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

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FORM 10-K

|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|                                                                 | For the fiscal year ended December 31, 2003                                             
|o                                                                | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                                to

|1-12181-01(Commission File Number)                                                                     |  | 1-12181(Commission File Number)                                                                       
|------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------
|Protection One, Inc.(Exact Name of Registrant as Specified in Charter)                                 |  | Protection One Alarm Monitoring, Inc.(Exact Name of Registrant as Specified in Charter)               
|Delaware(State of Other Jurisdiction
of Incorporation or Organization)                                 |  | Delaware(State of Other Jurisdiction
of Incorporation or Organization)                                
|93-1063818(I.R.S. Employer Identification No.)                                                         |  | 93-1064579(I.R.S. Employer Identification No.)                                                        
|818 S. Kansas Avenue, Topeka, Kansas 66612(Address of Principal Executive Offices,
Including Zip Code) |  | 818 S. Kansas Avenue, Topeka, Kansas 66612(Address of Principal Executive Offices,
Including Zip Code)
|(785) 575-1707(Registrant's Telephone Number,
Including Area Code)                                     |  | (785) 575-1707(Registrant's Telephone Number,
Including Area Code)                                    

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

Title of Each Class

Name of Each Exchange On Which RegisteredNone

None


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

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


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

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

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

The aggregate market value of common stock of Protection One, Inc. held by nonaffiliates on June 30, 2003 (based on the last sale price of such
shares on the New York Stock Exchange) was $11,790,755.

As
of March 15, 2004, Protection One, Inc. had 98,282,679 shares of Common Stock outstanding, par value $0.01 per share. As of such date, Protection One Alarm
Monitoring, Inc. had outstanding 110 shares of Common Stock, par value $0.10 per share, all of which shares were owned by Protection One, Inc. Protection One Alarm
Monitoring, Inc. meets the conditions set forth in General Instructions I (1)(a) and (b) for Form 10-K and is therefore filing this form with the reduced disclosure
format set forth therein. Protection One's sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring's wholly owned subsidiaries, as such there are no separate financial
statements for Protection One Alarm Monitoring, Inc.



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TABLE OF CONTENTS

|         |  |                                                                                       |  | Page
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                              |  | 3   
|Item 2.  |  | Properties                                                                            |  | 21  
|Item 3.  |  | Legal Proceedings                                                                     |  | 21  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 22  
|PART II 
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                 |  | 22  
|Item 6.  |  | Selected Financial Data                                                               |  | 23  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 25  
|Item 7A. |  | Qualitative and Quantitative Disclosure About Market Risk                             |  | 50  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 51  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 96  
|Item 9A. |  | Controls and Procedures                                                               |  | 96  
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrants                                   |  | 97  
|Item 11. |  | Executive Compensation                                                                |  | 100 
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 109 
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 110 
|Item 14. |  | Principal Accountant Fees and Services                                                |  | 110 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  | 111 

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PART I        FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the materials incorporated by reference herein include "forward-looking statements" intended to qualify for
the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified as such because the context of the
statement includes words such as we "believe," "expect," "anticipate," "will" or other words of similar import. Similarly, statements herein that describe our objectives, plans or goals also are
forward-looking statements. Such statements include those made on matters such as our earnings and financial condition, litigation, accounting matters, our business, our efforts to consolidate and
reduce costs, our customer account acquisition strategy and attrition, our efforts to implement new financial and human resources software, our liquidity and sources of funding and our capital
expenditures. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Important
factors that could cause actual results to differ materially from our expectations include, among others, the factors discussed in Item 1, "BusinessRisk Factors." We continue to
face liquidity problems caused by our significant debt burdens and continuing net losses. The consummation of the sale of its ownership interests in us by Westar Energy, Inc., which we refer to
as Westar Energy, our former majority owner that beneficially owned approximately 88% of the our common stock, to POI Acquisition, L.L.C. and POI Acquisition I, Inc., entities formed by
Quadrangle Capital Partners L.P., Quadrangle Select Partners L.P., Quadrangle Capital Partners-A L.P. and Quadrangle Master Funding Ltd., which we refer to collectively as
Quadrangle, and the assignment of Westar's rights and obligations as the lender under our revolving credit facility with its wholly owned subsidiary, Westar Industries, Inc., to POI
Acquisition, L.L.C., is expected to materially adversely affect our financial position, results of operations and liquidity, and we may need to restructure our indebtedness in an
out-of-court proceeding and/or seek the protection of federal bankruptcy laws to reorganize our debts. Statements made in the Form 10-K regarding the sale by
Westar Energy and its possible effects on us also constitute forward-looking statements. The forward-looking statements included herein are made only as of the date of this report and we undertake no
obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

ITEM 1.    BUSINESS

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

Westar's Sale of Our Stock and Assignment of its Rights and Obligations in the Revolving Credit Facility

Westar Energy is a public electric utility and is regulated by the Kansas Corporation Commission, or KCC. Westar Energy, along with its wholly owned subsidiary,
Westar Industries, Inc., which we refer to collectively as Westar, owned approximately 88% of the common stock of Protection One and provided us with a revolving credit facility.

On
February 17, 2004, Westar Industries, Inc. consummated the sale of approximately 87% of the issued and outstanding shares of our common stock to POI Acquisition
I, Inc., a wholly owned subsidiary of POI Acquisition, L.L.C. POI Acquisition, L.L.C. and POI Acquisition I, Inc. are entities formed by Quadrangle. Approximately 1% of our common stock,
representing shares underlying

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restricted
stock units granted to current and former employees of Westar, was retained by Westar. As part of the sale transaction, Westar also assigned its rights and obligations as the lender under
our revolving credit facility, which had an outstanding principal balance of $215.5 million, to POI Acquisition, L.L.C. Quadrangle paid approximately $122.2 million to Westar as
consideration for the common stock, revolving credit facility and accrued interest, and Westar could receive up to an additional $39.2 million that is contingent upon certain potential
post-closing events.

In
addition, pursuant to the terms of the purchase agreement governing the sale transaction, dated as of December 23, 2003, among POI Acquisition, L.L.C., Westar Industries and
Westar Energy, Westar's designees on our Board of Directors, Bruce A. Akin, James T. Clark, Greg Greenwood, Larry D. Irick and William B. Moore, resigned from our Board of
Directors, effective as of the closing of the sale transaction.

In
connection with the closing of the sale transaction described above, we announced, among other things, the (i) retention of Houlihan Lokey Howard & Zukin Capital to
assist us with our evaluation of the effects of the sale transactions, (ii) execution of two standstill agreements with POI Acquisition, L.L.C. and POI Acquisition I, Inc., and
(iii) deferral of payment of the semi-annual interest payment due on February 17, 2004 on the outstanding $190.9 million aggregate principal amount of our
73/8% senior notes due in 2005.

We
also announced that Donald A. Johnston resigned from our Board of Directors, effective as of the closing of the sale transaction.

See
further discussion relating to this sale and its impact on us in "Matters to Consider" below.

Matters to Consider

We have reported losses for the past several years. Westar Energy has consummated the sale of its equity interest in us and the assignment of its rights and
obligations in the credit facility that it provided to us to Quadrangle. We refer to such credit facility as the revolving credit facility. A primary financing source for us has been the revolving
credit facility, and additional credit under such facility has been eliminated by a standstill agreement executed by Quadrangle and us. Payments made to us by Westar Energy under a tax sharing
agreement between Westar and us were another important source of liquidity for us, and except for amounts owed with respect to losses we incurred prior to leaving the Westar consolidated tax group as
a result of Westar selling its interest in us, we will no longer receive payments from Westar Energy under the tax sharing agreement. We have evaluated these conditions and events in establishing our
operating plans. In addition to the plans and strategies noted under "Overview" below, we plan to carefully monitor the level of investment in new customer accounts and continue control of operating
expenses and capital expenditures. The sale by Westar Energy will have a material adverse effect upon our financial position and liquidity, and we may need to restructure our indebtedness in an
out-of-court proceeding and/or seek the protection of federal bankruptcy laws to reorganize. See "Risk Factors," below, for a further discussion of these and other important
matters.

We
continue to face liquidity problems caused by our significant debt burden and continuing net losses. Absent recapitalization and restructuring our debts, management believes our
projected cash flow will be insufficient to support our current debt balances, which may be accelerated or which we are required to offer to repurchase as a result of the change in control, and
related interest obligations. Our independent public accountants included in their report on our consolidated financial statements for the fiscal year ended December 31, 2003 explanatory
language that describes the significant uncertainty about our ability to continue as a going concern due to recurring losses from operations, deficiency in working capital, inability to obtain ongoing
financing and breach of covenants on outstanding debt subsequent to year end.

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We
have retained Houlihan Lokey Howard & Zukin Capital as our financial advisor and have begun preliminary discussions regarding a proposed restructuring with Quadrangle and its
affiliates, the lenders under our revolving credit facility, and certain holders of our publicly-held debt. If an agreement with such parties is reached, a resulting restructuring plan may
be presented for judicial approval under Chapter 11 of the U.S. Bankruptcy Code, which provides for companies to reorganize and continue to operate as going concerns. Discussions with Quadrangle and
other debt holders are in the preliminary stages, and there can be no assurance that an agreement regarding financial restructuring will be reached or what other actions we may need to take, including
selling assets, to meet our liquidity needs.

As
part of the restructuring initiative, we have deferred payment of the semi-annual interest payment that was due on February 17, 2004 on the outstanding
$190.9 million aggregate principal amount of our 73/8% senior notes. If we do not make this interest payment within the 60-day interest payment grace period available
under the 73/8% senior notes, the trustee or the holders of such senior notes may seek to exercise certain remedies available to them under the indenture governing the notes, including,
without limitation, acceleration of the indebtedness, which acceleration, if not rescinded or satisfied, would cause cross defaults under our other debt instruments. If such acceleration should occur,
we do not have the funds available to repay the indebtedness, and we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

In
addition, as a result of Westar's sale of its interests in us, the indenture relating to our 135/8% senior subordinated discount notes requires us to give notice of our
intention to repurchase the notes, which had aggregate outstanding principal of $29.9 million as of March 15, 2004, within 30 days following the date of a change in control, and
to consummate the repurchase within 60 days of such notification. We have not given notice of our intention to repurchase these notes, and this inaction constitutes a covenant breach under the
notes' indenture, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default under the indenture. Furthermore, upon any such event of
default, the trustee or the holders of such senior subordinated discount notes may seek to exercise certain remedies available to them under the indenture governing the notes, including, without
limitation, acceleration of the notes, which acceleration, if not rescinded or satisfied, would cause a cross default to be triggered under the indenture for our 81/8% senior
subordinated notes, which had aggregate outstanding principal of $110.3 million as of March 15, 2004. If such acceleration and cross default should occur, we do not have the funds
available to repay the indebtedness, and we could be
forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

Furthermore,
as a result of Westar's sale of its interests in us, the $215.5 million outstanding under the revolving credit facility is in default. We entered into a standstill
agreement with Quadrangle, pursuant to which, among other things, Quadrangle agreed to waive the change in control default and other specified covenant breaches for a period not to exceed
90 days, and we agreed that we could not borrow any additional amounts under the revolving credit facility. Upon the expiration or termination of this standstill agreement, Quadrangle may
exercise its rights under the revolving credit facility and declare the indebtedness to be due and payable. Furthermore, acceleration of our revolving credit facility, if not rescinded or satisfied,
would cause cross defaults under our other debt instruments. If such acceleration should occur, we would not have the funds available to repay the indebtedness, and we could be forced to seek relief
under the U.S. Bankruptcy Code or an out-of-court restructuring.

Stockholders
and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this
Form 10-K have not occurred. If we seek an out-of-court restructuring, there can be no assurances as to whether or not such restructuring would be successful.

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See
also "Risk Factors," below, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources," Item 8,
Note 5 "Long-Term Debt," Item 8, Note 15 "Subsequent Events" and Item 8, Note 17 "Going Concern and Management's Plans" for further discussion.

Overview

Protection One is a leading provider of property monitoring services, providing electronic monitoring and maintenance of alarm systems to approximately
1.0 million customers as of December 31, 2003. Our revenues are generated primarily from recurring monthly payments for monitoring and maintaining the alarm systems that are installed in
our customers' homes and businesses. We provide our services to single family residential, commercial, wholesale and multifamily residential customers. At December 31, 2003, our customer base
composition was as follows:

Market Segment

Percentage of TotalSingle family and commercial

53.1
%Wholesale

14.9Protection One North America Total

68.0Multifamily/Apartment

32.0Total

100.0
%


Our
company is divided into two business segments:

Protection One North America,which we refer to as North America, generated approximately $239.0 million, or 86.3%, of our revenues
in 2003 and is comprised of our retail alarm monitoring business, which serves residential and commercial customers directly, and our wholesale monitoring business, which provides alarm monitoring
services to independent alarm companies.

Network Multifamily,which we refer to as Multifamily, generated approximately $38.1 million, or 13.7%, of our revenues in 2003 and
is comprised of our alarm monitoring business servicing apartments, condominiums and other multifamily dwellings.

Financial
information for each of our business segments is presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsSegment
Information" and in Item 8, Note 13 "Segment Reporting" and is incorporated herein by reference.

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

New software will be required.During 2003 we began the process of replacing our accounting, human resources, inventory
management, and accounts payable software. Implementation of new software is required as a result of Westar's disposition of its investment in us and has commenced in the first quarter of 2004.

Payment of transaction-related bonuses and fees.In order to retain the services of numerous employees who, as a result of
Westar's interest in exploring strategic alternatives for divesting its ownership interest in us, may have felt uncertain about our future ownership, management and

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direction,
we entered into retention and severance arrangements in 2003 with approximately 190 employees to provide incentives for these employees to remain with us through the sales process. On
October 31, 2003, we paid approximately $5.1 million to those employees who fulfilled their obligation related to the retention agreement. Additional severance amounts of up to an
aggregate of approximately $11.0 million may also be paid under these arrangements to those employees, if any, who are terminated within a defined period following the change in control that
occurred on February 17, 2004. No significant amounts have been expensed by us relating to the severance arrangements.

Upon
the change in control on February 17, 2004, an additional $11.0 million was paid to executive management. In addition, upon the change in control, fees and expenses of
$3.5 million were paid to the financial advisor to our Special Committee of the Board of Directors. As of December 31, 2003, no amounts had been expensed relating to these additional
payments to executive management or to the financial advisor to our Special Committee. As of December 31, 2003, we had expensed approximately $1.2 million for legal and other
professional fees related to the change in control. In addition, in February 2004 we recorded an expense of $1.6 million for director and officer insurance coverage that lapsed upon the
change in control.

Attrition and customer creation.In 2003, we had a net loss of 25,378 customers in our customer base. Our North America
segment had a net loss of 31,295 customers while our Multifamily segment had a net increase of 5,917 customers. The North America segment decline resulted from attrition, the decision to add new
customers at reasonable costs through our internal sales force and our focus on operational efficiencies. Our customer acquisition strategy for our North America segment relies primarily on our
internal sales force, which generated 50,731 accounts in 2003 compared to 45,642 accounts in 2002, and our marketing alliance with BellSouth Telecommunications, Inc., which we refer to as
BellSouth. See "Sales and Marketing" and "Attrition" below.

Dispute regarding tax sharing payments.We have been a member of Westar's consolidated tax group since 1997. During that
time, Westar made payments to us for tax benefits attributable to us and utilized by
Westar in its consolidated tax return pursuant to the terms of a tax sharing agreement. Following the consummation of the sale of Westar's ownership interests in us, we are no longer a part of the
Westar consolidated tax group.

We
and Westar did not, however, terminate our tax sharing agreement, and based on discussions with Westar and its counsel, there are several areas of potential dispute between us
regarding Westar's obligations under the terms of the tax sharing agreement. The most material of these potential disputes involve (i) the amount of any tax sharing payments that would be due
to us if Westar decides in the future to elect to treat the sale of its interests in us as a sale of assets under the Internal Revenue Code, (ii) the proper treatment under the tax sharing
agreement of tax obligations or benefits arising out of the transaction in which Westar sold its ownership interests in us, including the impact on future tax sharing payments to us related to the
cancellation of indebtedness income generated by a partial write down of the revolving credit facility prior to closing or the assignment of the revolving credit facility for less than the full amount
outstanding under the facility at closing and (iii) whether tax sharing payments due to us when Westar was subject to alternative minimum tax should be calculated at the alternative minimum tax
rate of 20% or the normal statutory rate of 35% to the extent that Westar has utilized or is reasonably expected to be able to utilize the associated alternative minimum tax credits or otherwise has
received full benefits at normal statutory rates from our losses. We believe that we have strong positions with respect to these items and will aggressively pursue our positions. If we prevail, we may
realize additional tax sharing payments from Westar.

Operations

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

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Centralized Monitoring, Common Technology Platform and Customer Service

Customer Security Alarm Systems.Security alarm systems include many different types of devices installed at customers'
premises designed to detect or react to various occurrences or conditions, such as intrusion or the presence of fire or smoke. These devices are connected to a computerized control panel that
communicates through wireline and/or wireless phone lines to a monitoring facility. In most systems, control panels can identify the nature of the alarm and the areas within a building where the
sensor was activated and can transmit that information to a central monitoring station.

Customer Contracts.Our existing alarm monitoring customer contracts generally have initial terms ranging from two to ten
years in duration, and, in most states, provide for automatic renewals for a fixed period (typically one year) unless we or the customer elect to cancel the contract at the end of its term. Since
2002, most new single family residential customers have been entering into contracts with an initial term of three years and, for most new commercial customers, the initial term is five years.
Typically, customers sign alarm monitoring contracts that include a bundled monthly charge for monitoring and extended service protection, which covers the normal costs of repair of the security
system. Customers may elect to sign an alarm monitoring contract that excludes extended service protection at a reduced monthly charge. A significant percentage of new residential and commercial
customers are also electing to include line security based on cellular technology in their service bundle.

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

Location

Approximate Number of
Customers Monitored

Primary MarketsIrving, TX

330,000

MultifamilyLongwood, FL

140,000

Wholesale/ResidentialWichita, KS

530,000

Residential/Commercial/WholesalePortland, ME

40,000

Commercial/Residential


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

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

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Backup Facility.Our backup facility is in Wichita, Kansas and is a highly secure concrete building.
This fully operable
resource has the ability to backup all mission critical operations normally performed at our primary monitoring center. The structure is equipped with diverse voice and data telecommunication paths,
backup power which includes standby UPS, access control, video surveillance and data vaults. In addition, we have deployed hot redundancy for our entire compliment of equipment essential in the remote
monitoring of security systems we offer. Furthermore, we have replicated the computer systems that are used to maintain our mission critical applications. This facility was purchased with the ability
to be expanded for future internal growth and is actively used for other business related operations.

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

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

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

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



Branch Operations

We maintain approximately fifty-five service branches in North America from which we provide field repair, customer care, alarm response and sales
services, and eleven satellite locations from which we provide field repair services. Our nationwide network of branches operates in some of the largest cities in the United States and plays a
critical role in enhancing customer satisfaction, reducing customer loss and building brand awareness. Repair services generate revenues primarily through

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billable
field service calls and recurring payments under our extended service protection program. By focusing growth in targeted areas we hope to increase the density of our customer base which will
permit more effective scheduling and routing of field service technicians and will create economies of scale.

Sales and Marketing

Our current customer acquisition strategy for our North America segment relies primarily on internally generated sales. In June 2001, we notified most of
our remaining domestic dealers that we were terminating our dealer arrangement with them and therefore would not be extending or renewing their contracts. The number of accounts being purchased
through our dealer program decreased to 135 accounts in 2003 from 1,135 and 7,501 accounts in 2002 and 2001, respectively.

Our
internal sales program for our North America segment was started in February 2000 on a commission only basis with a goal of creating accounts at a cost lower than our external
programs. In 2001, we revised and enhanced our internal sales program, and in 2002, enhanced the benefits package for our sales force. This program utilizes our existing branch infrastructure in
approximately fifty-five markets. The internal sales program for our North America segment generated 50,731 accounts and 45,642 accounts in 2003 and 2002, respectively. We operate a
dedicated telesales center in Wichita from which we respond to questions that customers or potential customers have about our services, support the alliance with BellSouth and provide quality control
follow-up calls to customers for whom we recently provided installation or maintenance services.

We
are a partner in a marketing alliance with BellSouth to offer monitored security services to the residential, single family market and to small businesses in seventeen of the larger
metropolitan markets in the nine-state BellSouth region. The marketing alliance agreement may be terminated by either party upon 180 days notice or earlier upon occurrence of
certain events.

Under
this agreement, we operate as "BellSouth Security Systems from Protection One" from our branches in the nine-state BellSouth region. BellSouth provides us with
information about new owners of single family residences in its territory and of transfers of existing BellSouth customers within its territory. We follow up on the information to create leads for our
sales force. We also market directly to small businesses. We pay BellSouth an upfront royalty for each new contract and a recurring royalty based on a percentage of recurring charges. Approximately
one-fifth of our new accounts created in 2003 and one-fourth of our new accounts created in 2002 were produced from this arrangement. Should we make an assignment for the
benefit of creditors, should an order for relief under Chapter 11 of the United States Bankruptcy Code be entered by a United States Court against us or should a trustee or receiver of any substantial
part of our assets be appointed by any court, or if we are in default with respect to any of the covenants relating to financial performance set forth in the 73/8% senior notes,
BellSouth may seek to terminate the alliance, which could have a material adverse impact on our operating results and on our ability to generate new customers in this territory.

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

Our
Multifamily segment utilizes a salaried and commissioned sales force to produce new accounts. Multifamily markets its services and products primarily to developers, owners and
managers of apartment complexes and other multifamily dwellings. Multifamily sales and marketing activities consist of national and regional advertising, nationwide professional field sales efforts,
prospective acquisition marketing efforts and professional industry-related association affiliation. Services are sold directly to the property owner, and payment is based on a monthly price on a
per-unit basis. Ongoing service for the duration of the lease includes equipment, maintenance, 24-hour monitoring from our

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central
monitoring station, customer service and individual market support. Property owner contracts generally have initial terms ranging from five to ten years in duration, and provide for automatic
renewal for a fixed period (typically five years) unless Multifamily or the customer elects to cancel the contract at the end of its term.

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

Attrition

Customer attrition has a direct impact on our results of operations since it affects our revenues, amortization expense and cash flow. We define attrition as a
ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of the adjustments described below, and the denominator of which is the average number of accounts
for a given period. In some instances, we use estimates to derive attrition data. We make adjustments to lost accounts primarily for the net change, either positive or negative, in our wholesale base
and for accounts which are covered under a purchase price holdback and are "put" back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in
the purchase agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience. Adjustments to lost accounts for purchase holdbacks have been
decreasing because we are purchasing fewer accounts in the types of transactions that create holdbacks. We do not reduce the gross accounts lost during a period by "move in" accounts, which are
accounts where a new customer moves into the premises equipped with the Company's security system and vacated by a prior customer, or "competitive takeover" accounts, which are accounts where the
owner of a premise monitored by a competitor requests that we provide monitoring services.

Our
actual attrition experience shows that the relationship period with any individual customer can vary significantly. Customers' service can be discontinued for a variety of reasons,
including relocation, non-payment, customers' perception of value and competition. A portion of the acquired customer base can be expected to discontinue service every year. Any
significant change in the pattern of our historical attrition experience would have a material effect on our results of operations.

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

Customer
attrition by business segment for the years ended December 31, 2003, 2002 and 2001 is summarized below:

|                                      |  | Customer Account Attrition |  
|------------------------------------- |  | -------------------------- | -
|
|
|North America(a)                      |  | 10.3                       | %
|North America, excluding wholesale(a) |  | 14.6                       | %
|Multifamily                           |  | 6.5                        | %
|Total Company(a)                      |  | 9.1                        | %

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11

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Attrition
decreased in our North America segment in 2003 compared to 2002 for a variety of reasons including:



Competition

The security alarm industry is highly competitive. In North America, there are only four alarm companies that offer services across the United States with the
remainder being either large regional or small, privately held alarm companies. Based on total annual revenues in 2003, we believe the top four alarm companies in North America are:



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

Intellectual Property

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

Regulatory Matters

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



12

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

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

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

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

Risk Management

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

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

Employees

At December 31, 2003, we had approximately 2,300 full-time employees. Our workforce is not unionized.

Access to Company Information

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

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

13

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RISK FACTORS

Cautionary Statements Regarding Future Results of Operations

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

Introduction

We have reported losses for the past several years. Westar, the former owner of 88% of our common stock, has consummated the sale of its equity interest in us and
the assignment of its rights and obligations in our revolving credit facility to Quadrangle. Additionally, a primary financing source has been the revolving credit facility, and additional credit
available under such facility has been eliminated by, among other things, a standstill agreement executed by Quadrangle and us. We have evaluated these conditions and events in establishing our
operating plans. In addition to the plans and strategies noted below, we plan to monitor carefully the level of investment in new customer accounts and to continue control of operating expenses and
capital expenditures. Absent recapitalization and restructuring our debts, management believes that cash flow from operations, coupled with receipts, if any, under the tax sharing agreement and
proceeds from asset sales, if any, will be insufficient to support our current debt balances, which may be accelerated as a result of the change in control, and related interest obligations. (See Item
7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.") Consummation of the sale by Westar could have a material
adverse effect upon our financial position and liquidity, and we may need to restructure our indebtedness in an out-of-court proceeding and/or seek the protection of federal
bankruptcy laws to reorganize. See further discussion of these and other important matters below.

The Westar sale transaction and assignment of rights and obligations under the revolving credit facility triggered an obligation to offer to repurchase our
135/8% senior subordinated discount notes which have outstanding principal of $29.9 million.

As a result of the sale transaction, the indenture relating to our 135/8% senior subordinated discount notes requires us to give notice of our
intention to repurchase the notes, which had aggregate outstanding principal of $29.9 million as of March 15, 2004, within 30 days following the date of a change in control, and
to consummate the repurchase within 60 days of such notification. Under the terms of this indenture, because we have not offered to repurchase such notes, our inaction constitutes a covenant
breach, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default under the notes' indenture. Furthermore, upon any such event of
default, the trustee or the holders of such senior subordinated discount notes may seek to exercise certain remedies available to them under the indenture governing the notes, including, without
limitation, acceleration of the notes, which acceleration, if not rescinded or satisfied, would cause a cross default to be triggered under the indenture for our 81/8% senior
subordinated notes, which had aggregate outstanding principal of $110.3 million as of March 15, 2004. If such acceleration and cross default should occur, we do not have the funds
available to repay the indebtedness, and we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

The Westar sale transaction and assignment of rights and obligations under the revolving credit facility triggered a change in control provision in our revolving credit
facility.

As a result of the sale transaction, the $215.5 million outstanding under the revolving credit facility is in default. We entered into a standstill
agreement with Quadrangle, however, pursuant to which,

14

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among
other things, Quadrangle agreed to waive the change in control default and other specified covenant breaches for a period not to exceed 90 days, and we agreed, among other things, that we
could not borrow any additional amounts under the revolving credit facility. Upon the expiration of this standstill agreement, Quadrangle may exercise its rights under the Credit Facility and declare
the indebtedness to be due and payable. We do not have the funds available to repay the revolving credit facility, and such non-payment would trigger a cross default under the indentures
for our other publicly-held debt. If this should occur, we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

Holders of our 73/8% senior notes and 81/8% senior subordinated notes may assert that Westar's sale transaction and assignment of rights and
obligations under the revolving credit facility triggered the change in control provisions in those indentures.

As a result of the sale transaction, certain holders of our 73/8% senior notes, which had aggregate outstanding principal of $190.9 million
as of March 15, 2004, and 81/8% senior subordinated notes, which had aggregate outstanding principal of $110.3 million as of March 15, 2004, may assert that a
change in control triggering event has occurred as defined in the respective indentures. A change of control triggering event consists of a change in control coupled with the withdrawal of the rating
of the notes or two ratings downgrades by one of certain specified rating agencies provided that such withdrawal or downgrade occurs within 90 days after the date of public notice of the
occurrence of a change in control or the intention to effect a change in control. Such an event would require that we repurchase the notes within 60 days of mailing such offer to repurchase at
101% of aggregate principal amount plus accrued interest. We do not have the available funds to repurchase the notes. If such a triggering event should occur, we do not have the funds available to
repurchase the indebtedness, and we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

A financial restructuring, whether administered though a court proceeding or out-of-court, could substantially dilute or cancel, in whole or in part,
the interests of our stockholders.

If we were to restructure or reorganize our debts or seek relief under the U.S. Bankruptcy Code, such actions could have a material adverse impact on our common
stockholders as we believe they would be subordinate to our senior and subordinated debt in such proceedings.

The Westar sale transaction and assignment of rights and obligations under the revolving credit facility will force us to implement new financial and human resource systems.

As a result of the sale transaction, we will be forced to purchase our own accounting and human resource systems and transition from the Westar systems within
(i) six months from the date of close of the sale for the human resource system and (ii) 12 months from the date of close of the sale for the accounting system. We estimate the
cost to replace those systems to be approximately $2.6 million. We can give no assurances that we will be able to complete such transitions in the time allotted or within our estimated costs.
Failure to do so could have a material adverse impact on our financial condition and results of operations.

The Westar sale transaction and assignment of rights and obligations under the revolving credit facility was accompanied by the resignation of a majority of the members of our
Board of Directors, and no new employment agreements have been entered into with executive management.

As required by the terms of the sale transaction, five Westar-designated members of our Board of Directors resigned concurrently with the closing of the sale
transaction. Another director resigned concurrently for personal reasons, leaving only three directors. Additionally, we entered into a standstill agreement with Quadrangle, which, among other things,
prohibits Quadrangle from appointing directors to the Board for a period not to exceed 90 days if certain conditions are met. We can make

15

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no
guarantees that we can attract additional directors to our Board. Additionally, executive management has not entered into new employment agreements with us, and upon fulfilling their minimum
contractual obligations under their old agreements, may leave after six months has elapsed from the date of the change in control.

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

Quadrangle owns approximately 87% of the outstanding common stock of Protection One as of February 17, 2004. Upon the expiration of the standstill
agreement, it will be able to direct the election of all of our directors and exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or
other business combinations involving us, appointment of our officers, our acquisition or disposition of material assets and our incurrence of indebtedness. Similarly, Quadrangle will continue to have
the power to determine matters submitted to a vote of our stockholders without the consent of other stockholders, to accelerate obligations under the revolving credit facility and to take other
actions that might be favorable to Quadrangle, whether or not these actions would be favorable to us or our stockholders generally.

The Westar sale transaction and assignment of rights and obligations under the revolving credit facility may cause us to focus on short term goals at the expense of
long-term goals.

As a result of the sale transaction and the possibility that we may enter into an out-of-court restructuring or seek relief under the U.S.
Bankruptcy Code, we may focus on business strategies that are in the short-term best interests of us, our stockholders and our creditors but not necessarily in our collective
long-term best interests. This could mean, for example, that a substantial amount of management time may be spent developing relationships with creditors and vendors instead of building
the company, its business and its assets for the long-term. As a result, during this period of time, we may experience
difficulty developing new long-term customers and maintaining relationships with companies with which we do business who may feel uncertain about our future ownership, management and
direction. In addition, we may be unable to retain the services of some of our key employees who may also feel uncertain about our future ownership, management and direction.

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

Westar Energy provides us certain administrative services pursuant to a services agreement, which we refer to as the administrative services agreement (see Item
8, Note 6 "Related Party Transactions"), including accounting, tax, audit, human resources, legal, purchasing and facilities services. The administrative services agreement provides for
continuation of the services during an agreed-upon transition period following the sale of Westar's interest in us. Our cost of obtaining these services from either a third party or by
hiring sufficient staff to perform those services internally may increase and we will incur significant costs to procure and to develop replacement information technology systems.

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

We incurred net losses of $34.4 million in 2003, $880.9 million in 2002 and $86.0 million in 2001. These losses reflect the following, among
other factors:



16

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We
will continue to incur substantial interest expense unless we significantly reduce our debt, which, absent restructuring, is unlikely given our expected cash flow. We do not expect to
attain profitability in the foreseeable future unless we significantly reduce our interest expense and our amortization charges for purchased customer accounts.

We have deferred tax assets that we do not expect to be able to utilize.

Westar Energy has in the past made payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return pursuant to a tax sharing
agreement, which has been an important source of liquidity for us. As a result of the sale transaction whereby Westar sold its investment in us, a substantial portion of our net deferred tax assets,
which were $286.3 million at December 31, 2003, are not expected to be realizable and we are not expected to be in a position to record a tax benefit for losses incurred. We will be
required to record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge will be material and will have a material
adverse effect on our financial condition and results of operations. In addition, as a result of the sale, except for amounts owed with respect to losses we incurred prior to leaving the Westar
consolidated tax group as a result of Westar selling its interest in us, we will no longer receive payments from Westar Energy. In 2003 and 2002, we received aggregate payments from Westar Energy of
$20.0 million and $1.7 million, respectively. The loss of these payments will have a material adverse effect on our cash flow. There are several areas of potential dispute between us
regarding Westar's obligations under the terms of the tax sharing agreement. See "OverviewDispute regarding tax sharing payments" above.

The Westar sale transaction may adversely affect our tax position after the closing.

If Westar does not elect to treat the sale of its equity interest in us to Quadrangle as a sale of assets, the sale of our stock will constitute a
more-than-50-percent change in ownership of the Company within the meaning of Internal Revenue Code Section 382. As a result, our use of
pre-closing tax losses (if any such losses are not used by the Westar consolidated tax group) and certain "built-in losses" in our assets (generally the excess of the tax basis
of such assets over their fair market value) will be significantly limited after the closing of the sale transaction. Such limits will have a material adverse effect on our tax position after the
closing.

If
Westar elects to treat the sale of its equity interests in us to Quadrangle as a sale of assets, the deemed sale of assets will cause a reduction in the tax basis of our assets to an
amount generally equal to the deemed asset sale price. Such a reduction will be significant in amount and will have a material adverse effect on our tax position after the closing of the sale
transaction.

Our debt agreements impose operational restrictions on us.

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



In
each case, the ratio reflects the impact of acquisitions and other capital investments for the entire period covered by the calculation. These debt instruments contain restrictions
based on "EBITDA". The definition of EBITDA varies among the various indentures. EBITDA is generally

17

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derived
by adding to income (loss) before income taxes, the sum of interest expense and depreciation and amortization expense. However, under the varying definitions of the indentures, additional
adjustments are required. Below are the our actual ratios for the quarter ended December 31, 2003:



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

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

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

In
addition, you should be aware that:



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



As
discussed in "Matters to Consider," above, our revolving credit facility is in default due to the sale by Westar of its investment in us on February 17, 2004. Furthermore, the
indentures governing our debt securities require that we offer to repurchase the securities in certain circumstances following a change of control:



18

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As
of December 31, 2003, we had outstanding $29.9 million principal amount of the 135/8% senior subordinated discount notes, $190.9 million principal
amount of the 73/8% senior notes and $110.3 million principal amount of the 81/8% senior subordinated notes.

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

In the first quarter of 2002, we recorded an impairment charge to write-down goodwill and customer accounts to their estimated fair values. The amount
of this charge was approximately $765.2 million, net of $190.7 million tax, of which approximately $543.6 million, net of $72.3 million tax, was related to goodwill and
approximately $221.6 million, net of $118.4 million tax, was related to customer accounts. In addition, we recorded a $90.7 million impairment charge, net of $13.3 million
tax, in the fourth quarter of 2002 to reflect the impairment of all remaining goodwill of our North America segment. The tax benefits from these impairments increased our deferred tax assets by
$204.0 million, most of which are not expected to be realized due to Westar's sale of our common stock. For further information on these impairment charges, see Item 8, Note 14
"Impairment Charges." We have $41.8 million of goodwill associated with our Multifamily segment and $244.7 million in customer accounts recorded on our December 31, 2003 balance
sheet. The remaining amount of goodwill will be required to be tested annually for impairment. We established July 1 as our annual impairment testing date. We completed our annual impairment
testing during the third quarter of 2003 on our Multifamily segment and determined that no additional impairment of goodwill was required as of July 1, 2003. Our North America segment has no
goodwill and, therefore, did not require testing as of July 1, 2003. No impairment charge was recorded in 2003. If we fail future impairment tests for either goodwill or customer accounts, we
will be required to recognize additional impairment charges on these assets in the future. Any such impairment charges could be material.

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

Prior to 2000, we grew very rapidly by acquiring portfolios of alarm monitoring accounts through acquisitions and dealer purchases. Our current strategy is to
reduce the cost of acquiring new accounts by utilizing other customer account acquisition channels such as our internal sales force augmented by traditional marketing support. We compete with major
companies, some of which have greater financial resources than we do, or which may be willing to offer higher prices than us to purchase customer accounts or to increase the amount of investment to
create a new customer. The effect of competition may be to reduce the purchase opportunities available to us, or to increase the price we pay for or invest in customer accounts, which could have a
material adverse effect on our return on investment in such accounts, and on our results of operations, financial condition and ability to service debt.

Should
we seek debt relief either under the U.S. Bankruptcy Code or by way of an out-of-court restructuring, we expect our competitors to use our actions to their
advantage in competing against us for residential and, in particular, commercial sales. Homeowners and businesses that might have contracted with us may be unwilling to do so while we are
restructuring our debts.

We lose some of our customers over time, and the loss of customers may increase if we restructure.

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



19

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

During
2003 our focus on strengthening our operations resulted in a net loss of 25,378 customers or a 2.4% decrease in our customer base from January 1, 2003. During 2002, our
change in focus from growth to strengthening our operations, resulted in a net loss of 59,625 customers or a 5.3% decrease in our customer base from January 1, 2002. While our attrition rate is
decreasing, we continue to lose customers at a faster rate than our rate of adding customers. Some of the reasons for the decrease in attrition in 2003 are discussed in
"BusinessAttrition," above. The net loss of customers was the primary cause of our decline in monitoring and related service revenues in the North America segment of $13.9 million
in 2003 and $47.5 million in 2002. We expect this trend will continue until the efforts we are making to acquire new accounts and further reduce our rate of attrition become more successful
than they have been to date. Until we are able to reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations.

Should
we seek debt relief either under the U.S. Bankruptcy Code or by way of an out-of-court restructuring, we expect to experience higher attrition from
customers unwilling to continue relying on us to provide security monitoring services even though we do not expect our capabilities to provide such services to be affected.

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

The customer account acquisition strategy we are now employing relies primarily on our internal sales force and making alliances such as our strategic alliance
with BellSouth. We have changed our acquisition strategy several times over the past few years attempting to decrease the cost of adding customers and to decrease the rate of attrition from new
accounts. While our present strategy resulted in some improvement in 2003, there can be no assurance that this strategy will be successful. If the strategy is not successful, our customer base could
continue to decline. If successful, the selling costs related to this strategy will increase our expenses and uses of cash. Failure to economically replace customers lost through attrition or
increased cash needs could have a material adverse effect on our business, financial condition, results of operations and ability to service debt obligations.

Should
we make an assignment for the benefit of creditors, should an order for relief under Chapter 11 of the United States Bankruptcy Code be entered by a United States Court against us
or should a
trustee or receiver of any substantial part of our assets be appointed by any court, or if we are in default with respect to any of the covenants relating to financial performance set forth in the
73/8% senior notes, BellSouth may seek to terminate their alliance with us, which could have a material adverse impact on our operating results.

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

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

20

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

A restructuring under the U.S. Bankruptcy Code may affect our ability to maintain, renew or obtain licenses required under state and local regulations.

We hold numerous state and local licenses and permits for the conduct of our business. Should we become involved in a proceeding under the U.S. Bankruptcy Code,
our ability to maintain and renew such licenses and permits could be impaired if governmental authorities seek to terminate such licenses and permits, which could materially and adversely affect our
operations.

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

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

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

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

ITEM 2.    PROPERTIES

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

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

ITEM 3.    LEGAL PROCEEDINGS

Information on our legal proceedings is set forth in Item 8, Note 12 "Commitments and Contingencies" and Note 15 "Subsequent Events" of the Notes to
Consolidated Financial Statements, which are incorporated herein by reference.

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

No matters were submitted to Protection One's stockholders during the fourth quarter of 2003.

PART II

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

Market Price Information

Our common stock was listed on the New York Stock Exchange under the symbol "POI" until the fourth quarter of 2003. Because our stock was trading below $1, we did
not meet listing requirements of the New York Stock Exchange. Since December 4, 2003, our stock has traded on the OTC Bulletin Board under the symbol "POIX". The table below sets forth for each
of the calendar quarters indicated, the high and low sales prices per share of our common stock, as reported by the New York Stock Exchange and the OTC bulletin board, as applicable. All prices are as
reported by the National Quotation Bureau, Incorporated.

High

Low2002:First Quarter

$
2.80

$
2.05Second Quarter


3.32


2.25Third Quarter


3.10


2.46Fourth Quarter


2.82


1.942003:First Quarter

$
2.01

$
1.25Second Quarter


1.59


0.98Third Quarter


1.02


0.73Fourth Quarter


1.17


0.15


Dividend Information

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

Other
than a $7.00 cash distribution paid to holders of record of Protection One common stock as of November 24, 1997, to holders of outstanding options to purchase Protection One
common stock and to holders of warrants exercisable for Protection One common stock, all in connection with the combination of Protection One's and Westar Energy's security businesses in
November 1997, Protection One has never paid any cash dividends on its common stock and does not intend to pay any cash dividends in the foreseeable future. The indentures governing the
81/8% senior subordinated notes due in 2009, the 135/8% senior subordinated discount notes due in 2005 and the credit agreement relating to the revolving credit facility
restrict Protection One Alarm Monitoring's ability to pay dividends or to make other distributions to its corporate parent. Consequently, these agreements restrict our ability to declare or pay any
dividend on, or make any other distribution in respect of, our capital stock.

Number of Stockholders

As of March 15, 2004, there were approximately 128 stockholders of record who held shares of our common stock.

22

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Securities Authorized for Issuance Under Equity Compensation Plans

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

ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited consolidated financial statements and notes to the financial statements of Protection One, which can be found in Item 8. All amounts are
in thousands, except per share and customer data, unless otherwise noted.

|                                                              |                                            | SELECTED CONSOLIDATED FINANCIAL DATA |           
|------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ----------
|
|
|Statements of operations data                                 |                                            |                                      |           
|Revenues                                                      |                                            | $                                    | 277,085   
|Cost of revenues                                              |                                            |                                      | 102,205   
|                                                              |                                            |                                      |           
|Gross profit                                                  |                                            |                                      | 174,880   
|Selling, general and administrative expenses                  |                                            |                                      | 109,261   
|Amortization of intangibles and depreciation expense(b)       |                                            |                                      | 80,252    
|Other charges:                                                |                                            |                                      |           
|                                                              | Loss on impairment of customer accounts(b) |                                      |           
|                                                              | Loss on impairment of goodwill(b)          |                                      |           
|                                                              |                                            |                                      |           
|Operating loss(b)                                             |                                            |                                      | (14,633   
|Interest expense                                              |                                            |                                      | (40,101   
|Gain (loss) on retirement of debt                             |                                            |                                      |          
|Other income                                                  |                                            |                                      | 2,829     
|                                                              |                                            |                                      |           
|Loss from continuing operations before income taxes(b)        |                                            |                                      | (51,905   
|Income tax benefit(b)                                         |                                            |                                      | 17,494    
|                                                              |                                            |                                      |           
|Loss from continuing operations before accounting change(b)   |                                            |                                      | (34,411   
|Loss from discontinued operations, net of taxes               |                                            |                                      |          
|Cumulative effect of accounting change, net of taxes          |                                            |                                      |           
|                                                              | Continuing operations(b)                   |                                      |           
|                                                              | Discontinued operations(b)                 |                                      |           
|                                                              |                                            |                                      |           
|Net loss(b)                                                   |                                            | $                                    | (34,411   
|                                                              |                                            |                                      |           
|Net loss per share of common stock                            |                                            | $                                    | (0.35     
|                                                              |                                            |                                      |           
|Weighted average number of shares of common stock outstanding |                                            |                                      | 98,129,343
|                                                              |                                            |                                      |           

23

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|Consolidated balance sheet data                                  |  |   |           |   |   |           |   |   |           |   |   |           |   |   |           |  
|---------------------------------------------------------------- |  | - | --------- | - | - | --------- | - | - | --------- | - | - | --------- | - | - | --------- | -
|Working capital deficit                                          |  | $ | (148,957  | ) | $ | (12,071   | ) | $ | (2,834    | ) | $ | (27,864   | ) | $ | (27,572   | )
|Customer accounts, net                                           |  |   | 244,744   |   |   | 312,785   |   |   | 719,679   |   |   | 863,961   |   |   | 1,104,081 |  
|Goodwill, net (b)                                                |  |   | 41,847    |   |   | 41,847    |   |   | 763,449   |   |   | 823,663   |   |   | 1,049,996 |  
|Total assets                                                     |  |   | 809,022   |   |   | 837,572   |   |   | 1,748,938 |   |   | 1,930,127 |   |   | 2,512,558 |  
|Long term debt, including capital leases, net of current portion |  |   | 331,874   |   |   | 547,798   |   |   | 584,115   |   |   | 637,181   |   |   | 1,077,152 |  
|Total stockholders' equity                                       |  |   | 146,174   |   |   | 168,147   |   |   | 1,061,776 |   |   | 1,177,455 |   |   | 1,216,920 |  
|Other operating data                                             |  |   |           |   |   |           |   |   |           |   |   |           |   |   |           |  
|Number of customers at end of period                             |  |   | 1,048,320 |   |   | 1,073,698 |   |   | 1,133,323 |   |   | 1,330,980 |   |   | 1,584,445 |  
|Cash flows provided by operations                                |  |   | 59,035    |   |   | 43,391    |   |   | 36,811    |   |   | 99,402    |   |   | 93,448    |  
|Cash flows provided by (used in) investment activities           |  |   | (27,471   | ) |   | (20,943   | ) |   | (7,724    | ) |   | 120,191   |   |   | (273,892  | )
|Cash flows provided by (used in) financing activities            |  |   | 1,865     |   |   | (24,950   | ) |   | (27,879   | ) |   | (223,764  | ) |   | 177,161   |  

---

24

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

Introduction

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



As
you read this section, please refer to our Consolidated Statements of Operations and Comprehensive Loss and accompanying notes found in Item 8. These statements show our operating
results for 2003, 2002 and 2001. In this section, we analyze and explain the significant annual changes of specific line items in the Consolidated Statements of Operations and Comprehensive Loss. We
also suggest you read Item 1, "BusinessRisk Factors" which will help your understanding of our financial condition, liquidity and operations, including our concerns over the impact of the
disposition by Westar Industries of its ownership interest in us and its assignment of its rights and obligations as the lender under the revolving credit facility.

Business Structure

Protection One is a leading provider of property monitoring services, providing electronic monitoring and maintenance of alarm systems to approximately
1.0 million customers as of December 31, 2003. Our revenues are generated primarily from recurring monthly payments for monitoring and maintaining the alarm systems that are installed in
our customers' homes and businesses. We provide our services to single family residential, commercial, wholesale and multifamily residential customers.

Our
company is divided into two business segments:

Protection One North America,which we refer to as North America, generated approximately $239.0 million, or 86.3% of our revenues
in 2003 and is comprised of our retail alarm monitoring business, which serves residential and commercial customers directly, and our wholesale monitoring business, which provides alarm monitoring
services to independent alarm companies.

Network Multifamily,which we refer to as Multifamily, generated approximately $38.1 million, or 13.7% of our revenues in 2003 and
is comprised of our alarm monitoring business servicing apartments, condominiums and other multifamily dwellings.

Important Matters

We continue to face liquidity problems caused by our significant debt burden and continuing net losses. Absent recapitalization and restructuring our debts,
management believes our projected cash flow will be insufficient to support our current debt balances, which may be accelerated or which we are required to offer to repurchase as a result of the
change in control, and related interest obligations. Our independent public accountants included in their report on our consolidated financial statements for the fiscal year ended December 31,
2003 explanatory language that describes the significant

25

---

uncertainty
about our ability to continue as a going concern due to recurring losses from operations, deficiency in working capital, inability to obtain ongoing financing and breach of covenants on
outstanding debt subsequent to year end.

We
have retained Houlihan Lokey Howard & Zukin Capital as our financial advisor and have begun preliminary discussions regarding a proposed restructuring with Quadrangle and its
affiliates, the lenders under our revolving credit facility, and certain holders of our publicly-held debt. If an agreement with such parties is reached, a resulting restructuring plan may
be presented for judicial approval under Chapter 11 of the U.S. Bankruptcy Code, which provides for companies to reorganize and continue to operate as going concerns. Discussions with Quadrangle and
other debt holders are in the preliminary stages, and there can be no assurance that an agreement regarding financial restructuring will be reached or what other actions we may need to take, including
selling assets, to meet our liquidity needs.

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

As
part of the restructuring initiative, we have deferred payment of the semi-annual interest payment that was due on February 17, 2004, on the outstanding
$190.9 million aggregate principal amount of our 73/8% senior notes. If we do not make this interest payment within the 60-day interest payment grace period available
under the 73/8% senior notes, the trustee or the holders of such senior notes may seek to exercise certain remedies available to them under the indenture governing the notes, including,
without limitation, acceleration of the indebtedness, which acceleration, if not rescinded or satisfied, would cause cross defaults under our other debt instruments. If such acceleration should occur,
we do not have the funds available to repay the indebtedness, and we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

In
addition, as a result of Westar's sale of its interests in us, the indenture relating to our 135/8% senior subordinated discount notes requires us to give notice of our
intention to repurchase the notes, which had aggregate outstanding principal of $29.9 million as of March 15, 2004, within 30 days following the date of a change in control, and
to consummate the repurchase within 60 days of such notification. We have not given notice of our intention to repurchase these notes, and this inaction constitutes a covenant breach under the
notes' indenture, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default under the indenture. Furthermore, upon any such event of
default, the trustee or the holders of such senior subordinated discount notes may seek to exercise certain remedies available to them under the indenture governing the notes, including, without
limitation, acceleration of the notes, which acceleration, if not rescinded or satisfied, would cause a cross default to be triggered under the indenture for our 81/8% senior
subordinated notes, which had aggregate outstanding principal of $110.3 million as of March 15, 2004. If such acceleration and cross default should occur, we do not have the funds
available to repay the indebtedness, and we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

Furthermore,
as a result of the Westar's sale of its interest in us, the $215.5 million outstanding under the revolving credit facility is in default. We entered into a standstill
agreement with Quadrangle, pursuant to which, among other things, Quadrangle agreed to waive the change in control default and other specified covenant breaches for a period not to exceed
90 days, and we agreed that we could not borrow any additional amounts under the revolving credit facility. Upon the expiration or termination

26

---

of this standstill agreement, Quadrangle may exercise its rights under the revolving credit facility and declare the indebtedness to be due and payable. Furthermore, acceleration of our revolving
credit facility, if not rescinded or satisfied, would cause cross defaults under our other debt instruments. If such acceleration should occur, we would not have the funds available to repay the
indebtedness, and we could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

Stockholders
and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this
Form 10-K have not occurred. If we seek an out-of-court restructuring, there can be no assurances as to whether or not such restructuring would be successful.

See
also Item 1, "Risk Factors," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
Resources," Item 8, Note 5 "Long-Term Debt," Item 8, Note 12 "Commitments and Contingencies," Item 8, Note 15 "Subsequent Events" and
Item 8, Note 17 "Going Concern and Management's Plans" for further discussion.

Summary of Other Significant Activities

Net Loss.We incurred a net loss of $34.4 million in 2003. This net loss is a result of the continuing decline in our
revenues caused by our declining North America account base, expansion of our efforts to create new customer accounts through internal efforts which increase our selling expense, substantial charges
incurred by us for amortization of customer accounts and interest incurred on indebtedness. We do not expect to attain earnings in the foreseeable future unless we significantly reduce our interest
expense and our amortization charges for purchased customer accounts.

Payment of Transaction-Related Bonuses and fees.In order to retain the services of numerous employees who, as a result of
Westar Energy's announcement of its intent to dispose of its ownership interest in us, may have felt uncertain about our future ownership, management and direction, we entered into retention and
severance arrangements with approximately 190 employees to provide incentives for these employees to remain with us through the sales process. On October 31, 2003, we paid approximately
$5.1 million to those employees who fulfilled their obligation related to the retention agreement. Additional severance amounts of approximately $11.0 million may also be paid under
these arrangements to those employees, if any, who are terminated within a defined period following the
change in control which occurred on February 17, 2004. No significant amounts have been expensed relating to the severance arrangements.

Upon
the change in control in February 2004, an additional $11.0 million was paid to executive management and customary fees and expenses of $3.5 million were paid
to the financial advisor to our Special Committee of the Board of Directors. As of December 31, 2003, no amounts had been expensed relating to these additional payments to key employees or to
the financial advisor to our Special Committee. As of December 31, 2003, we had expensed approximately $1.2 million for legal and other professional fees related to the change in
control. In addition, in February 2004 we recorded an expense of $1.6 million for director and officer insurance coverage that lapsed upon the change in control.

Amendment to Credit Agreement with Westar Industries.In June 2003, we entered into two separate amendments to the
revolving credit facility with Westar Industries. The Thirteenth Amendment decreased the maximum capacity of the revolving credit facility from $280 million to $228.4 million.
Accordingly, Westar Industries refunded approximately $0.5 million to us in amendment fees. The Fourteenth Amendment to the revolving credit facility, among other things, extended the maturity
date of the revolving credit facility to January 5, 2005 and increased the applicable borrowing rate on Eurodollar borrowings from LIBOR plus 3.75% to LIBOR plus 5.00%. In June 2003, we
paid an amendment fee to Westar Industries of approximately $0.5 million. At March 15, 2004, we had

27

---

outstanding
borrowings of $215.5 million. Under the terms of the standstill agreement with Quadrangle, however, we cannot borrow additional funds under the revolving credit facility.

The
revolving credit facility has been reflected as a current liability based on Westar's stated intent to dispose of its interest in us. As described in Note 15 "Subsequent
Events" to the Consolidated Financial Statements, a change in control has occurred subsequent to year-end.

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

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

Extinguishment of Debt.During 2003, we retired at face value $9.7 million of our bonds that matured. During 2002, we
acquired $103.2 million of our bonds for $83.2 million resulting in a gain of $19.3 million. See Item 8, Note 6 "Related Party Transactions" for further discussion.

Recurring Monthly Revenue.At various times during each year, we measure all of the monthly revenue we are entitled to
receive under contracts with customers in effect at the end of the period. Our computation of recurring monthly revenue, or RMR, may not be comparable to other similarly titled measures of other
companies, and recurring monthly revenue should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles.

We
had approximately $20.1 million, $21.0 million and $22.9 million of recurring monthly revenue as of December 31, 2003, 2002, and 2001 respectively. The
slowing rate of decrease reflects our net loss of 25,378 customers during 2003 compared to a net loss of 59,625 customers during 2002. We expect this trend will continue until the efforts we are
making to acquire new accounts and to reduce our rate of attrition become more successful than they have been to date. Until we are able to reverse this

28

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trend,
net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations.

We
believe the presentation of recurring monthly revenue is useful to investors because the measure is used by investors and lenders to value companies such as ours with recurring
revenue streams. Management monitors recurring monthly revenue, among other things, to evaluate our ongoing
performance. The table below reconciles our recurring monthly revenue to revenues reflected on our consolidated statements of operations.

Years Ended December 31,2003

2002

2001(in millions)Recurring Monthly Revenue at 12/31

$
20.1

$
21.0

$
22.9Amounts excluded from RMR:Amortization of deferred revenue


0.6


0.4


0.1Other revenues(a)


2.1


2.6


3.0Revenues (GAAP basis):December


22.8


24.0


26.0January - November


254.3


266.6


306.8January - December

$
277.1

$
290.6

$
332.8


---

Our
recurring monthly revenue includes amounts billable to customers with past due balances that we believe are collectible. We seek to preserve the revenue stream associated with each
customer contract, primarily to maximize our return on the investment we made to generate each contract. As a result, we actively work to collect amounts owed to us and to retain the customer at the
same time. In some instances, we may allow up to six months to collect past due amounts, while evaluating the ongoing customer relationship. After we have made every reasonable effort to collect past
due balances, we will disconnect the customer and include the loss in attrition calculations.

The
following table identifies RMR by segment and in total for the years indicated.

|                            |  | Year ended December 31, 2003 |        | Year ended December 31, 2002 |  
|--------------------------- |  | ---------------------------- | ------ | ---------------------------- | -
|
|
|Beginning RMR balance(a)    |  | $                            | 18,239 |                              | $
|RMR retail additions        |  |                              | 1,656  |                              |  
|RMR retail losses           |  |                              | (2,684 | )                            |  
|Net change in wholesale RMR |  |                              | 44     |                              |  
|                            |  |                              |        |                              |  
|Ending RMR balance          |  | $                            | 17,255 |                              | $
|                            |  |                              |        |                              |  

---

29

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The
table below reconciles our recurring monthly revenue by segment to revenues reflected in our segment results of operations.

Years Ended December 31,2003

2002North
America

Multi-
family

North
America

Multi-
family(in millions)Recurring Monthly Revenue at 12/31

$
17.3

$
2.8

$
18.2

$
2.8Amounts excluded from RMR:Amortization of deferred revenue


0.5


0.1


0.3


0.1Other revenues(a)


1.8


0.3


2.4


0.2Revenues (GAAP basis):December


19.6


3.2


20.9


3.1January - November


219.4


34.9


231.6


35.0January - December

$
239.0

$
38.1

$
252.5

$
38.1


---

Customer Creation and Marketing.Our current customer acquisition strategy for our North America segment
relies primarily on internally generated sales. In June 2001, we notified most of our remaining domestic dealers that we were terminating our dealer arrangements with them and therefore would
not be extending or renewing their contracts. The number of accounts purchased through our dealer program decreased to 135 in 2003 from 1,135 in 2002. We added 315 accounts from acquisitions in 2003.
We currently have a salaried and commissioned sales force that utilizes our existing branch infrastructure in approximately fifty-five markets. The internal sales program generated 50,731
accounts and 45,642 accounts in 2003 and 2002, respectively. Our Multifamily segment also utilizes a salaried and commissioned sales force to produce new accounts. We are susceptible to macroeconomic
downturns that may affect our ability to attract new customers.

Year Ended December 31,2003

2002North America Segment(1):Customer additions


51,181


46,777Customer losses


(82,476
)

(109,765
)Net decrease in account base


(31,295
)

(62,988
)RMR additions

$
1,638,275

$
1,696,031RMR losses

$
(2,622,938
)
$
(3,525,336
)Net decrease in RMR

$
(984,663
)
$
(1,829,305
)Multifamily Segment(2):Customer additions


25,045


24,929Customer losses


(19,128
)

(21,566
)Net increase in account base


5,917


3,363RMR additions

$
286,643

$
306,388RMR losses

$
(249,739
)
$
(349,161
)Net increase (decrease) in RMR

$
36,904

$
(42,773
)


---

30

---



We
are a partner in a marketing alliance with BellSouth to offer monitored security services to the residential, single family market and to small businesses in seventeen of the larger
metropolitan markets in the nine-state BellSouth region. The marketing alliance agreement provides that it may be terminated by either party upon 180 days notice or earlier upon
occurrence of certain events. Should we make an assignment for the benefit of creditors, should an order for relief under the U. S. Bankruptcy Code be entered by a United States Court against us or
should a trustee or receiver of any substantial part of our assets be appointed by any court, or if we are in default with respect to any of the covenants relating to financial performance set forth
in the 73/8% senior notes, BellSouth may seek to terminate the alliance which could have a material adverse impact on our operating results. Under this agreement, we operate as
"BellSouth Security Systems from Protection One" from our branches in the nine-state BellSouth region. BellSouth provides us with leads of new owners of single family residences in its
territory and of transfers of existing BellSouth customers within its territory. We follow up on the leads and attempt to persuade them to become customers of our monitored security services. We also
market directly to small businesses. We pay BellSouth an upfront royalty for each new contract and a recurring royalty based on a percentage of recurring charges.
Approximately one-fifth of our new accounts created in 2003 and one-fourth of our new accounts created in 2002 were produced from this arrangement. Termination of this
agreement could have an adverse affect on our ability to generate new customers in this territory.

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

Attrition.Customer attrition has a direct impact on our results of operations since it affects our revenues, amortization
expense and cash flow. We define attrition as a ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of the adjustments described below, and the
denominator of which is the average number of accounts for a given period. In some instances, we use estimates to derive attrition data. We make adjustments to lost accounts primarily for the net
change, either positive or negative, in our wholesale base and for accounts which are covered under a purchase price holdback and are "put" back to the seller. We reduce the gross accounts lost during
a period by the amount of the guarantee provided for in the purchase agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience. We do not
reduce the gross accounts lost during a period by "move in" accounts, which are accounts where a new customer moves into a home installed with our security system and vacated by a prior customer, or
"competitive takeover" accounts, which are accounts where the owner of a residence monitored by a competitor requests that we provide monitoring services.

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

We
monitor attrition each quarter based on a quarterly annualized and trailing twelve-month basis. This method utilizes each segment's average customer account base for the applicable
period in measuring attrition. Therefore, in periods of customer account growth, customer attrition may be

31

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understated
and in periods of customer account decline, customer attrition may be overstated. See Item 1 "BusinessAttrition" for a comparison of our attrition rates over the past
three years.

For
the period ended December 31, 2003, our total company quarterly annualized and trailing twelve month attrition rates were 9.1% and 9.0%, respectively. The table below shows
the change in our total
company customer base including customer additions and attritions from 2003 to 2001. The "Conversion adjustments" line item reflects the impact on the calculation of our customer base from the
conversion of our Wichita, Hagerstown, Beaverton and Irving monitoring and billing systems to one technology platform, MAS®.

|                                                             |  | Year Ended December 31, |  
|------------------------------------------------------------ |  | ----------------------- | -
|
|Beginning Balance, January 1                                 |  | 1,073,698               |  
|Additions                                                    |  | 76,226                  |  
|Conversion adjustments                                       |  |                        |  
|Customer losses from dispositions                            |  |                        |  
|Customer losses not guaranteed with holdback put backs       |  | (95,905                 | )
|Customer losses guaranteed with holdback put backs and other |  | (5,699                  | )
|                                                             |  |                         |  
|Ending Balance, December 31,                                 |  | 1,048,320               |  
|                                                             |  |                         |  

---

Should
we seek debt relief either under the U.S. Bankruptcy Code or by way of an out-of-court restructuring, we expect to experience higher attrition from
customers unwilling to continue relying on us to provide security monitoring services even though we do not expect our capabilities to provide such services to be affected.

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

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

SFAS
No. 144 substantially reduced the net undiscounted cash flows used for customer account impairment evaluation purposes as compared to the previous accounting standards. The
undiscounted cash flow stream was reduced from the 16 year remaining life of the goodwill to the 9 year remaining

32

---

life
of customer accounts for impairment evaluation purposes. Using these guidelines, we determined that there was an indication of impairment of the carrying value of the customer accounts and an
impairment charge was recorded as discussed below.

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

Goodwill

Customer
Accounts

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

$
509.4

$
338.1

$
847.5Impairment chargediscontinued operations


2.3


1.9


4.2Estimated income tax benefit


(65.1
)

(118.4
)

(183.5
)Net charge

$
446.6

$
221.6

$
668.2Multifamily Segment:Impairment charge

$
104.2

$


$
104.2Estimated income tax benefit


(7.2
)




(7.2
)Net charge

$
97.0

$


$
97.0Total Company:Impairment charge

$
615.9

$
340.0

$
955.9Estimated income tax benefit


(72.3
)

(118.4
)

(190.7
)Net charge

$
543.6

$
221.6

$
765.2


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

Another
impairment test was completed by us as of July 1, 2002 (the date selected for our annual impairment test), with the independent appraisal firm providing the valuation of
the estimated fair value of our reporting units, and no impairment was indicated. After regulatory actions (see Item 8, Note 6 "Related Party Transactions"), including Kansas Corporation
Commission Order No. 55, which prompted Westar to advise us that it intended to dispose of its investment in us, we retained the independent appraisal firm to perform an additional valuation of
our reporting units, so we could perform an impairment test as of December 31, 2002. The order limited the amount of capital Westar Energy could provide to us which increased our risk profile.
Therefore, we reevaluated our corporate forecast, reducing the amount of capital invested over our forecast horizon and lowered our base monthly recurring revenue to incorporate actual 2002 results,
which resulted in a lower valuation than our July 1, 2002 valuation. In December 2002, we recorded an additional $90.7 million impairment charge, net of $13.3 million tax,
to reflect the impairment of all remaining goodwill of our North America segment.

We
completed our annual impairment testing during the third quarter of 2003 on our Network Multifamily segment and determined that no additional impairment of goodwill was required as of
July 1, 2003. Our North America segment has no goodwill and, therefore, did not require testing as of July 1, 2003. No impairment charge was recorded in 2003.

A
deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit estimated above and an additional deferred tax benefit of
$13.3 million was recorded with the fourth quarter impairment charge. However, as a result of the sale transaction whereby Westar sold its investment in us, a substantial portion of our net
deferred tax assets of $286.3 million at

33

---

December 31,
2003 are not expected to be realizable and we are not expected to be in a position to record a tax benefit for losses incurred. We will be required to record a non-cash
charge against income for the portion of our net deferred tax assets we determine will not be realizable. This charge will be material and will have a material adverse effect on our financial
condition and results of operations.

In
2001, we recorded approximately $48.9 million of goodwill amortization, including $0.3 million related to the discontinued Canadian operations. Because we have adopted
the new rule for goodwill, we will no longer be permitted to amortize goodwill to income. In 2003, we recorded approximately $68.6 million of customer account amortization expense. Customer
account amortization expense in 2002 was approximately $68.9 million.

The
following table reflects our results for the years ended December 31, 2003, 2002 and 2001, adjusted for the cessation of amortization of goodwill, as discussed above.

Year ended December 31,2003

2002

2001(in thousands, except per share amounts)Reported net loss

$
(34,411
)
$
(880,855
)
$
(86,048
)Add back: Goodwill amortization








48,554Adjusted net loss

$
(34,411
)
$
(880,855
)
$
(37,494
)Basic and diluted earnings per share:Reported net loss

$
(0.35
)
$
(8.98
)
$
(0.82
)Add back: Goodwill amortization








0.46Adjusted net loss

$
(0.35
)
$
(8.98
)
$
(0.36
)


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

Streamlining of Operations.With the goal of reducing our variable and fixed costs as our North American account base
declined, we streamlined our business operations and improved operating efficiencies. During 2001, we merged our Hagerstown, Maryland, our Beaverton, Oregon and our Irving, Texas monitoring operations
into our Wichita, Kansas customer service center. The Wichita customer service center now monitors approximately 530,000 customers. Additionally, we discontinued our National Accounts and Patrol
divisions and sold certain customer accounts which we believed were not part of our core business. In June 2001, we eliminated 180 positions from a variety of departments. In
September 2001, we consolidated additional operational and administrative facilities. These consolidations and other cost cutting measures resulted in a total reduction of nearly 600 positions
in 2001. We incurred $9.7 million in severance and facility closure costs relating primarily to these actions in 2001.

Critical Accounting Estimates

Our discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an
on-going basis, including those related to bad debts, inventories,

34

---

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

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

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

The
table below reflects the impact of this accounting policy on the respective line items of the Statement of Operations for the years ended December 31, 2003 and 2002. The
"Total amount incurred" line represents the current amount of billings that were made and the current costs that were incurred for the period. We then subtract the deferral amount and add back the
amortization of previous deferral amounts to determine the amount we report in the Statement of Operations.

|                                           |  | For the year ended December 31, |        
|------------------------------------------ |  | ------------------------------- | -------
|
|
|
|North America segment:                     |  |                                 |        
|Total amount incurred                      |  | $                               | 32,494 
|Amount deferred                            |  |                                 | (18,145
|Amount amortized                           |  |                                 | 4,474  
|                                           |  |                                 |        
|Amount included in Statement of Operations |  | $                               | 18,823 
|                                           |  |                                 |        
|Multifamily segment:                       |  |                                 |        
|Total amount incurred                      |  | $                               | 922    
|Amount deferred                            |  |                                 | (707   
|Amount amortized                           |  |                                 | 1,781  
|                                           |  |                                 |        
|Amount included in Statement of Operations |  | $                               | 1,996  
|                                           |  |                                 |        
|Total Company:                             |  |                                 |        
|Total amount incurred                      |  | $                               | 33,416 
|Amount deferred                            |  |                                 | (18,852
|Amount amortized                           |  |                                 | 6,255  
|                                           |  |                                 |        
|Amount reported in Statement of Operations |  | $                               | 20,819 
|                                           |  |                                 |        

35

---

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



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

We
established July 1 as our annual impairment testing date for goodwill. We completed our annual impairment testing during the third quarter of 2003 on our Multifamily segment
and determined that no additional impairment of goodwill was required as of July 1, 2003. Our North America segment has no goodwill and, therefore, did not require testing as of July 1,
2003. No impairment charge was recorded in 2003. We have $41.8 million of goodwill at December 31, 2003 associated with our Multifamily reporting unit. For further information, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of OperationsImpairment Charges" and Item 8, Note 14 "Impairment Charges."

We
completed our 2002 testing during the third quarter of 2002 and determined that no additional impairment was required as of July 1, 2002. After regulatory actions (see
Item 8, Note 6 "Related Party Transactions"), including Kansas Corporation Commission Order No. 55, which prompted Westar Energy to advise us that it intended to dispose of its
investment in us, we retained the independent appraisal firm to perform an additional valuation of our reporting units, so we could perform an impairment test as of December 31, 2002. The order
limited the amount of capital Westar Energy could provide to us which increased our risk profile. Therefore, we reevaluated our corporate forecast, reducing the amount of capital invested over our
forecast horizon and lowered our base monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower valuation than our July 1, 2002 valuation. We recorded an
additional $90.7 million impairment charge, net of $13.3 million tax, to reflect the impairment of all remaining goodwill of our North America segment.

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

Customer Account Amortization.The choice of an amortization life and method is based on our estimates and judgments about
the amounts and timing of expected future revenues from customer accounts and average customer account life. Amortization methods and selected periods were determined because, in our opinion, they
would adequately match amortization cost with anticipated revenue. We periodically use an independent appraisal firm to perform lifing studies on our customer accounts to assist us in determining
appropriate lives of our customer accounts. These reviews are

36

---

performed
specifically to evaluate our historic amortization policy in light of the inherent declining revenue curve over the life of a pool of customer accounts, and our historical attrition
experience. We have identified the following three distinct pools of customer accounts, each of which has distinct attributes that effect differing attrition characteristics. For the North America
pool, the results of the lifing studies indicated to us that we can expect attrition to be greatest in years one through five of asset life and that a declining balance (accelerated) method would
therefore best match the future amortization cost with the estimate revenue stream from these customer pools.

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

Pool

MethodNorth America:

Acquired Westinghouse Customers

Eight-year 120% declining balance

Other Customers

Ten-year 135% declining balanceMultifamily

Nine-year straight line


The
results of a lifing study performed by a third party appraisal firm in the first quarter of 2002 showed a deterioration in the average remaining life of customer accounts. The report
showed our North America customer pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of nine years. Our Multifamily pool can expect a
declining revenue stream over the next 30 years with an estimated average remaining life of ten years. Taking into account the results of the lifing study and the inherent expected declining
revenue streams for North America and Multifamily, in particular during the first five years, we adjusted the amortization of customer accounts for our North America and Multifamily customer pools to
better match the rate and period of amortization expense with the expected decline in revenues.

In
the first quarter of 2002, we changed the amortization rate for our North America pool to a ten-year 135% declining balance method from a ten-year 130%
declining balance method. The change to this ten year 135% accelerated method, provides for a better matching to the declining revenue stream, in particular during the first five years, where the year
over year decline is greatest and a significant portion of the revenue stream is expected to be received. For the Multifamily pool we will continue to amortize on a straight-line basis,
utilizing a shorter nine year life. The change to the nine year life straight-line method provides for a better matching to the declining revenue stream, in particular during the first
five years, where the decline is greatest and a significant portion of the revenue stream is expected to be received. We accounted for these amortization changes prospectively beginning
January 1, 2002, as a change in estimate. These changes in estimates increased amortization expense for the year ended December 31, 2002 on a pre-tax basis by approximately
$1.3 million and on an after tax basis by approximately $0.8 million. The change in estimate had no significant impact on reported earnings per share.

We
recorded approximately $68.6 million and $68.9 million of customer account amortization expense in 2003 and 2002, respectively. This amount would change if we changed
the estimated life or amortization rate for customer accounts. See "Estimated Lives of Customer Accounts Changed Based on Customer Account Lifing Study Results" above.

Income Taxes.As part of the process of preparing our consolidated financial statements, we are required to estimate our
income taxes in each of the jurisdictions in which we operate. Significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities.
This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization,
for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood

37

---

that
our deferred tax assets will be recovered. To the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. As of December 31, 2003, other than
for net operating loss carryforwards, we had not established a valuation allowance since the tax sharing agreement utilizes a parent company down approach in the allocation of income tax expense and
deferred tax assets and liabilities among members of the consolidated tax group and, consistent with that approach, no valuation allowance had been allocated to us.

In
the past, Westar Energy has made payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return pursuant to the tax sharing agreement, which has been
an important source of liquidity for us. As a result of the sale transaction whereby Westar sold its investment in us, a significant portion of our net deferred tax assets, which were
$286.3 million at December 31, 2003, are not expected to be realizable and we are not expected to be in a position to record a tax benefit for losses incurred. We will be required to
record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge will be material and will have a material adverse
effect on our financial condition and results of operations.

In
addition, as a result of the sale, except for amounts owed with respect to losses we incurred prior to leaving the Westar consolidated tax group as a result of Westar selling its
interest in us, we will no longer receive payments from Westar Energy. In 2003 and 2002, we received payments from Westar Energy of $20.0 million and $1.7 million, respectively. The loss
of these payments will likely have a material adverse effect on our cash flow. See "Liquidity and Capital Resources" below.

Results of Operations

Protection One Consolidated

For the years ended December 31, 2003, 2002 and 2001, we incurred consolidated net losses of $34.4 million, $880.9 million and
$86.0 million, respectively, or losses per share of common stock of $0.35, $8.98 and $0.82, respectively. From May 2000 through December 2003, we purchased 29,842,905 of our
shares which resulted in a decrease in our weighted average shares outstanding used in calculating our consolidated loss per share. Our weighted average shares outstanding for the years ended
December 31, 2003, 2002 and 2001 were 98,129,343 shares, 98,071,206 shares and 105,458,601 shares, respectively. Between February 2000 and December 2002, we purchased and retired
$470.5 million face value of our notes at discounted prices resulting in gains from retirement of debt of $19.3 million and $53.0 million for the years ended December 31,
2002 and 2001. In 2003 we retired $9.7 million of our notes at face value with no resulting gain or loss. Primarily due to this reduction of outstanding debt, our interest expense decreased
from $51.7 million in 2001 to $43.0 million in 2002 and $40.1 million in 2003.

Revenues
have declined since 1999, primarily due to a decrease in the size of our customer base. Cost of revenues have also declined due primarily to a reduction in telecommunication
costs and labor resulting from our monitoring center consolidations and a decrease in service costs. Revenues have declined at a rate faster than our decline in cost of revenues resulting in a
reduction in gross profit over time. We did, however, see a slight improvement in our gross profit as a percent of total revenue from 2002 to 2003. Our gross profit as a percent of total revenue was
63.1% in 2003, 61.1% in 2002 and 64.2% in 2001. General and administrative costs have declined due to our efforts to streamline operations and a decrease in bad debt expense based on improved
collection experience and recoveries of previously written off accounts. Selling costs have increased due to our shift from purchasing dealer accounts to an internal sales effort.

38

---

Segment Information

We separate our business into two reportable segments: North America and Multifamily. North America provides security alarm monitoring services, which includes
sales, installation and related servicing of security alarm systems in the United States. Multifamily provides security alarm services to apartments, condominiums and other multifamily dwellings.
During the third quarter of 2002, we
identified a new segment, Data Services, with the creation of Protection One Data Services, or PODS. As discussed in Item 8, Note 6 to the Consolidated Financial Statements "Related
Party Transactions," the operations of this segment were discontinued in the fourth quarter of 2002.



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

|                                                     |                                 | Year Ended December 31, |        
|---------------------------------------------------- | ------------------------------- | ----------------------- | -------
|
|
|Revenues                                             |                                 |                         |        
|                                                     | Monitoring and related services |                         | $      
|                                                     | Other                           |                         |        
|                                                     |                                 |                         |        
|                                                     | Total Revenues                  |                         |        
|Cost of revenues                                     |                                 |                         |        
|                                                     | Monitoring and related services |                         |        
|                                                     | Other                           |                         |        
|                                                     |                                 |                         |        
|                                                     | Total cost of revenues          |                         |        
|                                                     |                                 |                         |        
|                                                     | Gross profit                    |                         |        
|Selling expenses                                     |                                 |                         | 28,855 
|General and administrative expenses(a)               |                                 |                         | 66,611 
|Amortization of intangibles and depreciation expense |                                 |                         | 75,335 
|Loss on impairment of customer accounts(b)           |                                 |                         |       
|Loss on impairment of goodwill(b)                    |                                 |                         |       
|                                                     |                                 |                         |        
|Operating loss                                       |                                 | $                       | (19,722
|                                                     |                                 |                         |        

---

2003 Compared to 2002.We had a net decrease of 31,295 customers in 2003, as compared to a net
decrease of 62,988 customers in 2002. This decline is the primary reason for the $13.5 million decline in revenues in 2003. The average customer base was 728,139 for 2003 compared to 775,280
for 2002. Although our net customers decreased for the year, attrition decreased in 2003 compared to 2002 for a variety of reasons including:



39

---



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

Further
analysis of the change in the North America customer account base is shown in the table below. The "Conversion adjustments" line item reflects the impact on the calculation of
our customer base from the conversion of our Wichita, Hagerstown, Beaverton and Irving monitoring and billing systems to one technology platform.

2003

2002

2001Beginning Balance, January 1,

743,786

806,774

1,023,023Additions

51,181

46,777

46,400Conversion adjustments





(62,443
)Customer losses from dispositions



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

(76,777
)
(101,860
)
(170,823
)Customers losses guaranteed with holdback put backs and other

(5,699
)
(6,543
)
(16,771
)Ending Balance, December 31,

712,491

743,786

806,774Twelve month trailing attrition

10.5
%
13.1
%
18.7
%


Monitoring and related service revenuesfor 2003 decreased 5.9% compared to 2002. The decrease is primarily due to the decline in our
customer base which decreased for the reasons discussed above. These revenues consist primarily of contractual revenue derived from providing monitoring and maintenance service.

Other revenuesfor 2003 increased slightly compared to 2002 primarily due to an increase in the amortization of previously deferred
revenues of approximately $2.0 million, partially offset by a reduction in commercial sales of $1.8 million. These revenues consist primarily of sales of burglar alarms, closed circuit
television systems, fire alarms and card access control systems to commercial customers as well as amortization of previously deferred revenues.

Cost of monitoring and related services revenuesfor 2003 decreased 7.9% compared to 2002. These costs generally relate to the cost of
providing monitoring service and include the costs of monitoring, billing, customer service and field operations. The decrease is primarily due to the decline in our customer base which resulted in a
decrease in service expense of $3.6 million and a decrease in monitoring expense of $1.9 million. Costs of monitoring and related services revenues as a percentage of the related
revenues decreased from 30.0% in 2002 to 29.4% in 2003.

Cost of other revenuesfor 2003 decreased 18.4% compared to 2002. These costs consist primarily of equipment and labor charges to install
alarm systems, closed circuit televisions, fire alarms and card access control systems sold to our customers. The decrease is primarily due to a decrease in amortization of deferred customer
acquisition costs of $2.9 million and a decrease in the cost of commercial sales of $2.2 million, which corresponds to the decrease in commercial sales revenue

40

---

discussed
above. These costs as a percentage of other revenues were approximately 122.8% in 2003 compared to approximately 153.4% in 2002.

Selling expensesfor 2003 increased 9.5%. The increase is due to our increased efforts to generate new customers through an internal sales
force by building the necessary sales support. As our internal sales force increases its generation of new customers, the amount of direct and incremental selling costs that are deferred also
increases. These deferred selling costs are amortized to selling expense over a customer's initial contract term, typically a two to three year period, which resulted in an aggregate increase of
$3.2 million in amortization of selling expense.

General and administrative expensesfor 2003 decreased 8.9% compared to 2002. This decrease is generally comprised of a
$3.6 million decrease in management fees due to termination of a management services agreement with Westar Industries, $3.5 million decrease in bad debt expense primarily due to
increased collection efforts and a decline in revenues, reductions in outside services of $1.5 million primarily due to completion of system integration projects, $1.4 million decrease
in equipment leases due to purchase of computer equipment as opposed to leasing in prior years, $1.3 million decrease in office supplies, and $1.1 million decrease in corporate
advertising due to a decrease in our national sponsorships. Severance and relocation costs decreased $4.2 million primarily due to fewer facility closures in 2003. These decreases were
partially offset by an increase of $7.4 million in wages and benefits related to our retention bonus payout of $4.5 million and an increase in short term incentive payments of
$1.9 million combined with a $3.0 million increase in insurance premiums for our director and officer liability insurance. As a percentage of total revenues, general and administrative
expenses decreased from 29.0% in 2002 to 27.9% in 2003.

Amortization of intangibles and depreciation expensefor 2003 decreased 2.4%. This decrease reflects a reduction in customer amortization
of $0.3 million and a decrease in depreciation expense of $1.5 million primarily due to a decrease in the amount of capital purchases.

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



Further
analysis of the change in the North American account base between the two years is shown in the table below. The "Conversion adjustments" line item reflects the impact on the

41

---

calculation
of our customer base from the conversion of our Wichita, Hagerstown, Beaverton and Irving monitoring and billing systems to one technology platform.

2002

2001

2000Beginning Balance, January 1,

806,774

1,023,023

1,165,886Additions

46,777

46,400

62,340Conversion adjustments



(62,443
)
Customer losses from dispositions

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

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

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

743,786

806,774

1,023,023Twelve month trailing attrition

13.1
%
18.7
%
15.6
%


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

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

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

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

Selling expensesfor 2002 increased 73.0% compared to 2001. The increase is due to our increased efforts to generate new customers through
an internal sales force by increasing the number of sales representatives and building the necessary sales support. As our internal sales force increases its generation of new customers, the amount of
direct and incremental selling costs that are deferred also increases. These deferred selling costs are amortized to selling expense over a customer's initial contract term, typically a two to five
year period, which results in increased amortization to selling expense.

General and administrative expensesfor 2002 decreased 25.8% compared to 2001. This decrease is generally comprised of reduction in
professional fees and outside services of $10.9 million primarily due to completion of system integration projects and lower litigation costs, $5.8 million decrease in wage expense
primarily due to consolidation efforts, $2.4 million decrease in bad debt expense primarily due to increased collection efforts and a decline in revenues, and $1.0 million decrease in
telecommunications expense. Severance and relocation costs decreased $5.1 million primarily due to fewer facility closures in 2002. These decreases were partially offset by an increase of
$1.2 million in

42

---

insurance
premiums for our director and officer liability insurance. As a percentage of total revenues, general and administrative expenses decreased from 33.3% in 2001 to 29.0% in 2002.

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



We present the table below to show how the Multifamily operating results have changed over the past three years. Next to each year's results of operations, we
provide the relevant percentage of total revenues so that comparisons about the relative change in revenues and expenses can be made.

|                                                     |                                 | Year Ended December 31, |       
|---------------------------------------------------- | ------------------------------- | ----------------------- | ------
|
|
|Revenues:                                            |                                 |                         |       
|                                                     | Monitoring and related services |                         | $     
|                                                     | Other                           |                         |       
|                                                     |                                 |                         |       
|                                                     | Total revenues                  |                         |       
|Cost of revenues:                                    |                                 |                         |       
|                                                     | Monitoring and related services |                         |       
|                                                     | Other                           |                         |       
|                                                     |                                 |                         |       
|                                                     | Total cost of revenues          |                         |       
|                                                     |                                 |                         |       
|                                                     | Gross profit                    |                         |       
|Selling expense                                      |                                 |                         | 2,662 
|General and administrative expense(a)                |                                 |                         | 11,133
|Amortization of intangibles and depreciation expense |                                 |                         | 4,917 
|                                                     |                                 |                         |       
|Operating income (loss)                              |                                 | $                       | 5,089 
|                                                     |                                 |                         |       

---

2003 Compared to 2002.We had a net increase of 5,917 customers in 2003 compared to a net increase of
3,363 customers in 2002. The average customer base was 332,871 for 2003 compared to 328,231 for 2002. The change in the Multifamily account base is shown in the table below.

Year ended December 31,2003

2002

2001Beginning Balance, January 1

329,912

326,549

307,957Additions

25,045

24,929

38,492Customer losses

(19,128
)
(21,566
)
(19,900
)Ending Balance, December 31,

335,829

329,912

326,549Twelve month trailing attrition

5.8
%
6.6
%
6.3
%


Monitoring and related services revenuefor 2003 decreased 2.0% compared to 2002. These revenues consist primarily of contractual revenue
derived from providing monitoring and maintenance service. This decrease is primarily due to a decline in our recurring monthly revenue per customer and reduced

43

---

contract buyouts offset by an increase in the average customer base of 1.4%. The decline in the RMR per customer is primarily due to an increasing number of customer renewals, which provide for
significant contract extensions at a reduced RMR, upon expiration of their primary contract terms.

Other revenuesfor 2003 increased 59.4% compared to 2002 primarily due to a $0.8 million increase in the amortization of previously
deferred revenues. These revenues consist primarily of amortization of previously deferred revenues associated with the sale of alarm systems and revenues from the sale of access control systems.

Cost of monitoring and related service revenuesfor 2003 increased 1.1% compared to 2002. These costs generally relate to the cost of
providing monitoring service and include the costs of monitoring, customer service and field operations. The increase is primarily due to an increase in employment costs related to an employee
retention bonus. Cost of monitoring and related services revenues as a percentage of the related revenues increased to 23.3% in 2003 from 22.6% in 2002.

Cost of other revenuesfor 2003 decreased 4.7% compared to 2002. These costs consist primarily of amortization of installation costs
previously deferred and the costs to install access control systems. The costs decreased primarily due to decreased amortization of deferred customer acquisition costs of $0.2 million. These
costs as a percentage of other revenues were approximately 294.7% in 2003 compared to approximately 493.3% in 2002.

Selling expensesfor 2003 increased 17.5% compared to 2002. The increase is due to an increase in employment costs related to employee
retention bonuses, increased advertising costs and an increase in amortization of deferred selling expenses.

General and administrative expensesfor 2003 decreased slightly compared to 2002. This slight decrease is generally comprised of a
$0.3 million decrease in legal costs, decreased liability insurance of $0.3 million, lower bad debt expense of $0.3 million, a $0.2 million decline in vehicle fleet
maintenance, a decline in office supplies of $0.1 million and decreased telecommunications expenses of $0.1 million. These decreases were partially offset by an increase of
$0.7 million in employment costs primarily related to our retention bonus and a $0.5 million increase in management fee allocation from Protection One. As a percentage of total revenues,
general and administrative expenses decreased slightly to 29.2% in 2003 from 29.5% in 2002.

Amortization of intangibles and depreciation expensefor 2003 decreased 6.6% compared to 2002. This decrease reflects a reduction in
customer amortization of $0.5 million primarily due to a reduction in
customer intangibles related to the settlement and contract buyout in late 2002 of significant units under contract with one developer. This decrease was offset by an increase in depreciation expense
of $0.2 million.

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

Year ended December 31,2002

2001

2000Beginning Balance, January 1

326,549

307,957

294,960Additions

24,929

38,492

39,855Customer losses

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

329,912

326,549

307,957Twelve month trailing attrition

6.6
%
6.3
%
8.9
%


44

---

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

Monitoring and related services revenuesfor 2002 increased 2.7% compared to 2001. This increase is primarily due to the increase in the
average customer base of 3.5% and increased contract buyouts totaling $0.5 million. The increase was partially offset by a decline in our recurring monthly revenue per customer due primarily to
an increasing number of customer renewals, which provide for significant contract extensions at a reduced RMR upon expiration of their primary contract term.

Other revenuesfor 2002 increased 101.0% compared to 2001 primarily due to an increase in deferred revenue amortization of
$1.0 million pursuant to Staff Accounting Bulletin 101, or SAB 101, which requires deferral of revenue over the life of the customer along with deferral of associated direct and incremental
costs offset by a $0.4 million decline in outright sales of access control systems.

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

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

Selling expensesfor 2002 increased 16.7% compared to 2001 due to higher selling expense amortization of $0.2 million associated
with the increase in other revenue and cost of other revenue amortization pursuant to SAB 101 and a slight increase in the sales force increasing costs $0.1 million.

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

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

Liquidity and Capital Resources

We continue to face liquidity problems caused by our significant debt burden and continuing net losses. Absent recapitalization and restructuring our debts,
management believes our projected cash flow will be insufficient to support our current debt balances, which may be accelerated or which we are required to offer to repurchase as a result of the
change in control, and related interest obligations. Our independent public accountants included in their report on our consolidated financial statements for the fiscal year ended December 31,
2003 explanatory language that describes the significant uncertainty about our ability to continue as a going concern due to recurring losses from operations, deficiency in working capital, inability
to obtain ongoing financing and breach of covenants on outstanding debt subsequent to year end.

We
have retained Houlihan Lokey Howard & Zukin Capital as our financial advisor and have begun preliminary discussions regarding a proposed restructuring with Quadrangle and its
affiliates, the

45

---

lenders
under our revolving credit facility, and certain holders of our publicly-held debt. If an agreement with such parties is reached, a resulting restructuring plan may be presented
for judicial approval under Chapter 11 of the U.S. Bankruptcy Code, which provides for companies to reorganize and continue to operate as going concerns. Discussions with Quadrangle and other debt
holders are in the preliminary stages, and there can be no assurance that an agreement regarding financial restructuring will be reached or what other actions we may need to take, including selling
assets, to meet our liquidity needs. We expect to incur significant costs related to any proposed restructuring of our indebtedness. Such costs could include, among other things, fees and expenses of
our legal and other professional advisors, as well as, to the extent we agree to pay such fees in connection with any restructuring, the fees and expenses of our creditors' advisors and any committees
created on behalf of those creditors.

Westar,
which owned approximately 88% of our common stock, was also an important source of our external capital through a revolving credit facility and through payments made under a tax
sharing agreement. On February 17, 2004, Westar Industries consummated the sale of its equity interest in us and the assignment of its rights and obligations under the revolving credit facility
to Quadrangle. As a result of this transaction, we do not expect to have sufficient cash flow to fund our operations in 2004 without a restructuring of our debts for the reasons described below.

The
indenture relating to our 135/8% senior subordinated discount notes requires us to give notice of our intention to repurchase the notes within 30 days following
the date of a change in control and to consummate the repurchase within 60 days of such notification. Under the terms of this indenture, because we did not offer to repurchase such notes, our
inaction constitutes a covenant breach, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default under the indenture for the
135/8% senior subordinated discount notes. Furthermore, upon any such event of default, the trustee or the holders of such senior subordinated discount notes may seek to
exercise certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the notes, which acceleration, if not rescinded or satisfied, would
cause a cross default to be triggered under the indenture for our 81/8% senior subordinated notes, which had aggregate outstanding principal of $110.3 million as of
March 15, 2004. If such acceleration and cross default should occur, we do not have the funds available to repay the indebtedness, and we could be forced to seek relief under the U.S.
Bankruptcy Code or an out-of-court restructuring.

The
$215.5 million outstanding under the revolving credit facility is in default due to the change in control of Protection One consummated on February 17, 2004. We entered
into a standstill agreement with Quadrangle, however, pursuant to which, among other things, Quadrangle agreed to waive the breach of the change in control provision and other covenant breaches for a
period not to exceed 90 days, and we agreed, among other things, not to borrow additional amounts under the revolving credit facility. Upon the expiration or termination of this standstill
agreement, Quadrangle may exercise its rights under the revolving credit facility and declare the indebtedness to be due and payable. Furthermore, acceleration of our revolving credit facility, if not
rescinded or satisfied, would cause cross defaults under our other debt instruments. If such acceleration should occur, we would not have the funds available to repay the indebtedness, and we could be
forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

We
have deferred payment of the semi-annual interest payment that was due on February 17, 2004 on the outstanding $190.9 million aggregate principal amount of
our 73/8% senior notes. At the end of the 60-day interest payment grace period available under the 73/8% senior notes, the trustee or the holders of such
senior notes may attempt to exercise certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the indebtedness, which acceleration, if
not rescinded or satisfied, would cause cross defaults under our other debt instruments. If such acceleration should occur, we could be forced to seek relief under the U.S. Bankruptcy Code or an
out-of-court restructuring.

46

---

We
have been a member of Westar's consolidated tax group since 1997. During that time, Westar made payments to us for tax benefits attributable to us and utilized by Westar in its
consolidated tax return pursuant to the terms of a tax sharing agreement. Except for amounts owed with respect to losses we incurred prior to leaving the Westar consolidated tax group as a result of
Westar selling its interest in us, we will no longer receive payments from Westar under the tax sharing agreement. Such loss of tax payments will have a material adverse effect on our liquidity.

We
and Westar did not, however, terminate our tax sharing agreement, and based on discussions with Westar and its counsel, there are several areas of potential dispute between us
regarding Westar's obligations under the terms of the tax sharing agreement. The most material of these potential disputes involve (i) the amount of any tax sharing payments that would be due
to us if Westar decides in the future to elect to treat the sale of its interests in us as a sale of assets under the Internal Revenue
Code, (ii) the proper treatment under the tax sharing agreement of tax obligations or benefits arising out of the transaction in which Westar sold its ownership interests in us, including the
impact on future tax sharing payments to us related to the cancellation of indebtedness income generated by a partial writedown of the revolving credit facility prior to closing or the assignment of
the revolving credit facility for less than the full amount outstanding under the facility at closing and (iii) whether tax sharing payments due to us when Westar was subject to alternative
minimum tax should be calculated at the alternative minimum tax rate of 20% or the normal statutory rate of 35% to the extent that Westar has utilized or is reasonably expected to be able to utilize
the associated alternative minimum tax credits or otherwise has received full benefits at normal statutory rates from our losses. We believe that we have strong positions with respect to these items
and will aggressively pursue our positions. If we prevail, we may realize additional tax sharing payments from Westar.

Furthermore,
we cannot provide any assurances regarding what actions Quadrangle may cause us to take, including whether it would (a) invest sufficient equity capital or provide
credit support to meet our liquidity needs, (b) cause us to seek to restructure our debts, or (c) cause us to seek to reorganize under the federal bankruptcy laws, which may involve the
possible elimination or cancellation of our current common stock with little or no value being given to our current stockholders.

Our
73/8% senior notes and 81/8% senior subordinated notes require us to make a repurchase offer at 101% of the principal amount, plus interest, in the
event of a change in control triggering event. A change in control triggering event consists of a change in control coupled with the withdrawal of the rating of the notes or two ratings downgrades by
one of certain specified rating agencies provided that such withdrawal or downgrade occurs within 90 days after the date of public notice of the occurrence of a change in control or the intention to
effect a change in control. As of December 31, 2003, $190.9 million principal amount of the 73/8% senior notes and $110.3 million principal amount of the
81/8% senior subordinated notes were outstanding. Should such repurchase right be triggered, we lack the funds to repurchase these debt securities, and we could be forced to seek relief
under the U.S. Bankruptcy Code or an out-of-court restructuring.

Additional
credit under the revolving credit facility has been eliminated by a standstill agreement executed by Quadrangle and us. Our inability to borrow under the revolving credit
facility could have a material adverse effect on our liquidity and financial position. Because of the potential default that existed at the end of 2003 related to Westar's pending sale of its
ownership interest in us, our outstanding borrowings under the revolving credit facility are currently priced as ABR borrowings and are at a rate higher than our previous Eurodollar borrowings. If
interest rates increase one percent, we would incur an additional $2.2 million of annual interest expense.

Most
of the long-term debt instruments contain restrictions based on "EBITDA". The definition of EBITDA varies among the various indentures and the revolving credit facility.
EBITDA is generally derived by adding to income (loss) before income taxes, interest expense and depreciation and

47

---

amortization
expense. However, under the varying definitions of the indentures, various and numerous additional adjustments are sometimes required.

Our
revolving credit facility and the indentures relating to our other indebtedness contain the following financial tests that must be satisfied in order for us to incur additional
indebtedness, pay dividends, make loans or advances and sell assets.

|Debt Instrument                    |  | Financial Covenant                                                                                                       |  | Ratio as of 12/31/03
|---------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------------------
|Revolving Credit Facility          |  | Total consolidated debt/annualized most recent quarter EBITDA less than 5.75 to 1.0                                      |  | 4.7                 
|                                   |  | Consolidated annualized most recent quarter EBITDA/latest four fiscal quarters interest expense greater than 2.10 to 1.0 |  | 2.9                 
|Senior Subordinated Notes          |  | Current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0                           |  | 3.1                 
|Senior Subordinated Discount Notes |  | Total debt/annualized current quarter EBITDA less than 6.0 to 1.0                                                        |  | 4.1                 
|                                   |  | Senior debt/annualized current quarter EBITDA less than 4.0 to 1.0                                                       |  | 3.0                 

These
debt instruments also restrict our ability to pay dividends to stockholders, but do not otherwise restrict our ability to fund cash obligations. Our ability to comply with the
ratios and the tests will be affected by events outside our control and there can be no assurance that we will continue to meet those tests. Failure to meet the tests would place additional
restrictions on our ability to incur indebtedness. A violation of these restrictions would result in an event of default which would allow the lenders to declare all amounts outstanding immediately
due and payable.

Operating Cash Flows for the Year Ended December 31, 2003.Our operating activities provided
net cash flows of $59.0 million in 2003 compared to $43.4 million in 2002, an increase of $15.6 million. The main reason for the increase was the receipt of $20.0 million
from Westar Energy under the tax sharing agreement.

Investing Cash Flows for the Year Ended December 31, 2003.We used a net $27.5 million
for our investing activities in 2003. Proceeds from the sale of customer accounts and other assets provided cash of $2.8 million. We invested a net $24.3 million in cash to install and
acquire new accounts and $7.4 million to acquire fixed assets. The sale of AV ONE to Westar Energy provided $1.4 million. In 2002, we invested a net $30.1 million in cash to
install and acquire new accounts and $8.1 million to acquire fixed assets.

Financing Cash Flows for the Year Ended December 31, 2003.Financing activities provided net
cash flows of $1.9 million in 2003. We used cash to purchase $10.2 million of our outstanding debt at face value. At December 31, 2003, the revolving credit facility had a
weighted average annual interest rate before fees of 7.8% and an outstanding balance of $215.5 million. In 2003, we received $11.9 million for the sale of parent securities that were
held as treasury and $0.5 million for the sale of our Protection One Europe trademark rights. In 2002, we used a net $25.0 million in financing activities. In 2002, borrowings under our
revolving credit facility increased by $78.0 million and we used cash to purchase $103.2 million in face value of our outstanding debt for $83.2 million. In 2002, we also acquired
1,000,000 shares of our outstanding stock for $2.2 million and invested $13.5 million in Westar

48

---

Energy
securities. At December 31, 2002 our revolving credit facility had a weighted average annual interest rate of 5.2% and an outstanding balance of $215.5 million.

Capital Expenditures.We anticipate making capital expenditures of approximately $34.6 million
in 2004. Of such amount, we plan to expend approximately $23.7 million in customer acquisition costs and $10.9 million for fixed assets. Assuming we have available funds, capital
expenditures for 2005 and 2006 are expected to be approximately $35.6 million and $41.6 million, respectively. Of these amounts approximately $27.2 million and
$32.8 million would be used for customer acquisition costs with the balance for fixed assets. These estimates are prepared for planning purposes and are revised from time to time. Actual
expenditures for these and possibly other items not presently anticipated will vary from these estimates during the course of the years presented.

Material Commitments.We have future, material, long-term commitments made in the past
several years in connection with our growth. The following reflects our commitment as of December 31, 2003:

|                                |  | Payment Due by Period
|------------------------------- |  | ---------------------
|
|
|Contractual Obligations         |  |                      
|Long-Term Debt Obligations(a)   |  | $                    
|Operating Leases Obligations    |  |                      
|Change in Control Agreements(c) |  |                      
|Purchase Obligations(b)         |  |                      
|                                |  |                      
|Total                           |  | $                    
|                                |  |                      

---

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

|                             |                              | Amount of Commitment Expiration Per Period
|---------------------------- | ---------------------------- | ------------------------------------------
|
|
|
|Other Commercial Commitments |                              |                                           
|Line of credit               |                              | $                                         
|Standby letters of credit    |                              |                                           
|                             |                              |                                           
|                             | Total commercial Commitments |                                           
|                             |                              |                                           

Credit Ratings.As of March 15, 2004, our public debt was rated as follows:

Senior
Unsecured
Debt

Senior
Subordinated
Unsecured Debt

OutlookS & P

CCC-

C

NegativeMoody's

Caa2

Ca

Negative


49

---

There
are no covenants or restrictions in our indentures or other agreements that would be affected by a change in these ratings unless coupled with a change in control. Upon a change in
control and the withdrawal of the rating of the notes or two ratings downgrades by one of certain specified rating agencies, provided that such withdrawal or downgrade occurs within 90 days
after the date of public notice of the occurrence of a change in control or the intention to effect a change in control, the holders of our 73/8% senior notes and 81/8%
senior subordinated notes have the option to redeem the respective notes at a price of 101% of par as discussed above.

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

Off-Balance Sheet Arrangements.We have no off-balance sheet arrangements at
December 31, 2003.

ITEM 7A.    QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to market risk relating to interest rates.

Interest Rate Exposure.We have approximately $215.5 million of variable rate debt as of December 31, 2003. A
100 basis point change in the debt benchmark rate would impact pre tax income by approximately $2.2 million.

50

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS' REPORT

To
the Stockholders of Protection One, Inc.:

We
have audited the accompanying consolidated balance sheets of Protection One, Inc. and subsidiaries (the "Company") as of December 31, 2003 and 2002 and the related
consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included
the financial statement schedule IIValuation and Qualifying Accounts. These consolidated financial statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Protection One, Inc. and subsidiaries as of
December 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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

The
accompanying consolidated financial statements for the year ended December 31, 2003 have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 17 "Going Concern and Management's Plans" to the consolidated financial statements, the Company's recurring losses from operations, deficiency in working capital, inability to obtain
ongoing financing and breach of covenants on outstanding debt subsequent to year end raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 17. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Deloitte &
Touche LLP

Kansas
City, Missouri
March 23, 2004

51

---



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

|                                                                                                                                                          |                                                                 | December 31, |           
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------ | ----------
|
|ASSETS                                                                                                                                                    |                                                                
|Current assets:                                                                                                                                           |                                                                 |              |           
|                                                                                                                                                          | Cash and cash equivalents                                       |              | $         
|                                                                                                                                                          | Restricted cash                                                 |              |           
|                                                                                                                                                          | Receivables, net                                                |              |           
|                                                                                                                                                          | Inventories, net                                                |              |           
|                                                                                                                                                          | Prepaid expenses                                                |              |           
|                                                                                                                                                          | Related party tax receivable                                    |              |           
|                                                                                                                                                          | Deferred tax assets                                             |              |           
|                                                                                                                                                          | Other                                                           |              |           
|                                                                                                                                                          | Assets of discontinued operations                               |              |           
|                                                                                                                                                          |                                                                 |              |           
|                                                                                                                                                          | Total current assets                                            |              |           
|Property and equipment, net                                                                                                                               |                                                                 |              | 31,921    
|Customer accounts, net                                                                                                                                    |                                                                 |              | 244,744   
|Goodwill                                                                                                                                                  |                                                                 |              | 41,847    
|Deferred tax assets, net of current portion                                                                                                               |                                                                 |              | 252,411   
|Deferred customer acquisition costs                                                                                                                       |                                                                 |              | 94,225    
|Other                                                                                                                                                     |                                                                 |              | 7,506     
|                                                                                                                                                          |                                                                 |              |           
|Total Assets                                                                                                                                              |                                                                 | $            | 809,022   
|                                                                                                                                                          |                                                                 |              |           
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                      |                                                                
|Current liabilities:                                                                                                                                      |                                                                 |              |           
|                                                                                                                                                          | Current portion of long-term debt, due to related party in 2003 |              | $         
|                                                                                                                                                          | Accounts payable                                                |              |           
|                                                                                                                                                          | Accrued liabilities                                             |              |           
|                                                                                                                                                          | Due to related parties                                          |              |           
|                                                                                                                                                          | Deferred revenue                                                |              |           
|                                                                                                                                                          | Liabilities of discontinued operations                          |              |           
|                                                                                                                                                          |                                                                 |              |           
|                                                                                                                                                          | Total current liabilities                                       |              |           
|Long-term debt, net of current portion                                                                                                                    |                                                                 |              | 331,874   
|Deferred customer acquisition revenue                                                                                                                     |                                                                 |              | 44,209    
|Other liabilities                                                                                                                                         |                                                                 |              | 1,440     
|                                                                                                                                                          |                                                                 |              |           
|Total Liabilities                                                                                                                                         |                                                                 |              | 662,848   
|                                                                                                                                                          |                                                                 |              |           
|Commitments and contingencies (see Note 12)                                                                                                               |                                                                 |              |           
|Stockholders' equity:                                                                                                                                     |                                                                 |              |           
|Preferred stock, $.10 par value, 5,000,000 shares authorized                                                                                              |                                                                 |              |          
|Common stock, $.01 par value, 150,000,000 shares authorized, 128,125,584 shares and 127,796,745 shares issued at December 31, 2003 and 2002, respectively |                                                                 |              | 1,281     
|Additional paid-in capital                                                                                                                                |                                                                 |              | 1,379,434 
|Accumulated other comprehensive income                                                                                                                    |                                                                 |              | 78        
|Deficit                                                                                                                                                   |                                                                 |              | (1,200,007
|Investment in parent                                                                                                                                      |                                                                 |              |          
|Treasury stock, at cost, 29,842,905 and 29,840,405 shares at December 31, 2003 and 2002, respectively                                                     |                                                                 |              | (34,612   
|                                                                                                                                                          |                                                                 |              |           
|                                                                                                                                                          | Total stockholders' equity                                      |              |           
|                                                                                                                                                          |                                                                 |              |           
|Total Liabilities and Stockholders' Equity                                                                                                                |                                                                 | $            | 809,022   
|                                                                                                                                                          |                                                                 |              |           

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

52

---

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

|                                                                           |                                                                                    | Year Ended December 31,                             |        
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------- | -------
|
|Revenues:                                                                  |                                                                                    |                                                     |        
|                                                                           | Monitoring and related services                                                    |                                                     | $      
|                                                                           | Other                                                                              |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|                                                                           | Total revenues                                                                     |                                                     |        
|Cost of revenues (exclusive of amortization and depreciation shown below): |                                                                                    |                                                     |        
|                                                                           | Monitoring and related services                                                    |                                                     |        
|                                                                           | Other                                                                              |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|                                                                           | Total cost of revenues                                                             |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|                                                                           | Gross profit (exclusive of amortization and depreciation shown below)              |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|Operating expenses:                                                        |                                                                                    |                                                     |        
|                                                                           | Selling                                                                            |                                                     |        
|                                                                           | General and administrative                                                         |                                                     |        
|                                                                           | Amortization and depreciation                                                      |                                                     |        
|                                                                           | Loss on impairment of customer accounts                                            |                                                     |        
|                                                                           | Loss on impairment of goodwill                                                     |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|Total operating expenses                                                   |                                                                                    |                                                     | 189,513
|                                                                           |                                                                                    |                                                     |        
|                                                                           | Operating loss                                                                     |                                                     |        
|Other (income) expense                                                     |                                                                                    |                                                     |        
|                                                                           | Interest expense                                                                   |                                                     |        
|                                                                           | Related party interest                                                             |                                                     |        
|                                                                           | Gain on retirement of debt                                                         |                                                     |        
|                                                                           | Other                                                                              |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|                                                                           |                                                                                    | Loss from continuing operations before income taxes |        
|Income tax benefit                                                         |                                                                                    |                                                     | 17,494 
|                                                                           |                                                                                    |                                                     |        
|                                                                           | Loss from continuing operations before accounting change                           |                                                     |        
|Loss from discontinued operations, net of taxes                            |                                                                                    |                                                     |       
|Cumulative effect of accounting change, net of taxes                       |                                                                                    |                                                     |        
|                                                                           | Continuing operations                                                              |                                                     |        
|                                                                           | Discontinued operations                                                            |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|                                                                           | Net Loss                                                                           |                                                     | $      
|                                                                           |                                                                                    |                                                     |        
|Other comprehensive income (loss), net of tax:                             |                                                                                    |                                                     |        
|                                                                           | Unrealized gain on marketable securities                                           |                                                     |        
|                                                                           | Unrealized gain (loss) on currency translation                                     |                                                     |        
|                                                                           | Reclassification adjustment for losses included in sales of foreign operations     |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|Comprehensive loss                                                         |                                                                                    | $                                                   | (34,333
|                                                                           |                                                                                    |                                                     |        
|Net loss per common share, basic and diluted:                              |                                                                                    |                                                     |        
|                                                                           | Loss from continuing operations per common share                                   |                                                     | $      
|                                                                           | Loss from discontinued operations per common share                                 |                                                     |        
|                                                                           | Cumulative effect of accounting change on continuing operations per common share   |                                                     |        
|                                                                           | Cumulative effect of accounting change on discontinued operations per common share |                                                     |        
|                                                                           |                                                                                    |                                                     |        
|Net loss per common share                                                  |                                                                                    | $                                                   | (0.35  
|                                                                           |                                                                                    |                                                     |        

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

53

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

|                                                                                    |                                                                                                    | Year Ended December 31, |        
|----------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------- | -------
|
|Cash flows from operating activities:                                               |                                                                                                    |                         |        
|Net loss                                                                            |                                                                                                    | $                       | (34,411
|Adjustments to reconcile net loss to net cash provided by operating activities:     |                                                                                                    |                         |        
|                                                                                    | Gain on retirement of debt                                                                         |                         |        
|                                                                                    | Loss on discontinued operations, net of taxes                                                      |                         |        
|                                                                                    | Cumulative effect of accounting change, net of taxes                                               |                         |        
|                                                                                    | Loss on impairment of customer accounts                                                            |                         |        
|                                                                                    | Loss on impairment of goodwill                                                                     |                         |        
|                                                                                    | (Gain) loss on sale of branch assets                                                               |                         |        
|                                                                                    | Amortization and depreciation                                                                      |                         |        
|                                                                                    | Amortization of debt costs and premium                                                             |                         |        
|                                                                                    | Amortization of deferred customer acquisition costs in excess of amortization of deferred revenues |                         |        
|                                                                                    | Deferred income taxes                                                                              |                         |        
|                                                                                    | Provision for doubtful accounts                                                                    |                         |        
|                                                                                    | Other                                                                                              |                         |        
|Changes in assets and liabilities, net of effects of acquisitions and dispositions: |                                                                                                    |                         |        
|                                                                                    | Receivables                                                                                        |                         |        
|                                                                                    | Related party tax receivable                                                                       |                         |        
|                                                                                    | Other assets                                                                                       |                         |        
|                                                                                    | Accounts payable                                                                                   |                         |        
|                                                                                    | Deferred revenue                                                                                   |                         |        
|                                                                                    | Other liabilities                                                                                  |                         |        
|                                                                                    |                                                                                                    |                         |        
|                                                                                    | Net cash provided by operating activities                                                          |                         |        
|Cash flows from investing activities:                                               |                                                                                                    |                         |        
|                                                                                    | Installations and purchases of new accounts                                                        |                         |        
|                                                                                    | Deferred customer acquisition costs                                                                |                         |        
|                                                                                    | Deferred customer acquisition revenue                                                              |                         |        
|                                                                                    | Purchase of property and equipment                                                                 |                         |        
|                                                                                    | Purchase of parent company bonds                                                                   |                         |        
|                                                                                    | Proceeds from sale of parent company bonds                                                         |                         |        
|                                                                                    | Sale (purchase) of AV One, Inc.                                                                    |                         |        
|                                                                                    | Proceeds from disposition of assets and sale of customer accounts                                  |                         |        
|                                                                                    |                                                                                                    |                         |        
|                                                                                    | Net cash used in investing activities                                                              |                         |        
|Cash flows from financing activities:                                               |                                                                                                    |                         |        
|                                                                                    | Payments on long-term debt                                                                         |                         |        
|                                                                                    | Proceeds from long-term debt                                                                       |                         |        
|                                                                                    | Borrowings from revolving credit facility                                                          |                         |        
|                                                                                    | Sale (purchase) of parent company stock held as treasury                                           |                         |        
|                                                                                    | Purchase of treasury stock                                                                         |                         |        
|                                                                                    | Proceeds from sale of trademark                                                                    |                         |        
|                                                                                    | Issuance costs and other                                                                           |                         |        
|                                                                                    | Funding from parent                                                                                |                         |        
|                                                                                    |                                                                                                    |                         |        
|                                                                                    | Net cash provided by (used in) financing activities                                                |                         |        
|                                                                                    |                                                                                                    |                         |        
|Net cash provided by (used in) discontinued operations                              |                                                                                                    |                         | 229    
|                                                                                    |                                                                                                    |                         |        
|                                                                                    | Net increase (decrease) in cash and cash equivalents                                               |                         |        
|Cash and cash equivalents:                                                          |                                                                                                    |                         |        
|                                                                                    | Beginning of period                                                                                |                         |        
|                                                                                    |                                                                                                    |                         |        
|                                                                                    | End of period                                                                                      |                         | $      
|                                                                                    |                                                                                                    |                         |        
|Cash paid for interest                                                              |                                                                                                    | $                       | 40,989 
|                                                                                    |                                                                                                    |                         |        
|Cash paid for taxes, exclusive of benefits received from parent                     |                                                                                                    | $                       | 296    
|                                                                                    |                                                                                                    |                         |        

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

54

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

|                                      |  | Common Stock |   |   |       |  |   |         |   |   |           | Accumulated
Other
Comprehensive
Income(Loss) |   |         |  
|------------------------------------- |  | ------------ | - | - | ----- |  | - | ------- | - | - | --------- | -------------------------------------------- | - | ------- | -
|
|
|Common Stock                          |  |              |   |   |       |  |   |         |   |   |           |                                              |   |         |  
|December 31, 2000                     |  | 120,207,987  |   | $ | 1,270 |  | $ | (5,332  | ) | $ | 1,380,774 |                                              | $ |        |  
|Exercise of options and warrants      |  | 65,568       |   |   | 1     |  |   |        |   |   | 612       |                                              |   |        |  
|Shares issued-ESPP                    |  | 145,523      |   |   | 1     |  |   |        |   |   | 99        |                                              |   |        |  
|Intercompany transactions             |  |             |   |   |      |  |   |        |   |   | (35       | )                                            |   |        |  
|Unrealized loss-currency translation  |  |             |   |   |      |  |   |        |   |   |          |                                              |   |        |  
|Acquisition of treasury stock         |  | (22,013,592  | ) |   |      |  |   | (27,099 | ) |   |          |                                              |   |        |  
|Investment in parent securities       |  |             |   |   |      |  |   |        |   |   |          |                                              |   | (1,413  | )
|Net loss                              |  |             |   |   |      |  |   |        |   |   |          |                                              |   |        |  
|                                      |  |              |   |   |       |  |   |         |   |   |           |                                              |   |         |  
|December 31, 2001                     |  | 98,405,486   |   | $ | 1,272 |  | $ | (32,431 | ) | $ | 1,381,450 |                                              | $ | (1,413  | )
|Exercise of options and warrants      |  | 61,063       |   |   | 1     |  |   |        |   |   | 224       |                                              |   |        |  
|Shares issued-ESPP                    |  | 489,791      |   |   | 5     |  |   |        |   |   | 372       |                                              |   |        |  
|Intercompany transactions             |  |             |   |   |      |  |   |        |   |   | (22       | )                                            |   |        |  
|Unrealized loss-currency translation  |  |             |   |   |      |  |   |        |   |   |          |                                              |   |        |  
|Acquisition of treasury stock         |  | (1,000,000   | ) |   |      |  |   | (2,178  | ) |   |          |                                              |   |        |  
|Investment in parent securities       |  |             |   |   |      |  |   |        |   |   |          |                                              |   | (13,537 | )
|Net loss                              |  |             |   |   |      |  |   |        |   |   |          |                                              |   |        |  
|                                      |  |              |   |   |       |  |   |         |   |   |           |                                              |   |         |  
|December 31, 2002                     |  | 97,956,340   |   | $ | 1,278 |  | $ | (34,609 | ) | $ | 1,382,024 |                                              | $ | (14,950 | )
|Exercise of options and warrants      |  | 178,600      |   |   | 2     |  |   |        |   |   | 168       |                                              |   |        |  
|Shares issued-ESPP                    |  | 150,239      |   |   | 1     |  |   |        |   |   | 252       |                                              |   |        |  
|Unrealized gain-marketable securities |  |             |   |   |      |  |   |        |   |   |          |                                              |   |        |  
|Acquisition of treasury stock         |  | (2,500       | ) |   |      |  |   | (3      | ) |   |          |                                              |   |        |  
|Investment in parent securities       |  |             |   |   |      |  |   |        |   |   | (3,010    | )                                            |   | 14,950  |  
|Net loss                              |  |             |   |   |      |  |   |        |   |   |          |                                              |   |        |  
|                                      |  |              |   |   |       |  |   |         |   |   |           |                                              |   |         |  
|December 31, 2003                     |  | 98,282,679   |   | $ | 1,281 |  | $ | (34,612 | ) | $ | 1,379,434 |                                              | $ |        |  
|                                      |  |              |   |   |       |  |   |         |   |   |           |                                              |   |         |  

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

55

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

1.    The Company:

Protection One, Inc. ("Protection One" or the "Company"), is a publicly traded security alarm monitoring company. Protection One is principally engaged in
the business of providing security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and business customers. On
February 17, 2004, Westar Industries, Inc., a Delaware corporation ("Westar Industries") and a wholly owned subsidiary of Westar Energy, Inc., a Kansas corporation ("Westar
Energy," and together with Westar Industries, "Westar"), sold approximately 87% of the issued and outstanding shares of the Company's common stock, par value $0.01 per share (the "Common Stock") to
POI Acquisition I, Inc., a wholly-owned subsidiary of POI Acquisition, L.L.C. Both POI Acquisition, L.L.C. and POI Acquisition I, Inc. are entities formed by Quadrangle Capital Partners
L.P., Quadrangle Select Partners L.P., Quadrangle Capital Partners-A L.P. and Quadrangle Master Funding Ltd. (collectively, "Quadrangle"). Westar retained approximately 1% of the
Company's common stock, representing shares underlying restricted stock units granted to current and former employees of Westar. As part of the sale transaction, Westar Industries also assigned its
rights and obligations as the lender under the revolving credit facility to POI Acquisition, L.L.C. Quadrangle paid approximately $122.2 million to Westar as consideration for both the common
stock, revolving credit facility, including accrued interest of $2.2 million, and Westar could receive up to an additional $39.2 million that is contingent upon certain potential
post-closing events. See Note 15 of the Consolidated Financial Statements "Subsequent Events" for additional discussion regarding the sale of the Company's common stock.

The
Company prepares its financial statements in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. The accompanying consolidated financial statements include the accounts of Protection One's wholly owned subsidiaries. All significant intercompany balances have been eliminated in
consolidation.

See
Note 17 of the Consolidated Financial Statements for further discussion on Management's plan regarding liquidity and going concern issues.

2.    Summary of Significant Accounting Policies:

(a)    Stock Based Compensation.

In
December 2002, Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, it amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement
requires that companies follow the prescribed format and provide the additional disclosures in their annual reports for fiscal years ending after December 15, 2002. The Company applies the
recognition and measurement principles of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed by SFAS Nos. 123 and 148,

56

---

and
related interpretations in accounting for its stock-based compensation plans, as described in Note 7 of the Consolidated Financial Statements "Stock Warrants and Options." The Company has
adopted the disclosure requirements of SFAS No. 148.

For
purposes of the pro forma disclosures required by SFAS No. 148, the estimated fair value of the options is amortized to expense on a straight-line method over the
options' vesting period. Under SFAS No. 123, compensation expense would have been $0.7 million in 2003 and $0.9 million in 2002 and $2.8 million in 2001. Information
related to the pro forma impact on the Company's earnings and earnings per share follows.

Year ended December 31,2003

2002

2001Loss available for common stock, as reported

$
(34,411
)
$
(880,855
)
$
(86,048
)Add: Stock-based employee compensation expense included in reported net loss, net of related taxes


89


89


97Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects


(676
)

(880
)

(2,808
)Loss available for common stock, pro forma

$
(34,998
)
$
(881,646
)
$
(88,759
)Net loss per common share (basic and diluted):As reported

$
(0.35
)
$
(8.98
)
$
(0.82
)Pro forma

$
(0.36
)
$
(8.99
)
$
(0.84
)


(b)    Revenue Recognition

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

The
Company follows Staff Accounting Bulletin 101, or SAB 101, which requires the Company to defer certain system sales and installation revenues and expenses, primarily equipment,
direct labor and direct and incremental sales commissions incurred. Deferred system and upgrade installation revenues are recognized over the expected life of the customer utilizing an accelerated
method for residential and commercial customers and a straight-line method for our Multifamily customers. Deferred costs in excess of deferred revenue are recognized over the initial
contract term, utilizing a straight-line method, typically two to three years for North America and five to ten years for Multifamily systems. To the extent deferred costs are less than
deferred revenues, such costs are recognized over the estimated life of the customer.

57

---

In
2003, the Company deferred approximately $18.9 million in revenues and approximately $42.8 million of associated direct and incremental selling and installation costs.
In 2002, the Company deferred approximately $17.1 million in revenues and approximately $45.5 million of associated direct and incremental selling and installation costs. In 2001, the
Company deferred approximately $12.2 million in revenues and approximately $28.8 million of associated direct and incremental selling and installation costs. Prior to 2001 the Company
had acquired most of its customer accounts by acquisition or through an independent dealer program. In the dealer program, dealers billed and retained all installation revenues.

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

(c)    Inventories

Inventories, primarily comprised of alarm systems and parts, are stated at the lower of average cost or market. Inventory is shown net of an obsolescence reserve
of $2.8 million and $3.6 million at December 31, 2003 and 2002, respectively. This reserve is determined based primarily upon current usage of the individual parts included in
inventory.

(d)    Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over estimated useful lives. Gains or losses from retirements
and dispositions of property and equipment are recognized in income in the period realized. Repair and maintenance costs are expensed as incurred.

Estimated
useful lives of property and equipment are as follows:

Furniture, fixtures and equipment

5-10 yearsData processing and telecommunication

3-7 yearsLeasehold improvements

lease term; generally 5-10 yearsVehicles

5 yearsBuildings

40 years


(e)    Income Taxes

The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when reported amounts of the assets or liabilities are recovered
or settled. The deferred tax assets are periodically reviewed for recoverability.

The
Company has a tax sharing agreement with Westar Energy. Pursuant to this agreement Westar Energy has in the past made payments to the Company for current tax benefits utilized by
Westar Energy in its consolidated tax return irrespective of whether the Company would realize these current benefits on a separate return basis. As of December 31, 2003, other than for net
operating loss carryforwards, no valuation allowance had been established by the Company because the tax sharing

58

---

agreement
utilizes a parent company down approach in the allocation of income tax expense among members of the consolidated tax group and, consistent with that approach, no valuation allowance had
been allocated to the Company. During the first quarter of 2004, Westar completed its disposition of Protection One. Payment for subsequent benefits will, therefore, no longer be made, except for
amounts owed with respect to losses the Company incurred prior to leaving the Westar consolidated tax group as a result of Westar selling its interest in the Company. Accordingly, a substantial
portion of the Company's net deferred tax assets of $286.3 million at December 31, 2003 will be impaired. As discussed in Note 15 of the Consolidated Financial Statements
"Subsequent Events," the Company will be required to record a non-cash charge against income for the portion of its net deferred tax assets determined not to be realizable. This charge
will be material and will have a material adverse effect on its financial condition and results of operations.

(f)    Comprehensive Loss

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

(g)    Customer Accounts

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

The
choice of an amortization life is based on estimates and judgments about the amounts and timing of expected future revenues from customer accounts and average customer account life.
Selected periods were determined because, in management's opinion, they would adequately match amortization cost with anticipated revenue. The Company periodically uses an independent appraisal firm
to perform lifing studies on its customer accounts in order to assist management in determining appropriate lives of its customer accounts. These reviews are performed specifically to evaluate the
Company's historic amortization policy in light of the inherent declining revenue curve over the life of a pool of customer accounts, and the Company's historical attrition experience. The Company has
identified three distinct
pools of customer accounts, each of which has distinct attributes that effect differing attrition characteristics.

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

Pool

MethodNorth AmericaAcquired Westinghouse Customers

Eight-year 120% declining balanceOther Customers

Ten-year 135% declining balanceMultifamily

Nine-year straight-line


The
results of a lifing study performed by a third party appraisal firm in the first quarter of 2002 showed a deterioration in the average remaining life of customer accounts. The report
showed the Company's North America customer pool can expect a declining revenue stream over the next 30 years

59

---

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

Effective
January 1, 2002, the Company adopted SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment
and Disposal of Long-Lived Assets." To implement the new standards, an independent appraisal firm was engaged to help management estimate the fair values of goodwill and customer accounts.
Based on this analysis completed during 2002, the Company recorded a net charge of approximately $765.2 million, net of tax, of which $543.6 million was related to goodwill and
$221.6 million was related to customer accounts. These accounting standards, the related charge and other related information are detailed in Note 14 of the Consolidated Financial
Statements "Impairment Charges."

Due
to the levels of customer attrition experienced in 2001 and because of recurring losses, management performed impairment tests on its customer account asset and goodwill in 2001.
These tests indicated that future estimated undiscounted cash flows exceeded the sum of the recorded balances for customer accounts and goodwill and no impairment charge was recorded in 2001.
Additionally, no impairment charge for the customer account asset was deemed to be necessary in 2003.

(h)    Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. In 2001, goodwill was amortized over its estimated
remaining useful life based on a 20-year life.

Beginning
January 1, 2002, goodwill is no longer amortized. Accounting rules adopted on January 1, 2002 do not permit amortization and require an annual impairment test.
See Note 14 of the Consolidated Financial Statements "Impairment Charges" for information regarding an impairment recorded in 2002. The Company established July 1 as its annual
impairment testing date. The Company completed an annual impairment test during the third quarter of 2002 and determined that no additional impairment was required as of that date.

60

---



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

The
Company performed impairment testing during the third quarter of 2003 and determined that no additional impairment was required as of that date.

The
Company is required to perform impairment tests for long-lived assets prospectively when the Company determines that indicators of impairment are present. Declines in
market value of its business or the value of its customer accounts that may be incurred prospectively may also require additional impairment charges. Any such impairment charges could be material.

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

(i)    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.

(j)    Restricted Cash

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

(k)    Receivables

Gross receivables, which consist primarily of trade accounts receivable, of $30.6 million at December 31, 2003 and $32.4 million at
December 31, 2002 have been reduced by allowances for doubtful accounts of $6.9 million and $6.3 million, respectively.

The
Company's policy for North America is to establish a reserve for a percentage of a customer's total receivable balance when any portion of that receivable balance is greater than
30 days past due. This percentage, which is based on the Company's historical experience, is increased as any portion of the receivable ages until it is fully reserved and written off when it
is 120 days past due and the account is disconnected and turned over to a collection agency. Additionally, once the customer's balance is greater than 120 days past due, all other
receivable balances associated with that customer, irrespective of how many days past due, are deemed to be 120 days past due and fully reserved. In

61

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certain
instances, based upon the discretion of the local general manager, credit can be extended and the account may remain active.

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

(l)    Marketable securities

The Company's marketable securities are available-for-sale and consist of 16,168 shares of MetLife stock received as part of MetLife's
demutualization. The securities are recorded at market value with a balance of $0.5 million at December 31, 2003, which includes $0.1 million of unrealized gains.

(m)    Advertising Costs

Printed materials are expensed as incurred. Broadcast advertising costs are expensed upon the first broadcast of the respective advertisement. Total advertising
expense was $2.8 million, $3.9 million and $3.4 million, during the years ended December 31, 2003, 2002, and 2001, respectively.

(n)    Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables from a large number of
customers, including both residential and commercial, dispersed across a wide geographic base. The Company extends credit to its customers in the normal course of business, performs periodic credit
evaluations and maintains allowances for the potential credit losses. The Company has customers located throughout the United States. The Company does not believe a significant risk of loss from a
concentration of credit risk exists.

(o)    Loss Per Share

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

December 31,2003

2002

2001Weighted average shares outstanding

98,129,343

98,071,206

105,458,601


The
Company had outstanding stock options and warrants of which approximately 5.6 thousand, 1.7 million and 0.6 million represent dilutive potential common shares
for the years ended December 31, 2003, 2002 and 2001. These securities were not included in the computation of diluted earnings per share since to do so would have been antidilutive for all
periods presented.

(p)    New Accounting Standards

Consolidation of Variable Interest Entities.In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entitiesan Interpretation of ARB No. 51." This interpretation was replaced by FIN No. 46R in December of 2003. The revised interpretation (FIN
No. 46R) provides guidance related to identifying variable interest entities and determining whether such entities should be included in consolidated financial statements. Special provisions
apply to enterprises that have fully or partially applied Interpretation 46 prior to issuance of FIN No. 46R. Otherwise, application of FIN

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No. 46R
(or Interpretation 46) is required in financial statements of public entities that have interests in variable interest entities or potential variable interest entities, commonly
referred to as special-purpose entities, for periods ending after December 15, 2003. The Company adopted the provisions of FIN No. 46R in 2003. The Company does not have any variable
interest entities and therefore has no impact from this interpretation.

Accounting for Financial Instruments with Characteristics of Both Liabilities and Equity.In May 2003, the FASB issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement establishes standards for classification and measurement of certain
financial instruments. The statement requires financial instruments within its scope to be classified as liabilities in most circumstances. The Company adopted SFAS No. 150 in the second
quarter of 2003. The Company does not have any financial instruments that are within the scope of SFAS No. 150, and therefore has no impact from this statement.

(q)    Prior Year Reclassification

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

3.    Property and Equipment:

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

December 31,2003

2002Furniture, fixtures and equipment

$
7,507

$
7,199Data processing and telecommunication


69,894


65,836Leasehold improvements


3,127


5,085Vehicles


14,066


13,892Buildings and other


6,194


6,654100,788


98,666Less accumulated depreciation


(68,867
)

(60,912
)Property and equipment, net

$
31,921

$
37,754


Depreciation
expense was $11.6 million, $13.5 million and $15.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.

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4.    Intangible AssetsCustomer Accounts and Goodwill:

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

December 31,2003

2002Beginning customer accounts

$
680,349

$
1,283,495Acquisition of customer accounts


259


1,195Impairment charge (Note 14)





(603,285
)Sale of accounts


(28
)

(398
)Purchase holdbacks and other


348


(658
)680,928


680,349Less accumulated amortization


(436,184
)

(367,564
)Ending customer accounts, net

$
244,744

$
312,785


Amortization
expense was $68.6 million, $68.9 million and $132.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. As part of the
impairment charge in 2002, approximately $265.2 million of accumulated amortization was written off.

The
table below reflects the estimated aggregate customer account amortization for each of the five succeeding years on the Company's existing customer account base as of
December 31, 2003 (in thousands):

2004

2005

2006

2007

2008Estimated amortization expense

$
68,612

$
52,322

$
51,961

$
45,641

$
20,000


The
changes in carrying amounts of goodwill for the years ended December 31, 2003 and 2002, are as follows (in thousands):

North
America
Segment

Multifamily
Segment

TotalBalance as of January 1, 2002

$
613,414

$
150,035

$
763,449Impairment losses (Note 14)


(613,414
)

(104,188
)

(717,602
)Realization of purchased tax assets





(4,000
)

(4,000
)Balance as of December 31, 2002 and 2003




$
41,847

$
41,847


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5.    Long-Term Debt:

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

December 31,2003

2002Revolving Credit Facility maturing January 5, 2005, variable 7.8%(a)

$
215,500

$
215,500Senior Subordinated Notes, maturing January 2009, fixed 8.125%


110,340


110,340Senior Unsecured Notes, maturing August 2005, fixed 7.375%


190,925


190,925Senior Subordinated Discount Notes, maturing June 2005, fixed 13.625%(b)


30,609


31,033Convertible Senior Subordinated Notes, maturing September 2003, fixed 6.75%





9,725Other debt obligations, including capital leases





434547,374


557,957Less current portion(c)


(215,500
)

(10,159
)Total long-term debt

$
331,874

$
547,798


---

During
2003 the Company retired at face value $9.7 million of its 6.75% bonds that matured. During 2002 the Company acquired $103.2 million of its bonds for
$83.2 million resulting in a gain of $19.3 million. During 2001 the Company acquired $146.0 million of its bonds for $91.7 million resulting in a gain of
$53.0 million. In some cases these debt securities were acquired from Westar Industries limiting the amount of gain.

Revolving Credit Facility

The revolving credit facility provides for borrowings up to $215.5 million with a variable interest rate and currently expires on January 5, 2005.
The revolving credit facility's terms provide that it must be paid in full upon a change in control. The revolving credit facility has been reflected as a current liability based on Westar's execution
of a definitive sales agreement on December 23, 2003 to dispose of the Company. Because of the potential default that existed at the end of 2003 related to Westar's pending sale of its
ownership interest in the Company, the Company's outstanding borrowings under the revolving credit facility are currently ABR borrowings and are at a rate higher than previous Eurodollar borrowings.
The Company and Quadrangle entered into a standstill agreement, which among other things, prohibits the Company from making borrowings under the facility and also

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prohibits
Quadrangle from exercising its remedies under the facility for a period not to exceed 90 days if certain conditions are met.

The
weighted-average annual interest rate after fees on all borrowings under the facility was 6.3%, 7.0% and 9.0% for the years ended December 31, 2003, 2002, and 2001
respectively.

Senior Subordinated Notes

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

Senior Notes

In 1998, the Company issued $250 million of 73/8% senior notes. Interest is payable semi-annually on February 15 and
August 15. As described in Note 15 of the Consolidated Financial Statements, the Company did not make the interest payment that was due on February 17, 2004 and has 60 days
before the grace period expires. Upon expiration of the grace period, the trustee or the holders of the notes may declare such notes to be immediately due and payable. The notes are redeemable at the
Company's option, in whole or in part, at a predefined price. As of December 31, 2003, approximately $26.6 million of these notes were held by Westar.

Senior Subordinated Discount Notes

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

The
indenture relating to the Company's 135/8% senior subordinated discount notes requires the Company to give notice of its intention to repurchase the notes within
30 days following the date of a change in control and to consummate the repurchase within 60 days of such notification. Under the terms of this indenture, because the Company did not
offer to repurchase such notes, such inaction constitutes a covenant breach, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default
under the indenture for the 135/8% senior subordinated discount notes. Furthermore, upon any such event of default, the trustee or the holders of such senior subordinated discount notes
may seek to exercise certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the notes, which acceleration, if not rescinded or
satisfied, would cause a cross default to be triggered under the indenture for the 81/8% senior subordinated notes, which had aggregate outstanding principal of $110.3 million as
of March 15, 2004. If such acceleration and cross default should occur, the Company does not have the funds available to repay the indebtedness, and could be forced to seek relief under the
U.S. Bankruptcy Code or an out-of-court restructuring.

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Convertible Senior Subordinated Notes

In 1996, the Company issued $103.5 million aggregate principal amount of 63/4% convertible senior subordinated notes. These notes matured in
September 2003 and have been paid in full.

Other

This category represents debt obligations for software leases. The weighted average interest rate on these obligations approximates 6.92% for 2002. These
obligations were satisfied during 2003.

Debt Maturities

Debt maturities other than under the Company's revolving credit facility, and exclusive of the potential impact of any uncured conditions of default (see
Note 15 of the Consolidated Financial Statements "Subsequent Events"), are as follows (in thousands):

2004


2005


220,797
(a)2006


2007


2008 and thereafter


110,340Total

$
331,137


---

Financial and operating covenants

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

The
Company's revolving credit facility contains financial and operating covenants which may restrict the Company's ability to incur additional debt, pay dividends, make loans or
advances and sell

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assets.
Under the standstill agreement executed with Quadrangle, the Company has received a waiver of certain specified defaults for a period not to exceed 90 days, if certain conditions are
met.

Debt Instrument

Financial CovenantRevolving Credit Facility

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

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

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


At
December 31, 2003, the Company believed it was in compliance with the covenants under the revolving credit facility and the indentures relating to the Company's other
indebtedness. The Company's ability to comply with the ratios and the tests will be affected by events outside its control and there can be no assurance that the Company will continue to meet those
tests. Failure to meet the tests would place additional restrictions on the Company's ability to incur indebtedness. A violation of these restrictions would result in an event of default which would
allow the lenders to declare all amounts outstanding immediately due and payable.

Following
the change in control on February 17, 2004, the revolving credit facility is in default, and the Company is required to (i) make an offer to the holders of the
Company's 135/8% senior subordinated discount notes to purchase the notes at approximately 101% of par and (ii) make an offer to the holders of the Company's 73/8%
senior notes and 81/8% senior subordinated notes to purchase the notes at 101% of par if such change in control is coupled with the withdrawal of the rating of the notes or two ratings
downgrades by one of certain specified rating agencies provided that such withdrawal or downgrade occurs within 90 days after the date of public notice of the occurrence of the change in
control or the intention to effect the change in control.

See
Note 15 "Subsequent Events" for further discussion.

6.    Related Party Transactions



On November 8, 2002, the Kansas Corporation Commission, or KCC, issued Order No. 51 which required Westar Energy to initiate a corporate and
financial restructuring, reverse specified accounting

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transactions
described in the Order, review, improve and/or develop, where necessary, methods and procedures for allocating costs between utility and non-utility businesses for KCC
approval, refrain from any action that would result in its electric businesses subsidizing non-utility businesses, reduce outstanding debt giving priority to reducing utility debt and,
pending the corporate and financial restructuring, imposed standstill limitations on Westar Energy's ability to finance non-utility businesses including the Company. These standstill
protections required that Westar Energy seek KCC approval before it takes actions such as making any loan to, investment in or transfer of cash in excess of $100,000 to the Company or another
non-utility affiliate, entering into any agreement with the Company or another non-utility affiliate where the value of goods or services exchanged exceeds $100,000, investing
by Westar Energy or Westar Energy's affiliate, of more than $100,000 in an existing or new non-utility business and transferring any non-cash assets or intellectual property to
the Company or another non-utility affiliate. In addition, Westar Energy must charge interest to the Company and other non-utility affiliates at the incremental cost of their
debt on outstanding balances of any existing or future inter-affiliate loans, receivables or other cash advances due Westar Energy. The Order also suggested that the sale by Westar Energy of the
Company's stock should be explored, along with other alternatives, as a possible source of cash to be used to reduce Westar Energy debt. An additional provision affecting the Company includes a
requirement that it cannot sell assets having a value of $100,000 or more with prior KCC approval.

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

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

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

On
February 25, 2003, the Company entered into a partial Stipulation and Agreement, which is referred to as the reconsideration agreement, with the Staff of the KCC, Westar
Energy, Westar Industries and an intervenor. The reconsideration agreement requested that the KCC issue an order granting limited reconsideration and clarification to its order issued
December 23, 2002. The reconsideration agreement also requested that the KCC authorize Westar Energy and Westar Industries to perform their respective obligations to the Company under the tax
sharing agreement and the revolving credit facility. Additionally, the reconsideration agreement provided that, among other things: (a) the maximum borrowing capacity under the revolving credit
facility will be reduced to $228.4 million and the maturity date may be extended one year to January 5, 2005; (b) Westar Energy may provide funds to Westar Industries to the
extent necessary to perform its obligations to the

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Company
under the revolving credit facility; (c) Westar Energy will reimburse the Company approximately $4.4 million for expenses incurred in connection with services provided by
Protection One Data Services and AV One, Inc. to Westar Energy and Westar Industries, and for the sale of AV One, Inc. to Westar Energy and (d) the management services agreement
between the Company and Westar Industries was cancelled.

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

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

On
January 2, 2004, Westar Energy and Westar Industries filed a Joint Motion with the KCC to sell Westar Industries' equity interest in Protection One to Quadrangle. The Joint
Motion also sought to assign Westar Industries' interest in the revolving credit facility to Quadrangle. In the alternative, the Joint Motion sought permission for Westar Energy to sell its shares of
stock in Westar Industries to Quadrangle, at which time Westar Industries' assets and liabilities would consist of the revolving credit facility and its equity interest in Protection One. On
February 13, 2004, the KCC approved the Joint Motion.



The Company had outstanding borrowings under the revolving credit facility with Westar Industries of $215.5 million at December 31, 2003 and 2002.
The Company accrued interest expense of $12.6 million, $12.3 million and $10.5 million and made interest payments of $13.1 million, $12.4 million and
$10.4 million on borrowings under the facility for the years ended December 31, 2003, 2002 and 2001, respectively. Pursuant to the reconsideration agreement, the maximum borrowing
capacity of the revolving credit facility was reduced from $280.0 million to $228.4 million. Accordingly, Westar Energy agreed to refund approximately $0.5 million to the Company
in amendment fees. This amount was refunded on June 24, 2003 upon execution of the Thirteenth Amendment to the revolving credit facility.

70

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On
June 30, 2003 the Company paid $0.5 million amendment fee to Westar Industries for the Fourteenth Amendment to the revolving credit facility. This amendment extended the
maturity date of the revolving credit facility to January 5, 2005 and increased the applicable margin on Eurodollar borrowings to 5.00%.



On June 30, 2003 Westar Industries paid the Company approximately $0.5 million partially as consideration for the Company's grant of a license to
Protection One Europe Holding S.A. to use the Protection One trademark and name in certain European countries. Revenues from this agreement will be recognized over the life of the licensing agreement.



During 2002 and 2001, respectively, the Company acquired from Westar Industries $83.9 million and $93.7 million face value of the Company's bonds
for $66.8 million and $61.8 million, respectively. These bonds were purchased at Westar Industries' cost which generally approximated fair value. As a result of these transactions, a
gain of $16.6 million and $31.6 million was recognized in 2002 and 2001, respectively. No bonds were repurchased from Westar Industries in 2003.

During
2002, the Company acquired approximately $41.2 million of Westar Energy 6.25% notes, approximately $21.6 million of Westar Energy 6.875% notes, and approximately
$4.6 million of Westar Energy 7.125% notes. All of these notes were subsequently sold at cost to Westar Energy prior to June 30, 2002. In addition, in the first quarter of 2002 the
Company acquired $0.3 million of Westar Energy preferred securities and $0.1 million of ONEOK, Inc. common stock, all of which were subsequently sold at cost to Westar Energy on
March 27, 2002. During 2002 the Company acquired in open market purchases approximately $12.6 million of Westar Energy common stock and approximately $1.5 million of Westar Energy
preferred stock. During 2002, the Company received dividends of approximately $0.1 million and $0.5 million on Westar Energy preferred stock and common stock, respectively. The dividends
were recorded as a reduction in basis in Westar Energy equity securities. At December 31, 2002, the Company held 850,000 shares of Westar Energy common stock at a cost of approximately
$13.0 million and 34,213 shares of Westar Energy preferred stock at a cost of approximately $2.0 million for a combined cost of approximately $15.0 million which is reflected in
the equity section of the Company's balance sheet. These securities were sold to Westar Energy on February 14, 2003 for approximately $11.6 million. The difference between the cost and
proceeds received from Westar Energy was reflected as a reduction of contributed capital from Westar Energy in the first quarter of 2003.

At
December 31, 2003 and 2002, Westar held approximately $26.6 million of the Company's 73/8% senior notes which it acquired in prior years.



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

71

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The Company acquired 16,101,892 shares of its common stock at market prices from Westar Industries during the year ended December 31, 2001 for
$19.5 million. The Company reports these shares as treasury stock, at cost, in the equity section of the accompanying balance sheet. As of December 31, 2003 and 2002, the Company's
shares of common stock owned by Westar Energy and Westar Industries represented approximately 88% of the total outstanding shares.



The Company had a receivable balance of $26.1 million and $20.7 million at December 31, 2003 and 2002, respectively, relating to the tax
sharing agreement with Westar Energy. Subsequent to December 31, 2002, upon completion of the 2002 income tax return by Westar, along with adjustments from amended income tax returns, an
additional receivable of $12.8 million was recorded in 2003. An additional $12.6 million receivable was recorded for the estimated tax benefit generated in 2003 that Westar Energy will
be able to utilize in its 2003 consolidated income tax return. In December 2003 the Company received $20.0 million from Westar Energy as partial payment for the tax benefit utilized in
their 2002 tax return filed in the third quarter of 2003. In February 2002, the Company received $1.7 million from Westar Energy for payment of the tax receivable at December 31,
2001. In October 2001, the Company received $7.3 million and $11.8 million from Westar Energy under the tax sharing agreement for tax year 2000 and the estimated tax benefit
through September 30, 2001, respectively. See Note 8 of the Consolidated Financial Statements "Income Taxes" for further discussion relating to income taxes and the tax sharing
agreement.



Westar Energy provides administrative services at its fully loaded cost to the Company pursuant to an agreement which is referred to as the administrative
services agreement, which includes accounting, tax, audit, human resources, legal, purchasing and facilities services. Charges of approximately $4.3 million were incurred for the year ended
December 31, 2003, compared to charges of approximately $3.9 million and $8.1 million for the year ended December 31, 2002 and 2001, respectively. The Company had a net
balance due to Westar Energy primarily for these services of $0.3 million and $1.0 million at December 31, 2003 and 2002, respectively. The Company rents office space for its
corporate headquarters from Westar on a month-to-month basis. The Company paid approximately $0.6 million for rent for each of the years ended December 31, 2003,
2002 and 2001.

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

72

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

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



In late 2002 and early 2003, Westar Energy and various AV One personnel were served with subpoenas by the grand jury of the United States District Court for the
District of Kansas, concerning, among other things, the use of aircraft leased by Westar Industries, and by AV One. The Company cooperated with the grand jury and Westar Energy in connection with such
subpoenas. On December 4, 2003, two former executives of Westar Energy, who were also previous members of the Company's Board of Directors, were indicted by the grand jury for various alleged
offenses, including alleged misuse of and improper accounting related to these aircraft. It is the Company's understanding that the grand jury's investigation into these issues has been concluded.

The
Company's chief executive officer, Richard Ginsburg, and its chief financial officer, Darius Nevin, held similar positions with Guardian International, Inc. (Guardian) prior
to taking their current positions with the Company. The Company granted Guardian an option to purchase an aggregate of 250,000 shares of the Company's common stock in connection with the Company's
hiring of Mr. Ginsburg. See Note 7 of the Consolidated Financial Statements "Stock Warrants and Options" for additional discussion regarding these options. In November 2001, the
Company sold a portfolio of customer accounts for approximately $0.1 million to Mutual Central Alarm Services, Inc. (Mutual), a

73

---

wholly
owned subsidiary of Guardian. In December 2001, the Company purchased a portfolio of customer accounts from Guardian for approximately $0.4 million. Westar Energy is a significant
holder of Guardian's preferred stock.

7.    Stock Warrants and Options:

The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock
Issued to Employees." Under APB No. 25, the Company recognizes no compensation expense related to employee stock options that are granted with an exercise price at or greater than the market
price on the day of grant.

A
summary of warrant and option activity for the Company's common stock from December 31, 2000 through December 31, 2003 is as follows:

Warrants
And Options

Weighted
Average
Exercise
PriceOutstanding at December 31, 2000

4,664,533

$
6.294Granted

2,045,541


1.329Exercised

(65,568
)

1.438Surrendered

(974,394
)

4.658Outstanding at December 31, 2001

5,670,112

$
4.840Granted

797,500


2.201Exercised

(60,621
)

1.422Surrendered

(1,144,138
)

10.063Outstanding at December 31, 2002

5,262,853

$
3.344Granted

40,000


1.200Exercised

(178,600
)

0.183Surrendered

(792,967
)

5.672Outstanding at December 31, 2003

4,331,286

$
3.029


74

---

The
table below summarizes stock options and warrants for the Company's common stock outstanding as of December 31, 2003:

Description

Range of
Exercise Price

Number of
Shares of
Common
Stock

Weighted-
Average
Remaining
Contractual
Life in years

Weighted
Average
Exercise
PriceExercisableFiscal 1995

$6.375-$6.500

10,800

1 year

$
6.444Fiscal 1996

8.000-13.875

24,000

2 years


9.469Fiscal 1997

9.500

44,000

3 years


9.500Fiscal 1998

11.000

213,000

4 years


11.000Fiscal 1999

5.250-8.9275

284,914

5 years


8.274Fiscal 2000

1,3125-1.4375

290,695

6 years


1.431Fiscal 2001

0.875-1.480

1,249,912

7 years


1.328Fiscal 2002

2.070-2.750

256,575

8 years


2.2041995 Note Warrants

3.890

780,837

1 year


3.8903,154,733Not exercisable2001 options

0.8750-1.480

615,628

7 years


1.3282002 options

2.070-2.750

520,925

8 years


2.2042003 options

1.200

40,000

9 years


1.2001,176,553Outstanding



4,331,286


On
April 16, 2001, the Company granted an option to purchase an aggregate of 875,000 shares of its common stock to Richard Ginsburg as part of his employment agreement with the
Company. The option has a term of ten years and vests ratably over the next three years. The purchase price of the shares issuable pursuant to the option is $1.32 per share while the fair market value
of the common stock at the date of the option grant was $1.79 per share resulting in $0.4 million in deferred compensation expense amortized over three years. The expense amount was
$0.1 million for each of the years ending December 31, 2003, 2002 and 2001.

1994 Stock Option Plan

The 1994 Stock Option Plan, which is referred to as the Plan, approved by the Protection One stockholders in June 1994, provides for the award of incentive
stock options to directors, officers and key employees under the Plan. A total of 1,300,000 shares are reserved for issuance, subject to such adjustment as may be necessary to reflect changes in the
number or kinds of shares of common stock or other securities of Protection One. The Plan provides for the granting of options that qualify as incentive stock options under the Internal Revenue Code
and options that do not so qualify.

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

75

---



1997 Long-Term Incentive Plan

The 1997 Long-Term Incentive Plan, which is referred to as the LTIP, approved by the Protection One stockholders on November 24, 1997, provides
for the award of incentive stock options to directors, officers and key employees. Under the LTIP, 5,700,000 shares are reserved for issuance, subject to such adjustment as may be necessary to reflect
changes in the number or kinds of shares of common stock or other securities of Protection One. The LTIP provides for the granting of options that qualify as incentive stock options under the Internal
Revenue Code and options that do not so qualify.

Each
option has a term of ten years and vests ratably over three years. As a result of Westar selling its interest in the Company's stock (see Note 15 of the Consolidated
Financial Statements "Subsequent Events"), all options have subsequently vested due to the change in control. The purchase price of the shares issuable pursuant to the options is equal to (or greater
than) the fair market value of the common stock at the date of the option grant. The weighted average fair value of options granted during 2003, 2002 and 2001 estimated on the date of grant using the
Black-Scholes Option Pricing Model were $0.80, $1.78 and $0.98, respectively. The fair value was calculated for the respective year using the following assumptions:

Year Ended December 31,2003

2002

2001Expected stock price volatility

67.1
%
91.3
%
83.9
%Risk free interest rate

3.2
%
4.8
%
4.95
%Remaining expected option life

7 years

6 years

6 years


On
April 16, 2001, the Company granted an option to purchase an aggregate of 250,000 shares of its common stock to Guardian International, Inc. (Guardian) in connection
with the hiring of Richard Ginsburg as the Company's new chief executive officer, who was formerly the chief executive officer of Guardian. The option has a term of ten years and vested ratably over
three years. The purchase price of the shares issuable pursuant to the option is $1.32 per share while the fair market value of the common stock at the date of the option grant was $1.79 per share
resulting in $0.4 million expense in 2001. On December 31, 2003, all options were outstanding and 166,667 options are exercisable. The options issued to Guardian are not included in the
outstanding options listed in the above tables.

76

---

8.    Income Taxes:

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

Year Ended December 31,2003

2002

2001FederalCurrent

$
23,071

$
20,745

$
19,564Deferred


(7,493
)

127,886


2,301StateCurrent


2,892


264


(266
)Deferred


(976
)

(43
)

(27
)17,494


148,852


21,572Tax on discontinued operations





674


(41
)Tax on cumulative effect of accounting change





72,335


Total

$
17,494

$
221,861

$
21,531


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

2003

2002

2001Federal statutory tax rate

35
%
35
%
35
%Non-deductible goodwill



(16
)
(15
)Other

(1
)
1

34
%
20
%
20
%


The
tax sharing agreement between Protection One and Westar Energy provides for payments to Protection One for tax benefits utilized by Westar Energy. Accordingly, in 2003 and 2002, the
Company received payments from Westar Energy of $20.0 million and $1.7 million, respectively. The receivable balance of $26.1 million at December 31, 2003 reflects the
balance of the estimated tax benefit to be utilized by Westar Energy in its 2003 consolidated income tax return plus the remainder of the 2002 tax benefit not paid in 2003. As described in
Note 15 of the Consolidated Financial Statements "Subsequent Events", for periods subsequent to February 17, 2004 future tax benefit will not be realized because the Company will no
longer file consolidated tax returns with Westar Energy. See Note 2(e) of the Consolidated Financial Statements "Summary of Significant Accounting PoliciesIncome Taxes", above.

77

---

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

2003

2002Deferred tax asset, current:Accrued liabilities

$
4,085

$
5,454Accounts receivable, due to allowance


615


1,248Revolving credit facility


28,844


Other


355


1,554$
33,899

$
8,256Deferred tax asset, noncurrent:AMT credit carryforwards

$
20,001

$
27,196Net operating loss carryforwards


8,307


8,307Valuation allowance


(8,307
)

(8,307
)Customer accounts


138,751


146,094Installed systems


40,328


40,147Property & equipment


742


(14,343
)Goodwill


68,321


76,680OID amortization


3,343


3,343Deferred customer acquisition costs (net of revenues)


(12,795
)

4,282Other


(6,280
)

3,246$
252,411

$
286,645


Following
the consummation of the sale of Westar's ownership interests in the Company, it is no longer a part of the Westar consolidated tax group. The Company and Westar did not,
however, terminate their tax sharing agreement, and based on discussions with Westar and its counsel, there are several areas of potential dispute regarding Westar's obligations under the terms of the
tax sharing agreement. The most material of these potential disputes involve (i) the amount of any tax sharing payments that would be due to the Company if Westar decides in the future to elect
to treat the sale of its interests in the Company as a sale of assets under the Internal Revenue Code, (ii) the proper treatment under the tax sharing agreement of tax obligations or benefits
arising out of the transaction in which Westar sold its ownership interests in the Company, including the impact on future tax sharing payments relating to the cancellation of indebtedness income
generated by a partial writedown of the revolving credit facility prior to closing or the assignment of the revolving credit facility for less than the full amount outstanding under the facility at
closing and (iii) whether tax sharing payments due to the Company when Westar was subject to alternative minimum tax should be calculated at the alternative minimum tax rate of 20% or the
normal statutory rate of 35% to the extent that Westar has utilized or is reasonably expected to be able to utilize the associated alternative minimum tax credits or otherwise has received full
benefits at normal statutory rates from our losses. The Company believes that it has strong positions with respect to these items and will aggressively pursue its positions. If successful, the Company
may realize additional tax sharing payments from Westar.

78

---

9.    Employee Benefit Plans:

401(k) Plan

The Company maintains a tax-qualified, defined contribution plan that meets the requirements of Section 401(k) of the Internal Revenue Code,
known as the Protection One 401(k) Plan. The Company makes contributions to the Protection One 401(k) Plan, which contributions are allocated among participants based upon the respective contributions
made by the participants through salary reductions during the applicable plan year. The Company's matching contribution may be made in common stock, in cash or in a combination of both stock and cash.
For the years ended December 31, 2003, 2002, and 2001, Protection One made matching cash contributions to the plan of $1.0 million, $1.1 million and $1.1 million,
respectively. The funds of the plan are deposited with a trustee and at each participant's option in one or more investment funds, including a Company stock fund. Contributions to the Company stock
fund were suspended during 2003, and the Company does not expect to resume contributions in 2004. The plan was amended effective January 1, 2001 requiring the Company to match employees'
contributions up to specified maximum limits.

Employee Stock Purchase Plan

Participation in the Employee Stock Purchase Plan, which is referred to as the ESPP, was suspended during 2003 due to the sales process associated with Westar
selling its ownership interest in the Company. All amounts contributed by employees through the ESPP in 2003 were returned in November 2003. Participation in the ESPP has not resumed and is not
expected to resume in 2004.

The
ESPP is designed to qualify as an "Employee Stock Purchase Plan" within the meaning of Section 423 of the Internal Revenue Code, and to allow eligible employees to acquire
shares of common stock at periodic intervals through their accumulated payroll deductions. A total of 4,650,000 shares of common stock have been reserved for issuance under the Employee Stock Purchase
Plan and a total of 1,062,868 shares have been issued including the issuance of 150,239 shares in January 2003.

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

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



79

---



10.    Leases:

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

Year ended December 31,2004

$
6,5722005


4,2152006


2,7282007


1,7922008


860Thereafter


1,036$
17,203


Total
rent expense for the years ended December 31, 2003, 2002 and 2001, was $9.2 million, $11.7 million and $11.8 million respectively.

The
Company rents office space for its corporate headquarters from Westar on a month-to-month basis. The Company paid approximately $0.6 million for rent
for each of the years ended December 31, 2003, 2002 and 2001.

11.    Fair Market Value of Financial Instruments:

For certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other accrued liabilities, the
carrying amounts approximate fair market value due to their short maturities.

The
fair value of the Company's debt instruments are estimated based on quoted market prices except for the revolving credit facility which had no available quote and was estimated by
the Company. The Company's estimate of fair value for the revolving credit facility was determined to be equal to the value determined by Westar pursuant to the purchase agreement. At
December 31, 2003, the fair value and carrying amount of the Company's debt were as follows (in thousands):

Fair Value

Carrying Value2003

2002

2003

2002Revolving Credit Facility

$
133,088

$
178,865

$
215,500

$
215,500Senior Subordinated Notes (8.125%)


76,135


82,755


110,340


110,340Senior Notes (7.375%)


175,651


156,559


190,925


190,925Senior Subordinated Discount Notes (13.625%)


28,378


30,320


30,609


31,033Convertible Senior Subordinated Notes (6.75%)





9,725





9,725$
413,252

$
458,224

$
547,374

$
557,523


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.

80

---

12.    Commitments and Contingencies:



In 1999, six former Protection One dealers filed a class action lawsuit against Protection One Alarm Monitoring, Inc., known as Monitoring, in the U. S.
District Court for the Western District of Kentucky alleging breach of contract arising out of a disagreement over the interpretation of certain provisions of their dealer contracts. The action is
styledTotal Security Solutions, Inc., et al. v. Protection One Alarm Monitoring, Inc., Civil Action
No. 3:99CV-326-H (filed May 21, 1999). In September 1999, the court granted Monitoring's motion to stay the proceeding pending the individual
plaintiffs' pursuit of arbitration as required by the terms of their agreements. On June 23, 2000, the court denied plaintiffs' motion for collective arbitration. On or about October 4,
2000, notwithstanding the court's denial of plaintiffs' motion for collective arbitration, the six former dealers filed a Motion to Compel Consolidation Arbitration with the American Arbitration
Association, or AAA. On November 21, 2000, the AAA denied the dealers' motion and advised they would proceed on only one matter at a time. Initially, only Masterguard Alarms proceeded with
arbitration. On March 8, 2002, Masterguard's claims against the Company were settled by the mutual agreement of the parties.

On
July 25, 2002, Complete Security, Inc., a dealer which was among the original plaintiffs in the Total Security Solutions court proceeding, initiated arbitration
proceedings against Monitoring, alleging breach of contract, misrepresentation, consumer fraud and franchise law violations. On September 2, 2003, Complete Security's claims against the Company
were settled by the mutual agreement of the parties.

Two
dealers, not plaintiffs in the original Total Security Solutions litigationSecurity Response Network, Inc. and Homesafe Security, Inc.have
brought similar claims in arbitration against the Company. Discovery is on-going in theSecurity Response Networkand Homesafe Securitymatters.

The
Company believes it has complied with the terms of its contracts with these former dealers, and intends to aggressively defend against these claims. In the opinion of management,
none of these pending dealer claims, either alone or in the aggregate, will have a material adverse effect upon the Company's consolidated financial position or results of operations.

Other
Protection One dealers have threatened, and may bring, claims against the Company based upon a variety of theories surrounding calculations of holdback and other payments, or based
on other theories of liability. The Company believes it has materially complied with the terms of its contracts with dealers. The Company cannot predict the aggregate impact of these potential
disputes with dealers which could be material.



On July 2, 2002, Monitoring received a letter from the University of New Hampshire, asserting claims against Monitoring due to Monitoring's alleged failure
to properly monitor a low-temperature freezer used by the university to store research specimens, which failure allegedly caused damage to or destruction of scientific specimens. The
university's letter alleged losses of $250,000. On or about August 13, 2002, Monitoring received a letter from counsel to Dr. Stacia Sower, whom we understand to be a professor at the
University whose specimens were among those allegedly damaged or destroyed, alleging that the loss was approximately $1.1 million.

81

---

Monitoring
entered into a tolling agreement with the university and Dr. Sower, extending the applicable statute of limitations to August 7, 2003, in order to allow
claimants time to further investigate the cause of the freezer failure and potentially resolve the matter without resorting to litigation. The parties engaged in informal discovery and settlement
discussions during the tolling period.

In
early August, 2003, Dr. Sower and the university filed separate lawsuits against Monitoring in New Hampshire Superior Court (Stacia Sower v. Protection One Alarm
Monitoring, Inc. and University of New Hampshire v. Protection One Alarm Monitoring, Inc. & CU Security, Docket Number 03-C-0199). Dr. Sower's suit
alleges breach of the duty of care, violations of New Hampshire Revised Statute Chapter 358-A, products liability and other causes of action. The university's suit alleges negligence,
breach of contract, breach of implied covenant of good faith and fair dealing, negligent or intentional misrepresentation, strict liability, violations of New Hampshire Revised Statute Chapter
358-A, breach of implied warranties and other causes of action. Both lawsuits seek unspecified monetary damages. The university's lawsuit also seeks rescission of Monitoring's contract
with the university.

Both
lawsuits were removed, without objection, to the United States District Court for the District of New Hampshire. Monitoring has answered the complaints, filed a counterclaim against
the University of New Hampshire (seeking a declaratory judgment that the University of New Hampshire is contractually obligated to defend and/or indemnify Monitoring as to the claims asserted by
Dr. Sower) and filed a cross-complaint against the subcontractor who installed portions of the alarm system, seeking indemnification. The subcontractor has answered Monitoring's cross-complaint
with a denial of any obligation to indemnify the Company in connection with this matter. The parties have informally agreed to have the two cases consolidated and the court has issued a consolidation
order effectively joining the cases under one case number.

Since
the consolidation, the University of New Hampshire has amended its complaint to assert direct claims against the subcontractor alleging that the subcontractor's duty to indemnify
Monitoring for alleged losses suffered by Dr. Sower is primary and supercedes any indemnification obligation owed by the University of New Hampshire. No new allegations against Monitoring were
made in the University of New Hampshire's Amended Complaint.

Monitoring's
liability insurance carrier has been notified of these claims. Monitoring intends to vigorously defend against any and all claims relating to this matter, and believes it
has adequate insurance coverage with respect to any potential liability arising from this suit. In the opinion of management, the outcome of this dispute will not have a material adverse effect upon
the Company's consolidated financial position or results of operations.



On August 2, 2002, Monitoring, Westar Energy, Inc. and certain former employees of Monitoring, as well as certain third parties, were sued in the
District Court of Jefferson County, Texas, by Regina Rogers, a resident of Beaumont, Texas (Case No. D167654). Ms. Rogers has asserted various claims due to casualty losses and property damage
she allegedly suffered as a result of a fire to her residence on August 17, 2000. In her complaint, Ms. Rogers alleges that Protection One and certain of its employees were negligent,
grossly negligent and malicious in allegedly failing to properly service and monitor the alarm system at the residence. The complaint also alleges various violations of the Texas

82

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Deceptive
Trade Practices Act, or DTPA, fraud and breach of contract. Relief sought under the complaint includes actual, exemplary and treble damages under the DTPA, plus attorneys' fees. Although the
complaint does not specify the amount of damages sought, counsel for the plaintiff has previously alleged actual damages of approximately $7.5 million. The Company believes it has adequate
insurance coverage with respect to any potential liability. The Company's primary insurance carrier is providing defense of the action, and the excess carrier is proceeding under a reservation of
rights. In the opinion of management the outcome will not have a material adverse effect upon the Company's consolidated financial position or results of operations.



On May 20, 2003, Joseph G. Milstein filed a putative class action suit against Protection One Alarm Services, Inc. in Los Angeles Superior Court
(Case No. BC296025). The complaint alleges that Mr. Milstein, and similarly situated Protection One customers in California, should not be required to
continue to pay for alarm services on their homes after they have moved from the home. The complaint seeks money damages and disgorgement of profits based on several alleged causes of action. On
May 29, 2003, the plaintiff added Protection One Alarm Monitoring as a defendant in the lawsuit. On October 28, 2003, the Court granted Protection One's motion to compel arbitration of
the dispute pursuant to the terms of the customer contract.

In
late January 2004, plaintiff filed an arbitration submission agreement with the Los Angeles office of the AAA. The AAA has neither assigned an arbitrator to the case, nor set
any arbitration schedule. Protection One Alarm Monitoring maintains that the claims asserted in this matter are without merit, and it intends to vigorously defend against any and all claims relating
to this matter.



The
Company is a party to claims and matters of litigation incidental to the normal course of its business. Additionally, the Company receives notices of consumer complaints filed with
various state agencies. The Company has developed a dispute resolution process for addressing these administrative complaints. The ultimate outcome of such matters cannot presently be determined;
however, in the opinion of management of the Company, the resolution of such matters will not have a material adverse effect upon the Company's consolidated financial position or results of
operations.



In order to retain the services of numerous employees who, as a result of Westar's announcement of its intent to dispose of its ownership interest in the Company,
may have felt uncertain about the future ownership, management and direction, the Company entered into retention and severance arrangements with approximately 190 employees to provide incentives for
such employees to remain with the Company through the sales process. On October 31, 2003, the Company paid approximately $5.1 million to those employees who fulfilled their obligations
related to the retention agreements. Additional severance amounts of approximately $11.0 million may also be paid under these arrangements to those employees, if any, who are terminated
following a change in control. No significant amounts have been expensed by the Company relating to the severance arrangements.

An
additional approximately $11.0 million was paid to executive management upon the change in control of the Company on February 17, 2004, pursuant to their employment
agreements with the

83

---

Company.
As of December 31, 2003 no amounts had been expensed relating to these additional payments to executive management.

In
addition, upon the change in control, $3.5 million was paid to the financial advisor to the Company's Special Committee of the Board of Directors. In February 2004, the Company
recorded an expense of $1.6 million for director and officer insurance coverage that lapsed upon the change in control. In 2003, the Company expensed approximately $1.2 million for legal
and other professional fees related to the change in control for the year ended December 31, 2003.



On or about November 1, 2002, the Company, Westar Energy and its former independent auditor, Arthur Andersen LLP, were advised by the Staff of the
Securities and Exchange Commission that the Staff would be inquiring into the practices of the Company and Westar Energy with respect to the restatement of their first and second quarter 2002
financial statements announced in November 2002 and the related announcement that the 2000 and 2001 financial statements of the Company and Westar Energy would be reaudited. The Company has
cooperated and intends to cooperate further with the Staff in connection with any additional information requested in connection with such inquiry.

13.    Segment Reporting:

The Company's operating segments are defined as components for which separate financial information is available that is evaluated regularly by the chief
operating decision maker. The operating segments are managed separately because each operating segment represents a strategic business unit that serves different markets.

Protection
One's reportable segments include North America and Multifamily. North America provides residential, commercial, and wholesale security alarm monitoring services, which
include sales, installation and related servicing of security alarm systems for residential and business customers in the United States of America. Multifamily provides security alarm services to
apartments, condominiums and other multifamily dwellings. During the third quarter of 2002, the Company identified a new reportable segment, Data Services, with the creation of PODS. As discussed in
Note 6 of the
Consolidated Financial Statements "Related Party Transactions," the operations of this segment were discontinued in the fourth quarter of 2002, and accordingly, they are not included in the amounts
reported below.

The
accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. The Company manages its business segments based on
earnings before interest, income taxes, depreciation, amortization (including amortization of deferred customer acquisition costs and revenues) and other income and expense, referred to as Adjusted
EBITDA.

84

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Reportable segments (in thousands):

|                                                                              |  | For the year ended December 31, 2003 |        
|----------------------------------------------------------------------------- |  | ------------------------------------ | -------
|
|Revenue                                                                       |  | $                                    | 238,999
|Adjusted EBITDA(4)                                                            |  |                                      | 68,487 
|Amortization of intangibles and depreciation expense                          |  |                                      | 75,335 
|Amortization of deferred costs in excess of amortization of deferred revenues |  |                                      | 12,874 
|Operating income (loss)                                                       |  |                                      | (19,722
|Segment assets                                                                |  |                                      | 778,384
|Expenditures for property                                                     |  |                                      | 6,553  
|Investment in new accounts, net                                               |  |                                      | 19,623 

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

---

85

---



2003

2002(amounts in thousands)Loss from continuing operations before income taxes

$
(51,905
)
$
(483,127
)Plus:Interest expense


40,101


43,023Amortization of intangibles and depreciation expense


80,252


82,440Amortization of deferred costs in excess of amortization of deferred revenues


17,027


19,714Loss on Impairment





442,041Less:Gain on retirement of debt





(19,337
)Other non-recurring income


(2,829
)

(602
)Adjusted EBITDA

$
82,646

$
84,152


14.    Impairment Charges:

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

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

SFAS
No. 144 substantially reduced the net undiscounted cash flows used for customer account impairment evaluation purposes as compared to the previous accounting standards. The
undiscounted cash flow stream was reduced from the 16 year remaining life of the goodwill to the nine year

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remaining
life of customer accounts for impairment evaluation purposes. Using these guidelines, the Company determined that there was an indication of impairment of the carrying value of the customer
accounts and an impairment charge was recorded as discussed below.

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

Goodwill

Customer
Accounts

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

$
509.4

$
338.1

$
847.5Impairment chargediscontinued operations


2.3


1.9


4.2Estimated income tax benefit


(65.1
)

(118.4
)

(183.5
)Net charge

$
446.6

$
221.6

$
668.2Multifamily Segment:Impairment charge

$
104.2

$


$
104.2Estimated income tax benefit


(7.2
)




(7.2
)Net charge

$
97.0

$


$
97.0Total Company:Impairment charge

$
615.9

$
340.0

$
955.9Estimated income tax benefit


(72.3
)

(118.4
)

(190.7
)Net charge

$
543.6

$
221.6

$
765.2


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

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

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The
Company completed its annual impairment testing during the third quarter of 2003 on its Multifamily segment and determined that no additional impairment of goodwill was required as
of July 1, 2003. The Company's North America segment has no goodwill and, therefore, did not require testing as of July 1, 2003. No impairment charge was recorded in 2003.

A
deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit estimated above and an additional deferred tax benefit of
$13.3 million was recorded with the fourth quarter impairment charge. As a result of the sale transaction whereby Westar sold its investment in the Company, a substantial portion of the
Company's net deferred tax assets, which were $286.3 million at December 31, 2003, is not expected to be realizable and the Company is not expected to be in a position to record a tax
benefit for losses incurred. The Company will be required to record a non-cash charge against income for the portion of its net deferred tax assets determined not to be realizable. This
charge will be material and will have a material adverse effect on the financial condition and results of operations of the Company.

In
2001, the Company recorded approximately $48.9 million of goodwill amortization, including $0.3 million from discontinued operations. Since the Company adopted
SFAS 142, it will no longer amortize goodwill to income. In 2001, the Company recorded approximately $132.0 million of customer account amortization expense. As a result of the customer
impairment charge, customer account amortization expense in 2002 decreased to approximately $68.9 million. Customer account amortization for 2003 was approximately $68.6 million.

The
following table reflects the Company's results for the years ended December 31, 2003, 2002 and 2001 adjusted for the cessation of amortization of goodwill, as discussed above:

Year ended December 31,2003

2002

2001(in thousands, except per share amounts)Reported net loss

$
(34,411
)
$
(880,855
)
$
(86,048
)Add back: Goodwill amortization








48,554Adjusted net loss

$
(34,411
)
$
(880,855
)
$
(37,494
)Basic and diluted earnings per share:Reported net loss

$
(0.35
)
$
(8.98
)
$
(0.82
)Add back: Goodwill amortization








0.46Adjusted net loss

$
(0.35
)
$
(8.98
)
$
(0.36
)


The
Company is required to perform impairment tests for long-lived assets prospectively when the Company determines that indicators of potential impairment are present.
Goodwill is required to be tested at least annually for impairment. Declines in market value of the Company's business or the value of its customer accounts that may occur in the future may require
additional write-down of these assets in the future.

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15.    Subsequent Events:

On February 17, 2004, Westar Industries, Inc., sold approximately 87% of the issued and outstanding shares of the Company's common stock, par value
$0.01 per share, referred to as the common stock, to POI Acquisition I, Inc. As part of the sale transaction, Westar Industries also assigned its rights and obligations as the lender under our
revolving credit facility to POI Acquisition, L.L.C. Quadrangle paid approximately $122.2 million to Westar as consideration for the common stock, revolving credit facility and accrued
interest, and Westar could receive up to an additional $39.2 million that is contingent upon certain potential post-closing events.

In
addition, pursuant to the terms of the purchase agreement governing the sale transactions, dated as of December 23, 2003, among POI Acquisition, L.L.C., Westar Industries and
Westar Energy, Westar's designees on the Company's Board of Directors, Bruce A. Akin, James T. Clark, Greg Greenwood, Larry D. Irick and William B. Moore, resigned from the Board of Directors,
effective as of the closing of the sale transactions.

In
connection with the closing of the sale transactions described above, the Company announced, among other things, the (i) retention of Houlihan Lokey Howard & Zukin
Capital to assist it with its evaluation of the effects of the sale transactions, (ii) execution of two standstill agreements with POI Acquisition, L.L.C. and POI Acquisition I, Inc.,
and (iii) deferral of payment of the semi-annual interest payment due on February 17, 2004 on the outstanding $190.9 million aggregate principal amount of our
73/8% senior notes due 2005.

The
Company also announced that Donald A. Johnston resigned from its Board of Directors, effective as of the closing of the sale transaction.

The
indenture relating to the Company's 135/8% senior subordinated discount notes requires the Company to give notice of its intention to repurchase the notes within
30 days following the date of a change in control and to consummate the repurchase within 60 days of such notification. Under the terms of this indenture, because the Company did not
offer to repurchase such notes, its inaction
constitutes a covenant breach, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default under the indenture for the
135/8% senior subordinated discount notes. Furthermore, upon any such event of default, the trustee or the holders of such senior subordinated discount notes may seek to exercise
certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the notes, which acceleration, if not rescinded or satisfied, would cause a
cross default to be triggered under the indenture for the 81/8% senior subordinated notes, which had aggregate outstanding principal of $110.3 million as of March 15,
2004. If such acceleration and cross default should occur, the Company does not have the funds available to repay the indebtedness, and the Company could be forced to seek relief under the U.S.
Bankruptcy Code or an out-of-court restructuring.

The
$215.5 million outstanding under the revolving credit facility is in default due to the change in control of Protection One consummated on February 17, 2004. The
Company entered into a standstill agreement with Quadrangle, however, pursuant to which, among other things, Quadrangle agreed to waive the change in control default and other specified covenant
breaches for a period not to exceed 90 days, and the Company agreed, among other things, that it could not borrow any additional amounts under the revolving credit facility. Upon the expiration
or termination of this standstill agreement, Quadrangle may exercise its rights under the revolving credit facility and declare the indebtedness to be due and payable. Furthermore, acceleration of the
revolving credit facility, if not rescinded or satisfied, would cause cross defaults under the Company's other debt instruments. If such acceleration should

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occur,
the Company does not have the funds available to repay the indebtedness, and the Company could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

The
Company has deferred payment of the semi-annual interest payment that was due on February 17, 2004 on the outstanding $190.9 million aggregate principal
amount of our 73/8% senior notes. At the end of the 60-day interest payment grace period available under the 73/8% senior notes, the trustee or the holders of
such senior notes may attempt to exercise certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the indebtedness, which
acceleration, if not rescinded or satisfied, would cause cross defaults under the Company's other debt instruments. If such acceleration should occur, the Company does not have the funds available to
repay the indebtedness, and the Company could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

The
Company has a tax sharing agreement with Westar Energy. Pursuant to this agreement Westar Energy has made payments to the Company for current tax benefits utilized by Westar Energy
in its consolidated tax return irrespective of whether the Company would realize these current benefits on a separate return basis. As of December 31, 2003, other than for net operating loss
carryforwards, no valuation allowance had been established by the Company because the tax sharing agreement utilizes a parent company down approach in the allocation of income tax expense among
members of the consolidated tax group and, consistent with that approach, no valuation allowance had been allocated to the Company. As a result of the sale transaction whereby Westar sold its
investment in the Company, a substantial portion of the Company's net deferred tax assets, which were $286.3 million at December 31, 2003, is not expected to be realizable and the
Company is not expected to be in a
position to record a tax benefit for losses incurred. The Company will be required to record a non-cash charge against income for the portion of its net deferred tax assets determined not to be
realizable. This charge will be material and will have a material adverse effect on the Company's financial condition and results of operations. See also Note 8 of the Consolidated Financial
Statements "Income Taxes" above.

Upon
the change in control in February 2004, an additional $11.0 million was paid to executive management and customary fees and expenses of $3.5 million were paid
to the financial advisor to our Special Committee of the Board of Directors. As of December 31, 2003, no amounts had been expensed relating to these additional payments to executive management
or to the financial advisor to our Special Committee. As of December 31, 2003, we had expensed approximately $1.2 million for legal and other professional fees related to the change in
control. In addition, in February 2004 the Company recorded an expense of $1.6 million for director and officer insurance coverage that lapsed upon the change in control.

16.    Discontinued Operations:

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

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

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An
impairment charge of $2.3 million relating to the Canadian operations' goodwill is reflected in the consolidated statement of operations as a cumulative effect of accounting change on
discontinued operations. Revenues from these operations were $4.2 million for the approximately six month period ended July 9, 2002 compared to $8.2 million for the year ended
December 31, 2001.

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

17.    Going Concern and Management's Plans:



The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company continues to face liquidity problems caused by its significant debt burden and continuing net losses. Absent recapitalization and
restructuring its debts, management believes its projected cash flow will be insufficient to support its current debt balances, which may be accelerated or which it may be required to offer to
repurchase as a result of the change in control, and related interest obligations.

Westar,
which owned approximately 88% of the Company's common stock, was also an important source of the Company's external capital through a revolving credit facility and through
payments made under a tax sharing agreement. On February 17, 2004, Westar Industries consummated the sale of its equity interest in the Company and the assignment of its rights and obligations
under the revolving credit facility to Quadrangle. As a result of this transaction, the Company does not expect to have sufficient cash flow to fund our operations in 2004 without a restructuring of
its debts for the reasons described below.

The
indenture relating to the Company's 135/8% senior subordinated discount notes requires the Company to give notice of its intention to repurchase the notes within
30 days following the date of a change in control and to consummate the repurchase within 60 days of such notification. Under the terms of this indenture, because the Company did not
offer to repurchase such notes, its inaction constitutes a covenant breach, which breach, if not cured within 30 days after receipt of appropriate notice, would constitute an event of default
under the indenture for the 135/8% senior subordinated discount notes. Furthermore, upon any such event of default, the trustee or the holders of such senior subordinated discount notes
may seek to exercise certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the notes, which

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acceleration,
if not rescinded or satisfied, would cause a cross default to be triggered under the indenture for the Company's 81/8% senior subordinated notes, which had aggregate
outstanding principal of $110.3 million as of March 15, 2004. If such acceleration and cross default should occur, the Company does not have the funds available to repay the
indebtedness, and it could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

The
$215.5 million outstanding under the revolving credit facility is in default due to the change in control of Protection One consummated on February 17, 2004. The
Company entered into a standstill agreement with Quadrangle, however, pursuant to which, among other things, Quadrangle agreed to waive the breach of the change in control provision and other covenant
breaches for a period not to exceed 90 days, and the Company agreed, among other things, not to borrow additional amounts under the revolving credit facility. Upon the expiration or termination
of this standstill agreement, Quadrangle may exercise its rights under the revolving credit facility and declare the indebtedness to be due and payable. Furthermore, acceleration of the revolving
credit facility, if not rescinded or satisfied, would cause cross defaults under the Company's other debt instruments. If such acceleration should occur, the Company does not have the funds available
to repay the indebtedness, and the Company could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

The
Company has deferred payment of the semi-annual interest payment that was due on February 17, 2004 on the outstanding $190.9 million aggregate principal
amount of its 73/8% senior notes. At the end of the 60-day interest payment grace period available under the 73/8% senior notes, the trustee or the holders of
such senior notes may attempt to exercise certain remedies available to them under the indenture governing the notes, including, without limitation, acceleration of the indebtedness, which
acceleration would cause cross defaults under its other debt instruments. If such acceleration should occur, the Company does not have funds available to repay such indebtedness, and it could be
forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.

Except
for amounts owed with respect to losses the Company incurred prior to leaving the Westar consolidated tax group as a result of Westar selling its interest in the Company, it will
no longer receive payments from Westar under the tax sharing agreement. Such loss of tax payments will have a material adverse effect on the Company's liquidity.

The
Company's 73/8% senior notes and 81/8% senior subordinated notes require it to make a repurchase offer at 101% of the principal amount, plus interest,
in the event of a change in control triggering event. A change in control triggering event consists of a change in control coupled with the withdrawal of the rating of the notes or two ratings
downgrades by one of certain specified rating agencies, provided that such withdrawal or downgrade occurs within 90 days after the date of public notice of the occurrence of a change in control
or the intention to effect a change in control. As of December 31, 2003, $190.9 million principal amount of the 73/8% senior notes and $110.3 million principal
amount of the 81/8% senior subordinated notes were outstanding. Should such repurchase right be triggered, the Company lacks the funds to repurchase these debt securities, and the
Company could be forced to seek relief under the U.S. Bankruptcy Code or an out-of-court restructuring.



The Company has retained Houlihan Lokey Howard & Zukin Capital as its financial advisor and has begun preliminary discussions regarding a proposed
restructuring with Quadrangle and its affiliates (the lenders under the revolving credit facility) and certain holders of its publicly-held debt. If an

92

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agreement
with such parties is reached, a resulting restructuring plan may be presented for judicial approval under Chapter 11 of the U.S. Bankruptcy Code, which provides for companies to reorganize
and continue to operate as going concerns. Discussions with Quadrangle and other debt holders are in the preliminary stages, and there can be no assurance that an agreement regarding financial
restructuring will be reached or what other actions the Company may need to take, including selling assets, to meet its liquidity needs.

The
Company's operating strategy continues to be to improve returns on invested capital by realizing economies of scale from increasing customer density in the largest urban markets in
North America. The Company plans to accomplish this goal by: (i) retaining its customers by providing superior customer service from its monitoring facilities and its branches; and
(ii) using its national presence, strategic alliances, such as its alliance with BellSouth Telecommunications, Inc., and strong local operations to persuade the most desirable residential and
commercial prospects to enter into long term agreements with it on terms that permit it to achieve appropriate returns on capital.

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18.    Unaudited Quarterly Financial Information:

The following is a summary of the unaudited quarterly financial information for 2003 and 2002 respectively, and includes restated amounts for the first three
quarters of 2002.

|                                                                  |                                                                   | March 31 |          | June 30 |   | September 30 |        | December 31 |       
|----------------------------------------------------------------- | ----------------------------------------------------------------- | -------- | -------- | ------- | - | ------------ | ------ | ----------- | ------
|2003                                                              |                                                                   |          |          |         |   |              |        |             |       
|Revenues                                                          |                                                                   | $        | 70,086   |         | $ | 68,942       |        | $           | 69,758
|Gross profit                                                      |                                                                   |          | 44,075   |         |   | 43,619       |        |             | 44,434
|Loss from continuing operations before accounting change          |                                                                   |          | (9,317   | )       |   | (7,990       | )      |             | (8,664
|Net loss                                                          |                                                                   |          | (9,317   | )       |   | (7,990       | )      |             | (8,664
|Basic and diluted loss per share:                                 |                                                                   |          |          |         |   |              |        |             |       
|                                                                  | Loss from continuing operations change                            |          |          | (0.09   | ) |              | (0.08  | )           |       
|                                                                  | Net loss                                                          |          |          | (0.09   | ) |              | (0.08  | )           |       
|                                                                  | Weighted average number of shares of common stock outstanding     |          |          | 98,082  |   |              | 98,106 |             |       
|2002                                                              |                                                                   |          |          |         |   |              |        |             |       
|Revenues                                                          |                                                                   | $        | 73,927   |         | $ | 73,289       |        | $           | 72,365
|Gross profit                                                      |                                                                   |          | 41,610   |         |   | 46,442       |        |             | 44,773
|Income (loss) from continuing operations before accounting change |                                                                   |          | (230,473 | )       |   | 3,910        |        |             | (7,341
|Income (loss) from discontinued operations                        |                                                                   |          | (1,668   | )       |   | (1,344       | )      |             | 85    
|Cumulative effect of accounting change, net of taxes              |                                                                   |          | (543,613 | )       |   |             |        |             |      
|Net income (loss)                                                 |                                                                   |          | (775,754 | )       |   | 2,566        |        |             | (7,256
|Basic and diluted loss per share:                                 |                                                                   |          |          |         |   |              |        |             |       
|                                                                  | Income (loss) from continuing operations before accounting change |          |          | (2.34   | ) |              | 0.04   |             |       
|                                                                  | Loss from discontinued operations before accounting change        |          |          | (0.02   | ) |              | (0.01  | )           |       
|                                                                  | Cumulative effect of accounting change                            |          |          | (5.52   | ) |              |       |             |       
|                                                                  | Net income (loss)                                                 |          |          | (7.88   | ) |              | 0.03   |             |       
|                                                                  | Weighted average number of shares of common stock outstanding     |          |          | 98,451  |   |              | 97,935 |             |       

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

|Description                                                                       |  | Balance at
Beginning
of period |  | Charged to
costs and
expenses |  | Deductions(a) |   | Balance at
End of Period
|--------------------------------------------------------------------------------- |  | ------------------------------ |  | ----------------------------- |  | ------------- | - | ------------------------
|Year ended December 31, 2001Allowances deducted from assets for doubtful accounts |  | 34,222                         |  | 5,889                         |  | (33,539       | ) | 6,572                   
|Year ended December 31, 2002Allowances deducted from assets for doubtful accounts |  | 6,572                          |  | 4,566                         |  | (4,868        | ) | 6,270                   
|Year ended December 31, 2003Allowances deducted from assets for doubtful accounts |  | 6,270                          |  | 774                           |  | (145          | ) | 6,899                   

---

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

Effective May 30, 2002, the Audit and Finance Committee of our Board of Directors decided not to retain Arthur Andersen LLP as our public accountants and
engaged Deloitte & Touche LLP to serve as our principal accountants for fiscal year 2002. This matter was previously reported by us in our Form 8-K dated May 30, 2002
filed with the SEC. The accountants' report contained neither an adverse or disclaimer of opinion and was neither qualified or modified prior to the decision not to retain Arthur Andersen. There were
no disagreements with the former accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure.

ITEM 9A.    CONTROLS AND PROCEDURES

As of December 31, 2003, the end of the period covered by this report, we, under the supervision and with the participation of our management, including
our chief executive officer and our chief financial officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this
evaluation, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures (a) were effective to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to management, including its chief
executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our chief executive officer and chief financial
officer, recognize that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving management's control objectives. Our
management, including our chief executive officer and chief financial officer, believe that, as of December 31, 2003, our disclosure controls and procedures were effective to provide reasonable
assurance of achieving management's control objectives.

During
the fourth fiscal quarter ended December 31, 2003, no change in our internal control over financial reporting occurred that, in our judgment, either materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

Board of Directors

|Name             |  | Age |  | Background                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Ben M. Enis      |  | 62  |  | Mr. Enis has served as our director since April 1994. He is founder and Chief Executive Officer of Enis Renewable Energy Systems, LLP and provides marketing consulting services through Enis Marketing Counsel/Communication. Until 1999, Mr. Enis was a
Professor of Marketing at the University of Southern California where he currently serves as Professor Emeritus of Marketing. He is currently a director of Countrywide Financial Corporation (formerly known as Countrywide Credit Industries,
Inc.).
|Richard Ginsburg |  | 35  |  | Mr. Ginsburg has served as our director and Chief Executive Officer since April 2001, and President since July 2001. He was founder, President and Chief Executive Officer of Guardian International, Inc., a security monitoring company, from August
1996 to April 2001. He is a director of Guardian International.                                                                                                                                                                                          
|James Q. Wilson  |  | 72  |  | Mr. Wilson has served as our director since June 1996. Mr. Wilson was a Professor of Management and Public Policy at the University of California at Los Angeles (for more than 12 years), where he currently serves as Professor Emeritus of Management
and Public Policy. He is currently a director of State Farm Mutual Life Insurance Company. Mr. Wilson is now the Reagan Professor of Public Policy at Pepperdine University.                                                                           

On
February 17, 2004, in accordance with the terms of the purchase agreement governing the Westar sales transactions, each of Westar Energy's designees on our Board of Directors,
Bruce A. Akin, James T. Clark, Greg Greenwood, Larry D. Irick, and William B. Moore, resigned from the Board. Donald A. Johnston also resigned from the Board. Quadrangle Group has not appointed any
directors to our Board.

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Executive Officers

The name, age, and current position(s) of each of our executive officers are set forth below. All of our officers are appointed by the Board and hold their
respective offices until their respective successors have been appointed, or their earlier death, resignation or removal by the Board.

|Name               |  | Age |  | Background                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------ |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Richard Ginsburg   |  | 35  |  | Mr. Ginsburg has served as our director and Chief Executive Officer since April 2001, and President since July 2001. He was President and Chief Executive Officer of Guardian International, Inc., a security monitoring company, from August 1996 to
April 2001. He is a director of Guardian International.                                                                                                                                                                                                                                                 
|Darius G. Nevin    |  | 46  |  | Mr. Nevin has served as our Executive Vice President and Chief Financial Officer since August 2001. He served as our director from November 2002 to May 2003. From October 1997 to August 2001, he was the Chief Financial Officer of Guardian
International, Inc. For most of the ten years prior to October 1997, Mr. Nevin served in senior executive positions of a predecessor company to Security Technologies Group, Inc., a provider of electronic security systems and services to the
commercial market. He is a director of Guardian International.
|Peter J. Pefanis   |  | 57  |  | Mr. Pefanis has been Executive Vice President of Protection One Alarm Monitoring, Inc., our wholly owned subsidiary since September 2002. He served as Senior Vice President from June 4, 2001 to September 30, 2002. From January 2001 until June 2001,
Mr. Pefanis was Regional Vice President for Security Link, a provider of electronic security systems. Prior to that he was East Area Director for Honeywell, Inc., a provider of electronic security systems.                                                                                        
|Mack Sands         |  | 55  |  | Mr. Sands has been our Executive Vice President and Chief Operating Officer since September 2001. From October 1995 to September 2001, he was Vice President, Corporate Communications Technology of Simplex/Grinnell, a subsidiary of Tyco International,
Inc. providing fire alarm systems and monitoring services. Prior to that he was Vice President, Monitoring Operations and Product Development of The Alert Centre, a security monitoring company purchased by ADT.                                                                                 
|Steven V. Williams |  | 51  |  | Mr. Williams has served as our Executive Vice President since July 2001. He served as our director from October 2000 to March 2003. He was Senior Vice President from May 2000 to July 2001. He is President of Multifamily (since 1997). Mr. Williams is
a director of the National Multi-Housing Council.                                                                                                                                                                                                                                                   

Family Relationships

There are no family relationships between any of the directors or executive officers.

98

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Involvement in certain legal proceedings

During the past five years, none of the directors or executive officers have been involved in any legal proceedings that are material to the evaluation of their
ability or integrity.

Audit Committee; Financial Expert

The Audit Committee of the Board of Directors is responsible for the appointment, compensation and termination of and oversight over the work of our public
accountants. The Audit Committee oversees the integrity of our financial statements, our compliance with legal and regulatory requirements, the public accountants' qualifications and independence and
the performance of our internal audit function and public accountants.

The
directors who served on the Audit Committee during 2003 were James T. Clark, Ben M. Enis, Donald A. Johnston and Gene A. Budig. Prior to his resignation
on February 17, 2004, the Board of Directors had determined that one member of its Audit Committee, James T. Clark, was an "audit committee financial expert" and "independent," as those terms
are defined by Item 401(h) of Regulation S-K. Mr. Clark is a certified public accountant with an understanding of generally accepted accounting principles, the ability to
assess the application of such principles, accounting experience, an understanding of internal control over financial reporting and an understanding of audit committee functions.

After
Mr. Clark and Mr. Johnston resigned from the Board, the Board dissolved the Audit Committee, and the entire Board is currently administering the functions of the
Audit Committee. No financial expert has been identified to replace Mr. Clark.

Section 16(a) Beneficial Ownership Reporting Compliance

Pursuant to Section 16(a) of the Exchange Act and the rules issued thereunder, our executive officers and directors are required to file certain reports
with the Securities and Exchange Commission. These reports disclose the amount of our common stock that is held by our executive officers and directors, in addition to changes in their ownership of
stock. Copies of these reports are required to be furnished to us. We believe that our current executive officers, directors and beneficial owners of more than 10% of our common stock filed on a
timely basis the reports required for 2003 by Section 16(a) of the Exchange Act, except that each of James T. Clark, Ben M. Enis, Donald A. Johnston and James Q.
Wilson had one late report in connection with options granted to the directors. Our belief that all other required filings were made on a timely basis is based solely on our review of the copies of
reports furnished to us, or on written representations to us that no such reports were required.

Code of Ethics

We have adopted a code of ethics that applies to all employees, including executive officers and senior financial and accounting employees. It is our policy to
comply strictly with the letter and spirit of all laws affecting our business and the conduct of our officers, directors and employees in business matters. We make available the code of ethics, free
of charge, by responding to requests addressed to our investor relations department. The investor relations department can be contacted by mail at Protection One, Inc., Attn: Investor
Relations, 818 S. Kansas Avenue, Topeka, KS 66612 or by calling (785) 575-6421.

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ITEM 11.    EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

|                                                                        |  |                |  | Annual Compensation     |  | Long Term Compensation  |  |                  
|----------------------------------------------------------------------- |  | -------------- |  | ----------------------- |  | ----------------------- |  | -----------------
|
|
|Richard Ginsburg(4)
President and Chief Executive Officer               |  | 2003
2002
2001 |  | 439,583
325,000
232,971 |  | 669,049
397,854
150,000 |  | 30,295
118,929
 
|Mack Sands(5)
Executive Vice President and Chief Operations Officer     |  | 2003
2002
2001 |  | 327,520
300,000
106,033 |  | 490,636
417,250
       |  | 

            
|Darius G. Nevin(6)
Executive Vice President and Chief Financial Officer |  | 2003
2002
2001 |  | 293,333
220,000
96,840  |  | 446,032
269,317
65,000  |  | 60,635
116,871
 
|Steven V. Williams
Executive Vice President                             |  | 2003
2002
2001 |  | 273,596
232,741
231,000 |  | 265,255
190,265
136,826 |  | 9,997
9,601
6,881
|Peter J. Pefanis(7)
Executive Vice President                            |  | 2003
2002
2001 |  | 263,083
210,000
106,326 |  | 396,969
269,317
60,000  |  | 

            

---

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Options Granted In Last Fiscal Year

No options were granted to executive officers during the year ended December 31, 2003.

Aggregated Option Exercises In Last Fiscal Year  And Fiscal Year-End Option Values

The following table sets forth, for each of the named executive officers, certain information regarding the value of stock options held at year end. No stock
option was exercised by any such executive officer during the year ended December 31, 2003.

Name

Number of Shares of Stock
Underlying Unexercised
Options at 12/31/03
Exercisable/Unexercisable

Value of Unexercised In-the-Money
Options at 12/31/03(1)
Exercisable/UnexercisableRichard Ginsburg

583,333/291,667

$
0/$0Darius G. Nevin

163,333/106,667

$
0/$0Peter J. Pefanis

90,000/130,000

$
0/$0Mack Sands

333,333/166,667

$
0/$0Steven V. Williams

170,456/50,833

$
0/$0


---

Compensation of Directors

During 2003, directors received for their services an annual retainer fee and a fee for their participation in each meeting of the Board or committee on which
they served. Directors are also reimbursed for travel and other out-of-pocket expenses incurred in attending meetings of the Board. The table below shows the schedule for
director compensation. Directors who are our employees do not receive additional compensation for their services as directors.

Annual retainer

$
30,000Attendance fee for each Board meeting

$
1,500Attendance fee for each Committee meeting

$
1,500Attendance fee for meeting attendance of Committee Chair

$
2,250Telephonic attendance

$
750Annual grant of stock options


10,000 stock options


Executive Employment and Change in Control Agreements

Protection One, itself and through its wholly owned subsidiaries, entered into new employment agreements with its executive officers, Mr. Ginsburg,
Mr. Sands, Mr. Nevin, Mr. Williams and Mr. Pefanis, as of March 18, 2003. The current employment agreements superseded and replaced all previous employment
agreements among the parties. Each current employment agreement will remain in effect until the earlier of (i) the date on which the executive officer's employment is terminated by us or the
executive officer or (ii) 180 days after the occurrence of a Change in Control (as defined in the current employment agreements), subject to certain exceptions.

The
current employment agreements provide for minimum annual base salaries for each of Mr. Ginsburg ($450,000), Mr. Sands ($330,000), Mr. Nevin ($300,000),
Mr. Williams ($277,000) and Mr. Pefanis ($267,000). Pursuant to the current employment agreements, the executive officers are

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eligible
to receive bonus awards, payable in cash or otherwise, and to participate in all of our employee benefit plans and programs in effect for the benefit of our senior executives, including stock
option, 401(k) and insurance plans. We will reimburse the executive officers for all reasonable expenses incurred in connection with the conduct of the business of the company, provided the executive
officers properly account for any such expenses in accordance with our policies. Pursuant to the current employment agreements, Mr. Ginsburg's and Mr. Nevin's reimbursable business
expenses will include the costs of weekly air travel to and from their homes. Further, pursuant to the current employment agreements, should any portion of the company's reimbursements of travel
expenses incurred by Mr. Ginsburg or Mr. Nevin constitute taxable wages for federal income and/or employment tax purposes, we will pay Mr. Ginsburg and Mr. Nevin an
additional amount to cover such tax liability.

The
current employment agreements also contain customary provisions relating to nonsolicitation, antidisparagement and the protection of confidential information. In addition, for a
period of at least two years following termination of an executive officer's employment with the company, such executive officer will be prohibited from owning, managing, operating or otherwise being
connected to any entity engaged in the business of providing property monitoring services with revenue in excess of $200,000,000 or, in the case of Mr. Williams, in excess of $10,000,000.
Despite such prohibition, Mr. Ginsburg and Mr. Nevin will be permitted to participate in any capacity with Guardian International following termination of their employment with the
company.

Pursuant
to the terms of the employment agreements, upon the occurrence of a change in control of the company, Westar Energy or certain of their subsidiaries, each executive officer was
entitled to receive (a) a lump-sum cash payment equal to (i) annual base salary and bonus amounts earned but not previously paid through the date of the change in control,
(ii) a pro rata portion of the executive officer's bonus for the fiscal year in which the change in control occurs and (iii) the cash equivalent of any accrued paid time off,
(b) a lump-sum cash payment equal to the sum of (x) 2.99 times the executive officer's annual base salary plus (y) 2.99 times the executive officer's bonus and
(c) continued participation for three years in our medical, dental and life insurance plans or a lump-sum cash payment in lieu thereof. Also, each executive officer's outstanding
stock options and other equity-based awards would fully vest upon the occurrence of a change in control.

A
detailed definition of the term "Change in Control" is contained in the current employment agreements, which were filed as exhibits to our Form 10-K for the year
ended December 31, 2002. The definition provides, subject to several important exceptions, that a Change in Control occurs in the event that (i) "Incumbent Directors" (as defined in the
current employment agreements) cease to constitute a majority of the Board, (ii) any person (other than Westar Energy, its subsidiaries and certain other entities) becomes a beneficial owner of
more than 40% of the combined voting power of our voting securities, (iii) we merge or sell substantially all of our assets, (iv) we
substantially liquidate or dissolve or (v) Westar Energy becomes the beneficial owner of 100% of the combined voting power of our voting securities.

A
Change in Control occurred as a result of Westar's sale of its investment in us on February 17, 2004, and payments were made to our executive officers pursuant to the terms of
their respective employment agreements. In the event that any amounts or benefits paid to the executive officers pursuant to the current employment agreements are subject to the excise tax imposed
under Section 4999 of the Code, we will pay those executive officers an additional amount to compensate them for that tax liability.

Change in control payments

In order to retain the services of numerous employees who, as a result of Westar's interest in exploring strategic alternatives for divesting its ownership
interest in us, may have felt uncertain about our future ownership, management and direction, we entered into retention and severance

102

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arrangements
with approximately 190 employees to provide incentives for these employees to remain with us through the sales process. On October 31, 2003, we paid approximately
$5.1 million to those employees who fulfilled their obligations related to the retention agreements. Additional severance amounts of approximately $11.0 million may also be paid under
these arrangements to those employees, if any, who are terminated following a change in control. No amounts were expensed by us for the year ended December 31, 2003 relating to the severance
arrangements.

Approximately
$11.0 million was paid to executive management on February 17, 2004 as a result of a change in control, in accordance with the employment agreements discussed
in "Executive Employment and Change in Control Agreements" above. No amounts were expensed relating to these additional payments to executive management in 2003. In addition, upon the change in
control, $3.5 million was paid to the financial advisor to our Special Committee of the Board of Directors. In February 2004, we recorded an expense of $1.6 million for director and
officer insurance coverage that lapsed upon the change in control. We expensed approximately $1.2 million for legal and other professional fees related to the change in control for the year
ended December 31, 2003.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

During 2003, no Compensation Committee member was an officer or employee of the Company or its subsidiaries, or formerly an officer, nor had any relationship
otherwise requiring disclosure under the
rules of the Securities and Exchange Commission. No executive officer of the company served as a member of the Compensation Committee or as a director of any company where an executive officer of that
company is a member of our Compensation Committee. The members of the Compensation Committee thus did not have any Compensation Committee interlocks or insider participation. Certain relationships and
related transactions that may indirectly involve our board members are reported in Item 8, Note 6 "Related Party Transactions."

Report of the Board of Directors in Lieu of the Compensation Committee Report

The company's director and executive compensation programs were administered by the Compensation Committee. The Compensation Committee was responsible for the
review and approval of all issues pertaining to director and executive compensation.

Between
January 1 and March 21, 2003, the Compensation Committee was composed of Maria De Lourdes Duke, Donald A. Johnston and James Q. Wilson, all
non-employee directors. From the date of Ms. Duke's resignation until May 28, 2003, the Compensation Committee was composed of Donald A. Johnston and James Q. Wilson. On May 28,
2003, Bruce A. Akin, also a non-employee director and Vice President of Westar Energy, was appointed to the Compensation Committee, and Mr. Johnston and Mr. Wilson were
reappointed to the Compensation Committee.

Mr. Akin
and Mr. Johnston resigned from the Board and all committees (including the Compensation Committee) on February 17, 2004. Prior to their resignations, on
February 13, 2004, the Compensation Committee as it was then configured approved the 2003 executive compensation awards. After Mr. Akin and Mr. Johnston resigned from the Board,
however, the Board dissolved the Compensation Committee. The functions of the Compensation Committee are now currently being administered by the entire Board. The Board issued this report based on the
minutes of the meetings of the Compensation Committee prior to its dissolution.

With
respect to actions taken by the Compensation Committee prior to its dissolution, readers should interpret references in this report to the "Compensation Committee" to mean the
Compensation Committee as it was then configured. With respect to ongoing actions or actions to be performed in the future, the phrase "Compensation Committee" should be interpreted to include the
entire Board in lieu of the now dissolved Compensation Committee, or, if it is reconstituted after the date of this report, the Compensation Committee as it will then be configured.

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Overview

The Compensation Committee reviews and approves all issues pertaining to director and executive compensation. The objective of our three executive compensation
programs (base salary, short-term incentive and long-term incentive) is to provide compensation which enables us to attract, motivate and retain talented and dedicated
executives, foster a team orientation toward the achievement of business objectives and directly link the success of our executives with that of our shareholders.

The
key objectives of the Company's compensation philosophy are as follows: an emphasis on shareholder value creation by increasing cash flow and recurring monthly revenue; setting base
salaries and total compensation within a market competitive range; the utilization of a pay-for-performance philosophy; and an emphasis on long-term incentives and
equity programs for executive employees. The Company extends participation in its long-term and short-term incentive programs to certain employees in addition to executive
officers based on the potential to contribute to increasing shareholder value.

In
structuring the Company's compensation plans, the Compensation Committee takes into consideration Section 162(m) (which disallows the deduction of compensation in excess of
$1,000,000 except for certain payments based upon performance goals) of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, and other factors the Compensation Committee deems
appropriate. As a result, some of the compensation under the company's compensation programs may not be deductible by reason of Section 162(m).

Recent
events prompted us to increase the base salaries and short term incentive compensation of our executives and senior managers in 2003. First, recently enacted federal legislation
and associated changes in the regulatory climate affecting public companies generally have significantly increased the perceived risks to and liabilities of management and the time commitments of
management in connection with corporate governance, accounting and regulatory matters. Moreover, in January 2003, Westar announced its intention to explore strategic alternatives for divesting its
interest in the Company. This announcement directly affected our ability to incentivize and retain our management team, and at the same time created uncertainty in the value of management's long-term
incentive compensation. For these reasons, the Compensation Committee, after discussions with management and upon the advice of an independent compensation consultant retained by the Compensation
Committee, entered into new employment agreements (which include change of control and severance provisions) with executives and senior managers and approved increases in base compensation for such
personnel for 2003.

Base Salary Compensation

An annual base salary range is established for each executive position to reflect the potential contribution of each position to the achievement of the Company's
business objectives. Due to large consolidations in the security monitoring industry, we have few truly comparable companies for executive compensation purposes.

In
late 2002, the Compensation Committee engaged an independent compensation consultant to provide national market data for executive positions and to evaluate the appropriateness of and
to make recommendations regarding our executive compensation and benefit programs. For purposes of determining market rates, in addition to security monitoring companies, the consultant utilized
companies within the telecommunications, cable and paging industries due to the fact that these companies provide similar basic services. Information concerning base salaries, annual incentives and
long-term incentives for the executive officers of companies identified by the consultant and the Compensation Committee as "peer group companies" was compiled. In addition, published
surveys were utilized by the consultant for market information. The peer group data was averaged with the published survey data to determine the market ranges and averages for the jobs for which peer
data was available.

104

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Within
the established base salary ranges, actual base salary is determined by a subjective assessment of each executive's achievement of individual objectives and managerial
effectiveness. The Compensation Committee annually reviews the performance of the executive officers. The Compensation Committee, after consideration of the financial performance of the Company, the
recommendations of the compensation consultant, the Chief Executive Officer's subjective evaluation of the performance of the executives and senior managers, and such other subjective factors as the
Compensation Committee deems appropriate for the period being reviewed, establishes the base compensation of those officers.

All
executive officers, excluding Mr. Williams who was hired in 1997, were hired in 2001.

For
the reasons noted above, the base compensation of executives and certain senior managers was increased for 2003.

Annual Incentive Compensation

All executive officers are eligible for annual incentive compensation.

The
primary form of short-term incentive compensation is provided through the Company's Short-Term Incentive Plan, or STIP. Through the STIP, employees selected
by the Compensation Committee who have an opportunity to directly and substantially contribute to the Company's achievement of short-term objectives are eligible to receive
short-term incentive compensation. Short-term incentives are structured so that potential compensation is comparable with short-term compensation granted to persons
in comparable positions in the national market and are targeted to approximate the median in the national market.

In
2002, the STIP was amended to provide that, in order for participants to fully maximize their incentive compensation, the participant, during the STIP plan year, must invest a stated
percentage of his or her base salary in Company stock. We refer to this percentage as the Purchase Requirement. The Purchase Requirement may be satisfied either through open-market
purchases, exercise of options, participation in the company's employee stock purchase plan, or self-directed investments into Company stock through the Company's 401(k) plan. Pursuant to
this amendment, executive officers were required to invest 7% of their base salary as stated above in order to maximize their incentive compensation.

On
January 13, 2003, Westar announced its intention to explore strategic alternatives for divesting its interest in the Company. Due to the unlikelihood that insiders would be
permitted to engage in transactions involving company securities while Westar and the Company were pursing such strategic alternatives, on March 26, 2003, the Board authorized a further
amendment to the STIP, to delete for plan year 2003 the Purchase Requirement for all participants other than the executive officers. The executive officers were still required to meet the Purchase
Requirement in 2003 in order to maximize their incentive compensation, provided there were sufficient defined opportunities during the year for executives to purchase company stock without violating
insider trading restrictions. However, due to Westar's and the Company's continuing pursuit of strategic alternatives throughout almost all of 2003, no sufficient trading opportunities for the
executive officers to purchase company stock arose, and accordingly these conditions on the executive's Purchase Requirements were not satisfied.

Under
the STIP, as amended, Mr. Ginsburg, Mr. Nevin, Mr. Sands and Mr. Pefanis may nominally earn an annual short-term incentive target of 60% of
their base salaries. Mr. Williams may nominally earn an annual short-term incentive target of 60% of his base salary under his agreement with Multifamily. Other participants may
earn for annual short-term incentive targets ranging from 15% to 40% of base salary. Actual (as opposed to nominal) earned short-term incentive compensation as a percentage of
salary can be greater or less than the target percentage depending on actual performance of the Company against budgeted performance criteria established by the Compensation Committee. Accordingly, it
is possible that if the Company's
performance exceeds budgeted criteria, actual incentive compensation paid under the STIP may exceed the targeted percentage of base compensation.

105

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For Mr. Ginsburg, Mr. Nevin, Mr. Sands and Mr. Pefanis, 25% of the annual incentive is based upon the attainment of individual goals and management skill, 25%
is based upon cash flow per share, 25% is based upon the ratio of debt to earnings before interest, taxes, depreciation and amortization, or EBITDA, and 25% is based upon the ratio of debt to
recurring monthly revenue. For Mr. Williams, 25% of the annual incentive is based upon the attainment of individual goals and management skill, 25% is based upon achievement of sales goals, 25%
is based on Protection One's cash flow per share, and 25% is based upon Multifamily's EBITDA.

For
the reasons noted above, the Compensation Committee approved short-term incentive awards for 2003 that were higher, as a percentage of base compensation, than in previous
years.

Long Term Incentives

Long-term incentive compensation has typically been offered to employees who are in positions that can affect the long-term success of the
Company through the formation and execution of the Company's business strategies. The 1997 Long Term Incentive Plan, or LTIP, is the principal method for awarding long-term incentive
compensation, and compensation thereunder takes the form of stock options. The purposes of long-term incentive compensation are to: (a) align the interests of award recipients with
those of the shareholders by increasing the proprietary interest of the recipients in the company's growth and success; (b) advance our interests by attracting and retaining the services of
directors, officers and other key employees; and (c) motivate recipients to act in the long-term best interests of our shareholders.

All
exempt employees are eligible for grants under the LTIP. Typically, at the beginning of each incentive period, stock-based awards are provided to such participants and in such
amounts as the Compensation Committee deems appropriate. The number and form of awards vary on the basis of position and pay grade. The level of total compensation and stock awards for similar
executive positions in comparable companies are used as a reference in establishing the level of stock options for Company executives. The Compensation Committee sought to establish a level of stock
options for company executives that would place them in the median range of the Company's peer group in terms of total compensation.

Options
generally vest and become exercisable ratably over a three-year period. Upon the change in control of the Company on February 17, 2004, all previously issued
and unexpired options accelerated and vested.

Although
the Company has historically viewed the use of stock options as a significant component of compensation, believing that they create a strong and direct link between the
financial outcomes of the employees and the shareholders, due to changing economic and regulatory factors, the Compensation Committee is considering various alternative approaches to its traditional
reliance on stock options as a long-term incentive for directors and executive management. Partly in consideration of these factors, and partly in consideration of the increases in 2003 to
base salary compensation and awards under the STIP, the Company awarded no stock options to Company executives in 2003.

Network Multi-Family Security Corporation Deferred Compensation Plan

On October 16, 2003, the Board of Directors authorized the termination of the Network Multi-Family Security Corporation Deferred Compensation Plan.

401(k) Company Stock Fund

On September 5, 2003, the Company's 401(k) Committee, comprised of senior officers and employees of the Company, removed the Protection One Stock Fund as
an investment option under the Plan. This action did not require plan participants to divest or reallocate investments previously

106

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made
into the Stock Fund, but effectively prohibited further contributions or allocations into the Stock Fund.

Employee Stock Purchase Plan

On October 16, 2003, due to the sales process associated with Westar selling its ownership interest in the Company, the Compensation Committee suspended
participation in the ESPP for 2003 and 2004. All amounts contributed by employees through the ESPP in 2003 were returned to plan participants in November 2003.

Chief Executive Officer

Mr. Ginsburg has been Chief Executive Officer of the company since April 2001. In determining the terms of his employment, the Compensation
Committee took into account relevant salary information in the national market and the recommendations made by an independent compensation consultant.

Base Salary:Mr. Ginsburg received a base salary in 2003 of $450,000 as required under his
agreement with the Company.

Short-Term Incentive Pay:The Compensation Committee awarded Mr. Ginsburg a bonus
equal to approximately 248% of his target award under the STIP for 2003. Twenty-five percent of Mr. Ginsburg's annual incentive was based upon the attainment of individual goals and
management skill. The remainder of Mr. Ginsburg's 2003 bonus was based on the actual performance of the Company against budgeted performance criteria, as follows: (a) cash flow per share
(25%), (b) the ratio of debt to earnings before interest, taxes, depreciation and amortization (25%), and (c) the ratio of debt to recurring monthly revenue (25%). As discussed above in
the Section entitledAnnual Incentive Compensation, because the actual performance of the Company exceeded the budgeted performance criteria established
by the Compensation Committee, pursuant to the terms of the STIP, Mr. Ginsburg was entitled to a bonus which exceeded the targeted award. The amount of the 2003 bonus is listed in the summary
compensation table in Item 11 above.

Stock Options:No stock options were awarded by the Compensation Committee to Mr. Ginsburg in
2003.



107

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PERFORMANCE GRAPH

The following chart compares the cumulative total stockholder returns on the common stock since December 31, 1997 to (1) the cumulative total
returns over the same period of the Russell 2000 index; and (2) the group of companies selected as our peers at the current time which we refer to as our peer group. The peer group is comprised
of Brinks, Frisco Bay Industries, Ltd. and Lifeline Systems, Inc. The market price of the common stock of Lifeline Systems was impacted, in part, during the period of October 14,
1998 to March 31, 1999, by our agreement to acquire Lifeline, which was not consummated. The annual returns for the Peer Group indices are weighted based on the capitalization of each company
within the peer group at the beginning of each period for which a return is indicated. The chart assumes the value of the investment in the common stock and each index was $100 at December 31,
1997 and that all dividends were reinvested.

CHART

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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth certain information with respect to the beneficial ownership of our common stock by holders of more than 5% of the outstanding
common stock as of March 15, 2004, based on prior filings by these owners with the SEC.

Name and Address of Beneficial Owner

Amount and Nature of
Beneficial Ownership

Percent
of ClassPOI Acquisition I, Inc.
375 Park Avenue, 14th Floor
New York, NY 10152

85,291,497
(1)
86.8
%Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401

4,361,600
(2)
4.5
%


---

Security Ownership of Management

The following table sets forth certain information with respect to beneficial ownership of our common stock as of March 15, 2004 by each of our directors
and named executive officers, and all of our directors and executive officers as a group.

Name of Beneficial Owner

Amount and Nature of Beneficial
Ownership of the Company(1)Ben M. Enis

67,500
(2)Richard Ginsburg

907,064
(2)(3)Darius G. Nevin

277,570
(2)(3)Peter J. Pefanis

223,233
(2)Mack Sands

500,134
(2)Steven V. Williams

257,025
(2)James Q. Wilson

59,600
(2)All directors and executive officers of Protection One as a group (7 persons)

2,292,126
(4)


---

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Shares Authorized for Issuance Under Equity Compensation Plans

The following table summarizes the total shares of our common stock that may be received by option holders upon the exercise of currently outstanding options, the
weighted average exercise price of those outstanding options and the number of shares of our common stock that are still available for future issuance under our equity compensation plans after
considering the stock options currently outstanding.

|Plan category                                                                                |  | Number of shares to be issued upon
exercise of outstanding options,
warrants and rights |  | Weighted average exercise
price of outstanding
options, warrants and
rights |      | Number of shares remaining
available for future
issuance
|-------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | --------------------------------------------------------
|Incentive Stock Option Plan (the only equity compensation plan approved by our shareholders) |  | 3,550,449                                                                               |  | $                                                                           | 2.84 |                                                         
|Any equity compensation plans not approved by security holders                               |  | 0                                                                                       |  |                                                                             | 0.00 |                                                         
|                                                                                             |  |                                                                                         |  |                                                                             |      |                                                         
|Total                                                                                        |  | 3,550,449                                                                               |  | $                                                                           | 2.84 |                                                         
|                                                                                             |  |                                                                                         |  |                                                                             |      |                                                         

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information on certain relationships and related transactions is set forth in Note 6 "Related Party Transactions" of the Notes to Consolidated Financial
Statements, which is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

Aggregate fees billed to us for the fiscal years listed represent fees billed by our principal accounting firm, Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their respective affiliates.

For the year
ending
December 31,
2003

Percentage
of service
approved
by the audit
committee

For the year
ending
December 31,
2002

Percentage
of service
approved
by the audit
committeeAudit fees(a)

$
400,000



$
1,280,500

N/AAudit-related fees(b)


44,050




34,550

N/ATax fees(c)


1,808

100
%

10,842

N/AAll other fees




N/A




N/ATotal fees

$
445,858



$
1,325,892


---

110

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The
Audit Committee of our Board reviewed the services provided by Deloitte & Touche, along with the fees related to such services. The Audit Committee reviews audit fees to be
paid to and other services to be provided by the independent public accountants. The Committee has considered, and will consider, whether the provision of non-audit services is compatible
with maintaining the independence of our independent accounting firm.

Our
Audit Committee must pre-approve all non-audit services provided to us by our independent accountants. According to our Audit Committee Charter, this
pre-approval authority may be delegated to a single member of the Audit Committee and then reviewed by the entire Audit Committee at the committee's next meeting. As described above,
following the resignations of Mr. Clark and Mr. Johnston, the Board dissolved the Audit Committee, and the entire Board is currently administering the functions of the Audit Committee.

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|Exhibits |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1      |  | Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"), between Westar Energy and Protection One, Inc. ("POI") (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by
POI and Protection One Alarm Monitoring, Inc. ("Monitoring") dated July 30, 1997 (the "July 1997 Form 8-K")). The Common File Number of POI is 0-24780. The Common File Number of Monitoring is 33-73002-01.
|2.2      |  | Amendment No. 1 dated October 2, 1997, to the Contribution Agreement (incorporated by reference to Exhibit 99.1 to the Current Report of Form 8-K filed by POI and Monitoring dated October 2, 1997).                                                                                                                                                                                                                                    
|2.3      |  | Amendment No. 2 dated February 29, 2000 to the Contribution Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by POI and Monitoring dated February 29, 2000).                                                                                                                                                                                                                                 
|2.4      |  | Amendment No. 3 dated June 21, 2001 to the Contribution Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by POI and Monitoring dated August 14, 2001).                                                                                                                                                                                                                                       
|2.5      |  | Amendment No. 4 dated October 25, 2001 to the Contribution Agreement (incorporated by reference to Exhibit 2.5 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended December 31, 2001 (the "Fiscal 2001 Form 10-K")
).                                                                                                                                                                                       
|2.6      |  | Consent and Limited Waiver Agreement dated March 18, 2002 to the Contribution Agreement (incorporated by reference to Exhibit 2.6 to the Fiscal 2001 Form 10-K).                                                                                                                                                                                                                                                                         
|2.7      |  | Consent and Limited Waiver Agreement dated July 1, 2002 to the Contribution Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by POI and Monitoring dated November 14, 2002).                                                                                                                                                                                                              
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|3.1  |  | Fifth Amended and Restated Certificate of Incorporation of POI, as amended (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended September 30, 1997 (the "Fiscal 1997
Form 10-K")).                                                                                                                         
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2  |  | Amendment dated as of November 24, 1997 to Fifth Amended and Restated Certificate of Incorporation of POI.                                                                                                                                                                                                                                                                       
|3.3  |  | By-laws of POI (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by POI and Monitoring for the quarter ended March 31, 1996).                                                                                                                                                                                                                 
|3.4  |  | Certificate of Incorporation of Monitoring, as amended (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 (Registration Number 333-09401) originally filed by Monitoring and, inter alia, POI on August 1, 1996 (the
"August 1996 Form S-3")).                                                                                                  
|3.5  |  | Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by POI and, inter alia, Monitoring for the year ended September 30, 1994).                                                                                                                                                                                                
|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 of the year ended September 30, 1996 (the "Fiscal 1996 Form 10-K")).
|4.3  |  | Second Supplemental Indenture dated as of October 28, 1996, among Monitoring as Issuer, POI inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.3 to the Fiscal 1996 Form 10-K)).                                                                                                                                                              
|4.4  |  | Third Supplemental Indenture dated as of February 14, 2000 among Monitoring as Issuer, POI inter alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.4 to the Annual Report on Form 10-K filed by POI and
Monitoring for the year ended December 31, 2000 (the "Fiscal 2000 Form 10-K")).                                                            
|4.5  |  | Indenture, dated as of August 17, 1998, among Monitoring, as issuer, POI as guarantor, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 filed by POI and Monitoring on September
22, 1998).                                                                                                              
|4.6  |  | Indenture, dated as of December 21, 1998, among Monitoring, as issuer, POI, as guarantor, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K filed by POI and Monitoring for
the year ended December 31, 1998 (the "Fiscal 1998 Form 10-K")).                                                                      
|10.1 |  | Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Merita Bank, Ltd. (formerly Kansallis-Osake-Pankki) (incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-Q filed by POI and, inter alia, Monitoring for
the quarter ended March 31, 1994).                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                  

112

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|10.2  |  | Warrant Agreement dated as of November 3, 1993, between Monitoring and United States Trust Company of New York, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (Registration Statement 33-73002)
originally filed by POI, Monitoring and certain former subsidiaries of Monitoring on December 15, 1993 (the "1993 Form S-4")).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3  |  | Registration Rights Agreement dated as of November 3, 1993, among Monitoring, POI, certain former subsidiaries of Monitoring and Bear, Stearns & Co., Inc. (incorporated by reference to Exhibit 4.4 to the 1993 Form S-4).                                                                                                                                                          
|10.4  |  | Warrant Agreement dated as of May 17, 1995, between POI and The First National Bank of Boston, as Warrant Agent (incorporated by reference to Exhibit 10.40 to the 1995 Form S-4).                                                                                                                                                                                                   
|10.5  |  | 1994 Stock Option Plan of POI, as amended (incorporated by reference to Exhibit 10.23 to the Fiscal 1996 Form 10-K).*                                                                                                                                                                                                                                                                
|10.6  |  | 1997 Long-Term Incentive Plan of POI (incorporated by reference to Appendix F to POI's proxy statement dated November 7, 1997).*                                                                                                                                                                                                                                                     
|10.7  |  | Notes Registration Rights Agreement dated as of May 17, 1995, among POI, Monitoring, Morgan Stanley & Co., Incorporated and Montgomery Securities (incorporated by reference to Exhibit 4.2 to the 1995 Form S-4).                                                                                                                                                                   
|10.8  |  | Revolving Credit Agreement among Monitoring, borrower, NationsBank, N.A., administrative agent, First Union National Bank, syndication agent, Toronto Dominion (Texas), Inc., documentation agent, and Lenders named therein, dated December 21, 1998 (the
"Revolving Credit Agreement") (incorporated by reference to Exhibit 10.11 to the Fiscal 1998 Form 10-K).                  
|10.9  |  | First Amendment to the Revolving Credit Agreement, dated as of February 26, 1999 (incorporated by reference to Exhibit 10.12 to the Fiscal 1998 Form 10-K).                                                                                                                                                                                                                          
|10.10 |  | Agreement, dated as of February 29, 2000, by and among POI, Monitoring, and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring dated February 29, 2000).                                                                                                                                               
|10.11 |  | Second Amendment of Credit Agreement, effective as of February 29, 2000, between Monitoring and Westar Industries, Inc., as Administrative Agent and a Lender (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by POI
and Monitoring dated February 29, 2000).                                                                                     
|10.12 |  | Registration Rights Agreement, dated December 21, 1998, among Monitoring, POI and various subsidiary guarantors and Morgan Stanley & Co. Incorporated, Chase Securities Inc; First Union Capital Markets, NationsBanc Montgomery Securities LLC and TD
Securities (USA), Inc. (the "Placement Agents") (incorporated by reference to Exhibit 99.2 to the Fiscal 1998 Form 10-K).     
|10.13 |  | Form of Change of Control Agreement with Anthony Somma (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended December 31, 1999 (the "Fiscal 1999 Form 10-K")).*                                                                                                                                               
|10.14 |  | Third Amendment to the Revolving Credit Agreement, dated as of January 2, 2001, between Monitoring and Westar Industries, Inc., as Administrative Agent and as a Lender (incorporated by reference to Exhibit 10.15 to the Fiscal 2000 Form
10-K).                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                                                                                                                                      

113

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|10.15 |  | Fourth Amendment to the Revolving Credit Agreement, dated as of February 28, 2001, between Monitoring and Westar Industries, Inc., as Administrative Agent and as a Lender (incorporated by reference to Exhibit 10.16 to the Fiscal 2000 Form
10-K).                                   
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16 |  | Fifth Amendment of Credit Agreement effective as of June 30, 2001 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring dated
August 15, 2001).            
|10.17 |  | Sixth Amendment of Credit Agreement effective as of November 1, 2001 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring
dated November 14, 2001).       
|10.18 |  | Seventh Amendment to Credit Agreement effective March 25, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.19 to the Fiscal 2001 Form 10-K).                                                                     
|10.19 |  | Eighth Amendment of Credit Agreement effective as of June 3, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by POI and Monitoring
dated August 13, 2002).         
|10.20 |  | Ninth Amendment of Credit Agreement effective as of June 26, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by POI and Monitoring
dated August 13, 2002).         
|10.21 |  | Tenth Amendment of Credit Agreement effective as of July 25, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by POI and Monitoring
dated November 14, 2002).       
|10.22 |  | Eleventh Amendment of Credit Agreement effective as of August 26, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring dated November 14, 2002).  
|10.23 |  | Twelfth Amendment of Credit Agreement effective as of September 11, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by POI and
Monitoring dated November 14, 2002).
|10.24 |  | Thirteenth Amendment of Credit Agreement effective as of March 11, 2003 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring
dated June 26, 2003).        
|10.25 |  | Fourteenth Amendment of Credit Agreement effective as of June 20, 2003 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by POI and Monitoring
dated June 26, 2003).         
|      |  |                                                                                                                                                                                                                                                                                         

114

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|10.26 |  | Employment Agreement dated as of April 16, 2001 between Protection One, Inc. and Richard Ginsburg (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by POI and Monitoring dated May 15, 2001).*                                                                                          
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Richard Ginsburg (incorporated by reference to Exhibit 10.25 to the Annual Report on Form 10-K filed by POI and Monitoring for the year ended December 31, 2002 (the "Fiscal
2002 Form 10-K").*                                                
|10.28 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Darius G. Nevin (incorporated by reference to Exhibit 10.26 to the Fiscal 2002 Form 10-K).*                                                                                                                                                    
|10.29 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Peter J. Pefanis (incorporated by reference to Exhibit 10.27 to the Fiscal 2002 Form 10-K).*                                                                                                                                                   
|10.30 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Mack Sands (incorporated by reference to Exhibit 10.28 to the Fiscal 2002 Form 10-K).*                                                                                                                                                         
|10.31 |  | Employment Agreement dated March 18, 2003 between Protection One, Inc. and Steve V. Williams (incorporated by reference to Exhibit 10.29 to the Fiscal 2002 Form 10-K).*                                                                                                                                                  
|10.32 |  | Letter Agreement dated November 1, 2001 between Westar Industries, Inc. and POI regarding management fee and financial advisory services (incorporated by reference to Exhibit 10.23 to the Fiscal 2001 Form 10-K).                                                                                                       
|10.33 |  | Outsourcing Agreement between Westar Energy, Inc. and Protection One Data Services, Inc. dated July 1, 2002 (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by POI and Monitoring dated
August 13, 2002).                                                                           
|10.34 |  | Westar Aviation, Inc. Stock Purchase Agreement dated as of June 5, 2002 by and between Westar Industries, Inc. and Protection One, Inc. (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q filed by POI and Monitoring dated
August 13, 2002).                                               
|10.35 |  | Aircraft Reimbursement Agreement dated as of June 5, 2002 between AV ONE, Inc. (f/k/a Westar Aviation, Inc.) and Westar Industries (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q filed by POI
and Monitoring dated August 13, 2002).                                                    
|10.36 |  | Kansas Corporation Commission Order dated November 8, 2002 (incorporated by reference to Exhibit 99.2 to our Quarterly Report on Form 10-Q dated November 14, 2002).                                                                                                                                                      
|10.37 |  | Kansas Corporation Commission Order No. 55 dated December 23, 2002 (filed as Exhibit 99.1 to our December 30, 2002 Form 8-K).                                                                                                                                                                                             
|10.38 |  | Limited Stipulation and Agreement dated February 11, 2003, with the Staff of the Kansas Corporation Commission, Westar Energy, Inc., Westar Industries, Inc., Citizens' Utility Ratepayer Board, MBIA Insurance Corporation and the Kansas Industrial
Consumers (filed as Exhibit 99.1 to our February 11, 2003 Form 8-K).
|10.39 |  | Kansas Corporation Commission Order dated February 10, 2003 (filed as Exhibit 99.1 to our February 14, 2003 Form 8-K).                                                                                                                                                                                                    
|10.40 |  | Partial Stipulation and Agreement dated February 25, 2003, with the Staff of the Kansas Corporation Commission, Westar Energy, Inc., Westar Industries, Inc. and MBIA Insurance Corporation (filed as Exhibit 99.1 to our February 25, 2003 Form
8-K).                                                                    
|      |  |                                                                                                                                                                                                                                                                                                                           

115

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|10.41 |  | Kansas Corporation Commission Order No. 62 approving Limited Stipulation and Agreement dated February 14, 2003 (incorporated by reference to Exhibit 10.39 to the Fiscal 2002 Form 10-K).                                                                                      
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.42 |  | Kansas Corporation Commission Order No. 65 dated March 11, 2003 (filed as Exhibit 99.1 to our March 14, 2003 Form 8-K).                                                                                                                                                        
|10.43 |  | Letter dated March 19, 2003 from J. Eric Griffin of Protection One, Inc. to the Kansas Corporation Commission accepting the conditions of Kansas Corporation Commission Order No. 65. (incorporated by reference to Exhibit 10.41 to the Fiscal 2002 Form
10-K).               
|10.44 |  | Letter dated March 19, 2003 from J. Eric Griffin of Protection One, Inc. to Martin J. Bregman of Westar Energy pursuant to Kansas Corporation Commission Order No. 65 (incorporated by reference to Exhibit 10.42 to the Fiscal 2002 Form
10-K).                               
|10.45 |  | Revolving Credit Facility Standstill Agreement dated as of February 17, 2004, among POI Acquisition, LLC, Protection One, Inc., Protection One Alarm Monitoring, Inc. and Network Multi-Family Security Corporation (filed as Exhibit 10.43 to our
February 18, 2004 Form 8-K).
|10.46 |  | Equity Standstill Agreement dated as of February 17, 2004, by and between Protection One, Inc. and POI Acquisition I, Inc. (filed as Exhibit 10.44 to our February 18, 2004 Form 8-K).                                                                                         
|12.1  |  | Statement regarding Computation of Earnings to Fixed Charges.+                                                                                                                                                                                                                 
|16.1  |  | Letter from Arthur Andersen LLP to the Securities and Exchange Commission re: Change in Certifying Accountant (incorporated by reference to Exhibit 16 to our Current Report on Form 8-K dated May 30, 2002).                                                                  
|21.1  |  | Subsidiaries of POI and Monitoring.+                                                                                                                                                                                                                                           
|23.1  |  | Consent of Deloitte & Touche LLP.+                                                                                                                                                                                                                                             
|31.1  |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                      
|31.2  |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.+                                                                                                                                                                                                      
|32.1  |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                        
|32.2  |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.+                                                                                                                        

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SIGNATURES

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

|               |  | PROTECTION ONE, INC.
PROTECTION ONE ALARM MONITORING, INC.
|-------------- |  | ----------------------------------------------------------
|               |  |                                                           
|March 23, 2004 |  | By:                                                       

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

|Signature                           |  | Title                                                                         |  | Date          
|----------------------------------- |  | ----------------------------------------------------------------------------- |  | --------------
|                                    |  |                                                                               |  |               
|/s/RICHARD GINSBURGRichard Ginsburg |  | President, Chief Executive Officer and Director (Principal Executive Officer) |  | March 23, 2004
|/s/BEN M. ENISBen M. Enis           |  | Director                                                                      |  | March 23, 2004
|/s/JAMES Q. WILSONJames Q. Wilson   |  | Director                                                                      |  | March 23, 2004
|                                    |  |                                                                               |  |               

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