income of $2.6  million in fiscal  1995.  Operating  income as a  percentage  of
revenue was 2.7% in 1996 compared to 2.9% in 1995.

         The  effective  income tax  benefit for 1996,  1995,  and 1994 has been
estimated at 38%. The  historical  net  operating  income or losses prior to the
WestSec purchase were included in WEC's consolidated federal income tax return.

Capital Resources and Liquidity


                                                       26


<PAGE>



         In  general,  the  Company  has  financed  its  operations  and  growth
primarily from operating cash flows,  supplemented  by advances from its parent,
Western Resources.

         Recent Developments. On November 24, 1997, pursuant to the Contribution
Agreement,  Protection One received  $367.4 million of cash and securities  from
Western Resources,  and made the following  disbursements,  either  concurrently
with or within several days of the closing of the Western Resources transaction:
(i) $114.1  million to make a cash  distribution  to holders of record of Common
Stock as of November 24, 1997, holders of outstanding options to purchase Common
Stock and holders of certain warrants  exercisable for Common Stock;  (ii) $94.4
million to pay the cash purchase price of Centennial; and (iii) $61.6 million to
repay  borrowings  under its revolving  credit  facility.  The  remaining  $97.3
million included $14.8 million of marketable  securities,  which amount included
common and preferred shares in Guardian  International,  Inc., and $82.5 million
of cash.

         The  amounts   contributed  by  Western  Resources  have  substantially
enhanced the Company's liquidity. In addition, the Company believes the issuance
of 68.7  million  shares of Common Stock to Western  Resources  has improved its
access to the  public  equity  markets.  The  Company  intends  to use cash flow
provided by operations,  cash on hand, funding by Western Resources, and capital
raised in debt and equity offerings,  as needed, to fund its ongoing  operations
and growth  activities.  The  Company  believes  that cash  required to fund its
growth  activities  will continue to exceed cash flow provided by operations for
the foreseeable future.

         Subsequent  to the end of  fiscal  year  1997,  on  February  4,  1998,
Protection One announced its decision to exercise its option to purchase Network
Multi-Family Security Corporation ("Network"),  the leading provider of security
alarm   monitoring  to  multi-family   dwellings  with   approximately   200,000
subscribers.  Pursuant  to the  terms of the  option,  Protection  One will give
Western Resources cash consideration of approximately $180 million.

         On March 2, 1998,  Protection One completed the  acquisition of 147,000
subscribers   and  related  assets  of  Multimedia   Security   Services,   Inc.
("Multimedia")  for  a  purchase  price  of  approximately  $233  million.   The
Multimedia  purchase  added to the  Company's  market  positions in  California,
Florida and Texas and added  substantial  numbers of  subscribers  in Kansas and
Oklahoma. In addition,  Protection One will maintain Multimedia's monitoring and
customer service center in Wichita, Kansas.

         On March 17, 1998,  Protection One completed the  acquisition of Comsec
Narragansett   Security,   Inc.   ("Comsec")   for  a  cash  purchase  price  of
approximately  $45 million and the  assumption of $15 million of debt.  Comsec's
30,000  subscribers are located primarily in Connecticut,  Maine,  Massachusetts
and New Hampshire.

         Material  Commitments.  The Company has several long-term  commitments.
The 6 3/4% Convertible  Senior  Subordinated  Notes (the  "Convertible  Notes"),
which total $103.5 million in aggregate  principal  amount,  mature on September
15, 2003, and the Company must make a payment of $166.0 million on September 30,
2005 at the  maturity  of the 135/8%  Senior  Subordinated  Discount  Notes (the
"Discount  Notes").  Cash interest payable on the Convertible Notes and Discount
Notes  will  total  $18.3  million in 1998 and $29.6  million  thereafter  until
maturity.  (See Note 6 of Protection One, Inc. Notes to  Consolidated  Financial
Statements, for further information regarding the Convertible Notes and Discount
Notes.)  In  addition,  Protection  One has  assumed,  as  part  of the  Western
Resources  transaction,  approximately  $60 million of the WestSec  indebtedness
from  agreements  entered  into by WSS,  of which  approximately  $26 million is
payable in 1998 and $34 million in 1999.  Under the  agreements,  Protection One
monitors  and  services  subscriber  accounts  for  which  certain  rights  were
transferred to a third party.  Protection One is required to purchase the rights
in the contracts as the underlying third party notes mature.

         On March 2, 1998,  the  Company  entered  into a  promissory  note with
Westar Capital, Inc., a subsidiary of Western Resources. The 6 11/16% promissory
note has a principal amount of $274 million and is due on June 1, 1998. Prior to
the maturity of the promissory note, the Company anticipates entering into

                                                       27


<PAGE>



a longer term financing arrangement with Westar Capital, Inc.

         Fiscal 1997 results. For fiscal 1997, the Company's net cash flows used
in operating activities was $4.9 million,  compared to $0.1 million used by WRSB
and $23.7 million provided by WSS for 1996. This shift from a net cash inflow in
1996 to a net  cash  outflow  in  1997 is  primarily  due to the  timing  of tax
payments.

         Net cash flows used in investing activities of the Company in 1997 were
$156.7  million,  compared to $369.5 million used by WRSB and $40.5 million used
by WSS in 1996.  The Company  paid $107.7  million in special  distributions  to
equityholders related to the Contribution.  WRSB paid WEC $357.3 million in cash
in 1996 to purchase WSS. The remaining  cash used for account  acquisitions  and
placements  for WRSB in 1996 was $11.3  million and $39.2  million for WSS. This
total is  comparable  to the  $46.5  million  spent by the  Company  in 1997 for
account acquisitions and placements.

         The Company  generated  $237.0  million of net cash  through  financing
activities in 1997. The Company  received $300.7 million in funding from Western
Resources  in 1997,  approximately  $258.0  million of which was  related to the
Contribution  Agreement  . All of  the  borrowings  ($61.6  million)  under  the
Company's  Revolving Credit Facility were paid off with proceeds  received under
the  Contribution  Agreement.  In 1996,  WRSB generated  $369.7 million  through
financing  activities  while WSS generated $16.7 million.  Substantially  all of
WRSB's  financing  came from Western  Resources in 1996.  WSS received  $21.9 in
proceeds  from WEC in 1996.  WSS also made  payments of $5.1 million  related to
repayments of amounts owed under the agreements discussed in Footnote 6 of Notes
to Consolidated Financial Statements.

         The  indentures  governing  the Discount  Notes and  Convertible  Notes
contain  certain  restrictions  on the  transfer  of  Company  funds,  including
dividends,  loans and advances  made by the Company.  The Company  believes such
restrictions  have  not  had and  will  not  have a  significant  impact  on the
Company's ability to meet its cash obligations.

         Capital   Expenditures.   The  Company   anticipates   making   capital
expenditures in fiscal 1998 of approximately  $15 million,  including $5 million
to upgrade branch  operations,  $5 million for  integration  activities,  and $5
million for service center improvements and other capital items.


                                                       28


<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

         None.

                                                       29


<PAGE>



                                                     PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

         Information  relating  to the  Company's  directors  and  nominees  for
directors is set forth under the heading  "Election of  Directors"  in the Proxy
Statement  relating to the Annual Meeting of  Stockholders  to be held April 23,
1998,  which will be filed with the  Securities  and Exchange  Commission  on or
about April 2, 1998, and which is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION

         Information  relating to the Company's 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 April 23, 1998,  which will be filed
with the Securities and Exchange Commission on or about April 2, 1998, and which
is incorporated herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

         Information  relating to the security  ownership of certain  beneficial
owners and  management  is set forth under the headings  "Security  Ownership of
Management" and "Security  Ownership of Certain  Beneficial Owners" in the Proxy
Statement  relating to the Annual Meeting of  Stockholders  to be held April 23,
1998,  which will be filed with the  Securities  and Exchange  Commission  on or
about April 2, 1998, 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 April 23, 1998,  which will be
filed with the Securities and Exchange Commission on or about April 2, 1998, and
which is incorporated herein by reference.

                                                       30


<PAGE>



                                                      PART IV

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

         (a) The following documents are filed as a part of this report:

              1.  The financial  statements  and financial  statement  schedules
                  listed on the accompanying Index to Financial Statements.
              2.  The following Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number                                               Exhibit Description
<S>               <C>
2.1               Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"), between
                  Western Resources and POI (incorporated by reference to Exhibit 2.1 to the Current Report
                  on Form 8-K filed by POI1 and Monitoring2 dated July 30, 1997 (the "July 1997 Form 8-
                  K")).

2.2               Amendment No. 1 dated October 2, 1997, to the Contribution Agreement (incorporated by
                  reference to Exhibit 99.1 to the Current Report of Form 8-K filed by POI and Monitoring
                  dated October 2, 1997).

2.3               Assignment and Assumption Agreement (Centennial Security Holdings, Inc.) dated as of
                  November 24, 1997, among Western Resources, Westar Capital, Inc. ("Westar Capital"),
                  Westar Security, Inc. ("Westar Security") and POI (incorporated by reference to Exhibit 2.3
                  to the Current Report on Form 8-K filed by POI and Monitoring dated November 24, 1997
                  (the "November 1997 Form 8-K")).

2.4               Assignment and Assumption Agreement (Guardian International, Inc.) dated as of November
                  24, 1997, among Western Resources, Westar Capital, Westar Security and POI (incorporated
                  by reference to Exhibit 2.4 to the November 1997 Form 8-K).

2.5               Stock Purchase Agreement dated as of October 2, 1997, among Centennial Security
                  Holdings, Inc. ("Centennial"), the shareholders of Centennial and Westar Capital
                  (incorporated by reference to Exhibit 2.5 to the November 1997 Form 8-K).

2.6               Stock Subscription Agreement dated as of October 4, 1997, between Guardian International,
                  Inc. ("Guardian") and Westar Capital (incorporated by reference to Exhibit 2.6 to the
                  November 1997 Form 8-K).

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               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).

--------
1 The Commission File Number of POI is 0-24780.
2 The Commission File Number of Protection One Alarm Monitoring is 33-73002-01.

                                                       31


<PAGE>



3.3               Certificate of Incorporation of Monitoring, as amended (incorporated by reference to Exhibit
                  3.2 to the Registration Statement of 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")).

3.4               Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual Report on
                  Form 10-K filed by POI and, inter alia, Monitoring for the year ended September 30, 1994).

4.1               Indenture dated as of May 17, 1995, among Monitoring, as Issuer, POI, inter alia, as
                  Guarantor, and The First National Bank of Boston ("FNBB"), as Trustee (incorporated by
                  reference to Exhibit 4.1 to the Registration Statement on Form S-4 (Registration No. 33-
                  94684) originally filed by POI and, inter alia, Monitoring on July 18, 1995 (the "1995 Form
                  S-4")).

4.2               First Supplemental Indenture dated as of July 26, 1996, among Monitoring, as Issuer, POI,
                  inter alia, as Guarantor and State Street Bank and Trust Company ("SSBTC") as successor
                  to FNBB as Trustee (incorporated by reference to Exhibit 4.2 to the Annual Report on Form
                  10-K filed by POI and Monitoring for the year ended September 30, 1996 (the "Fiscal 1996
                  Form 10-K")).

4.3               Second Supplemental Indenture dated as of October 28, 1996, among Monitoring as Issuer,
                  POI inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.3
                  to the Fiscal 1996 Form 10-K).

4.4               Subordinated Debt Shelf Indenture dated as of August 29, 1996, among Monitoring as Issuer,
                  POI as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.3 to the
                  August 1996 Form S-3).

4.5               Supplemental Indenture No. 1 dated as of September 20, 1996, among Monitoring as Issuer,
                  POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.1
                  to the Current Report on Form 8-K filed by POI and Monitoring and dated September 20,
                  1996 (the "September 1996 Form 8-K")).

4.6               Supplemental Indenture No. 2 dated as of October 28, 1996, among Monitoring as Issuer,
                  POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.6
                  to the Fiscal 1996 Form 10-K).

4.7               Amended and Restated Credit Agreement dated as of June 7, 1996, among Monitoring,
                  Heller Financial, Inc. ("Heller Financial") as Agent and the financial institutions signatory
                  thereto (the "Lenders") (incorporated by reference to Exhibit 10.2 to the Quarterly Report on
                  Form 10-Q filed by POI and Monitoring for the quarter ended June 30, 1996).

4.8               Consent and First Amendment to Credit Agreement dated as of September 16, 1996, among
                  Monitoring, Heller Financial as Agent and the Lenders (incorporated by reference to Exhibit
                  10.1 to the September 1996 Form 8-K).

4.9               Second Amendment to Amended and Restated Credit Agreement dated as of March 31,
                  1997, among Monitoring, Heller Financial as Agent and the Lenders (incorporated by
                  reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by POI and Monitoring
                  for the quarter ended March 31, 1997).

4.10              Third Amendment to Amended and Restated Credit Agreement dated
                  as of September 30, 1997, among  Monitoring,  Heller Financial
                  as Agent and the Lenders (incorporated by

                                                       32


<PAGE>



                  reference to Exhibit 4.10 to the Fiscal 1997 Form 10-K.)

4.11              Form of Revolving Note executed by Monitoring in favor of each Lender pursuant to the
                  Amended and Restated Credit Agreement filed as Exhibit 4.7 (incorporated by reference to
                  Exhibit 4.9 to the Fiscal 1996 Form 10-K).

4.12              Amended and Restated Guaranty dated as of June 7, 1996, executed by POI in favor of
                  Heller Financial as Agent (incorporated by reference to Exhibit 4.10 to the Fiscal 1996 Form
                  10-K).

4.13              Amended and Restated Stock Pledge Agreement dated as of June 7, 1996, between POI and
                  Heller Financial as Agent (incorporated by reference to Exhibit 4.11 to the Fiscal 1996 Form
                  10-K).

4.14              Amended and Restated Security Agreement dated as of June 7, 1996, between Monitoring
                  and Heller Financial as Agent (incorporated by reference to Exhibit 4.12 to the Fiscal 1996
                  Form 10-K).

4.15              Amended and Restated Continuing Security Interest and Conditional Assignment of Patents,
                  Trademarks, Copyrights and Licenses dated as of June 7, 1996, between Monitoring and
                  Heller Financial as Agent (incorporated by reference to Exhibit 4.13 to the Fiscal 1996 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              Amended and Restated Stockholders' Agreement dated as of August 15, 1994, among POI
                  and the stockholders of POI named therein (incorporated by reference to Exhibit 10.42 to the
                  Registration Statement of Form S-1 (Registration No. 33-81292) originally filed by POI on
                  July 8, 1994).

10.3              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")).

10.4              Registration Rights Agreement dated as of November 3, 1993, among Monitoring, POI,
                  certain former subsidiaries of Monitoring and Bear, Stearns & Co., Inc. (incorporated by
                  reference to Exhibit 4.4 to the 1993 Form S-4).

10.5              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).


10.6              Common Stock Registration Rights Agreement dated May 17,1995, among POI, Morgan
                  Stanley & Co. Incorporated and Montgomery Securities (incorporated by reference to Exhibit
                  10.41 to the 1995 Form S-4).

10.7              Employment Agreement dated as of November 24, 1997, between Protection One and James

                                                       33


<PAGE>



                  M. Mackenzie, Jr. (incorporated by reference to Exhibit 10.4 to the November 1997 Form
                  8-K).*

10.8              Employment  Agreement  dated as of November 24, 1997,  between
                  Protection One and John W. Hesse (incorporated by reference to
                  Exhibit 10.5 to the November 1997 Form 8-K).*

10.9              Employment  Agreement  dated as of November 24, 1997,  between
                  Protection  One  and  John  E.  Mack,  III   (incorporated  by
                  reference to Exhibit 10.6 to the November 1997 Form 8-K).*

10.10             Employment Agreement dated as of November 24, 1997, between Protection One and
                  Thomas K. Rankin (incorporated by reference to Exhibit 10.7 to the November 1997 Form
                  8-K).*

10.11             Employment  Agreement  dated as of November  3, 1993,  between
                  Monitoring and George A. Weinstock  (incorporated by reference
                  to Exhibit 10.13 to the 1993 Form S-4).*

10.12             Non-Competitive and Non-Solicitation Agreement dated as November 3, 1993, between
                  Monitoring and George A. Weinstock (incorporated by reference to Exhibit 10.14 to the
                  1993 Form S-4).*

10.13             Consulting Agreement dated as of February 19, 1996, between POI and Dr. Ben Enis
                  (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q filed by
                  POI and Monitoring for the quarter ended June 30, 1996).*

10.14             1994 Stock Option Plan of POI, as amended (incorporated by reference to Exhibit 10.23 to
                  the Fiscal 1996 Form 10-K).*

10.15             1997 Long-Term Incentive Plan of POI (incorporated by reference to Appendix F to POI's
                  proxy statement dated November 7, 1997).*

10.16             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),

10.17             Agreement for Purchase and Sale of Assets, dated May 25, 1995,
                  between Alert Centre,  Inc. and  Monitoring  (incorporated  by
                  reference to Exhibit 4.2 to the 1995 Form S-4).

10.18             Agreement to Purchase and Sell Stock dated as of May 23, 1996, among Metrol, the persons
                  named therein as the "Shareholders" (the "Metrol Shareholders"), Monitoring and POI
                  (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-3
                  (Registration NO. 33-5849) originally filed by POI on June 12, 1996 (the "June 1996 Form
                  S-3)).

10.19             Amendment No. 1 to Agreement dated as of June 28, 1996, among Metrol, the Metrol
                  Shareholders, Monitoring and POI (incorporated by reference to Exhibit 2.2 to the June 1996
                  Form S-3).

10.20             Escrow Agreement dated May 31, 1996, among Metrol, the Metrol Shareholders,
                  Monitoring, POI and First National Bank of Denver, N.A. as the Escrow Agent (incorporated
                  by reference to Exhibit 2.3 to the Current Report on Form 8-K filed by POI and Monitoring

                                                       34


<PAGE>



                  dated June 7, 1996 (the "June 1996 Form 8-K)).*

10.21             Registration Rights Agreement dated as of June 28, 1996, among
                  POI and the Metrol Shareholders  (incorporated by reference to
                  Exhibit 99.1 to the June 1996 Form 8-K).

10.22             Stock  Option  Agreement  dated as of July 30,  1997,  between
                  Western   Resources  and  Protection  One   (incorporated   by
                  reference to Exhibit 10.1 to the July 1997 Form 8-K).

10.23             Option and Voting Agreement dated as of July 30, 1997, between
                  Western   Resources  and  Protection  One   (incorporated   by
                  reference to Exhibit 10.2 to the July 1997 Form 8-K).

10.24             Promissory Note dated as of March 2, 1998 between Westar Capital, Inc, and Protection One
                  (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K filed by POI
                  and Monitoring dated March 17, 1998.)

16.1              Letter from Coopers & Lybrand to the Securities and Exchange Commission re: Change in
                  Certifying Accountant (incorporated by reference to Exhibit 16 to Amendment No. 1 to the
                  Current Report on Form 8-K filed by POI and Monitoring dated February 5, 1998.)

21.1              Subsidiaries of POI and Monitoring.

23.1              Consent of Arthur Andersen LLP.

27                Financial Data Schedule.

                  *Each exhibit marked with an asterisk constitutes a management
                  contract or  compensatory  plan or arrangement  required to be
                  filed or  incorporated  by  reference  as an  exhibit  to this
                  report pursuant to Item 14(c) of Form 10-K.

               (b)During the last  quarter of the  fiscal  year  covered by this
                  Report,  POI and  Monitoring  filed three Reports on Form 8-K.
                  Amendment  No.  1 to the  Current  Report  on Form  8-K  dated
                  October 2, 1997  reported  an  amendment  to the  Contribution
                  Agreement  and the Stock  Option  Agreement  filed in the July
                  1997 Form 8-K. A Current  Report on Form 8-K dated November 7,
                  1997  reported  in  response  to Item 5 the  record  date  and
                  special  meeting  of  stockholders  date  in  connection  with
                  transactions  provided for in the  Contribution  Agreement.  A
                  Current Report on Form 8-K dated November 24, 1997 reported in
                  response  to  Item  2  the   execution  of  the   Contribution
                  Agreeement.


                                                       35

</TABLE>
<PAGE>



<TABLE>
<CAPTION>
                                       PROTECTION ONE, INC. AND SUBSIDIARIES

                                           INDEX TO FINANCIAL STATEMENTS




                                                                                                       Page
<S>                                                                                                    <C>
PROTECTION ONE, INC. AND SUBSIDIARIES
     Report of Independent Public Accountants...........................................................F-2
     Consolidated Balance Sheets as of December 31, 1997 and 1996.......................................F-3
     Consolidated Statements of Operations for the years ended December 31, 1997 and 1996...............F-4
     Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996...............F-5
     Consolidated Statement of Changes in Stockholders' Equity for the
        years ended December 31, 1997 and 1996..........................................................F-6
     Notes to Consolidated Financial Statements.........................................................F-7

WESTINGHOUSE SECURITY
     Report of Independent Public Accountants...........................................................F-22
     Statements of Operations for the 53-week period ended December 30, 1996,
        and the 52-week period ended December 20, 1995..................................................F-23
     Statements of Cash Flows for the 53-week period ended December 30, 1996,
        and the 52-week period ended December 20, 1995..................................................F-24
     Notes to Financial Statements......................................................................F-25

FINANCIAL SCHEDULES
     Protection One, Inc. and Subsidiaries-
        Schedule II - Valuation and Qualifying Accounts.................................................S-1
     Westinghouse Security-
        Schedule II - Valuation and Qualifying Accounts.................................................S-2
</TABLE>

                                                      F-1


<PAGE>














                                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Protection One, Inc.:

         We have audited the  consolidated  financial  statements  of Protection
One, Inc. and subsidiaries listed in the index on page F-1 of this Annual Report
on Form 10-K. These consolidated  financial statements are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects, the financial position of Protection One, Inc.
and subsidiaries as of December 31, 1997 and 1996, and its consolidated  results
of  operations  and cash flows for each of the periods  presented in  conformity
with generally accepted accounting principles.

         Our audit was made for the  purpose  of forming an opinion on the basic
financial  statements  taken as a whole.  The  schedules  listed in the index of
financial statements are presented for purposes of complying with the Securities
and  Exchange  Commission  rules  and  are  not  part  of  the  basic  financial
statements. The schedules have been subjected to the auditing procedures applied
in the audit of the basic  financial  statements  and,  in our  opinion,  fairly
states in all material  respects  the  financial  data  required to be set forth
therein in relation to the basic financial statements taken as a whole.





                                                          ARTHUR ANDERSEN LLP


Dallas, Texas,
January 29, 1998


                                                      F-2


<PAGE>
<TABLE>
<CAPTION>


                                       PROTECTION ONE, INC. AND SUBSIDIARIES

                                            CONSOLIDATED BALANCE SHEETS

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

ASSETS                                                                  December 31, 1997       December 31, 1996
                                                                        -----------------------------------------
<S>                                                                       <C>                    <C>
Current assets:
    Cash and cash equivalents........................................     $     75,556           $        168
    Restricted cash..................................................          -                           94
    Marketable securities............................................            5,701                -
    Receivables, net.................................................           20,302                 12,572
    Inventories......................................................              556                  2,892
    Prepaid expenses.................................................              367                    407
    Deferred tax asset, current......................................           45,078                -
    Other............................................................           28,320                    132
                                                                         -------------           ------------
        Total current assets.........................................          175,880                 16,265

    Property and equipment, net......................................           14,934                  5,446
    Subscriber accounts, net.........................................          538,318                265,530
    Goodwill and trademarks..........................................          682,180                218,991
    Deferred tax asset...............................................           26,158                -
    Other............................................................            9,174                    415
                                                                        --------------           ------------
                                                                            $1,446,644               $506,647
                                                                            ==========               ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable.................................................   $        6,235          $       1,585
    Accrued liabilities..............................................           83,200                 16,579
    Purchase holdbacks...............................................           11,444                -
    Acquisition transition costs.....................................            7,469                -
    Current portion of long-term debt................................           21,217                  4,548
    Capital leases...................................................              490                -
    Deferred revenue.................................................           33,900                 13,000
                                                                         -------------           ------------
        Total current liabilities....................................          163,955                 35,712

    Long-term debt, net of current portion...........................          337,159                 60,505
    Capital leases, net of current portion...........................              604                -
    Deferred tax liability...........................................           10,325                -
    Other liabilities................................................              626                -
    Commitments and contingencies (Note 11) Stockholders' equity:
       Contributed Capital...........................................          -                      411,068
       Preferred stock, $.10 par value, 5,000,000 shares authorized..          -                      -
       Common Stock, $.01 par value, 150,000,000 shares
          authorized, 83,362,938 shares issued
          and outstanding at December 31, 1997 (Note 1)..............              834                -
    Additional paid-in capital.......................................          983,082                -
    Retained losses..................................................          (49,941)                  (638)
                                                                          ------------         --------------
       Total stockholders' equity....................................          933,975                410,430
                                                                          ------------           ------------
                                                                            $1,446,644            $   506,647
                                                                            ==========            ===========
The   accompanying   notes  are  an  integral   part  of  these consolidated financial statements.
</TABLE>

                                                      F-3


<PAGE>
<TABLE>
<CAPTION>


                                          PROTECTION ONE, INC. AND SUBSIDIARIES


                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                                        (Note 14)

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



                                                                               Year Ended             Year Ended
                                                                            December 31, 1997      December 31, 1996
                                                                            ----------------------------------------
<S>                                                                         <C>                    <C>
Revenues:
     Monitoring and related services                                              $126,630                $6,382
     Installation and other                                                         18,143                 1,715
                                                                                ----------               -------
        Total revenues                                                             144,773                 8,097

Costs and expenses:
     Monitoring and related services                                                32,656                 1,761
     Other                                                                           3,013                 1,587
                                                                               -----------               -------
        Total costs and expenses                                                    35,669                 3,348
                                                                                ----------               -------

        Gross profit                                                               109,104                 4,749

Selling, general and administrative expenses                                        77,203                 5,091
Acquisition and transition expense                                                   1,308                  -
Amortization of intangibles and depreciation
     expense                                                                        39,822                   609
Nonrecurring charges                                                                40,144                  -
                                                                                ----------              --------

        Operating loss                                                             (49,373)                 (951)

Other (income) expenses:
     Interest expense, net                                                          32,900                    15
                                                                                ----------             ---------

        Loss before income taxes                                                   (82,273)                 (966)
                                                                                ----------              --------

Income tax benefit                                                                  32,970                   310
                                                                               -----------              --------

        Net loss                                                                $  (49,303)              $  (656)
                                                                                ===========              ========

Net loss per share                                                              $     (.70)              $  (.01)
                                                                                ============             ========

The   accompanying   notes  are  an  integral   part  of  these consolidated financial statements.
</TABLE>


                                                      F-4


<PAGE>
<TABLE>
<CAPTION>


                                          PROTECTION ONE, INC. AND SUBSIDIARIES


                                          CONSOLIDATED STATEMENTS OF CASH FLOWS

                                              (Dollar amounts in thousands)




                                                                                 Year Ended             Year Ended
                                                                             December 31, 1997      December 31, 1996
                                                                             ----------------------------------------
<S>                                                                              <C>                 <C>
Cash flow from operating activities:
    Net loss                                                                     $(49,303)           $      (656)
    Adjustments to reconcile net loss to net cash
       provided by operating activities:
       Amortization of intangibles and depreciation                                39,822                    609
       Accretion of debt premium                                                    1,026                -
       Net deferred taxes                                                          (8,230)               -
       Provision for doubtful accounts                                              3,657                    184
       Non-recurring charges                                                       40,144                -
    Changes in assets and liabilities, net of effects of acquisitions:
           Receivables                                                             (2,467)                (1,424)
           Inventories                                                                940                   (540)
           Prepaid expenses and deposits                                              294                    (32)
           Other current assets                                                   (28,988)                  (200)
           Accounts payable                                                           492                     41
           Accrued liabilities                                                     (2,985)                 1,749
           Deferred revenue                                                           670                    178
                                                                              -----------           ------------
           Net cash used in operating activities                                   (4,928)                   (91)

Cash flows from investing activities:
    Purchases of property and equipment                                            (3,826)                  (977)
    Placement of installed security systems                                       (29,043)                (1,392)
    Cash acquired in acquisition transaction                                        1,374                -
    Distribution to equityholders in acquisition transaction                     (107,695)               -
    WSS acquisition, net of cash received                                         -                     (357,269)
    Account acquisitions, net of cash received                                    (17,494)                (9,898)
                                                                                ---------            -----------
           Net cash used in investing activities                                 (156,684)              (369,536)

Cash flows from financing activities:
    Payments on long-term debt                                                    (63,749)               -
    Proceeds from long-term debt                                                  -                           53
    Funding from Parent                                                           300,749                369,629
                                                                                 --------              ---------
           Net cash provided by financing activities                              237,000                369,682
                                                                                ---------              ---------

Net increase in cash and cash equivalents                                          75,388                     55

Cash and cash equivalents:
    Beginning of period                                                       $       168            $       113
                                                                              ===========            ===========
    End of period                                                               $  75,556            $       168
                                                                                =========            ===========

    Cash paid for interest                                                      $  10,202            $      -
                                                                                =========             ==========
    Cash paid for taxes                                                       $      -               $      -
                                                                              ===========             ==========

Non-cash financing:
    Contribution of net assets from Parent                                       $109,219            $      -
                                                                                 ========              =========

The  accompanying  notes  are an  integral  part  of  these consolidated financial statements.
</TABLE>

                                                    F-5


<PAGE>
<TABLE>
<CAPTION>



                                       PROTECTION ONE, INC. AND SUBSIDIARIES

                             CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

                                           (Dollar amounts in thousands)



                                                     Common Stock                          Additional                      Total
                                    Preferred                               Contributed     Paid-In      Accumulated   Stockholders'
                                      Stock       Shares       Amount         Capital       Capital   Earnings (losses)   Equity
<S>                                 <C>           <C>          <C>          <C>            <C>        <C>               <C>
          December 31, 1995             -           -          $  -         $    5,373     $   -      $        18        $    5,391

    Net investment and advances
       from WRI                         -           -             -            379,229         -             -              379,229
    Contribution by WRI of Small Subs   -           -             -             26,466         -             -               26,466
    Net loss                            -           -             -                            -             (656)             (656)
                                     -----------------------------------------------------------------------------------------------

           December 31, 1996            -           -             -            411,068         -             (638)          410,430

    Net investment and advances
        from WRI                        -           -             -             43,827         -             -               43,827
    Recapitalization                    -       68,673,402      687           (454,895)      454,208         -                 -
    Issuance of shares in reverse
       purchase acquisitions            -       14,689,230      147               -          528,874         -              529,021
    Exercise of options                 -              306        -               -             -            -                 -
    Net loss                            -           -             -               -             -         (49,303)          (49,303)
                                     -----------------------------------------------------------------------------------------------

           December 31, 1997       $    -       83,362,938   $  834         $      -         $983,082    $(49,941)          $933,975
                                      ==============================================================================================


The accompanying  notes are an integral part of these consolidated financial statements.
</TABLE>



                                                      F-6


<PAGE>


                                PROTECTION ONE, INC. AND SUBSIDIARIES


                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   (Dollar amounts in thousands, except for per share amounts)




1.   The Company and Summary of Significant Accounting Policies:

Basis of Consolidation and Business

     Protection One, Inc. (Protection One, a Delaware corporation;  the Company)
is principally  engaged in the business of providing  security alarm  monitoring
services,  which include sales,  installation and related  servicing of security
alarm  systems for  residential  and small  business  subscribers  in the United
States.

     Prior to  November  24,  1997,  Protection  One was a  standalone  security
business based in Culver City, California. On November 24, 1997, pursuant to the
Contribution  Agreement dated July 30, 1997,  between Protection One and Western
Resources,  Inc. (a publicly  traded  utility  company based in Topeka,  Kansas;
"WRI"),   Protection   One   acquired   Centennial   Security   Holdings,   Inc.
("Centennial"),  WestSec,  Inc., and Westar Security,  Inc. (WestSec and Westar,
respectively;  together the "Western  Resources  Security  Business" or "WRSB").
(See  Note 2 for  discussion  of  consideration  exchanged.)  As a result of the
transaction,  WRI owns  approximately  82.4% of  Protection  One at December 31,
1997.

     The  transaction has been accounted for as a reverse  purchase  acquisition
which  treats  WRSB as the  accounting  acquiror.  Accordingly,  the  results of
operation  of  Protection  One  and   Centennial   have  been  included  in  the
consolidated  financial  statements since November 24, 1997 following principles
of purchase accounting.  Furthermore, the 1996 and 1995 (see Note 14) historical
financial  statements of Protection  One are those of the  accounting  acquiror,
WRSB.

     On December 30, 1996, WRI,  through its indirect  wholly owned  subsidiary,
WestSec,  purchased the assets and assumed  certain  liabilities  comprising the
security  business of Westinghouse  Security  Systems ("WSS") from  Westinghouse
Electric  Corporation  ("WEC").  WSS is  deemed  to be a  predecessor  entity of
Protection One. As such, WSS's 1996 and 1995 results of operations are presented
separately from Protection One's consolidated  financial statements elsewhere in
this document.

     All significant intercompany balances and transactions have been eliminated
in consolidation.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  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.

Revenues

     Revenues are recognized when  installation of security alarm systems occurs
and when  monitoring,  extended  service  protection,  patrol,  repair and other
services are provided.  The Company does not receive separate connection fees in
any aspect of its business.  Deferred  revenues result from  subscribers who are
billed for monitoring, extended service protection and patrol and alarm response
services  in advance of the period in which such  services  are  provided,  on a
monthly,  quarterly or annual basis.  Deferred  revenues  relating to subscriber
accounts  acquired are recorded as part of the  allocation of the purchase price
and are  amortized  to income  during the period in which  service is  provided.
Costs of providing service and installations,  including inventory,  are charged
to income in the period  incurred and when the  installation  occurs.  Losses on
contracts for which future costs are  anticipated to exceed revenues are accrued
in the period such losses are identified.  Costs of services provided to dealers
are  expensed  as  incurred  and are  included  in  acquisition  and  transition
expenses. Contracts for services are generally for an initial noncancelable term
of one to five years with automatic renewal

                                                      F-7


<PAGE>



on an annual basis thereafter unless terminated by either party.

Inventories

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

Property and Equipment

     Property  and  equipment  are  stated  at cost and  depreciated  using  the
straight-line  method  over  estimated  useful  lives.  Costs  of  property  and
equipment of purchased  businesses are based on fair market value at the date of
acquisition.  When property and equipment are retired or sold,  the cost and the
related  allowance  for  depreciation  are  eliminated  from  the  property  and
allowance  accounts.  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.

Income Taxes

     Deferred  tax assets and  liabilities  reflect the tax effect of  temporary
differences  between  the  financial  statement  and tax  basis  of  assets  and
liabilities and the availability of net operating losses and tax credits.

Subscriber Accounts and Intangibles

     Subscriber  accounts acquired and intangible assets are stated at cost. The
cost of acquired subscriber accounts includes the cost of accounts purchased and
the estimated fair value of accounts  acquired in business  acquisitions  at the
date of acquisition,  including an accrual for estimated acquisition  transition
costs.  The Company's  personnel and related  support costs  incurred  solely in
support of  acquiring  and  transitioning  subscriber  accounts  are expensed as
incurred.  Direct and incremental external costs associated with the acquisition
of subscriber  accounts are capitalized.  If the acquisition is terminated prior
to  completion of the purchase  transaction  the costs are recorded as a loss in
the period of termination. The accrual for transition costs includes liabilities
assumed  and  incremental  external  costs  related to customer  changeover  and
transition, warranty obligations costs, employee and lease termination costs and
other  related  costs.  Costs  related to sales and  marketing  of  systems  for
accounts internally generated are expensed as incurred.

     The cost of subscriber  accounts is amortized on a straight-line basis over
a 10-year period.  It is the Company's  policy to evaluate  acquired  subscriber
account attrition on a quarterly basis utilizing  historical attrition rates for
the  subscriber  accounts in total and,  when  necessary,  adjust the  remaining
useful lives.

     Intangible assets include  goodwill,  which is amortized on a straight-line
basis  over 40 years  and debt  issuance  costs,  which are  amortized  over the
respective lives of associated debt using the interest method.

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.

Receivables

     Receivables,  which  consist  primarily of trade  accounts  receivable,  of
$25,509 at December 31, 1997 and $16,985 at December 31, 1996, have been reduced
by allowances for doubtful accounts of $5,207 and $4,413, respectively.

                                                      F-8


<PAGE>



Marketable Securities

     Management  has  determined  that the Company's  marketable  securities are
considered  held-for-sale  securities.  As of  December  31,  1997,  no material
difference  existed  between the cost and market value of the portfolio,  and as
such, no mark-to-market adjustment has been recorded.

Restricted Cash

     Restricted  cash as of December 31,  1996,  was held in escrow to guarantee
payment to certain third parties for licensing and insurance related matters.

Advertising Costs

     The Company expenses  advertising  costs based on the timing of the release
of the  advertising  materials.  Printed  materials,  due to the short lead time
between incurrence of cost and the release,  are generally expensed as incurred,
whereas  broadcast  advertising  costs are generally  recognized  upon the first
broadcast of the respective advertisement.  Total advertising expense was $9,906
and $2,320 during the years ended December 31, 1997 and 1996, respectively.

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.

Accounting Pronouncement

     The  Financial   Accounting  Standards  Board  (FASB)  has  issued  several
accounting  pronouncements  that the Company will be required to adopt in future
fiscal reporting periods.

     FASB Statement No. 130, "Reporting Comprehensive Income," which the Company
will adopt for periods beginning after December 15, 1997,  establishes standards
for  reporting  and  display  of  comprehensive  income  and its  components  in
financial  statements.  Comprehensive income generally represents all changes in
shareholders' equity except those resulting from investments by or distributions
to shareholders.  Such changes are generally not significant to the Company; and
the  adoption  of  Statement  No.  130,   including  the  required   comparative
presentation for prior periods, is not expected to have a material impact on its
financial statements.

     FASB  Statement No. 131,  "Disclosures  about Segments of an Enterprise and
Related  Information,"  establishes  standards for the way that public  business
enterprises  report  information about operating  segments in interim and annual
financial  statements.  Operating  segments  are  defined  as  components  of an
enterprise  about which  separate  financial  information  is available  that is
evaluated  regularly by the chief  operating  decision  maker in deciding how to
allocate  resources  and in  assessing  performance.  The Company will adopt the
provisions  of SFAS 131 for financial  statements  for periods  beginning  after
December  15,  1997.  Management  does  not  expect  that  the  adoption  of the
disclosure  requirements of this pronouncement will be materially different than
that of its current presentation.

Reclassifications

     Certain prior period amounts were  reclassified  to conform to the December
31,  1997,  presentation.  Such  reclassifications  did  not  affect  previously
reported net losses.


                                                      F-9


<PAGE>



Loss Per Share

     Loss per share has been computed and presented in accordance  with SFAS 128
"Earnings Per Share." The  incremental  shares that would have been  outstanding
upon the assumed  exercise of dilutive  stock options and warrants do not result
in a change to net loss per share for the year ended December 31, 1997. As such,
no  presentation  of  diluted  earnings  per  share  has  been  included  in the
consolidated  statements of operations.  The weighted average shares outstanding
used in the computation of net loss attributable to common shares was 70,202,716
for the year ended  December 31, 1997,  and,  while there were no actual  shares
issued or outstanding for prior fiscal years,  for purposes of calculating  loss
per share there were deemed to be 68,673,402 shares (number of new shares issued
to effect the transaction) for all prior fiscal years.

2.   Acquisition Transaction:

     Pursuant to the Contribution  Agreement,  on November 24, 1997, the Company
issued to WRI an aggregate of  68,673,402  (the Shares) of Common  Stock,  which
shares  constituted  82.4% of the  shares  of  Common  Stock  (the  only  voting
securities of the Company)  outstanding  immediately after such acquisition (the
Acquisition Transaction).  In consideration of the issuance of the Shares to WRI
(the Share  Issuance),  WRI  transferred  to the Company all of the  outstanding
capital stock of WestSec, and Westar, and an aggregate of $367.4 million in cash
and securities.

     As  provided in the  Contribution  Agreement,  the Company  paid (i) to the
holders of record of shares of  Protection  One Common  Stock as of the close of
business on November  24,  1997 (other than WRI),  a cash  dividend of $7.00 per
share (the Special Dividend);  (ii) to the holders of options to purchase shares
of  Protection  One Common  Stock (other than WRI) $7.00 in cash with respect to
each share of Common Stock issuable upon exercise of such options;  and (iii) to
a bank as the holder of record of a warrant issued by the Company in 1991 and to
the holders of record of warrants  issued by the Company in 1993,  $7.00 in cash
with  respect to each  share of Common  Stock  issuable  upon  exercise  of such
warrants.  As a result of the  payment of the  Special  Dividend,  each  warrant
issued  by the  Company  in 1995 has  become  exercisable  for  1.629  shares of
Protection  One  Common  Stock at an  exercise  price of  $4.05,  and the 6 3/4%
Convertible  Senior  Subordinated  Notes due 2003 issued by Protection One Alarm
Monitoring,  Inc., a Delaware  corporation,  will be convertible  into shares of
Common Stock at a conversion price of $11.19 per share.

     Included in the marketable securities the Company received from WRI was (i)
all of the outstanding  capital stock of Centennial  Security Holdings,  Inc., a
Delaware  corporation  (Centennial),  and (ii)  2,885,000  shares (the  Guardian
Common  Shares) of the Class A Voting Common Stock,  par value $.001 per shares,
and  1,875,000  shares (the  Guardian  Preferred  Shares) of the Series A 9 3/4%
Convertible Cumulative Preferred Stock of Guardian International, Inc., a Nevada
corporation  (Guardian).  The Guardian  Preferred Shares are convertible into an
aggregate of 1,500,000 additional shares of Guardian common stock.

     The Acquisition  Transaction  has been accounted for as a reverse  purchase
acquisition  and,  accordingly,  the  operating  results of  Protection  One and
Centennial have been included in the  consolidated  financial  statements  since
November  24, 1997.  The excess of the  aggregate  purchase  price over the fair
market value of net assets  acquired of  approximately  $410 million  related to
Protection  One and  approximately  $50 million  related to  Centennial is being
amortized over 40 years.


                                                      F-10


<PAGE>



     The following  unaudited pro forma  consolidated  results of operations for
the  years  ended  December  31,  1997 and  1996,  assume  the  Protection  One,
Centennial,  and WSS acquisitions occurred as of the beginning of the respective
years:

                                                     1997 (A)           1996
                                                  ---------------    --------

Revenues                                            $256,063         $216,861
Net loss                                             (73,360)         (28,910)
Earnings per common share                              (0.88)           (0.35)

(A) Excludes nonrecurring charges from 1997 presentation.

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

     In conjunction  with the  acquisition of Protection One by WRSB on November
24, 1997, and the acquisition of WSS by WRSB on December 30, 1996, net cash paid
was as follows:

                                          Protection One                WSS

Assets acquired                              $998,758                 $451,344
Liabilities assumed                          (362,042)                 (93,844)
Shares issued                                (529,021)                 -
                                             ---------               ---------

Cash paid                                     107,695                  357,500

Less- cash acquired                            (1,374)                    (231)
                                             -----------           ------------

Net cash paid                                $106,321                 $357,269
                                             ========                 ========

3.   Nonrecurring Charges:

     In  connection  with the  Acquisition  Transaction,  the  Company  incurred
nonrecurring  charges of $40.1 million,  in order to reflect business activities
of the accounting acquiror,  WRSB, that are no longer of continuing value to the
combined  entity and that will be phased out in the  integration  of operations.
These charges have been separately identified as a component of operating income
in the accompanying statements of operations.

     Generally,  management  intends to bring all security  operations under the
Protection  One  brand  and  to  eliminate  redundant  facilities,  systems  and
activities in specific locations where such exist.  Additionally,  costs must be
incurred to transition  individual  customer  accounts  from the former  service
providers with respect to operations,  billing and network systems, and to close
down these operations.  Management  intends to complete these exit activities by
the fourth quarter of 1998.

Charges for the year ended December 31, 1997, are as follows:

Inventory and other asset losses                                       $17,697
Customer account transition                                             12,337
Disposition of excess fixed assets                                       4,128
Closure of duplicate facilities                                          1,991
Severance compensation and benefits                                      1,865
Other                                                                    2,126
                                                                     ---------
                                                                       $40,144

                                                      F-11


<PAGE>



4.   Property and Equipment:

     Property and equipment are summarized as follows:

                                                         December 31,
                                                     1997              1996
                                                   ------------      --------

     Office equipment                              $  5,690         $  3,285
     Furniture and fixtures                           4,009              986
     Data processing and telecommunication            4,634            1,413
     Other                                            3,777             -
                                                   ---------         -------
                                                     18,110            5,684
     Less accumulated depreciation and amortization   3,176              238
                                                  ---------       ----------
                                                    $14,934         $  5,446
                                                    =======         ========

     Included in furniture and fixtures at December 31, 1997, are $452 of assets
under capital leases.  Virtually all property and equipment is depreciated  over
estimated useful lives ranging from five to ten years.

5.   Subscriber Accounts:

     Subscriber accounts (at cost) consist of the following:

                                                           December 31,
                                                      1997              1996
                                                  ------------      --------

     Acquired subscriber accounts                  $566,811         $270,038
     Less accumulated amortization                   28,493            4,508
                                                  ----------      -----------
                                                   $538,318         $265,530

Reconciliation of activity for acquired subscriber accounts is as follows:

                                                           December 31,
                                                      1997              1996
                                                 ------------        --------

     Balance, beginning of year                    $270,038        $      -
     Acquisition of subscriber accounts             296,822          270,038
     Charges against acquisition holdbacks             (49)               -
                                                 ------------       ---------

     Balance, end of year                          $566,811         $270,038
                                                   ========         ========

     In conjunction  with certain  purchases of subscriber  accounts the Company
withholds  a portion of the  purchase  price as a reserve  to offset  qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements,  and as a reserve for purchase price settlements
of assets acquired and liabilities  assumed.  As of December 31, 1997,  purchase
holdbacks were $11,444.  Virtually all of this amount was brought forward in the
Acquisition  Transaction.  Also in connection with the Acquisition  Transaction,
the Company took a nonrecurring  charge for excess  subscriber  attrition as the
Company integrated the operations of WSS (see Note 2).


                                                      F-12


<PAGE>



6.   Long-Term Debt:

     Long-term debt is comprised of the following:

                                                       December 31,
                                                  1997              1996
                                               ------------      --------

     Senior Subordinated Discount Notes          $191,926       $      -
     Convertible Senior Subordinated Notes        103,500              -
     SAMCO financing                               62,950         65,053
     Less current portion                         (21,217)        (4,548)
                                                --------        ---------
                                                 $337,159       $  60,505
                                                 ========       =========
Senior Subordinated Discount Notes

     The  Senior   Subordinated   Discount  Notes  are  unsecured   subordinated
obligations  of the  Company's  wholly  owned  Protection  One Alarm  Monitoring
subsidiary  (Monitoring)  (see  Note  13),  limited  to $166  million  aggregate
principal  amount at maturity,  and will mature on June 30, 2005.  In connection
with the Acquisition  Transaction,  the notes were restated to fair market value
for book purposes  reflecting a current market yield of approximately 6.4%. This
resulted in bond premium being  recorded to reflect the increase in value of the
notes as a result of the decline in interest rates since the note issuance.  The
revaluation has no impact on the expected cash flow to existing noteholders.

     Although for federal  income tax purposes a significant  amount of original
issue discount,  taxable as ordinary  income,  will be recognized by a holder as
such discount  accrues from the issue date, no interest will be payable prior to
December 31, 1998. From and after June 30, 1998, cash interest on the notes will
accrue at the rate of 13 5/8% per annum, payable in cash semiannually on June 30
and December 31, of each year, commencing December 31, 1998.

     The  Senior  Subordinated  Discount  Notes are fully,  unconditionally  and
jointly and severally  guaranteed on a senior  subordinated  basis by Protection
One.

     The Senior Subordinated Discount Notes contain covenants which, among other
matters,  limit the Company and its Subsidiaries' ability to incur indebtedness,
pay dividends,  sell assets,  make stock distributions or sell shares of certain
subsidiaries.

Convertible Senior Subordinated Notes

     The Convertible Notes are unsecured subordinated  obligations of Monitoring
and rank equal to the Senior Subordinated  Discount Notes. The Convertible Notes
mature on September 15, 2003, and previously were convertible, at any time, into
Common Stock at a price of $17.95 per share,  subject to adjustment.  Subsequent
to the  Acquisition  Transaction,  the  Convertible  Notes maintain a conversion
price of $11.19 per share.

     Interest on the Convertible  Notes accrues at the rate of 6 3/4% per annum,
payable  in cash  semiannually  on  March  15 and  September  15 of  each  year,
commencing  March  15,  1997.  The  Convertible  Notes  are  redeemable,  at the
Company's  option,  in whole or in part, at any time or from time to time, on or
after  September  19, 1999,  and prior to  maturity,  upon not less than 30 days
prior  notice at certain  specified  redemption  prices plus  accrued and unpaid
interest.

     The Convertible Notes are fully,  unconditionally and jointly and severally
guaranteed on a senior subordinated basis by Protection One.

     The  indenture  under  which the  Convertible  Notes were  issued  contains
covenants which limit the Company and its subsidiaries' ability to incur certain
indebtedness.

Revolving Credit Facility

     At December 31, 1997,  Protection One had a $100 million  revolving  credit
facility (the "Revolving Credit Facility")

                                                      F-13


<PAGE>



which matures in January 2000.  Borrowings  under the Revolving  Credit Facility
bear  interest  at the lesser of the bank's  prime rate plus 1.00% or LIBOR plus
2.50%. Borrowings made under the Revolving Credit Facility are collateralized by
substantially  all of the  Company's  assets.  The  outstanding  balance  of the
Revolving  Credit Facility was paid on November 25, 1997, with proceeds from the
Acquisition Transaction. The facility was terminated in February of 1998.

SAMCO

     During 1992 and through 1994, WSS entered into a series of agreements  (the
"SAMCO  Agreements")  to  sell  certain  rights  in  security  alarm  monitoring
contracts (the  "Contracts") to an investor for  approximately  $76.9 million in
cash.  The  investor  financed  the  transactions  through the issuance of three
series  of  secured  five-year  notes  (the  "Investor  Notes").  For  financial
reporting   purposes,   WEC  accounted  for  the  transactions  as  a  financing
arrangement  and recorded the proceeds  received  from the investor as long-term
debt.  The amounts  recorded as debt were amortized  using the interest  method.
Generally,  principal  and  interest  payments on the debt consist of 65% of the
monitoring revenues collected under the Contracts.  In addition,  as part of the
SAMCO  Agreements,  Westinghouse  provided the investor with certain  guarantees
with respect to accounts which terminate prior to the completion of the contract
period.

     Under the  SAMCO  Agreements,  WEC had the  right  but not the  obligation,
exercisable  not more than 15 months or less than 12 months  prior to the stated
maturity of any series of Investor  Notes to  repurchase  the Contracts or cause
the disposition of Contracts securing a particular series of Investor Notes, for
an amount equal to the then fair market value of such  Contracts,  provided such
fair  market  value will not be less than the amount  necessary  to satisfy  all
obligations  of the  investor  related  to such  series of  Investor  Notes plus
certain  taxes,  if any  (the  "Minimum  Purchase  Price").  In the  event of an
unsolicited  third party offer in excess of the then Minimum  Purchase  Price to
purchase such  Contracts  prior to 12 months  before the stated  maturity of any
series of Investor Notes,  the Agreements  provided WEC a right of first refusal
to buy such  Contracts.  In addition,  the  Agreements  provided  that WEC would
receive  60% of the excess of the fair market  value over the  Minimum  Purchase
Price, if any, if WEC repurchases or arranges the sale of such Contracts.

     On December 30, 1996,  WEC assigned to WestSec all of WEC's  rights,  title
and  interest,  and  WestSec  agreed  to  assume  all  of  WEC  liabilities  and
obligations under the SAMCO Agreements in connection with WestSec's  purchase of
WSS. This assumption of liabilities  requires  WestSec to purchase the Contracts
on the respective stated maturity date of the Investor Notes. The purchase price
payable by WestSec is equal to the greater of a) Minimum Purchase Price plus 40%
of the excess of the fair market value over the minimum  purchase price or b) 30
times total monthly recurring  revenue related to the Contracts.  As a condition
of  assuming  the debt  obligation,  WestSec  issued a letter of credit  for $85
million to ensure the debt holder the obligation would be repaid. Protection One
pays  interest  on this  obligation  on a monthly  basis and amounts of interest
actually paid  approximated  interest  expense for the years ended  December 31,
1997 and 1996.

     The effective  interest rate related to these Agreements  approximates 15%.
The  estimated  minimum  principal  payment for each of the years  subsequent to
December  31, 1997,  based upon current  estimates of fair value are as follows:
1998 - $21.2 million and 1999 - $41.7 million.


                                                      F-14


<PAGE>



7.   Investments in Unconsolidated Subsidiary:

     At December 31, 1997, Protection One owned common stock and preferred stock
representing  a  41%  ownership  interest  in  Guardian   International,   Inc.,
("Guardian")  at an  aggregate  cost  of  $9.2  million.  Such  securities  were
contributed  by WRI to Protection  One pursuant to the  Contribution  Agreement.
Since  Protection  One does not  exercise  control over  Guardian's  operations,
Protection  One  accounts  for  the  investment   under  the  equity  method  of
accounting, recognizing the proportionate share of income or losses of Guardian.
For the 36 days ended  December 31, 1997,  Protection  One's equity in income of
the unconsolidated subsidiary, Guardian, was $25.


8.   Stock Warrants and Options:

     The  following  is a detail of  previously  issued  options and warrants of
Protection One:

     In January 1993, Protection One issued 103,697 warrants ("KOP Warrants") to
purchase  shares of Common Stock at an exercise  price of $3.633 per share.  The
outstanding warrants expire in January 2001.

     On November 3, 1993,  Protection One issued 1,400,000  warrants to purchase
840,000 shares of Common Stock as part of a Units offering.  Each warrant,  when
exercised,  will entitle the holder to receive  six-tenths (0.6) of one share of
Common Stock at an exercise  price of $0.167 per share,  subject to  adjustment.
The outstanding warrants expire on November 1, 2003.

     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.  One million  three  hundred  thousand
(1,300,000)  shares are reserved for  issuance  under the Plan,  subject to such
adjustment  as may be  necessary  to  reflect  changes in the number or kinds of
shares of Common Stock or other  securities of  Protection  One. The Option 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.

     During  fiscal year 1995,  Protection  One  granted  options to purchase an
aggregate of 266,000 shares of Common Stock including 132,000 shares to officers
of  Protection  One. Each option has a term of 10 years and vests 20% on each of
the third through seventh anniversaries of the commencement of the participant's
employment  with the Protection  One. The purchase price of the shares  issuable
pursuant  to the options is equal to fair  market  value of Common  Stock at the
date of option grant.  Pursuant to the Acquisition  Transaction,  the vesting of
these options  accelerated  on November 24, 1997 and all  remaining  options are
currently exercisable.

     In connection with the issuance of the Senior  Subordinated  Discount Notes
in May 1995, Protection One issued warrants to purchase 531,200 shares of common
stock at an exercise price of $6.60 per share.  The outstanding  warrants expire
in May 2005.

     During  fiscal year 1996,  Protection  One  granted  options to purchase an
aggregate of 638,800 shares of Common Stock including  400,000 shares granted to
officers of Protection  One. Each option has a term of 10 years and vests 20% on
each of the first through fifth anniversaries of the later of November 15, 1995,
or the  commencement  of the  participant's  employment with Protection One. 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.  Pursuant to the  Acquisition  Transaction,  the vesting of these
options accelerated on November 24, 1997 and all remaining options are currently
exercisable.

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


                                                      F-15


<PAGE>



     During  fiscal year 1997,  Protection  One  granted  options to purchase an
aggregate  of 375,444  shares of Common  Stock to  employees  including  100,000
shares granted to officers of Protection One. Each option has a term of 10 years
and vests 20% on each of the first through fifth  anniversaries  of the later of
December 6, 1996,  or the  commencement  of the  participant's  employment  with
Protection  One.  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.  Pursuant to the Acquisition  Transaction,  the
vesting of these  options  accelerated  on November  24, 1997 and all  remaining
options are currently exercisable.

     A summary of warrant and option  activity for  Protection One from the date
of the Acquisition Transaction is as follows:

                                                     Warrants
                                                    and Options    Price Range

Outstanding and exercisable at November 24, 1997 1   2,198,389  $0.05 to $16.375
Granted                                                   -            -
Exercised                                                 (306)            $0.05
Surrendered                                               -            -
                                                    ----------- ----------------
Outstanding and exercisable at December 31, 1997      2,198,083  $0.05 - $16.375
                                                    =========== ================

1 As WRSB had no  outstanding  stock at or prior to November  24, 1997 there
were no related options.

     The table summarizes stock options outstanding as of December 31, 1997:
<TABLE>
<CAPTION>


                                                                    Number          Weighted-
                                                                  Outstanding        Average          Weighted-
                                                  Range of            and           Remaining          Average
             Description                       Exercise Price     Exercisable   Contractual Life   Exercise Price
<S>                                            <C>                <C>           <C>                <C>
     Fiscal 1995 Options                       $5.875 - $9.125     159,360           8 years           $6.602
     Fiscal 1996 Options                       $8.00 - $10.313     384,300           8 years           $8.088
     Fiscal 1996 Options                      $12.125 - $16.375    148,000           8 years          $14.857
     Fiscal 1997 Options                            $9.50          253,000           9 years           $9.50
     Fiscal 1997 Options                           $15.00           50,000           9 years          $15.00
     1997 Options                                  $14.268          50,000           4 years          $14.268
     Phillips Options                               $0.05            1,425           9 years           $0.05
     KOP Warrants                                  $3.633          103,697           4 years           $3.633
     November 1993 Warrants                        $0.167          462,001           6 years           $0.167
     May 1995 Note Warrants                         $6.60          466,400           8 years           $6.60
</TABLE>


     In connection  with the acquisition  transaction,  Protection One issued to
Western  Resources a call  option on an  additional  2,750,238  shares of common
stock at a price of $15.50 per share. The option expires on the earlier of a) 45
days following the last date on which any Protection One  convertible  notes are
still outstanding, and b) October 31, 1999.


                                                      F-16


<PAGE>



9.   Income Taxes:

     Components of the income tax benefit are as follows:

                                             Year Ended         Year Ended
                                          December 31, 1997  December 31, 1996

Federal-
  Current                                      $21,640       $         265
  Deferred                                       7,210                -

State-
  Current                                        3,090                  45
  Deferred                                       1,030                -

Total                                          $32,970        $        310
                                               =======             =======

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

                                             Year Ended           Year Ended
                                          December 31, 1997  December 31, 1996

Federal statutory tax rate                      (35)%                (35)%

State income taxes, net
  of Federal benefit                             (6)%                 (6)%

Non-deductible goodwill                            1%                   9%
                                                  --                   --
                                                (40)%                (32)%



Protection One

     Components  of the income tax  benefit  from losses  recorded  for the year
ended December 31, 1997, include Protection One from the date of the Acquisition
Transaction  and WRSB for the  calendar  year  then  ended.  Protection  One and
subsidiaries  will be included in the tax returns filed by Western Resources for
calendar year 1997. A tax sharing agreement  between  Protection One and Western
Resources  provides for the payment to Protection  One by Western  Resources for
tax benefits  utilized by Western  Resources and accordingly,  the receivable of
$24.7 million related to the current tax benefit for the year ended December 31,
1997, has been included in other current assets in the accompanying consolidated
balance sheet.

     At December 31, 1997,  consolidated  Protection One had  approximately  $50
million in net  operating  loss  carryforwards  for income tax return  purposes.
Current  tax  regulations  limit  the use of these NOL  carryforwards  to 1) the
extent  Protection One earns taxable income subsequent to November 24, 1997, and
2) certain annual use levels, even if taxable income is generated.  As a result,
Management  has  determined  that  a  valuation   allowance  is  appropriate  in
accordance with SFAS 109 "Accounting for Income Taxes."



                                                      F-17


<PAGE>



     At December  31,  1997,  deferred  income tax assets and  liabilities  were
composed of the following:

Deferred tax asset (liability) current-
   Accrued liabilities                                                  $24,305
   Accounts receivable, due to allowance                                  2,083
   Acquisition reserves and holdbacks                                     6,684
   Prepaids                                                               1,501
   Other                                                                 10,505
                                                                       --------
                                                                        $45,078

Deferred tax asset (liability) noncurrent-
   Net operating loss carryforwards                                     $16,943
   Valuation allowance                                                  (16,943)
   Subscriber accounts                                                    1,348
   Property, plant & equipment                                            3,429
   Noncompete agreements                                                  1,101
   Capitalized Direct installation costs                                (10,200)
   OID amortization                                                      16,824
   Debt offering costs                                                    3,331
                                                                      ---------
                                                                        $15,833

WRSB

The income tax attributes of WRSB were  consolidated  into the tax returns filed
by Western  Resources for calendar year 1996. As a result,  the  cumulative  tax
losses were utilized by Western Resources. No cash was paid for income taxes for
the year ended  December  31,  1996.  The  resulting  net deferred tax asset was
contributed  to Western  Resources and was recorded as a reduction of additional
paid-in  capital in the  accompanying  balance sheet.  Therefore,  there were no
deferred tax assets and liabilities recorded at December 31, 1996.

10.  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 "401(k)
Plan").  The Company at its election also may make  contributions  to the 401(k)
Plan, which  contributions  will be allocated among  participants based upon the
respective  contributions  made by the  participants  through salary  reductions
during the applicable plan year. The Company's matching contribution may be made
in Common  Stock,  in cash or in a  combination  of both  stock and cash.  As of
year-end, Protection One made a matching contribution to the plan of $34.

     WRSB also  maintained a savings plan which  qualified under Section 401(k).
The savings plan allowed  eligible  employees to  contribute  up to 15% of their
income on a pretax  basis,  with a  discretionary  employer  match of 50% of the
employee's  contribution  up to the  first  6% of the  employee's  compensation.
During the year ended December 31, 1997, WRSB made matching  contributions equal
to $721.  Management  intends to merge the two 401(k) employee  benefit plans as
soon as practically possible.

     Employee Stock Purchase Plan

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

     The purchase price of shares of Common Stock  purchased  under the Employee
Stock  Purchase Plan during any purchase  period will be the lower of (i) 85% of
the fair  market  value of the  Common  Stock on the first day of that  purchase
period or (ii) 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 (i) the last business day in September  2005, (ii)
the date on which all shares  available  for  issuance  under the plan have been
sold or (ii) the date on which all purchase  rights are  exercised in connection
with an acquisition of the Company or all or substantially all of its assets.

11.  Commitments and Contingencies:

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

Year ended December 31
  1998............................................                   $  6,592
  1999............................................                      4,874

                                                      F-18


<PAGE>

   2000............................................                     3,452
   2001............................................                     2,794
   2002............................................                     2,504
   Thereafter......................................                     6,438
                                                                    ---------
                                                                      $26,654

     Total rent expense for the years ended  December 31,  1997,  and 1996,  was
$4,654 and $3,409, respectively.

         On January 8, 1997,  Innovative  Business  Systems,  Ltd. ("IBS") filed
suit against  Western  Resources,  Westinghouse  Electric  Corporation  ("WEC"),
Westinghouse  Security Systems, Inc. ("WSS") and WestSec in Dallas County, Texas
district  court (Cause No.  97-00184)  alleging,  among other things,  breach of
contract by WEC and  interference  with contract  against Western  Resources and
WestSec  in  connection  with the sale by WEC of the  assets  of WSS to  Western
Resources and WestSec. IBS claims that WEC improperly transferred software owned
by IBS to Western  Resources and WestSec and that Western  Resources and WestSec
are not entitled to its use.  Western  Resources  and WestSec have demanded that
WEC defend and indemnify  them. WEC,  Western  Resources and WestSec have denied
IBS' allegations and are vigorously defending against them.  Management does not
believe the  ultimate  disposition  of the matter  will have a material  adverse
effect upon the Company's overall financial condition or results of operations.

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

12.  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.

     Due to the adjustments recorded in purchase accounting,  as of December 31,
1997,  Protection  One  debt  is  believed  to be  reflected  in  the  financial
statements as an amount approximating fair market value.

     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-19


<PAGE>



13.  Supplemental Subsidiary Company Summarized Financial Information

     Protection  One is a  guarantor  of all  outstanding  debt  of  Monitoring.
Protection One has no other assets or operation  outside the  investments in its
subsidiaries.  Separate  audited  financial  statements  for  Monitoring as debt
issuer  have  not been  provided  because  Monitoring  is  wholly-owned  and the
guarantee is full and unconditional.

     The summarized  financial  information  of Monitoring  from the date of the
Acquisition Transaction through December 31, 1997, is presented below:

Summarized Balance Sheet                                     December 31, 1997
  Assets
    Current assets                                               $110,350
    Subscriber accounts and intangibles, net                      229,366
    Goodwill and patents                                          408,295
    Other noncurrent assets                                        46,418

  Liabilities and Stockholders' Equity
    Deferred revenue                                               16,457
    Other current liabilities                                      55,216
    Long-term debt, net of current position                       295,426
    Other long-term liabilities                                       703
    Stockholders' equity                                          457,511

                                                          For the period from
                                                         November 24, 1997, to
                                                            December 31,1997

Summarized Statement of Operations
  Revenues                                                       $10,812
  Gross profit                                                     7,527
  Net loss                                                        (1,124)

14.  1995 Operating Results of Protection One

     The operating results of the WRSB for the year ended December 31, 1995, can
be considered nominal in relation to the accompanying consolidated statements of
operations.  The 1995  results  are  comprised  of only two  months of  start-up
activity. Summarized operating results are as follows:

     Revenue                                                        $344
     Gross Profit                                                    189
     Net Income                                                       18

                                                      F-20


<PAGE>




     15.  Subsequent Events - Mergers and Acquisitions (Unaudited):

         Subsequent  to the end of  fiscal  year  1997,  on  February  4,  1998,
Protection One announced its decision to exercise its option to purchase Network
Multi-Family Security Corporation ("Network"),  the leading provider of security
alarm   monitoring  to  multi-family   dwellings  with   approximately   200,000
subscribers.  Pursuant  to the  terms of the  option,  Protection  One will give
Western Resources cash consideration of approximately $180 million.

         On March 2, 1998,  Protection One completed the  acquisition of 147,000
subscribers   and  related  assets  of  Multimedia   Security   Services,   Inc.
("Multimedia")  for  a  purchase  price  of  approximately  $233  million.   The
Multimedia  purchase  added to the  Company's  market  positions in  California,
Florida and Texas and added  substantial  numbers of  subscribers  in Kansas and
Oklahoma. In addition,  Protection One will maintain Multimedia's monitoring and
customer service center in Wichita, Kansas.

         On March 17, 1998,  Protection One completed the  acquisition of Comsec
Narragansett   Security,   Inc.   ("Comsec")   for  a  cash  purchase  price  of
approximately  $45 million and the  assumption of $15 million of debt.  Comsec's
30,000  subscribers are located primarily in Connecticut,  Maine,  Massachusetts
and New Hampshire.






                                                      F-21


<PAGE>















                     REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Protection One, Inc.

         We have audited the  accompanying  statements  of  operations  and cash
flows of  Westinghouse  Security (a predecessor of Protection One, Inc.) for the
52 weeks ended  December  20,  1995,  and the 53 weeks ended  December 30, 1996.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

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

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material  respects,  the results of its operations and cash flows
of  Westinghouse  Security (a  predecessor  of Protection  One, Inc.) for the 52
weeks ended  December 20,  1995,  and the 53 weeks ended  December 30, 1996,  in
conformity with generally accepted accounting principles.




                                                          ARTHUR ANDERSEN LLP


Kansas City, Missouri
August 22, 1997

                                                      F-22


<PAGE>
<TABLE>



                               WESTINGHOUSE SECURITY


                        STATEMENTS       OF      OPERATIONS
          (Predecessor  financial  statements  for  Protection One, Inc.)

                           (Dollar amounts in thousands)



<CAPTION>

                                                      For the              For the
                                                   53 weeks ended       52 weeks ended
                                                 December 30, 1996    December 20, 1995
<S>                                              <C>                  <C>
Revenues:
     Monitoring and related services                 $  93,765             $74,911
     Installation and other                             17,116              13,799
                                                     ----------            --------
        Total revenues                                 110,881              88,710

Costs and expenses:
     Monitoring and related services                    24,987              16,843
     Other                                                 973                 437
                                                     ------------          ----------
        Total costs and expenses                        25,960              17,280
                                                     ----------            --------

        Gross profit                                    84,921              71,430

Selling, general and administrative expenses            60,166              50,919
Acquisition and transition expense                         101                 101
Amortization of intangibles and depreciation expense    21,613              17,804
                                                     ----------            --------

        Operating income (loss)                          3,041               2,606

Other income/expense:
     Interest expense, net                              10,879              12,159
                                                     ----------            --------
        Loss before income taxes                        (7,838)             (9,553)
                                                     -----------           ---------

Income tax benefit                                       2,978               3,630
                                                     -----------           ---------

        Net loss                                    $   (4,860)            $(5,923)
                                                     ==========             =======

The  accompanying  notes  are  an  integral  part  of  these financial statements.
</TABLE>
                                                      F-23


<PAGE>
<TABLE>




                                          WESTINGHOUSE SECURITY


                                   STATEMENTS     OF    CASH     FLOWS
                 (Predecessor  financial  statements  for  Protection One, Inc.)

                                           (Dollar amounts in thousands)

<CAPTION>

                                                                                  For the              For the
                                                                              53 weeks ended       52 weeks ended
                                                                             December 30, 1996   December 20, 1995
<S>                                                                           <C>                  <C>
Cash flow from operating activities:
    Net loss                                                                  $    (4,860)         $    (5,923)
    Adjustments to reconcile net loss to net cash
       provided by operating activities:
       Depreciation                                                                 1,052                   975
       Amortization of intangibles                                                 20,562                16,829
       Provision for doubtful accounts                                              3,108                 2,542
    Changes in assets and liabilities, net of effects of acquisitions:
           Restricted cash                                                            119                    (5)
           Receivables                                                             (2,170)               (3,449)
           Inventories                                                              1,491                  (755)
           Prepaid expenses and deposits                                             (182)                  311
           Other current assets                                                       (65)                  909
           Accounts payable                                                        (1,835)                  385
           Accrued liabilities                                                      5,876                   922
           Deferred revenue                                                           633                 2,332
                                                                             ------------           -----------
           Net cash provided by operating activities                               23,729                15,073

Cash flows from investing activities:
    Purchases of property and equipment                                            (1,219)               (2,794)
    Subscriber account installations and purchases                                (39,241)              (40,300)
                                                                                ---------             ---------
           Net cash used in investing activities                                  (40,460)              (43,094)

Cash flows from financing activities:
    Funding from Westinghouse                                                      21,880                34,935
    Repayments of long-term debt                                                   (5,146)               (6,806)
                                                                               ----------            ----------
           Net cash provided by financing activities                               16,734                28,129
                                                                               ----------            ----------

Net increase in cash and cash equivalents                                   $           3            $      108
                                                                            =============            ==========

Cash and cash equivalents:
    Beginning of period                                                       $       134           $        26
                                                                              ===========           ===========

    End of period                                                             $       137            $      134
                                                                              ===========            ==========


The  accompanying  notes are an  integral  part of these financial statements.
</TABLE>

                                                      F-24


<PAGE>





                                WESTINGHOUSE SECURITY


                           NOTES TO FINANCIAL STATEMENTS
            (Predecessor financial statements for Protection One, Inc.)
                           (Dollar amounts in thousands)



1.   Background Information and Summary of Significant Accounting Policies

General

     On December  30,  1996,  Western  Resources,  Inc.  ("Western  Resources"),
through  its  indirect  wholly  owned  subsidiary,  WestSec,  Inc.  ("WestSec"),
purchased the assets and assumed  certain  liabilities  comprising  the security
business  of  Westinghouse  Security  Systems  ("WSS")  (the  "Company"),   from
Westinghouse  Electric Corporation  ("Westinghouse").  The historical results of
operations of WSS are presented herein (as predecessor  financial statements for
Protection One, Inc.) and do not reflect the adjustments  related to the Western
Resources'  purchase at December 30, 1996.  Prior to 1996, WSS closed its fiscal
year on December 20.

     WSS provided  alarm  monitoring  services and sold,  installed and serviced
security  alarm  systems   principally   for   residential  and  small  business
subscribers.  Most of the WSS  customers  were in the  southern  portion  of the
United States.

Revenues

     Monitoring  revenues,  generally  derived  from  contracts  for an  initial
noncancelable  term,  are recognized  monthly as services are provided.  Amounts
billed in advance are deferred and are  recognized in the month service  occurs.
Installation  revenues are recognized in the period of installation of the alarm
system.  Service  revenues  are  recognized  in the period that the services are
provided.

Inventories

     Inventories,  comprised of alarm systems and parts,  held for  installation
and service, are stated at the lower of average cost or market. For the 52 weeks
ended December 20, 1995, and the 53 weeks ended December 30, 1996, approximately
$650 and  $1,634,  respectively,  was  charged  to  expense  resulting  from the
writedown of inventory to its respective market values.

Property and Equipment

     Property  and  equipment  is  stated  at cost  and  depreciated  using  the
straight-line  method  over its  estimated  useful  life  (five to ten years for
furniture and other equipment).  When property and equipment is retired or sold,
the cost and the  related  accumulated  depreciation  is  eliminated  from their
respective  accounts.  Gains or losses  from  retirements  and  dispositions  of
property  and  equipment  are  recognized  in the  period  realized.  Repair and
maintenance costs are expensed as incurred.

Income Taxes

     WSS historically  has been included in the consolidated  federal income tax
return filed by Westinghouse. Income taxes have been allocated to WSS as if they
were filing a separate tax return.  WSS accounts for income taxes in  accordance
with  Statement of Financial  Accounting  Standards No. 109 which  requires that
deferred tax assets and  liabilities  be established  for the basis  differences
between the reported  amounts of assets and liabilities for financial  reporting
purposes and income tax purposes.


                                                      F-25


<PAGE>





Advertising Costs

WSS generally expensed broadcast and print advertising costs based on the timing
of the release of the  advertising  materials.  Advertising  costs are generally
recognized upon the first broadcast of the respective advertisement.

Subscriber Accounts

     Subscriber accounts installed are stated at cost. Direct costs of installed
accounts are capitalized.  These direct costs include materials and equipment on
subscriber  premises,  direct  installation labor, and other direct installation
costs.  Accounts  purchased  are  capitalized  at amounts paid to acquire  these
accounts. Such capitalized costs are amortized on a straight-line basis over the
average subscriber life estimated to be ten years.

Goodwill

     Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over 40 years.

Cash and Cash Equivalents

     Westinghouse  historically  performed  cash  management  functions for WSS.
Disbursements  were funded and deposits were swept centrally by Westinghouse and
intercompany accounts were used to accumulate net amounts owed or borrowed.  WSS
maintained certain bank accounts  primarily related to payroll,  permit fees and
customer referral  payments.  The balances of such accounts are included in cash
and cash equivalents in the accompanying balance sheet.

     For purposes of the  statement  of cash flows,  WSS  considered  all highly
liquid  investments  purchased with a remaining maturity of three months or less
at the date acquired to be cash equivalents.

Related Party Transactions

     WSS  received  a  number  of  administrative   and  support  services  from
Westinghouse,  participated in certain Westinghouse  employee benefit plans, and
its  results  of  operations   were   included  in  certain  of   Westinghouse's
consolidated  income tax returns.  Further  information about such relationships
and transactions is included in Notes 2, 3, and 4.

Concentration of Credit Risk

     Financial  instruments which  potentially  subject WSS 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.  WSS extended  credit to its customers in the normal course of
business,  performs  periodic credit  evaluations  and maintains  allowances for
potential credit losses.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  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.

                                                      F-26


<PAGE>





2.  Income Taxes:

     Components of the income tax benefit are as follows:

                                       52 Weeks Ended     53 Weeks Ended
                                      December 20, 1995  December 30, 1996

             Federal-
               Current                     $11,650              $9,462
               Deferred                     (8,865)             (7,172)

             State-
               Current                       1,605               1,303
               Deferred                       (760)               (615)

                 Total                     $  3,630             $2,978
                                           ========             =======

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

                                        52 Weeks Ended         53 Weeks Ended
                                       December 20, 1995      December 30, 1996

  Federal statutory tax rate                 (35)%                 (35)%

  State income taxes, net
   of Federal benefit                         (3)%                  (3)%
                                             ----                  ----
                                             (38)%                 (38)%
                                             ====                  ====

     No cash was paid for income taxes for the 52 weeks ended December 20, 1995,
and the 53 weeks ended December 30, 1996.

3.   Related Party Transactions

     During 1995 and 1996,  WSS  purchased  products  from and sold  products to
other  Westinghouse  operations on a limited basis. WSS was charged directly for
the  costs of  certain  services  that  Westinghouse  provided.  These  services
included  information  system support,  certain  accounting  functions,  such as
transaction processing,  legal services, human resources and telecommunications.
Westinghouse  also  provided  WSS with  other  services,  as  needed,  including
printing,  productivity  and other consulting  services.  For the 52 weeks ended
December 20, 1995, amounts charged for these services were not significant.  For
the 53 weeks ended December 30, 1996,  approximately $1.1 million was charged to
WSS for these services,  primarily for telecommunications.  Historically,  these
transactions  were not  settled in cash,  but instead  recorded in  intercompany
payable  accounts.  Since this obligation was not repaid by WSS to Westinghouse,
amounts accrued were recorded as contributed capital.

     Westinghouse  allocated a portion of its corporate expenses to its business
units  and  subsidiaries.   These  allocated  costs  include  certain  corporate
overhead,  including among others, corporate legal, environmental and insurance.
These  corporate  expenses were allocated  primarily  based on payroll costs and
revenue. Such allocations were not necessarily  indicative of actual results and
it is not practical for  management to estimate the level of expenses that might
have been incurred had WSS operated as a standalone entity. Amounts allocated to
WSS by Westinghouse approximated $660 and $802 in 1995 and 1996, respectively.

4.   Employee Benefit Plans

     WRSB  maintained  savings plans which  qualify under Section  401(k) of the
Internal  Revenue  Code.  The  savings  plans  allowed  eligible   employees  to
contribute  up to 15% of their income on a pretax  basis to such savings  plans.
WSS,  at its  discretion,  may  have  elected  to  match  50% of the  employee's
contribution  up to the first 6% of the employee's  compensation.  The charge to
operations for WSS' matching contribution approximated $376 and $449 in 1995 and
1996, respectively.

                                                      F-27


<PAGE>


5.   Commitments and Contingencies

     WSS leased office space and other equipment under noncancellable  operating
leases that require aggregate minimum future rentals of:

Year ending December 31
  1997............................................                  $2,206
  1998............................................                   1,739
  1999............................................                   1,248
  2000............................................                     882
  2001............................................                     642
  Thereafter......................................                   1,701
                                                                   -------
                                                                    $8,418

     Total rental  expense  recognized for the 52 weeks ended December 20, 1995,
and the 53 weeks ended December 30, 1996, for operating leases was approximately
$3,356 and $3,409, respectively.

     During the 52 weeks ended December 31, 1995, WSS recognized  losses related
to a remaining purchase  commitment of $650 based upon management's  estimate of
the current market value of certain equipment  inventory which was substantially
less than the remaining contractual commitment.

     WSS was a party to claims  and  matters  of  litigation  incidental  to the
normal course of its business.  The  resolution of these matters is not expected
to have a material  adverse  effect on WSS's  financial  position  or results of
operations.


                                                      F-28


<PAGE>
<TABLE>




                                           PROTECTION ONE, INC. AND SUBSIDIARIES

                                      SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                               (Dollar amounts in thousands)

<CAPTION>
                                             Balance at                          Charged to
                                             beginning      Charged to costs       other                              Balance at
           Description                       of period        and expenses       accounts (a)       Deductions (b)   end of period
                                             ---------        ------------       --------           ----------       -------------
<S>                                         <C>               <C>                  <C>                <C>            <C>
Year ended December 31, 1996
Allowances deducted from assets
for doubtful accounts . . . . . . . . . .   $     50          $   184              $4,179             $   -               $4,413
Year ended December 31, 1997
Allowances deducted from assets
for doubtful accounts . . . . . . . . . .      4,413            3,657               4,578             (7,441)              5,207


(a) Allowances recorded on receivables purchased in conjunction with acquisition of customer accounts.
(b) Results from write-offs of accounts receivable.

                                                          S-1

</TABLE>
<PAGE>
<TABLE>

                                        WESTINGHOUSE SECURITY (PREDECESSOR ENTITY)

                                      SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                               (Dollar amounts in thousands)

<CAPTION>
                                             Balance at                            Charged to
                                             beginning        Charged to costs       other                             Balance at
           Description                       of period          and expenses      accounts (a)     Deductions (b)    end of period
                                             ---------          ------------      --------         ----------        -------------
<S>                                          <C>               <C>                <C>              <C>               <C>
52 weeks ended December 20, 1995
Allowances deducted from assets
for doubtful accounts . . . . . . . . . .     $   454            $2,542             $  -             $(340)               $2,656
53 weeks ended December 30, 1996
Allowances deducted from assets
for doubtful accounts . . . . . . . . . .       2,656             3,108                -            (1,585)                4,179


(a) Allowances recorded on receivables purchased in conjunction with acquisition of customer accounts.
(b) Results from write-offs of accounts receivable.
</TABLE>



                                                          S-2


<PAGE>






                                        SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          PROTECTION ONE, INC.
                                          PROTECTION ONE ALARM MONITORING, INC.


                                               By:

                                                   John W. Hesse
                                                   Executive Vice President and
                                                   Chief Financial Officer
Date: March 26, 1998
<TABLE>


                  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 registrant and in the capacities and on the dates indicated.

<CAPTION>

               Signature                                   Title                              Date
<S>                                     <C>                                          <C>
                                        President, Chief Executive Officer           March 26, 1998
-----------------------------------
James M. Mackenzie, Jr.                 and Director (principal executive
                                        officer)

                                        Executive Vice President,                    March 26, 1998

John W. Hesse                           Chief Financial Officer and Secretary
                                        (principal financial and accounting
                                        officer)


                                        Director                                     March 26, 1998
Robert M. Chefitz

                                        Director                                     March 26, 1998
James Q. Wilson

                                        Director                                     March 26, 1998

Ben Enis

                                        Director                                     March 26, 1998

Steven L. Kitchen


                                        Director                                     March 26, 1998
Carl M. Koupal, Jr.

                                        Director                                     March 26, 1998
Peter C. Brown


                                        Director                                     March 26, 1998
Howard A. Christensen


                                        Director                                     March 26, 1998
Joseph J. Gardner

                                        Director                                     March 26, 1998
William J. Gremp


                                        Director                                     March 26, 1998
John C. Nettles

                                        Director                                     March 26, 1998
Jane Dresner Sadaka



</TABLE>
<PAGE>



<TABLE>


                                               Exhibit List
<CAPTION>


Exhibit Number                                                Exhibit Description
<S>               <C>
2.1               Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"),
                  between Western Resources and POI (incorporated by reference to Exhibit 2.1 to the
                  Current Report on Form 8-K filed by POI3 and Monitoring4 dated July 30, 1997 (the
                  "July 1997 Form 8-K")).

2.2               Amendment No. 1 dated October 2, 1997, to the Contribution Agreement
                  (incorporated by reference to Exhibit 99.1 to the Current Report of Form 8-K filed
                  by POI and Monitoring dated October 2, 1997).

2.3               Assignment and Assumption Agreement (Centennial Security Holdings, Inc.) dated
                  as of November 24, 1997, among Western Resources, Westar Capital, Inc. ("Westar
                  Capital"), Westar Security, Inc. ("Westar Security") and POI (incorporated by
                  reference to Exhibit 2.3 to the Current Report on Form 8-K filed by POI and
                  Monitoring dated November 24, 1997 (the "November 1997 Form 8-K")).

2.4               Assignment and Assumption Agreement (Guardian International, Inc.) dated as of
                  November 24, 1997, among Western Resources, Westar Capital, Westar Security
                  and POI (incorporated by reference to Exhibit 2.4 to the November 1997 Form 8-K).

2.5               Stock Purchase Agreement dated as of October 2, 1997, among Centennial Security
                  Holdings, Inc. ("Centennial"), the shareholders of Centennial and Westar Capital
                  (incorporated by reference to Exhibit 2.5 to the November 1997 Form 8-K).

2.6               Stock Subscription Agreement dated as of October 4, 1997, between Guardian
                  International, Inc. ("Guardian") and Westar Capital (incorporated by reference to
                  Exhibit 2.6 to the November 1997 Form 8-K).

3.5               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               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).

3.3               Certificate of Incorporation of Monitoring, as amended (incorporated by reference
                  to Exhibit 3.2 to the Registration Statement of 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")).

3.4               Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual
--------
3 The Commission File Number of POI is 0-24780.
4  The   Commission   File  Number  of  Protection  One  Alarm Monitoring is 33-73002-01.

                  Report on Form 10-K filed by POI and,  inter alia,  Monitoring
                  for the year ended September 30, 1994).

4.1               Indenture dated as of May 17, 1995, among Monitoring, as Issuer, POI, inter alia,
                  as Guarantor, and The First National Bank of Boston ("FNBB"), as Trustee
                  (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4
                  (Registration No. 33-94684) originally filed by POI and, inter alia, Monitoring on
                  July 18, 1995 (the "1995 Form S-4")).

4.2               First Supplemental Indenture dated as of July 26, 1996, among Monitoring, as
                  Issuer, POI, inter alia, as Guarantor and State Street Bank and Trust Company
                  ("SSBTC") as successor to FNBB as Trustee (incorporated by reference to Exhibit
                  4.2 to the Annual Report on Form 10-K filed by POI and Monitoring for the year
                  ended September 30, 1996 (the "Fiscal 1996 Form 10-K")).

4.3               Second Supplemental Indenture dated as of October 28, 1996, among Monitoring
                  as Issuer, POI inter alia, as Guarantor and SSBTC as Trustee (incorporated by
                  reference to Exhibit 4.3 to the Fiscal 1996 Form 10-K).

4.4               Subordinated Debt Shelf Indenture dated as of August 29, 1996, among Monitoring
                  as Issuer, POI as Guarantor and SSBTC as Trustee (incorporated by reference to
                  Exhibit 4.3 to the August 1996 Form S-3).

4.5               Supplemental Indenture No. 1 dated as of September 20, 1996, among Monitoring
                  as Issuer, POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by
                  reference to Exhibit 4.1 to the Current Report on Form 8-K filed by POI and
                  Monitoring and dated September 20, 1996 (the "September 1996 Form 8-K")).

4.6               Supplemental Indenture No. 2 dated as of October 28, 1996, among Monitoring as
                  Issuer, POI, inter alia, as Guarantor and SSBTC as Trustee (incorporated by
                  reference to Exhibit 4.6 to the Fiscal 1996 Form 10-K).

4.7               Amended and Restated Credit Agreement dated as of June 7, 1996, among
                  Monitoring, Heller Financial, Inc. ("Heller Financial") as Agent and the financial
                  institutions signatory thereto (the "Lenders") (incorporated by reference to Exhibit
                  10.2 to the Quarterly Report on Form 10-Q filed by POI and Monitoring for the
                  quarter ended June 30, 1996).

4.8               Consent and First Amendment to Credit Agreement dated as of September 16, 1996,
                  among Monitoring, Heller Financial as Agent and the Lenders (incorporated by
                  reference to Exhibit 10.1 to the September 1996 Form 8-K).

4.9               Second Amendment to Amended and Restated Credit Agreement dated as of March
                  31, 1997, among Monitoring, Heller Financial as Agent and the Lenders
                  (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
                  filed by POI and Monitoring for the quarter ended March 31, 1997).

4.10              Third Amendment to Amended and Restated Credit Agreement dated as of
                  September 30, 1997, among Monitoring, Heller Financial as Agent and the Lenders
                  (incorporated by reference to Exhibit 4.10 to the Fiscal 1997 Form 10-K.)

4.11              Form of Revolving Note executed by Monitoring in favor of each Lender pursuant
                  to the Amended and Restated Credit Agreement filed as Exhibit 4.7 (incorporated
                  by reference to Exhibit 4.9 to the Fiscal 1996 Form 10-K).

4.12              Amended and Restated Guaranty dated as of June 7, 1996, executed by POI in favor
                  of Heller Financial as Agent (incorporated by reference to Exhibit 4.10 to the Fiscal
                  1996 Form 10-K).

4.13              Amended and Restated Stock Pledge Agreement dated as of June 7, 1996, between
                  POI and Heller Financial as Agent (incorporated by reference to Exhibit 4.11 to the
                  Fiscal 1996 Form 10-K).

4.14              Amended and Restated Security Agreement dated as of June 7, 1996, between
                  Monitoring and Heller Financial as Agent (incorporated by reference to Exhibit 4.12
                  to the Fiscal 1996 Form 10-K).

4.15              Amended and Restated Continuing Security Interest and Conditional Assignment of
                  Patents, Trademarks, Copyrights and Licenses dated as of June 7, 1996, between
                  Monitoring and Heller Financial as Agent (incorporated by reference to Exhibit 4.13
                  to the Fiscal 1996 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              Amended and Restated Stockholders' Agreement dated as of August 15, 1994,
                  among POI and the stockholders of POI named therein (incorporated by reference
                  to Exhibit 10.42 to the Registration Statement of Form S-1 (Registration No. 33-
                  81292) originally filed by POI on July 8, 1994).

10.3              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")).

10.4              Registration Rights Agreement dated as of November 3, 1993, among Monitoring,
                  POI, certain former subsidiaries of Monitoring and Bear, Stearns & Co., Inc.
                  (incorporated by reference to Exhibit 4.4 to the 1993 Form S-4).

10.5              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).

10.6              Common Stock Registration Rights Agreement dated May 17,1995, among POI,
                  Morgan Stanley & Co. Incorporated and Montgomery Securities (incorporated by
                  reference to Exhibit 10.41 to the 1995 Form S-4).


10.7              Employment Agreement dated as of November 24, 1997, between Protection One
                  and James M. Mackenzie, Jr. (incorporated by reference to Exhibit 10.4 to the
                  November 1997 Form 8-K).

10.8              Employment Agreement dated as of November 24, 1997, between Protection One
                  and John W. Hesse (incorporated by reference to Exhibit 10.5 to the November 1997
                  Form 8-K).

10.9              Employment Agreement dated as of November 24, 1997, between Protection One
                  and John E. Mack, III (incorporated by reference to Exhibit 10.6 to the November
                  1997 Form 8-K).

10.10             Employment Agreement dated as of November 24, 1997, between Protection One
                  and Thomas K. Rankin (incorporated by reference to Exhibit 10.7 to the November
                  1997 Form 8-K).

10.11             Employment Agreement dated as of November 3, 1993, between Monitoring and
                  George A. Weinstock (incorporated by reference to Exhibit 10.13 to the 1993 Form
                  S-4).

10.12             Non-Competitive and Non-Solicitation Agreement dated as November 3, 1993,
                  between Monitoring and George A. Weinstock (incorporated by reference to Exhibit
                  10.14 to the 1993 Form S-4).

10.13             Consulting Agreement dated as of February 19, 1996, between POI and Dr. Ben Enis
                  (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q
                  filed by POI and Monitoring for the quarter ended June 30, 1996).

10.14             1994 Stock Option Plan of POI, as amended (incorporated by reference to Exhibit
                  10.23 to the Fiscal 1996 Form 10-K).

10.15             1997 Long-Term Incentive Plan of POI (incorporated by reference to Appendix F
                  to POI's proxy statement dated November 7, 1997).

10.16             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).

10.17             Agreement for Purchase and Sale of Assets, dated May 25, 1995, between Alert
                  Centre, Inc. and Monitoring (incorporated by reference to Exhibit 4.2 to the 1995
                  Form S-4).

10.18             Agreement to Purchase and Sell Stock dated as of May 23, 1996, among Metrol, the
                  persons named therein as the "Shareholders" (the "Metrol Shareholders"),
                  Monitoring and POI (incorporated by reference to Exhibit 2.1 to the Registration
                  Statement on Form S-3 (Registration NO. 33-5849) originally filed by POI on June
                  12, 1996 (the "June 1996 Form S-3)).

10.19             Amendment No. 1 to Agreement dated as of June 28, 1996, among Metrol, the
                  Metrol Shareholders, Monitoring and POI (incorporated by reference to Exhibit 2.2
                  to the June 1996 Form S-3).

10.20             Escrow Agreement dated May 31, 1996, among Metrol, the Metrol Shareholders,
                  Monitoring, POI and First National Bank of Denver, N.A. as the Escrow Agent
                  (incorporated by reference to Exhibit 2.3 to the Current Report on Form 8-K filed
                  by POI and Monitoring dated June 7, 1996 (the "June 1996 Form 8-K)).*

10.21             Registration Rights Agreement dated as of June 28, 1996, among
                  POI and the Metrol Shareholders  (incorporated by reference to
                  Exhibit 99.1 to the June 1996 Form 8-K).

10.22             Stock Option Agreement dated as of July 30, 1997, between Western Resources and
                  Protection One (incorporated by reference to Exhibit 10.1 to the July 1997 Form 8-K).

10.23             Option and Voting Agreement dated as of July 30, 1997, between Western
                  Resources and Protection One (incorporated by reference to Exhibit 10.2 to the July
                  1997 Form 8-K).

10.24             Promissory Note dated as of March 2, 1998 between Westar Capital, Inc, and
                  Protection One (incorporated by reference to Exhibit 99.1 to the Current Report on
                  Form 8-K filed by POI and Monitoring dated March 17, 1998.)

16.1              Letter from Coopers & Lybrand to the Securities and Exchange Commission re:
                  Change in Certifying Accountant (incorporated by reference to Exhibit 16 to
                  Amendment No. 1 to the Current Report on Form 8-K filed by POI and Monitoring
                  dated February 5, 1998.)

21.1*             Subsidiaries of POI and Monitoring.

23.1*             Consent of Arthur Andersen LLP.

27*               Financial Data Schedule.


*                 Filed herewith.

</TABLE>
<PAGE>