UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2002~~2003

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

For the transition period from to

1-12181-01		1-12181
(Commission File Number)		(Commission File Number)
PROTECTION ONE, INC.		PROTECTION ONE ALARM MONITORING, INC.
(Exact Name of Registrant		(Exact Name of Registrant
(Exact Name of Registrant As Specified In its Charter)		(Exact Name of Registrant As Specified In its Charter)
As Specified In its Charter)		As Specified In its Charter)
Delaware		Delaware
(State or Other Jurisdiction		(State of Other Jurisdiction
(State or Other Jurisdiction Of Incorporation or Organization)		(State of Other Jurisdiction Of Incorporation or Organization)
Of Incorporation or Organization)		Of Incorporation or Organization)
93-1063818		93-1064579
(I.R.S. Employer Identification No.)		(I.R.S. Employer Identification No.)
818 S. Kansas Avenue		818 S. Kansas Avenue
818 S. Kansas Avenue Topeka, Kansas 66612		818 S. Kansas Avenue Topeka, Kansas 66612
Topeka, Kansas 66612		Topeka, Kansas 66612
(Address of Principal Executive Offices, Including Zip Code)		(Address of Principal Executive Offices, Including Zip Code)
(Address of Principal Executive Offices,		(Address of Principal Executive Offices,
Including Zip Code)		Including Zip Code)
(785) 575-1707		(785) 575-1707
(Registrant’s Telephone Number,		(Registrant’s Telephone Number,
(Registrant’s Telephone Number, Including Area Code)		(Registrant’s Telephone Number, Including Area Code)
Including Area Code)		Including Area Code)

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

AsIndicate ~~of August 8, 2002, Protection One, Inc. had~~by ~~outstanding~~check ~~97,943,440~~mark ~~shares~~whether ofeach ~~Common Stock, par value $0.01 per share. As~~ of ~~such~~ ~~date,~~the ~~Protection~~registrants ~~One~~is ~~Alarm~~an ~~Monitoring,~~accelerated ~~Inc.~~filer ~~had~~(as ~~outstanding 110 shares of~~defined ~~Common~~in ~~Stock,~~Rule ~~par~~12b-2 ~~value $0.10 per share, all~~ of ~~which shares were owned by Protection One, Inc. Protection One Alarm Monitoring, Inc. meets~~ the ~~conditions set~~Exchange ~~forth in General Instructions H(1~~Act)~~(a) and (b) for Form 10-Q and is~~. Yes o ~~therefore filing this form with the reduced disclosure format set forth therein.~~No ý

As of August 7, 2003, Protection One, Inc. had outstanding 98,106,279 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 H(1)(a) and (b) for Form 10-Q and is therefore filing this form with the reduced disclosure format set forth therein. Protection One’s sole asset is Protection One Alarm Monitoring and Protection One Alarm Monitoring’s wholly owned subsidiaries, as such there are no separate financial statements for Protection One Alarm Monitoring, Inc.

FORWARD-LOOKING STATEMENTS

Certain matters discussed in this Form 10-Q are 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~~ statements generally can be identified as such because the context of the ~~statement~~ statement includes words such as we “believe,” “expect,” “anticipate” or other words of similar import. Similarly, statements herein that describe our objectives, plans or goals also are forward–-looking statements. Such statements include those made on matters such as our earnings and financial condition, litigation, accounting matters, our business, our efforts to consolidate and reduce costs, our customer account acquisition strategy and attrition, our liquidity and sources of funding and our capital expenditures. All such forward–-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward–-looking statements. Please refer to “Risk Factors” in our Form 10-K for the year ended December 31, ~~2001~~2002 with respect to such risks and uncertainties as well as certain important factors, among others, that could cause actual results to differ materially from our expectations.

Unless the context otherwise indicates, all references in this Report on Form 10-Q ~~(this “Report”)~~ to the “Company,” “Protection One,” “we,” “us” or “our” or similar words are to Protection One, Inc., its direct wholly owned ~~subsidiaries~~subsidiary, Protection One Alarm Monitoring, Inc., (which we refer to in this document as “Monitoring,”~~) including~~ and Monitoring’s wholly owned subsidiaries ~~and AV ONE, Inc~~. Protection One’s sole ~~assets~~asset ~~are~~is, ~~Monitoring~~ and AVProtection ~~ONE~~One operates solely through, ~~Inc~~Monitoring and Monitoring’s wholly owned subsidiaries. Both Protection One and Monitoring are Delaware corporations organized in September 1991.

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PROTECTION ONE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	June 30, 2002			December 31, 2001
	June 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	117,~~320~~444		$	31,~~671~~545
Restricted cash	21,~~597~~804			—2,616
Receivables, net	2821,~~172~~595			3526,~~972~~084
Inventories	7,726			8,043
Inventories, net	7,570			7,213
Prepaid expenses	12,~~619~~677			24,~~487~~672
Related party tax receivable	1220,~~671~~745			120,~~655~~745
Deferred tax assets	12,911			8,783
Deferred tax assets, current	7,707			8,256
Other	52,~~693~~741			4,~~744~~094
Total current assets	72,709			65,355
Assets of discontinued operations	—			1,117
Property and equipment, net	52,242			54,341
Total current assets	82,283			76,342
Customer accounts, net	386,593			746,574
Property and equipment, net	33,045			37,754
Goodwill	262,811			763,449
Customer accounts, net	279,146			312,785
Deferred tax assets, net of current portion	246,639			79,612
Goodwill	41,847			41,847
Other	20,584			18,082
Related party tax receivable, net of current portion	19,266			—
Assets of discontinued operations	19,410			22,938
Deferred tax assets, net of current portion	276,897			286,645
Total assets	$	1,060,988		$	1,750,351
Deferred customer acquisition costs	85,484			75,403
Other	7,727			6,796
Total assets	$	825,695		$	837,572
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	~~197~~1,~~054~~592		$	~~688~~10,159
Accounts payable	85,~~842~~676			5,~~617~~795
Accrued liabilities	3433,~~903~~071			4035,~~543~~921
Due to related parties	41,~~748~~994			~~1,875~~995
Deferred revenue	3833,~~776~~747			4135,~~370~~115
Total current liabilities	284,323			90,093
Liabilities of discontinued operations	—			428
Long-term debt, net of current portion	368,667			584,115
Total current liabilities	76,080			88,413
Other liabilities	17,583			11,590
Long-term debt, net of current portion	547,593			547,798
Liabilities of discontinued operations	1,333			1,364
Deferred customer acquisition revenue	37,753			31,662
Total liabilities	671,906			687,162
Other liabilities	1,167			1,552
Commitments and contingencies (Note 8)
Total liabilities	662,593			669,425
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.10 par value, 5,000,000 authorized	—			—
Preferred stock, $0.10 par value, 5,000,000 shares authorized	—			—
Common stock, $0.01 par value, 150,000,000 shares authorized, 127,779,286 shares and 127,245,891 issued at June 30, 2002 and December 31, 2001 respectively	1,278			1,272
Common stock, $0.01 par value, 150,000,000 shares authorized, 127,949,184 shares and 127,796,745 shares issued at June 30, 2003 and December 31, 2002, respectively	1,279			1,278
Additional paid-in capital	1,~~381~~379,~~923~~337			1,~~381~~382,~~450~~024
Accumulated other comprehensive loss	—			(2,361		)
Deficit	(1,182,902		)	(1,165,596		)
Deficit	(946,483		)	(284,741		)
Investment in parent	—			(14,950		)
Investment in parent stock – held in treasury	(13,027		)	—
Treasury Stock, at cost, 29,842,905 and 29,840,405 shares at June 30, 2003 and December 31, 2002, respectively	(34,612		)	(34,609		)
Treasury Stock, at cost, 29,840,405 and 28,840,405 shares at June 30,2002 and December 31, 2001 respectively	(34,609		)	(32,431		)
Total stockholders’ equity	163,102			168,147
Total stockholders’ equity	389,082			1,063,189
Total liabilities and stockholders’ equity	$	825,695		$	837,572
Total liabilities and stockholders’ equity	$	1,060,988		$	1,750,351

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

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except for per share amounts)

(Unaudited)

	Six Months Ended June 30,
	2002			2001
	2003			2002
				(As Restated See Note 10)
Revenues:
Monitoring and related services	$	~~138~~129,~~204~~125		$	~~168~~138,~~263~~204
Other	89,~~784~~903			79,~~551~~011
Total revenues	~~146~~139,~~988~~028			~~175~~147,~~814~~215
Cost of revenues (exclusive of depreciation and amortization shown below):
Monitoring and related services	4037,~~468~~189			5440,~~115~~468
Other	814,~~387~~146			618,~~692~~697
Total cost of revenues	4851,~~855~~335			6059,~~807~~165
Gross profit (exclusive of depreciation and amortization shown below)	9887,~~133~~693			~~115~~88,~~007~~050
Operating expenses:
Selling	1016,~~803~~079			912,~~333~~747
General and administrative	4240,~~673~~320			5343,~~497~~223
Amortization and depreciation	4440,~~849~~314			9941,~~834~~456
Loss on impairment	~~332,194~~—			—338,104
Severance and other	550			4,695
Total operating expenses	96,713			435,530
Total operating expenses	431,069			167,359
Operating loss	(9,020		)	(347,480		)
Operating loss	(332,936		)	(52,352		)
Other (income) expense:
Interest expense	1612,~~822~~675			2216,~~418~~822
Related party interest	46,~~815~~652			54,~~480~~815
Other	117			478
Gain on retirement of debt	—			(16,735		)
Loss from continuing operations before income taxes & extraordinary item	(354,690		)	(80,728		)
Other	(2,092		)	117
Income tax benefit	126,622			17,202
Loss from continuing operations before income taxes	(26,255		)	(352,499		)
Loss from continuing operations before extraordinary item & accounting change	(228,068		)	(63,526		)
Income tax benefit	8,949			125,934
Loss from discontinued operations, net of taxes	(3,012		)	(236		)
Loss from continuing operations before accounting change	(17,306		)	(226,565		)
Extraordinary gain, net of tax effect of $(5,857) and $(13,015)	10,877			24,171
Loss from discontinued operations, net of taxes	—			(3,012		)
Cumulative effect of accounting change, net of taxes
Continuing operations	~~(439,257~~—		)	—(541,330		)
Discontinued operations	~~(2,283~~—		)	—(2,283		)
Net loss	(~~661~~17,~~743~~306		)	(39773,~~591~~190		)
Other comprehensive income (loss):
Other comprehensive income:
Foreign currency translation gain (loss)	863			(675		)
Foreign currency translation gain	—			863
Reclassification adjustment for foreign currency translation loss included in discontinued operations	~~1,499~~—			—1,499
Total other comprehensive income (loss)	2,362			(675		)
Total other comprehensive income	—			2,362
Comprehensive loss	$	(~~659~~17,~~381~~306	)	$	(40770,~~266~~828	)
Basic and diluted per share information:
Loss from continuing operations per common share	$	(20.3218	)	$	(02.5731	)
Loss from discontinued operations per common share	$	~~(0.03~~—	)	—$	(0.03	)
Extraordinary gain per common share	$	0.11		$	0.21
Cumulative effect of accounting change on continuing operations per common share	$	—		$	(5.51	)
Cumulative effect of accounting change on continuing operations per common share	$	(4.48	)	—
Cumulative effect of accounting change on discontinued operations per common share	$	—		$	(0.02	)
Cumulative effect of accounting change on discontinued operations per common share	$	(0.02	)	—
Net loss per common share	$	(0.18	)	$	(7.87	)
Net loss per common share	$	(6.74	)	$	(0.36	)
Weighted average common shares outstanding (in thousands)	98,094			98,194
Weighted average common shares outstanding (in thousands)	98,194			111,065

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

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~OPERATIONSAND COMPREHENSIVE INCOME (LOSS)

AND COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands, except for per share amounts)

(Unaudited)

	Three Months Ended June 30,_
	Three Months Ended June 30,
	2002			2001
	2003			2002
				(As Restated See Note 10)
Revenues:
Monitoring and related services	$	6864,~~198~~019		$	8268,~~365~~198
Other	4,~~745~~923			35,~~685~~091
Total revenues	7268,~~943~~942			8673,~~050~~289
Cost of revenues (exclusive of depreciation and amortization shown below):
Cost of revenues (exclusive of amortization and depreciation shown below):
Monitoring and related services	1918,~~892~~231			2619,~~973~~892
Other	37,~~917~~092			26,~~847~~954
Total cost of revenues	2325,~~809~~323			2926,~~820~~846
Gross profit (exclusive of depreciation and amortization shown below)	49,134			56,230
Gross profit (exclusive of amortization and depreciation shown below)	43,619			46,443
Operating expenses:
Selling	57,~~617~~838			46,~~630~~153
General and administrative	2119,~~240~~954			2721,~~328~~280
Amortization and depreciation	2220,~~384~~111			5020,~~124~~609
Severance and other	39			4,276
Total operating expenses	47,903			48,042
Total operating expenses	49,280			86,358
Operating loss	(4,284		)	(1,599		)
Operating loss	(146		)	(30,128		)
Other (income) expense:
Interest expense	76,~~990~~513			107,~~523~~990
Related party interest	23,~~652~~539			32,~~079~~652
Other	24			498
Gain on retirement of debt	—			(13,585		)
Loss from continuing operations before income taxes & extraordinary item	(10,812		)	(44,228		)
Other	(2,073		)	24
Income tax benefit	6,826			7,341
Income (loss) from continuing operations before income taxes	(12,263		)	1,320
Loss from continuing operations before extraordinary item & accounting change	(3,986		)	(36,887		)
Income tax benefit	4,273			2,589
Loss from discontinued operations net of tax	(1,343		)	(54		)
Income (loss) from continuing operations	(7,990		)	3,909
Extraordinary gain, net of tax effect of $(4,756) and $(3,137)	8,830			5,826
Loss from discontinued operations, net of taxes	—			(1,343		)
Net income (loss)	~~3,501~~$	(7,990	)	~~(31,115~~$	2,566	)
Other comprehensive income:
Foreign currency translation gain	~~900~~—			~~934~~900
Reclassification adjustment for foreign currency translation loss included in discontinued operations	~~1,499~~—			—1,499
Total other comprehensive income	2,399			934
Comprehensive income (loss):	$	(7,990	)	$	4,965
Comprehensive income (loss)	$	5,900		$	(30,181	)
Basic and diluted per share information:
Loss from continuing operations per common share	$	(0.04	)	$	(0.35	)
Income (loss) from continuing operations per common share	$	(0.08	)	$	0.04
Loss from discontinued operations per common share	$	~~(0.01~~—	)	—$	(0.01	)
Extraordinary gain per common share	$	0.09		$	0.06
Net income (loss) per common share	$	(0.08	)	$	0.03
Net income (loss) per common share	$	0.04		$	(0.29	)
Weighted average common shares outstanding (in thousands)	98,106			97,935
Weighted average common shares outstanding (in thousands)	97,935			105,907

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

PROTECTION ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended June 30,
	2002			2001
	2003			2002
				(As Restated See Note 10)
Cash flow from operating activities:
Net loss	$	(~~661~~17,~~743~~306	)	$	(39773,~~591~~190	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Gain on retirement of debt	—			(16,735		)
Extraordinary gain, net of taxes	(10,877		)	(24,171		)
Gain on sale of assets	(2,092		)
Loss on discontinued operations, net of taxes	3,012			236
Loss on discontinued operations, net of tax	—			3,012
Cumulative effect of accounting change, net of taxes	~~441,540~~—			—543,613
Loss on impairment of subscriber accounts	332,194			—
Loss on impairment of customer accounts	—			338,104
Loss on sale of certain customer accounts	—			428
Amortization and depreciation	40,314			41,456
Amortization and depreciation	44,849			99,834
Amortization of debt costs and premium	369			597
Amortization of debt costs and premium	597			661
Amortization of deferred customer acquisition costs in excess of deferred revenues	8,277			12,022
Deferred income taxes	~~(114~~10,~~856~~217		)	(11114,~~116~~168		)
Provision for doubtful accounts	~~2,983~~916			32,~~425~~983
Other	7968			~~310~~79
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Receivables, net	43,~~818~~573			14,~~488~~818
Deferred costs	(8,636		)	(4,466		)
Related party tax receivable	(19,266		)	(11,016		)
Other assets	~~(10~~2,~~575~~523		)	~~(12,011~~441		)
Accounts payable	~~3,155~~(48		)	(23,~~766~~155		)
Deferred revenue	3(2,~~610~~202		)	~~995~~(2,928		)
Other liabilities	(42,~~733~~850		)	11(4,~~919~~733		)
Net cash provided by operating activities	2522,~~417~~493			2527,~~175~~510
Cash flows from investing activities:
Installations and purchases of new accounts	(11,003		)	(12,807		)
Purchases of new accounts	(249		)	(1,211		)
Purchase of property and equipment	(3,328		)	(3,743		)
Deferred customer acquisition costs	(21,896		)	(19,415		)
Purchase of AV ONE	(1,378		)	—
Deferred customer acquisition revenues	8,960			7,530
Proceeds from sale of certain customer accounts	—			19,164
Purchase of property and equipment	(2,795		)	(3,328		)
Net cash provided by (used in) investing activities	(15,709		)	2,614
Purchase of parent company bonds	—			(67,364		)
Proceeds from sale of parent company bonds	—			67,364
Sale (purchase) of AV ONE	1,411			(1,378		)
Proceeds from disposition of assets	2,598			—
Net cash used in investing activities	(11,971		)	(17,802		)
Cash flows from financing activities:
Payments on long-term debt	(608,~~220~~567		)	(6760,~~622~~220		)
Proceeds from long term-debt	44—			~~495~~44
Borrowings from Senior Credit Facility	59,000			66,000
Proceeds from sale of trademark	450			—
Purchase of parent company stock — held as treasury	(11,615		)	—
Debt issue costs	74			—
Purchase of Treasury Stock	(2,178		)	(22,804		)
Borrowings from Westar Credit Facility	—			59,000
Issuance costs and other	432			(1,049		)
Purchase of parent company stock - held as treasury	—			(11,615		)
Funding from parent	2,148			(536		)
Proceeds from sale of parent company stock - held as treasury	11,940			—
Net cash used in financing activities	(12,389		)	(25,516		)
Purchase of Treasury Stock	(3		)	(2,178		)
Net cash provided by (used in) discontinued operations	330			(308		)
Exercise of stock options and Employee Stock Purchase Plan	256			432
Net increase (decrease) in cash and cash equivalents	(2,351		)	1,965
Funding from parent	998			2,148
Net cash provided by (used in) financing activities	5,148			(12,389		)
Net cash provided by discontinued operations	229			330
Net increase (decrease) in cash and cash equivalents	15,899			(2,351		)
Cash and cash equivalents:
Beginning of period	31,~~671~~545			23,~~610~~671
End of period	$	117,~~320~~444		$	41,~~575~~320
Cash paid for interest	$	2419,~~119~~690		$	3124,~~040~~119
Cash paid for taxes	$	~~134~~237		$	92134

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

PROTECTION ONE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Consolidation and Interim Financial Information:

Protection One, Inc., ~~a Delaware corporation~~ (“Protection One” or the “Company”), isa Delaware corporation, is a publicly traded security alarm monitoring company. Protection One is principally engaged in the business of ~~providing~~ providing security alarm monitoring services, which include sales, installation ~~and~~ and related servicing of security alarm systems for residential and ~~small~~ business customers. Westar Industries, Inc. (“Westar Industries”), a wholly owned subsidiary of Westar Energy, Inc. (“Westar Energy”), owns approximately 8788% of the Company’s common stock. Westar Energy is a public electric utility and is regulated by the Kansas Corporation Commission (“KCC”). On November 8, 2002 the KCC issued an Order that, among many findings and directives, requested Westar Energy consider selling its investment in Protection One. In early 2003, Westar Energy announced that it intends to sell its investment in Protection One stock.

The Company’s unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, ~~2001~~ 2002, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

InThe ~~the~~Company’s strategy ~~opinion~~is ofto ~~management~~ improve returns on invested capital by realizing economies of scale from increasing customer density in the largest urban markets in North America. The Company, ~~all~~plans ~~adjustments~~to accomplish ~~considered~~this ~~necessary~~goal ~~for~~by: a(i) ~~fair~~retaining ~~presentation~~its ofcustomers by providing quality customer service from its monitoring facilities and its branches; and (ii) ~~the~~using ~~financial~~its ~~statements~~national ~~have~~presence, ~~been~~strategic ~~included.~~alliances ~~The~~and ~~results~~strong oflocal operations ~~for~~to persuade the ~~three~~ ~~and~~most ~~six~~desirable ~~months~~residential ~~ended~~and ~~June~~commercial ~~30,~~prospects ~~2002~~to ~~are~~enter ~~not~~into long ~~necessarily~~term ~~indicative~~agreements ofwith the Company on terms that permit it to achieve appropriate returns on capital. When ~~results~~adequate capital becomes available, the Company would like to beresume ~~expected~~acquiring alarm ~~for~~companies and portfolios of alarm accounts pursuant to transactions that meet the ~~full~~Company’s ~~year~~strategic and financial requirements.

The Company has reported losses for the past several years and Westar Energy has announced that it intends to sell its investment in Company stock. Additionally, the Company’s current primary financing source is through a credit facility with Westar Energy and credit available under such facility has been reduced (see Notes 4 and 5). Management of the Company has evaluated these conditions and events in establishing its operating plans for the Company. In addition to the plans and strategies noted in the paragraph above, management plans to carefully monitor the level of investment in new customer accounts, continue control of operating expenses, curtail other capital expenditures, if necessary, and continue efforts to extend or replace the credit facility upon its expiration in January 2005. Management believes that the funds provided from operations and from the Westar Credit Facility, coupled with receipts under the tax sharing agreement (see Note 8), will be sufficient throughout 2004.

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

148, and related interpretations in accounting for its stock-based compensation plans. The Company has adopted the disclosure requirements of SFAS No. 148.

For purposes of the pro forma disclosures required by SFAS No. 148, the estimated fair value of the options is amortized to expense on a straight-line method over the options’ vesting period. Under SFAS No. 123, compensation expense would have been $0.2 million and $0.4 million in the three and six months ended June 30, 2003, respectively and $0.2 million and $0.4 million in the three and six months ended June 30, 2002, respectively. Information related to the pro forma impact on earnings and earnings per share follows.

	Six Months Ended June 30,
	2003			2002

Net loss, as reported	$	(17,306	)	$	(773,190	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects	45			45
Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects	(392		)	(439		)
Net loss, pro forma	$	(17,653	)	$	(773,584	)

Net loss per common share (basic and diluted):
As reported	$	(0.18	)	$	(7.87	)
Pro forma	$	(0.18	)	$	(7.88	)

	Three Months Ended June 30,
	2003			2002

Net income (loss), as reported	$	(7,990	)	$	2,566
Add: Stock-based employee compensation expense included in reported net earnings (loss), net of related tax effects	22			22
Deduct: Total stock option expense determined under fair value method for all awards, net of related tax effects	(188		)	(220		)
Net income (loss), pro forma	$	(8,156	)	$	2,368

Net earnings (loss) per common share (basic and diluted):
As reported	$	(0.08	)	$	0.03
Pro forma	$	(0.08	)	$	0.02

In the opinion of management of the Company, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the financial statements have been included. The results of operations for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year.

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

The Company has issued stock options and warrants of which approximately 10.34 million and 0.5 million represent dilutive potential common shares for the three and six months ended June 30, 2003, respectively and 1. 9 million and 1.7 million for the three and six months ended June 30, 2002, respectively. These securities were not included in the computation of diluted earnings per share for those periods presented with net losses since to do so would have been antidilutive. For the three months ended June 30, 2002, the dilutive impact of these securities was not significant and did not result in a change in the earnings per share amount reported for ~~all~~basic ~~periods~~earnings ~~presented~~per share.

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

2. Impairment Charge Pursuant to New Accounting Rules:

Effective January 1, 2002, the Company adopted the new accounting standards SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets,” and SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets.” SFAS No. 142 establishes new standards for accounting for goodwill. SFAS No. 142 continues to require the recognition of goodwill as an asset, but discontinues amortization of goodwill. In addition, annual impairment tests must be performed using a fair-value based approach as opposed to an undiscounted cash flow approach required under prior standards.

SFAS No. 144 establishes a new approach to determining whether the Company’s customer account asset is impaired. The approach no longer permits the Company to evaluate its customer account asset for impairment based on the net undiscounted cash flow stream obtained over the remaining life of goodwill associated with the customer accounts being evaluated. Rather, the cash flow stream to be used under SFAS No. 144, is limited to future estimated undiscounted cash flows from existing customer accounts. Additionally, the new rule no longer permits the Company to include estimated cash flows from forecasted customer additions. If the undiscounted cash flow stream from existing customer accounts is less than the combined book value of customer accounts and goodwill, an impairment charge would be required.

The new rule substantially reduces the net undiscounted cash flows used for impairment evaluation purposes as compared to the previous accounting rules. The undiscounted cash flow stream has been reduced from the 16 year remaining life of the

goodwill to the remaining life of customer accounts for impairment evaluation purposes and does not include estimated cash flows from forecasted customer additions.

To implement the new standards, the Company engaged an appraisal firm to help management estimate the fair values of goodwill and customer accounts. Based on this analysis, the Company recorded a non-cash net charge of approximately $659.3 million in the first quarter of 2002. The charge is detailed as follows:

	Goodwill			Customer Accounts			Total
	(in millions)
Impairment charge on continuing operations	$	496.6		$	332.2		$	828.8
Impairment charge on discontinued operations	2.3			1.9			4.2
Estimated income tax benefit	(57.4		)	(116.3		)	(173.7		)
Net charge	$	441.5		$	217.8		$	659.3

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

A deferred tax asset in the amount of $173.7 million was recorded in the first quarter of 2002 for the tax benefit shown above. The total net deferred tax asset was $259.6 million at June 30, 2002. If Westar Energy were to own less than 80% of Westar Industries voting stock, or if Westar Industries were to own less than 80% of the Company’s voting stock, the Company would no longer file its tax return on a consolidated basis with Westar Energy. As a result, the Company would be required to record a non-cash charge against income to establish a valuation allowance for the portion of its net deferred tax assets determined not to be realizable. This charge could be material.

Because the Company adopted the new rule for goodwill, it is no longer amortizing goodwill to income. The following tables reflect the Company’s results for the three and six months ended June 30, 2001, calculated using the new accounting treatment discussed above, as compared to the Company’s results for the three and six months ended June 30, 2002.

	Six Months ended June 30,
	2002			2001
	(in thousands, except per share amounts)
Reported net loss	$	(661,743	)	$	(39,591	)
Add back: Goodwill amortization	—			21,616
Adjusted net loss	$	(661,743	)	$	(17,975	)
Basic earnings per share:
Reported net loss	$	(6.74	)	$	(0.36	)
Add back: Goodwill amortization	—			0.19
Adjusted net loss	$	(6.74	)	$	(0.17	)

	Three Months ended June 30,
	2002		2001
	(in thousands, except per share amounts)
Reported net income (loss)	$	3,501	$	(31,115	)
Add back: Goodwill amortization	—		10,960
Adjusted net income (loss)	$	3,501	$	(20,155	)
Basic earnings per share:
Reported net loss	$	0.04	$	(0.29	)
Add back: Goodwill amortization	—		0.10
Adjusted net income (loss)	$	0.04	$	(0.19	)

The Company will be required to perform impairment tests for long-lived assets prospectively as long as it continues to incur recurring losses or for other matters that may negatively impact its business2. Impairment ~~Goodwill~~Charge ~~will~~Pursuant ~~be required~~ to beNew ~~tested~~Accounting each year for impairment. Declines in market values of the Company’s business or the value of its customer accounts that may occur hereafter may require additional impairment charges in the future, which could be material.Rules:

3Effective January 1, 2002, the Company adopted the new accounting standards SFAS No. ~~Change~~ in142, “Accounting ~~Estimate~~for Goodwill and Other Intangible Assets,” and SFAS No. 144, “Accounting for the Impairment and Disposal of ~~Customer~~Long-Lived Assets.” SFAS No. 142 establishes new standards for accounting for goodwill. SFAS No. 142 ~~Life:~~continues to require the recognition of goodwill as an asset, but discontinues amortization of goodwill. In addition, annual impairment tests must be performed using a fair-value based approach as opposed to an undiscounted cash flow approach required under prior standards. The completion of the impairment test by the Company, based upon a valuation performed by an independent appraisal firm, as of January 1, 2002, indicated that the carrying value of goodwill had been impaired and an impairment charge was recorded as discussed below.

~~The~~SFAS ~~results~~No. ~~of a lifing study performed by a third~~144 ~~party~~establishes ~~appraisal firm in the first quarter of 2002 showed~~ a ~~deterioration~~new inapproach ~~the average~~to ~~remaining~~determining ~~life~~whether ~~of customer accounts. The report showed~~ the Company’s ~~North America~~ customer account ~~pool~~asset ~~can~~is ~~expect~~impaired. The aapproach ~~declining~~no ~~revenue~~longer ~~stream~~permits ~~over~~ the ~~next~~Company ~~30 years~~to ~~with~~evaluate anits ~~estimated~~customer ~~average~~account ~~remaining~~asset ~~life~~for impairment ofbased 9on ~~years. The~~the ~~Company’s~~net ~~Multifamily~~undiscounted ~~pool~~cash ~~can~~flow ~~expect a declining revenue~~ stream obtained over the ~~next 30 years with an estimated average~~ remaining life of 10goodwill ~~years. Taking~~associated ~~into account~~with the ~~results~~customer ofaccounts ~~the lifing study~~being evaluated. Rather, the ~~Company~~cash ~~adjusted~~flow ~~the amortization~~stream ofto ~~customer~~be ~~accounts~~used ~~for~~under ~~its~~SFAS ~~North~~No. ~~America~~144, ~~and~~is ~~Multifamily~~limited ~~customer pools~~ to ~~better~~ ~~match~~future ~~the~~estimated ~~rate~~undiscounted ~~and~~cash flows ~~period~~from ofassets ~~amortization~~in ~~expense~~the ~~with~~asset ~~the~~group, ~~expected decline~~which ininclude ~~revenues. In~~customer accounts, the ~~first~~primary ~~quarter~~asset of ~~2002,~~ the ~~Company~~reporting ~~changed~~unit, ~~its~~plus ~~amortization~~an ~~rate~~estimated amount for ~~its~~the ~~North America~~sale ~~pool~~of tothe remaining aassets ~~10-year~~within ~~135%~~the ~~declining~~asset ~~balance~~group ~~method~~(including ~~from a 10-year 130% declining balance method~~goodwill). ~~For~~If the ~~Multifamily~~ ~~pool~~undiscounted ~~the~~cash ~~Company~~flow ~~reduced~~stream ~~its estimated customer life~~ from ~~10 to 9~~ ~~years~~the ~~and~~asset ~~will~~group ~~continue~~is toless ~~amortize~~than onthe acombined ~~straight-line~~book ~~basis. The~~value ~~Company~~of ~~accounts~~the ~~for~~asset ~~these~~group, ~~amortization~~then ~~changes~~the ~~prospectively~~Company asis arequired ~~change~~to inmark ~~estimate. These~~the ~~changes~~customer inaccount ~~estimates~~asset ~~increased~~down ~~amortization~~to ~~expense~~fair ~~for the three~~value, ~~and~~by ~~six~~way ~~months~~of ~~ended~~recording ~~June~~an 30impairment, ~~2002~~to onthe aextent ~~pre-tax~~fair ~~basis~~value byis ~~approximately~~less ~~$0.3~~than its ~~million~~book ~~and $0~~value.7 To ~~million,~~the ~~respectively~~extent ~~and~~net ~~on an after tax basis by~~book ~~approximately~~value ~~$0.2~~is ~~million~~less ~~and~~than ~~$0.4~~fair ~~million~~value, ~~respectively. The change in estimate had~~ no ~~significant impact~~impairment onwould ~~reported~~be ~~earnings per share~~recorded.

4The new rule substantially reduces the net undiscounted cash flows used for customer account impairment evaluation purposes as compared to the previous accounting rules. ~~Discontinued~~ The ~~Operations~~undiscounted –cash ~~Sale~~flow stream was reduced from the 16 year remaining life of the goodwill to the 9 year remaining life of customer accounts for impairment evaluation ~~Canadian~~purposes. Using ~~Operations:~~these new guidelines, the Company determined that there was an indication of impairment of the carrying value of the customer accounts and an impairment charge was recorded as discussed below.

~~During~~To implement the ~~second~~new ~~quarter~~standards, ~~of 2002~~ the Company ~~entered into~~engaged ~~negotiations~~an ~~for~~appraisal ~~the~~firm ~~sale~~to ofhelp ~~its~~management estimate ~~Canadian~~the ~~business~~fair ~~which~~values isof ~~included~~goodwill ~~in its~~and ~~North~~customer ~~American segment~~accounts. ~~The~~Based ~~sale was consummated~~ on ~~July~~this 9analysis, ~~2002. The~~ the Company recorded a ~~pretax~~net ~~impairment~~charge ~~loss~~ of approximately $2765.02 million ~~and an after tax loss of approximately $1.3 million~~ in the ~~second~~first quarter of 2002. The ~~as evidenced~~charge byis ~~the~~detailed ~~sale.~~as follows:

The net operating losses of these operations are included in the consolidated statements of operations under “discontinued operations.” The net operating loss for the six months ended June 30, 2002 of $1.7 million includes an impairment loss on customer accounts of approximately $1.9 million. An impairment charge of $2.3 million relating to the Canadian operations’ goodwill is reflected in the consolidated statement of operations as a cumulative effect of accounting change on discontinued operations. Revenues from these operations were $2.1 million and $4.2 million for the three and six months ended June 30, 2002, compared to $2.1 million and $4.1 million for the three and six months ended June 30, 2001.

	Goodwill			Customer Accounts			Total
				(in millions)
North America Segment:
Impairment charge - continuing operations	$	509.4		$	338.1		$	847.5
Impairment charge – discontinued operations	2.3			1.9			4.2
Estimated income tax benefit	(65.1		)	(118.4		)	(183.5		)
Net charge	$	446.6		$	221.6		$	668.2

Multifamily Segment:
Impairment charge	$	104.2		$	—		$	104.2
Estimated income tax benefit	(7.2		)	—			(7.2		)
Net charge	$	97.0		$	—		$	97.0

Total Company:
Impairment charge	$	615.9		$	340.0		$	955.9
Estimated income tax benefit	(72.3		)	(118.4		)	(190.7		)
Net charge	$	543.6		$	221.6		$	765.2

The ~~major~~impairment charge ~~classes~~for ofgoodwill ~~assets~~is ~~and~~reflected ~~liabilities~~in the consolidated statement of ~~the~~operations as ~~Canadian~~a ~~operations~~cumulative ~~are~~effect asof ~~follows~~a (change in ~~thousands):~~accounting principle. The impairment charge for customer accounts is reflected in the consolidated statement of

	June 30, 2002		December 31, 2001
Assets:
Current	$	948	$	478
Property and equipment	608		571
Customer accounts, net	15,649		16,992
Goodwill	2,147		4,842
Other	58		55
Total assets	$	19,410	$	22,938
Current liabilities	$	1,333	$	1,364

5operations as an operating cost. ~~Customer~~ These ~~Accounts:~~impairment charges reduced the recorded value of these assets to their estimated fair values at January 1, 2002.

~~The~~Another impairment ~~following~~test ~~reflects~~was completed by the ~~changes~~Company inas of July 1, 2002 (the date selected for its annual impairment test), with the independent appraisal firm providing the valuation of the estimated fair value of the Company’s reporting units, and no impairment was indicated. After regulatory actions (see Note 5, “Related Party Transactions”), including Kansas Corporation Commission Order No. 55, which prompted Westar Energy to advise the Company that it intended to dispose of its investment in the ~~customer~~Company, ~~accounts~~the ~~(at~~independent ~~cost)~~appraisal ~~for~~firm was again retained to perform an additional valuation so that the ~~following~~Company ~~periods~~could (perform an impairment test as of December 31, 2002. Order No. 55 limited the amount of capital Westar Energy could provide to the Company which increased the Company’s risk profile. Therefore, the Company reevaluated its corporate forecast, reduced the amount of capital invested over its forecast horizon and lowered its base monthly recurring revenue to incorporate actual 2002 results, which resulted in a lower valuation than the July 1, 2002 valuation. The Company recorded an ~~thousands):~~additional $90.7 million impairment charge, net of $13.3 million tax, to reflect the impairment of all remaining goodwill of its North America segment in the fourth quarter of 2002.

	Six Months Ended June 30, 2002			Three Months Ended June 30, 2002			Year Ended December 31, 2001
Beginning customer accounts, net	$	746,574		$	403,625		$	881,726
Acquisition of customer accounts	3,755			1,781			11,556
Amortization of customer accounts	(37,447		)	(18,749		)	(135,197		)
Sale of accounts	(48		)	(48		)	(8,769		)
Purchase holdbacks and other	(186		)	(16		)	(2,742		)
Impairment	(326,055		)	—			—
Total customer accounts, net	$	386,593		$	386,593		$	746,574

A deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit shown above and an additional deferred tax benefit of $13.3 million was recorded with the fourth quarter impairment charge. If Westar Energy completes its intended disposal of Protection One, however, the Company’s net deferred tax asset of $284.6 million at June 30, 2003 might not be realizable and the Company might not be in a position to record a tax benefit for losses incurred. As a result, the Company would be required to record a charge against income for the portion of its net deferred tax assets determined not to be realizable. This charge could be material and could have a material adverse effect on the Company’s business, financial condition and results of operations.

The ~~investment~~Company atis required ~~cost~~to inperform ~~customer~~impairment ~~accounts~~tests atfor ~~June 30,~~long-lived ~~2002~~assets ~~and~~prospectively ~~December~~when the ~~31,~~Company ~~2001~~determines ~~was~~that ~~$994.9~~indicators ~~million~~of ~~and~~potential ~~$1,317.5~~impairment ~~million~~are ~~respectively~~present. Goodwill ~~Accumulated~~is ~~amortization~~required ofto ~~the investment in customer accounts~~be tested at ~~June~~least ~~30,~~annually ~~2002~~for ~~and~~impairment. Declines ~~December~~in ~~31,~~market ~~2001~~values ~~was~~of ~~$608.3~~the ~~million~~Company’s ~~and~~business ~~$570.9~~or ~~million respectively. The~~the ~~table~~value ~~below~~of ~~reflects~~its ~~the~~customer ~~estimated~~accounts ~~aggregate~~that ~~customer~~may ~~account~~occur ~~amortization~~in ~~expense~~the ~~for~~future ~~2002~~may ~~and~~require ~~each~~additional write-down of ~~the~~these ~~four~~assets ~~succeeding~~in ~~fiscal~~the ~~years~~future. No onimpairment ~~the~~charge ~~existing~~was ~~customer~~recorded ~~account~~in ~~base~~the asfirst ~~of June~~six ~~30,~~months ~~2002~~of 2003.

	2002		2003		2004		2005		2006
	(Dollars in thousands)
Estimated amortization expense	$	74,951	$	74,661	$	74,559	$	57,778	$	57,416

3. Intangible Assets - Customer Accounts and Goodwill:

~~6. Debt~~The following reflects the changes in the Company’s investment in purchased customer accounts (at cost) for the following periods (in thousands):

During the first six months of 2002, the Company’s borrowings under the Senior Credit Facility increased by $59.0 million and the Company’s other outstanding long-term debt decreased by $77.9 million. Extraordinary gain from extinguishment of debt securities was $10.9 million, net of tax of $5.9 million, and $24.2 million, net of tax of $13.0 million, for the first six months of 2002 and 2001, respectively.

	Six Months Ended June 30, 2003			Three Months Ended June 30, 2003			Year Ended December 31, 2002
Beginning customer accounts, net	$	312,785		$	295,951		$	719,679
Acquisition of customer accounts	315			148			1,195
Amortization of customer accounts	(34,185		)	(17,076		)	(68,929		)
Impairment charge	—			—			(338,104		)
Sale of accounts	—			—			(398		)
Purchase holdbacks and other	231			123			(658		)
Ending customer accounts, net	$	279,146		$	279,146		$	312,785

AsThe ofinvestment at cost in customer accounts at June 30, ~~2002,~~2003 and December 31, ~~2001,~~2002 ~~total borrowings~~was ~~under the Senior Credit Facility were~~ $~~196~~946.5 2 million and $~~137~~945.5 1 million, respectively. ~~The~~ ~~remaining availability~~Accumulated ~~under~~amortization ~~this~~of ~~facility~~the investment asin ofcustomer accounts at June 30, ~~2002~~2003 and December 31, ~~2001~~2002 was $33667.51 million and $17632.53 million, respectively. The ~~Senior~~table ~~Credit~~below ~~Facility currently~~reflects ~~expires on January 3, 2003. The Company expects to renew~~ the ~~facility~~estimated ~~with~~aggregate ~~Westar~~customer ~~Industries unless~~account ~~efforts~~amortization toexpense ~~replace~~for ~~the~~2003 ~~facility~~and ~~with~~each ~~financing from an unaffiliated third party lender are successful. The success~~ of ~~these efforts will depend on improvements in~~ the ~~Company’s~~four ~~financial~~succeeding ~~performance.~~fiscal ~~The~~years ~~Kansas Corporation Commission has~~on ~~issued an order prohibiting Westar Energy from borrowing to make loans or capital contributions to Westar Industries. This order limits~~ the ~~resources~~existing ~~available~~customer toaccount ~~Westar~~base ~~Industries~~as ~~for funding~~of ~~its~~June ~~obligations~~30, ~~under the Senior Credit Facility~~2003. The Company would face significant liquidity issues if it were unable to renew the Senior Credit Facility with Westar Industries or if Westar Industries was unable to fund its obligations under the Senior Credit Facility.

The Company’s ability to borrow under the facility is subject to compliance with certain financial covenants including a leverage ratio of 5.75 to 1.0 and an interest coverage ratio of 2.10 to 1.0. At June 30, 2002, the ratios were approximately 4.9 to 1.0 and 2.6 to 1.0, respectively.

	2003		2004		2005		2006		2007
	(Dollars in thousands)
Estimated amortization expense	$	68,679	$	68,572	$	52,288	$	51,931	$	45,610

~~The~~There ~~indentures~~were ~~governing~~no ~~the~~changes ~~Company’s~~in ~~outstanding~~the ~~senior~~carrying ~~and~~amounts ~~subordinated~~of ~~notes~~goodwill ~~contain~~for ~~similar~~the ~~covenants~~three ~~with~~and ~~different~~six months ended June 30, ~~calculations~~2003. The ~~relating~~changes toin the ~~Company’s~~carrying amounts ~~ability~~of togoodwill ~~incur~~for ~~indebtedness. The~~the ~~Company~~year isended inDecember ~~compliance~~31, ~~with~~2002, ~~all covenants~~are ~~contained~~as infollows ~~these indentures.~~(in thousands):

7. Related Party Transactions

	North America Segment			Multifamily Segment			Total

Balance as of December 31, 2001	$	613,414		$	150,035		$	763,449
Impairment losses (Note 2)	(613,414		)	(104,188		)	(717,602		)
Realization of purchased tax assets	—			(4,000		)	(4,000		)

Balance as of December 31, 2002	$	—		$	41,847		$	41,847

~~The Company had outstanding borrowings under the Senior Credit Facility with Westar Industries of $196~~4.5 million and $137.5 million at June 30, 2002 and December 31, 2001, respectively. The Company entered into three separate amendments to the Senior Credit facility in the first six months of 2002. Each of the amendments increased the capacity of the Senior Credit facility by $25 million resulting in a total capacity of $230 million as of June 30, 2002. For each amendment the Company incurred an amendment fee of $250,000 for a total of $750,000 which was paid to Westar Industries in the third quarter of 2002. On July 25, 2002, the Company and Westar Industries entered into a further amendment to the Senior Credit Facility which increased the amount of the facility to $255 million. The Company will pay an amendment fee of $250,000 for the amendment in the third quarter of 2002. Debt:

~~The Company accrued interest expense of $2.3 million~~Long-term ~~and~~debt ~~$4.3 million~~ and ~~made interest payments of $2.3 million and $4.2 million on borrowings under~~ the ~~facility~~fixed ~~for~~or ~~the~~weighted ~~three~~average ~~and six months ended June 30, 2002, compared to~~ interest ~~expense~~rates ofare ~~$2.8~~as ~~million~~follows ~~and $4.5 million for the three and~~(in ~~six months ended June 30, 2001.~~thousands):

In the first six months of 2002 and 2001, the Company purchased from Westar Industries $60.7 million and $66.1 million face value of the Company’s bonds for $46.0 million and $45.2 million, respectively. As a result of these transactions, an extraordinary gain of $9.2 million, net of tax and $13.4 million, net of tax was recognized in the first six months of 2002 and 2001, respectively.

	June 30, 2003			December 31, 2002
Westar Credit Facility with Westar Industries, maturing January 5, 2005,variable 6.2% (a)	$	215,500		$	215,500
Senior Subordinated Notes, maturing January 2009, fixed 8.125%	110,340			110,340
Senior Unsecured Notes, maturing August 2005, fixed 7.375%	190,925			190,925
Senior Subordinated Discount Notes, maturing June 2005, effective rate 11.8%	30,828			31,033
Convertible Senior Subordinated Notes, maturing September 2003, fixed 6.75%	1,345			9,725
Other debt obligations, including capital leases	247			434
	549,185			557,957
Less current portion	(1,592		)	(10,159		)

Total long-term debt	$	547,593		$	547,798

~~During~~(a) ~~the first six months in 2002 the Company~~Represents ~~acquired~~weighted inaverage ~~open~~interest ~~market~~rate ~~purchases~~before ~~approximately~~fees ~~$41.2~~on ~~million~~borrowings ofunder ~~Westar~~the ~~Energy 6.25%~~facility ~~notes, approximately $21.6 million of Westar Energy 6.875% notes and approximately $4.6 million of Westar Energy 7.125% notes. All of these notes were subsequently sold~~ at ~~cost to Westar Energy prior to~~ June 30, ~~2002~~2003. ~~During~~ The ~~the first six months in 2002 the Company acquired in open market~~weighted-average ~~purchases~~annual ~~approximately~~interest ~~$10.1~~rate ~~million~~before offees ~~Westar~~on ~~Energy~~borrowings ~~common~~at ~~stock~~December ~~and approximately $1.8 million in Westar Energy preferred stock. At June 30~~31, 2002, ~~the~~was ~~Company held approximately $11~~5.~~0 million in Westar Energy common stock and approximately $~~2%.0 million in Westar Energy preferred stock for a combined $13.0 million investment which is reflected in the equity section of the Company’s balance sheet. The Company’s board of directors has authorized the purchase of up to an additional $100 million in Westar Energy debt and equity securities.

InThe ~~the~~Company’s ability ~~second~~to ~~quarter~~borrow ofunder ~~2002,~~ the ~~Company~~facility ~~exercised its~~is ~~option~~subject to ~~buy~~compliance anwith ~~office~~certain financial ~~building~~covenants, ~~located~~including ina ~~downtown~~leverage ~~Wichita,~~ratio ~~Kansas,~~of ~~from Kansas~~5.75 ~~Gas~~to 1.0 and ~~Electric~~an ~~Company,~~interest coverage aratio ~~wholly owned subsidiary~~ of ~~Westar~~2.10 ~~Energy, for~~to ~~approximately $~~1.0.~~5 million.~~

OnSome ~~June 21, 2001, the Company entered into an amendment to the Contribution Agreement dated as~~ of ~~July 30, 1997 between~~ the ~~Company~~indentures ~~and~~governing ~~Westar Energy. This amendment permitted Westar Energy’s beneficial ownership of~~ the Company’s ~~outstanding~~ ~~common stock to exceed 85% provided that its beneficial ownership on a fully diluted basis does not exceed 81% of the~~ outstanding ~~shares.~~senior ~~In March, 2002 the Company~~ and ~~Westar~~subordinated ~~Energy~~notes contain ~~entered~~similar ~~into~~covenants awith ~~Consent~~different ~~and~~calculations ~~Limited Waiver~~relating ~~Agreement~~to ~~whereby~~ the Company ~~consented to Westar~~’s ~~ownership interest~~ inability ~~the~~to ~~Company~~incur ~~exceeding the ceiling set forth in the amended Contribution Agreement for the period commencing on March 11, 2002 and ending on July 1, 2002~~indebtedness. ~~On July 1, 2002, the Company and Westar entered into a second Consent and~~ The ~~Limited Waiver Agreement whereby the~~ Company ~~consented~~was ~~to Westar’s ownership interest~~ in ~~the~~compliance ~~Company~~with ~~exceeding~~all ~~the~~covenants ~~said~~contained ~~ceiling~~in ~~for~~these ~~the~~indentures ~~period commencing on~~at ~~July~~June 130, ~~2002 and ending on March 31,~~ 2003. The amendment to the Contribution Agreement and the Consent and Limited Waiver Agreements were each approved by the Company’s continuing directors as required by the terms of the Contribution Agreement.

In June 2003, the Company used available cash to purchase $8.4 million of its 6.75% Convertible Senior Subordinated Notes which mature in September of 2003. The notes were purchased at face value and no gain or loss was recorded on the transaction.

In accordance with the Partial Stipulation and Agreement (see Note 5, Related Party Transactions) approved by the KCC, the Westar Credit Facility with Westar Industries provides for borrowings up to $228.4 million with a variable interest rate. Additionally, the Westar Credit Facility must be paid in full upon the sale of all or a majority of Westar Energy’s investment in the Company’s common stock to a new owner. In June 2003 the Company and Westar Industries executed the thirteenth and fourteenth amendments to the Westar Credit Facility that, among other things, extended the maturity date of the credit facility to

~~The~~January ~~Company had a receivable balance of $12.7 million and $1.7 million at June 30~~5, ~~2002~~2005 and ~~December 31, 2001, respectively, relating~~increased tothe aapplicable ~~tax~~borrowing ~~sharing~~rate ~~agreement~~on ~~with~~Eurodollar ~~Westar~~borrowings ~~Energy. In February 2002, the Company received $1.7 million~~ from ~~Westar Energy~~LIBOR ~~for~~plus ~~payment of the tax receivable at December 31, 2001~~3.75% ~~See Note 10 for~~to ~~further~~LIBOR ~~discussion~~plus ~~relating to income taxes~~5.00%.

The Company has obligations under which its outstanding notes were issued which could require the Company to offer to purchase such debt in connection with a change in control such as a disposition by Westar Energy ~~provides~~of ~~administrative~~its ~~services~~investment toin the Company’s ~~pursuant~~common tostock. The ~~services~~Westar Credit ~~agreements,~~Facility ~~including~~must ~~accounting,~~be ~~tax,~~paid ~~audit,~~in ~~human~~full ~~resources,~~upon ~~legal,~~any ~~facilities~~sale ~~and~~by Westar Energy of the Company’s ~~technology~~common ~~services~~stock. ~~Charges~~Furthermore, ofthe indentures ~~approximately~~governing ~~$1.5~~all ~~million~~of ~~and~~the ~~$3.1~~Company’s ~~million~~debt ~~were~~securities ~~incurred~~require ~~for~~that it offers to repurchase the ~~three~~securities ~~and~~in ~~six~~certain circumstances following a change in ~~months~~control ~~ended~~such ~~June~~as ~~30,~~would ~~2002,~~occur ~~compared~~if toWestar ~~charges~~Energy completes the sale of ~~approximately~~its investment $2in the Company.8 The ~~million~~135/8% senior subordinated discount notes and ~~$5.2~~63/4% ~~million~~convertible notes ~~for~~require the ~~three~~Company ~~and~~to ~~six~~make ~~months~~a ~~ended~~repurchase ~~June~~offer 30at approximately 101% of principal amount, ~~2001~~plus interest in the event of a change in control. The 73/8% senior notes and 81/8% senior subordinated notes require the Company to ~~had~~make a ~~net~~repurchase ~~intercompany~~offer ~~balance due~~at to101% ~~Westar~~of ~~Energy~~principal ~~primarily~~amount, ~~for~~plus ~~these~~interest ~~services~~in the event of ~~$1.5~~a ~~million~~change ~~and~~in ~~$1.7~~control ~~million~~coupled with two ratings downgrades that occurred atafter ~~June~~the ~~30,~~date ~~2002~~the ~~and~~Company ~~December~~announced ~~31,~~an ~~2001,~~intent ~~respectively~~to pursue a transaction that would result in a change in control.

In November 2001, the Company entered into an agreement pursuant to which it pays to Westar Industries, beginning with the quarter ended March 31, 2002, a financial advisory fee, payable quarterly, equal to 05.~~125% of the Company’s~~ Related ~~consolidated~~Party total assets at the end of each quarter. The Company incurred $1.3 million and $2.6 million of expense for the three months and six months ended June 30, 2002, respectively for the financial advisory fee which is included in general and administrative expenses on the income statement. The Company paid the first quarter fee of $1.3 million to Westar Industries in the second quarter and the second quarter fee of $1.3 million in the third quarter.Transactions:

On ~~June~~November 58, 2002, the ~~Company~~Kansas ~~acquired~~Corporation ~~the~~Commission ~~stock~~issued ofOrder No. 51 which required Westar Energy to initiate a ~~wholly~~corporate ~~owned~~and ~~subsidiary~~financial ofrestructuring, ~~Westar~~reverse specified accounting transactions described in the Order, review, improve ~~Industries~~and/or ~~named~~develop, ~~Westar~~where ~~Aviation~~necessary, ~~Inc.~~methods and procedures for ~~approximately~~allocating ~~$1.4~~costs ~~million. The~~between utility ~~Company~~and ~~subsequently~~non-utility ~~changed~~businesses ~~the~~for ~~name~~KCC ofapproval, refrain from any action that would result in its electric businesses subsidizing non-utility ~~the~~businesses, ~~newly~~reduce ~~acquired~~outstanding ~~corporation~~debt giving priority to AVreducing ~~ONE~~utility debt and, ~~Inc.~~pending ~~(“AV~~the ~~ONE”)~~corporate and ~~entered~~financial ~~into~~restructuring, animposed standstill limitations on Westar Energy’s ability to finance non-utility businesses including the ~~Aircraft~~Company. ~~Reimbursement~~These ~~Agreement~~standstill ~~with~~protections require that Westar ~~Industries. Under~~Energy ~~this~~seek ~~agreement~~KCC approval before it takes actions such as making any loan to, AVinvestment ~~ONE~~in ~~agrees~~or transfer of cash in excess of $100,000 to the Company or another non-utility affiliate, entering into any agreement with the Company or another non-utility ~~reimburse~~affiliate where the value of goods or services exchanged exceeds $100,000, investing, by Westar ~~Industries~~Energy ~~for~~or ~~lease~~Westar ~~payments~~Energy’s affiliate, of more than $100,000 in an existing or new non-utility business and transferring any non-cash assets or intellectual property to the Company or another non-utility affiliate. In addition, Westar ~~Industries~~Energy ~~agrees~~must charge interest to the Company and other non-utility affiliates at the incremental cost of their debt on outstanding balances of any existing or future ~~reimburse~~inter-affiliate AVloans, ~~ONE~~receivables ~~for~~or ~~certain~~other ~~costs~~cash ~~and~~advances ~~expenses~~due ~~relating~~Westar Energy. The Order also suggested that the sale by Westar Energy of the Company’s stock should be explored, along with other alternatives, as a possible source of cash to ~~its~~be ~~operations~~used to reduce Westar Energy debt. An additional provision affecting the Company includes a requirement that it cannot sell assets having a value of $100,000 or more without prior KCC approval.

InOn ~~June~~December 23, 2002, the ~~Company~~Kansas ~~formed~~Corporation aCommission ~~wholly~~issued ~~owned subsidiary~~Order ~~named Protection One Data Services, Inc~~No. ~~(“PODS”)~~55 ~~and~~clarifying ~~on July 1,~~and ~~2002~~modifying ~~transferred~~the toNovember ~~it approximately 42 of its Information Technology employees. Effective July 1~~8, 2002~~, PODS~~ ~~entered into an outsourcing agreement with Westar Energy pursuant to which PODS will provide Westar Energy information technology services~~Order. ~~As a condition of the agreement, PODS~~ ~~offered~~One ~~employment~~such toclarification ~~approximately~~was ~~100~~that Westar Energy ~~Information Technology employees. PODS will perform the information technology services~~ and ~~functions~~Westar ~~for a fixed annual fee of $20.9~~Industries ~~million,~~would ~~subject~~be toprohibited ~~adjustment. No assets~~from ~~were~~making ~~transferred~~payments to ~~PODS, but PODS will have access to Westar Energy’s equipment, software and facilities to provide~~ the ~~information~~Company ~~technology services. The~~under ~~term of~~ the ~~outsourcing agreement~~tax ~~expires December 31, 2005, subject to the right of either party to~~sharing ~~terminate the~~ agreement onuntil ~~six~~certain ~~months~~requirements ~~prior~~were ~~written~~met ~~notice,~~by ~~provided~~Westar ~~that notice~~Energy ofregarding ~~termination may not be given prior to June 30, 2003~~their debt.

8On January 10, 2003, Protection One filed a petition seeking reconsideration of certain aspects of Order No. ~~Commitments~~ 55. Specifically, the Company requested that the Commission reconsider and ~~Contingencies:~~revise Order No. 55 so that it clearly does not interfere with the Company’s contractual arrangements with Westar Energy and Westar Industries, including, but not limited to the tax sharing agreement and the Westar Credit Facility.

~~During~~On February 11, 2003, the ~~three~~parties ~~months~~to the KCC proceeding filed a Limited Stipulation and Agreement, which sought the KCC’s approval for Protection One to sell all of ~~ended~~its ~~June~~Westar 30Energy stock to Westar Energy. The KCC approved the Limited Stipulation and Agreement on February 14, 2003. Protection One sold its Westar Energy stock to Westar Energy on February 14, 2003 for $11.6 million. At December 31, 2002 this Westar Energy stock was recorded as a reduction of stockholders’ equity, similar to treasury stock, in the approximate amount of $15.0 million. In January 2003, the Company ~~entered~~received ~~into~~approximately ~~settlement~~$0.3 ~~arrangements~~million in ~~with~~dividends on the stock which resulted in reduction in the investment in ~~respect~~parent. toThe ~~several~~difference ~~litigation~~between ~~matters~~the cost and proceeds received from Westar Energy was reflected as ~~discussed~~a ~~below~~reduction of contributed capital from Westar Energy in the first quarter of 2003.

The Company, its subsidiary Protection One Alarm Monitoring, Inc. (“Monitoring”) and certain present and former officers and directors of Protection One were defendants in a purported class action litigation pending in the United States District Court for the Central District of California, Alec Garbini, et al. v. Protection One, Inc., et al., No CV 99-3755 DT (RCx). A settlement of this action was reached on June 12, 2002. A Memorandum of Understanding provides for no finding of wrongdoing on the part of any of the defendants, or any other finding that the claims alleged had merit, and a $7.5 million payment to the plaintiffs, which will be fully funded by the Company’s existing insurance. Finalization of the settlement is subject to the execution of definitive documentation and approval by the district court and is expected to take several months. The history of this matter is summarized as follows: Pursuant to an Order dated August 2, 1999, four pending purported class actions were consolidated into a single action. On February 27, 2001, plaintiffs filed a Third Consolidated Amended Class Action Complaint (“Third Amended Complaint”). Plaintiffs purported to bring the action on behalf of a class consisting of all purchasers of publicly traded securities of Protection One, including common stock and note, during the period of February 10, 1998 through February 2, 2001. The Third Amended Complaint asserted claims under Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against Protection One, Monitoring, and certain present and former officers and directors of Protection One based on allegations that various statements concerning Protection One’s financial results and operations for 1997, 1998, 1999 and the first three quarters of 2000 were false and misleading and not in compliance with generally accepted accounting principles. Plaintiffs alleged, among other things, that former employees of Protection One have reported that Protection One lacked adequate internal accounting controls and that certain accounting information was unsupported or manipulated by management in order to avoid disclosure of accurate information. The Third Amended Complaint further asserted claims against Westar Energy and Westar Industries as controlling persons under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. A claim was also asserted under Section 11 of the Securities Act of 1933 against Protection One’s auditor, Arthur Andersen LLP. The Third Amended Complaint sought an unspecified amount of compensatory damages and an award of fees and expenses,

~~including attorneys’ fees.~~ On ~~June 4~~February 25, ~~2001~~2003, the ~~District~~Company ~~Court dismissed~~entered ~~plaintiffs’~~into ~~claims~~a ~~under~~Partial ~~Sections~~Stipulation ~~10(b)~~ and 20Agreement (athe Reconsideration Agreement) with the Staff of the ~~Securities~~KCC, Westar Energy, Westar ~~Exchange~~Industries ~~Act~~and an intervener. The Reconsideration ~~Court~~Agreement ~~granted plaintiffs~~requested ~~leave~~that tothe ~~replead~~KCC ~~such~~issue ~~claims. The~~an ~~Court~~order ~~also~~granting limited ~~dismissed~~reconsideration ~~all~~and ~~claims~~clarification ~~brought~~to onits ~~behalf~~order ofissued ~~bondholders with~~December ~~prejudice~~23, 2002. The ~~Court~~Reconsideration Agreement also requests ~~dismissed~~that ~~plaintiffs’~~the ~~claims~~KCC ~~against~~authorize ~~Arthur~~Westar ~~Andersen,~~Energy and ~~plaintiffs~~Westar ~~have~~Industries to perform their respective obligations to the Company under the tax sharing agreement and the ~~appealed~~Westar ~~that~~Credit ~~dismissal~~Facility. OnAdditionally, ~~February~~the ~~22,~~Reconsideration ~~2002~~Agreement provides that, ~~plaintiffs~~among ~~filed~~other things; (a) ~~Fourth Consolidated~~the ~~Amended~~maximum ~~Class~~borrowing ~~Action~~capacity ~~Complaint.~~ under the Westar ~~The~~Credit ~~fourth~~Facility ~~amended~~will ~~complaint~~be ~~realleged~~reduced ~~claims~~to on$228.4 ~~behalf~~million ofand ~~purchasers~~the ofmaturity date may be ~~common~~extended ~~stock~~one ~~under~~year ~~Sections~~to 11January ~~and~~5, 152005; of(b) Westar Energy may provide funds to Westar Industries to the ~~Securities~~extent ~~Act~~necessary ofto ~~1933~~perform ~~and~~its obligations to the ~~Sections~~Company ~~10(b)~~under ~~and~~the 20Westar Credit Facility; (ac) ofWestar ~~the~~Energy ~~Securities~~will ~~Exchange~~reimburse ~~Act~~the Company ofapproximately ~~1934~~$4. ~~The~~4 ~~fourth~~million ~~amended~~for ~~complaint~~expenses ~~did~~incurred ~~not~~in ~~assert~~connection with ~~any~~services ~~claims~~provided ~~against~~by ~~Monitoring~~Protection One Data Services and AV One, Inc. On ~~April~~to Westar 5,Energy ~~2002,~~and ~~the~~Westar ~~Company~~Industries, and for the ~~other~~sale ~~defendants~~of ~~filed~~AV aOne, ~~motion~~Inc. to ~~dismiss~~Westar Energy; and (d) the Management Services ~~Fourth~~Agreement ~~Consolidated~~between ~~Amended~~the ~~Class~~Company ~~Action~~and ~~Complaint~~Westar Industries is cancelled.

On ~~May~~March 2911, ~~2002~~ 2003, the ~~claims~~KCC ofissued ~~Ralph~~Order ~~Apa~~No. ~~and~~65 ~~Apa Security~~conditionally ~~against~~approving the ~~Company~~Reconsideration Agreement. ~~were~~The ~~settled~~KCC byimposed the ~~mutual~~following ~~agreement~~on the terms of the Reconsideration ~~parties. This~~Agreement: ~~matter~~(a) ~~involved~~the ~~an arbitration~~Westar ~~that~~Credit ~~was~~Facility ~~commenced~~must ~~against~~be ~~Protection~~paid ~~One~~off ~~and~~upon ~~Protection~~the ~~One~~sale ~~Alarm~~of all ~~Monitoring~~or bya ~~Apa~~majority inof ~~December,~~Protection ~~2000,~~One ~~that~~common ~~alleged~~stock ~~common~~held ~~law~~by ~~fraud~~Westar Industries, ~~negligent~~and ~~misrepresentation~~this ~~and~~pay-off ~~Oregon~~must ~~Blue~~be ~~Sky~~a ~~law~~condition ~~claims~~of ~~based~~any onsale ~~the~~by ~~allegedly~~Westar Industries of Protection ~~inflated~~One’s stock; ~~price~~(b) ofWestar Energy must provide advance notice to the ~~shares~~KCC ofif ~~Protection~~the payment ~~One~~to ~~stock~~the ~~received~~Company inunder the tax sharing agreement exceeds approximately ~~connection~~$20 ~~with~~million; (c) Protection One’s ~~acquisition~~must ofreceive ~~his~~KCC ~~alarm~~approval ~~monitoring~~prior ~~business~~to selling any onassets ~~October~~exceeding 1$100,000 ~~1998. Mr.~~and ~~Apa~~Westar ~~also alleged~~Energy ~~breach~~and ofWestar ~~contract,~~Industries ~~breach~~must ofreceive KCC ~~the~~approval ~~covenant~~prior ofto ~~good~~selling ~~faith~~their stock in Protection One; and ~~fair~~(d) ~~dealing~~Protection One must waive potential claims against Westar Energy and ~~conversion~~Westar ~~arising~~Industries relating ~~from~~to ~~the~~certain ~~transaction~~inter-company agreements. In addition, the KCC reserved the right to impose a deadline for the ~~The~~sale ~~statement~~by Westar Industries of ~~claim~~its ~~sought~~Protection ~~undisclosed~~One ~~compensatory~~stock. Westar ~~and~~Energy ~~punitive~~is precluded from extending ~~damages,~~any ~~interest~~credit ~~and~~to ~~attorneys~~the ~~fees~~Company ~~and~~except ~~costs.~~for borrowings the Company may make under the Westar Credit Facility.

OnThe ~~May 15~~Company, ~~2002 the proceedings styled Protection~~ ~~One~~Westar ~~Alarm~~Energy ~~Monitoring, Inc. v Crimebusters, Inc., First Federal Security Systems, Inc.~~ and ~~Anthony~~Westar ~~Perrotti,~~Industries ~~Jr.,~~also ~~Civil~~agreed ~~Action~~that ~~No.~~they ~~300CV-1932DJS~~will ~~and related~~provide ~~disputes, were settled by~~ the ~~mutual agreement of the parties. The history of these proceedings~~ isKansas ~~summarized~~Corporation asCommission ~~follows: On October 2, 2000, the Company, as successor-in-interest to Centennial Security, Inc., was served~~ with aperiodic ~~demand~~reports ~~for~~on ~~arbitration by Crimebusters, Inc. before~~ the ~~AAA wherein~~progress ~~Crimebusters sought in excess~~ of ~~$7.0~~their efforts ~~million in damages due~~ to ~~alleged defaults~~sell byWestar ~~the~~Energy’s ~~Company~~equity ~~under~~investment an asset purchase agreement between Crimebusters, et al., and Centennial Security, Inc. On October 6, 2000, the Company filed claims alleging fraud, willful misconduct and breach of contract against Crimebusters, et al., in ~~the~~Protection ~~United States District Court for the District of Connecticut~~One. ~~All of these claims and counterclaims were resolved by the settlement.~~

In ~~1999~~addition, ~~six former Protection One dealers filed a~~ ~~class~~on ~~action~~March ~~lawsuit~~19, ~~against~~2003, ~~Monitoring in~~ the U.Company S.submitted ~~District~~two ~~Court~~letters ~~for~~to the ~~Western~~ ~~District~~KCC ofin ~~Kentucky~~response ~~alleging breach of contract arising out of a~~to ~~disagreement~~KCC ~~over~~Order ~~the interpretation of certain provisions of their dealer contracts. The action is styled Total Security Solutions, Inc., et al. v. Protection One Alarm Monitoring, Inc., Civil Action~~ No. ~~3:99CV-326-H (filed May 21~~65, ~~1999). In~~one ~~September~~of ~~1999,~~which ~~the~~was ~~Court~~addressed ~~granted Monitoring’s motion~~ to ~~stay~~ the ~~proceeding~~KCC ~~pending~~and the ~~individual~~other ~~plaintiffs’ pursuit~~ of ~~arbitration as~~which ~~required~~was byaddressed ~~the~~to ~~terms~~Westar ~~of their agreements~~Energy. As Ondescribed ~~June~~in ~~23,~~the ~~2000~~letters, the ~~Court~~Company ~~denied~~agreed ~~plaintiffs’~~to ~~motion~~(i) ~~for~~release ~~collective arbitration.~~Westar OnEnergy ~~or about October 4, 2000, notwithstanding the Court’s denial of~~from ~~plaintiffs’~~certain ~~motion~~claims ~~for~~relating ~~collective arbitration, the six former dealers filed a Motion~~ to ~~Compel~~Protection ~~Consolidation~~One ~~Arbitration~~Data ~~with~~Services, ~~the~~Inc ~~American Arbitration Association~~ (“~~AAA~~PODS”)~~. On November 21~~, ~~2000,~~ ~~the~~AV ~~AAA denied the dealers’ motion and advised they would proceed on only one matter at a time. Initially~~One, ~~only Masterguard Alarms proceeded with~~ ~~arbitration~~Inc. Onand ~~March 8, 2002, Masterguard’s claims against~~ the ~~Company~~Management ~~were settled~~Services byAgreement ~~the~~and ~~mutual~~(ii) ~~agreement~~accept of the ~~parties.~~conditions ~~On July 25, 2002, Complete~~set ~~Security,~~forth ~~Inc., a dealer which was among the original plaintiffs~~ in ~~the~~Order ~~Total Security~~No. ~~Solutions~~65 ~~court~~relating ~~proceeding,~~to ~~initiated~~matters ~~arbitration proceedings against Monitoring, alleging breach of contract, misrepresentation, consumer fraud and franchise law violations. Three~~ other ~~dealers,~~than ~~not plaintiffs in the original Total Security Solutions litigation — Sentralarms~~PODS, ~~Inc.,~~AV ~~Security Response Network~~One, Inc. and ~~Homesafe Security, Inc. (~~the ~~latter two of which are associated with Ira R. Beer), have similar claims~~ inManagement ~~arbitration~~Services ~~pending against the Company~~Agreement. The Company ~~believes~~does itnot ~~has complied~~intend ~~with~~to ~~the~~seek ~~terms~~reconsideration of ~~its~~Order ~~contracts with these former dealers, and intends to aggressively defend against these claims~~No. In the opinion of management, none of these pending dealer claims, either alone or in the aggregate, will have a material adverse effect upon the Company’s consolidated financial position or results of operations65.

~~Other~~The ~~Protection~~Company ~~One~~had ~~dealers~~outstanding ~~have~~borrowings ~~threatened,~~under ~~and~~the ~~may~~Westar Credit Facility ~~bring,~~with ~~claims~~Westar ~~against~~Industries ~~the~~of ~~Company~~$215.5 ~~based~~million ~~upon~~at aJune ~~variety~~30, of2003 ~~theories~~and ~~surrounding~~December 31, ~~calculations~~2002. The Company accrued interest expense of ~~holdback~~$2.8 million and ~~other~~$5.6 million and made interest payments, orof ~~based~~$2.8 million and $5.6 million on ~~other~~borrowings ~~theories~~under ofthe facility for the three months and six months ended June 30, 2003, ~~liability~~respectively. The Company ~~believes~~accrued interest itexpense ~~has~~of $2.3 million and $4.3 million and made interest payments of $2.3 million and $4.2 million on borrowings under the facility for the three months and six months ended June 30, 2002, ~~materially~~respectively. Pursuant ~~complied~~to ~~with~~the Reconsideration Agreement, the ~~terms~~maximum borrowing capacity of ~~its~~the ~~contracts~~Westar ~~with~~Credit Facility ~~dealers~~was reduced from $280.0 million to $228.4 million. ~~The~~Accordingly, ~~Company~~Westar ~~cannot~~Energy ~~predict~~agreed to refund approximately $0.5 million to the ~~aggregate~~Company in amendment fees. This amount was refunded on June 24, 2003 ~~impact~~upon execution of ~~these~~the ~~potential~~thirteenth ~~disputes~~amendment ~~with~~to ~~dealers~~the ~~which~~Westar ~~could~~Credit ~~be material~~Facility.

On ~~August~~June 230, ~~2002,~~2003 ~~Protection One~~the ~~Alarm~~Company ~~Monitoring,~~paid ~~Inc~~$0.5 ~~(“Monitoring”),~~million ~~Westar~~amendment ~~Energy,~~fee ~~Inc.~~to ~~and certain~~Westar ~~former~~Industries ~~employees~~for ofthe ~~Monitoring,~~fourteenth asamendment ~~well~~to asthe ~~certain~~Westar ~~third~~Credit ~~parties,~~Facility. This ~~were~~amendment ~~sued~~extended in the ~~District~~maturity ~~Court~~date of ~~Jefferson County, Texas, by Regina Rogers, a resident of~~ ~~Beaumont,~~the ~~Texas~~facility ~~(Cause No. D167654). Ms. Rogers has asserted various claims due~~ to ~~casualty~~January ~~losses and property damage she allegedly suffered as a result of a fire to her residence. In her complaint~~5, ~~Ms.~~2005 ~~Rogers alleges that Protection One~~ and ~~certain~~increased ofthe ~~its~~applicable ~~employees~~margin ~~were negligent, grossly negligent and malicious in~~on ~~allegedly~~Eurodollar ~~failing~~borrowings to 5.00%.

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

During the first six months of 2002, the Company acquired from Westar Industries $60.7 million face value of the Company’s bonds for $46.1 million. These bonds were purchased at Westar Industries’ cost which generally approximated fair value. As a result of these transactions, a gain of $14.2 million was recognized in the first six months of 2002. No bonds were repurchased from Westar Industries in the first six months of 2003.

~~properly~~During ~~service~~the first ~~and~~six ~~monitor~~months of 2002 the ~~alarm~~Company ~~system~~acquired atin open market purchases ~~the~~approximately ~~residence~~$41.2 ~~The~~million ~~complaint~~of ~~also~~Westar ~~alleges~~Energy ~~various~~6.25% ~~violations~~notes, approximately $21.6 million of ~~the~~Westar ~~Texas~~Energy 6.875% ~~Deceptive~~notes ~~Trade~~and ~~Practices~~approximately ~~Act~~$4.6 ~~(“DTPA”),~~million ~~fraud~~of ~~and~~Westar ~~breach~~Energy of7.125% ~~contract~~notes. All ~~Relief~~of these notes were subsequently sold at ~~sought~~cost ~~under~~to ~~the~~Westar ~~complaint~~Energy ~~includes~~prior ~~actual~~to June 30, ~~exemplary~~2002. During ~~and~~the ~~treble~~first ~~damages~~six ~~under~~ months in 2002 the ~~DTPA,~~Company ~~plus~~acquired ~~attorneys’~~in ~~fees~~open market purchases approximately $10.1 ~~Although~~million ~~the~~of ~~complaint~~Westar ~~does~~Energy ~~not~~common ~~specify~~stock ~~the~~and ~~amount~~approximately $1.8 million of ~~damages~~Westar ~~sought,~~Energy ~~counsel~~preferred ~~for~~stock. In addition, in the ~~plaintiff~~first ~~has~~quarter ~~previously~~of ~~alleged~~2002, ~~actual~~the ~~damages~~Company acquired $0.3 million of ~~approximately~~Westar Energy preferred securities and $70.51 million of ONEOK, Inc. ~~The~~common ~~matter~~stock, ~~has~~all ~~been~~of ~~referred~~which were subsequently sold at cost to Westar Energy on March 27, 2002. At December 31, 2002, the Company’s ~~insurance~~held ~~carrier.~~850,000 Inshares ~~the~~of ~~opinion~~Westar Energy common stock at a cost of ~~management~~approximately ~~the~~$13.0 ~~outcome~~million ~~will~~and 34,213 shares of ~~not~~Westar ~~have~~Energy preferred stock at a ~~material~~cost ~~adverse~~of ~~effect~~approximately ~~upon~~$2.0 million for a combined cost of approximately $15.0 million which is reflected in the equity section of the Company'’s ~~consolidated~~balance ~~financial~~sheet. These securities were sold to Westar Energy on February 14, 2003 for approximately ~~position~~$11.6 ormillion, ~~results~~as ofdiscussed ~~operations~~above.

~~The~~On ~~Company~~June is21, 2001, athe ~~party~~Company toentered ~~claims~~into ~~and~~an ~~matters~~amendment ~~of litigation incidental~~ to the ~~normal~~Contribution ~~course~~Agreement dated as of ~~its~~July ~~business. Additionally~~30, ~~the Company~~1997 ~~receives~~between ~~notices~~the ofCompany ~~consumer~~and ~~complaints~~Westar ~~filed with various state agencies~~Energy. ~~The~~This ~~Company~~amendment ~~has~~permitted ~~developed~~Westar aEnergy’s ~~dispute~~beneficial ~~resolution~~ownership ~~process~~of ~~for~~the ~~addressing~~Company’s ~~these~~outstanding ~~administrative~~common ~~complaints. The~~stock ~~ultimate~~to ~~outcome~~exceed ~~of such matters cannot~~85% ~~presently~~provided bethat ~~determined;~~its ~~however,~~beneficial inownership ~~the~~on ~~opinion~~a offully ~~management~~diluted ofbasis ~~the~~does ~~Company,~~not exceed ~~the~~81% ~~resolution~~ of ~~such~~the ~~matters~~outstanding ~~will~~shares. The amendment ~~not~~to ~~have~~the aContribution ~~material~~Agreement ~~adverse~~was ~~effect~~approved ~~upon~~by the Company’s ~~consolidated~~continuing directors ~~financial~~as ~~position~~required orby ~~results~~the terms of ~~operations~~the Contribution Agreement.

9The Company had a receivable balance of $40. ~~Segment~~0 ~~Reporting:~~million and $20.7 million at June 30, 2003 and December 31, 2002, respectively, relating to a tax sharing agreement with Westar Energy. The $20.7 million receivable at December 31, 2002, is the estimated tax benefit Westar Energy will be able to utilize in its 2002 consolidated income tax return which will be filed in 2003. An additional $19.3 million receivable was recorded for the estimated tax benefit generated in the first six months of 2003 that Westar Energy will be able to utilize in its 2003 consolidated income tax return which will be filed in 2004. In February 2002, the Company received $1.7 million from Westar Energy for payment of the tax receivable at December 31, 2001. See Note 8 for further discussion relating to income taxes.

~~The~~Westar Energy provides administrative services at cost to the Company’s ~~reportable~~pursuant ~~segments~~to ~~include~~an agreement ~~North~~(the “Administrative Services Agreement”), which includes accounting, ~~America~~tax, audit, human resources, legal, purchasing and ~~Multifamily~~facilities services. ~~North~~Charges ~~America~~of approximately $1.1 million and ~~provides~~$2.3 ~~residential,~~million ~~commercial~~were incurred for the three months and ~~wholesale~~six ~~security~~months ~~alarm~~ended ~~monitoring~~June 30, ~~services~~2003, ~~which~~respectively, ~~include~~compared ~~sales,~~to ~~installation~~charges of approximately $1.5 million and ~~related~~$3.1 million ~~servicing~~for ofthe ~~security~~three months and six months ended June 30, 2002, respectively. The Company had a net ~~alarm~~balance ~~systems~~due into ~~the~~Westar ~~United~~Energy ~~States~~of $2. ~~Multifamily~~0 ~~provides~~million ~~security~~and ~~alarm~~$1.0 ~~services~~million toat ~~apartments~~June 30, ~~condominiums~~2003 and ~~other~~December ~~multi-family~~31, ~~dwellings~~2002, respectively.

~~The~~In ~~accounting~~November ~~policies~~2001, of the ~~operating~~Company ~~segments~~entered ~~are~~ into an agreement (the “Management ~~same~~Services asAgreement”) ~~those~~pursuant ~~described~~to inwhich it paid to Westar Industries, beginning with the ~~summary~~quarter ofended ~~significant~~March ~~accounting~~31, ~~policies~~2002, a financial inadvisory fee, payable quarterly, equal to 0.125% of the Company’s ~~Form~~consolidated total ~~10-K~~assets ~~for~~at the ~~year~~end ~~ended~~of ~~December~~each ~~31, 2001~~quarter. The Company ~~manages~~incurred ~~its~~$1.3 ~~business~~million ~~segments~~and $2.6 million of expense for the ~~based~~three onand ~~earnings~~six ~~before~~months ~~interest~~ended June 30, ~~income~~2002, ~~taxes~~respectively, ~~depreciation~~for ~~and~~the ~~amortization~~financial ~~(“EBITDA”)~~advisory fee which weis ~~derive~~included byin ~~adjusting income~~general ~~(loss)~~and ~~from~~administrative ~~continuing~~expenses ~~operations~~on ~~before~~the statement ~~income~~of ~~taxes~~operations. During ~~and extraordinary~~the ~~gain~~fourth byquarter ~~adding: (i)~~of ~~interest expense~~2002, ~~net (ii)~~ ~~amortization~~the ofmanagement ~~intangibles and~~fee ~~depreciation~~was ~~expense,~~suspended. This ~~(iii)~~agreement ~~loss~~was onterminated ~~impairment,~~in ~~(iv)~~accordance with ~~other~~the ~~charges~~Reconsideration Agreement and ~~(v) other~~the ~~non-recurring~~remaining ~~expenses~~balance asdue ~~set~~was ~~forth~~paid during in the ~~table~~fourth ~~below~~quarter of 2002.

~~EBITDA~~On ~~does~~June ~~not represent cash flow from operations as defined by generally accepted accounting principles~~5, ~~should~~2002, ~~not~~the beCompany ~~construed~~acquired asthe anstock ~~alternative~~of toa ~~operating~~wholly ~~income~~owned ~~and~~subsidiary isof ~~indicative~~Westar ~~neither~~Industries ofnamed ~~operating~~Westar ~~performance~~Aviation, ~~nor~~Inc. ~~cash~~for ~~flows~~approximately ~~available~~$1.4 tomillion. The ~~fund~~Company subsequently changed the ~~cash needs~~name of the ~~Protection~~newly ~~One.~~acquired ~~Items~~corporation ~~excluded~~to ~~from~~AV ~~EBITDA~~ONE, ~~are~~Inc. ~~significant~~(“AV ~~components in~~ONE”) ~~understanding~~ and ~~assessing~~entered ~~the~~into ~~financial performance of Protection One.~~an ~~Protection~~Aircraft ~~One~~Reimbursement ~~believes~~Agreement ~~presentation~~with ofWestar ~~EBITDA~~Industries. Under ~~enhances~~this anagreement, ~~understanding~~Westar ofIndustries ~~financial~~agreed ~~condition,~~to ~~results~~reimburse ofAV ~~operations~~ONE ~~and~~for ~~cash~~certain ~~flows~~costs ~~because~~and ~~EBITDA~~expenses ~~is used~~relating ~~by Protection One~~ to ~~satisfy~~ its operations. In ~~debt~~accordance ~~service~~with ~~obligations~~the ~~and~~Reconsideration ~~its~~Agreement, ~~capital~~Westar Energy ~~expenditure~~reimbursed ~~and~~the ~~other~~Company ~~operational~~for ~~needs,~~all ascosts ~~well~~incurred asrelating to ~~provide~~the ~~funds~~services ~~for~~provided ~~growth.~~to InWestar ~~addition,~~Energy ~~EBITDA~~and isWestar ~~used~~Industries ~~by senior lenders~~ and ~~subordinated creditors~~on ~~and~~March ~~the~~21, ~~investment~~2003, ~~community~~repurchased ~~to determine~~ the ~~current borrowing~~ ~~capacity~~stock ~~and~~of toAV ~~estimate~~ONE ~~the~~at ~~long–term~~book value. The Company ofdid ~~companies~~not ~~with~~incur ~~recurring cash~~any ~~flows~~gain ~~from~~or ~~operations.~~loss ~~Protection~~on ~~One’s~~the ~~computation~~transaction ofsince ~~EBITDA~~the ~~may~~sale ~~not be~~was ~~comparable~~transacted toat ~~other~~book ~~similarly titled measures of other companies~~value.

~~The~~On ~~following~~September 17, ~~tables~~2002, ~~provide~~Westar Energy was served with a federal grand jury subpoena by the ~~calculation~~United States Attorney’s Office concerning, among other things, the use of aircraft ~~EBITDA~~leased ~~for~~by ~~each~~Westar Industries, and by AV ONE. Since that date, the United States Attorney’s Office has served additional information requests on Westar Energy, its subsidiaries, including AV ONE, and certain employees of Westar Energy and AV ONE. The Company is cooperating with the ~~periods~~grand jury ~~presented~~and Westar Energy in ~~the~~connection ~~segment~~with ~~tables:~~such requests.

	Six Months Ended June 30, 2002								Six Months Ended June 30, 2001
	(Dollars in thousands)								(Dollars in thousands)
	North America			Multifamily		Consolidated			North America			Multifamily			Consolidated
Income (loss) from continuing operations before income taxes and extraordinary gain	$	(354,737	)	$	47	$	(354,690	)	$	(77,308	)	$	(3,420	)	$	(80,728	)
Plus:
Interest expense, net	18,937			2,700		21,637			23,935			3,963			27,898
Loss on impairment	332,194			—		332,194			—			—			—
Amortization of intangibles and depreciation expense	40,759			4,090		44,849			91,798			8,036			99,834
Other charges (a)	550			—		550			4,695			—			4,695
Other non-recurring expense (b)	117			—		117			478			—			478
EBITDA	$	37,820		$	6,837	$	44,657		$	43,598		$	8,579		$	52,177

	Three Months Ended June 30, 2002									Three Months Ended June 30, 2001
	(Dollars in thousands)									(Dollars in thousands)
	North America			Multifamily			Consolidated			North America			Multifamily			Consolidated
Income (loss) from continuing operations before income taxes and extraordinary gain	$	(10,619	)	$	(193	)	$	(10,812	)	$	(42,522	)	$	(1,706	)	$	(44,228	)
Plus:
Interest expense, net	9,415			1,227			10,642			11,682			1,920			13,602
Amortization of intangibles and depreciation expense	20,317			2,067			22,384			46,089			4,035			50,124
Other charges (a)	39			—			39			4,276			—			4,276
Other non-recurring expense (b)	24			—			24			498			—			498
EBITDA	$	19,176		$	3,101		$	22,277		$	20,023		$	4,249		$	24,272

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

~~(a) Other charges in 2002 and 2001 consist of~~6. Commitments ~~severance, relocation~~ and ~~facility closure costs incurred in connection with our efforts to consolidate and improve efficiency of our monitoring facilities and branch operations and to reduce costs.~~Contingencies:

In 1999, six former Protection One dealers filed a class action lawsuit against Protection One Alarm Monitoring, Inc. (b“Monitoring”) ~~Other~~ ~~non~~in the U. S. District Court for the Western District of Kentucky alleging breach of contract arising out of a disagreement over the interpretation of certain provisions of their dealer contracts. The action is styled Total Security Solutions, Inc., et al. v. Protection One Alarm Monitoring, Inc., Civil Action No. 3:99CV-~~recurring~~326-H ~~expense~~(filed inMay ~~2002~~21, ~~and~~1999). In ~~2001~~September ~~are~~1999, the Court granted Monitoring’s motion to stay the proceeding pending the individual plaintiffs’ pursuit of arbitration as required by the terms of their agreements. On June 23, 2000, the Court denied plaintiffs’ motion for ~~losses~~collective arbitration. On or about October 4, 2000, notwithstanding the Court’s denial of plaintiffs’ motion for collective arbitration, the six former dealers filed a Motion to Compel Consolidation Arbitration with the American Arbitration Association (“AAA”). On November 21, 2000, the AAA denied the dealers’ motion and advised they would proceed on ~~sales~~only one matter at a time. Initially, only Masterguard Alarms proceeded with arbitration. On March 8, 2002, Masterguard’s claims against the Company were settled by the mutual agreement of ~~assets~~the parties.

~~Six~~On ~~Months~~July ~~Ended~~25, 2002, ~~June~~Complete 30Security, ~~2002~~Inc., a dealer which was among the original plaintiffs in the Total Security Solutions court proceeding, initiated arbitration proceedings against Monitoring, alleging breach of contract, misrepresentation, consumer fraud and franchise law violations.

~~(Dollars~~In addition, two dealers, not plaintiffs in ~~thousands)~~the original Total Security Solutions litigation — Security Response Network, Inc. and Homesafe Security, Inc. — have brought similar claims in arbitration against the Company.

	North America(1)			Multifamily(2)		Consolidated
Revenues	$	128,563		$	18,425	$	146,988
EBITDA	37,820			6,837		44,657
Amortization and depreciation expense	40,759			4,090		44,849
Loss on impairment	332,194			—		332,194
Severance and other expense	550			—		550
Operating income (loss)	(335,683		)	2,747		(332,936		)
Segment assets	964,290			96,698		1,060,988
Capital expenditures for new accounts	7,922			3,081		11,003

Discovery is on-going in the Complete Security, Security Response Network and Homesafe Security matters.

~~Six~~The ~~Months~~Company believes ~~Ended~~it ~~June~~has 30complied with the terms of its contracts with these former dealers, ~~2001~~and intends to aggressively defend against these claims. In the opinion of management, none of these pending dealer claims, either alone or in the aggregate, will have a material adverse effect upon the Company’s consolidated financial position or results of operations.

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

	North America(1)			Multifamily		Consolidated
Revenues	$	157,934		$	17,880	$	175,814
EBITDA	43,598			8,579		52,177
Amortization and depreciation expense	91,798			8,036		99,834
Severance and other expense	4,695			—		4,695
Operating income (loss)	(52,895		)	543		(52,352		)
Segment assets	1,638,078			197,412		1,835,490
Capital expenditures for new accounts	10,234			2,573		12,807

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

~~Three~~Monitoring entered ~~Months~~into ~~Ended~~a ~~June~~tolling 30agreement with the University and Dr. Sower, ~~2002~~extending the applicable statute of limitations to August 7, 2003, in order to allow claimants time to further investigate the cause of the freezer failure and potentially resolve the matter without resorting to litigation. The parties engaged in informal discovery and settlement negotiations during the tolling period.

~~(Dollars~~On Friday, August 8, 2003, Monitoring received notice that on or about August 1, 2003, and August 5, 2003, respectively, Dr. Sower and the University filed separate lawsuits against Monitoring in ~~thousands~~New Hampshire Superior Court (Stacia Sower v. Protection One Alarm Monitoring, inc. and University of New Hampshire v. Protection One Alarm Monitoring, Inc. & SU Security, Docket Number 03-C0199). Dr. Sower's suit alleges breach of the duty of care, violations of New Hampshire Revised Statute Chapter 358-A, products liability, and other causes of action. The University's suit alleges negligence, breach of contract, breach of implied covenant of good faith and fair dealing, negligent or intentional misrepresentation, strict liability, violations of New Hampshire Revised Statute Chapter 358-A, breach of implied warranties, and other causes of action. Both lawsuits seek unspecified monetary damages. The University's lawsuit also seeks rescission of Monitoring's contract with the University.

	North America(3)			Multifamily(2)		Consolidated
Revenues	$	63,740		$	9,203	$	72,943
EBITDA	19,176			3,101		22,277
Amortization and depreciation expense	20,317			2,067		22,384
Severance and other expense	39			—		39
Operating income (loss)	(1,180		)	1,034		(146		)
Capital expenditures for new accounts	3,012			1,509		4,521

~~Three~~Monitoring’s liability ~~Months~~insurance ~~Ended~~carrier ~~June~~has 30been notified of these claims. Monitoring intends to vigorously defend against any and all claims relating to this matter, ~~2001~~and believes it has adequate insurance coverage with respect to any potential liability arising from this suit. In the opinion of management, the outcome of this dispute will not have a material adverse effect upon the Company’s consolidated financial position or results of operations.

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

	North America(3)			Multifamily		Consolidated
Revenues	$	77,002		$	9,048	$	86,050
EBITDA	20,023			4,249		24,272
Amortization and depreciation expense	46,089			4,035		50,124
Severance and other expense	4,276			—		4,276
Operating income (loss)	(30,342		)	214		(30,128		)
Capital expenditures for new accounts	5,890			1,207		7,097

On May 20, 2003, Joseph G. Milstein filed a putative class action suit against Protection One Alarm Services, Inc. in Los Angeles Superior Court (Milstein v. Protection One Alarm Services, Inc., John Does 1-100, including Protection One Alarm Monitoring, Inc, Case No. BC296025). The complaint alleges that Mr. Milstein, and similarly situated Protection One customers in California, should not be required to continue to pay for alarm services on their homes after they have moved from the home. The complaint seeks money damages and disgorgement of profits based on alleged breach of contract, breach of the covenant of good faith and fair dealing, fraud by intentional misrepresentation, fraud by negligent misrepresentation and concealment, violation of California Business & Professions Code §17200, and violation of the California Consumer Legal Remedies Act. On May 29, 2003, the plaintiff added Protection One Alarm Monitoring, Inc. as a defendant in the lawsuit.

~~(1) Includes~~On ~~allocation~~July of3, ~~holding~~2003, ~~company~~the ~~expenses~~court ~~reducing~~stayed ~~EBITDA~~the lawsuit, and ~~operating~~the ~~income~~court ~~(loss)~~indicated byit ~~$3.8~~would not accept ~~million~~additional ~~and~~filings ~~$2.7~~on ~~million~~this ~~for~~case ~~the~~pending ~~six~~a ~~months~~status ~~ended~~conference ~~June~~which ~~30,~~has ~~2002~~been scheduled ~~and~~for ~~2001~~August 13, ~~respectively~~ 2003.

~~(2) Includes allocation of~~Monitoring ~~holding~~maintains ~~company~~that ~~expenses~~the ~~reducing~~claims ~~EBITDA~~asserted ~~and~~in ~~operating~~this ~~income~~matter ~~(loss)~~are bywithout ~~$0.4 million~~merit, and Monitoring ~~$0.8~~intends ~~million~~to ~~for~~vigorously ~~the~~defend ~~three~~against any and ~~six~~all ~~months~~claims ~~ended~~relating ~~June 30, 2002,~~to ~~respectively~~this matter.

~~(3) Includes~~The ~~allocation~~Company ofis ~~holding~~a ~~company~~party ~~expenses~~to ~~reducing~~claims ~~EBITDA~~ and ~~operating~~matters ~~income~~of ~~(loss)~~litigation byincidental $1to the normal course of its business.9 Additionally, the Company receives notices of consumer complaints ~~million~~filed ~~and~~with $1various state agencies.2 The Company ~~million~~has developed a dispute resolution process for ~~the~~addressing ~~three~~these administrative ~~months~~complaints. The ~~ended~~ultimate outcome ~~June~~of 30such matters cannot presently be determined; however, ~~2002~~in ~~and~~the ~~2001~~opinion of management of the Company, the resolution of such matters will not have a material adverse effect upon the Company’s consolidated financial position or ~~respectively~~results of operations.

In order to retain the services of numerous employees who may feel uncertain about the future ownership, management and direction of the Company, as a result of Westar Energy’s announcement to dispose of its ownership interest in the Company (see Note 9), the Company entered into retention and severance arrangements with approximately 190 employees to provide incentives for such employees to remain with the Company through the sales process. The maximum retention amount of approximately $5.3 million in the aggregate will be paid to those employees who remain employed with the Company through November 1, 2003 (or, if a change in control of the Company occurs prior to that date, then such payment will be made on or about the change in control date). Additional severance amounts of approximately $11.0 million may also be paid under these arrangements to those employees, if any, who are terminated following a change in control. Approximately $0.6 million was expensed in March of 2003 related to the maximum $5.3 million retention payment, and approximately $0.6 million is expected to be expensed each month through October 31, 2003 or until a change in control, if earlier. As of June 30, 2003, $2.7 million has been expensed related to the retention payment. No amounts have been expensed by the Company relating to the severance arrangements. Upon a change in control of the Company, an additional approximately $10. ~~Income~~5 ~~Taxes:~~million will be paid to other key employees. No amounts have been expensed relating to these additional payments to key employees. In addition, upon a change in control, customary fees and expenses will be paid to the financial advisor to the Company’s Special Committee of the Board of Directors. The Company has expensed approximately $0.4 million for legal and other professional fees related to a possible change in control.

The difference between the expected annual effective rate and the federal statutory rate of 35% is primarily attributable to a tax benefit of approximately $2.7 million associated with the sale of the Canadian operations. The Company has a tax sharing agreement with Westar Energy which allows it to be reimbursed for tax deductions utilized by Westar Energy in its consolidated tax return. If Westar Energy were to own less than 80% of Westar Industries voting stock, or if Westar Industries were to own less than 80% of the Company’s voting stock, the Company would no longer file its tax return on a consolidated basis with Westar Energy. As a result, a substantial portion of the Company’s net deferred tax assets of $259.6 million at June 30, 2002 would likely not be realizable and the Company would likely not be in a position to record a tax benefit for losses incurred. Accordingly, the Company would not be in a position to utilize the deferred tax asset and it would record a charge to earnings to establish a valuation allowance. This charge could be material.16

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

7. Segment Reporting:

The Company’s reportable segments include North America and Multifamily. North America provides residential, commercial and wholesale security alarm monitoring services, which include sales, installation and related servicing of security alarm systems in the United States. Multifamily provides security alarm services to apartments, condominiums and other multi-family dwellings.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company’s Form 10-K for the year ended December 31, 2002. The Company manages its business segments based on adjusted earnings before interest, income taxes, depreciation and amortization (including amortization of deferred customer acquisition costs and revenues) and other income and expenses (“adjusted EBITDA”).

	Six Months Ended June 30, 2003										Six Months Ended June 30, 2002
	(Dollars in thousands)										(Dollars in thousands)
	North America(1)			Multifamily(2)		Adjustments(3)		Consolidated			North America(1)			Multifamily(2)		Adjustments(3)		Consolidated
Revenues	$	120,082		$	18,946			$	139,028		$	128,563		$	18,652			$	147,215
Adjusted EBITDA(6)	32,812			6,759				39,571			37,263			6,839				44,102
Amortization of intangibles and depreciation expense	37,868			2,446				40,314			38,822			2,634				41,456
Amortization of deferred costs in excess of deferred revenues	6,159			2,118				8,277			8,985			3,037				12,022
Loss on impairment	—			—				—			338,104			—				338,104
Operating income (loss)	(11,215		)	2,195				(9,020		)	(348,648		)	1,168				(347,480		)
Segment assets	786,991			96,257		(57,553	)	825,695			902,259			102,023		(48,469	)	955,813
Expenditures for property	2,335			460				2,795			2,955			373				3,328
Investment in new accounts, net	10,382			2,803				13,185			9,949			3,147				13,096

	Three Months Ended June 30, 2003									Three Months Ended June 30, 2002
	(Dollars in thousands)									(Dollars in thousands)
	North America(4)			Multifamily(5)		Adjustments(3)	Consolidated			North America(4)			Multifamily(5)		Adjustments(3)	Consolidated
Revenues	$	59,341		$	9,601		$	68,942		$	63,740		$	9,549		$	73,289
Adjusted EBITDA(6)	17,155			3,046			20,201			19,245			3,103			22,348
Amortization of intangibles and depreciation expense	18,898			1,213			20,111			19,291			1,318			20,609
Amortization of deferred costs in excess of deferred revenues	3,285			1,089			4,374			2,390			948			3,338
Operating income (loss)	(5,028		)	744			(4,284		)	(2,436		)	837			(1,599		)
Expenditures for property	1,107			296			1,403			2,605			230			2,835
Investment in new accounts, net	4,805			1,703			6,508			6,594			1,513			8,107

(1) Includes allocation of holding company expenses reducing Adjusted EBITDA by $3.8 million for each of the six months ended June 30, 2003 and 2002.

(2) Includes allocation of holding company expenses reducing Adjusted EBITDA by $1.0 million and $0.8 million for the six months ended June 30, 2003 and 2002, respectively.

(3)Adjustment to eliminate intersegment accounts receivable.

(4) Includes allocation of holding company expenses reducing Adjusted EBITDA by $3.2 million and $1.9 million for the three months ended June 30, 2003 and 2002, respectively.

(5) Includes allocation of holding company expenses reducing Adjusted EBITDA by $0.8 million and $0.4 million for the three months ended June 30, 2003 and 2002, respectively.

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

	Six Months Ended June 30,
	2003			2002
	(amounts in thousands )

Loss from continuing operations before income taxes	$	(26,255	)	$	(352,499	)

Plus:

Interest expense	19,327			21,637

Amortization of intangibles and depreciation expense	40,314			41,456
Amortization of deferred costs in excess of deferred revenues	8,277			12,022

Loss on Impairment	—			338,104

Less:

Gain on retirement of debt	—			(16,735		)

Other non-recurring (income) expense	(2,092		)	117

Adjusted EBITDA	$	39,571		$	44,102

	Three Months Ended June 30,
	2003			2002
	(amounts in thousands)

Income (loss) from continuing operations before income taxes	$	(12,263	)	$	1,320

Plus:

Interest expense	10,052			10,642

Amortization of intangibles and depreciation expense	20,111			20,609
Amortization of deferred costs in excess of deferred revenues	4,374			3,338

Less:

Gain on retirement of debt	—			(13,585		)

Other non-recurring (income) expense	(2,073		)	24

Adjusted EBITDA	$	20,201		$	22,348

8. Income Taxes:

The income tax benefit recorded for the six-month period ended June 30, 2003 is approximately 34% of the pre-tax loss. This rate represents the expected effective rate for 2003. The Company has a tax sharing agreement with Westar Energy which allows it to be reimbursed for tax deductions utilized by Westar Energy in its consolidated tax return. If Westar Energy completes its intended disposition of its investment in the Company, the net deferred tax assets, which were $284.6 million at June 30, 2003, might not be realizable and the Company might not be in a position to record a tax benefit for losses incurred. The Company would be required to record a non-cash charge against income for the portion of its net deferred tax assets it determines not to be realizable. This charge could be material and could have a material adverse effect on the Company’s business, financial condition and results of operations. The amount of deferred taxes increased by approximately $204.0 million upon the recording of impairment charges in the first and fourth quarters of 2002 as discussed above. In addition, as a result of a sale, the Company would no longer receive payments from Westar Energy for current tax benefits utilized by Westar Energy. The Company had a receivable balance of $40.0 million and $20.7 million at June 30, 2003 and December 31, 2002, respectively, from Westar Energy related to these tax benefits. The Company expects to receive an estimated $20.7 million from Westar Energy in the fourth quarter of 2003 as payment for the tax benefit Westar Energy is expected to utilize in its 2002 consolidated income tax return to be filed in the third quarter. In 2002, the Company received aggregate payments from Westar Energy of $1.7 million. The loss of these payments would have a material adverse effect on cash flow.

9. Recent Developments:

In May 2003, the Company received approximately $2.5 million related to the purchase holdback amount from the sale of its Sonitrol business in June 2001. This was recorded as a gain on sale of assets and is included in other income in the consolidated statement of operations and comprehensive income (loss).

On November 8, 2002 the KCC issued an Order that, among many findings and directives, requested Westar Energy to consider selling its investment in Protection One. In early 2003, Westar Energy announced that it intends to sell its equity investment in Protection One, and the Company and Westar Energy are currently exploring strategic alternatives for the Company, including the possible sale of the Company.

To facilitate this process, the Company’s Board of Directors (the “Board”) formed a Special Committee in January 2003 comprised of independent directors. The Special Committee has been authorized by the Board to, among other things: (i) monitor the continuing proceeding between Westar Energy and the KCC on behalf of the Company; (ii) monitor Westar Energy’s process with respect to selling its equity investment in the Company; (iii) consider whether it is in the best interests of the Company and all of its stockholders that the Company participate in that sales process and, if so, direct and oversee that participation; (iv) review and evaluate any proposal by Westar Energy to divest its equity investment in the Company, which will be called a Controlling Stockholder Proposal; (v) determine whether any Controlling Stockholder Proposal is fair to and in the best interests of the Company and all of its stockholders; (vi) determine whether there are strategic alternatives for the

Company to any Controlling Stockholder Proposal that would provide a greater benefit to the Company and all of its stockholders than such Controlling Stockholder Proposal; and (vii) determine what action(s), if any, the Company should take in response to any Controlling Stockholder Proposal.

In February 2003, the Special Committee announced that it had retained Bear, Stearns & Co. Inc. to serve as its financial advisor. Westar Energy has retained Lehman Brothers Inc.

10. Restatement of 2002 Consolidated Financial Statements:

Subsequent to the Company’s filing its Form 10-Q on November 14, 2002 and as reflected in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, the Company determined it would restate its quarterly financial information for each of the first three quarters of 2002. Since adopting Staff Accounting Bulletin 101 on January 1, 2000, the Company had capitalized as property and equipment the direct and incremental costs of the electronic security systems (equipment and associated labor) that it installs in homes or businesses and for which the Company retains title. The Company had amortized this equipment to depreciation expense over the expected life of the customer. The Company’s North America segment utilized a 10-year accelerated amortization method and its Multifamily segment utilized a 9-year straight line amortization method. Direct and incremental selling costs in excess of deferred revenue incurred in connection with the installation of these systems were capitalized as deferred customer acquisition cost and amortized over the initial contract term.

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

Management of the Company determined that the costs capitalized as property and equipment should have been capitalized as deferred customer acquisition costs and included with other such costs and amortized as discussed above. For the North America segment the initial contract term is typically 3 years for residential customers and 5 years for commercial customers and for the Multifamily segment the initial contract term typically ranges from 5 to 10 years. The impact of this change on the financial results of 2001 and 2000 was not significant and was reflected in the first quarter results of 2002.

As a result of the above restatement, the accompanying consolidated statements of operations for the six and three months ended June 30, 2002 and the consolidated statement of cash flows for the six months ended June 30, 2002 have been restated from the amounts previously reported to correct the accounting for the impact of the restatement. A summary of the affected line items is as follows:

Changes to Statements of Operations

	Six Months Ended June 30, 2002
	As Previously Reported			As Restated
	(Dollars in thousands, except per share amounts)
Other revenues	$	8,784		$	9,011
Total revenues	146,988			147,215
Other cost of revenues	8,387			18,697
Total cost of revenues	48,855			59,165
Gross profit	98,133			88,050
Selling expense	10,803			12,747
Amortization and depreciation	44,189			41,456
Total operating expenses	436,319			435,530
Operating loss	(338,186		)	(347,480		)
Loss from continuing operations before income taxes (1)	(343,205		)	(352,499		)
Income tax benefit (1)	122,602			125,934
Loss from continuing operations before accounting change (1)	(220,603		)	(226,565		)
Net loss	$	(767,228	)	$	(773,190	)
Basic and diluted per share information:
Loss from continuing operations (1)	$	(2.25	)	$	(2.31	)
Net loss	$	(7.81	)	$	(7.87	)

Changes to Statements of Operations

	Three Months Ended June 30, 2002
	As Previously Reported		As Restated
	(Dollars in thousands, except per share amounts)
Other revenues	$	4,745	$	5,091
Total revenues	72,943		73,289
Other cost of revenues	3,917		6,954
Total cost of revenues	23,809		26,846
Gross profit	49,134		46,443
Selling expense	5,617		6,153
Amortization and depreciation	22,054		20,609
Total operating expenses	48,950		48,042
Operating income (loss)	184		(1,599		)
Income from continuing operations before income taxes (1)	3,103		1,320
Income tax benefit (1)	1,956		2,589
Income from continuing operations before accounting change (1)	5,059		3,909
Net income	$	3,716	$	2,566
Basic and diluted per share information:
Loss from continuing operations (1)	$	0.05	$	0.04
Net income	$	0.04	$	0.03

Changes to Statements of Cash Flows

	Six Months Ended June 30, 2002
	As Previously Reported			As Restated
	(In Thousands)
Net loss	$	(767,228	)	$	(773,190	)
Amortization and depreciation	44,189			41,456
Amortization of deferred customer acquisition costs in excess of deferred revenues (2)	(5		)	12,022
Deferred income taxes (1)	(110,836		)	(114,168		)
Purchases of new accounts	(11,003		)	(1,211		)
Deferred customer acquisition costs (2)	$	(9,623	)	$	(19,415	)

(1) Previously reported amounts have been reclassified to conform to the current year presentation resulting from the Company’s adoption of new accounting standards in July 2002 which required gains from extinguishment of debt, previously reported as extraordinary gains, to be reported as other income.

(2) Previously reported amounts have been reclassified to conform to the current year presentation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~ Operations updates the information provided in and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, ~~2001~~ 2002.

Important Matters

We have reported losses for the past several years and Westar Energy has announced that it intends to sell its investment in us. Additionally, our current primary financing source is through a credit facility with Westar Energy and credit available under such facility has been limited. We have evaluated these conditions and events in establishing our operating plans. In addition, we plan to carefully monitor the level of investment in new customer accounts, continue control of operating expenses, curtail other capital expenditures, if necessary, and continue efforts to extend or replace the credit facility upon its expiration in January 2005. We believe that the funds provided from operations and from the Westar Credit Facility, coupled with receipts under the tax sharing agreement (see “Liquidity and Capital Resources” below) will be sufficient to meet our needs throughout 2004.

Overview

Protection One is a leading provider of property monitoring services, providing electronic monitoring and maintenance of alarm systems to approximately 1.1 million customers in North America as of June 30, ~~2002~~2003. Our revenues are generated primarily from recurring monthly payments for monitoring and maintaining the alarm systems that are installed in ~~our~~ our customers’ homes and businesses. We provide our services to residential (both single family and multifamily residences), commercial, and wholesale customers.

Summary of Significant Matters

Net Loss. We incurred a net loss of $8617.03 million ~~for the year ended December 31, 2001 and a net loss of $661.7 million~~ in the first six months of ~~2002~~2003. This ~~The~~ net loss ~~in 2001~~ reflects a decline in ~~revenues~~revenue, ~~and~~ substantial charges incurred by us for amortization of customer accounts, and ~~goodwill~~ ~~and~~ interest incurred on indebtedness. ~~Approximately~~We ~~$659.3~~do ~~million~~not ofexpect ~~the~~to ~~net~~have ~~loss~~earnings in the ~~first six~~ ~~months~~foreseeable ~~of 2002 is related to an impairment charge as discussed below~~future. ~~In addition to the impairment~~

16Impairment Charge Pursuant to New Accounting Rules. Effective January 1, 2002, we adopted the new accounting standards SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets,” and SFAS No. 144, “Accounting for the

charge in 2002, this net loss reflects a decline in revenue, substantial charges incurred by us for amortization of customer accounts, and interest incurred on indebtedness. We do not expect to have earnings in the foreseeable future.22

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

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

The new rule substantially reduces the net undiscounted cash flows used for customer account impairment evaluation purposes as compared to the previous accounting rules. The undiscounted cash flow stream ~~has~~was ~~been~~ reduced from the 16 year remaining life of the goodwill to the 9 year remaining life of customer accounts for impairment evaluation purposes. Using these new guidelines, ~~evaluation~~we ~~purposes~~determined ~~and~~that ~~does~~there ~~not~~was ~~include~~an ~~estimated~~indication ~~cash~~of ~~flows~~impairment ~~from~~of ~~forecasted~~the carrying value of the customer ~~additions~~accounts and an impairment charge was recorded as discussed below.

To implement the new standards, we engaged an appraisal firm to help usmanagement estimate the fair values of goodwill and customer accounts. Based on this analysis, we recorded a ~~non-cash~~ net charge of approximately $~~659~~765.3 2 million in the first quarter of 2002. The charge is detailed as follows:

	Goodwill			Customer Accounts			Total
	(in millions)
Impairment charge on continuing operations	$	496.6		$	332.2		$	828.8
North America Segment:
Impairment charge on discontinued operations	2.3			1.9			4.2
Impairment charge - continuing operations	$	509.4		$	338.1		$	847.5
Estimated income tax benefit	(57.4		)	(116.3		)	(173.7		)
Impairment charge - discontinued operations	2.3			1.9			4.2
Net charge	$	441.5		$	217.8		$	659.3
Estimated income tax benefit	(65.1		)	(118.4		)	(183.5		)
Net charge	$	446.6		$	221.6		$	668.2
Multifamily Segment:
Impairment charge	$	104.2		$	—		$	104.2
Estimated income tax benefit	(7.2		)	—			(7.2		)
Net charge	$	97.0		$	—		$	97.0
Total Company:
Impairment charge	$	615.9		$	340.0		$	955.9
Estimated income tax benefit	(72.3		)	(118.4		)	(190.7		)
Net charge	$	543.6		$	221.6		$	765.2

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

WeAnother impairment ~~are~~test nowas ~~longer~~completed ~~permitted~~as toof ~~amortize~~July ~~goodwill~~1, ~~to income~~2002 ~~because of~~ (the ~~adoption~~date ofselected ~~SFAS~~for ~~No.~~our annual ~~142. The~~impairment ~~following~~test), ~~table~~with ~~reflects~~the ~~our~~independent ~~results~~appraisal ~~for~~firm ~~the~~providing ~~three and six~~the ~~months~~valuation ~~ended~~of ~~June~~the ~~30,~~estimated ~~2001,~~fair ~~calculated~~value ~~using~~of ~~the~~our ~~new~~reporting ~~accounting standard for goodwill~~units, ~~compared~~and tono ~~our~~impairment was ~~results~~indicated. After ~~for~~regulatory ~~the~~actions (see ~~three~~Note ~~and~~5, ~~six~~“Related ~~months~~Party ~~ended~~Transactions”), ~~June~~including ~~30,~~Kansas Corporation ~~2002.~~Commission

	Six Months ended June 30,
	2002			2001
	(in thousands, except per share amounts)
Reported net loss	$	(661,743	)	$	(39,591	)
Add back: Goodwill amortization	—			21,616
Adjusted net loss	$	(661,743	)	$	(17,975	)
Basic earnings per share:
Reported net loss	$	(6.74	)	$	(0.36	)
Add back: Goodwill amortization	—			0.19
Adjusted net loss	$	(6.74	)	$	(0.17	)

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

	Three Months ended June 30,
	2002		2001
	(in thousands, except per share amounts)
Reported net income (loss)	$	3,501	$	(31,115	)
Add back: Goodwill amortization	—		10,960
Adjusted net income (loss)	$	3,501	$	(20,155	)
Basic earnings per share:
Reported net loss	$	0.04	$	(0.29	)
Add back: Goodwill amortization	—		0.10
Adjusted net income (loss)	$	0.04	$	(0.19	)

A deferred tax asset in the amount of $190.7 million was recorded in the first quarter of 2002 for the tax benefit shown above and an additional deferred tax benefit of $13.3 million was recorded with the fourth quarter impairment charge. However, if Westar Energy completes its intended disposal of Protection One, our net deferred tax asset of $284.6 million at June 30, 2003 might not be realizable and we might not be in a position to record a tax benefit for losses incurred. As a result, we would be required to record a charge against income for the portion of our net deferred tax assets determined not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations.

~~The~~We ~~Company will be~~ are required to perform impairment tests for long-lived assets prospectively ~~as long as it continues to incur~~when ~~recurring~~we ~~losses~~determine orthat ~~for~~indicators ~~other~~of ~~matters~~potential ~~that may~~impairment ~~negatively~~are ~~impact our business~~present. Goodwill ~~will~~is be required to be tested ~~each~~at ~~year~~least annually for impairment. Declines in market values of our business or the value of our customer accounts that may occur bein ~~incurred~~the ~~prospectively~~future may require additional write-down of these assets in the future. No impairment ~~charges~~charge was recorded in the ~~future,~~first ~~which~~six ~~could~~months beof ~~material~~2003.

~~Estimated~~Security ~~Lives of Customer Accounts Changed Based on~~and ~~Customer~~Exchange ~~Account~~Commission ~~Lifing Study Results~~Inquiry. ~~The~~ We, ~~results~~Westar ofEnergy aand ~~lifing~~its ~~study~~former ~~performed by a third party~~independent ~~appraisal~~auditor, ~~firm~~Arthur inAndersen ~~the~~LLP, ~~first~~have ~~quarter~~been ofadvised ~~2002~~by ~~showed a deterioration in~~ the ~~average~~ ~~remaining~~Staff ~~life~~ of ~~customer accounts. The report showed our North America customer pool can expect a declining revenue stream over~~ the ~~next 30 years with an estimated average remaining life~~Securities ofand 9Exchange ~~years. Our~~Commission ~~Multifamily~~that ~~pool can expect a declining revenue stream over~~ the ~~next~~Staff 30will ~~years~~be ~~with~~inquiring ~~an estimated average remaining life of 10 years. Taking~~ into ~~account~~ the ~~results~~practices of ~~the lifing study, we adjusted the~~ ~~amortization~~Westar ofEnergy ~~customer~~with ~~accounts~~respect ~~for our North America and Multifamily customer pools~~ to ~~better match~~ the ~~rate~~restatement ~~and period~~ of ~~amortization~~its ~~expense with the expected decline in revenues. In the~~ first ~~quarter~~and ofsecond quarter 2002, wefinancial ~~changed~~statements ~~our~~announced ~~amortization~~in ~~rate~~November ~~for~~2002 ~~our~~and ~~North America~~the ~~pool to a 10-year 135% declining balance method from a 10-year 130%~~related ~~declining~~announcement ~~balance~~that ~~method. For~~ the ~~Multifamily~~ ~~pool~~2000 weand ~~reduced~~2001 ~~our~~financial ~~estimated~~statements ~~customer~~of ~~life~~Protection ~~from~~One ~~10 to 9 years~~ and ~~will~~Westar ~~continue~~Energy towould ~~amortize~~be ~~on a straight-line basis~~reaudited. We ~~account for these amortization changes prospectively as a~~ ~~change~~are incooperating ~~estimate. These~~with ~~changes in estimates increased amortization expense for~~ the ~~three~~Staff and six months ended June 30, 2002 on a pre-tax basis by approximately $0.3 million and $0.7 million, respectively and on an after tax basis by approximately $0.2 million and $0.4 million, respectively. The change in ~~estimate~~connection ~~had~~with notheir ~~significant impact on reported earnings per share~~inquiry.

~~Discontinued~~Amendments ~~Operations~~to –Westar Credit ~~Sale~~Facility. We ofand ~~Canadian~~Westar ~~Operations. During~~Industries ~~the~~entered ~~second~~into ~~quarter~~two ofseparate ~~2002~~amendments weto ~~entered~~the ~~into~~Westar ~~negotiations~~Credit ~~for~~facility in the ~~sale~~first ofsix ~~our~~months ~~Canadian~~of ~~business~~2003. Amendment ~~which~~thirteen isdecreased ~~included~~the inmaximum ~~our~~capacity ~~North~~of ~~American~~the ~~segment~~Westar Credit Facility from $280 million to $228.4 million. ~~The~~Accordingly, ~~sale~~Westar Industries ~~was~~refunded ~~consummated~~approximately on$0.5 ~~July~~million 9,to ~~2002~~us in amendment fees. WeAmendment fourteen to the Westar Credit ~~recorded~~Facility, aamong ~~pretax~~other ~~impairment~~things, ~~loss~~extended the maturity date of ~~approximately~~the ~~$2.0~~facility ~~million~~to January 5, 2005 and anincreased ~~after~~the applicable borrowing rate on Eurodollar ~~tax~~borrowings ~~loss~~from ofLIBOR ~~approximately~~plus ~~$1.~~3.75% ~~million~~to inLIBOR ~~the~~plus ~~second~~5.00%. In ~~quarter~~June of2003, ~~2002~~we ~~as evidenced~~paid byan amendment fee to Westar Industries in the ~~sale~~approximate amount of $0.5 million.

~~The~~Sale ~~net operating losses~~ of ~~these~~Protection One ~~operations~~Europe ~~are~~Trademark. We ~~included~~entered ininto ~~the~~an ~~consolidated~~agreement ~~statements~~with ofWestar ~~operations~~Industries ~~under~~for ~~“discontinued operations.” The~~rights ~~net~~to ~~operating~~our ~~loss for~~Protection ~~the~~One ~~six~~Europe ~~months~~trademark. In ~~ended~~ June ~~30,~~2003 Westar ~~2002~~Industries ofpaid us approximately $10.75 million ~~includes~~partially anas ~~impairment loss~~consideration onfor ~~customer~~granting ~~accounts~~a oflicense ~~approximately~~to ~~$1.9~~Protection ~~million. An~~One ~~impairment~~Europe ~~charge~~Holding ~~of $2~~S.3A. ~~million relating~~ to ~~the~~use ~~Canadian~~the ~~operations’~~Protection ~~goodwill~~One istrademark ~~reflected~~and name in ~~the~~certain ~~consolidated~~European ~~statement~~countries. Revenue from ofthis ~~operations as~~agreement awill ~~cumulative~~be ~~effect~~recognized ofover ~~accounting~~the ~~change~~life onof ~~discontinued~~the licensing agreement.

18Potential Write Down of Deferred Tax Assets. We have a pro-rata tax sharing agreement with Westar Energy. Pursuant to this agreement, Westar Energy makes payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return. If Westar Energy completes its intended disposition of its investment in us, our net deferred tax assets, which were $284.6 million at June 30, 2003, might not be realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations. The amount of our deferred taxes increased by approximately $204.0 million upon our recording of impairment charges in the first and fourth quarters of 2002 as discussed above. In addition, as a result of a sale, we would no longer receive payments from Westar Energy for current tax benefits utilized by Westar Energy. We had a receivable balance of $40.0 million and $20.7 million at June 30, 2003 and December 31, 2002, respectively, from Westar Energy related to tax benefits. In 2002, we received aggregate payments from Westar Energy of $1.7 million. The loss of these payments would have a material adverse effect on our cash flow.

~~operations. Revenues~~Retirement ~~from~~of Additional ~~these~~Debt. ~~operations~~In ~~were~~June 2003, we used available cash to purchase $28.14 million ~~and~~of $4our 6.275% ~~million~~Convertible ~~for~~Senior ~~the~~Subordinated ~~three~~Notes ~~and~~which ~~six~~mature ~~months ended~~in ~~June~~September ~~30,~~of 2003. The ~~2002,~~notes ~~compared~~were topurchased ~~$2.1~~at ~~million~~face value and ~~$4.1~~no ~~million~~gain ~~for~~or loss was recorded on the ~~three and~~transaction. In the first six months ~~ended~~of ~~June 30~~2002, ~~2001~~we purchased from Westar Industries $8.3 million face value

~~The major classes of assets and liabilities of the Canadian operations are as follows (in thousands):~~24

	June 30, 2002		December 31, 2001
Assets:
Current	$	948	$	478
Property and equipment	608		571
Customer accounts, net	15,649		16,992
Goodwill	2,147		4,842
Other	58		55
Total assets	$	19,410	$	22,938
Current liabilities	$	1,333	$	1,364

of our 13⁵/₈ % bonds for $7.5 million, $49.9 million face value of our 8¹/₈% bonds for $36.4 million, and $2.5 million face value of our 7³/₈% bonds for $2.2 million for an aggregate purchase of $60.7 million face value of our bonds for $46.1 million. In addition, we purchased on the open market $8.8 million face value of our 7³/₈% bonds for $7.9 million, $7.4 million face value of our 8¹/₈% bonds for $5.7 million, and $0.1 million face value of our 13⁵/₈% for $0.1 million for an aggregate purchase of $16.3 million face value of our bonds for $13.7 million. As a result of these transactions, we recognized a gain of $16.7 million in the first six months of 2002.

~~Potential~~Share ~~write down of deferred tax assets~~Repurchase. ~~We have a tax sharing agreement with Westar Energy which allows us to be reimbursed for tax deductions utilized by Westar Energy in its consolidated tax return.~~ IfIn ~~Westar~~the ~~Energy~~first ~~were~~quarter ~~to own less than 80%~~ of ~~Westar Industries voting stock~~2003, ~~or if Westar Industries were~~we toacquired ~~own~~2,500 ~~less~~shares ~~than 80%~~ of our ~~voting~~common stock, wein ~~would~~open nomarket ~~longer~~purchases ~~file our tax~~for ~~return on a consolidated basis with Westar Energy. As a result, a substantial portion of our net deferred tax assets of~~ $~~259~~3,400.6 No ~~million~~additional atshares ~~June 30, 2002 would likely not be realizable and we would~~were ~~likely~~acquired ~~not be~~ in athe ~~position~~second ~~to record a tax benefit for losses incurred~~quarter. ~~Accordingly,~~ In ~~we would be required to record a non-cash charge against income~~the ~~for~~first ~~the~~six ~~portion~~months of ~~our~~2002, ~~net deferred tax assets~~ we ~~determine~~acquired ~~not to be realizable~~1.0 ~~This~~million ~~charge~~shares ~~could~~of beour ~~material~~common ~~and could have a material adverse~~stock ~~effect~~for onapproximately ~~our~~$2.2 ~~business, financial condition and results of operations~~million.

~~Increase~~Recurring inMonthly Revenue. At ~~Senior~~various ~~Credit~~times ~~Facility. We~~during ~~entered~~each ~~into~~year, ~~three~~we ~~separate~~measure ~~amendments~~all to of the ~~Senior~~monthly ~~Credit~~revenue we ~~facility~~are inentitled ~~the~~to ~~first~~receive ~~six~~under ~~months~~contracts with customers in effect at the end of ~~2002~~the period. ~~Each~~ Our computation of ~~the~~recurring ~~amendments~~monthly ~~increased~~revenue ~~the~~may ~~capacity~~not be comparable to other similarly titled measures of ~~the~~other ~~Senior~~companies ~~Credit~~and ~~facility~~recurring monthly revenue should not be viewed by ~~$25~~investors ~~million~~as ~~resulting~~an alternative to actual monthly revenue, as determined in aaccordance ~~total~~with ~~capacity~~generally ofaccepted accounting principles. We had approximately $20.6 million and $~~230~~21.7 million of recurring monthly revenue as of June 30, 2003 and 2002, respectively. ~~For~~The ~~each~~decrease is ~~amendment~~primarily wea ~~incurred~~result anof ~~amendment~~our ~~fee~~net loss of ~~$250~~41,~~000~~201 ~~for~~customers aduring ~~total~~the oftwelve ~~$750,000~~month ~~which~~period ~~was~~ending ~~paid~~June to30, ~~Westar~~2003. While ~~Industries~~the rate inof ~~the~~decrease ~~third~~is ~~quarter~~significantly ofslower ~~2002.~~than Onit ~~July~~was ~~25, 2002,~~in ~~the~~prior ~~Company~~years, ~~and~~we ~~Westar~~expect this ~~Industries~~trend ~~entered~~will ~~into~~continue auntil ~~further~~we ~~amendment~~reduce toattrition on the ~~Senior~~ ~~Credit~~North ~~Facility~~American ~~which~~retail portfolio ~~increased~~of ~~the~~accounts ~~amount~~to ofa ~~the~~level ~~facility~~lower tothan ~~$255 million. The~~recorded ~~Company~~in ~~will~~this ~~pay~~reporting anperiod ~~amendment~~and ~~fee~~we ofhave ~~$250,000~~access ~~for~~to the ~~amendment~~capital needed to invest in ~~the~~creating ~~third~~at ~~quarter~~least ofas ~~2002. At~~many accounts ~~August~~as 8,we ~~2002,~~lose. Until we ~~had~~are ~~outstanding~~able ~~borrowings~~to reverse this trend, net losses of ~~$189.7~~customer ~~million~~accounts will materially and adversely ~~$65.3~~affect ~~million~~our ofbusiness, ~~remaining~~financial ~~capacity~~condition and results of operations.

~~Retirement~~We ofbelieve ~~Additional Debt. In~~ the ~~first quarter of 2002, we purchased from Westar Industries $14.8 million~~ ~~face~~presentation ~~value~~ of ~~our~~recurring ~~bonds~~monthly ~~for~~revenue ~~$12.0~~is ~~million. As~~useful ato ~~result~~investors ofbecause ~~these transactions, we recognized an extraordinary gain~~the ofmeasure ~~$2.0~~is ~~million,~~used ~~net~~by ofinvestors ~~tax.~~and Inlenders ~~the~~to ~~second~~value ~~quarter~~companies ofsuch ~~2002,~~as weours ~~purchased $16.4~~with ~~million~~recurring ~~face~~revenue ~~value of our bonds in the open market and $45~~streams.9 The ~~million face value~~table ofbelow reconciles our ~~bonds~~recurring ~~from~~monthly ~~Westar~~revenue ~~Industries~~to ~~for~~revenues ~~$47.8~~reflected ~~million~~on ~~resulting in an~~our ~~extraordinary~~consolidated ~~gain~~statements of $8operations.~~8 million, net of tax.~~

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This standard limits the income statement classification of gains and losses from extinguishment of debt as extraordinary to those transactions meeting the criteria of Accounting Principles Board (APB) Opinion No. 30, “Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” Under SFAS No. 145, extinguishments resulting from a company’s risk management strategy do not meet the criteria for classification as extraordinary transactions. This standard is effective for fiscal years beginning after May 15, 2002 with early adoption encouraged. We expect to adopt this standard in the third quarter of 2002. Gains or losses in prior periods that were classified as extraordinary that do not meet the APB Opinion No. 30 criteria will be required to be reclassified.

	Six months ended June 30,
	2003		2002
	(in millions)

Recurring Monthly Revenue, or RMR, at 6/30	$	20.6	$	21.7
Amounts excluded from RMR:
Amortization of deferred revenue	0.6		0.3
Other revenues (a)	1.9		2.1
Revenues (GAAP basis) :
June	23.1		24.1
January – May	115.9		123.1
January – June	$	139.0	$	147.2

Share Repurchase. In the first quarter of 2002, we purchased 1,000,000 shares of our common stock in the open market for $2.2 million. As of August 8, 2002, we had authority from our board of directors to purchase an additional approximately 8.2 million shares of our common stock.

	Three months ended June 30,
	2003		2002
	(in millions)

Recurring Monthly Revenue, or RMR, at 6/30	$	20.6	$	21.7
Amounts excluded from RMR:
Amortization of deferred revenue	0.6		0.3
Other revenues (a)	1.9		2.1
Revenues (GAAP basis) :
June	23.1		24.1
April – May	45.8		49.2
April – June	$	68.9	$	73.3

1925

Customer Creation and Marketing. For the three and six months ended June 30, 2002, our North America segment added 11,296 and 20,946 accounts, respectively, although our net number of accounts decreased by 12,887 and 33,683 accounts, respectively. For the three and six months ended June 30, 2001, our North America segment added 12,827 and 26,297 accounts, respectively, and our net number of accounts decreased by 54,434 and 85,023 accounts, respectively.(a) ~~Multifamily~~Revenues ~~added~~that ~~5,523 and~~are ~~12,382~~not ~~accounts~~pursuant ~~for~~to ~~the three and six-months ended June 30, 2002,~~monthly ~~respectively,~~contractual ~~with its net number of accounts decreasing by 741 accounts for the three months ended June 30, 2002 and increasing by 1,999 accounts for the six months ended June 30, 2002~~billings. For the three and six months ended June 30, 2001, Multifamily added 6,810 and 20,087 accounts, respectively, and its net number of accounts increasing by 2,966 accounts and 11,358 accounts, respectively.

Our ~~current~~recurring ~~customer~~monthly ~~acquisition~~revenue ~~strategy~~includes ~~for~~amounts ~~our~~billable ~~North~~to ~~America~~customers ~~segment~~with ~~relies~~past ~~primarily~~due onbalances ~~internally~~which ~~generated~~we ~~sales. Our internal~~believe ~~sales~~are ~~program~~collectible. ~~was~~We ~~started~~seek into ~~February~~preserve ~~2000~~the onrevenue astream associated ~~commission~~with ~~only~~each ~~basis with~~customer acontract, ~~goal~~primarily ofto ~~creating~~maximize ~~accounts~~our atreturn aon ~~cost~~the investment ~~lower~~we ~~than~~made ~~our~~to ~~external~~generate ~~programs~~each contract. ~~In 2001~~As a result, we ~~revised~~actively ~~and~~work ~~enhanced~~to collect ~~our~~amounts ~~internal~~owed ~~sales~~to ~~program~~us and, into ~~early~~retain ~~2002,~~the ~~we introduced~~customer ~~modest~~at ~~base~~the ~~compensation~~same time. ~~This~~ ~~program~~In ~~utilizes~~some instances, ~~our~~we ~~existing~~may ~~branch~~allow ~~infrastructure~~up ~~in approximately~~to 60six ~~markets. The~~months ~~internal sales~~to ~~program~~collect ~~generated~~past 20due amounts,~~430~~ ~~accounts~~while evaluating ~~and~~the ~~23,865~~ongoing ~~accounts~~customer inrelationship. ~~the~~After ~~six~~we ~~months ended~~have ~~June~~made ~~30,~~every reasonable ~~2002~~effort ~~and~~to ~~2001,~~collect ~~respectively. Our~~past ~~Multifamily~~due ~~segment~~balances, ~~also~~we ~~utilizes~~will adisconnect ~~salaried~~the customer and ~~commissioned~~include ~~sales force~~the toloss ~~produce~~in ~~new~~attrition ~~accounts~~calculations.

InCustomer ~~late~~Creation and ~~2001,~~Marketing. Our wecurrent ~~entered~~customer ~~into~~acquisition astrategy ~~marketing~~for ~~alliance with~~our ~~BellSouth~~North ~~Telecommunications,~~America ~~Inc.~~segment relies ~~(“BellSouth”)~~primarily toon ~~offer~~internally ~~monitored security~~generated ~~services~~sales. toIn ~~the~~June ~~residential~~2001, ~~single~~we ~~family~~notified ~~market~~most of inour ~~the~~remaining ~~nine-state BellSouth~~domestic ~~region. Under~~dealers ~~this~~that ~~agreement,~~ we ~~operate~~were asterminating ~~“BellSouth~~our ~~Security~~dealer ~~Systems~~arrangements ~~from~~with ~~Protection~~them ~~One”~~and ~~from~~therefore ~~all~~would ofnot ~~our~~be ~~branches~~extending inor ~~the~~renewing ~~nine-state~~their ~~BellSouth region~~contracts. ~~BellSouth~~We ~~provides~~currently ushave a salaried ~~with~~and ~~leads~~commissioned ofsales ~~new~~force ~~owners~~that ofutilizes ~~single~~our ~~family~~existing ~~residences~~branch infrastructure in ~~its~~approximately ~~territory~~60 ~~and of~~markets. The ~~transfers~~internal ofsales ~~existing~~program ~~BellSouth~~generated ~~customers~~24,521 ~~within~~accounts ~~its~~and ~~territory. We~~20,430 ~~follow~~accounts upin on the ~~leads~~six months ~~and~~ended ~~attempt~~June ~~to persuade~~30, ~~them~~2003 toand ~~become~~2002, ~~customers~~respectively. Our ofMultifamily ~~our~~segment ~~monitored~~also ~~security~~utilizes ~~services. We~~a ~~pay~~salaried ~~BellSouth~~and ancommissioned sales ~~upfront~~force ~~royalty~~to ~~for~~produce ~~each~~ new ~~contract~~accounts. Customer additions and alosses ~~recurring~~by ~~royalty~~segment ~~based~~are onreflected ain ~~percentage~~the ~~of recurring~~table ~~revenues.~~below:

	Quarter Ended June 30, 2003			Six Months Ended June 30, 2003			Quarter Ended June 30, 2002			Six Months Ended June 30, 2002

North America Segment (1):
Customer additions	12,785			24,971			11,296			20,946
Customer losses	(22,556		)	(44,161		)	(24,183		)	(54,629		)
Net decrease in account base	(9,771		)	(19,190		)	(12,887		)	(33,683		)

RMR additions	$	405,473		$	828,777		$	445,521		$	746,805
RMR losses	$	(648,156	)	$	(1,310,047	)	$	(935,184	)	$	(2,020,012	)
Net decrease in RMR	$	(242,683	)	$	(481,270	)	$	(489,663	)	$	(1,273,207	)

Multifamily Segment (2):
Customer additions	9,191			15,489			5,523			12,382
Customer losses	(4,049		)	(9,559		)	(6,264		)	(10,383		)
Net increase (decrease) in account base	5,142			5,930			(741		)	1,999

RMR additions	$	93,606		$	160,484		$	79,405		$	170,007
RMR losses	$	(62,372	)	$	(128,665	)	$	(70,003	)	$	(128,434	)
Net increase in RMR	$	31,234		$	31,819		$	9,402		$	41,573

(1) Customer and RMR additions do not include the activity in our wholesale business. RMR additions include additional RMR for new contracts providing additional services to existing customers. The net change in wholesale customers and wholesale RMR for each period presented is included in customer losses and RMR losses. RMR losses also include the net increase or decrease in RMR relating to services already being provided to existing customers.

(2) RMR additions and RMR losses reflect the net change in RMR related to access control and resident optional contracts. RMR losses also include changes in RMR on existing customers.

We are a partner in a marketing alliance with BellSouth Telecommunications, Inc. to offer monitored security services to the residential, single family market and to small businesses in seventeen of the larger metropolitan markets in the nine-state BellSouth region. The term of the marketing alliance will renew for a two-year period on December 31, 2003 unless terminated by either party. At this time, we believe that BellSouth intends to renew this marketing alliance. Under this agreement, we operate as “BellSouth Security Systems from Protection One” from our branches in the nine-state BellSouth region. BellSouth provides us with leads of new owners of single family residences in its territory and of transfers of existing BellSouth customers within its territory. We follow up on the leads and attempt to persuade them to become customers of our monitored security services. We also market directly to small businesses. We pay BellSouth an upfront royalty for each new contract and a

recurring royalty based on a percentage of recurring charges. Approximately one-fourth of our new accounts created in the first six months of 2003 and for the twelve months of 2002 were from this arrangement.

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

Attrition. Subscriber attrition has a direct impact on our results of operations since it affects our revenues, amortization expense and cash flow. We define attrition as a ratio, the numerator of which is the gross number of lost customer accounts for a given period, net of ~~certain~~the adjustments described below, and the denominator of which is the average number of accounts for a given period. In some instances, we use estimates to derive attrition data. We make adjustments to lost accounts primarily for the net change, either positive or negative, in our wholesale base and for accounts which are covered under a purchase price holdback and are “put” back to the seller. We reduce the gross accounts lost during a period by the amount of the guarantee provided for in the purchase agreements with sellers. In some cases, the amount of the purchase holdback may be less than actual attrition experience. ~~For~~We do not reduce the gross accounts lost ~~quarter~~during ~~ended~~a ~~June~~period ~~30,~~by ~~2001~~“move wein” ~~further~~accounts, ~~reduced~~which ~~gross~~are accounts ~~lost~~where ~~for~~a ~~account~~new customer ~~dispositions~~moves ~~and~~into ~~for~~a ~~adjustments~~home ~~resulting~~installed ~~from~~with ~~the~~our ~~conversion~~security ofsystem ~~accounts~~and tovacated by a prior ~~MAS®~~customer, ~~that~~or ~~relate~~“competitive totakeover” ~~how~~accounts, awhich ~~customer~~are ~~is defined~~accounts ~~and~~where the owner ~~transition~~ of ~~that~~a ~~definition~~residence ~~from~~monitored ~~one~~by ~~system~~a tocompetitor ~~another~~requests that we provide monitoring services.

We do not reduce the gross accounts lost during a period by “move in” accounts, which are accounts where a new customer moves into a home installed with our security system and vacated by a prior customer, or “competitive takeover” accounts, which are accounts where the owner of a residence monitored by a competitor requests that we provide monitoring services.

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

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

20Customer attrition by business segment for the three months ended June 30, 2003 and 2002 is summarized below:

Customer attrition by business segment for the three months ended June 30, 2002 and 2001 is summarized below:

	Customer Account Attrition
	June 30, 2003				June 30, 2002
	Annualized Second Quarter		Trailing Twelve Month		Annualized Second Quarter		Trailing Twelve Month

North America	11.1	%	11.9	%	12.2	%	17.1	%
Multifamily	4.9	%	6.2	%	7.6	%	6.7	%
Total Company	9.1	%	10.1	%	10.8	%	14.3	%

	Customer Account Attrition
	June 30, 2002				June 30, 2001
	Annualized Second Quarter		Trailing Twelve Month		Annualized Second Quarter		Trailing Twelve Month
North America(1)	12.2	%	17.1	%	14.7	%	16.8	%
Multifamily	7.6	%	6.7	%	4.8	%	5.8	%
Total Company	10.8	%	14.3	%	12.3	%	14.3	%

(1) Excludes Canadian operations which were sold in July 2002.

Critical Accounting Policies

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

Note 2 of the “Notes to Consolidated Financial Statements” of our 2001 Form 10-K includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief description of the more significant accounting policies and methods we use.27

~~Revenue~~Note ~~Recognition.~~2 ~~Revenues~~of the ~~are~~Notes ~~recognized~~to ~~when~~Consolidated ~~security~~Financial ~~services~~Statements ~~are~~of ~~provided. Installation~~our ~~revenue,~~2002 ~~sales~~Form ~~revenues~~10-K onincludes ~~equipment upgrades and~~a ~~direct~~summary ~~costs~~ of ~~installations~~the ~~and~~significant ~~sales~~accounting ~~are~~policies ~~deferred~~and ~~for~~methods ~~residential~~used ~~customers with~~in ~~service contracts. For commercial~~the ~~customers~~preparation ~~and~~of ~~national~~our ~~account~~consolidated ~~customers,~~financial ~~revenue recognition is dependent upon each specific customer contract~~statements. ~~In instances~~The ~~when~~following ~~the~~is ~~company~~a ~~sells~~brief ~~the~~description ~~equipment~~of ~~outright, revenues and costs are recognized in~~ the ~~period~~more ~~incurred. In~~significant ~~cases~~accounting ~~where~~policies ~~there is no outright sale, revenues~~ and ~~direct~~methods ~~costs~~we ~~are deferred and amortized~~use.

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

Deferred system and upgrade installation revenues ~~also~~are ~~result~~recognized ~~from~~over ~~customers~~the ~~who~~estimated ~~are~~life ~~billed~~of ~~for~~the ~~monitoring,~~customer ~~extended~~utilizing ~~service~~an ~~protection~~accelerated method for our residential and commercial ~~patrol~~customers and ~~response~~a straight-line method for our Multifamily ~~services~~customers. Deferred costs in ~~advance~~excess of deferred revenue are recognized utilizing a straight-line method over the initial ~~period~~contract interm, ~~which~~typically ~~such~~two ~~services~~to ~~are~~three ~~provided~~years for residential systems, five onyears afor commercial systems and five to ten years for Multifamily systems. To the extent deferred costs ~~monthly~~are less than deferred revenues, ~~quarterly~~such orcosts ~~annual~~are ~~basis~~recognized over the estimated life of the customer utilizing the same method as with the related deferred revenues.

21The table below reflects the impact of this accounting policy on the respective line items of the Statement of Operations for the six months and three months ended June 30, 2003 and 2002. The “Total Amount Incurred” column represents the current amount of billings that were made and the current costs that were incurred for the period. We then subtract the deferral amount and add back the amortization of previous deferral amounts to determine the amount we report in the Statement of Operations.

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

	For the six months ended June 30, 2003
	Total Amount Incurred		North America			Multifamily			Accrual Amount Per Statement Of Operations
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
	(in thousands)

Revenues – Other	$	16,045	(8,641	)	1,954	(320	)	865	$	9,903
Cost of Revenues – Other	$	21,700	(11,467	)	4,019	(2,939	)	2,833	$	14,146
Selling Expense	$	19,324	(7,265	)	4,094	(224	)	150	$	16,079

	For the six months ended June 30, 2002
	Total Amount Incurred		North America			Multifamily			Accrual Amount Per Statement Of Operations
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
	(in thousands)

Revenues – Other	$	15,322	(7,249	)	960	(280	)	258	$	9,011
Cost of Revenues – Other	$	21,632	(10,281	)	7,396	(3,271	)	3,221	$	18,697
Selling Expense	$	15,986	(5,664	)	2,549	(198	)	74	$	12,747

	For the three months ended June 30, 2003
	Total Amount Incurred		North America			Multifamily			Accrual Amount Per Statement Of Operations
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
	(in thousands)

Revenues – Other	$	7,946	(4,386	)	1,046	(206	)	523	$	4,923
Cost of Revenues – Other	$	10,598	(5,466	)	2,228	(1,805	)	1,537	$	7,092
Selling Expense	$	9,268	(3,492	)	2,103	(116	)	75	$	7,838

	For the three months ended June 30, 2002
	Total Amount Incurred		North America			Multifamily			Accrual Amount Per Statement Of Operations
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
			Deferral Amount		Amortization Amount	Deferral Amount		Amortization Amount
	(in thousands)

Revenues – Other	$	8,036	(3,741	)	539	(108	)	365	$	5,091
Cost of Revenues – Other	$	11,063	(5,870	)	1,997	(1,480	)	1,244	$	6,954
Selling Expense	$	8,821	(3,533	)	932	(136	)	69	$	6,153

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

• high levels of customer attrition;

• continuing recurring losses inabove ~~excess~~our of expectations; and

• ~~declines~~ adverse inregulatory ~~the market value of our publicly traded equity and debt securities~~rulings.

An impairment test of customer accounts would have to be ~~recognized~~performed when the undiscounted expected future operating cash flows by ~~customer~~asset ~~pool~~group, ~~derived~~which ~~from~~consists ~~customer accounts is less than the carrying value~~primarily of capitalized customer accounts and related goodwill~~. We~~, ~~performed~~is ~~impairment~~less ~~tests~~than ~~on our customer~~the ~~account~~carrying ~~assets~~value ~~and goodwill as~~ of ~~December~~that ~~31,~~asset ~~2001~~group. ~~These~~An impairment ~~tests~~would ~~have~~be ~~indicated~~recognized ~~that~~if ~~future~~the ~~estimated~~fair ~~undiscounted cash~~value ~~flows~~of ~~exceeded~~ the ~~sum~~customer ofaccounts is less than the ~~recorded~~net ~~balances~~book ~~for~~value of the customer accounts ~~and goodwill~~. See “Summary of Significant Matters — Impairment Charge Pursuant to New Accounting Rules” for a discussion of the impairment recorded on these assets in the first quarter of 2002 pursuant to the adoption of new accounting rules.

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

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

Pool		Method
North America
North America:
-Acquired Westinghouse Customers		Eight-year 120% declining balance
• Acquired Westinghouse Customers		Eight-year 120% declining balance
-Other Customers		Ten-year 135% declining balance
• Other Customers		Ten-year 135% declining balance
Multifamily		Nine- –year straight-line

~~Income~~The ~~Taxes. As~~results ~~part~~ of ~~the~~a ~~process~~lifing ofstudy ~~preparing~~performed ~~our~~by ~~consolidated financial~~a ~~statements~~third weparty ~~are~~appraisal ~~required to estimate our income taxes~~ firm in ~~each of~~ the ~~jurisdictions~~first inquarter ~~which~~of we2002 ~~operate. Significant~~showed ~~management~~a ~~judgment~~deterioration ~~is required~~ in ~~determining~~the ~~our~~average ~~provision~~remaining ~~for~~life ~~income~~of ~~taxes~~customer ~~and our deferred tax assets and liabilities~~accounts. ~~This~~The ~~process involves us estimating our~~report ~~actual~~showed current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and amortization, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our ~~consolidated~~North ~~balance~~America ~~sheet.~~customer Wepool ~~must then assess the likelihood that our deferred tax assets will be recovered. To the extent we believe that recovery is not likely, we must establish a valuation allowance.~~can

expect a declining revenue stream over the next 30 years with an estimated average remaining life of 9 years. Our Multifamily pool can expect a declining revenue stream over the next 30 years with an estimated average remaining life of 10 years. Taking into account the results of the lifing study and the inherent expected declining revenue streams for North America and Multifamily, in particular during the first five years, we adjusted the amortization of customer accounts for our North America and Multifamily customer pools to better match the rate and period of amortization expense with the expected decline in revenues. In the first quarter of 2002, we changed the amortization rate for our North America pool to a 10-year 135% declining balance method from a 10-year 130% declining balance method. The change to this ten year 135% accelerated method, provides for a better matching to the declining revenue stream, in particular during the first five years, where the year over year decline is greatest and a significant portion of the revenue stream is expected to be received. For the Multifamily pool we will continue to amortize on a straight-line basis, utilizing a shorter nine year life. The change to the nine year life straight-line method provides for a better matching to the declining revenue stream, in particular during the first five years, where the decline is greatest and a significant portion of the revenue stream is expected to be received. We accounted for these amortization changes prospectively beginning January 1, 2002, as a change in estimate.

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

Westar Energy makes payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return pursuant to a tax sharing agreement, which is an important source of liquidity for us. If Westar Energy completes its intended disposition of its investment in us, our net deferred tax assets, which were $284.6 million at June 30, 2003, might not be realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of a sale, we would no longer receive payments from Westar Energy for tax benefits utilized by Westar Energy. In 2002 we received aggregate payments from Westar Energy of $1.7 million and our tax receivable at June 30, 2003 is $40.0 million, of which $20.7 million is reflected as current. The loss of these payments would have a material adverse effect on our cash flow.

Operating Results

We separate our business into two reportable segments: North America and Multifamily. North America provides security alarm ~~monitoring~~ monitoring services, which include sales, installation and related servicing of ~~security~~ security alarm systems. AsWe ~~discussed above, we~~ sold our Canadian operations in July 2002, which previously had been included in ~~our~~ our North America segment. We are ~~therefore~~ therefore excluding the impact of the Canadian operations in the following analyses. Multifamily provides security alarm services to apartments, condominiums and other multi-family dwellings.

Six Months Ended June 30, ~~2002~~2003 Compared to Six Months Ended June 30, ~~2001~~2002

Protection One Consolidated

~~Revenues~~During the first six months of 2003 compared to the first six months of 2002, revenues decreased approximately $~~28.~~8.2 million , primarily due to the decline in the size of our customer base. Cost of revenues decreased approximately $127.08 million ~~and general~~primarily ~~and~~due ~~administrative~~to ~~costs~~a ~~decreased~~decrease ~~approximately~~of $103.8 million ~~primarily due~~in toamortization ~~the~~expense ~~consolidation~~ of ~~our~~deferred ~~call~~customer ~~centers~~acquisition costs, a ~~downsizing~~decrease ~~efforts~~of $1.6 million in telecommunication costs and ~~other~~a ~~cost~~decrease ~~reduction~~of ~~initiatives~~$1.4 million in service costs. ~~Selling~~General and administrative costs ~~increased~~decreased approximately $12.5 9 million, primarily due to decreases ~~increased~~of ~~efforts~~$2.7 tomillion ~~generate~~from ~~new~~the ~~customers~~cancellation ~~through~~ of our ~~internal~~Management ~~sales~~Services Agreement ~~force~~with Westar Industries, $2.1 ~~Interest~~million in bad debt expense ~~decreased~~primarily due byto ~~approximately~~recoveries of written off accounts, $61.32 million in rent expense due partially to our decision to purchase computer equipment, as opposed to leasing, and $0.9 million ~~primarily~~in other outside services due to acompletion ~~reduction~~of information intechnology ~~debt~~projects. These decreases were partially offset by increases of

2230

$2.6 million for the retention bonus accrual and $1.8 million in our director and officer insurance premiums. Selling costs increased approximately $3.3 million, primarily due to increased efforts to generate new customers through our internal sales force and increased amortization of deferred selling costs. Interest expense decreased by approximately $2.3 million, primarily due to a reduction in the weighted average interest rate and a reduction of fixed rate debt. Other income of approximately $2.1 million relates primarily to the receipt in May 2003 of purchase holdback amounts from the sale of our Sonitrol business in June 2001.

North America Segment

We present the table below for comparison of our North America operating results for the periods presented. Next to each period’s results of operations, we provide the relevant percentage of total revenues so you can make comparisons about the relative change in revenues and expenses.

	Six Months Ended June 30,
	2002					2001
	2003					2002
	(dollars in thousands)
Revenues:
Monitoring and related services	$	~~119~~111,~~922~~194		9392.36	%	$	~~150~~119,~~705~~922		9593.43	%
Other	8,~~641~~888			6.7.4		78,~~229~~641			4.6.7
Total revenues	~~128~~120,~~563~~082			100.0		~~157~~128,~~934~~563			100.0
Cost of revenues:
Monitoring and related services	3633,~~140~~052			2827.15		5036,~~147~~140			3128.71
Other	811,~~221~~115			69.43		615,~~309~~342			411.09
Total cost of revenues	44,~~361~~167			3436.58		5651,~~456~~482			3540.70
Gross profit	8475,~~202~~915			6563.52		~~101~~77,~~478~~081			6460.30
Selling expense	914,~~765~~673			712.62		811,~~381~~636			59.31
General and administrative expense	3634,~~617~~589			28.58		4937,~~499~~167			3128.49
Amortization and depreciation expense	40,759			31.7		91,798			58.1
Amortization of intangibles and depreciation expense	37,868			31.5		38,822			30.2
Loss on impairment	~~332,194~~—			~~258.4~~—		—338,104			—263.0
Severance and other expense	550			0.4		4,695			3.0
Operating loss	$	(11,215	)	(9.3	)%	$	(348,648	)	(271.2	)%
Operating (loss)	$	(335,683	)	(261.1	)%	$	(52,895	)	(33.5	)%

~~2002~~2003 Compared to ~~2001.~~ 2002. We had a net decrease of 3319,~~683~~190 customers in the first ~~half~~six months of ~~2002~~2003 as compared to a net decrease of 8533,~~023~~683 customers in the first half of ~~2001~~2002. The ~~Further~~average ~~analysis~~customer ofbase for the first six months of 2003 and 2002 was 734,191 and 789,933, respectively, or a decrease of ~~change~~55,742 incustomers. ~~the~~The ~~North~~number ~~American~~of ~~account~~customers ~~base~~decreased ~~between~~primarily ~~the~~because ~~two~~our customer ~~periods~~acquisition isstrategies ~~shown~~were not able to generate accounts in a ~~the~~sufficient ~~table~~volume ~~below~~at acceptable cost to replace accounts lost through attrition. ~~The~~We ~~“Conversion~~expect that this trend ~~adjustments”~~will ~~line~~continue ~~item~~until ~~reflects~~we ~~the~~reduce ~~impact~~attrition on the ~~calculation~~North American retail portfolio of ~~our~~accounts ~~customer~~to a level lower than recorded in this reporting period and we have ~~base~~access ~~from~~to the ~~conversion~~capital ofneeded ~~our~~to ~~Wichita,~~invest ~~Hagerstown~~in ~~and~~creating ~~Beaverton~~at ~~monitoring~~least as many accounts as ~~and~~we ~~billing~~lose. Until ~~systems~~we are able to ~~our~~reverse this ~~new~~trend, ~~technology~~net ~~platform~~losses of customer accounts will materially and adversely affect our business, ~~MAS®~~financial condition and results of operations. ~~These~~We ~~conversion~~believe ~~adjustments~~the ~~relate~~decrease toin ~~how~~annualized attrition is due to a ~~customer~~company iswide ~~defined~~focus ~~and~~on retaining our current customers, the ~~transition~~consolidation of ~~that~~our call centers and the conversion to one common technology platform. We ~~definition~~are ~~from~~currently ~~one~~focused ~~system~~on toreducing ~~another~~attrition, developing cost effective marketing programs, and generating positive cash flow.

~~We expect that our customer base~~Further ~~will~~analysis ~~continue~~of tothe ~~decline~~change ~~until~~in the ~~efforts~~North weAmerican ~~are~~account ~~making~~base ~~to acquire or create new accounts and to reduce attrition become more successful than they have been to date. Until we achieve equilibrium~~ between ~~additions~~the ~~and attrition, net losses of customer accounts will~~two ~~materially~~periods ~~and~~is ~~adversely~~discussed ~~affect our business, financial condition and results of operations~~below. ~~We are currently focused on reducing attrition, developing cost effective marketing programs, and generating positive cash flow.~~

	Six Months Ended June 30,
	2002		2001
	2003		2002
Beginning Balance, January 1	806,774		1,023,023
Beginning Balance, January 1,	743,786		806,774
Additions	2024,~~946~~971		2620,~~297~~946
Conversion adjustments	—		(12,212	)
Customer losses	(39,776	)	(52,828	)
Customer losses from dispositions	—		(9,440	)
Other (a)	(4,385	)	(1,801	)
Customer losses not guaranteed with holdback put backs	(52,828	)	(77,004	)
Ending Balance, June 30,	724,596		773,091
Customer losses guaranteed with holdback put backs and other	(1,801	)	(12,664	)
Annualized attrition	10.8	%	13.4	%
Ending Balance, June 30	773,091		938,000

2331

~~Monitoring~~(a) ~~and related service revenues~~Other ~~decreased~~consists ~~approximately~~primarily ~~$30.8~~of ~~million~~customer insites ~~the~~that ~~first~~had ~~six~~no ~~months~~associated ofrecurring ~~2002 as~~revenue, ~~compared~~therefore to the ~~first~~loss ~~six~~of ~~months~~these ofaccounts ~~2001~~does ~~primarily~~not ~~due~~reduce toour ~~the~~recurring ~~decline~~monthly revenue. Other inalso ~~our~~includes attritted ~~customer~~accounts ~~base.~~covered ~~These~~by ~~revenues~~purchase ~~consist~~holdbacks. ~~primarily~~As of ~~contractual~~June ~~revenue~~30, ~~derived~~2003, ~~from~~we ~~providing~~no ~~monitoring~~longer ~~and maintenance~~have ~~service~~any accounts covered by purchase holdbacks.

~~Other~~Monitoring ~~revenues~~and related ~~increased~~service byrevenues decreased approximately $18.47 million or 197.53% in the first six months of 2003 compared to ~~$8.6~~the ~~million~~first insix months of 2002 ~~from~~primarily ~~$7.2~~due ~~million~~to the decline in ~~2001.~~our customer base. These revenues consist primarily of ~~sales of~~ ~~burglar~~contractual ~~alarms,~~revenue ~~closed~~derived ~~circuit~~from ~~televisions,~~providing ~~fire~~monitoring ~~alarms~~ and ~~card~~maintenance ~~access control systems to commercial customers~~service.

~~Cost~~Other ~~of monitoring and related services~~ revenues consist ~~for~~primarily ~~the first six months~~ of ~~2002~~revenues ~~decreased~~generated byfrom ~~$14.0~~our ~~million,~~internal orinstallations ~~27.9%,~~of tonew ~~$36.1~~alarm ~~million~~systems, ~~from~~as ~~$50.1~~well ~~million~~as ~~for~~amortization ~~the~~of ~~first~~previously ~~six~~deferred ~~months~~customer ~~of 2001~~acquisition revenue. Installation ~~These~~revenues ~~costs~~consist primarily ~~generally relate to the cost~~ of ~~providing~~ ~~monitoring~~sales ~~service and include the costs~~ of ~~monitoring,~~burglar ~~billing~~alarms, ~~customer~~ ~~service~~closed ~~and~~circuit ~~field~~televisions, ~~operations. The~~fire ~~decrease is primarily due to a reduction of telecommunication costs~~alarms and ~~wage~~card ~~expense~~access ~~associated~~control ~~with~~systems ~~the~~to ~~consolidation~~commercial ~~of our call centers and other cost reduction initiatives~~customers. ~~Costs of~~In ~~monitoring~~the ~~and~~first ~~related~~six ~~services~~months ~~revenues as a percentage~~ of ~~the~~2003, ~~related~~these revenues ~~decreased~~increased toby 30approximately $0.1%2 inmillion ~~the~~or ~~first six months of 2002 from 33~~2.39% infrom the first six months of ~~2001. This improvement~~2002 ~~arises~~primarily ~~from~~due ~~the~~to ~~percentage~~an ~~reduction~~increase in ~~monitoring and related costs exceeding~~ the ~~percentage~~amortization ~~reduction~~of inpreviously deferred ~~related~~customer ~~revenues~~revenue.

Cost of ~~other revenues increased by~~monitoring ~~$1.9~~and ~~million~~related ~~from~~services ~~$6.3~~revenues ~~million~~for in the first six months of ~~2001~~2003 todecreased by $3.0 million, or 8.25%, to $33.1 million infrom $36.1 million for the first six months of 2002. These costs generally ~~consist~~relate ~~primarily~~to the cost of ~~equipment~~providing monitoring service and ~~labor~~include ~~charges~~the costs of monitoring, billing, customer service and field operations. The decrease in the first six months of 2003 compared to ~~install~~the ~~alarm~~first ~~systems,~~six months of 2002 is primarily ~~closed~~due ~~circuit~~to ~~televisions,~~decreases ~~fire~~in ~~alarms~~telecommunication and ~~card~~service ~~access~~costs ~~control~~of ~~systems~~$1.6 ~~sold~~million toand ~~our~~$1.4 ~~customers~~million, respectively. ~~These~~Costs ~~costs~~of monitoring and related services revenues as a percentage of ~~other~~the related revenues ~~increased~~decreased to ~~approximately 95~~29.17% ~~for~~in the first six months of ~~2002~~2003 asfrom ~~compared to approximately 87~~30.31% ~~for~~in the first six months of ~~2001~~ 2002.

~~Selling~~Cost ~~expenses~~of ~~increased~~other revenues decreased approximately $1.4 .2 million or 16 27.56% compared to ~~$9.8 million in~~ the first six months of 2002. ~~from~~These ~~$8.4~~costs consist primarily of equipment and labor charges to install alarm systems, closed circuit ~~million~~televisions, infire ~~2001~~alarms and card access control systems sold to our customers, as well as amortization of previously deferred customer acquisition costs. ~~The~~These ~~increase~~costs isas ~~due~~a percentage of other revenues were 125.1% for the first half of 2003 as compared to 177.5% for the first half of 2002. The decrease in ~~our~~2003 ~~increased~~is ~~efforts~~primarily due to ~~generate~~a ~~new~~$3.4 ~~customers~~million ~~through~~decrease anin ~~internal~~amortization ~~sales~~of previously ~~force~~deferred customer acquisition costs.

~~General~~Selling ~~and administrative~~ expenses ~~decreased~~increased $123.91 million ~~or 26.0%~~ from $4911.~~5 million to $36.~~6 million in the first ~~half~~six months of 2002~~. The~~ ~~decrease is~~to ~~generally~~$14.7 ~~comprised~~million ~~of reductions~~ in ~~outside~~the ~~services~~first ~~primarily~~six ~~due~~months toof ~~completion~~2003. ofThe ~~special~~increase ~~software~~is ~~projects~~generally ~~and~~due ato ~~reduction~~an inincreased ~~wages~~emphasis ~~and~~on ~~related~~internal ~~benefits due~~sales togeneration aand ~~reduction~~the inresulting ~~workforce. Other decreases~~increase ~~include a reduction~~ in ~~professional~~sales ~~fees~~commissions, ~~collection~~wages, ~~agency expense~~benefits, and ~~travel~~support ~~expense. These~~costs ~~decreases~~as ~~are partially~~well ~~offset~~as byan aincrease ~~$2.7 million expense for a management fee to Westar Industries beginning~~ in ~~2002. As~~amortization ~~a percentage~~ of ~~total~~previously ~~revenues, general and administrative expenses decreased to~~deferred 28commissions.~~5% for the first six months of 2002 from 31.4% for the first six months of 2001 because the percentage reduction in these costs exceeded the percentage decline in revenues.~~

~~Amortization~~General and administrative ~~depreciation~~expenses ~~expense~~decreased $2.6 million ~~for~~from $37.2 million in the first ~~six~~half ~~months~~ of 2002 ~~decreased~~to by $5134.06 million, orin 55the first half of 2003.~~6%,~~ toThis decrease is generally comprised of a decrease of $402.87 million due to the termination of our Management Services Agreement with Westar Industries, a $1.9 million ~~from~~decrease in bad debt expense, $911.81 million. ~~This~~in ~~decrease~~rent ~~reflects~~expense due partially to our decision to purchase computer equipment, as opposed to leasing, and a ~~reduction~~$0.9 million decrease in ~~subscriber~~other ~~amortization~~outside services due to completion of information technology projects. These decreases were partially offset by an increase in wage and related expense of $313.05 million primarily related to an employee retention plan ~~the~~implemented ~~impairment~~in ~~charge~~the ~~and~~first aquarter ~~decrease~~of in2003 ~~goodwill~~and ~~amortization~~an increase of $191.79 million in ~~due~~premiums to ~~implementation~~insurance ofcompanies ~~SFAS~~related ~~No.~~to ~~142~~director and officer insurance. As a percentage of total revenues, general ~~The~~and ~~remaining~~administrative ~~$0.3~~expenses ~~million~~decreased ~~decrease~~slightly isin the first half of 2003 to 28.8% from ~~depreciation~~28.9% ~~expense~~in 2002.

~~Severance~~Amortization of intangibles and ~~other~~depreciation expense ~~decreased~~for the first six months of 2003 decreased by $40.1 9 million, ~~from~~or $42.75%, to $37.9 million tofrom $038.6 8 million in the first ~~half~~six ofmonths ~~2001 and~~of 2002~~, respectively~~. ~~This expense for 2002 consisted primarily of severance and relocation costs related to the consolidation of our monitoring operations.~~ This ~~expense~~ ~~for~~decrease ~~2001~~ is ~~primarily~~comprised ~~for severance charges incurred in the closing~~ of ~~our~~ ~~Beaverton and Hagerstown customer service centers, the~~ a reduction ofin ~~180 positions,~~subscriber ~~the~~amortization ~~discontinuation~~expense of ~~the~~$0.1 ~~National~~million ~~Accounts~~ and ~~Patrol~~a ~~divisions and~~reduction ~~the relocation~~ of ~~certain departments.~~ ~~Also~~$0.8 ~~included~~million ~~are~~in ~~certain~~depreciation ~~other costs incurred with the closure of facilities~~expense.

Multifamily Segment

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

2432

	Six Months Ended June 30,
	2002				2001
	2003				2002
	(dollars in thousands)
Revenues:
Monitoring and related services	$	1817,~~282~~931	9994.26	%	$	1718,~~558~~282	98.20	%
Other	~~143~~1,015		05.84		~~322~~370		12.80
Total revenues	18,~~425~~946		100.0		1718,~~880~~652		100.0
Cost of revenues:
Monitoring and related services	4,~~328~~137		2321.58		34,~~967~~328		2223.2
Other	~~167~~3,031		016.90		~~384~~3,355		218.10
Total cost of revenues	47,~~495~~168		2437.48		47,~~351~~683		2441.32
Gross profit	1311,~~930~~778		7562.62		1310,~~529~~969		7558.78
Selling expense	1,~~037~~406		57.64		~~953~~1,111		5.39
General and administrative expenses	65,~~056~~731		3230.93		36,~~997~~056		2232.45
Amortization and depreciation expense	4,090		22.2		8,036		45.0
Amortization of intangibles and depreciation expense	2,446		12.9		2,634		14.1
Operating income	$	2,~~747~~195	1411.96	%	$	~~543~~1,168	36.03	%

~~2002~~2003 Compared to ~~2001~~ 2002. We had a net increase of 15,~~999~~930 customers in the first six months of ~~2002~~2003 as compared to a net increase of 111,~~358~~999 customers in ~~2001~~the first six months of 2002. The average customer base was ~~327~~332,~~549~~877 for the first six months of ~~2002~~ 2003 compared to ~~313~~327,~~636~~549 for the first six months of ~~2001~~ 2002. The change in Multifamily’s customer base for the period is shown below.

	Six Months Ended June 30,
	2002		2001
	2003		2002
Beginning Balance, January 1,	~~326~~329,~~549~~912		~~307~~326,~~957~~549
Additions, net of holdback put backs	12,382		20,087
Additions	15,489		12,382
Customer losses, net of holdback put backs	(10,383	)	(8,729	)
Customer losses	(9,559	)	(10,383	)
Ending Balance	~~328~~335,~~548~~842		~~319~~328,~~315~~548
Annualized Attrition	6.3	%	5.6	%
Annualized attrition	5.7	%	6.3	%

Monitoring and related services revenues consist primarily of contractual revenue derived from providing monitoring and maintenance ~~was~~service. These revenues were $1817.3 9 million in ~~2002~~the first six months of 2003 compared to $1718.63 million in ~~2001. This~~the ~~4.1%~~first six ~~increase~~months ~~was~~of ~~primarily~~2002 ~~the~~due ~~result of~~to ana decline in our RMR per customer offset by an increase in the average customer base of 41.46%. The decline in recurring monthly revenue per customer is primarily due to an increasing number of renewals, which provide for contract extensions at a reduced RMR.

Other revenues ~~decreased~~consist primarily ~~slightly~~of toamortization of deferred revenue associated with the sale of alarm $0systems and revenues from the sale of access control systems. These revenues increased to $1.0 million in the ~~2002~~first half of 2003 from $0.34 million in ~~2001~~2002 primarily due to aan ~~decrease~~increase in deferred revenue amortization of $0.6 million pursuant to Staff Accounting ~~outright~~Bulletin ~~sales~~101, or SAB 101, which requires deferral of ~~access~~revenue ~~control~~over ~~systems~~the life of the customer.

Cost of monitoring and related revenues for the first six months of 2003 ~~2002~~decreased ~~increased~~ $0.3 2 million to $4.31 million ~~in 2002~~ from $4.03 million in ~~2001. This~~the ~~9.1%~~first ~~increase~~six months isof ~~primarily~~2002. These ~~the~~costs ~~result~~generally ofrelate to the ~~increase~~cost inof ~~the~~providing ~~subscriber~~monitoring ~~base~~ and ~~increased~~maintenance ~~field~~ service ~~costs. Costs of monitoring~~ and ~~related services~~include ~~revenues~~the ascosts ~~a percentage~~ of ~~the~~monitoring, ~~related~~customer ~~revenues~~service ~~increased~~and tofield 23service.7 The 4.4% decrease in the first six months of 2003 ~~2002~~compared ~~from~~to ~~22.6% in~~ the first six months of ~~2001~~2002 is primarily as athe result of reduced ~~the increase in~~ field service costs. Cost of monitoring and related

~~Cost of other revenues decreased by $0.2 million, or 56.5% to $0.2 million in 2002 from $0.4 million in 2001 due to the decline in outright sales of access control systems.~~33

~~Selling~~revenues ~~expense~~as ina ~~2002~~percentage ~~remained~~of ~~consistent~~related ~~with~~revenues ~~2001~~decreased atto $23.1% in the first six months of 2003 from 23.07% in ~~million~~the first six months of 2002.

~~General~~Cost ~~and~~of other revenues consist principally of amortization of ~~administrative~~deferred ~~expenses~~installation ~~for~~costs ~~2002~~pursuant ~~increased~~to ~~$2.1~~SAB ~~million~~101 and the costs to install access control systems. These costs decreased by $60.13 million inor ~~2002~~9.7% ~~from~~to $43.0 million in ~~2001. This~~the ~~51.5%~~first ~~increase~~half ~~is primarily~~of ~~due~~2003 tofrom $3.3 million in the ~~allocation~~first half of ~~holding~~2002 ~~company~~primarily ~~expenses~~due ~~which~~to ~~were~~a ~~not allocated~~decrease in ~~2001~~deferred ~~until~~cost amortization ~~the~~totaling $0.3 million.

25Selling expense increased $0.3 million to $1.4 million in the first six months of 2003 from $1.1 million in the first six months of 2002 primarily due to higher selling expense amortization of $0.1 million pursuant to SAB 101 and higher advertising costs.

~~fourth~~General ~~quarter~~ and administrative toexpenses ~~increased~~for ~~insurance~~the ~~costs.~~first ~~As a~~six ~~percentage~~ months of ~~total~~2003 ~~revenues,~~decreased ~~general~~$0.3 ~~and~~million ~~administrative~~to ~~expenses~~$5.7 ~~increased to~~million 32from $6.9%0 ~~for~~million in the first six months of 2002. This ~~from 22~~5.4% ~~for~~decrease is ~~the~~primarily ~~first~~due ~~six~~to ~~months~~lower insurance costs totaling $0.3 million, a $0.2 million decline in bad debt expense, and a $0.1 million decrease in legal costs, offset ofby ~~2001~~a ~~due~~$0.3 million increase in employment costs related to ~~the~~an ~~allocation~~employee ofretention plan ~~holding~~and ~~company~~a ~~expenses~~$0.2 million increase in ~~2002~~management fees allocated from Protection One.

Amortization of intangibles and depreciation expense for ~~2002~~the first half of 2003 decreased by $30.92 million, or 49 7.1% to $42.14 million from $82.0 6 million in ~~2001. This decrease is due to~~ the ~~elimination~~first half of ~~goodwill amortization~~2002. This ~~totaling~~decline ~~$4.8~~is ~~million~~primarily ~~resulting~~due ~~from~~to a ~~change~~reduction in ~~accounting principle offset by an increase in~~ subscriber ~~amortization~~intangibles ~~resulting~~related ~~from a change in estimate of~~to the ~~subscriber~~settlement ~~life~~and ~~from~~contract 10buyout ~~years~~in tolate 92002 ~~years~~of ~~and~~significant ~~the~~units ~~increasing~~under contract ~~customer~~with ~~base being~~one ~~amortized~~developer.

Three Months Ended June 30, ~~2002~~2003 Compared to Three Months Ended June 30, ~~2001~~2002

Protection One Consolidated

Revenues decreased approximately $134.13 million in the second quarter of 2003 compared to the second quarter of 2002, primarily due to the decline in ~~our~~the size of our customer base. Cost of revenues decreased approximately $61.05 million primarily due to a decrease of $0.9 million in telecommunication costs and ~~general~~a decrease of $0.7 million in service costs. General and administrative costs decreased approximately $6.1.3 million, primarily due to decreases of $1.3 million from the ~~consolidation~~cancellation of our ~~call~~Management ~~centers~~Services Agreement with Westar Industries, $1.8 million in bad debt expense primarily due to recoveries of written off accounts, $0.5 million in rent expense due partially to our ~~downsizing~~decision ~~efforts~~to purchase computer equipment (as opposed to leasing), $0.4 million in telecommunications expense and ~~other~~$0.3 ~~cost~~million ~~reduction~~in ~~initiatives~~marketing expense. These decreases were partially offset by increases of $2.0 million for the retention bonus accrual and $0.9 million in our insurance premiums. Selling costs increased approximately $1.0 7 million, primarily due to increased efforts to generate new customers through our internal sales force. Interest expense decreased by approximately $3.0 .6 million, primarily due to a reduction in the weighted average interest rate of our variable debt. Other income of approximately $2.1 million relates primarily to the receipt in May 2003 of purchase holdback amounts from the sale of our Sonitrol business in June 2001.

North America Segment

	Three Months Ended June 30,
	2002							2001
	2003					2002
	(dollars in thousands)
Revenues:
Monitoring and related services	$	5955,~~070~~003		92.7	%	%$	$59,070		~~73,496~~92.7	%	~~95.4~~	%
Other	4,~~670~~338			7.3		4,670	~~3,506~~		7.3		~~4.6~~
Total revenues	6359,~~740~~341			100.0		63,740	~~77,002~~		100.0		~~100.0~~
Cost of revenues:
Monitoring and related services	1716,~~645~~089			27.71		17,645	~~24,930~~		27.7		~~32.4~~
Other	35,~~813~~453			69.02		5,627	~~2,624~~		8.8		~~3.4~~
Total cost of revenues	21,~~458~~542			3336.73		23,272	~~27,554~~		36.5		~~35.8~~
Gross profit	4237,~~282~~799			6663.37		40,468	~~49,448~~		63.5		~~64.2~~
Selling expense	57,~~068~~083			711.9		5,536	~~4,153~~		8.7		~~5.4~~
General and administrative expense	1816,~~038~~846			28.34		18,077	~~25,272~~		28.3		~~32.8~~
Amortization and depreciation expense	20,317			31.9			46,089				59.8
Amortization of intangibles and depreciation expense	18,898			31.9		19,291			30.3
Severance and other expense	39			0.1			4,276				5.6
Operating loss	$	(5,028	)	(8.5	)%	$	(2,436	)	(3.8	)%
Operating loss	$	(1,180	)	(1.9		)%	$		(30,342	)	(39.4	)%

2002 Compared to 2001. We had a net decrease of 12,887 customers in the second quarter of 2002 as compared to a net decrease of 54,434 customers in the second quarter of 2001. Further analysis of the change in the North American account base between the two periods is shown in the table below. The “Conversion adjustments” line item reflects the impact on the calculation of our customer base from the conversion of our Beaverton monitoring and billing system to MAS®. These conversion adjustments relate to how a customer is defined and the transition of that definition from one system to another.34

262003 Compared to 2002. We had a net decrease of 9,771 customers in the second quarter of 2003 as compared to a net decrease of 12,887 customers in the second quarter of 2002. The average customer base for the second quarter of 2003 and 2002 was 729,482 and 779,535, respectively, or a decrease of 50,053 customers. The number of customers decreased primarily because our customer acquisition strategies were not able to generate accounts in a sufficient volume at acceptable cost to replace accounts lost through attrition. We expect that this trend will continue until we reduce attrition on the North American retail portfolio of accounts to a level lower than recorded in this reporting period and we have access to the capital needed to invest in creating at least as many accounts as we lose. Until we are able to reverse this trend, net losses of customer accounts will materially and adversely affect our business, financial condition and results of operations. We believe the decrease in annualized quarterly attrition is due to a company wide focus on retaining our current customers, the consolidation of our call centers and the conversion to one common technology platform. We are currently focused on reducing attrition, developing cost-effective marketing programs, and generating positive cash flow.

	Three Months Ended June 30,
	2002		2001
	2003		2002
Beginning Balance, April 1	785,978		992,434
Beginning Balance, April 1,	734,367		785,978
Additions	1112,~~296~~785		1211,~~827~~296
Conversion adjustments	—		(15,532	)
Customer losses	(20,231	)	(23,785	)
Customer losses from dispositions	—		(9,440	)
Other (a)	(2,325	)	(398	)
Customer losses not guaranteed with holdback put backs	(23,785	)	(35,509	)
Ending Balance, June 30,	724,596		773,091
Customer losses guaranteed with holdback put backs and other	(398	)	(6,780	)
Annualized quarterly attrition	11.1	%	12.2	%
Ending Balance, June 30	773,091		938,000
Annualized quarterly attrition	12.2	%	14.7	%

~~Monitoring~~(a) ~~and~~Other consists ~~related~~primarily ~~service~~of ~~revenues~~customer ~~decreased~~sites ~~approximately~~that ~~$14.4~~had ~~million~~no orassociated ~~19.6%~~recurring inrevenue, therefore the ~~second~~loss ~~quarter~~ of ~~2002~~these ~~compared~~accounts todoes ~~the~~not ~~second~~reduce ~~quarter~~our ofrecurring ~~2001~~monthly revenue. ~~This~~Other isalso ~~primarily~~includes ~~due~~attritted accounts tocovered ~~the~~by ~~decline~~purchase ~~in our~~holdbacks. ~~customer~~As ~~base~~of June 30, 2003, we no longer have any accounts covered by purchase holdbacks.

~~Other~~Monitoring ~~revenues consist primarily of revenues generated from our~~and ~~internal~~related ~~installations~~service ~~of new alarm systems. These~~ revenues ~~increased approximately~~decreased approximately $14.21 million, or 336.29% in the second quarter of ~~2002~~2003 compared to the second quarter of ~~2001~~2002 primarily due to the decline in our customer base. These revenues consist primarily of contractual revenue derived from providing monitoring and maintenance service.

~~Cost~~Other ~~of monitoring and related services~~ revenues ~~for the~~consist ~~second~~primarily ~~quarter~~ of ~~2002~~revenues ~~decreased~~generated ~~by $7.3 million, or 29.2%, to $17.6 million~~ from ~~$24.9~~our ~~million~~internal ~~for~~installations ~~the second quarter~~ of ~~2001.~~new ~~The~~alarm ~~decrease~~systems, isas ~~primarily~~well ~~due~~as toamortization ~~a reduction~~ of ~~telecommunication~~previously ~~costs,~~deferred ~~rent~~customer acquisition ~~expense~~revenue. Installation ~~and~~revenues ~~wage~~consist primarily ~~expense~~of ~~associated~~sales ~~with~~of ~~the~~burglar ~~consolidation~~alarms, ofclosed ~~our~~circuit ~~call~~televisions, ~~centers~~fire alarms and ~~other~~card ~~cost~~access ~~reduction~~control ~~initiatives. Costs~~systems ofto ~~monitoring~~commercial ~~and~~customers. In ~~related~~the ~~services~~second asquarter ~~a percentage~~ of ~~the~~2003, ~~related~~these revenues decreased toby 29approximately $0.9%3 inmillion ~~the~~or ~~second quarter of 2002 from 33~~7.91% infrom the ~~second~~ second quarter of ~~2001.~~2002 ~~This~~due ~~improvement~~to ~~arises~~lower ~~from~~outright ~~the~~commercial ~~percentage~~sale ~~reduction in~~revenue, ~~monitoring~~partially ~~and~~offset by ~~related~~an ~~costs~~increase ~~exceeding~~in the ~~percentage~~amortization ~~reduction~~of inpreviously ~~related revenues~~deferred customer revenue.

Cost of ~~other~~monitoring and related services revenues ~~increased~~for ~~approximately~~the second quarter of 2003 decreased by $1.2 5 million, or 8.8%, to $316.81 million from $17.6 million for the second quarter of 2002. ~~from~~These ~~$2.6~~costs ~~million~~generally inrelate to the ~~second~~cost ~~quarter~~ of ~~2001. This~~providing ~~increase~~monitoring isservice ~~related~~and to include the ~~increase~~costs inof monitoring, ~~other~~billing, ~~revenues. Cost~~customer ~~of other~~service ~~revenues~~and asfield aoperations. ~~percentage~~The ofdecrease in the second ~~related~~quarter ~~revenues~~of ~~increased~~2003 compared to ~~81.6% in~~ the second quarter of 2002 ~~from 74.8%~~is primarily due to decreases in ~~the~~telecommunication ~~second~~and ~~quarter~~service costs of ~~2001~~$0.9 million

Selling expenses increased $0.9 million from $4.2 million in the second quarter of 2001 to $5.1 million in the second quarter of 2002. The increase is generally due to an increase in the internal sales force and the resulting increase in sales commissions, wages and benefits and support costs.35

~~General~~ and ~~administrative expenses decreased~~ $~~7.3 million from $25.3 million in the second quarter of 2001 to $18.~~0 ~~million in the second quarter of 2002~~.7 ~~The decrease in 2002 is comprised generally of a $3.0~~ million ~~decrease in wages and related benefits resulting from downsizing our workforce~~, ~~a $3~~respectively.6 Costs ~~million decrease~~of inmonitoring ~~outside services~~ and ~~shared~~related services ~~subcontract labor primarily~~ ~~relating~~revenues toas ~~the~~a ~~completion~~percentage of ~~software projects, a $1.1 million decrease in professional fees, and a $0.3 million decrease in travel and entertainment expenses. These decreases are partially offset by a $1.3 million expense for~~ the ~~second quarter of 2002~~ related ~~to a financial advisory fee to Westar Industries. As a percentage of total~~ revenues, ~~general and administrative expenses~~ decreased to 2829.3% ~~for~~in the ~~second~~ second quarter of ~~2002~~2003 from 3229.89% ~~for~~in the second quarter of ~~2001 because the percentage reduction in these costs exceeded the percentage decline in revenues~~2002.

27Cost of other revenues decreased approximately $0.2 million or 3.1% in the second quarter of 2003 compared to the second quarter of 2002. These costs consist primarily of equipment and labor charges to install alarm systems, closed circuit televisions, fire alarms and card access control systems sold to our customers as well as amortization of previously deferred customer acquisition costs. These costs as a percentage of other revenues were 125.7% for the second quarter of 2003 as compared to 120.5% for the second quarter of 2002. The decrease in 2003 is primarily due to lower outright commercial sales, partially offset by an increase in amortization of previously deferred customer acquisition costs.

~~Amortization~~Selling ~~and~~expenses increased ~~depreciation~~$1.6 ~~expense~~million ~~for~~from $5.5 million in the second quarter of 2002 ~~decreased by $25.8 million, or 55.9%,~~ to $207.~~3 million from $46.~~1 million in the second quarter of ~~2001~~2003. The ~~This~~increase ~~decrease~~is ~~reflects~~generally adue ~~reduction~~to inan ~~subscriber amortization~~increased ofemphasis ~~$15.6~~on ~~million~~internal ~~related~~sales generation toand the ~~impairment~~resulting ~~charge~~increase ~~and~~in asales ~~decrease~~commissions, wages, benefits, inand ~~goodwill~~support ~~amortization~~costs ofas ~~$9.8~~well ~~million~~as ~~due~~an toincrease ~~implementation~~in the amortization of ~~SFAS~~previously deferred Nocommissions. ~~142.~~

~~Severance~~General and administrative ~~other~~expenses ~~expense~~decreased of$1.2 million from $3918.0 ~~thousand~~million in the second quarter of 2002 to $16.8 million in the second ~~consisted~~quarter ~~primarily~~of 2003. This decrease is generally comprised of ~~severance~~a ~~and~~decrease ~~relocation~~of ~~costs~~$1.3 million ~~related~~due to the ~~consolidation~~ termination of our ~~monitoring~~Management ~~operations~~Services Agreement with Westar Industries, a $1. ~~Severance~~7 million decrease in bad debt expense offset by an increase in wage and ~~other~~related expense of $42.35 million primarily related to an employee retention plan implemented in the ~~second~~first quarter of ~~2001~~2003 ~~consisted~~and ~~primarily~~an ofincrease in ~~severance~~premiums ~~charges~~paid ~~incurred~~to ininsurance ~~the~~companies ~~closing~~ of ~~our~~$1.0 ~~Beaverton~~million ~~customer~~primarily ~~service~~due to an increase in director and officer insurance. ~~center,~~As ~~the~~a ~~reduction~~percentage of ~~180~~total ~~positions~~revenues, ~~the~~general ~~discontinuation~~and ofadministrative ~~the National~~expenses ~~Accounts~~were ~~and~~approximately ~~Patrol~~28.4% ~~divisions~~in ~~and~~both the ~~relocation~~second quarter of ~~certain~~2003 ~~departments~~and 2002.

Amortization of intangibles and depreciation expense for the second quarter of 2003 decreased by $0.4 million, or 2.0%, to $18.9 million from $19.3 million in the second quarter of 2002. This decrease is comprised of a reduction in subscriber amortization expense of $0.1 million and a reduction of $0.3 million in depreciation expense.

Multifamily Segment

	Three Months Ended June 30,
	2002				2001
	2003				2002
	(dollars in thousands)
Revenues:
Monitoring and related services	$	9,~~128~~016	9993.29	%	$	89,~~869~~128	9895.06	%
Other	75585		06.81		~~179~~421		24.04
Total revenues	9,~~203~~601		100.0		9,~~048~~549		100.0
Cost of revenues:
Monitoring and related services	2,~~247~~142		2422.43		2,~~043~~247		2223.65
Other	~~103~~1,639		117.1		~~223~~1,327		213.49
Total cost of revenues	23,~~350~~781		2539.54		23,~~266~~574		2537.04
Gross profit	65,~~853~~820		7460.56		65,~~782~~975		7562.06
Selling expense	~~549~~755		67.09		~~478~~617		56.35
General and administrative expenses	3,~~203~~108		3432.84		23,~~055~~203		2233.75
Amortization and depreciation expense	2,067		22.5		4,035		44.6
Amortization of intangibles and depreciation expense	1,213		12.6		1,318		13.8
Operating income	$	~~1,034~~744	117.27	%	$	~~214~~837	28.48	%

2002 Compared to 2001. We had a net decrease of 741 customers in the second quarter of 2002 as compared to a net increase of 2,966 customers in 2001. The average customer base was 328,919 for the second quarter of 2002 compared to 317,832 for the second quarter of 2001. The change in Multifamily’s customer base for the period is shown below.36

	Three Months Ended June 30,
	2002		2001
Beginning Balance, April 1	329,289		316,349
Additions, net of holdback put backs	5,523		6,810
Customer losses, net of holdback put backs	(6,264	)	(3,844	)
Ending Balance, June 30	328,548		319,315
Annualized quarterly attrition	7.6	%	4.8	%

2003 Compared to 2002. We had a net increase of 5,142 customers in the second quarter of 2003 as compared to a net decrease of 741 customers in the second quarter of 2002. The average customer base was 333,271 for the second quarter of 2003 compared to 328,919 for the second quarter of 2002. The change in Multifamily’s customer base for the period is shown below.

	Three Months Ended June 30,
	2003		2002

Beginning Balance, April 1,	330,700		329,289
Additions	9,191		5,523
Customer losses	(4,049	)	(6,264	)
Ending Balance	335,842		328,548

Annualized quarterly attrition	4.9	%	7.6	%

Monitoring and related services revenues consist primarily of contractual revenue derived from providing monitoring and maintenance service. These revenues were $9.1 0 million in the second quarter ~~2002~~ of 2003 compared to $8.9.1 million in ~~2001~~the same quarter of 2002. The ~~increase~~decrease was the result of ~~the~~a ~~3.5%~~decline in our recurring monthly revenue per customer primarily related to an increasing number of ~~increase~~renewals, which provide for contract extensions at a reduced monthly rate. This decline was offset by a slight increase in the ~~subscriber~~average customer base of 1.3%.

Other revenues consist ~~decreased~~primarily ~~slightly~~of toamortization of deferred revenue associated with the sale of alarm systems and revenue from the sale of access control systems. These revenues increased to $0.16 million in the second quarter of ~~2002~~2003 from $0.24 million in ~~2001~~the second quarter of 2002 primarily ~~due~~ due to aan ~~decrease~~increase in ~~outright~~deferred ~~sales~~revenue amortization of ~~access~~$0.2 ~~control~~million ~~systems~~pursuant to SAB 101, which requires deferral of revenue over the life of the customer along with the deferral of associated direct and incremental costs.

Cost of monitoring and related revenues for the second quarter of 2003 ~~2002~~decreased ~~increased~~ $0.2 1 million to $2.21 million ~~in 2002~~ from $2.02 million in ~~2001~~the second quarter of 2002. ~~This~~These 10costs generally relate to the cost of providing monitoring and maintenance service and include the costs of monitoring, customer service and field operations.0 The 4.7% ~~increase~~decrease isin ~~primarily~~ the ~~result~~ second quarter of 2003 compared to the ~~increase~~second inquarter of 2002 is primarily the ~~subscriber~~result ~~base~~of ~~and~~a decrease ~~increased~~in field service costs. ~~Costs~~ Cost of monitoring and related ~~services~~ revenues as a percentage of ~~the~~ related revenues decreased ~~increased~~ to 2423.68% in the second quarter of ~~2002~~2003 from 2324.06% in the ~~second~~ second quarter of ~~2001 primarily as a result of the increase in field service costs~~2002.

Cost of other revenues ~~decreased~~consists ~~slightly~~primarily of amortization of deferred installation costs pursuant to $0SAB 101 and the costs to install access control systems. These costs increased to $1.6 million in the second quarter of ~~2002~~2003 from $01.23 million in ~~2001~~the second quarter of 2002 primarily due to aan ~~decrease~~increase in ~~outright~~ ~~sales~~deferred ofcost ~~access~~amortization totaling ~~control~~$0.3 ~~systems~~million.

Selling expense in the second quarter of ~~2002~~2003 ~~remained~~increased ~~consistent~~$0.2 ~~with~~million ~~2001~~to ~~second~~$0.8 ~~quarter~~million atfrom $0.5 6 million in the second quarter of 2002 due to higher advertising costs.

General and administrative expenses for the second quarter of 2003 ~~2002~~decreased ~~increased~~ $10.1 million to $3.21 million ~~in 2002~~ from $23.12 million in ~~2001~~the second quarter of 2002. This 553.90% ~~increase~~decrease is primarily due to ~~the~~a ~~allocation~~$0.2 ofmillion ~~holding company~~decline ~~expenses which were not allocated~~ in ~~2001~~insurance ~~until~~costs, ~~the~~reduced ~~fourth quarter and~~facility tocosts ~~increased~~of ~~insurance costs~~$0.1 Asmillion, alower ~~percentage~~legal costs of ~~total~~$0.1 ~~revenues,~~million ~~general~~ and ~~administrative~~lower ~~expenses~~bad ~~increased~~debt expense toof 34$0.8%1 ~~for~~million ~~the~~offset ~~second~~by ~~quarter~~a of$0.4 ~~2002 from~~million ~~22.7%~~increase ~~for~~in ~~the~~management ~~second~~fees allocated ~~quarter~~from ofProtection ~~2001~~One ~~due~~and toincreased ~~the~~employment ~~allocation~~costs of ~~holding~~$0.1 million ~~company~~primarily ~~expenses~~related into ~~2002~~an employee retention plan.

Amortization of intangibles and depreciation expense for ~~the~~ the second quarter of ~~2002~~2003 decreased by $10.91 million, or ~~48.~~8.0% to $2.1.2 million ~~from~~ from $41.03 million in ~~2001. This decrease is due to~~ the ~~elimination~~second quarter of ~~goodwill amortization totaling $2~~2002.4 ~~million~~This ~~resulting~~decline ~~from~~is aprimarily ~~change~~due into ~~accounting~~a ~~principle~~reduction ~~offset by an increase~~ in subscriber ~~amortization~~ intangibles resulting from ~~a change in estimate of~~ the ~~subscriber~~ ~~life~~settlement ~~from~~and 10contract ~~years~~buyout toin 9late ~~years~~2002 ~~and~~of ~~the~~significant units ~~increasing~~under ~~customer~~contract ~~base~~with ~~being amortized~~one developer.

Liquidity and Capital Resources

WeWestar ~~believe~~Energy, wewhich ~~will~~owns ~~have~~88% ~~sufficient cash to fund future operations~~ of our ~~business~~common ~~through July 1~~stock, ~~2003~~is ~~from~~also ~~a combination of cash flow from~~ our ~~security~~principal ~~monitoring customer~~source ~~base which generated $25.4 million~~ of ~~positive cash flow from operations in~~ the ~~first six months of 2002, the sale of our Canadian operations,~~ ~~possible~~external ~~other~~capital ~~asset~~we ~~sales~~need ~~and~~to ~~borrowings~~operate ~~under~~ our ~~existing Senior Credit Facility with Westar Industries, which had approximately $65~~business.~~3 million of availability at August 8, 2002.~~ We ~~have sought to~~ obtain amost ~~third party source~~ of ~~funds~~our toexternal ~~replace~~cash ~~those~~requirements ~~provided by Westar Industries~~ under ~~our~~the ~~Senior Credit Facility~~$228. ~~We have not been able to obtain another lender or lenders on~~4 ~~terms~~million ~~or at a cost acceptable to us or~~ Westar ~~Industries. We~~Credit ~~can~~Facility ~~give no assurance that we would be able to obtain adequate financing from third party sources should that become necessary.~~which

The Senior Credit Facility currently expires on January 2, 2003. We expect to renew the facility with Westar Industries unless efforts to replace the facility with financing from an unaffiliated third party lender are successful. The success of these efforts will depend on improvements in our operating and financial performance. The Kansas Corporation Commission has issued an order prohibiting Westar Energy from borrowing to make loans or capital contributions to Westar Industries. This order limits the resources available to Westar Industries for funding its obligations under the Senior Credit Facility. The Kansas Corporation Commission is also conducting a proceeding to consider a financial plan proposed by Westar Energy which includes the separation of its electric utility and non-electric utility businesses. We would face significant liquidity issues if we were unable to renew the Senior Credit Facility with Westar Industries or if Westar Industries were unable to fund its obligations under the Senior Credit Facility.37

~~Our~~expires ~~ability~~January 5, 2005. As of June 30, 2003, we had $12.9 million available to ~~borrow~~us under the ~~facility~~Westar isCredit ~~subject~~Facility toand $17.4 million of cash. In prior years, we also have ~~compliance~~obtained funds from a tax sharing agreement with ~~certain~~Westar ~~financial~~Energy. We ~~covenants~~expect ~~including~~to areceive ~~leverage~~an ~~ratio~~estimated $20.7 million from Westar Energy in the fourth quarter of ~~5.75~~2003 as payment for the tax benefit Westar Energy is expected to utilize in its 2002 consolidated income tax return to 1be filed in the third quarter.0 Westar ~~and~~Energy anmust ~~interest~~provide ~~coverage~~advance ~~ratio~~notice ofto ~~2.10~~the KCC if the payment to the 1Company under the tax sharing agreement exceeds approximately $20 million.0. AtWestar ~~June~~Energy ~~30,~~has ~~2002,~~filed a plan with the ~~ratios~~KCC ~~were~~in ~~approximately~~response ~~4.9~~to an order issued by it to ~~1.0~~restructure and reduce 2debt.6 In tothat ~~1.0~~plan, ~~respectively~~Westar Energy announced its intention to sell its investment in us.

~~Operating~~The ~~Cash~~KCC ~~Flows~~has ordered ~~for~~Westar Energy not to extend any credit to us except under the ~~Six~~Westar Credit ~~Months~~Facility, and has authorized Westar Energy to provide funds to meet its obligations under the Westar Credit Facility and to extend the term of the ~~Ended~~Westar ~~June~~Credit 30Facility for one year to January 5, ~~2002~~2005. ~~Our~~Additionally, ~~operating~~the ~~activities~~Westar ~~provided~~Credit ~~net cash~~Facility ~~flows~~must be paid in full upon the sale of ~~$25~~all or a majority of our common stock to a new owner.4 ~~million~~During ~~for~~the second quarter of 2003, the ~~first~~Westar ~~six~~Credit ~~months~~Facility ofwas amended ~~2002~~to ~~compared~~extend the maturity date to ~~$25~~January 5, 2005.2 KCC orders also preclude us from raising money through the sale of assets in excess of $100,000 without prior KCC ~~million~~approval. We ~~for~~have in the ~~first~~past ~~six~~few ~~months~~years tried to obtain a line of ~~2001~~credit from third party sources, but have been unable to do so.

29We repurchased $8.4 million in debt that would have matured in September 2003 at book value. We have $1.6 million in debt that matures in 2003, including $1.3 million principal amount of our convertible senior subordinated notes due in September 2003. We believe the required capital will be provided by cash flow from our security monitoring customer base, which generated $22.5 million of positive cash flow from operations in the first six months of 2003. While we believe we will have adequate cash to meet our needs through 2004 from internally generated sources, the Westar Credit Facility, payments made to us under the tax sharing agreement and from asset sales, factors such as economic conditions, or the inability to obtain required KCC approvals could impair our liquidity.

~~Investing~~As ~~Cash~~discussed below, ~~Flows~~we ~~for~~have ~~the~~obligations ~~Six~~under ~~Months~~which our outstanding notes were issued which ~~Ended~~could ~~June~~require ~~30,~~us ~~2002.~~to offer to purchase such debt in connection with a change in control Wesuch ~~used~~as ~~$15~~a disposition by Westar Energy of its investment in our common stock.7 Should ~~million~~a change in ~~cash~~control occur, ~~for~~we ~~investing~~anticipate ~~activities~~that a purchaser of Westar Energy’s interest in us would negotiate the ~~first~~amendment ~~six~~of ~~months~~the terms of our outstanding debt requiring its repurchase, or assist us in finding sufficient sources of ~~2002~~funds to meet our repurchase obligations. We ~~used~~also anticipate ~~$11.0~~that ~~million~~a purchaser would assist us in ~~cash~~arranging for new credit tofacilities ~~install~~or ~~and~~provide ~~acquire~~us ~~new~~needed ~~accounts~~credit. However, ~~$3.3~~we ~~million~~can togive ~~acquire~~no ~~fixed~~assurance ~~assets~~that ~~and~~any such arrangements will or ~~$1.4~~could ~~million~~be tomade ~~acquire~~or AVany ~~ONE,~~needed ~~Inc.~~funds ~~from~~otherwise ~~Westar~~be ~~Industries~~provided.

~~Financing~~Our ~~Cash~~ability ~~Flows for the Six Months Ended June 30, 2002. We used a net $12.4 million in cash for financing activities in the first six months of 2002. We used $11.6 million in cash~~ to ~~purchase~~borrow ~~stock of Westar Energy. We increased our borrowings~~ under the ~~Senior~~Westar Credit Facility byis ~~$59.0 million. We~~subject ~~used cash~~ to ~~purchase~~compliance ~~$77.0 million~~with ~~in face value of our outstanding debt for $59.8 million and to acquire~~certain ~~1,000,000~~financial ~~shares~~covenants ofdescribed ~~our~~under ~~outstanding~~“Material ~~stock~~Commitments” ~~for $2~~below.~~2 million. At June 30, 2002, the Senior Credit Facility had a weighted average interest rate of 5.6% and an outstanding balance of $196.5 million.~~

~~Debt~~The ~~and~~Westar Credit ~~Equity~~Facility ~~Repurchase~~must ~~Plans. We~~be ~~may~~paid ~~from~~in ~~time~~full toupon ~~time~~any ~~purchase~~sale ~~our~~by ~~debt and equity securities as well as~~ Westar Energy’s ~~debt~~of ~~and equity securities in the~~our ~~open~~common ~~market or through negotiated transactions~~stock. ~~The timing and terms of purchases~~Furthermore, ~~and~~ the ~~amount of debt or~~ ~~equity~~indentures ~~actually~~governing ~~purchased~~all ~~will~~of beour ~~determined~~debt ~~based~~securities onrequire ~~market~~that ~~conditions~~we ~~and other~~offer ~~factors. As of August 8, 2002, we~~to ~~had~~repurchase ~~authority~~the ~~from~~securities ~~our~~in ~~board~~certain ofcircumstances ~~directors~~following toa ~~purchase~~change ~~an additional~~in ~~approximately~~control ~~8.2~~such ~~million~~as ~~shares~~would ofoccur ~~our~~if ~~common~~Westar ~~stock. Our~~Energy ~~board~~completes ~~of directors has also authorized~~ the ~~purchase~~sale of ~~up to~~its aninvestment ~~additional $100 million~~ in ~~Westar Energy debt and equity securities~~us.

~~Material~~Our ~~Commitments. We~~135/8% senior subordinated discount notes and 63/4% convertible ~~have~~notes ~~future,~~require ~~material,~~us ~~long–term~~to ~~commitments~~make ~~made~~a inrepurchase ~~the~~offer ~~past~~at ~~several~~approximately 101% of principal ~~years~~amount, plus interest in ~~connection~~the ~~with~~event ~~our~~of ~~growth~~a change in control. Our We73/8% ~~believe~~senior ~~these~~notes and ~~commitments~~81/8% ~~will~~senior besubordinated ~~met through~~notes require us to make a repurchase ~~combination~~offer at 101% of ~~borrowings~~principal ~~under~~amount, ~~our~~plus ~~Senior~~interest ~~Credit~~in ~~Facility,~~the event of a ~~refinancings~~change ~~and~~in ~~positive~~control ~~operating~~coupled ~~cash~~with ~~flows.~~two ~~The~~ratings ~~following~~downgrades ~~reflects~~that ~~our~~occurred after the ~~commitments~~date aswe ofannounced ~~June~~an ~~30,~~intent ~~2002:~~to pursue a transaction that would result in a change in control.

	Payment Due by Period
At June 30, 2002:	2002		2003 – 2004		2005 – 2006		Thereafter		Total
	(Dollars in thousands)
Contractual Cash Obligations
Long-term debt (a)	$	—	$	23,785	$	223,672	$	119,540	$	366,997
Capital lease obligations	248		552		—		—		800
Operating leases	4,292		9,501		2,614		1,790		18,197
Unconditional purchase obligations (b)	2,030		6,090		—		—		8,120
Other long-term obligations	—		—		—		—		—
Total contractual cash obligations	$	6,570	$	39,928	$	226,286	$	121,330	$	394,114

As of June 30, 2003, we had outstanding $29.9 million principal amount of the senior subordinated discount notes, $1.3 million principal amount of the convertible notes, $190.9 million principal amount of the senior notes and $110.3 million principal amount of the senior subordinated notes.

(In order to retain the services of numerous employees who may feel uncertain about the future ownership, management and direction of the company as a result of Westar Energy’s announcement to dispose of its ownership interest in us (see Note 9 to our financial statements) , we entered into retention and severance arrangements with approximately 190 employees to provide incentives for such employees to ~~Excludes~~remain with us through the sales process. The maximum retention amount of approximately $15.43 million ~~premium~~in ~~which~~the aggregate iswill ~~being~~be ~~amortized~~paid to ~~income.~~those employees who remain employed with us through November 1, 2003 (or, if a change in control of the company occurs prior to that date, then such payment will be made on or about the change in control

~~(b) Contract tariff for telecommunication services.~~38

date). Additional severance amounts of approximately $11.0 million may also be paid under these arrangements to those employees, if any, who are terminated following a change in control. Approximately $2.0 and $2.7 million was expensed in the three and six months ended June 30, 2003, respectively, related to the maximum $5.3 million retention payment and approximately $0.6 million is expected to be expensed each month through October 31, 2003 or until a change in control, if earlier. No amounts have been expensed by us relating to the severance arrangements. Upon a change in control of the company, an additional approximately $10.5 million will be paid to other key employees. No amounts have been expensed relating to these additional payments to key employees. In addition, upon a change in control, customary fees and expenses will be paid to the financial advisor to our Special Committee of the Board of Directors. We have expensed approximately $0.4 million for legal and other professional fees related to a possible change in control.

Operating Cash Flows for the Six Months Ended June 30, 2003. Our operations provided a net $22.5 million in cash flow in the first six months of 2003, a decrease of $5.0 million compared to net cash provided of $27.5 million in the first six months of 2002 primarily due to a decrease in working capital.

Investing Cash Flows for the Six Months Ended June 30, 2003. We used a net $12.0 million for our investing activities in the first six months of 2003. We received proceeds of $1.4 million from the sale of our AV ONE operations and approximately $2.5 million from the purchase holdback relating to the sale of our Sonitrol business in 2001. We invested a net $13.2 million in cash to install and acquire new accounts, and $2.8 million to acquire fixed assets. In the first six months of 2002, we invested a net $13.1 million in cash to install and acquire new accounts and $3.3 million to acquire fixed assets.

Financing Cash Flows for the Six Months Ended June 30, 2003. Financing activities provided a net $5.1 million in cash for the first half of 2003 compared to a net use of $12.4 million in cash for financing activities in the first half of 2002. We received $11.9 million in the first quarter of 2003 from Westar Energy related to the sale of our Westar Energy securities. In the first half of 2002 we paid approximately $59.8 million to acquire $77.0 million in face amount of our long term debt and acquired 1,000,000 shares of our outstanding stock for $2.2 million.

In the first six months of 2003, we did not increase our borrowings under the Westar Credit Facility. At June 30, 2003 the Westar Credit Facility had a weighted average interest rate before fees of 6.2% and an outstanding balance of $215.5 million.

In the first half of 2002, we increased our borrowings under the Westar Credit Facility by $59.0 million. At June 30, 2002 the Westar Credit Facility had a weighted average interest rate before fees of 5.6% and an outstanding balance of $196.5 million.

Debt and Equity Repurchase Plans. We may from time to time purchase our debt and equity securities in the open market or through negotiated transactions. The timing and terms of purchases, and the amount of debt or equity actually purchased will be determined based on market conditions and other factors.

Material Commitments. We have future, material, long-term commitments made in the past several years in connection with our growth. We believe these commitments will be met through a combination of borrowings under our Westar Credit Facility, refinancings and positive operating cash flows. The following reflects these commitments as of June 30, 2003:

Debt Security	Maturity Date	Amount
		(in thousands)

Westar Credit Facility	January 2005	$	215,500
Convertible Senior Subordinated Notes (a)	September 2003	1,345
Senior Subordinated Discount Notes (b)	June 2005	29,872
Senior Unsecured Notes	August 2005	190,925
Senior Subordinated Notes	January 2009	110,340
Other debt obligations including capital leases	Various	247
Total		$	548,229

(a) These notes are convertible into Protection One common stock at a price of $11.19 per share, which is currently above the price at which our shares are traded in the public stock markets.

(b) Excludes $1.0 million premium which is being amortized to income.

We had no off-balance sheet transactions or commitments as of or for the six months ended June 30, 2003.

We have future, material, long-term commitments made in the past several years in connection with our growth. The following reflects our commitments as of June 30, 2003:

At June 30, 2003: Contractual Cash Obligations	Payment Due by Period
At June 30, 2003: Contractual Cash Obligations	2003			2004 – 2005		2006 – 2007		Thereafter		Total
	(Dollars in thousands)
Long-term debt	$	1,345		$	220,797	$	—	$	110,340	$	332,482
Capital lease obligations	247			—		—		—		247
Operating leases	4,468			10,694		3,808		1,925		20,895
Unconditional purchase obligations (a)	2,030			2,030		—		—		4,060
Other long-term obligations	—			—		—		—		—
Total contractual cash obligations	$		8,090	$	233,521	$	3,808	$	112,265	$	357,684

(a) Contract tariff for telecommunication services.

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

	Amount of Commitment Expiration Per Period
At June 30, 2003: Other Commercial Commitments	Amount of Commitment Expiration Per Period
At June 30, 2002:	2002		2003 – 2004		2005 – 2006		Thereafter		Total
	2003		2004 – 2005		2006 – 2007		Thereafter		Total
	(Dollars in thousands)
Other Commercial Commitments
Line of credit	$	—	$	215,500	$	—	$	—	$	215,500
Line of credit	$	—	$	196,500	$	—	$	—	$	196,500
Standby letters of credit	2,000		—		—		—		2,000
Standby letters of credit	—		2,000		—		—		2,000
Total commercial commitments	$	2,000	$	215,500	$	—	$	—	$	217,500
Guarantees	—		—		—		—		—
Standby repurchase obligations	—		—		—		—		—
Other commercial commitments	—		—		—		—		—
Total commercial commitments	$	—	$	198,500	$	—	$	—	$	198,500

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

30The Westar Credit Facility and the indentures relating to our other indebtedness contain the financial covenants summarized below:

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

Debt Instrument		Financial Covenant
Senior Credit Facility		Total consolidated debt/annualized most recent quarter EBITDA less than 5.75 to 1.0.
		Consolidated annualized most recent quarter EBITDA/latest four fiscal quarters interest expense greater than 2.10 to 1.0
Senior Subordinated Notes		Current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0
Senior Subordinated Discount Notes		Total debt/annualized current quarter EBITDA less than 6.0 to 1.0
		Senior debt/annualized current quarter EBITDA less than 4.0 to 1.0

Debt Instrument		Financial Covenant
Senior Credit Facility		Total consolidated debt/annualized most recent quarter EBITDA less than 5.75 to 1.0
		Consolidated annualized most recent quarter EBITDA/latest four fiscal quarters interest expense greater than 2.10 to 1.0
Senior Subordinated Notes		Current fiscal quarter EBITDA/current fiscal quarter interest expense greater than 2.25 to 1.0
Senior Subordinated Discount Notes		Total debt/annualized current quarter EBITDA less than 6.0 to 1.0
		Senior debt/annualized current quarter EBITDA less than 4.0 to 1.0

At June 30, 2003, we were in compliance with the covenants under these debt instruments and we expect to remain in compliance for the remainder of the year.

~~At June 30, 2002, we were in compliance with the covenants under these debt instruments and we expect to remain in compliance for the remainder of the year.~~40

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

Credit Ratings. Standard & Poor’s ~~(S&P)~~, Fitch Ratings, and Moody’s Investors Service ~~(Moody’s)~~ are independent credit-rating agencies that rate our debt securities. On April 2, 2002, Moody’s downgraded its ratings on our outstanding securities due to concerns regarding our leveraged financial condition, the cash investment required to obtain new customers, our attrition experience and our commitment to debt and equity repurchases. Moody’s outlook remained negative citing unresolved operations problems and uncertainty surrounding long-term resolution of our liquidity issues. As of ~~August~~July 831, ~~2002~~2003, our public debt was rated as follows:

	Senior Unsecured Debt	Senior Subordinated Unsecured Debt	Outlook
S & P	B	CCC+	Negative
Moody’s	Caa1	Caa3	Negative
Fitch	B	CCC+	Negative
Fitch Ratings	CCC+	CCC-	Negative

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

Capital Expenditures. We anticipate making capital expenditures of approximately $35 million in 2003, consisting of approximately $4025 million in ~~2002~~customer acquisition costs and $10 million for fixed assets. Of such ~~amount~~amounts, we ~~plan~~have toexpended ~~invest~~through ~~approximately~~June $30, ~~million~~2003 toapproximately ~~acquire~~$13 ~~customer~~million ~~accounts~~ and $10 3 million for customer acquisitions and fixed assets., respectively. Capital expenditures for ~~2003~~2004 and ~~2004~~2005 are expected to be ~~approximately~~ approximately $4536 million and $5040 million, respectively. Of these amounts approximately $3526 million and $4030 million would be toused for ~~acquire~~customer ~~accounts~~acquisition costs in 2004 and 2005, respectively, with the balance for fixed assets. These estimates are prepared for planning purposes and are revised from time to time. Actual expenditures for these and possibly other items not presently anticipated will vary from these estimates during the course of the years presented. We believe that our capital requirements will be met through the use of internally generated funds, asset sales (we may not sell assets in excess of $100,000 without KCC approval), the ~~Senior~~Westar Credit Facility or external financings. See “Liquidity and Capital Resources” above.

Tax Matters. Westar Energy makes payments to us for current tax benefits utilized by Westar Energy in its consolidated tax return pursuant to a tax sharing agreement. If Westar Energy completes its intended disposition of its investment in us, our net deferred tax assets, which were $284.6 million at June 30, 2003, might not be realizable and we might not be in a position to record a tax benefit for losses incurred. We would be required to record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations. The amount of our deferred taxes increased by approximately $190.7 million upon our recording of an impairment charge in the first quarter of 2002 and $13.3 million in the last quarter of 2002 as discussed above. In addition, as a result of a sale, we would no longer receive payments from Westar Energy for current tax benefits utilized by Westar Energy. We had a receivable balance of $40.0 million and $20.7 million at June 30, 2003 and December 31, 2002, respectively, from Westar Energy related to current tax benefits. In 2002, we received aggregate payments from Westar Energy of $1.7 million. The loss of these payments would have a material adverse effect on our cash flow.

Tax Matters

We have a tax sharing agreement with Westar Energy which allows us to be reimbursed for tax deductions utilized by Westar Energy in its consolidated tax return. If Westar Energy were to own less than 80% of Westar Industries voting stock, or if Westar Industries were to own less than 80% of our voting stock, we would no longer file our tax return on a consolidated basis with Westar Energy. As a result, a substantial portion of our net deferred tax assets of $259.6 million at June 30, 2002 would likely not be realizable and we would likely not be in a position to record a tax benefit for losses incurred. Accordingly, we would be required to record a non-cash charge against income for the portion of our net deferred tax assets we determine not to be realizable. This charge could be material and could have a material adverse effect on our business, financial condition and results of operations. In addition, as a result of a separation, we would no longer receive payments from Westar Energy for current tax benefits utilized by Westar Energy. In February 2002 we received a payment of approximately $1.7 million and in 2001 and 2000, we received aggregate payments from Westar Energy of $19.1 million and $48.9 million, respectively. We do not expect to receive any payments from Westar Energy for our 2002 tax benefit prior to the first quarter of 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~The~~We ~~Company~~have ~~has~~ not experienced any significant changes in ~~its~~our exposure to market risk since December 31, ~~2001~~2002. For additional information on ~~the~~our ~~Company’s~~ market risk, see Item 7A of the Form 10-K for the year ended December 31, ~~2001~~2002.

~~PART~~ITEM II4. CONTROLS AND PROCEDURES

~~OTHER~~As ~~INFORMATION~~required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including cost limitations, judgments used in decision making, assumptions regarding the likelihood of future events, soundness of internal controls, fraud, the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable, and not absolute, assurance of achieving their control objectives. Based upon and as of the date of the evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective, in all material respects, with respect to the recordings, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

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

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Information relating to legal proceedings is set forth in Note 86 of the Notes to Consolidated Financial Statements included in Part I of this report, which information is incorporated herein by reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.

Our Annual Meeting of Shareholders was held on May 2328, ~~2002~~ 2003. At After the ~~meeting,~~mailing ~~the~~of ~~holders~~our proxy, two of our directors who were 97recommended for reelection,~~033~~ Gene A. Budig and Darius G. Nevin,~~219~~ ~~shares~~resigned ~~voted~~from our ~~either~~board inand ~~person~~were orwithdrawn byas ~~proxy~~nominees. toIn ~~elect~~their ~~directors~~place ~~and~~were tosubstituted James ~~consider~~C. Clark and ~~act~~Greg ~~upon~~Greenwood. anIn ~~increase~~accordance inwith our proxy statement, the ~~number~~proxy representatives ofvoted ~~shares~~the ~~authorized~~proxies for these substitute nominees. Therefore, at the Annual Meeting of Shareholders, the following nine directors were each ~~issuance~~elected ~~under~~to ~~our~~serve ~~Employee~~for ~~Stock~~a ~~Purchase~~one-year ~~Plan.~~term:

All directors nominated were elected at the Annual Meeting. For the election of directors, the results were as follows:

Director	Votes For	Votes Against or Withheld	Abstentions or Broker Non-votes
Bruce A. Akin	96,724,994	212,998	1,169,093
James C. Clark	96,937,992	0	1,169,093
Ben M. Enis	96,748,496	189,496	1,169,093
Richard Ginsburg	96,849,425	88,567	1,169,093
Greg Greenwood	96,937,992	0	1,169,093
Larry D. Irick	96,742,644	195,348	1,169,093
Donald A. Johnston	96,748,496	189,496	1,169,093
William B. Moore	96,742,644	195,348	1,169,093
James Q. Wilson	96,741,496	196,496	1,169,093

Nominee	Votes For	Votes Withheld
Gene A. Budig	97,011,734	21,485
Maria de Lourdes Duke	97,015,034	18,185
Ben M. Enis	97,000,999	32,220
Richard Ginsburg	97,009,878	23,341
Donald A. Johnston	97,015,159	18,060
Douglas T. Lake	96,978,309	54,910
Steven V. Williams	97,001,799	31,420
James Q. Wilson	97,014,959	18,260
David C. Wittig	96,978,606	54,613

No other business was conducted at the meeting.

The proposal to increase the number of shares authorized for issuance under the Employee Stock Purchase Plan was approved. The result of the vote taken was as follows:

For		Against		Abstain
96,251,937		756,226		25,056

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits. The following exhibits are filed with this Quarterly Report on Form 10-Q or incorporated by reference.

Exhibit Number		Exhibit Description
10.1		Seventh Amendment of Credit Agreement effective as of March 25, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc.
31.1		Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934
10.2		Eighth Amendment of Credit Agreement effective as of June 3, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc.
31.2		Certification pursuant to Rule 13a-14 under the Securities Exchange Act of 1934
10.3		Ninth Amendment of Credit Agreement effective as of June 26, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc.
32.1		Certification pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
10.4		Outsourcing Agreement between Westar Energy, Inc. and Protection One Data Services, Inc. dated July 1, 2002.
10.5		Westar Aviation, Inc. Stock Purchase Agreement dated as of June 5, 2002 by and between Westar Industries, Inc. and Protection One, Inc.
10.6		Aircraft Reimbursement Agreement dated as of June 5, 2002 between AV ONE, Inc. (f/k/a Westar Aviation, Inc.) and Westar Industries.
99.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

33(b) Reports on Form 8-K. During the quarter ended June 30, 2003, we filed the following Current Reports on Form 8-K:

(b) During the quarter ended June 30, 2002, the Company filed one Current Report on Form 8-K dated May 30, 2002, reporting that our Audit and Finance Committees of the Board of Directors dismissed Arthur Andersen, LLP as our public accountants and engaged Deloitte & Touche LLP to serve as our principal accountants for fiscal year 2002.

Date Filed	Item Number(s)	Report Description

6/26/03	5,7	We reported that on June 20, 2003 we entered into the thirteenth and fourteenth amendments to the senior credit facility with our lenders. Among other things, the amendments (i) extended the maturity date to January 5, 2005, (ii) decreased the maximum borrowing capacity to $228.4 million and (iii) increased the applicable borrowing rates.
5/30/03	5,7	We reported that on May 30, 2003, the Board of Directors announced the election of nine directors at our annual meeting and the resignation of Mr. Darius Nevin from the board of directors.
5/12/03	5,7	We reported that on May 8, 2003, Dr. Gene A. Budig resigned from the Board of Directors.
4/02/03	5,7	We reported that on March 28, 2003 we announced our unaudited financial results for the fourth quarter and full year ended December 31, 2002. We also announced that we would file our Annual Report on Form 10-K not later than 15 days following March 31, 2003 to allow sufficient time for the special committee of the Board of Directors of Westar Energy, Inc., to complete its previously announced investigation which would enable our independent auditor to complete its audit of our financial statements.

3443

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

Date:	August 1311, ~~2002~~2003	PROTECTION ONE, INC.
		PROTECTION ONE ALARM MONITORING, INC.
		By:	/s/ Darius G. Nevin
			Darius G. Nevin
			Darius G. Nevin, Executive Vice President and Chief Financial Officer
			Executive Vice President and Chief Financial Officer

3544

Exhibit List

Exhibit Number		Exhibit Description
10.1		Seventh Amendment of Credit Agreement effective as of March 25, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc.
10.2		Eighth Amendment of Credit Agreement effective as of June 3, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc.
10.3		Ninth Amendment of Credit Agreement effective as of June 26, 2002 between Protection One Alarm Monitoring, Inc. and Westar Industries, Inc.
10.4		Outsourcing Agreement between Westar Energy, Inc. and Protection One Data Services, Inc. dated July 1, 2002.
10.5		Westar Aviation, Inc. Stock Purchase Agreement dated as of June 5, 2002 by and between Westar Industries, Inc. and Protection One, Inc.
10.6		Aircraft Reimbursement Agreement dated as of June 5, 2002 between AV ONE, Inc. (f/k/a Westar Aviation, Inc.) and Westar Industries.
99.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filing Compare · PROTECTION ONE ALARM MONITORING INC