<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the fiscal year ended September 30, 1997

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

              For the transition period from ________ to _________

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

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


<TABLE>
<CAPTION>
                                                      Name of Each Exchange on
Title of Each Class                                      Which Registered
-------------------                                      ----------------
<S>                                                    <C>
6 3/4% Convertible Senior Subordinated Notes Due 2003 
of Protection One Alarm Monitoring, Inc.
Guaranteed by Protection One, Inc.                     New York Stock Exchange
</TABLE>

                 Securities registered pursuant to Section 12(g)
                  of the Act: Common Stock, par value $0.1 per
                          share of Protection One, Inc.
                                (Title of Class)

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

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

         The aggregate market value of the common stock of Protection One, Inc.
held by nonaffiliates on December 19, 1997 (based on the last sale price of such
shares on the Nasdaq National Market) was approximately $125,639,250

         As of December 19, 1997, Protection One, Inc. had outstanding
83,362,938 shares of Common Stock, par value $0.01 per share. As of such date,
Protection One Alarm Monitoring, Inc. had outstanding 110 shares of Common
Stock, par value $0.10 per share, all of which shares were owned by Protection
One, Inc.  Protection One Alarm Monitoring, Inc. meets the conditions set forth
in General Instructions I (1)(a) and (b) for Form 10-K and is therefore filing
this form with the reduced disclosure format set forth therein.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Portions of Protection One, Inc.'s Prospectus dated January 2, 1997 as filed
pursuant to Rule 424(b), under the Securities Act of 1933 are incorporated into
Parts I and II and portions of Protection One, Inc.'s Proxy Statement dated
November 7, 1997 for the Special Meeting of Stockholders held on November 24,
1997 are incorporated by reference in Part III.



<PAGE>   2


                               INTRODUCTORY NOTES



         COMPANY STRUCTURE. Unless the context otherwise indicates, all
references in this Annual Report on Form 10-K (this "Report") to "the Company"
or "Protection One" are to Protection One, Inc. ("POI"), its direct wholly owned
subsidiary, Protection One Alarm Monitoring, Inc. ("Monitoring") and (following
consummation of the Western Resources transaction (as defined below)) POI's
other wholly owned subsidiaries . Each of POI and Monitoring is sometimes
referred to herein as "Registrant." POI's sole asset is, and POI operates solely
through, its investment in Monitoring and (subsequent to the Western Resources
transaction) POI's other wholly owned subsidiaries.. See "Recent Acquisitions"
included in Item 1 of this Report. Each of POI and Monitoring is a Delaware
corporation organized in September 1991.

         MRR AND EBITDA. As used in this Report, "MRR" means monthly recurring
revenue (excluding revenues from patrol services) that the Company is entitled
to receive under contracts in effect at the end of the period and "EBITDA" means
earnings before interest, taxes, depreciation and amortization (excluding
adjustments of purchase accounting accruals, losses or gains on disposition of
fixed assets, loss on assets held for sale, loss on abandoned acquisitions and
extraordinary items). MRR is a term commonly used in the security alarm industry
as a measure of the size of a company, but not as a measure of profitability or
performance, and does not include any allowance for future attrition or
allowance for doubtful accounts. EBITDA is derived by adding to loss before
income taxes, extraordinary items and cumulative effect of change in accounting
method--net of taxes, the sum of (i) loss on sales of assets, (ii) loss on
assets held for sale, (iii) amortization of debt issuance costs and original
issue discount ("OID"), (iv) interest expense, net (v) amortization of
subscriber accounts and goodwill, (vi) depreciation expense, (vii) performance
warrants compensation expense, (viii) adjustment of purchase accounting
accruals, net and (ix) loss on acquisition terminations. EBITDA does not
represent cash flow from operations as defined by generally accepted accounting
principles, should not be construed as an alternative to net income and is
indicative neither of the Company's operating performance nor of cash flows
available to fund the Company's cash needs. Items excluded from EBITDA are
significant components in understanding and assessing the Company's financial
performance. Management believes presentation of EBITDA enhances an
understanding of the Company's financial condition, results of operations and
cash flows because EBITDA is used by the Company to satisfy its debt service
obligations and its capital expenditure and other operational needs as well as
to provide funds for growth. In addition, EBITDA has been used by senior lenders
and subordinated creditors and the investment community to determine the current
borrowing capacity and to estimate the long-term value of companies with
recurring cash flows from operations and net losses.

         FORWARD-LOOKING STATEMENTS. This Report and the materials incorporated
by reference herein include "forward-looking statements" intended to qualify for
the safe harbor from liability established by the Private Securities Litigation
Reform Act of 1995. These forward-looking statements generally can be identified
as such because the context of the statement includes words such as the Company
or its management "believes," "expects," "anticipates" or other words of similar
import. Similarly, statements herein that describe the Company's objectives,
plans or goals also are forward-looking statements. All such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Important factors that could cause actual results to differ
materially form the expectations of Protection One include, among others:
Protection One's high degree of leverage, need for additional capital and
history of losses; the risks and uncertainties related to acquisitions of
subscriber accounts and alarm account portfolios and the Protection One dealer
program; subscriber account attrition; the impact of accounting differences for
account purchases and new installations; the possible adverse effect of false
alarm ordinances and future government regulations; risks of liability from
operations; and competition in the security alarm industry. For information with
respect to these factors, see the information included under the caption "Risk
Factors" in POI's Prospectus dated January 2, 1997, as filed with the Securities
and Exchange Commission pursuant to Rule 424(b), which information is filed as
an exhibit to this Report and incorporated herein by reference. Stockholders,
potential investors and other readers are urged to consider these factors
carefully in evaluating the forward-looking statements. The forward-looking
statements included herein are made only as of the date of this Report and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.



<PAGE>   3



                                     PART I


ITEM 1.  BUSINESS

         On November 24, 1997, POI acquired all of the outstanding stock of
WestSec, Inc. and Westar Security, Inc., which companies conducted the security
alarm monitoring business of Western Resources, Inc. ("Western Resources" and
such business the "Western Resources Security Business"), and certain cash and
marketable securities, and issued to Western Resources an aggregate of
68,673,402 shares of the common stock, par value $.01 per share of POI ("Common
Stock"), which shares represented approximately 82% of the shares of POI common
stock outstanding immediately after such issuance. For additional information
with respect to this transaction (the "Western Resources transaction"), see
"Recent Acquisitions" below. Except where the context indicates otherwise, the
remainder of this Item 1 describes the Company's business as of and during the
fiscal year ended September 30, 1997. Stockholders, potential investors and
other readers of this Report should be aware that the information below does
not, in general, reflect the impact that the Western Resources transaction has
had and will have on the operations or assets of the Company, and that the
business of the post-transaction Company may not follow the same historical
trends or be subject to or reflect the same dependence on the economic and
competitive factors described below.

         Protection One provides security alarm monitoring services for
residential and small business subscribers. Based on its 254,478 subscribers as
of September 30, 1997 (approximately 80.1% of which are residential), Protection
One believes it was at such date the fourth largest residential security alarm
monitoring company in the United States and the largest in the seven western
states of Arizona, California, Nevada, New Mexico, Oregon, Utah and Washington.

         The Company's revenues consist primarily of recurring payments under
written contracts for the monitoring and servicing of security systems and the
provision of additional enhanced security services. For the year ended September
30, 1997 ("fiscal 1997"), monitoring and service revenues represented 96.2% of
total revenues. The Company monitors digital signals arising from burglaries,
fires and other events through security systems installed at subscribers'
premises. Most of these signals are received and processed at the Company's
state-of-the-art central monitoring station located in Portland, Oregon, which,
as currently configured, has the capacity to support up to 500,000 subscribers.
The Company also sells enhanced security services, patrol and alarm response
services and alarm systems and provides local field repair services through 13
branch offices. Enhanced security services provided by the Company include,
among others, two-way voice communication, supervised monitoring services, pager
service, wireless backup service and extended service protection.

         From the Company's inception, the Company's growth has become primarily
through the acquisition of portfolios of subscriber accounts. Between, September
30, 1991 and September 30, 1997, the Company acquired 131 portfolios of
subscriber portfolios, representing an aggregate of approximately 207,000
subscribers. Management believes that numerous acquisition opportunities are
available, and the Company is pursuing, and intends to continue to pursue,
acquisitions of portfolios of subscriber accounts, some of which may be
significant. Since the beginning of fiscal 1995, the Company has increased its
emphasis on its dealer program ("Dealer Program"), which became a more
significant source of growth than in prior years. For the year ended September
30, 1997, subscribers generated by the Dealer Program accounted for 58% of the
Company's total subscriber additions, as compared with 38% of the subscribers
added during the year ended September 1996. The Company plans to continue its
emphasis on the Dealer Program because of the greater predictability and
relatively lower cost of adding subscribers through the Company's dealers as
compared with acquisitions of larger portfolios of subscriber accounts. In
addition, the Dealer Program generates a comparatively steady flow of new
subscribers spread more evenly over the Company's branch offices, making it
easier for the Company's branch operations to successfully assimilate these
accounts. See "-- The Dealer Program".

RECENT ACQUISITIONS

         On July 30, 1997, POI and Western Resources entered into a Contribution
Agreement dated as of July 30, 1997 (as amended, the "Contribution Agreement").

         Pursuant to the Contribution Agreement, on November 24, 1997, POI
issued to Western Resources an aggregate of 68,673,402 shares (the "Shares") of
Common Stock, which shares constituted 82.4% of the shares of Common Stock
outstanding immediately after such acquisition. In consideration of the issuance
of the Shares to Western Resources (the "Share Issuance"), Western Resources
transferred to POI all of the outstanding capital stock of WestSec, Inc., a
Kansas

                                        1

<PAGE>   4



corporation ("WestSec"), and Westar Security, Inc., a Kansas corporation
("Westar Security", and an aggregate of $367.4 million in cash and marketable
securities.

   WestSec and Westar provide security alarm monitoring services and sell,
install and service security alarm systems for homes and businesses located
throughout the continental United States. For information with respect to the
Western Resources Security Business, reference is made to the information
included under the caption "The Western Resources Security Business" and to the
financial statements of such business included in Protection One's proxy
statement dated November 7, 1997 for the special meeting of Protection One's
stockholders held on November 24, 1997, which proxy statement (the "Proxy
Statement") is filed as an exhibit to this Report and which information and
financial statements are incorporated herein by reference.

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

   Prior to the Share Issuance, the certificate of incorporation of POI was
amended to increase the maximum authorized number of shares of Common Stock to
150,000,000.

   As provided in the Contribution Agreement, immediately following the Share
Issuance, POI, through a subsidiary, acquired from Western Resources (i) all of
the outstanding capital stock of Centennial Security Holdings, Inc., a Delaware
corporation ("Centennial"), for a cash purchase price of $94.4 million, and (ii)
2,500,000 shares (the "Guardian Common Shares") of the Class A Voting Common
Stock, par value $.001 per share, and 1,875,000 shares (the "Guardian Preferred
Shares") of the Series A 9 3/4% Convertible Cumulative Preferred Stock of
Guardian International, Inc., a Nevada corporation ("Guardian"), for a cash
purchase price of $8.5 million. The Guardian Common Shares constitute
approximately 27.8% of the outstanding shares of Guardian common stock; the
Guardian Preferred Shares are convertible into an aggregate of 1,500,000
additional shares of Guardian common stock.

   POI used a portion of the cash contributed to POI by Western Resources to pay
for the shares of Centennial and Guardian purchased by POI. The amount of such
consideration was determined in arm's-length negotiations between Protection One
and Western Resources and equaled the sum of (i) the amount paid by Western
Resources for such securities, (ii) the fees and expense incurred by Western
Resources to attorneys and other third-party advisors in connection with Western
Resources' acquisition of such securities, and (iii) a carrying charge at a rate
of 10% per annum (pro-rated on the basis of a 365-day year) for the period
Western Resources held such securities.

   Centennial, based in Madison, New Jersey provides security alarm monitoring
services to residential and commercial subscribers located principally in Ohio,
Michigan, New Jersey, New York and Pennsylvania. As of September 30, 1997,
Centennial had approximately 47,000 subscribers (approximately 50% of which were
residential) and MRR of approximately $1.4 million. As of December 31, 1996,
Centennial had total assets of $47.8 million; for the year ended December 31,
1996, Centennial had total revenues of $17.3 million and a net loss of $5.0
million. Consummation of Western Resources' purchase of Centennial occurred in
November 1997. Guardian provides security alarm monitoring services to
approximately 12,000 subscribers in Florida; Guardian also monitors
approximately 16,000 additional subscribers on a "wholesale" basis for certain
third-party security alarm companies, sells alarm systems and provides field
repair services principally to commercial accounts and, to a more limited
extent, provides installation services to third-party security alarm companies.
For the year ended December 31, 1996, Guardian had total revenues of $3.6
million and a net loss of $590,000; as of that date, Guardian had total assets
of $9.0 million. Guardian's common stock trades on the OTC Bulletin Board under
the symbol "GIIS."

   The Contribution Agreement also granted to Protection One an option, (the
"Network Option") exercisable at any time prior to January 30, 1998, by vote of
a majority of the Board of Directors as constituted at the time the vote is
made, to acquire from Western Resources all of the equity securities of Network
Security Holdings, Inc. ("Network") at a price

                                        2

<PAGE>   5



determined in accordance with the formula used to determine the price paid by
Protection One for the shares of Centennial and Guardian, or approximately. For
the year ended December 31, 1996, Network had total revenues of $35.3 million
and annual earnings of $4.0 million; as of December 31, 1996, Network had total
assets of $69.6 million. As of the filing of this Report, POI believes that the
Network Option will probably be exercised during the first three months of
calendar year 1998.

     For additional information with respect to the businesses, results of
operations and financial condition of Network and Centennial, see the
consolidated financial statements of each of Network and Centennial included in
the Proxy Statement at pages F-60 through F-95.

     In connection with the transactions contemplated by the Contribution
Agreement and pursuant to a Stock Option Agreement dated as of July 30, 1997,
between POI and Western Resources (the "Stock Option Agreement"), POI granted to
Western Resources an option (the "19.9% Option") to purchase, in addition to the
Shares, up to 2,750,238 additional shares of Common Stock at a price of $15.50
per share. (If prior to the consummation of the Western Resources transaction,
certain events related to a proposed acquisition of the assets or a substantial
portion of the voting securities of POI by a party other than Western Resources
had occurred , the 19.9% Option would have been exercisable for up to the same
number of shares of Common Stock at a price of $13.50 per share.) Western
Resources' right to exercise the 19.9% Option will terminate on the earlier of
October 31, 1999 and the 45th day after the last day on which any of the
Convertible Notes remains outstanding.

     In connection with the transactions contemplated by the Contribution
Agreement and pursuant to a Stock Option Agreement dated as of July 30, 1997,
between POI and Western Resources (the "Stock Option Agreement"), POI granted to
Western Resources an option (the "19.9% Option") to purchase, in addition to the
Shares, up to 2,750,238 additional shares of Common Stock at a price of $15.50
per share. (If prior to the consummation of the Western Resources transaction,
certain events related to a proposed acquisition of the assets or a substantial
portion of the voting securities of POI by a party other than Western Resources
had occurred, the 19.9% Option would have been exercisable for up to the same
number of shares of Common Stock at a price of $13.50 per share.) Western
Resources' right to exercise the 19.9% Option will terminate on the earlier of
October 31, 199 and the 45th day after the last day on which any of 6 3/4%
Convertible Senior Subordinated Notes due 2003 issued by Monitoring (the
"Convertible Notes") remains outstanding.

MARKET OVERVIEW AND TRENDS

     The Company's target market consists of owners of single family residences
and small businesses. According to the most recent U.S. Census Bureau data,
there are over 10 million single-family residences and over 800,000 businesses
with 100 or fewer employees in the seven states in which the Company operates.

     The security alarm industry is characterized by the following attributes:

     o    HIGH DEGREE OF FRAGMENTATION. The security alarm industry is currently
          comprised mostly of a large number of small providers of alarm systems
          and services. According to data prepared in December 1995 by the J. P.
          Freeman Co. (the "Freeman Data"), there are approximately 12,700
          security alarm companies nationally, and the Company estimates that
          approximately 3,000 operate in the seven states served by the Company.
          A survey published by SDM magazine (formerly Security Distributing and
          Marketing) in May 1997 reported that in 1996, based upon information
          provided by the respondents, the 100 largest companies in the industry
          accounted for approximately 25% of alarm industry revenues. Based on
          its acquisition experience, the Company believes that many smaller
          alarm service companies, because of their size, have higher overhead
          expenses as a percentage of revenues than the Company and lack access
          to capital on terms as attractive as those available to the Company.
          Due to a decline in security system installation prices since 1995,
          security alarm monitoring companies participating in market growth are
          required today to make a substantial investment in each new
          subscriber. As a result, access to capital has become an increasingly
          important factor in a security alarm company's success.

     o    RAPID GROWTH AND LOW PENETRATION. The residential security alarm
          market is growing rapidly but is still characterized by a low level of
          market penetration. The Freeman Data indicate that residential
          security alarm monitoring revenues grew at a compounded annual rate of
          9.9% between 1989 and 1995. The Company believes that several factors,
          including increased concern about crime and favorable demographic
          trends, have contributed to the increased demand for residential
          security alarm services. In addition, based on the Freeman Data, the
          Company estimates that at November 1995, the percentage of total
          households in the United States with monitored security alarm systems
          was approximately 10.9%.


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<PAGE>   6




     o    ADVANCES IN DIGITAL COMMUNICATIONS TECHNOLOGY. Prior to the
          development of digital communications technology, alarm monitoring
          required a dedicated telephone line, which made long-distance
          monitoring uneconomic. Consequently, in order to achieve a national or
          regional presence, alarm monitoring companies were required to
          maintain a large number of geographically dispersed monitoring
          stations. The development of digital communications technology
          eliminated the need for dedicated telephone lines, reducing the cost
          of monitoring services to the subscriber and permitting the monitoring
          of subscriber accounts over a wide geographic area from a central
          monitoring station. The elimination of local monitoring stations has
          decreased the cost of providing alarm monitoring services and has
          substantially increased the economies of scale for larger alarm
          service companies. In addition, the concurrent development of
          microprocessor-based control panels has substantially reduced the cost
          of the equipment available to subscribers in the residential and small
          business markets. Digital technology also has enabled equipment
          manufacturers to build more features into security alarm systems
          (e.g., remote user interfaces, lighting and heating controls and use
          programming features).

     o    INCREASING FALSE ALARMS. According to American City & County magazine,
          police officers respond to more than 13.7 million alarm activations
          annually, 94% to 98% of which are false. The magazine reports that
          although alarm ownership is increasing by 11% annually, police
          department budgets are rising by 3% annually. Municipalities have
          responded to increasing false alarms by implementing alarm permit and
          fine systems and by limiting police response to private alarms until
          further verified by another response entity. Protection One believes
          this trend will continue in the future.

     o    ENTRANCE OF TELECOMMUNICATIONS COMPANIES AND UTILITIES. Large,
          consumer-oriented companies and industries facing deregulation,
          including long distance and local telephone companies and electric and
          gas utilities, have demonstrated an increased interest in the security
          alarm industry over the last several years. Protection One believes
          telecommunications and utility companies are interested in offering
          their customers additional services, including security services, as a
          means of enhancing customer loyalty and reducing future risk of losing
          customers in a fully competitive environment.

     The Company believes that several factors contribute to a favorable market
for security alarm services both generally in the United States and specifically
in the western portion of the country:

     o    INCREASE IN CRIME RATES. According to the Uniform Crime Report
          published by the Federal Bureau of Investigation in 1996 the ("UCR"),
          between 1986 and 1995 the number of violent crimes reported in the
          United States increased by 20.8% and the total number of reported
          criminal offenses increased by 5.0%. The UCR also reported that
          although the number of reported criminal offenses decreased on a
          nationwide basis from 1994 to 1995 by 0.9%, a property crime was
          committed in the United States in 1995 once every three seconds. In
          the states in which the Company operates, the property crime rate in
          1995 was 28.1% higher than the nation as a whole, averaging
          approximately 5,885 property crimes per 100,000 residents. In
          California, Protection One's largest market, the 1995 property crime
          and overall crimes rates were 5.9% and 10.5%, respectively, above the
          national averages.

     o    HIGH LEVEL OF CONCERN ABOUT CRIME. As violent crime and the reporting
          of crime by the news media has increased, the perception by Americans
          that crime is a significant problem has also grown. In a December 1996
          poll conducted by The Wall Street Journal, survey participants ranked
          reducing crime as one of the two highest priorities for Congress.

     o    PER CAPITA POLICE PROTECTION. The UCR reported that urban areas in the
          western region of the United States had the lowest ratio of law
          enforcement employees per capita of the four reporting regions in
          1995, the most recent period for which a UCR has been published.
          According to population and law enforcement employee data presented in
          the UCR, in 1994 Los Angeles had 3.2 law enforcement employees per
          1,000 citizens, while New York had 6.4 and Chicago had 5.7. The number
          of law enforcement employees per 1,000 citizens was 3.0 for Las Vegas,
          2.8 for Phoenix, 3.0 for Salt Lake City, 2.8 for Portland, 2.3 for San
          Diego, 3.3 for San Francisco, 2.4 for Tucson and 3.3 for Seattle.

     o    DEMOGRAPHIC TRENDS. According to the United States Census Bureau, from
          1989 to 1994 the rate of population growth in the states in which the
          Company operates was approximately twice the national average. Other
          recent trends that are favorable to the residential security alarm
          business include: the increase in women in the workforce resulting in
          more children being left at home alone and creating increased demand
          for security alarm services; the aging of the population in general,
          as older people tend to be more concerned about security; and the
          increase in people working at home, resulting in increasing demand for
          security services to protect home office equipment.


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<PAGE>   7




     o    INSURANCE DISCOUNTS. The increase in demand for security systems may
          also be attributable in part to the granting by insurance companies of
          discounts to homeowners who purchase alarm systems, and such discounts
          are typically greater when systems are monitored by a central station.
          In addition, insurance companies may require that businesses install
          an alarm system as a condition of insurance coverage.

  BUSINESS STRATEGY

         The Company's strategy has been to enhance its position as the largest
residential security alarm monitoring company in the seven western states in
which it operates as of September 30, 1997 by pursuing a balanced growth plan
incorporating the Dealer Program, acquisitions of portfolios of subscribers, the
sale of enhanced services and new alarm systems and possible joint ventures and
other strategic alliances.

         The Company's historical growth has enabled it to realize economies of
scale in its central monitoring station, branch operations and corporate
offices. As the number of subscribers monitored by the Company has increased,
the fixed costs of the central monitoring station have been spread over a larger
base, improving monitoring gross margins. Additionally, subscribers have been
added in areas surrounding the Company's branch offices, allowing the Company to
spread the branch office fixed costs over a larger base and increasing the
productivity of field service technicians through more efficient scheduling and
dispatching. Based on the Company's subscriber base at September 30, 1997, the
Company services an average of 19,500 subscribers per branch, which the Company
believes to be among the highest averages in the industry. Finally, the
Company's revenue growth has exceeded the growth of its selling, general and
administrative expenses, as the Company has realized management efficiencies and
has spread additional revenue over its fixed corporate expenses. Such economies
of scale have allowed the Company to add subscriber accounts at attractive
purchase prices.

         The principal components of the Company's business strategy as
conducted during fiscal 1997 are as follows:

         THE DEALER PROGRAM. The Company participates in the growth of the
residential security alarm market by providing monitoring and field repair
services to subscriber accounts generated on a monthly basis through exclusive
purchase agreements with independent alarm companies specializing in the sale
and installation of new alarm systems. The Company added approximately 53,117
subscriber accounts through its Dealer Program in the twelve months ended
September 30, 1997, an increase of approximately 45.9% over the approximately
36,405 subscribers added through the Dealer Program in the twelve months ended
September 30, 1996. As of September 30, 1997, the Company had 81 active
participants in the Dealer Program. The Company believes that participation in
the Dealer Program will expand due to: (i) the Company's concentrated presence
in areas surrounding its branch offices, which enhances the Company's name
recognition and therefore the marketability of the Company's services; (ii) the
Company's ability to obtain volume purchase discounts on security system
equipment on behalf of its dealers; (iii) the Company's support services
provided to dealers in the areas of administration, marketing and employee
training; and (iv) the Company's ability to generate new customer leads through
affinity programs and strategic alliances.

         ACQUISITIONS OF PORTFOLIOS OF SUBSCRIBER ACCOUNTS. The Company also has
grown by acquiring subscriber accounts, primarily from smaller alarm companies.
These acquisitions represented approximately 51,000, 53,000, 55,000 and 39,000
subscribers in each of fiscal years 1994 to 1997, respectively. The Company has
typically acquired only the subscriber accounts, and not the facilities or
liabilities, of such companies. As a result, the Company is able to obtain gross
margins on the monitoring of acquired subscriber accounts that are similar to
those the Company currently generates on the monitoring of its existing
subscriber base. In addition, the Company institutes price increases over time
for acquired subscriber accounts where the Company determines that the charges
previously paid by those subscribers do not appropriately reflect the higher
quality of services to be provided by the Company.

         JOINT VENTURES AND OTHER STRATEGIC ALLIANCES. To evaluate other
potential sources of subscriber growth, the Company has analyzed companies in
other industries that may have an interest in entering the residential security
alarm market. In addition, certain companies in industries facing deregulation
(such as the telecommunications and electric utility industries) have expressed
to the Company an interest in offering security alarm services to develop more
comprehensive relationships with their customers. The Company has entered into a
co-branding and marketing agreements with PacifiCorp, a Portland, Oregon based
utility holding company, and Salt River Project, a multi-purpose reclamation
project that provides electricity and water in the Phoenix area. The Company has
established an affinity marketing relationship with Kaufman & Broad Home
Corporation. In addition, the Company has an agreement with Southwestern Bell
Telephone Company pursuant to which that company markets, sells, installs and
maintains

                                        5

<PAGE>   8



alarm systems monitored by the Company, and acts as the Company's sales and
billing agent for purposes of alarm monitoring services provided by the Company
in Arkansas, Kansas, Missouri, Oklahoma and Texas. As of the date of this
Report, Protection One intends to continue to explore additional joint ventures,
co-marketing arrangements and other strategic alliances as a method of enhancing
the Company's subscriber growth and reducing its costs of generating new
subscribers. However, the Company does not currently believe that any such
additional joint venture or other strategic alliance is probable.

         SALE OF ENHANCED SERVICES; PATROL AND ALARM RESPONSE SERVICES. The
Company seeks to increase revenues from current and newly added subscribers by
actively marketing enhanced services to such subscribers. Such services include
extended service protection, two-way voice communication, supervised monitoring
services, pager service, remote video verification and wireless back up. The
Company also offers patrol and alarm response services, principally in southern
California and Las Vegas.

         CONVERSIONS, NEW OWNERS AND NEW ALARM SYSTEMS. The Company seeks to
convert subscribers from competitors' services to Company-provided services,
particularly in areas in which the Company's patrol and alarm response services
enhance the Company's presence and name recognition. The Company also generates
new subscriber accounts by signing monitoring contracts with new owners of
residences previously occupied by Protection One subscribers and through sales
of alarm systems by its own personnel.

         THE DEALER PROGRAM. The dealers that the Company selects for the Dealer
Program are typically small alarm companies that specialize in selling and
installing alarm systems for residential or small business subscribers in a
specified geographic area. Such companies often cannot profitably provide
monitoring and repair services because they lack a sufficient number of
subscribers to support the fixed operating expenses associated with such
services. Also, many dealers do not have access to capital on attractive terms.
The Company enters into exclusive contracts with such dealers that provide for
the purchase by the Company of the dealers' subscriber accounts on an ongoing
basis. The dealers install alarm systems (which have a Protection One logo on
the keypad), arrange for subscribers to enter into Protection One alarm
monitoring agreements, and install Protection One yard signs and window decals.
All of these subscribers are contacted individually by Company personnel, at the
time of the purchase of the accounts from the dealers, to facilitate subscriber
satisfaction and quality control. In addition, the Company requires dealers to
evaluate the credit history of prospective new subscribers. The Company strives
to provide quality, responsive field service to accounts purchased from dealers;
the Company's principal competitors typically subcontract the field service of
subscriber accounts they purchase, which the Company believes increases
attrition rates and may dissuade dealers from selling their subscriber accounts
to such competitors.

         The Company believes that its increased market share in the areas
surrounding its branch offices has enhanced both the Company's ability to
attract dealers and the ability of such dealers to attract new subscribers. To
further attract high quality dealers, the Company enables them to obtain volume
purchase discounts on security systems, coordinates cooperative dealer
advertising, and provides administrative, marketing and employee training
support services.

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

         THE ACQUISITION PROGRAM. The Company also has sought to grow by
acquiring portfolios of subscriber accounts from other alarm companies. The
Company has focused on acquisitions that allow it to "infill" areas surrounding
branch operations, which in turn leads to greater field maintenance repair and
patrol efficiencies. The Company estimates there are

                                        6

<PAGE>   9



approximately 3,000 alarm companies in its markets, substantially all of which
are independently owned and may, from time to time, become acquisition targets.
The Company believes that it has been an effective competitor in the acquisition
market because of the substantial experience of its management in acquiring
alarm companies and subscriber accounts, both as a result of the 131
acquisitions made by the Company between September 30, 1991 and September 30,
1997 and acquisitions made by members of management when they were employed by
other alarm service companies. The Company also believes that, through its
acquisition activities, it has developed a reputation in the alarm service
industry as an active purchaser of subscriber accounts. Although most
acquisitions add subscribers in the Company's existing market areas to achieve
greater account density, the Company may also make acquisitions outside these
areas.

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

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

THE ACQUISITION MANAGEMENT SYSTEM

         The Company employs a comprehensive acquisition management system to
identify, evaluate, and assimilate acquisitions of new subscriber accounts that
includes three components: (i) the identification and negotiation stage; (ii)
the due diligence stage; and (iii) the assimilation stage.

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

         The Company conducts an extensive pre-closing review and analysis of
all facets of the seller's operations. The process includes a combination of
selective field equipment inspections, individual review of substantially all of
the subscriber contracts, an analysis of the rights and obligations under such
contracts and other types of verification of the seller's operations.

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

DESCRIPTION OF OPERATIONS

         The Company's operations consist principally of alarm monitoring
services, enhanced security services, field repair services and patrol and alarm
response services.

         ALARM MONITORING SERVICES

         Subscriber Security Alarm Systems. Security alarm systems include
devices installed at the subscribers' premises designed to detect or react to
various occurrences or conditions, such as intrusion or the presence of fire or
smoke. These

                                        7

<PAGE>   10



devices are connected to a computerized control panel that communicates through
telephone lines to a central monitoring station. Subscribers may also initiate
an emergency signal from a device such as a "panic button." In most systems,
control panels can identify the nature of the alarm and the areas within a
building where the sensor was activated, and can transmit that information to
the central monitoring station.

         The Central Monitoring Station. The Company monitors substantially all
of its subscriber accounts at its central monitoring station in Portland,
Oregon. In addition, in connection with certain acquisitions, the monitoring of
certain subscriber accounts is subcontracted to independent monitoring companies
to comply with certain state regulations. However, it is the Company's policy to
transfer all monitoring services for its acquired subscriber accounts to its
central monitoring station as soon as practicable.

         The central monitoring station incorporates the use of advanced
communications and computer systems that route incoming alarm signals and
telephone calls to operators. Each operator sits before a computer monitor that
provides immediate information concerning the nature of the alarm signal, the
subscriber whose alarm has been activated, and the premises on which such alarm
is located. All telephone conversations are automatically recorded.

         The central monitoring station has the capacity to monitor up to
500,000 subscribers. The equipment at the central monitoring station includes:
sophisticated phone switching equipment; digital receivers that process the
incoming signals; two computers with built-in redundancy; a network of "smart"
computer terminals; a multi-channel, voice-activated recording system;
uninterruptable power supply; and dual backup generators supplied by different
fuel sources.

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

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

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

         Subscriber Contracts. The Company's alarm monitoring subscriber
contracts generally have initial terms ranging from one to five years in
duration, and provide for automatic renewal for a fixed period (typically one
year) unless the Company or the subscriber elects to cancel the contract at the
end of its term. The Company maintains an individual file with a signed copy of
the contract for each of its subscribers and a computerized customer data base.

         Substantially all of the Company's alarm monitoring agreements for the
Company's residential subscribers (which constitute approximately 80% of the
Company's total accounts) provide for subscriber payments of between $20 and $40
per month. The Company's commercial subscribers typically pay from $25 to $45
per month.

         In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, the cancellation of purchased accounts in the process of
assimilation into the Company's operations, unfavorable economic conditions,
dissatisfaction with field maintenance services and other reasons.

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<PAGE>   11



This attrition is offset to a certain extent by revenues from the sale of
additional services to existing subscribers, price increases, the reconnection
of premises previously occupied by subscribers, conversions of accounts
previously monitored by other alarm companies and guarantees provided by the
sellers of such accounts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Subscriber Attrition."

         ENHANCED SECURITY SERVICES

         Additional MRR is generated by the provision of enhanced security
services that the Company offers to both its existing subscribers and in
conjunction with the sales of new systems. These enhanced security services
include:

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

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

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

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

         Remote Video Verification, which allows video images to be sent to the
central monitoring station from small video cameras located within the monitored
premises. The Company has only recently begun offering this service and expects
that as a consequence of its cost, its primary market will be the Company's
small business accounts.

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

         FIELD REPAIR SERVICES

         The Company believes one of the most effective ways of improving
customer retention is the provision of responsive field repair service by
Company employees. Field service personnel are trained by the Company to provide
repair services for the various types of security systems owned by the Company's
subscribers. Field service personnel also inspect installations performed by the
Company's installation subcontractors.

         Repair services generate revenues primarily through billable field
service calls and contractual payments under the Company's extended service
program. The increasing density of the Company's subscriber base, as a result of
the Company's continuing effort to infill areas surrounding its branch
operations with new subscribers, permits more efficient scheduling and routing
of field service technicians, and results in economies of scale at the branch
level. The increased efficiency in scheduling and routing also allows the
Company to provide faster field service response and support, which leads to a
higher level of subscriber satisfaction.

         ALARM RESPONSE AND PATROL SERVICES

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


                                        9

<PAGE>   12



patrol officers to observe and report to police or other emergency agencies any
potential criminal activity at a subscriber's home.

         Protection One has begun to offer a new bundle of services in Las
Vegas. The bundle of services consists of alarm monitoring, field repair and
alarm response services billed to the subscriber as a consistent monthly charge
regardless of the number of service calls or responses to alarm activations.
Protection One believes this service package is attractive to current and
prospective subscribers because the package (i) enables Protection One to offer
a reliable and timely alarm response service, and (ii) eliminate subscriber
uncertainty arising from "per response" charges. Protection One intends to
expand the offering of this service's package to other areas within its markets
over the next several years.

         Patrol and alarm response officers are dispatched by a 24-hour central
radio dispatch office located in the local dispatch office. An alarm activation
signal from a subscriber to alarm response service is automatically processed by
computer at the central monitoring station in Portland and sent electronically
to the local dispatch office. If the patrol officer dispatched observes
potential criminal activity, the officer will report the activity to the
dispatch office, which will in turn notify local law enforcement. The patrol
officer will then maintain surveillance until law enforcement officers arrive.
If a patrol officer does not detect criminal activity, he will report his
conclusion to the dispatch office, which will cancel police response and thereby
reduce the potential for a false alarm fine.

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

         The Company's patrol and alarm response officers are subject to
extensive pre-employment screening. Officers are subject to background checks
and drug screening before being hired, and are required to have gun and baton
permits and state and city guard licenses. Officers also must be licensed by the
state to carry firearms and to provide patrol services. The Company's training
program includes arrest procedures, criminal law, weaponless defense, firearms
and baton usage, patrol tactics, and first-aid and CPR. This training program
exceeds state-mandated training requirements. However, the provision of patrol
and alarm response services subjects the Company to greater risks, relating to
accidents or employee behavior, than other types of businesses.

         The cost of providing patrol and alarm response services presently
exceeds the revenues generated by such services. However, the Company believes
that its ability to provide these services gives the Company a competitive
advantage in marketing its monitoring services over alarm service companies that
do not have these capabilities. Additionally, the Company believes such services
are an effective impediment to subscriber attrition.

         The Company believes that demand for patrol and alarm response services
may increase as a result of a trend on the part of local police departments to
limit their response to alarm activations and other factors that may lead to a
decrease of police presence. Although the Company currently incurs a loss in its
patrol and alarm response operations, the Company believes further demand for
such services would allow the Company to increase subscriber density in its
patrol routes, thereby reducing losses. In addition, the Company's provision of
patrol and alarm response services is a sales method used to convert subscribers
of other alarm monitoring companies that do not provide such services. To the
extent that further demand develops for patrol and alarm response services, the
Company believes its current presence would enable it to increase its
conversions of competitors' subscribers to the Company's services.

SALES AND MARKETING

         Each of the Company's 13 branch offices includes sales representatives
who track and sign up new owners and sell new systems, equipment add-ons and
upgrades and enhanced services to subscribers. Although the Company does not
actively use outbound marketing methods to sell new security alarm systems, the
Company receives in-bound telephone requests for such systems, primarily as a
result of television and radio advertising, subscriber referrals, local crime
activity and responses to yellow pages advertising. Such leads are pursued by
one of the Company's sales representatives. Alarm sales are made at the
subscriber's home, typically in a single visit by a sales representative. The
Company markets additional services through both its account sales
representatives and through a centralized telephone sales force in the Company's
corporate offices.

         The Company believes that the increasing density of the Company's
subscriber base (i.e., the increasing concentration of subscribers in certain
areas) has increased the overall presence and visibility of the Company. Both in
the Dealer Program

                                       10

<PAGE>   13



and in Company sales, new subscribers are provided with highly visible
reflective yard signs placed prominently in front of their homes or businesses.
The presence of these signs develops greater awareness in a neighborhood and
leads to more inbound and referral business. The Company encourages referrals
from existing subscribers through an incentive program promoted through
newsletters, billing inserts and employee contacts. Alarm response service,
which uses marked patrol cars, also increases the Company's visibility.

COMPETITION

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

         Competition in the security alarm industry is based primarily on
reliability of equipment, market visibility, services offered, reputation for
quality of service and price. The Company believes it competes effectively with
other national, regional and local security alarm companies in the western
United States because of the Company's reputation for reliable equipment and
services, its concentrated presence in the areas surrounding its branch offices,
its ability to bundle monitoring, maintenance and repair and enhanced services
and its low cost structure.

REGULATORY MATTERS

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

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

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

         The Company's advertising and sales practices are regulated by both the
Federal Trade Commission and state consumer protection laws. Such laws and
regulations include restrictions on the manner in which the Company promotes the
sale of its security alarm systems and the obligation of the Company to provide
purchasers of its alarm systems with certain recision rights. From time to time
subscribers have submitted complaints to state and local authorities regarding
the Company's sales and billing practices. Such complaints can result in
regulatory action against the Company, including civil complaints seeking
monetary and injunctive remedies.

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

                                       11

<PAGE>   14




RISK MANAGEMENT

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

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

         The Company carries insurance of various types, including general
liability and errors and omissions insurance. The loss experience of the
Company, and other security service companies, may affect the availability and
cost of such insurance. Certain of the Company's insurance policies, and the
laws of some states, may limit or prohibit insurance coverage for punitive or
certain other types of damages, or liability arising from gross negligence.

YEAR 2000 ISSUE

         The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue and is addressing
any potential impact to the Company from the issue. The Year 2000 problem is the
result of computer programs being written using two digits rather than four to
define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company presently believes that, with modications to
existing software and converting to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
so modified and converted. However, if such modifications and conversions are
not completed timely, the Year 2000 problem may have a material impact on the
operations of the Company.

EMPLOYEES

         At September 30, 1997, the Company employed 852 individuals on a
full-time basis. Currently, none of the Company's employees is represented by a
labor union or covered by a collective bargaining agreement. The Company
believes that its relations with its employees are good.


                                       12

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ITEM 2.  FACILITIES

         The information contained in this Item 2 describes the properties of
the Company as of September 30, 1997. For information with respect to the
properties of the Western Resources Securities Business, reference is made to
the information included under the caption "The Western Resources Security
Business" included in the Proxy Statement, which information is incorporated
herein by reference.

         The Company's executive offices are located at 6011 Bristol Parkway,
Culver City, California, and its central monitoring station and administrative
office are located in the Portland, Oregon metropolitan area at 3900 S.W. Murray
Boulevard, Beaverton, Oregon. The offices at both locations are leased by the
Company. The Culver City lease expires in 1998, but can be renewed by the
Company for an addition term of five years. The Company also leases office space
in Bullhead City, Arizona; Tempe, Arizona; Las Vegas, Nevada; Albuquerque, New
Mexico; Salt Lake City, Utah; Kent, Washington; Riverside, California;
Bakersfield, California; San Leandro, California; San Diego, California; Santa
Clara, California; and Van Nuys, California. The leases for these properties
expire on various dates through 2012, and in some cases are renewable at the
option of the Company.

ITEM 3.  LEGAL PROCEEDINGS

         On January 8, 1997, Innovative Business Systems ("IBS") filed suit
against Westinghouse Electric Corporation ("WEC"), Westinghouse Security
Systems, Inc. ("WSS"), Western Resources, WestSec and Renee T. Kingsley in the
298th Judicial District Court, Dallas County, Texas, alleging, among other
things, breach of contract by WEC and interference with contract by Western
Resources and WestSec in connection with the sale by WEC of the assets of WSS to
WestSec. IBS alleges in the suit that WEC improperly transferred to WestSec
certain computer software that is owned by IBS and used by WestSec to support
certain monitoring and operating functions and that WestSec is not entitled to
use such software and seeks actual and punitive damages, and injunction relief
to stop WestSec from using the software. All defendants have denied IBS'
allegations are vigorously defending against them. The case is currently
scheduled for trial in March, 1998. Pursuant to the Contribution Agreement, the
first $1 million of damages, costs, expenses and other losses incurred by
WestSec in connection with this litigation will be borne by Protection One, but
Western Resources will indemnify Protection One against all losses in excess of
such amount.

         On April 28, 1997, Westec Security, Inc. ("WS") filed suit against
WestSec, Western Resources and Westar Security in Superior Court of California,
Los Angeles County, West District.  The case was removed by Defendants to the
U.S. District Court for the Central District of California alleging that the
defendants' use of the trademarks "Weststar" and "WestSec" infringed on and
competed unfairly with WS's rights in the trademark "Westec." The suit sought
to enjoin defendants from using the Westar and Westec marks, a constructive 
trust on profits as a result of the use of the marks, monetary, general and
punitive damages. On December 10, 1997, the parties and POI entered into a
settlement agreement with respect to this litigation providing for, among other
things, the dismissal of the complaint with prejudice and the release of all
claims by WS against Westar, WestSec and POI arising out of the use of the
contested trademarks by the Western Resources Security Business in exchange for
an agreement by POI, Westar, WestSec and Western Resources to discontinue the
use of such trademarks in connection with the security alarm monitoring
business over a specified period of time.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

         None.

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                                     PART II


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

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

<TABLE>
<CAPTION>
                                                                                             HIGH            LOW
                                                                                             ----            ---
<S>                                                                                        <C>             <C>
Fiscal Year Ended September 30, 1996
         First Quarter...................................................................  $10 1/2         $ 7 9/32
         Second Quarter..................................................................   14 9/16          9
         Third Quarter...................................................................   17 5/16         13 3/8
         Fourth Quarter..................................................................   16 7/8          11 3/4
Fiscal Year Ended September 30, 1997
         First Quarter...................................................................  $15             $ 8 3/4
         Second Quarter..................................................................   11 1/8           7 3/8
         Third Quarter...................................................................   14 1/8           9 1/4
         Fourth Quarter..................................................................   21 3/4          13 3/8
</TABLE>

         As of December 19, 1997, there were 99 holders of record of the Common
Stock. The Company believes there are in excess of 400 beneficial owners of the
Common Stock.

         POI has never paid any cash dividends on the Common Stock other than
the Special Dividend, and does not intend to pay any cash dividends in the
foreseeable future. The Company intends to retain its cash flows for the
operation and expansion of its business. Monitoring's $100.0 million revolving
credit facility (the "Revolving Credit Facility"), the indenture (the "Discount
Note Indenture") pursuant to which Monitoring's 13 5/8% Senior Subordinated
Discount Notes due 2005 (the "Discount Notes") were issued and the indenture
(the "Convertible Note Indenture") pursuant to which Monitoring's Convertible
Notes due 2003 were issued restrict POI's ability to declare or pay any dividend
on, or make any other distribution in respect of, POI's capital stock. For
additional information with respect to the Special Dividend, see note 19 of the
notes to the consolidated financial statements of POI included in Item 14 of
this Report.

         Pursuant to the terms of the credit agreement (the "Credit Agreement")
governing the Revolving Credit Facility, Monitoring is restricted from making
dividend payments on its common stock. The Discount Note Indenture contains
restrictions on dividends paid by Monitoring that are similar to the
restrictions summarized above. During fiscal 1995, Monitoring paid dividends to
POI of approximately $0.2 million. No dividends were paid by Monitoring to POI
in fiscal 1996 or fiscal 1997.



                                       14

<PAGE>   17



ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The selected consolidated financial data for fiscal 1993, 1994, 1995,
1996 and 1997 are derived from the consolidated financial statements of the
Company that have been audited by Coopers & Lybrand L.L.P. The selected
consolidated financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the related notes
thereto, included elsewhere in this Report.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED SEPTEMBER 30,
                                                         ----------------------------------------------------------------
                                                           1993          1994          1995          1996          1997
                                                         --------      --------      --------      --------      --------
<S>                                                      <C>           <C>           <C>           <C>           <C>     
STATEMENT OF OPERATIONS DATA: ......................           IN THOUSANDS, EXCEPT PER SHARE AND SUBSCRIBER DATA
  Revenues:
    Monitoring and service .........................     $ 15,043      $ 29,297      $ 48,909      $ 68,778      $ 94,702
    Other ..........................................        6,847         5,183         6,973         4,679         3,791
                                                         --------      --------      --------      --------      --------
      Total revenues ...............................       21,890        34,480        55,882        73,457        98,493
                                                         --------      --------      --------      --------      --------
  Cost of revenues:
    Monitoring and service .........................        3,664         8,355        13,627        19,065        25,653
    Other ..........................................        3,562         3,225         3,887         2,513         2,291
                                                         --------      --------      --------      --------      --------
      Total cost of revenues .......................        7,226        11,580        17,514        21,578        27,944
                                                         --------      --------      --------      --------      --------
      Gross profit .................................       14,664        22,900        38,368        51,879        70,549
  Selling, general and administrative
    expenses .......................................       11,797        10,607        13,031        15,478        19,978
  Loss on acquisition terminations .................           --            26           208            --            --
  Performance warrants compensation
    expense ........................................           --         4,504            --            --            --
  Adjustment of purchase accounting
    Accruals, net ..................................         (742)           --            --            --            --
  Acquisition and transition expenses ..............           --            --         3,090         4,219         5,920
  Amortization of intangibles accounts and
    depreciation ...................................        4,386         9,289        16,543        25,121        38,227
                                                         --------      --------      --------      --------      --------
      Operating income (loss) ......................         (777)       (1,526)        5,496         7,061         6,424
  Interest expense, net(a) .........................        1,564         6,932         7,626         4,885         9,136
  Amortization of debt issuance costs
    and OID ........................................          185           891         6,797        17,812        20,706
  Loss on assets held for sale .....................           --            --            --            89           339
  Loss (gain) on sales of assets ...................           --            --           505            19          (100)
                                                         --------      --------      --------      --------      --------
      Loss before income taxes,
         extraordinary items and cumulative
         effect of change in accounting
         method - net of taxes .....................       (2,526)       (9,349)       (9,432)      (15,744)      (23,657)

  Income tax benefit ...............................           --         2,863         3,595           247         1,744
  Extraordinary item -- loss on early
    extinguishment of debt -- net (b) ..............         (281)       (1,174)       (8,906)           --            --
  Cumulative effect of change in
    accounting  method -- net (c) ..................           --            --        (1,955)           --            --
                                                         --------      --------      --------      --------      --------
      Net loss .....................................     $ (2,807)     $ (7,660)     $(16,698)     $(15,497)     $(21,913)
                                                         ========      ========      ========      ========      ========
      Loss attributable to common stock ............     $ (4,635)     $ (9,161)     $(18,453)     $(15,745)     $(21,913)

  Loss per common share:
    Before extraordinary items and
      cumulative effect of change in
      Accounting method ............................     $ (41.86)     $ (27.11)     $  (0.87)     $  (1.40)     $  (1.59)
Net loss per share .................................     $ (44.57)     $ (31.10)     $  (2.12)     $  (1.40)     $  (1.59)
</TABLE>

<TABLE>
<CAPTION>
                                                                                YEAR ENDED SEPTEMBER 30,
                                                         --------------------------------------------------------------------- 
                                                           1993           1994           1995           1996           1997
                                                         ---------      ---------      ---------      ---------      --------- 
<S>                                                      <C>            <C>            <C>            <C>            <C>       
CONSOLIDATED BALANCE SHEET DATA:
    Working capital (deficit) ......................     $  (1,632)     $ (11,505)     $  (9,159)     $  (5,632)     $ (14,834)
    Subscriber accounts and intangibles ............        37,204        114,620        162,239        257,354        326,748
    Total assets ...................................        44,472        126,085        178,669        297,636        369,191
      Long-term debt ...............................        23,591         86,842        146,023        225,650        303,880
      Redeemable preferred stock ...................        22,957         22,210          6,127             --             --
      Total stockholders' equity (deficit) .........        (8,796)        (6,084)         6,347         28,827         17,371
</TABLE>


<TABLE>
<CAPTION>
                                                                           YEAR ENDED SEPTEMBER 30,
                                                         ------------------------------------------------------------
                                                           1993         1994         1995         1996         1997
                                                         --------     --------     --------     --------     --------
<S>                                                      <C>          <C>          <C>          <C>          <C>     
OTHER OPERATING DATA:
    MRR (d) ........................................     $  1,208     $  2,737     $  3,924     $  6,187     $  8,003
    Number of subscribers net at end of period .....       39,527       85,269      129,420      196,531      254,478
    EBITDA (e) .....................................     $  3,609     $ 12,294     $ 22,247     $ 32,181     $ 44,651
</TABLE>


                                       15
<PAGE>   18
---------------

(a) Includes interest expense to related parties of $0.3 million in fiscal 1993.
(b) In connection with the early extinguishment of the $50.0 million principal
    amount of the Company's 12% Senior Subordinated Notes, the Company incurred
    an extraordinary loss of approximately $8.9 million, net of the effect of
    taxes of $0.9 million, in fiscal 1995.
(c) For information regarding this change, see "Management's Discussion and
    Analysis of Financial Condition and Results of Operations -- Overview --
    Recent Change in Accounting Method" included in Item 7 below and Note 2 of
    Notes to Consolidated Financial Statements included in Item 14 below.
(d) MRR means monthly recurring revenue (excluding revenues from patrol
    services) that the Company is entitled to receive under contracts in effect
    at the end of the period. MRR is a term commonly used in the security alarm
    industry as a measure of the size of a company, but not as a measure of
    profitability or performance, and does not include any allowance for future
    attrition or allowance for doubtful accounts. The Company does not have
    sufficient information as to the attrition of acquired subscriber accounts
    to predict the amount of acquired MRR that will be realized in future
    periods or the impact of the attrition of acquired accounts on the Company's
    overall rate of attrition.
(e) EBITDA is derived by adding to loss before income taxes, extraordinary items
    and cumulative effect of change in accounting method--net of taxes the sum
    of (i) loss on sales of subscriber accounts, (ii) amortization of debt
    issuance costs and OID, (iii) interest expense, net, (iv) amortization of
    subscriber accounts and goodwill, (v) depreciation expense, (vi) performance
    warrants compensation expense, (vii) adjustment of purchase accounting
    accruals, net and (viii) loss on acquisition terminations. EBITDA does not
    represent cash flow from operations as defined by generally accepted
    accounting principles, should not be construed as an alternative to net
    income and is indicative neither of the Company's operating performance nor
    of cash flows available to fund all the Company's cash needs. Items excluded
    from EBITDA are significant components in understanding and assessing the
    Company's financial performance. Management believes presentation of EBITDA
    enhances an understanding of the Company's financial condition, results of
    operations and cash flows because EBITDA is used by the Company to satisfy
    its debt service obligations and its capital expenditure and other
    operational needs as well as to provide funds for growth. In addition,
    EBITDA has been used by senior lenders and subordinated creditors and the
    investment community to determine the current borrowing capacity and to
    estimate the long-term value of companies with recurring cash flows and net
    losses.

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

<TABLE>
<CAPTION>
                                                                              YEARS ENDED SEPTEMBER 30,
                                                         ---------------------------------------------------------------- 
                                                           1993          1994          1995          1996          1997
                                                         --------      --------      --------      --------      -------- 
<S>                                                      <C>           <C>           <C>           <C>           <C>      
Loss before income taxes, extraordinary
  items and cumulative effect of change in
  accounting method-net of taxes (a) ...............     $ (2,526)     $ (9,349)     $ (9,432)     $(15,744)     $(23,657)
Plus:
  Loss (gain) on sales of assets ...................           --            --           505            19          (100)
  Loss on assets held for sale .....................           --            --            --            89           339
  Amortization of debt issuance costs and OID ......          185           891         6,797        17,812        20,706
  Interest expense, net ............................        1,564         6,932         7,626         4,885         9,136
  Amortization of subscriber accounts goodwill
    And amortization ...............................        3,864         8,772        15,460        23,275        34,975
  Depreciation expense .............................          522           518         1,083         1,845         3,252
  Performance warrants compensation expense ........           --         4,504            --            --            --
  Loss on acquisition terminations .................           --            26           208            --            --
                                                         --------      --------      --------      --------      -------- 
     EBITDA ........................................     $  3,609      $ 12,294      $ 22,247      $ 32,181      $ 44,651
                                                         ========      ========      ========      ========      ========
</TABLE>

---------------

    (a) Such adjustment caused such loss to be reduced by approximately $0.7
million for fiscal 1993.


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

         Except where the context indicates otherwise, the information contained
in this Item 7 based on the Company's business, operations and financial
condition as of and for the year ended September 30, 1997. Stockholders,
potential investors and other readers of this Report should be aware that the
information below does not, in general, reflect the impact that the Western
Resources transaction will have on the future business, operations, revenues,
expenses and net income or loss, or the future liquidity and capital resources,
of the Company, Western Resources and that the business, results of operations
and financial condition of the post-transaction Company may not follow the same
historical trends or be subject to or reflect the same dependence on the
economic and competitive factors described below.

OVERVIEW

         A majority of the Company's revenues are derived from recurring
payments for the monitoring and servicing of security systems and additional
security services, pursuant to contracts with initial terms ranging from one to
five years. Service revenues are derived from payments under extended service
contracts and for service calls performed on a time and materials basis. The
remainder of the Company's revenues are derived from revenues from the sale and
installation of security systems, add-ons and upgrades. Payment for monitoring
services is typically required in advance. Monitoring and service

<PAGE>   19

revenues are recognized as the service is provided. Installation, add-on and
upgrade revenue is recognized when the required work is completed. All direct
installation costs, which include materials, labor and installation overhead,
and selling and marketing costs are expensed in the period incurred.

         Alarm monitoring services generate a significantly higher gross margin
than do the other services provided by the Company. In fact, the cost of
providing patrol and alarm response services exceeds the revenues generated by
patrol services, and although sales and installation services contribute to the
Company's gross profits, the total expenses associated with alarm system
installations (including not only the direct costs of providing such services
but also the expenses associated with the sales and marketing of alarm systems)
also exceed the revenues generated by such services. The Company's strategy,
however, is to provide patrol and alarm response services and to invest in
system sales and installation because the Company believes that such services
and products contribute to the generation and retention of alarm monitoring
subscribers.

         Accounting Differences for Account Purchases and New Installations. A
difference between the accounting treatment of the purchase of subscriber
accounts and the accounting treatment of the generation of subscriber accounts
through direct sales by the Company's sales force has a significant impact on
the Company's results of operations. All direct external costs associated with
purchases of subscriber accounts (either through the Dealer Program or through
acquisitions of subscriber account portfolios) are capitalized and amortized
over 10 years on a straight-line basis. Company personnel and related support
and duplicate costs incurred solely in connection with subscriber account
acquisitions and transitions are expensed as incurred. Other acquisition
transition costs that reflect the Company's estimate of costs associated with
incorporating the purchased subscriber accounts into its operations, including
costs incurred by the Company in fulfilling the seller's pre-acquisition
warranty repair service and other obligations to the acquired subscribers are
capitalized and amortized as described above. In contrast, all of the Company's
costs related to the sales, marketing and installation of new alarm monitoring
systems generated by the Company's sales force are expensed in the period in
which such activities occur.

         Change in Accounting Method. In the third quarter of fiscal 1995, the
Company changed its method of accounting for certain subscriber account
acquisition and transition costs, effective as of October 1, 1994. The
acquisition and transition costs previously capitalized, which under the new
method are expensed as incurred, are the Company personnel and related support
and duplicate costs incurred solely in connection with acquisitions and
transitions.

         The new method is consistent with emerging guidelines as published on
July 21, 1995 by the Emerging Issue Task Force of the Financial Accounting
Standards Board. See Note 2 of the Notes to Consolidated Financial Statements
included in Item 14 hereof.

         As a result of the change in accounting method: (i) in the quarter
ended December 31, 1994, the Company recorded a non-cash, non-recurring charge
of approximately $2.0 million, which amount represents the cumulative effect
(net of income tax benefit of approximately $1.2 million) of the accounting
change on prior years' results of operations; and (ii) the Company's statement
of operations for fiscal 1995 includes (and subsequent statements of operations
will include) a new expense item captioned "acquisition and transition expenses"
to reflect the application of the new accounting method for fiscal 1995 and
subsequent periods. The expense was approximately $3.1 million for fiscal 1995
(before associated tax benefit). The foregoing non-recurring charge and expenses
are reflected in the financial information presented in this report. Such
expenses will fluctuate from quarter to quarter based primarily on the amount of
the Company's acquisition activity and its ability to require sellers to bear
certain of such acquisition-related expenses.

         Acquisition and Dealer Program Activity. A significant portion of
Protection One's growth has been generated by the purchase of subscriber
accounts through Protection One's Dealer Program and through the acquisition of
portfolios of subscriber accounts from other alarm companies. Protection One's
Dealer Program consists of exclusive purchase agreements with independent alarm
companies specializing in the sale and installation of new alarm systems. Dealer
Program participants install alarm systems (which have a Protection One logo on
the keypad), arrange for subscribers to enter into Protection One alarm
monitoring agreements, and install Protection One yard signs and window decals.
Substantially all of these subscribers are contacted individually by Protection
One personnel, at the time of purchase of the accounts from the dealer, to
facilitate


                                       17

<PAGE>   20
customer satisfaction and quality control. In addition, Protection
One requires dealers to evaluate the credit history of prospective new
subscribers.

         Protection One also purchases portfolios of subscriber accounts.
Because Protection One typically acquires only the subscriber accounts (and not
the accounts receivable or similar assets) of the sellers, Protection One
focuses its pre-acquisition review and analysis on the quality and stability of
the subscriber accounts to verify the monthly recurring revenue ("MRR")
represented by such accounts. If the subscriber accounts to be purchased pass
such due diligence scrutiny, Protection One then applies its monitoring and
other servicing costs to such MRR as a basis for determining the purchase price
to be paid by Protection One. To protect Protection One against the loss of
acquired accounts, Protection One typically seeks to obtain from the seller a
guarantee against the subscriber account cancellation for a period following the
acquisition and the right to retain a portion of the acquisition price (a
"purchase price holdback") against the MRR lost due to subscriber account
cancellations during the specified period. Protection One obtains a similar
purchase price holdback in its purchases through the Dealer Program.

         During fiscal 1997, the Company added (through acquisitions of 14
portfolios of subscriber accounts and through its Dealer Program) an aggregate
of approximately 92,000 subscriber accounts for a total purchase price of
approximately $108.9 million (including assumed liabilities of approximately
$20.7 million). The MRR of the acquired accounts ranged from approximately
$10.00 to $40.00, with an average of $29.25. Of the acquisitions completed
during fiscal 1997 by the Company, the substantial majority included purchase
price holdbacks in amounts that ranged from 0% to 20% of the initial purchase
price (and averaged 12.3% of the initial purchase price) and attrition
guarantees for periods that ranged from six months to 12 months (and averaged
11.9 months).

         Subscriber Attrition. Subscriber attrition has a direct impact on the
Company's results of operations, since it affects both the Company's revenues
and its amortization expense. Attrition can be measured in terms of canceled
subscriber accounts and in terms of decreased MRR resulting from canceled
subscriber accounts. Gross subscriber attrition is defined by the Company for a
particular period as a quotient, the numerator of which is equal to the number
of subscribers who disconnect service during such period and the denominator of
which is the average of the number of subscribers at each month-end during such
period. Net MRR attrition is defined by the Company for a particular period as a
quotient, the numerator of which is an amount equal to gross MRR lost as the
result of canceled subscriber accounts or services during such period, net of
(i) MRR generated during such period by the sale of additional services and
increases in rates to existing subscribers, (ii) MRR generated during such
period from the connection of subscribers who move into premises previously
occupied by subscribers and in which existing systems are installed and from
conversion of accounts that were previously monitored by other companies to the
Company's monitoring service (i.e., "reconnects" and "conversions"); and (iii)
attributable to canceled accounts that by virtue of a purchase holdback are
"put" back to the seller of such accounts during such period (i.e., "guaranteed
accounts"); and the denominator of which is the average month-end MRR in effect
during such period. While the Company reduces the gross MRR lost during a period
by the amount of guaranteed accounts provided for in purchase agreements with
sellers, in some cases the Company may not collect all or any of the
reimbursement due it from the seller. The following table sets forth the
Company's gross subscriber attrition and net MRR attrition for the periods
indicated:

<TABLE>
<CAPTION>
                              TWELVE MONTHS ENDED SEPTEMBER 30,
                              ---------------------------------
                                1995         1996        1997
                              --------     --------    --------
<S>                           <C>          <C>         <C>  
Gross subscriber attrition       19.3%        18.3%       17.3%
Net MRR attrition ........        6.6          7.0         7.8
</TABLE>

         Management has established target ranges for gross subscriber attrition
and net MRR attrition of 16%-18% and 6%-8%, respectively. Fluctuations in gross
subscriber attrition reflect changes in levels of acquisition activity, at the
rate at which subscribers move, the number of subscribers that the Company
disconnects for non-payment and customer satisfaction with Protection One's
customer service and field repair functions. Changes in net MRR attrition are
caused by the factors impacting gross subscriber attrition, as well as changes
in Protection One's ability to generate reconnects and conversions, to create
MRR through the sale of additional services and price increases and to obtain
purchase holdbacks covering the loss of acquired subscribers. In each of fiscal
years 1995, 1996 and 1997, gross subscriber attrition declined and net MRR
attrition increased. For each such period, while the gross number of subscriber
disconnects as a percentage of the average subscriber balance decreased, such
disconnects covered by purchase holdbacks declined and net MRR attrition
increased.

         MRR represents the monthly recurring revenue Protection One is entitled
to receive under subscriber contracts in effect at the end of the period.
Included in MRR and the number of subscribers are amounts associated with
subscribers with past due balances. It is the policy and practice of Protection
One that every effort be made to preserve the revenue stream


                                       18

<PAGE>   21

associated with these contractual obligations. To this end, Protection One
actively works to both collect amounts owed and to retain the subscriber. In
certain instances, this collection and evaluation period may exceed six months
in length. When, in the judgment of Protection One's collection personnel, all
reasonable efforts have been made to collect balances due, subscribers are
disconnected from Protection One's monitoring center and are included in the
calculation of gross subscriber and net MRR attrition.

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

         Generally, net MRR attrition is less than actual "net account
attrition," which the Company defines as canceled subscriber accounts net of
reconnects, conversions and guaranteed accounts. Estimated net account attrition
is the basis upon which the Company determines the period over which it
amortizes its investment in subscriber accounts. The Company amortizes such
investment over 10 years based on current estimates. If actual subscriber
account attrition were to exceed such estimated attrition, the Company could be
required to amortize its investment in subscriber accounts over a shorter
period, thus increasing amortization expense in the period in which such
adjustment is made and in future periods. Since the majority of the subscriber
accounts acquired by the Company since its formation were purchased recently,
there can be no assurance that the actual attrition rates for such accounts will
not be greater than the rate assumed by the Company. See " -- Results of
Operations -- Fiscal 1997 Compared to Fiscal 1996 -- Amortization of subscriber
accounts and goodwill" below and Note 7 of Notes to Consolidated Financial
Statements included in Item 14 of this Report.

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                        ------------------------------------
                                                          1995          1996          1997
                                                        --------      --------      --------
<S>                                                     <C>           <C>           <C>    
Beginning of period ................................      85,269       129,420       196,531
Additions through portfolio acquisitions and Dealer
  Program, net of sales of subscriber accounts .....      60,909        91,325        92,059
Installations by Company personnel .................       1,502           881           232
Reconnects and conversions .........................       3,585         4,633         4,981
Gross subscriber attrition .........................     (21,845)      (29,728)      (39,325)
                                                        --------      --------      --------
   End of period ...................................     129,420       196,531       254,478
                                                        ========      ========      ========
</TABLE>

         Changes in Statement of Operations Presentation Format. Beginning with
its Quarterly Report on Form 10-Q for the first quarter of fiscal 1997,
Protection One made changes to its presentation of income statement information.
First, Protection One has reclassified revenues and cost of revenues associated
with its alarm response and patrol operations from the "other" category to
"monitoring and related services." The "other" category now reflects solely
results from Protection One's installation, lock and other operations.
Protection One made this change to better reflect its efforts to sell a bundle
of monitoring, field service and alarm response services to both existing and
new subscribers. Second, Protection One has reclassified depreciation expense
from monitoring and service cost of revenues, other cost of revenues and the
selling, general and administrative expenses category, and included depreciation
expense in a line item entitled "amortization of intangibles and depreciation
expense." Protection One made this change to allow readers to more easily
calculate the aggregate amount of non-cash charges in the income statement.
Finally, Protection One has reclassified customer service expense from
monitoring and service cost of revenues to selling, general and administrative
expenses. This change reflects Protection One's move to centralize all customer
service functions into a single facility in Chatsworth, California. Customer
service personnel formerly dedicated to the support of monitoring and related
services are responsible for Protection One's entire customer service efforts.
Results reported in this Report for fiscal 1997 have been modified to reflect
these changes and make the information for such periods comparable to
information for the year ended September 30, 1997. Amounts in the audited
financial statements as of September 30, 1995 and 1996 and for the two years
ended September 30, 1996 included in this Report have also been reclassified to
reflect these changes.


                                       19
<PAGE>   22

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

         FASB Statement No. 128 "Earnings per Share" establishes new guidelines
for the calculation of and disclosures regarding earnings per share. The Company
will adopt the provisions of Statement No. 128 for financial statements for
periods after December 15, 1997, and at such time will be required to present
basic and diluted earnings per share and to restate all prior periods. There
will be no impact on the calculation of basic earnings per share for the three
months and nine months ended September 30, 1997 and 1996. Diluted earnings per
share is not expected to differ materially from basis earnings per share.

         The Company will adopt FASB Statement No. 129 "Disclosure of
Information About Capital Structure" for financial statements for periods after
December 15, 1997. The Company does not expect that adoption of the disclosure
requirements of this pronouncement will have a material impact on its financial
statements.

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

         Restrictions on Dividends. The Company has never paid any cash
dividends on the Common Stock (with the exception of the Special Dividend
associated with the Western Resources transaction) and does not intend to pay
any cash dividends in the foreseeable future. Both the Revolving Credit Facility
and the Discount Note Indenture restrict POI's ability to declare or pay any
dividend on, or make any other distribution in respect of, POI's capital stock.

RESULTS OF OPERATIONS

         The following table sets forth certain operating data as a percentage
of total revenues for the periods indicated.

<TABLE>
<CAPTION>
                                                            FISCAL YEAR
                                                   ------------------------------
                                                    1995        1996        1997
                                                   ------      ------      ------
<S>                                                <C>         <C>         <C>  
Revenues:
  Monitoring and service ...................         87.5%       93.6%       96.2%
  Other ....................................         12.5         6.4         3.8
                                                   ------      ------      ------
          Total revenues ...................        100.0%      100.0%      100.0%
                                                   ------      ------      ------
Cost of revenues:
      Monitoring and service ...............         24.4%       26.0%       26.1%
  Other ....................................          6.9         3.4         2.3
                                                   ------      ------      ------
          Total cost of revenues ...........         31.3        29.4        28.4
                                                   ------      ------      ------
          Gross profit .....................         68.7        70.6        71.6
Selling, general and administrative expenses         23.3        21.1        20.3
Loss on acquisition terminations ...........          0.4
Acquisition and transition expenses ........          5.6         5.7         6.0
Amortization of intangibles and
   depreciation expenses ...................         29.6        34.2        38.8
                                                   ------      ------      ------
          Operating income .................          9.8%        9.6%        6.5%
                                                   ======      ======      ======
</TABLE>


         FISCAL 1997 COMPARED TO FISCAL 1996

         Revenues for fiscal 1997 increased by $25.0 million, or 34.1%, to $98.5
million from $73.5 million for fiscal 1996. Monitoring and related service
revenues increased by $25.9 million, or 37.7%, substantially all of which
resulted from the addition of approximately 53,000 subscribers from the Dealer
Program and approximately 39,000 subscribers from the acquisition of portfolios
of subscriber accounts. Other revenues declined by approximately 19.0% to
approximately $3.8 million in fiscal 1997 from $4.7 million in fiscal 1996. The
decline in other revenues reflects a decrease in installation revenue of $0.6
million and a decrease in lock revenue of $0.1 million. The decline in
installation revenues resulted from the Company's continued emphasis on growth
through acquisitions and the Dealer Program, rather than through sales of new
alarm systems by Company personnel.


                                       20
<PAGE>   23


         Cost of revenues for fiscal 1997 increased by $6.4 million, or 29.5% to
$27.9 million. Cost of revenues as a percentage of total revenues declined to
28.4% during fiscal 1997 from 29.4% during fiscal 1996. Monitoring and related
services expenses increased by $6.6 million, or 34.6%, primarily due to
increased activity at the Company's central monitoring station and field service
branches due to a substantially larger subscriber base. Monitoring and related
services expenses as a percentage of monitoring and related services revenues
decreased to 27.1% from 27.7% during fiscal 1996. Such decrease reflects
increased efficiencies in the monitoring and field services areas noted above.
See "-Overview-Acquisition and Dealer Program Activity" above. Other expenses
declined by $0.2 million to $2.3 million in fiscal 1997 from $2.5 million in
fiscal 1996, reflecting the decline in installation activities.

         Gross profit for fiscal 1997 was $70.5 million, which represents an
increase of $18.7 million, or 36.0%, over the $51.9 million of gross profit
recognized in fiscal 1996. Such increase was caused primarily by an increase in
monitoring and service activities, which paralleled the increase in the
Company's subscriber base from 196,531 at September 30, 1996 to 254,478 at
September 30, 1997. Gross profit as a percentage of total revenues was 71.6% for
fiscal 1997 compared to 70.6% for fiscal 1996. This increase was caused
primarily by an increase in monitoring and related services revenues as a
percentage of total revenues.

         Selling, general and administrative expenses rose to $20.0 million in
fiscal 1997, an increase of $4.5 million, or 29.1%, over such expenses in fiscal
1996, but declined as a percentage of total revenues from 21.1% in fiscal 1996
to 20.3% in fiscal 1997. The increase in general and administrative expenses was
caused by increases in corporate and branch overhead expenses incurred to
supervise a larger employee base associated with a larger subscriber base.
Advertising and marketing expenses are expensed as incurred and comprised less
than 1% of revenues in each of fiscal 1996 and 1997. The provision for doubtful
accounts increased to approximately $3.3 million in fiscal 1997 from $2.6
million in fiscal 1996, reflecting the 38.4% increase in the Company's average
subscriber base from fiscal 1996 to fiscal 1997.

         Acquisition and transition expenses for fiscal 1997 totaled $5.9
million compared to $4.2 million for fiscal 1996. Such expenses will fluctuate
from quarter to quarter based primarily on the amount of the Company's
acquisition activity and its ability to require sellers to bear certain of such
acquisition-related expenses.

         Amortization of intangibles and depreciation expenses for fiscal 1997
increased by $13.1 million, or 52.2%, to $38.2 million. This increase is the
result of the Company's purchase of approximately 92,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and through the
Dealer Program, as well as increases in depreciation expense associated with the
Company's new software implementation.

         Operating income for fiscal 1997 was $6.4 million, compared to an
operating income of $7.1 million in fiscal 1996. Operating income as a
percentage of total revenues declined to 6.5% in fiscal 1997, compared to 9.6%
in fiscal 1996 due primarily to increases in amortization of subscriber accounts
and goodwill.

         Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $7.1 million, or 31.5%, to $29.8 million in fiscal
1997, reflecting the Company's use of debt to finance a substantial portion of
its subscriber account growth.

         Balance sheet data. At September 30, 1997, the Company's working
capital deficit was $14.8 million, as compared to a working capital deficit of
$5.6 million at September 30, 1996. Significant changes in working capital items
include a $4.5 million increase in accounts receivable, including income tax
receivable, and a $0.9 million increase in prepaid expenses offset by decreases
in cash and cash equivalents ($4.9 million), deferred tax assets ($2.5 million),
acquisition and transition costs ($3.1 million) and deferred revenue ($2.4
million), and an increase in accounts payable ($2.2 million). Subscriber
accounts and intangibles, net increased to $326.7 million at September 30, 1997
from $257.4 million at September 30, 1996. This increase of $69.4 million, or
27.0%, was caused by the addition of new subscribers, net of amortization
expense. Total stockholders' equity decreased to $17.4 million at September 30,
1996 from $28.8 million at September 30, 1996. The decrease reflects the net
loss of $21.9 million offset by the issuance of shares of common stock as a
portion of the purchase price paid on several acquisitions ($9.7 million) and
the exercise of warrants and options ($0.8 million).


                                       21

<PAGE>   24



FISCAL 1996 COMPARED TO FISCAL 1995

         Revenues for fiscal 1996 increased by $17.6 million, or 31.5%, to $73.5
million from $55.9 million for fiscal 1995. Monitoring and related service
revenues increased by $19.9 million, or 40.6%, substantially all of which
resulted from the addition of approximately 55,000 subscribers from the
acquisition of portfolios of subscriber accounts and approximately 36,000
subscribers from the Dealer Program. Other revenues declined by approximately
32.9% to approximately $4.7 million in fiscal 1996 from $7.0 million in fiscal
1995. The decline in other revenues reflects a decrease in installation revenue
of $1.4 million and a decrease in lock revenue of $0.6 million. The decline in
installation revenues resulted from the Company's continued emphasis on growth
through acquisitions and the Dealer Program, rather than through sales of new
alarm systems by Company personnel. In addition, during 1995 the Company
recognized $1.6 million of other revenue arising from the sales of security
alarm equipment received from a vendor.

         Cost of revenues for fiscal 1996 increased by $4.1 million, or 23.2%,
to $21.6 million. Cost of revenues as a percentage of total revenues declined to
29.4% during fiscal 1996 from 31.3% during fiscal 1995. Monitoring and related
services expenses increased by $5.4 million, or 39.9%, primarily due to
increased activity at the Company's central monitoring station and field service
branches due to a substantially larger subscriber base. Monitoring and related
services expenses as a percentage of monitoring and related services revenues
decreased slightly to 27.7% from 27.9% during fiscal 1995. Such decrease
reflects efficiencies achieved in patrol and alarm response operations, offset
by increased expenses in the monitoring and field services areas noted above.
Other expenses declined by $1.4 million to $2.5 million in fiscal 1996 from $3.9
million in fiscal 1995, reflecting the decline in installation activities.

         Gross profit for fiscal 1996 was $51.9 million, which represents an
increase of $13.5 million, or 35.2%, over the $38.4 million of gross profit
recognized in fiscal 1995. Such increase was caused primarily by an increase in
monitoring and service activities, which paralleled the increase in the
Company's subscriber base from 129,420 at September 30, 1995 to 196,521 at
September 30, 1996. Gross profit as a percentage of total revenues was 70.6% for
fiscal 1996 compared to 68.7% for fiscal 1995. This increase was caused
primarily by an increase in monitoring and related services revenues as a
percentage of total revenues.

         Selling, general and administrative expenses rose to $15.5 million in
fiscal 1996, an increase of $2.4 million, or 18.8%, over such expenses in fiscal
1995, but declined as a percentage of total revenues declined from 23.3% in
fiscal 1995 to 21.1% in fiscal 1996. Sales and marketing expenses declined due
to the Company's continued emphasis on growth through acquisitions and the
Dealer Program, rather than through sales of new alarm systems by Company
personnel. The increase in general and administrative expenses was caused by
increases in corporate and branch overhead expenses incurred to supervise a
larger employee base associated with a larger subscriber base. Advertising and
marketing expenses are expensed as incurred and comprised 1% of revenues in each
of fiscal 1995 and 1996. The provision for doubtful accounts increased to
approximately $2.6 million in fiscal 1996 from $1.8 million in fiscal 1995,
reflecting the 51.8% increase in the Company's average subscriber base from
fiscal 1995 to fiscal 1996.

         Acquisition and transition expenses for fiscal 1996 totaled $4.2
million compared to $3.1 million for fiscal 1995. Such expenses will fluctuate
from quarter to quarter based primarily on the amount of the Company's
acquisition activity and its ability to require sellers to bear certain of such
acquisition-related expenses.

         Amortization of intangibles and depreciation expenses for fiscal 1996
increased by $8.6 million, or 51.9%, to $25.1 million. This increase is the
result of the Company's purchase of approximately 91,000 subscriber accounts
through the acquisition of portfolios of subscriber accounts and through the
Dealer Program in fiscal 1996.

         Operating income for fiscal 1996 was $7.1 million, compared to an
operating income of $5.5 million in fiscal 1995. Operating income as a
percentage of revenue was 9.6% in fiscal 1996, compared to 9.8% in fiscal 1995.

         Interest expense, net and amortization of debt issuance costs and OID.
These amounts increased by $8.3 million, or 57.4%, to $22.7 million in fiscal
1996, reflecting the Company's use of debt to finance a substantial portion of
its subscriber account growth, including the issuance of the Discount Notes in
May 1995. See"-Liquidity and Capital Resources" Below.

         Balance sheet data. At September 30, 1996, the Company's working
capital deficit was $5.6 million, as compared to a working capital deficit of
$9.2 million at September 30, 1995. Significant changes in working capital items
include a $7.6 million increase in the deferred tax assets, a $6.9 million
increase in accounts receivable offset by increases in purchase


                                       22
<PAGE>   25

holdbacks ($5.0 million), acquisition and transition costs ($3.4 million) and
deferred revenue ($4.7 million). Subscriber accounts and intangibles, net
increased to $257.4 million at September 30, 1996 from $162.2 million at
September 30, 1995. This increase of $95.2 million, or 58.6%, was caused by the
addition of new subscribers, net of amortization expense. Total stockholders'
equity increased to $28.8 million at September 30, 1996 from $6.3 million at
September 30, 1995. The increase in such figure reflects the conversion of
redeemable preferred stock to common stock and the issuance of common stock in
the Company's February 1996 $25.0 million public offering (the "Secondary 
Public Offering") offset by a loss of $15.7 million for fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

         General. Since September 1991, the Company has financed its operations
and growth with a combination of capital raised through debt and equity
offerings and, to a lesser extent, cash flow from operations. During fiscal
1997, the Company issued $13.5 million aggregate principal amount of Convertible
Notes pursuant to the exercise of an over-allotment option by underwriters and
approximately 920,000 shares of Common Stock valued at approximately $11.7
million in connection with three acquisitions. In addition, the Company
generated $34.0 million of cash from operating activities and borrowed $45.7
million under its Revolving Credit Facility.

         Recent Developments On November 24, 1997, pursuant to the Contribution
Agreement, Protection One received $367.4 million of cash and marketable
securities from Western Resources, and made the following disbursements, either
concurrently with or within several days of the closing of the Western Resources
transaction: (i) $114.1 million to pay the Special Dividend and the Option
Warrant Payments; (ii) $94.4 million to pay the cash purchase price of
Centennial; and (iii) $61.6 million to repay borrowings under the Revolving
Credit Facility. The remaining $97.3 million included $14.8 million of
marketable securities, which amount included the Guardian Common Shares and the
Guardian Preferred Shares, and $82.5 million of cash.

         The amounts contributed by Western Resources have substantially
enhanced the Company's liquidity. In addition, the Company believes the issuance
of 68.7 million shares of Common Stock to Western Resources has improved its
access to the public equity markets. The Company intends to use cash flow
provided by operations, cash on hand, availability under its Revolving Credit
Facility (which currently is $100.0 million) and capital raised from debt and
equity offerings, as needed, to fund its ongoing operations and growth
activities. The Company believes that cash required to fund its growth
activities will continue to exceed cash flow provided by operations for the
foreseeable future.

         Material Commitments. The Company has several material commitments and
a growth opportunity that if pursued could require significant capital. First,
pursuant to the Contribution Agreement, the Company has the right to purchase
the stock of Network Holdings, Inc. for an amount equal to the purchase price
Western Resources paid for the Network Securities, plus a finance charge
representing the carrying cost of the purchase to Western Resources and
reimbursement of certain Western Resources' expenses. The Company believes the
exercise of the Network option is probable and is likely will occur during the
first quarter of calendar year 1998. The Company believes such exercise will
require approximately $175 million of cash.

         The Company has several other long-term commitments. Amounts borrowed
under the Revolving Credit Facility, which could range up to $100.0 million, are
due and payable on January 3, 2000. The Convertible Notes, which total $103.5
million in aggregate principal amount, mature on September 15, 2003, and the
Company must make a payment of $166.0 million on September 30, 2005 at the
maturity of the Discount Notes. Cash interest payable on the Convertible Notes
and Discount Notes will total $18.3 million in 1998 and $29.6 million thereafter
until maturity. (See Note 8 of Notes to Consolidated Financial Statements
included in Item 14 hereof, for further information regarding the Convertible
Notes and Discount Notes.) In addition, Protection One has assumed as part of
the Western Resources transaction approximately $65 million of Westec
indebtedness, of which approximately $5 million is payable in 1997, $26 million
in 1998 and $34 million in 1999. The Company believes its enhanced liquidity and
increased size due to the transaction with Western Resources will enable it to
satisfy such obligations.

         Fiscal 1997 Results. For fiscal 1997, the Company's net cash provided
by operating activities was $34.0 million, compared to $24.1 million for fiscal
1996. Net cash used in investing activities declined to $94.4 million in fiscal
1997 from $107.1 million in fiscal 1996. Net cash provided by financing
activities was $58.7 million in fiscal 1997 compared to $83.6 million in fiscal
1996.

         The indentures governing the Discount Notes and Convertible Notes and
the Revolving Credit Facility contain certain restrictions on the transfer of
Company funds, including dividends, loans and advances by the Company. The
Company


                                       23
<PAGE>   26

believes such restrictions have not had and will not have a significant
impact on the Company's ability to meet its cash obligations.

         Capital Expenditures. The Company anticipates making capital
expenditures in fiscal 1998 of approximately $15 million, including $5 million
to complete an upgrade of the Company's monitoring and administrative software,
$5 million for replacement and growth in the Company's fleet of service and
response vehicles, and $5 million of routine replacement of other capital items.
Such amounts also include expenditures for the businesses contributed by Western
Resources.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Company's consolidated financial statements and supplementary data,
together with the report of Coopers &Lybrand L.L.P., independent accountants,
are included elsewhere herein. See "Index to Consolidated Financial Statements"
on page F-1. Separate audited financial statements for Monitoring have not been
provided because the Company does not believe such financial statements are
material to investors. As described in "Introductory Notes - Company Structure;
Western Resources Transaction," for the period covered by this Report the
aggregate assets, liabilities, earnings and equity of Monitoring were
substantially equivalent to the assets, liabilities, earnings and equity of POI
on a consolidated basis.


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

         None.

                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

DIRECTORS

         The Board of Directors of Protection One presently consists of 12
persons, all of who are elected annually. As provided in the Contribution
Agreement, at the time of the Share Issuance, the Board of Directors of
Protection One increased the size of the Board of Directors from four to 12, and
eight persons nominated by Western Resources were added to such Board. The
nominees of Western Resources are Peter C. Brown, Howard A. Christensen, Joseph
J. Gardner, William J. Gremp, Steven L. Kitchen, Carl M. Koupal, Jr., John C.
Nettles, Jr. and Jane Dresner Sadaka.

         Certain information concerning the current directors of Protection One
is set forth below:

<TABLE>
<CAPTION>
         NAME            AGE                   POSITION
         ----            ---                   --------
<S>                      <C>    <C>
James M. Mackenzie, Jr.   50    President, Chief Executive Officer and Director
Robert M. Chefitz         38    Director
Dr. Ben Enis              54    Director
James Q. Wilson           66    Director
Peter C. Brown            39    Director
Howard A. Christensen     64    Director
Joseph J. Gardner         60    Director
William J. Gremp          54    Director
Steven L. Kitchen         52    Director
Carl M. Koupal, Jr.       44    Director
John C. Nettles, Jr.      41    Director
Jane Dresner Sadaka       43    Director
</TABLE>

         James M. Mackenzie, Jr. has been President and Chief Executive Officer
and a director of the Company since 1991.

         Robert M. Chefitz has been a director of Protection One since September
1991. Mr. Chefitz joined Patricof & Co. Ventures, Inc., an investment management
firm, in 1987, where he currently serves as a Managing Director; Mr. Chefitz
also


                                       24
<PAGE>   27


serves as a General Partner to various venture capital partnerships Patricof
manages. Mr. Chefitz currently serves on the Board of Directors of Xpedite
Systems, Inc. and is also a director of several private companies.

         Dr. Ben Enis has been a director of Protection One since October 1994.
He has been an independent investor and marketing consultant since 1996. Prior
to that time, he was a Professor of Marketing at the University of Southern
California since 1982. Dr. Enis currently serves on the Board of Directors of
Countrywide Credit Industries, Inc.

         James Q. Wilson has been a director of Protection One since June 1996.
Mr. Wilson has recently retired from his position as a Professor of Management
at the University of California at Los Angeles. Mr. Wilson is currently a
director of New England Electric System, the Rand Corporation and State Farm
Mutual Life Insurance Company.

         Peter C. Brown has served as President of AMC Entertainment, Inc., an
entertainment company ("AMCE"), since January 1997. He served as Executive Vice
President of AMCE from August 1994 to January 1997, and has served as AMCE's
Chief Financial Officer since November 1991. Mr. Brown currently serves as
director of AMCE and is Chairman of the Board of Trustees of Entertainment
Properties Trust, a recently formed real estate investment trust.

         Howard A. Christensen is President and Chief Executive Officer of
Chritensen & Associates, an investor relations and strategic planning firm.

         Joseph J. Gardner is the President of Condev Properties, a real estate
development company.

         William A. Gremp has been Senior Vice President and Managing Director
of the Utilities and Strategic Finance Group of First Union Capital Markets
Group, a banking firm, since April 1996. Prior to that time, he was a Managing
Director in the Global Power Group at Chase Manhattan Bank. Mr. Gremp is also a
director of St. Joseph Light & Power Company.

         Steven L. Kitchen is an Executive Vice President and the Chief
Financial Officer of Western Resources. He is also a director of Central
National Bank.

         Carl M. Koupal, Jr. has been Executive Vice President and the Chief
Administrative Officer for Western Resources since July 1995. From January 1995
to July 1995, Mr. Koupal was Executive Vice President of Corporate
Communications, Marketing and Economic Development for Western Resources. Prior
to that time, he served as Western Resources' Vice President, Corporate
Marketing, and Economic Development. Mr. Koupal also currently serves as a
director of Hanover Compressor Co.

         John C. Nettles, Jr. is a partner in the law firm of Morrison & Hecker
L.L.P.

         Jane Dresner Sadaka is an Advisory Board Member of DLJ Merchant Banking
Fund II. She served as a Special Limited Partner of Kellner, DiLeo & Co. from
1992 until 1997, and prior to that time was a General Partner, Head of Research,
for Kellner, DiLeo & Co. Ms. Sadaka is also Executive Vice President of the New
York University of School of Business Alumni Association.


                                       25

<PAGE>   28


EXECUTIVE OFFICERS

         The name, age and current position(s) with POI of each executive
officer of Protection One are as set forth below. Each individual other than Mr.
Weinstock also serves in the same capacities for Monitoring.

<TABLE>
<CAPTION>
         NAME             AGE                          POSITION
         ----             ---                          --------
<S>                       <C>     <C>
James M. Mackenzie, Jr.    50     President and Chief Executive Officer and
                                  Director
John W. Hesse              48     Executive Vice President, Chief Financial
                                  Officer and Secretary
John E. Mack, III          38     Executive Vice President -- Business
                                  Development and Assistant Secretary
Thomas K. Rankin           39     Executive Vice President -- Branch Management
                                  and Assistant Secretary
George A. Weinstock        60     Executive Vice President and Assistant
                                  Secretary
Steven Millstein           44     Executive Vice President of Western Resources
</TABLE>

         For information with respect to the business experience of Mr.
Mackenzie, see "Directors" above.

         John W. Hesse has been Executive Vice President, Chief Financial
Officer and Secretary of the Company since 1991

         John E. Mack, III was Vice President -- Business Development of
Protection One from 1991 until August 1996, and has been Protection One's
Executive Vice President - Business Development since August 1996 and Assistant
Secretary of Protection One since October 1994.

         Thomas K. Rankin was Vice President -- Branch Management of Protection
One from September 1991 to August 1996, and has been Protection One's Executive
Vice President - Branch Management since August 1996 and Assistant Secretary
since October 1994.

         George A. Weinstock has been Executive Vice President of Monitoring
since November 1993 and Executive Vice President of Protection One since June
1994, and was a director of Protection One from November 1993 to May 1994. Prior
to November 1993, Mr. Weinstock served as President of American Home Security,
Inc.

         Steven Millstein has been Executive Vice President of the Company since
November 1997. Prior to November 1997, Mr. Millstein served as President of
Westar Security.

ITEM 11.   EXECUTIVE COMPENSATION

         Information in response to this Item is incorporated by reference from
the section captioned "Management of Protection One After the Stock Acquisition
Transaction" in Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         (a)      Security Ownership of Certain Beneficial Owners.

                  The following table sets forth certain information with
         respect to beneficial ownership of the Common Stock

                                       26

<PAGE>   29


         as of December 19, 1997 by each person known to Protection One to 
         beneficially own more than 5% of the outstanding Common Stock.

<TABLE>
<CAPTION>
                  Name and Address                   Amount and Nature of
                  of Beneficial Owner                Beneficial Ownership               Class(1)
                  -------------------                --------------------               --------
                  <S>                                <C>                                <C>
                  Western Resources, Inc.            68,674,402(2)
                  818 S. Kansas Avenue
                  Topeka, KS 66612
</TABLE>

         (b)      Security Ownership of Management

                  The following tables sets forth certain information with
         respect to beneficial ownership of the Common Stock as of December 19,
         1997 by each of Protection One's directors, each of Protection One's
         executive officers and all directors and officers of Protection One as
         a group. Unless otherwise indicated below, each individual named in the
         table has sole voting power and sole investment power with respect to
         all shares beneficially owned, subject to community property laws where
         applicable.

<TABLE>
<CAPTION>
                                                  AMOUNT AND NATURE OF
        NAME OF BENEFICIAL OWNER                 BENEFICIAL OWNERSHIP (1)           PERCENT OF CLASS (2)
        ------------------------                 ------------------------           --------------------
<S>                                              <C>                                <C>
James M. Mackenzie, Jr.                                   431,381                            *
John W. Hesse                                             348,255                            *
John E. Mack, III                                         271,840                            *
Thomas K. Rankin                                          274,589                            *
Steven A. Millstein                                             0                            *
George M. Weinstock                                        57,177                            *
Peter C. Brown                                                  0                            *
Robert M. Chefitz (3)                                   2,545,444                          3.0
Howard A. Christensen                                           0                            *
Ben Enis                                                   30,000                            *
Joseph J. Gardner                                               0                            *
William J. Gremp                                                0                            *
Steven L. Kitchen                                               0                            *
Carl M. Koupal, Jr.                                             0                            *
John C. Nettles, Jr.                                            0                            *
Jane Dresner Sadaka                                             0                            *
James Q. Wilson                                            20,100                            *
All directors and executive officers
of Protection One as a group (17 persons)               3,978,786                          4.7                                     

</TABLE>


(1)      Includes shares subject to options that are currently exercisable or
         that become exercisable within 60 days after December 19, 1997, as
         follows: Mr. Mackenzie, 143,000 shares; Mr. Hesse, 155,000 shares; Mr.
         Mack, 161,000 shares; Mr. Rankin, 161,000 shares; Mr. Chefitz, 30,000
         shares; Mr. Enis, 30,000 shares and Mr. Wilson, 20,000 shares.

(2)      Based upon shares of Common Stock outstanding at December 19, 1997, as
         adjusted for options that are currently exercisable or that become
         exercisable within 60 days after December 19, 1997.

(3)      Mr. Chefitz, a director of Protection One, is also General Partner of
         APA Excelsior III, L.P. and APA Excelsior III/Offshore, L.P. and an
         officer of Patricof Ventures ("Patricof"), the manager or investment
         advisers to such investment funds and to CIN Venture Nominees, Ltd.,
         also an investment fund. Mr. Chefitz disclaims beneficial ownership of
         the shares listed in the table as owned by him, 2,515,444 of which
         shares are owned by APA Excelsior III, L.P., APA Excelsior III/Offshore
         L.P. or CIN Venture Nominees, Ltd., and the remainder of which are
         subject to an option held by Patricof.

------------------

(1)      Based upon shares of Common Stock outstanding at December 19, 1997.
(2)      Western Resources, Inc. has sole voting power and sole investment power
         with respect to these shares.

                                       27

<PAGE>   30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information in response to this Item is incorporated by reference from
the sections captioned "Summary," "The Stock Acquisition Transaction," "The
Contribution Agreement," "The Stock Option Agreement," "The Option and Voting
Agreement" and "Management of Protection One After the Stock Acquisition
Transaction" in the Proxy Statement.

ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM-8-K

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

                  1.       The financial statements and financial statement
                           schedules listed on the accompanying Index to
                           Financial Statements.

                  2.       The following exhibits:

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

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

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

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

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

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

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

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

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

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

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

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

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

4.15     Amended and Restated Continuing Security Interest and Conditional Assignment of Patents, Trademarks,
         Copyrights and Licenses dated as of June 7, 1996, between Monitoring and Heller Financial as Agent
         (incorporated by reference to Exhibit 4.13 to the Fiscal 1996 Form 10-K).

10.1     Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Merita Bank. Ltd. (formerly
         Kansallis-Osake-Pankki) (incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 
         10-Q filed by POI and, inter alia, Monitoring for the quarter ended March 31, 1994).

10.2     Amended and Restated Stockholders' Agreement dated as of August 15, 1994, among POI and the
         stockholders of POI named therein (incorporated by reference to Exhibit 10.42 to the Registration
         Statement of Form S-1 (Registration No. 33-81292) originally filed by POI on July 8, 1994).

10.3     Warrant Agreement dated as of November 3, 1993, between Monitoring and United States Trust Company of
         New York, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the Registration Statement on
         Form S-4 (Registration Statement 33-73002) originally filed by POI, Monitoring and certain former
         subsidiaries of Monitoring on December 15, 1993 (the "1993 Form S-4")).

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

10.5     Warrant Agreement dated as of May 17, 1995, between POI and The First National bank of Boston, as
         Warrant Agent (incorporated by reference to Exhibit 10.40 to the 1995 Form S-4).

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

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

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

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

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

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

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

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

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

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

10.16    Notes Registration Rights Agreement dated as of May 17, 1995, among POI, Monitoring, Morgan Stanley &
         Co., Incorporated and Montgomery Securities (incorporated by reference to Exhibit 4.2 to the 1995 Form
         S-4),

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

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

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

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


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

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

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

21.1     Subsidiaries of POI and Monitoring.
</TABLE>

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

         (b)      During the last quarter of the fiscal year covered by this
                  Report, POI and Monitoring filed a Current Report on Form 8-K
                  dated July 30, 1997 reporting in response to Item 5 the
                  execution and delivery of the Contribution Agreement and the
                  Stock Option Agreement (see "Recent Acquisitions" included in
                  Item 1 of this report.)

                                       28
<PAGE>   31


                      PROTECTION ONE, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                               PAGE

<S>                                                                                            <C>
           Report of Independent Accountants.............................................      F-2
           Consolidated Balance Sheets as of September 30, 1996 and 1997.................      F-3
           Consolidated Statements of Operations for the years ended September 30,
               1995, 1996 and 1997.......................................................      F-4
           Consolidated Statements of Cash Flows for the years ended September 30,
               1995, 1996 and 1997.......................................................      F-5
           Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
               years ended September 30, 1995, 1996 and 1997.............................      F-6
           Notes to Consolidated Financial Statements....................................      F-7
           Schedule VIII Valuation and Qualifying Accounts...............................      S-1
</TABLE>

                                       F-1
<PAGE>   32



                        REPORT OF INDEPENDENT ACCOUNTANTS



Board of Directors
Protection One, Inc.
Culver City, California

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

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Protection One,
Inc. and Subsidiaries as of September 30, 1997 and 1996, and their consolidated
results of operations and cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.

    As discussed in Note 2, effective October 1, 1994, the Company changed its
method of accounting for certain subscriber account acquisition and transition
costs.


                                                     COOPERS & LYBRAND L.L.P.

Portland, Oregon
November 26, 1997

                                      F-2
<PAGE>   33



                      PROTECTION ONE, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

           (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                       ASSETS

                                                                  SEPTEMBER 30,
                                                             ----------------------
                                                                  1996         1997
                                                             ---------    ---------
<S>                                                          <C>          <C>      
Current assets:
  Cash and cash equivalents ..............................   $   1,782    $     573
  Restricted cash ........................................       3,680           --
  Receivables, net .......................................      12,743       15,274
  Income tax receivable ..................................          --        1,953
  Inventories ............................................       1,920        1,722
  Prepaid expenses .......................................       1,221        2,147
  Deferred tax asset .....................................       7,561        5,088
                                                             ---------    ---------
     Total current assets ................................      28,907       26,757
Property and equipment, net ..............................       9,952       14,888
Subscriber accounts and intangibles, net .................     257,354      326,748
Assets held for sale .....................................         775
                                                                          ---------
Deposits .................................................         648          798
                                                             ---------    ---------
                                                             $ 297,636    $ 369,191
                                                             =========    =========



            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .......................................   $   2,278    $   4,520
  Accrued salaries, wages and benefits ...................       1,495        1,544
  Other accruals .........................................       1,048          776
  Purchase holdbacks .....................................       9,942       10,014
  Acquisition transition costs ...........................       4,326        7,451
  Other current liabilities ..............................       1,623          595
  Capital leases .........................................          --          481
  Deferred revenue .......................................      13,827       16,210
                                                             ---------    ---------
     Total current liabilities ...........................      34,539       41,591
Long-term debt ...........................................     225,650      303,880
Capital leases, net of current portion ...................          --          730
Deferred tax liability ...................................       7,561        5,088
Other liabilities ........................................       1,059          531
                                                             ---------    ---------
     Total liabilities ...................................     268,809      351,820
                                                             ---------    ---------
Commitments and contingencies (Note 14)
Stockholders' equity (deficit):
  Common Stock, $.01 par value, 150,000,000 shares
   authorized, 12,914,783 and 14,305,613 shares issued
   and outstanding at September 30, 1996 and 1997,
   respectively ..........................................         129          143
  Additional paid-in capital .............................      79,767       90,210
  Accumulated deficit ....................................     (51,069)     (72,982)
                                                             ---------    ---------
     Total stockholders' equity ..........................      28,827       17,371
                                                             ---------    ---------
                                                             $ 297,636    $ 369,191
                                                             ---------    ---------
</TABLE>

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



                                      F-3
<PAGE>   34



                      PROTECTION ONE, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

           (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                      YEAR ENDED SEPTEMBER 30,
                                                                  --------------------------------
                                                                    1995        1996        1997
                                                                  --------    --------    --------
<S>                                                               <C>         <C>         <C>     
Revenues:
  Monitoring and related services .............................   $ 48,909    $ 68,778    $ 94,702
  Other .......................................................      6,973       4,679       3,791
                                                                  --------    --------    --------
     Total revenues ...........................................     55,882      73,457      98,493
                                                                  --------    --------    --------

Cost of revenues:
  Monitoring and related services .............................     13,627      19,065      25,653
  Other .......................................................      3,887       2,513       2,291
                                                                  --------    --------    --------
     Total cost of revenues ...................................     17,514      21,578      27,944
                                                                  --------    --------    --------
     Gross profit .............................................     38,368      51,879      70,549
Selling, general and administrative expenses ..................     13,031      15,478      19,978
Loss on acquisition terminations ..............................        208          --          --
Acquisition and transition expenses ...........................      3,090       4,219       5,920
Amortization of intangibles and depreciation
 expense ......................................................     16,543      25,121      38,227
                                                                  --------    --------    --------
     Operating income .........................................      5,496       7,061       6,424

Other expenses:
  Interest expense, net .......................................      7,626       4,885       9,136
  Amortization of debt issuance costs and OID .................      6,797      17,812      20,706
  Loss on assets held for sale ................................         --          89         339
  Loss (gain) on sale of assets ...............................        505          19        (100)
                                                                  --------    --------    --------
     Loss before income taxes, extraordinary
      item and cumulative effect of change in
      accounting method - net of taxes ........................     (9,432     (15,744)    (23,657)
Income tax benefit ............................................      3,595         247       1,744
                                                                  --------    --------    --------
     Loss before extraordinary item and
     cumulative effect changes in accounting method -
        net of taxes ..........................................     (5,837)    (15,497)    (21,913)
Extraordinary item--loss on early extinguishment of debt-
  net of taxes ................................................     (8,906          --          --
Cumulative effect of changes in accounting method-
  net .........................................................     (1,955)         --          --
                                                                  --------    --------    --------
     Net loss .................................................    (16,698)    (15,497)    (21,913)
Preferred stock dividends .....................................        958         248          --
Accretion of redeemable preferred stock .......................        797          --          -- 
     Loss attributable to common stock ........................   $(18,453)   $(15,745)   $(21,913)
                                                                  ========    ========    ========
Loss per common share:
Before extraordinary item and cumulative effect of
  change in accounting method .................................   $  (0.87)   $  (1.40)   $  (1.59)
  Net loss per share ..........................................   $  (2.12)   $  (1.40)   $  (1.59)
</TABLE>





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


                                      F-4
<PAGE>   35





                      PROTECTION ONE, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          (DOLLAR AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                        YEAR ENDED SEPTEMBER 30,
                                                                   -----------------------------------
                                                                      1995         1996         1997
                                                                   ---------    ---------    ---------
<S>                                                                <C>          <C>          <C>       
Cash flows from operating activities:
  Net loss .....................................................   $ (16,698)   $ (15,497)   $ (21,913)
  Adjustments to reconcile net loss to net cash provided by
     Operating activities:
     Depreciation ..............................................       1,083        1,845        3,252
     Amortization of subscriber accounts and goodwill ..........      15,460       23,275       34,975
     Amortization of OID and debt issuance costs ...............       6,797       17,812       20,706
     Cumulative effect of change in accounting method ..........       1,955           --           --
     Loss on sales and abandonments ............................         713           --           --
     Inventory received in settlements of claim ................      (1,562)          --           --
     Deferred income tax benefit ...............................      (3,595)        (792)          --
     Extraordinary items .......................................       8,906           --           --
     Provision for doubtful accounts ...........................       1,751        2,649        3,344
     Other .....................................................          --         (204)          --
Changes in assets and liabilities net of effects of
 acquisitions:
     Restricted cash ...........................................          --           --           20
     Receivables ...............................................      (2,795)      (8,737)      (7,690)
     Inventories ...............................................          89        2,002          237
     Prepaid expenses and deposits .............................        (408)        (752)      (1,090)
     Accounts payable ..........................................        (121)         199        2,242
     Accrued liabilities .......................................      (2,247)       1,793         (290)
     Deferred revenue ..........................................        (832)         470          188
                                                                   ---------    ---------    ---------
          Net cash provided by operating activities ............       8,496       24,063       33,981
                                                                   ---------    ---------    ---------
Cash flows from investing activities:
  Cash restricted for acquisitions .............................          --           --         (383)
  Purchases of property and equipment ..........................      (3,268)      (5,420)      (6,560)
  Sales of assets previously held for sale .....................          --           --          205
  Acquisitions, net of cash received ...........................     (51,793)     (93,456)     (82,204)
  Payments on purchase holdbacks ...............................      (3,626)      (3,532)      (1,497)
  Deferred acquisition payments ................................      (2,167)      (1,613)      (1,518)
  Acquisition transition costs .................................      (2,558)      (3,111)      (1,891)
  Payment of other liabilities .................................        (109)          --           --
                                                                   ---------    ---------    ---------
          Net cash used in investing activities ................     (63,521)    (107,132)     (93,848)
                                                                   ---------    ---------    ---------
Cash flows from financing activities:
  Payments on long-term debt ...................................    (118,699)    (111,222)      (7,697)
  Proceeds from long-term debt .................................     168,005      174,248       66,905
  Payments on capital leases ...................................          --           --         (400)
  Debt and equity issuance costs ...............................      (6,780)      (4,981)        (953)
  Payments on stockholders' notes receivable ...................          47           --           --
  Issuance of preferred and common stock and warrants ..........      20,219       25,798          803
  Redemption of  preferred stock ...............................      (2,125)          --           --
  Note redemption and premium costs ............................      (2,627)          --           --
  Cash dividends paid ..........................................      (2,816)        (248)          --
                                                                   ---------    ---------    ---------
          Net cash provided by financing activities ............      55,224       83,595       58,658
                                                                   ---------    ---------    ---------
          Net increase (decrease) in cash and cash equivalents..         199          526       (1,209)

Cash and cash equivalents:
  Beginning of year ............................................       1,057        1,256        1,782
                                                                   ---------    ---------    ---------
  End of year ..................................................   $   1,256    $   1,782    $     573
                                                                   =========    =========    =========

Interest paid during the year ..................................   $   9,968    $   4,784    $   8,824
                                                                   =========    =========    =========

Income taxes paid during the year...............................   $      --    $     160    $   2,116
                                                                   =========    =========    =========
Supplemental disclosure (see Note 12)
</TABLE>



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


                                      F-5
<PAGE>   36


                      PROTECTION ONE, INC. AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

                          (DOLLAR AMOUNTS IN THOUSANDS)


<TABLE>
<CAPTION>
                                                 CLASS B    PREFERRED  ADDITIONAL   STOCKHOLDERS'
                                     COMMON      COMMON       STOCK      PAID-IN        NOTES   ACCUMULATED
                                      STOCK       STOCK      SERIES A    CAPITAL     RECEIVABLE   DEFICIT     TOTAL
                                     --------   ----------   ---------   --------    ---------   --------    --------
<S>                                  <C>                <C>  <C>         <C>         <C>         <C>         <C>      
September 30, 1994 ...............   $      2   $       18   $    67   $ 12,750      $   (47)  $(18,874)   $ (6,084)
Net loss .........................                                                              (16,698)    (16,698)
Issuance of common stock and
  warrants .......................         30                            20,120                              20,150
Exercise of stock purchase
  warrants .......................          2                                71                                  73
Stock and warrant issuance
  costs ..........................                                       (2,283)                             (2,283)
Accretion of Series C and E
  redeemable preferred stock .....                                         (797)                               (797)
Dividends on Series A, F, and H                                            (876)                               (876)
  preferred stock ................
Conversion to common stock .......         56          (18)      (67)    12,844                              12,815
Payments on stockholders' notes
  receivable .....................                                                        47                     47
                                     --------   ----------   -------   --------      -------   --------    --------

September 30, 1995 ...............         90                            41,829                 (35,572)      6,347
Net loss .........................                                                              (15,497)    (15,497)
Issuance of common shares ........         38                            38,913                              38,951
Exercise of  stock purchase
  warrants .......................          1                                65                                  66
Stock issuance costs .............                                         (792)                               (792)
Dividends on Series H preferred
  stock ..........................                                         (248)                               (248)
                                     --------   ----------   -------   --------      -------   --------    --------

September 30, 1996 ...............        129                            79,767                 (51,069)     28,827
Net loss .........................                                                              (21,913)    (21,913)
Issuance of common shares ........          8                             9,678                               9,686
Exercise of  stock purchase
  warrants and options ...........          6                               765                                 771
                                     --------   ----------   -------   --------      -------   --------    --------

September 30, 1997 ...............   $    143   $       --   $    --   $ 90,210      $    --   $(72,982)   $ 17,371
                                     ========   ==========   =======   ========      =======   ========    ========
</TABLE>






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

                                      F-6
<PAGE>   37






                     PROTECTION ONE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Basis of Consolidation and Business

    The consolidated financial statements include the accounts of Protection
One, Inc. (POI), and its wholly-owned subsidiary, Protection One Alarm
Monitoring, Inc. (Monitoring) (together with POI, the Company.) Monitoring's
former wholly-owned subsidiary, Protection One Alarm Services, Inc.
(Services) was merged into Monitoring in May 1996. The assets, results of
operations and stockholders' equity of Monitoring comprise substantially all of
the assets, results of operations and stockholders' equity of the Company on a
consolidated basis. The Company's principal assets and sole operations are in
and through its investment in Monitoring. All significant intercompany balances
and transactions have been eliminated in consolidation. Summarized financial
information of Monitoring is included in Note 16.

    The Company provides security alarm monitoring services and sells, installs
and services security alarm systems for residential and small business
subscribers principally in the western United States.

    Use of Estimates

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

   Western Resources Transaction

     On July 30, 1997, POI and Western Resources, Inc., a Kansas corporation
(Western Resources), entered into a Contribution Agreement (as amended, the
Contribution Agreement).  See Note 18.


                                      F-7
<PAGE>   38


  Revenues

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

  Inventories

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

  Property and Equipment

    Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives. Costs of property and
equipment of purchased businesses are based on estimated replacement costs at
the date of acquisition. When property and equipment are retired or sold, the
cost and the related allowance for depreciation are eliminated from the property
and allowance accounts. Gains or losses from retirements and dispositions of
property and equipment are recognized in the period realized. Repair and
maintenance costs are expensed as incurred.

  Income Taxes

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



                                      F-8
<PAGE>   39



Subscriber Accounts and Intangibles

    Subscriber accounts acquired and intangible assets are stated at cost. The
cost of acquired subscriber accounts includes the cost of accounts purchased and
the estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. The Company's personnel and related support costs and duplicative costs
incurred solely in support of acquiring and transitioning subscriber accounts
are expensed as incurred. Direct and incremental external costs associated with
the acquisition of subscriber accounts are capitalized. If the acquisition is
terminated prior to completion of the purchase transaction the costs are
recorded as a loss in the period of termination. The accrual for transition
costs includes liabilities assumed and incremental external costs related to
customer changeover and transition, warranty obligation costs, employee and
lease termination costs and other related costs. Costs related to sales,
marketing and installation of systems for accounts internally generated are
expensed as incurred. The Company has adopted Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Consistent with
this new standard, the Company determines the value of its subscriber accounts
and intangibles, net based on the undiscounted cash flows from the Monthly
Recurring Revenue (MRR) stream using the most recent historical attrition rate
and the aggregate MRR. The adoption of this statement did not affect the
Company's results of operations.

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

    The Company periodically estimates future cash flows from the subscriber
accounts. Because the expected cash flows have exceeded the unamortized cost of
the subscriber accounts the Company has not recorded an impairment loss.

    Intangible assets include goodwill, which is amortized on a straight-line
basis over the estimated life of 10 years and debt issuance costs, which are
amortized over the respective lives of associated debt using the interest
method.

  Cash and Cash Equivalents

    All highly liquid investments purchased with a remaining maturity of three
months or less at the date acquired are cash equivalents. These investments,
consisting of money market funds, are stated at cost, which approximates market.

  Restricted Cash

    Restricted cash as of September 30, 1996 was held in escrow pursuant to an 
acquisition agreement until final determination of the purchase price of the
assets acquired by the Company.

  Advertising Costs

      The Company expenses advertising costs based on the timing of the release
of the advertising materials. Printed materials, due to the short lead time
between incurrence of cost and the release, are generally expensed as incurred,
whereas broadcast advertising costs are generally recognized upon the first
broadcast of the respective advertisement. Total advertising expense was $411
and $374 during the years ended September 30, 1996 and 1997 respectively.

  Concentration of Credit Risk

    Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables from a
large number of customers, including both residential and commercial, dispersed
across a wide geographic base. The Company extends credit to its customers in
the normal course of business, performs periodic credit evaluations and
maintains allowances for potential credit losses.

    ACCOUNTING PRONOUNCEMENTS

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

    FASB Statement No. 128 "Earnings per Share" establishes new guidelines for
the calculation of and disclosures regarding earnings per share. The Company
will adopt the provisions of Statement No. 128 for financial statements for 
periods after December 15, 1997, and at such time

                                      F-9
<PAGE>   40

will be required to present basic and diluted earnings per share and to restate
all prior periods. There will be no impact on the calculation of basic earnings
per share for the three months and nine months ended September 30, 1997 and
1996. Diluted earnings per share is not expected to differ materially from
basic earnings per share.

    The Company will adopt FASB Statement No. 129 "Disclosure of Information
About Capital Structure" for financial statements after December 15, 1997. The 
Company does not expect that adoption of the disclosure requirements of this
pronouncement will have a material impact on its financial statements.

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

  LOSS PER COMMON SHARE

      The computation of fully diluted net loss per share for the years ended
September 30, 1995, 1996 and 1997 was antidilutive; as such, no presentation of
fully diluted earnings per share has been included in the consolidated
statements of operations. The weighted average shares outstanding used in the
computation of net loss attributable to common shares are as follows:

<TABLE>
<CAPTION>
                                       YEAR ENDED SEPTEMBER 30,
                               ------------------------------------------
                                  1995            1996            1997
                               ----------      ----------      ----------
<S>                             <C>            <C>             <C>       
Common Stock ............       8,695,395      11,250,185      13,744,929
Class B Common Stock ....           2,792              --              --
                               ----------      ----------      ----------
                                8,698,187      11,250,185      13,744,929
                               ==========      ==========      ==========
</TABLE>

  Reclassifications

    Certain prior period amounts were reclassified to conform to the September
30, 1997 presentation. Such reclassifications did not affect previously reported
net loss.

2.  CHANGE IN ACCOUNTING METHOD:

    In the third quarter of fiscal 1995, the Company changed its method of
accounting for certain subscriber account acquisition and transition costs,
effective as of October 1, 1994. Under the new method, the Company's personnel
and related support costs and duplicate costs incurred solely in support of
acquiring and transitioning subscriber accounts are expensed as incurred.
Capitalizable costs include the direct costs of accounts purchased and the
estimated fair value at the date of acquisition of the accounts acquired in
business acquisitions, including an accrual for estimated acquisition transition
costs. Such capitalized transition costs include incremental external costs
related to customer changeover and transition, warranty obligation costs,
employee and lease termination costs and other related costs.

    The new method is consistent with the guidelines adopted by the Emerging
Issues Task Force of the Financial Accounting Standards Board in Issue 95-3,
Recognition of Liabilities in Conjunction with Purchase Business Combinations.

    The consolidated financial statements for the year ended September 30, 1995
reflect the change in accounting method as of October 1, 1994. The effect of the
change on such year was to increase the loss before cumulative effect of the
accounting change, net loss and loss attributable to Common Stock by
approximately $1.5 million or $0.17 per share. The cumulative effect of the
change as of October 1, 1994 was approximately $1.95 million or $0.22 per share,
net of income taxes of $1.2 million, and is reported separately in the
consolidated statement of operations for the year ended September 30, 1995.




                                     F-10
<PAGE>   41



    The following unaudited pro forma amounts reflect the results of operations
for the year ended September 30, 1995 as if the change in accounting method had
been retroactively applied:


<TABLE>

<S>                                           <C>        
Pro forma:
   Loss before extraordinary items            $   (5,837)
   Net loss                                   $  (14,743)
   Net loss attributable to common stock      $  (16,498)
   Loss per common share:
        Before extraordinary item             $     (.87)
        Net loss per share                    $    (1.90)

Actual:
   Net loss per share:                        $    (2.12)
</TABLE>


3. PUBLIC EQUITY OFFERING AND CONVERSION OF PREFERRED STOCK:

  Initial Public Offering and Borrowing Under Revolving Credit Facility

    On October 6, 1994, Protection One, Inc. ("POI") issued 2,700,000 shares of
its Common Stock at $6.50 per share in an initial public offering (IPO). On
November 4, 1994, the Company's underwriters exercised their option to purchase
an additional 330,000 shares of Common Stock at $6.50 per share. In conjunction
with the issuance of shares on October 6, 1994, the Company borrowed $3 million
under Monitoring's revolving credit facility to pay accumulated unpaid
dividends, stock conversion inducements and accounts payable.

  Conversion of Shares

    In conjunction with the IPO, all outstanding shares of POI's Series A, B, C,
E and G Preferred Stock and Class B Common Stock were converted into a total of
5,557,003 shares of the Common Stock. At the time of conversion, POI paid
accumulated unpaid dividends totaling $2,104 to the holders of the Series A, C
and E Preferred Stock and payments totaling $82 to the holders of the Series A
Preferred Stock to induce conversion of the shares into Common Stock. As a
result of the conversion, the Company recorded a charge to additional paid in
capital of $1,043 which reflects: (i) the accrual of dividends on the Series C
and E Redeemable Preferred Stock from September 30, 1994 through October 6, 1994
totaling $15, (ii) the acceleration of accretion to redemption value of the
Company's Series C and E Redeemable Preferred Stock totaling $782, (iii) payment
of dividends to the holders of the Company's Series A Preferred Stock totaling
$164 and (iv) payments of conversion inducements to the holders of the Series A
Preferred Stock totaling $82.

4.  EXTRAORDINARY ITEMS:

    The extraordinary items for the year ended September 30, 1995 all relate to
losses on early extinguishment of debt and include the following components:


<TABLE>
<S>                                          <C>    
Unamortized debt issuance costs ............ $ 3,044
Unamortized OID ............................   4,138
Conversion and tender fees and expenses ....   2,635
                                             -------
                                               9,817
Deferred tax benefit .......................    (911)
                                             -------
                                             $ 8,906
                                             =======
</TABLE>

5.    RECEIVABLES:

    Receivables, which consist primarily of trade accounts receivable, of
$18,284 at September 30, 1996 and $25,570 at September 30, 1997, have been
reduced by allowances for doubtful accounts of $5,541 and $10,296, respectively.
Included in receivables and deferred revenue at September 30, 1996 and 1997 are
October invoices billed in advance of the periods in which the services are
provided totaling $7,309 and $8,570, respectively. The provisions for doubtful
accounts for the years ended September 30, 1995, 1996, and 1997 were $1,751,
$2,649 and $3,344, respectively.


                                     F-11
<PAGE>   42


6.  PROPERTY AND EQUIPMENT:

    Property and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                        -----------------------
                                                          1996           1997
                                                        --------       --------
<S>                                                     <C>            <C>     
Furniture and fixtures ...........................      $  2,668       $  6,152
Data processing ..................................         6,361         10,039
Vehicles .........................................         4,038          4,182
Leasehold improvements ...........................           927          1,201
                                                        --------       --------
                                                          13,994         21,574
Less accumulated depreciation and amortization ...        (4,042)        (6,686)
                                                        --------       --------
                                                        $  9,952       $ 14,888
                                                        ========       ========
</TABLE>

Included in furniture and fixtures at September 30, 1997 are $1,610 of assets
under capital leases.

7.  SUBSCRIBER ACCOUNTS AND INTANGIBLES:

    Subscriber accounts and intangibles (at cost) consist of the following:

<TABLE>
<CAPTION>
                                              SEPTEMBER 30,
                                       -------------------------
                                         1996            1997
                                       ---------       ---------
<S>                                    <C>             <C>      
Acquired subscriber accounts ....      $ 298,767       $ 402,307
Debt issuance costs .............         11,847          12,805
Goodwill and other ..............          2,497           4,052
                                       ---------       ---------
                                         313,111         419,164
Less accumulated amortization ...        (55,757)        (92,416)
                                       ---------       ---------
                                       $ 257,354       $ 326,748
                                       =========       =========
</TABLE>

    Reconciliation of acquired subscriber accounts:

<TABLE>
<CAPTION>

                                                             SEPTEMBER 30,
                                                       -------------------------
                                                          1996            1997
                                                       ---------       ---------
<S>                                                    <C>             <C>      
Balance, beginning of year ........................... $ 184,463       $ 298,767
Acquisition of subscriber accounts ...................   119,629         108,904
Charges against acquisition holdbacks ................    (5,325)         (5,364)
                                                       ---------       ---------
Balance, end of year ................................. $ 298,767       $ 402,307
                                                       =========       =========
Number of subscriber accounts acquired during the
year .................................................    91,325          92,059
                                                       =========       =========
</TABLE>

    In conjunction with certain purchases of subscriber accounts the Company
withholds a portion of the purchase price as a reserve to offset qualifying
attrition of the acquired subscriber accounts for a specified period as provided
for in the purchase agreements, and as a reserve for purchase price settlements
of assets acquired and liabilities assumed. During the years ended September 30,
1996 and 1997, purchase holdbacks as a percentage of total purchase price ranged
for 0% to 20% and extended for periods of up to 12 months.

    Reconciliation of purchase holdbacks:

<TABLE>
<CAPTION>

                                               SEPTEMBER 30,
                                         -----------------------
                                           1996           1997
                                         --------       --------
<S>                                      <C>            <C>     
Balance, beginning of year ............. $  4,949       $  9,942
Purchase holdbacks additions ...........   13,850         10,784
Charges against subscriber accounts ....   (5,325)        (5,364)
Cash payments to sellers ...............   (3,532)        (5,348)
                                         --------       --------
Balance, end of year ................... $  9,942       $ 10,014
                                         ========       ========
</TABLE>



                                     F-12
<PAGE>   43



8.  LONG-TERM DEBT

    Long-term debt is comprised of the following:

<TABLE>
<CAPTION>
                                                      SEPTEMBER 30,
                                               -------------------------
                                                  1996           1997
                                               ---------       ---------
<S>                                            <C>             <C>      
Notes payable under credit agreements:
  Senior Subordinated Discount Notes ........  $ 166,000       $ 166,000
  Unamortized original issue discount .......    (35,628)        (16,605)
  Convertible Senior Subordinated Notes .....     90,000         103,500
  Revolving credit facility .................      5,278          50,985
                                               ---------       ---------
                                               $ 225,650       $ 303,880
                                               =========       =========
</TABLE>

SENIOR SUBORDINATED DISCOUNT NOTES

    In May 1995, the Company completed a refinancing plan (the "Refinancing") to
increase its operating and financial flexibility and provide additional funds to
finance the acquisition of subscriber accounts. The principal components of the
Refinancing were:

        1. The offering of $166 million Senior Subordinated Discount Notes and
    warrants to purchase 531,200 shares of common stock at $6.60 per share. The
    net proceeds of $105.2 million were used to (i) repurchase all $50 million
    principal amount of the Series B Notes for an aggregate $52.5 million; (ii)
    repay $51.1 million of the Company's borrowings under its revolving credit
    facility; (iii) finance the repurchase of 25% of the outstanding shares of
    the Series F Preferred Stock from the holder thereof; and (iv) pay accrued
    interest on the Series B Notes to the date of repurchase, accrued dividends
    on the Series F Preferred Stock to the date of repurchase and certain fees
    relating to the extension of the maturity date of the Revolving Credit
    Facility.

        2. The execution of an amendment to the Revolving Credit Facility in
    order to permit the consummation of the Refinancing and to provide for the
    extension of the maturity date of the Revolving Credit Facility from
    November 1996 to November 1997.

        3. The repurchase by POI of 25% of the outstanding shares of Series F
    Preferred Stock from the holder thereof for consideration consisting of
    approximately $2.0 million in cash and the exchange of the remaining shares
    of Series F Preferred Stock for Series H Cumulative Convertible Preferred
    Stock.

    The Senior Subordinated Discount Notes are unsecured subordinated
obligations of Monitoring, limited to $166 million aggregate principal amount at
maturity, and will mature on June 30, 2005. These notes were sold at a
substantial discount from their principal amount, and will accrete to face value
through June 30, 1998. Although for federal income tax purposes a significant
amount of original issue discount, taxable as ordinary income, will be
recognized by a holder as such discount accrues from the issue date, no interest
will be payable prior to December 31, 1998. From and after June 30, 1998, cash
interest on the notes will accrue at the rate of 13 5/8% per annum, payable in
cash semiannually on June 30 and December 31, of each year, commencing December
31, 1998.

    The Senior Subordinated Discount Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after June
30, 2000 and prior to maturity, upon not less than 30 nor more than 60 days'
prior notice at certain specified redemption prices plus accrued and unpaid
interest.

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

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


                                     F-13
<PAGE>   44


    CONVERTIBLE SENIOR SUBORDINATED NOTES

    In September 1996, Monitoring issued $90.0 million principal amount of
Convertible Senior Subordinated Notes (the "Convertible Notes"). In October
1996, the underwriters exercised an overallotment option, and Monitoring issued
an additional $13.5 million of Convertible Notes. The Convertible Notes are
unsecured subordinated obligations of Monitoring and rank pari passu with the
Senior Subordinated Discount Notes. The Convertible Notes mature on September
15, 2003 and are convertible, at any time, into Common Stock at a price of
$17.95 per shares, subject to adjustment.

    Interest on the Convertible Notes accrues at the rate of 6.75% per annum,
payable in cash semiannually on March 15 and September 15 of each year,
commencing March 15, 1997. The Convertible Notes are redeemable, at Monitoring's
option, in whole or in part, at any time or from time to time, on or after
September 19, 1999 and prior to maturity, upon not less than 30 days prior
notice at certain specified redemption prices plus accrued and unpaid interest.

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

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

    REVOLVING CREDIT FACILITY

    At September 30, 1997 Monitoring had a $100 million revolving credit
facility (the "Revolving Credit Facility) which matures in January 2000.
Borrowings under the Revolving Credit Facility bear interest at the lesser of
the bank's prime rate plus 1.00% (9.50% at September 30, 1997) or LIBOR plus
2.50% (8.23% at September 30, 1997). Borrowings made under the Revolving Credit
Facility are collateralized by substantially all of the Company's assets,
including the stock of Monitoring and the Company's rights and interests in
subscriber contracts and agreements. At September 30, 1997, borrowings under the
Revolving Credit Facility amounted to $50,985, of which $33,500 bears interest 
at LIBOR plus 2.50% and $17,485 bear interest at Prime plus 1%. The outstanding
balance of the Revolving Credit Facility was paid on November 25, 1997 with 
proceeds from the Western Resources transaction. See Note 18.






                                     F-14
<PAGE>   45




9.  OTHER LIABILITIES:

    Other liabilities are comprised of the following:

<TABLE>
<CAPTION>
                                         SEPTEMBER 30,
                                      ------------------
                                        1996        1997
                                      ------      ------
<S>                                   <C>         <C>   
Deferred acquisition payments ..      $2,297      $1,126
Other ..........................         385          --
                                      ------      ------
                                      $2,682      $1,126
                                      ======      ======
Classified as follows:
  Other current liabilities ....      $1,623      $  595
  Other liabilities ............       1,059         531
                                      ------      ------
                                      $2,682      $1,126
                                      ======      ======
</TABLE>


    At September 30, 1997 deferred acquisition payments are due as follows:

<TABLE>
               Fiscal Year Ended September 30,
                   <S>                           <C>   
                    1998 ...............          $  595
                    1999 ...............             463
                    2000 ...............              28
                    2001 ...............              30
                    Thereafter .........              10
                                                  ------
                                                  $1,126
                                                  ======
</TABLE>

10. STOCK WARRANTS AND OPTIONS:

    Performance Warrants to purchase 500,472 shares of Common Stock at an
exercise price of $0.167 per share. The warrants are exercisable and expire in
September of 2002.

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

    The 1994 Stock Option Plan (the Plan), approved by the stockholders in June
1994 provides for the award of incentive stock options to directors, officers
and key employees. Nine hundred forty four thousand (944,000) shares are
reserved for issuance under the Plan, subject to such adjustment as may be
necessary to reflect changes in the number or kind of share of Common Stock or
other securities of the Parent Company. The Option Plan provides for the
granting of options that qualify as incentive stock options under the Internal
Revenue Code and options that do not so qualify.

    During the year ended September 30, 1995, the Company granted options to
purchase an aggregate of 288,000 shares of common stock including 132,000 shares
to officers of the Company. Each option has a term of 10 years and vests 20% on
each of the third through seventh anniversaries of the commencement of the
participant's employment with the Company. The purchase price of the shares
issuable pursuant to the options is equal to fair market value of Common Stock
at the date of option grant.

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

    During the year ended September 30, 1996, the Company granted options to
purchase an aggregate of 616,800 shares of Common Stock including 400,000 shares
granted to officers of the Company. Each option has a term of 10 years and vests

                                     F-15
<PAGE>   46

20% on each of the first through fifth anniversaries of the later of November
15, 1995 or the commencement of the participant's employment with the Company.
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.

    During the year ended September 30, 1997, the Company granted options to
purchase an aggregate of 425,444 shares of Common Stock to employee including
100,000 shares granted to officers of the Company. Each option has a term of 10
years and vests 20% on each of the first through fifth anniversaries of the
later of December 6, 1996 or the commencement of the participant's employment
with the Company. 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.

A summary of warrant and option activity is as follows:

<TABLE>
<CAPTION>
                                                        WARRANTS
                                                       AND OPTIONS            PRICE RANGE
                                                        ---------             -----------
<S>                                                     <C>                 <C>             
          Outstanding September 30, 1994 ....           1,572,429           $0.167 - $ 3.663
          Granted ...........................             819,200           $5.875 - $9.125
          Exercised .........................            (256,799)          $0.167 - $6.50
          Surrendered .......................             (14,400)              $ 6.50
                                                        ---------
          Outstanding September 30, 1995 ....           2,120,430           $0.167 - $9.125
          Granted ...........................             616,800           $8.00 - $16.75
          Exercised .........................             (74,252)          $0.167 - $6.50
          Surrendered .......................             (17,760)          $6.50 - $8.00
                                                        ---------
          Outstanding September 30, 1996 ....           2,645,218           $0.167 - $16.75
          Granted ...........................             425,444           $0.05 - $15.00
          Exercised .........................            (593,350)          $0.05 - $10.313
          Surrendered .......................             (25,892)          $6.50 - $16.75
                                                        ---------
          Outstanding September 30, 1997 ....           2,451,420           $0.05 - $16.75

          Exercisable:
            September 30, 1995 ..............           1,907,310           $0.167 - $6.50
            September 30, 1996 ..............           1,886,818           $0.167 - $6.50
            September 30, 1997 ..............           1,528,082           $0.05 - $16.75
</TABLE>

A summary of option activity is as follows:
<TABLE>
<CAPTION>

                                                           1995  Options                     1996 Options
                                                   -------------------------          ------------------------
                                                                    Weighted-                         Weighted-
                                                                     Average                           Average
                                                  Number of         Exercise         Number of         Exercise
                                                   Shares             Price           Shares            Price
                                                   -------           -------          -------          -------
<S>                                                <C>               <C>              <C>               <C>  
          Balance, October 1, 1995
             Options granted ............          612,000           $  9.80               --               --
             Options exercised ..........               --               --                --               --
             Options surrendered ........          (15,000)             8.46               --               --
                                                   -------           


          Balance, September 30, 1996 ...          597,000              9.80
             Options granted ............           22,000              9.26          328,000          $ 10.34
             Options exercised ..........          (11,639)             8.04               --               --
             Options surrendered ........          (15,361)            14.67               --               --
                                                   -------                            -------          -------

          Balance, September 30, 1997 ...          592,000           $  9.55          328,000          $ 10.34
                                                   =======           =======          =======          =======
</TABLE>


The weighted-average grant-date fair values of options granted during the years
ended September 30, 1996 and 1997 are:


<TABLE>
<CAPTION>
                                                           1996  Options                     1997 Options
                                                   -------------------------          ------------------------
                                                                    Weighted-                         Weighted-
                                                  Number of          Average         Number of         Average
          Options Granted                          Options          Grant-Data        Options         Grant-Data
    During the Year Ended September 30,            Granted          Fair Value        Granted         Fair Value
                                                   -------           -------          -------          -------
<S>                                                 <C>              <C>               <C>             <C>    
1996
     Options' exercise price equals
          stock's market price on grant date       492,000           $  8.53
     Options' exercise price exceeds
          stock's market price on grant date       120,000           $  5.28
                                                   -------
                                                   612,000
                                                   -------
1997
     Options' exercise price equals
          stock's market price on grant date        22,000           $  7.05           278,000         $  7.23

     Options' exercise price exceeds                                                    50,000         $  6.55
          stock's market price on grant date       -------                             -------
                                                    22,000                             328,000
                                                   =======                             =======
</TABLE>


The table summarizes information about stock options outstanding as of September
30, 1997:

<TABLE>
<CAPTION>

                                                                   Weighted-
                                                                    Average     Weighted-               Weighted-
                                                                   Remaining     Average                 Average
                                  Range of           Number       Contractual   Exercise    Number      Exercise
            Description         Exercise Price     Outstanding       Life        Price    Exercisable    Price
            -----------         -------------      -----------     ----------  ---------  -----------   --------
<C>                             <C>                  <C>              <C>       <C>           <C>        <C>     
1995 Options ...........        $8.00-$16.375        592,000          8.0 years $    9.55     120,839    $   9.23
1996 Options ...........        $9.50-$15.00         328,000          9.0 years $   10.34          --          --
</TABLE>


    During the fiscal year ended September 30, 1997 the Company adopted
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 allows companies to measure compensation
cost in connection with employee stock option plans using a fair value based
method, or to continue to use the intrinsic value based method. The Company has
decided to continue to use the intrinsic value based method; accordingly, no
compensation cost has been recorded. Had the fair value 

                                     F-16
<PAGE>   47

based method been adopted consistent with the provisions of SFAS 123, the
Company's pro forma net loss and pro forma net loss per common share for the
years ended September 30, 1996 and 1997 would have been as follows:


<TABLE>
<CAPTION>

                                                    Year Ended September 30,
                                                 -----------------------------
                                                    1996               1997
                                                 ----------         ----------
<S>                                              <C>                <C>        
Net loss ................................        $  (15,497)        $  (21,913)
                                                 ==========         ==========
Net loss - pro forma for effect
  of new standard .......................        $  (15,579)        $  (22,702)
                                                 ==========         ==========
Net loss per common share ...............        $    (1.40)        $    (1.59)
                                                 ==========         ==========
Net loss per common share - pro forma
  for effect of new standard ............        $    (1.41)        $    (1.65)
                                                 ==========         ==========
</TABLE>

For the purposes of the above pro forma information, the fair value of each 
option grant was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions.

<TABLE>
<CAPTION>

                                                     1995 and 1996
                                                        Stock                    Employee Stock
                                                     Option Plans                Purchase  Plan
                                                     ------------                --------------
<S>                                                        <C>                         <C> 
         Risk-free interest rate                           8.0%                        8.0%
         Expected life of options                          9 years                   6 months
         Expected stock price volatility                  62.0%                       62.0%
         Expected dividend yield
</TABLE>

11.  INCOME TAXES:

    For the years ended September 30, 1995, 1996 and 1997, the Company 
recognized federal and state deferred tax benefits of $5,714, $247, and $1,168
respectively. Such benefits were the result of a reduction in the valuation
allowance to correspond with deferred tax liabilities recorded in connection
with acquisitions of assets. At September 30, 1997, the Company had $36.1
million in NOL carryforwards for regular federal tax purposes and $35.1 million
for alternative minimum tax (AMT NOL) purposes which expire in the years
2006-2012. The Company also has certain general business and job credit
carryforwards. These carryforwards are available, subject to certain
restrictions, to reduce taxable income, alternative minimum taxable income and
income taxes payable in future years. As a result of the warrants to purchase
common stock issued in conjunction with the Company's refinancing plan, as well
as various prior issuances of preferred and common stock and stock warrants,
there are annual limitations on the amount of NOL and AMT NOL carryforwards, as
well as tax credits, that can be used to reduce taxable income, alternative
minimum taxable income and income tax payable.

    The components of deferred tax assets and liabilities are:

<TABLE>
<CAPTION>
                                                           At September 30,
                                                      -------------------------
                                                        1996             1997
                                                      --------         --------
<S>                                                   <C>              <C>     
Deferred Tax Asset (liability) - current:
  Accounts receivable, due to allowance               $  2,214         $     --
  Acquisition reserves & holdbacks                       5,701            6,778
Other                                                      139               61
Valuation allowance current                               (493)          (1,751)
                                                      --------         --------
Deferred tax asset (liability) - noncurrent           $  7,561         $  5,088

  Performance warrants                                $  1,662         $  1,685
  Net operating loss carryforwards                      12,814           13,087
  OID amortization                                       8,634           15,575
  Differences in basis of property and                
   equipment and intangibles                           (29,257)         (27,523)
Valuation allowance - noncurrent                        (1,414)          (7,912)
                                                      --------         --------
                                                      $ (7,561)        $ (5,088)
                                                      ========         ========
                                                       
                                                     
</TABLE>




                                     F-17

<PAGE>   48



    The valuation allowances at September 30, 1996 and September 30, 1997
reflect current estimates of limitations on utilization of NOL carryforwards
for federal and state income tax purposes. The valuation allowance at September
30, 1996 of $1,907 reflects a decrease of $1,666 from September 30, 1995 to
September 30, 1996 relating to amounts which were eliminated in connection with
the acquisition of Metrol Security Services Inc. (see Note 17). The increase in
valuation allowance of $7,695 from September 30, 1996 to September 30, 1997 is
primarily due to net operating losses generated in the year ended September 30,
1997, the benefit of which is not likely to be realized.

         The income tax benefit is comprised of the following:

<TABLE>
<CAPTION>

                                            YEAR ENDED SEPTEMBER 30,
                                      -----------------------------------
                                        1995          1996           1997
                                      ------        ------         ------
<S>                                      <C>        <C>            <C>   
Current
  Federal ....................        $   --        $ (463)        $  424
  State ......................            --           (82)           152
                                      ------        ------         ------
          Total current ......            --          (545)           576
                                      ------        ------         ------
Deferred
  Federal ....................         4,594           674          1,054
  State ......................         1,120           118            114
                                      ------        ------         ------
          Total deferred .....         5,714           792          1,168
                                      ------        ------         ------
Total income tax benefit .....        $5,714        $  247         $1,744
                                      ======        ======         ======
</TABLE>

The differences between the income tax benefit recognized and the expected
benefit at the statutory rate are as follows:

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED SEPTEMBER 30,
                                                                          ---------------------------------------
                                                                            1995            1996            1997
                                                                          -------         -------         -------
<S>                                                                       <C>             <C>             <C>    
Computed "expected" tax benefit ........................................  $ 7,620         $ 5,408         $ 8,044
State income tax benefit, net ..........................................    1,336             948           1,410
Other ..................................................................     (289)           (188)           (225)
Loss for which no tax benefits were provided ...........................   (2,953)         (5,921)         (7,485)
                                                                          -------         -------         -------
Total income tax benefit ...............................................  $ 5,714         $   247         $ 1,744
                                                                          =======         =======         =======
Income tax benefits included in the statement of operations are as
  follows:
  Continuing operations ................................................  $ 3,595         $   247         $ 1,744
  Extraordinary items-loss on early extinguishment of debt .............      911              --              --
  Cumulative effect of change in accounting method .....................    1,208              --              --
                                                                          -------         -------         -------
                                                                          $ 5,714         $   247         $ 1,744
                                                                          =======         =======         =======
</TABLE>


     The tax benefit of the extraordinary item and change in accounting method
resulted from recognition of the benefit of the related NOL carryforward to the
extent of available deferred tax credits. Such credits permitted full
recognition of the benefit related to the change in accounting method and
limited the benefit of the extraordinary item to $911.

12. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

  Acquisitions

<TABLE>
<CAPTION>
                                                            YEAR ENDED SEPTEMBER 30,
                                                    ----------------------------------------
                                                      1995            1996            1997
                                                    --------        --------        --------
<S>                                                      <C>             <C>             <C>
Subscriber accounts acquired ...............        $ 70,105        $119,629        $108,904
Goodwill ...................................              --             792           1,523
Cash acquired ..............................              --              31              10
Other assets acquired ......................             113           4,983             552
                                                    --------        --------        --------
          Total assets acquired ............        $ 70,218        $125,435        $110,959
                                                    ========        ========        ========

Cash paid to seller ........................        $ 49,361        $ 88,330        $ 79,666
Stock issued to seller .....................              --           8,960           9,654
Acquisition expenses .......................           1,451             943             955
Deferred revenue assumed ...................           3,213           3,676           2,194
Other assumed liabilities ..................          16,193          23,526          18,490
                                                    --------        --------        --------
  Purchase price and assumed liabilities ...        $ 70,218        $125,435        $110,959
                                                    ========        ========        ========
</TABLE>


                                     F-18
<PAGE>   49

    Cash paid to sellers, payments for acquisition expenses and payments on
liabilities assumed in conjunction with acquisitions are included in cash used
in investing activities in the period paid. Deferred revenue, which represents
advance payments by subscribers, is recognized as revenues in the period in
which the related service is provided. Such amounts are considered a non-cash
component of operations and are reflected as a reduction in cash provided by
operating activities.

    The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1995:

<TABLE>
<CAPTION>
                                                                                           CLASS B
                                                                                           COMMON
                                                                             REDEEMABLE      AND    ADDITIONAL
                                           SUBSCRIBER   PURCHASE    COMMON    PREFERRED   PREFERRED   PAID-IN
                                            ACCOUNTS    HOLDBACKS    STOCK      STOCK       STOCK     CAPITAL
                                            ---------   ---------    ------    -------     -------    -------
<S>                                         <C>         <C>           <C>       <C>           <C>      <C>     
Accretion to redemption value of
  preferred stock.........................                                        $(15)                    $15
Charge-off of purchase holdbacks..........    $(2,025)     $2,025
Accelerated accretion upon conversion of..
  preferred stock.........................                                        (782)                    782
Reclassification of IPO costs.............     (1,305)                                                   1,305
Conversion of Class B common and
preferred
  stock...................................                            $(56)     12,897        $85      (12,926)
                                              -------      ------     -----     ------        ---     ---------
                                              $(3,330)     $2,025     $(56)    $12,100        $85     $(10,824)
                                              =======      ======     =====    =======        ===     =========
</TABLE>

     In 1995 the Company received inventory from a supplier in settlement of a
claim. The estimated fair value of the inventory was determined through a
subsequent sale to an independent third party. In connection with such
settlement, the Company recorded revenue of approximately $1.6 million, which is
reflected in other revenues in the Company's statement of operations.

     The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1996:


<TABLE>
<CAPTION>
                                                                             ADDITIONAL  SERIES H
                                                         PURCHASE   COMMON     PAID-IN  PREFERRED
                                            INTANGIBLES  HOLDBACKS   STOCK     CAPITAL    STOCK
                                             --------    --------   --------  --------   --------
<S>                                          <C>         <C>        <C>       <C>        <C>     
Charge-off of purchase holdbacks........     $ (5,325)   $  5,325
Conversion of Series H Preferred........                             $    (7) $ (6,120)  $  6,127
Common shares issued to Metrol..........        6,843                     (4)   (6,839)
Common shares issued to Alltec..........        2,117                     (2)   (2,115)
Reclassification of stock offerings.....         (792)                    --       792         -- 
                                             --------    --------   --------  --------   --------
                                             $  2,843    $  5,325   $    (13) $(14,282)  $  6,127
                                             ========    ========   ========  ========   ========
</TABLE>

    The following reflects increases (decreases) in assets and accumulated
deficit, and decreases (increases) in liabilities and capital stock resulting
from noncash investing and financing activities which occurred during the year
ended September 30, 1997:


<TABLE>
<CAPTION>
                                                               ASSETS                                 
                                                                HELD   PROPERTY                       CAPITALIZED         ADDITIONAL
                                        RESTRICTED  OTHER       FOR       AND               PURCHASE    LEASE      COMMON  PAID-IN
                                          CASH     RECEIVABLE  SALE    EQUIPMENT INTANGIBLE HOLDBACKS  OBLIGATIONS  STOCK   CAPITAL
                                         -------    -------   -------   -------    -------   -------   -------     -------  -------
<S>                                      <C>        <C>       <C>       <C>        <C>       <C>      <C>          <C>      <C>     
Settlement of purchase holdbacks with                        
   Restricted cash...................... $(4,043)                                            $ 4,043  
Charge-off of purchase holdbacks........                                           $(5,364)  $ 5,364                              
Assets acquired under capital lease.....                                $ 1,610                       $(1,610)
Common shares issued for acquisitions...                                             9,654                         $    (8) $(9,646)
Sale of guard and patrol operations.....            $   588   $  (588)
                                         -------    -------   -------   -------    -------   -------  -------      -------  -------

                                         $(4,043)   $   588   $  (588)  $ 1,610    $ 4,290   $ 9,407  $(1,610)     $    (8) $(9,646)
                                         =======    =======   =======   =======    =======   =======  =======      -------  -------
</TABLE>


                                     F-19
<PAGE>   50

13. EMPLOYEE BENEFIT PLANS:

  401(k) Plan

    The Company maintains a tax-qualified, defined contribution plan that meets
the requirements of Section 401(k) of the Internal Revenue Code (the "401(k)
Plan"). The Company at its election also may make contributions to the 401(k)
Plan, which contributions will be allocated among participants based upon the
respective contributions made by the participants through salary reductions
during the applicable plan year. The Company's matching contribution may be made
in Common Stock, in cash or in a combination of both stock and cash. There were
no contributions made to the plan by the Company during the three-year period
ended September 30, 1997.

  Employee Stock Purchase Plan

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

    The purchase price of shares of Common Stock purchased under the Employee
Stock Purchase Plan during any purchase period will be the lower of (i) 85% of
the fair market value of the Common Stock on the first day of that purchase
period or (ii) 85% of the fair market value of the Common Stock on the purchase
date.

    Termination of a participant's employment for any reason (including death,
disability or retirement) cancels participation in the Employee Stock Purchase
Plan immediately. The Employee Stock Purchase Plan will in all events terminate
upon the earliest to occur of (i) the last business day in September 2005, (ii)
the date on which all shares available for issuance under the plan have been
sold or (iii) the date on which all purchase rights are exercised in connection
with an acquisition of the Company or all or substantially all of its assets.

14. COMMITMENTS AND CONTINGENCIES:

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

<TABLE>
                   <S>                                              <C>   
                   Year ending September 30,
                         1998............................           $1,903
                         1999............................            1,771
                         2000............................            1,759
                         2001............................            1,702
                         2002............................            1,713
                         Thereafter......................            6,640
                                                                  --------
                                                                   $15,488
                                                                  ========
</TABLE>

    Total rent expense for the years ended September 30, 1995, 1996 and 1997 was
$1,261, $1,101 and $1,651, respectively.

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

    The Company has entered into employment agreements with five of its
officers. The term of employment agreements with three officers is continually
extended as to cause such agreements to have a remaining term of three years;
the other two agreements expire in September and November 1998.

15.  FAIR 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 Company's Revolving Credit Facility, which bears a
floating market rate of interest is carried at an amount which approximates fair
market value.

    At September 30, 1997, the Senior Subordinated Discount Notes have an
estimated fair value of approximately $176,790 based on their quoted market
price as compared to their carrying value of $149,395, and the Convertible
Senior Subordinated 

                                     F-20
<PAGE>   51

Notes have an estimated fair value of approximately $122,389 based on their
quoted market price as compared to their carrying value of $103,500.

    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.

16.   SUPPLEMENTAL SUBSIDIARY COMPANY SUMMARIZED FINANCIAL INFORMATION:

     The assets, results of operations and stockholder's equity of Monitoring
comprise substantially all of the assets, results of operations and
stockholders' equity of the Company on a consolidated basis. POI's principal
assets and sole operations are in and through its investment in Monitoring. All
significant intercompany balances and transactions have been eliminated in
consolidation. Separate audited financial statements for Monitoring have not
been provided because the Company does not believe such separate financial
statements are material to investors.

<TABLE>
<CAPTION>
                                                                 AT SEPTEMBER 30,
                                                            ------------------------
Summarized Balance Sheet                                      1996            1997
                                                            --------        --------
<S>                                                         <C>             <C>     
     Assets:
        Current assets .............................        $ 28,906        $ 26,756
        Subscriber accounts and intangibles, net ...         257.354         326,748
        Other non-current assets ...................          11,375          15,686
     Liabilities and Stockholders' Equity
        Deferred revenue ...........................        $ 13,827        $ 16,210
        Other current liabilities ..................          20,712          25,381
        Long-term debt .............................         225,650         303,880
        Other long term liabilities ................           8,620           6,349
        Shareholders' equity .......................          28,826          17,370
</TABLE>


<TABLE>
<CAPTION>
                                                                       YEAR ENDED SEPTEMBER 30,
                                                             ------------------------------------------
                                                               1995             1996             1997
                                                             --------         --------         --------
<S>                                                          <C>              <C>              <C>     
Summarized Statements of Operations
   Revenues .........................................        $ 55,882         $ 73,457         $ 98,493
   Gross profit .....................................        $ 38,368         $ 51,879         $ 70,549
   Loss before extraordinary items and cumulative
     effect of change in accounting method ..........        $ (5,839)        $(15,497)        $(21,913)
   Net loss .........................................        $(16,700)        $(15,497)        $(21,913)
</TABLE>


17.    METROL SECURITY SERVICES, INC. ACQUISITION:

    On June 28, 1996 the Company acquired all of the outstanding stock of
Metrol Security Services, Inc. ("Metrol"). Metrol sells, installs, services and
monitors security alarm systems and provides guard and patrol services to
residential and commercial subscribers in Arizona and New Mexico.

    The following unaudited pro forma condensed consolidated results of
operations present information as if the acquisition had occurred as of the
beginning of each period presented. The pro forma information is presented
after giving effect to certain adjustments for the amortization of subscriber
accounts, interest expense and the disposition of Metrol's guard operations.
Certain of Metrol's expenses were estimated based on annual amounts incurred.
Management believes the estimates provide a reasonable approximation of actual
results. The pro forma information is provided for informational purposes only.
It is based on historical information and is not necessarily indicative of
future results of operations nor of the results which would have occurred had
this transaction


<TABLE>
<CAPTION>

                                                                          PRO FORMA FOR THE YEAR
                                                                            ENDED SEPTEMBER 30,
                                                                        -------------------------
                                                                          1995             1996
                                                                        --------         --------
                                                                               (UNAUDITED)
<S>                                                                     <C>              <C>     
Revenues .......................................................        $ 67,093         $ 82,313
Net loss before extraordinary item and cumulative effect of
   change in accounting method .................................        $ (8,328)        $(14,275)
Net loss .......................................................        $(16,355)        $(14,275)
Net loss before extraordinary item and cumulative effect of
   change in accounting method, per share ......................        $  (1.11)        $  (1.26)
Net loss per common share ......................................        $  (1.99)        $  (1.26)
</TABLE>


                                     F-21
<PAGE>   52


18.   SUBSEQUENT EVENTS - MERGERS AND ACQUISITIONS:

     On July 30, 1997, POI and Western Resources, Inc., a Kansas corporation
(Western Resources), entered into a Contribution Agreement dated as of July
30, 1997 (as amended, the Contribution Agreement).

     Pursuant to the Contribution Agreement, on November 24, 1997, POI issued to
Western Resources an aggregate of 68,673,402 shares (the Shares) of Common
Stock, which shares constituted 82.4% of the shares of Common Stock (the only
voting securities of POI) outstanding immediately after such acquisition. In
consideration of the issuance of the Shares to Western Resources (the Share
Issuance), Western Resources transferred to POI all of the outstanding capital
stock of WestSec, Inc., a Kansas corporation (WestSec), and Westar Security,
Inc., a Kansas corporation (Westar Security and together with WestSec, the
Western Resources Security Business), and an aggregate of $367.4 million in
cash and marketable securities.

     WestSec and Westar provide security alarm monitoring services and sell,
install and service security alarm systems for homes and businesses located
throughout the continental United States. POI intends to continue to use the
physical properties of WestSec and Westar Security in such business.

     The cash portion of the consideration for the Share Issuance was funded
with Western Resources' working capital. The amount of such consideration was
determined in arms-length negotiations between Protection One and Western
Resources, and the acquisition was accounted for under the purchase method of
accounting.

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

     Prior to the Share Issuance, the certificate of incorporation of POI was
amended to increase the maximum authorized number of shares of POI Common Stock
to 150,000,000.

     As provided in the Contribution Agreement, immediately following the Share
Issuance, POI, through a subsidiary, acquired from Western Resources (i) all of
the outstanding capital stock of Centennial Security Holdings, Inc., a Delaware
corporation ("Centennial"), for a cash purchase price of $94.4 million, and
(ii), 2,500,000 shares (the Guardian Common Shares) of the Class A Voting
Common Stock, par value $.001 per share, and 1,875,000 shares (the Guardian
Preferred Shares) of the Series A 9 3/4% Convertible Cumulative Preferred Stock
of Guardian International, Inc., a Nevada corporation ("Guardian"), for a cash
purchase price of $8.5 million. The Guardian Common Shares constitute
approximately 27.8% of the outstanding shares of Guardian common stock; the
Guardian Preferred Shares are convertible into an aggregate of 1,500,000
additional shares of Guardian common stock.

    POI used a portion of the cash contributed to POI by Western Resources to
pay for the shares of Centennial and Guardian purchased by POI. The amount of
such consideration equaled the sum of (i) the amount paid by Western Resources
for such securities, (ii) the fees and expense incurred by Western Resources to
attorneys and other third-party advisors in connection with Western Resources
acquisition of such securities, and (iii) a carrying charge at a rate of 10%
per annum (prorated on the basis of a 365-day year) for the period Western
Resources held such securities.

     Centennial, based in Madison, New Jersey provides security alarm monitoring
services to residential and commercial subscribers located principally in Ohio,
Michigan, New Jersey, New York and Pennsylvania. POI intends to continue to use
the physical properties of Centennial in such business. Guardian provides
security alarm monitoring services to approximately 12,000 subscribers in
Florida; Guardian also monitors approximately 16,000 additional subscribers on a
"wholesale" basis for certain third-party security alarm companies, sells alarm
systems and provides field repair services principally to commercial accounts
and, to a more limited extent, provides installation services to third-party
security alarm companies.


                                     F-22
<PAGE>   53

     The Contribution Agreement and the Stock Option Agreement entered into
between POI and Western Resources in connection therewith are filed as exhibits
to this report and are incorporated herein by this reference. For additional
information with respect to the businesses of WestSec and Westar Security,
Centennial and Guardian, reference is made to the portions of POI's proxy
statement dated November 7, 1997, also filed as an exhibit to this report and
incorporated therein by reference.

19.   SELECTED QUARTERLY INFORMATION:


     The table below summarizes the quarterly information for the Company for
the fiscal years ended September 30, 1996 and 1997. There were no extraordinary
items in the periods presented.

<TABLE>
<CAPTION>
                                                                          Quarter Ended
                                   ---------------------------------------------------------------------------------------------  
<S>                                <C>          <C>          <C>          <C>         <C>           <C>       <C>       <C>     
                                   12/31/95     3/31/96      6/30/96      9/30/96     12/31/96      3/31/97   6/30/97    9/30/97
                                   --------    --------     --------     --------     --------     --------  --------   --------  
Total revenues ...............     $ 15,511    $ 17,666     $ 18,617     $ 21,663     $ 22,661     $ 24,414  $ 24,879   $ 26,539
Gross profit .................       10,670      12,280       13,271       15,658       15,967       17,388    17,830     19,364
Net loss .....................       (3,739)     (3,500)      (3,861)      (4,397)      (3,247)      (5,617)   (6,245)    (6,804)


Weighted Average Shares
  Outstanding ................   9,100,892   10,828,400   12,330,317   12,740,095   13,448,981   13,707,01 12,744,869 14,708,028

    Per share ................  $    (0.41)  $    (0.32)  $    (0.31)  $    (0.35)  $    (0.24)  $    (0.41)  $ (0.45)  $ (0.46)
</TABLE>



                                      F-23
<PAGE>   54

                     PROTECTION ONE, INC. AND SUBSIDIARIES

               SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS

                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                BALANCE AT                      CHARGED TO 
                                                BEGINNING    CHARGED TO COSTS     OTHER                          BALANCE AT
                DESCRIPTION                     OF PERIOD      AND EXPENSES     ACCOUNTS(a)   DEDUCTIONS(b)    END OF PERIOD
                                                ---------    ----------------   -----------  --------------    -------------
<S>                                               <C>             <C>           <C>               <C>             <C>    
YEAR ENDED SEPTEMBER 30, 1995
Allowances deducted from assets for
  doubtful accounts ......................        $1,182          $1,751              --          $(430)          $ 2,503
                                                  ======          ======          ======          ======          =======
YEAR ENDED SEPTEMBER 30, 1996
Allowances deducted from assets for
  doubtful accounts ......................        $2,503          $2,649          $1,218          $(829)          $ 5,541
                                                  ======          ======          ======          ======          =======
YEAR ENDED SEPTEMBER 30, 1997
Allowances deducted from assets for
  doubtful accounts ......................        $5,541          $3,344          $  625          $ 786          $10,296
                                                  ======          ======          ======          ======          =======
</TABLE>

(a)   Allowances recorded on receivables purchased in conjunction with
      acquisition of customer accounts.

(b)   Results from write-offs of accounts receivable.



                                      S-1
<PAGE>   55

                                   SIGNATURES

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

                                               PROTECTION ONE, INC.

                                               By: /s/ John W. Hesse
                                                  -----------------------------
                                                   John W. Hesse
                                                   Executive Vice President and
                                                      Chief Financial Officer
Date: December 29, 1997


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

<TABLE>
<CAPTION>
              SIGNATURE                                   TITLE                            DATE
              ---------                                   -----                            ----
<S>                                     <C>                                        <C>
/s/ James M. Mackenzie, Jr.             President, Chief Executive Officer and     December 29, 1997
--------------------------------        Director
James M. Mackenzie, Jr.                 

/s/ John W. Hesse                       Executive Vice President,                  December 29, 1997
--------------------------------        Chief Financial Officer                    
John W. Hesse                           (principal financial officer)
                                        and Secretary
                                        
/s/ Robert M. Chefitz                   Director                                   December 29, 1997
--------------------------------
Robert M. Chefitz

                                        Director                                   December __, 1997
--------------------------------
James Q. Wilson

/s/  Ben Enis                           Director                                   December 29, 1997
--------------------------------
Ben Enis

/s/  Steven L. Kitchen                  Director                                   December 29, 1997
--------------------------------
Steven L. Kitchen

                                        Director                                   December __, 1997
--------------------------------
Carl M. Koupal, Jr.

                                        Director                                   December __, 1997
--------------------------------
Peter C. Brown

/s/ Howard A. Christensen               Director                                   December 29, 1997
--------------------------------                                                   
Howard A. Christensen

                                        Director                                   December __, 1997
--------------------------------
Joseph J. Gardner

/s/ William J. Gremp                    Director                                   December 29, 1997
--------------------------------
William J. Gremp

                                        Director                                   December __, 1997
--------------------------------
John C. Nettles

/s/ Jane Dresner Sadaka                 Director                                   December 29, 1997
--------------------------------
Jane Dresner Sadaka
</TABLE>



<PAGE>   56

                                   SIGNATURES

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


                                          PROTECTION ONE ALARM MONITORING, INC.


                                          By: /s/ John W. Hesse
                                             ----------------------------------
                                             John W. Hesse
                                             Executive Vice President and
                                                Chief Financial Officer
Date: December 29, 1997


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

<TABLE>
<CAPTION>
              SIGNATURE                                   TITLE                            DATE
              ---------                                   -----                            ----
<S>                                     <C>                                        <C>
/s/ James M. Mackenzie, Jr.             President, Chief Executive Officer and     December 29, 1997
-------------------------------         Director
James M. Mackenzie, Jr.                 

/s/   John W. Hesse                     Executive Vice President,                  December 29, 1997
-------------------------------         Chief Financial Officer
John W. Hesse                           (principal financial officer)
                                        and Secretary
                                        
/s/ Robert M. Chefitz                   Director                                   December 29, 1997
-------------------------------
Robert M. Chefitz

                                        Director                                   December __, 1997
-------------------------------
James Q. Wilson

/s/  Ben  Enis                          Director                                   December 29, 1997
-------------------------------
Ben Enis
</TABLE>



<PAGE>   57

                                    EXHIBITS


<TABLE>
<CAPTION>
Exhibit
Number                                             Exhibit Description
------                                             -------------------
<S>              <C>
2.1              Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"), between Western
                 Resources and POI (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by
                 POI(1) and Monitoring(2) dated July 30, 1997 (the "July 1997 Form 8-K")).

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

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

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

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

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

3.1              Fifth Amended and Restated Certificate of Incorporation of POI, as amended.

3.2              By-laws of POI (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed POI
                 and Monitoring for the quarter ended March 31, 1996).

3.3              Certificate of Incorporation of Monitoring, as amended (incorporated by reference to Exhibit 3.2 to the
                 Registration Statement of Form S-3 (Registration Number 333-09401) originally filed by Monitoring and,
                 inter alia, POI on August 1, 1996 (the "August 1996 Form S-3")).

3.4              Bylaws of Monitoring (incorporated by reference to Exhibit 3.2 to the Annual 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)).
</TABLE>


---------------

(1)   The Commission File Number of POI is 0-24780.

(2)   The Commission File Number of Protection One Alarm Monitoring is 
      33-73002-01.

<PAGE>   58
<TABLE>
<CAPTION>
Exhibit
Number                                             Exhibit Description
------                                             -------------------
<S>              <C>
4.2              First Supplemental Indenture dated as of July 26, 1996, among Monitoring, as Issuer, POI, inter alia,
                 as Guarantor and State Street Bank and Trust Company ("SSBTC") as successor to FNBB as Trustee
                 (incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K filed by POI and Monitoring
                 for the year ended September 30, 1996 (the "Fiscal 1996 Form 10-K")).

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

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

4.5              Supplemental Indenture No. 1 dated as of September 20, 1996, among Monitoring as Issuer, POI, inter
                 alia, as Guarantor and SSBTC as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report
                 on Form 8-K filed by POI and Monitoring and dated September 20, 1996 (the September 1996 Form 10-K")).

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

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

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

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

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

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

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

4.13             Amended and Restated Stock Pledge Agreement dated as of June 7, 1996, between POI and Heller Financial
                 as Agent (incorporated by reference 4.11 to the Fiscal 1996 Form 10-K).
</TABLE>
<PAGE>   59
<TABLE>
<CAPTION>
Exhibit
Number                                             Exhibit Description
------                                             -------------------
<S>              <C>
4.14             Amended and Restated Security Agreement dated as of June 7, 1996, between Monitoring and Heller
                 Financial as Agent (incorporated by reference to Exhibit 4.12 to the Fiscal 1996 Form 10-K).

4.15             Amended and Restated Continuing Security Interest and Conditional Assignment of Patents, Trademarks,
                 Copyrights and Licenses dated as of June 7, 1996, between Monitoring and Heller Financial as Agent
                 (incorporated by reference to Exhibit 4.13 to the Fiscal 1996 Form 10-K).

10.1             Stock Purchase Warrant dated as of September 16, 1991, issued by POI to Merita Bank. Ltd. (formerly
                 Kansallis-Osake-Pankki) (incorporated by reference to Exhibit 10.25 to the Quarterly Report on Form 10-
                 Q filed by POI and, inter alia, Monitoring for the quarter ended March 31, 1994).

10.2             Amended and Restated Stockholders' Agreement dated as of August 15, 1994, among POI and the
                 stockholders of POI named therein (incorporated by reference to Exhibit 10.42 to the Registration
                 Statement of Form S-1 (Registration No. 33-81292) originally filed by POI on July 8, 1994).

10.3             Warrant Agreement dated as of November 3, 1993, between Monitoring and United States Trust Company of
                 New York, as Warrant Agent (incorporated by reference to Exhibit 4.3 to the Registration Statement on
                 Form S-4 (Registration Statement 33-73002) originally filed by POI, Monitoring and certain former
                 subsidiaries of Monitoring on December 15, 1993 (the "1993 Form S-4")).

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

10.5             Warrant Agreement dated as of May 17, 1995, between POI and The First National bank of Boston, as
                 Warrant Agent (incorporated by reference to Exhibit 10.40 to the 1995 Form S-4).

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

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

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

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

10.10            Employment Agreement dated as of November 24, 1997, between Protection One and Thomas K. Rankin
                 (incorporated by reference to Exhibit 10.7 to the November 1997 Form 8-K).*
</TABLE>
<PAGE>   60
<TABLE>
<CAPTION>
Exhibit
Number                                             Exhibit Description
------                                             -------------------
<S>              <C>
10.11            Employment Agreement dated as of November 3, 1993, between Monitoring and George A. Weinstock
                 (incorporated by reference to Exhibit 10.13 to the 1993 Form S-4).*

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

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

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

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

10.16            Notes Registration Rights Agreement dated as of May 17, 1995, among POI, Monitoring, Morgan Stanley &
                 Co., Incorporated and Montgomery Securities (incorporated by reference to Exhibit 4.2 to the 1995 Form
                 S-4),

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

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

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

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


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

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

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

21.1             Subsidiaries of POI and Monitoring.

27               Financial Data Schedule

27.1             Financial Data Schedule                
</TABLE>