UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~September~~March 3031, ~~2009~~2010

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)

1-12181-01

PROTECTION ONE, INC.		PROTECTION ONE ALARM MONITORING, INC.
(Exact name of registrant		(Exact name of registrant
as specified in its charter)		as specified in its charter)
Delaware		Delaware
(State or other jurisdiction		(State or other jurisdiction
of incorporation or organization)		of incorporation or organization)
93-1063818		93-1064579
(I.R.S. Employer Identification No.)		(I.R.S. Employer Identification No.)
1035 N. Third Street, Suite 101		1035 N. Third Street, Suite 101
Lawrence, Kansas 66044		Lawrence, Kansas 66044
(Address of principal executive offices, including zip code)		(Address of principal executive offices, including zip code)
(785) 856-5500		(785) 856-5500
(Registrant’s telephone number,		(Registrant’s telephone number,
including area code)		including area code)

(Commission file number)

~~Indicate by check mark whether each registrant (1) has filed all~~PROTECTION ~~reports~~ONE, 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 daysINC. ~~Yes x No o~~

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§Exact ~~232.405~~name of ~~this chapter) during the preceding 12 months (or~~ ~~for such shorter period that the~~ registrant ~~was required to submit and post such files). Yes o No o~~

~~Indicate~~as byspecified check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in ~~Rule 12b-2~~ ofits ~~the Exchange Act.~~charter)

Protection One, Inc.: Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company x Protection One Alarm Large accelerated filer o Accelerated filer o Monitoring, Inc.: Non-accelerated filer x Smaller reporting company oDelaware

~~Indicate by check mark whether either registrant is a shell company~~ (~~as defined~~State inor ~~Rule 12b-2 of the Exchange Act).~~other jurisdiction

~~Yes~~of ~~o No~~incorporation or xorganization)

As of November 2, 2009, Protection One, Inc. had outstanding 25,333,371 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 were owned by Protection One, Inc.93-1063818

(I.R.S. Employer Identification No.)

1035 N. Third Street, Suite 101

Lawrence, Kansas 66044

(Address of principal executive offices, including zip code)

(785) 856-5500

(Registrant’s telephone number,

including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of May 11, 2010 was 25,435,221.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the materials incorporated by reference herein include “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking. These forward-looking statements generally can be identified by, among other things, the use of forward-looking language such as the words “estimate,” “project,” “intend,” “believe,” “expect,” “anticipate,” “may,” “will,” “would,” “should,” “could,” “seeks,” “plans,” “intends,” or other words of similar import or their negatives. Such statements include those made on matters such as our earnings and financial condition, ~~litigation,~~the ~~accounting~~tender ~~matters,~~offer ~~our~~and ~~business,~~proposed ~~our~~merger ~~efforts~~pursuant to ~~consolidate~~our ~~and~~definitive ~~reduce~~agreement ~~costs,~~with ~~our~~affiliates ~~customer~~of ~~acquisition~~GTCR ~~strategy~~Golder ~~and~~Rauner ~~attrition~~II, ~~projected~~L.L.C. ~~cash~~(“GTCR”), ~~flow~~litigation, ~~and~~accounting ~~potential~~matters, ~~prepayments under~~ our ~~Senior Credit Agreement~~business, our efforts ~~liquidity~~to consolidate and ~~sources~~reduce ~~of funding~~costs, our ~~capital~~customer account acquisition ~~expenditures~~strategy and attrition, our ~~plans~~liquidity toand ~~amend~~sources ~~our~~of ~~senior~~funding ~~credit facility~~ and ~~redeem~~ our ~~Senior~~ ~~Secured Notes~~capital expenditures. All forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. The forward-looking statements included herein are made only as of the date of this report and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances, except as required by ~~federal~~ federal securities laws. Certain factors ~~that~~ that could cause actual results to differ include:

· our ~~history~~substantial ofindebtedness ~~losses,~~and ~~which~~restrictive ~~are~~covenants governing ~~likely~~our ~~to continue~~indebtedness;

· ~~principal~~ our ~~and~~history ~~interest payment requirements~~ of ~~and restrictive covenants governing our indebtedness~~losses;

· effects from our entry into a definitive agreement to be acquired by an affiliate of GTCR;

· changes in technology that may make our services less attractive or obsolete or require significant expenditures to upgrade;

· loss of a relationship with alarm system manufacturers, suppliers and third party service providers;

· competition, including competition from companies that are larger than we are and have greater resources than we do;

· the development of new services or service innovations by our competitors;

· losses of our customers over time and difficulty acquiring new customers;

· ~~limited~~ changes ~~access~~in ~~to capital~~federal, ~~which~~state ~~may~~or ~~affect~~local ~~our ability~~government toor ~~invest~~other regulations inor ~~the~~standards ~~acquisition~~affecting ofour ~~new customers~~operations;

· ~~changes~~ limited inaccess ~~technology~~to ~~that~~capital which may ~~make~~affect our ~~services less~~ability ~~attractive~~to orinvest ~~obsolete~~in orthe ~~require~~acquisition ~~significant~~of ~~expenditures~~new ~~to upgrade~~customers;

· ~~failure~~ the topotential ~~realize~~for ~~benefits~~environmental ~~from~~or ~~acquisitions~~man-made catastrophes in areas of ~~monitoring~~ ~~contracts~~high customer concentration;

· ~~inability~~ changes toin ~~maintain~~conditions ~~supplier~~affecting ~~relationships~~the economy or security alarm monitoring service providers generally;

· potential liability for failure to respond adequately to alarm activations; and

· ~~loss of or~~ changes in ~~senior~~ management;.

~~· the~~New ~~potential~~factors emerge from time to time, and it is not possible for ~~environmental~~us to predict all factors or ~~man-made~~the ~~catastrophes~~impact of any factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in ~~areas~~any forward-looking statements. For a discussion of ~~high~~these ~~customer~~and ~~account~~other ~~concentration;~~risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009.

· changes in conditions affecting the economy or security alarm monitoring service providers generally; and

· changes in federal, state or local government or other regulations or standards affecting our operations.

New factors emerge from time to time, and it is not possible for us to predict all factors or the impact of any factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. For a discussion of these and other risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

INTRODUCTION

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

Stockholders and other security holders or buyers of our securities or our other creditors should not assume that material events subsequent to the date of this report have not occurred.

On April 26, 2010, we entered into a definitive agreement (the “Merger Agreement”) to be acquired by Protection Holdings, LLC, an affiliate of GTCR. Under the terms of the Merger Agreement, Protection Acquisition Sub, Inc,. a newly formed entity and wholly owned subsidiary of Protection Holdings, LLC, commenced a tender offer on May 3, 2010 to acquire all of our outstanding common stock for $15.50 per share in cash (the “Offer”), to be followed by a merger (the “Merger”) to acquire all remaining outstanding shares at the same price paid in the Offer. The Offer will expire on June 2, 2010, unless extended in accordance with the terms of the Merger Agreement. The aggregate value of the proposed transaction is approximately $828 million. The completion of the Offer and Merger are subject to certain conditions and termination rights set forth in the Merger Agreement. See “Item 1A —Risk Factors.” The statements in this Quarterly Report on Form 10-Q are not a solicitation or recommendation of the Company to its stockholders in connection with the proposed tender offer, and stockholders should carefully review the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company on May 3, 2010 and any amendments thereto before making any decision as to the tender offer.

Table of Contents

INDEX

PART I — FINANCIAL INFORMATION
PART I – FINANCIAL INFORMATION
ITEM 1.	~~FINANCIAL STATEMENTS~~	4FINANCIAL STATEMENTS	4
	~~CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)~~	4CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)	4
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)	5
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED)	5
	~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~	7CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	6
	~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~	8NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	7
ITEM 2.	~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~	28MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3.	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~	47QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	29
ITEM 4.	~~CONTROLS AND PROCEDURES~~	47CONTROLS AND PROCEDURES	29
PART II - OTHER INFORMATION
ITEM 1.	~~LEGAL PROCEEDINGS~~	48LEGAL PROCEEDINGS	30
ITEM 1A.	~~RISK FACTORS~~	48RISK FACTORS	30
ITEM 2.	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~	48UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	30
ITEM 3.	~~DEFAULTS UPON SENIOR SECURITIES~~	48DEFAULTS UPON SENIOR SECURITIES	31
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	48
ITEM 5.		OTHER INFORMATION	31
ITEM 5.	OTHER INFORMATION	48
ITEM 6.		EXHIBITS	31
ITEM 6.	EXHIBITS	48
		SIGNATURES	31
	SIGNATURES	49

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PROTECTION ONE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	September 30,			December 31,
	2009			2008
	Unaudited
ASSETS
Current assets:
Cash and cash equivalents	$	76,608		$	38,883
Accounts receivable, net of allowance of $7,104 at September 30, 2009 and $6,199 at December 31, 2008	32,842			39,281
Notes receivable	823			1,143
Inventories, net	4,259			4,973
Prepaid expenses	3,391			4,646
Other	1,422			3,022
Total current assets	119,345			91,948
Restricted cash	2,191			2,245
Property and equipment, net	32,173			36,168
Customer accounts, net	212,151			237,718
Dealer relationships, net	35,623			37,597
Other intangibles, net	39			209
Goodwill	41,604			41,604
Trade names	27,687			27,687
Notes receivable, net of current portion	2,746			3,049
Deferred customer acquisition costs	147,192			150,848
Other	7,368			9,981
Total Assets	$	628,119		$	639,054
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Current portion of long-term debt and capital leases	$	5,238		$	5,361
Accounts payable	3,357			3,315
Accrued liabilities	37,313			39,022
Deferred revenue	44,331			46,027
Total current liabilities	90,239			93,725
Long-term debt and capital leases, net of current portion	519,003			523,927
Deferred customer acquisition revenue	98,327			95,028
Deferred tax liability	1,252			1,166
Other liabilities	2,571			5,458
Total Liabilities	711,392			719,304
Commitments and contingencies (see Note 9)
Stockholders’ equity (deficiency in assets):
Preferred stock, $.10 par value, 5,000,000 shares authorized	—			—
Common stock, $.01 par value, 150,000,000 shares authorized, 25,333,371 and 25,316,529 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively	253			253
Additional paid-in capital	181,224			180,800
Accumulated other comprehensive loss	(7,158		)	(9,169		)
Deficit	(257,592		)	(252,134		)
Total stockholders’ equity (deficiency in assets)	(83,273		)	(80,250		)
Total Liabilities and Stockholders’ Equity (Deficiency in Assets)	$	628,119		$	639,054

(Unaudited)

	March 31,			December 31,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	33,253		$	26,068
Accounts receivable, net of allowance of $7,162 at March 31, 2010 and $7,147 at December 31, 2009	29,408			32,719
Notes receivable	632			674
Inventories, net	5,105			5,067
Prepaid expenses	4,684			4,073
Other	2,408			2,273
Total current assets	75,490			70,874
Restricted cash	2,146			2,180
Property and equipment, net	29,007			32,068
Customer accounts, net	196,057			203,453
Dealer relationships, net	34,353			34,965
Goodwill	43,853			43,853
Trade names	27,687			27,687
Notes receivable, net of current portion	2,193			2,275
Deferred customer acquisition costs	144,015			146,024
Other	8,052			8,516
Total Assets	$	562,853		$	571,895
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Current portion of long-term debt and capital leases	$	5,192		$	5,358
Accounts payable	2,819			5,009
Accrued liabilities	31,139			34,633
Deferred revenue	43,907			44,280
Total current liabilities	83,057			89,280
Long-term debt and capital leases, net of current portion	435,888			436,550
Deferred customer acquisition revenue	98,585			98,323
Deferred tax liability	5,276			4,879
Other liabilities	1,825			1,926
Total Liabilities	624,631			630,958
Commitments and contingencies (see Note 9)
Stockholders’ equity (deficiency in assets):
Preferred stock, $.10 par value, 5,000,000 shares authorized	—			—
Common stock, $.01 par value, 150,000,000 shares authorized, 25,433,371 and 25,333,371 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively	254			253
Additional paid-in capital	181,487			181,296
Accumulated other comprehensive loss	(4,130		)	(5,985		)
Deficit	(239,389		)	(234,627		)
Total stockholders’ equity (deficiency in assets)	(61,778		)	(59,063		)
Total Liabilities and Stockholders’ Equity (Deficiency in Assets)	$	562,853		$	571,895

The accompanying notes are an integral part of these

condensed consolidated financial statements.

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PROTECTION ONE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS AND COMPREHENSIVE LOSS~~

OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except for per share amounts)

(Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009			2008
	2010			2009
Revenue:
Monitoring and related services	$	~~248~~77,~~647~~450		$	~~250~~83,~~020~~533
Installation and other	2910,~~061~~865			289,~~014~~469
Total revenue	~~277~~88,~~708~~315			~~278~~93,~~034~~002
Cost of revenue (exclusive of amortization and depreciation shown below):
Monitoring and related services	7623,~~943~~356			8325,~~766~~746
Installation and other	3612,~~412~~761			3612,~~166~~041
Total cost of revenue (exclusive of amortization and depreciation shown below)	~~113~~36,~~355~~117			~~119~~37,~~932~~787
Operating expenses:
Selling	3812,~~440~~276			4213,~~133~~063
General and administrative	5920,~~396~~969			5921,~~551~~323
Amortization and depreciation	3711,~~529~~118			5012,~~065~~349
Impairment of trade name	—			475
Total operating expenses	44,363			46,735
Total operating expenses	135,365			152,224
Operating income	7,835			8,480
Operating income	28,988			5,878
Other expense:
Other expense (income):
Interest expense, net	11,872			11,103
Interest expense	33,846			36,876
Loss before income taxes	(4,037		)	(2,623		)
Interest income	(41		)	(752		)
Income tax expense	725			178
Loss on retirement of debt	—			12,788
Net loss	(4,762		)	(2,801		)
Other	—			(77		)
Other comprehensive income (loss), net of tax:
Total other expense	33,805			48,835
Net change in fair value of derivative	1,855			341
Loss before income taxes	(4,817		)	(42,957		)
Comprehensive loss	$	(2,907	)	$	(2,460	)
Income tax expense	641			354
Net loss	(5,458		)	(43,311		)
Other comprehensive income, net of tax:
Unrealized gain on cash flow hedging instruments	2,011			1,004
Comprehensive loss	$	(3,447	)	$	(42,307	)
Basic and diluted per share information:
Net loss per common share	$	(0.2219	)	$	(10.7111	)
Weighted average common shares outstanding	25,~~321~~374			25,~~308~~317

The accompanying notes are an integral part of these

condensed consolidated financial statements.

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PROTECTION ONE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except for per share amounts)

(Unaudited)

	Three Months Ended September 30,
	2009			2008
Revenue:
Monitoring and related services	$	82,433		$	84,192
Installation and other	10,127			9,864
Total revenue	92,560			94,056
Cost of revenue (exclusive of amortization and depreciation shown below):
Monitoring and related services	25,875			27,948
Installation and other	12,393			13,194
Total cost of revenue (exclusive of amortization and depreciation shown below)	38,268			41,142
Operating expenses:
Selling	12,903			14,647
General and administrative	17,155			20,442
Amortization and depreciation	12,580			16,431
Impairment of trade name	—			475
Total operating expenses	42,638			51,995
Operating income	11,654			919
Other expense (income):
Interest expense	11,529			12,219
Interest income	(13		)	(175		)
Other	—			(31		)
Total other expense	11,516			12,013
Income (loss) before income taxes	138			(11,094		)
Income tax expense	260			50
Net loss	(122		)	(11,144		)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on cash flow hedging instruments	517			(1,120		)
Comprehensive income (loss)	$	395		$	(12,264	)
Basic and diluted per share information:
Net loss per common share	$	(0.00	)	$	(0.44	)
Weighted average common shares outstanding	25,329			25,311

The accompanying notes are an integral part of these

condensed consolidated financial statements.

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PROTECTION ONE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009			2008
	2010			2009
Cash flows from operating activities:
Net loss	$	(54,~~458~~762	)	$	(432,~~311~~801	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on sale of assets	(9811		)	(6712		)
Loss on retirement of debt	—			12,788
Amortization and depreciation	11,118			12,349
Impairment of trade name	—			475
Amortization of debt costs, discounts and premiums and adjustments to derivatives	1,222			(122		)
Amortization and depreciation	37,529			50,065
Amortization of deferred customer acquisition costs in excess of amortization of deferred revenue	7,266			7,833
Amortization of debt costs, discounts and premium	(398		)	1,705
Stock based compensation expense	192			314
Amortization of deferred customer acquisition costs in excess of amortization of deferred revenue	23,208			22,815
Deferred income taxes	397			11
Stock based compensation expense	424			1,090
Provision for doubtful accounts	782			1,737
Deferred income taxes	90			(144		)
Impairment of assets and other	1,285			—
Provision for doubtful accounts	4,752			3,111
Other	338			(52		)
Changes in assets and liabilities
Accounts receivable, net	12,~~689~~528			(2,~~956~~995		)
Notes receivable	~~623~~124			~~2,148~~231
Other assets	~~4,669~~(670		)	12,~~997~~580
Accounts payable	41(2,190		)	~~1,182~~(207		)
Deferred revenue	(~~1,964~~452		)	(~~1,244~~465		)
Accrued interest	(~~896~~4,102		)	(~~823~~922		)
Other liabilities	(1,~~199~~970		)	(2,~~415~~524		)
Net cash provided by operating activities	6314,~~350~~697			4620,~~364~~997
Cash flows from investing activities:
Deferred customer acquisition costs	(319,~~250~~099		)	(4910,~~723~~862		)
Deferred customer acquisition revenue	154,~~127~~206			225,~~251~~237
Purchase of rental equipment	(~~1,685~~466		)	(~~4,093~~587		)
Purchase of property and equipment	(~~3,263~~790		)	(~~4,487~~806		)
Purchases of new accounts	(~~1,004~~25		)	~~(695~~—		)
Reduction of restricted cash	6035			~~1,617~~—
Proceeds from disposition of assets and other	~~249~~64			9549
Net cash used in investing activities	(216,~~766~~075		)	(356,~~035~~969		)
Cash flows from financing activities:
Payments on long-term debt and capital leases	(31,~~859~~376		)	(~~120~~1,~~170~~389		)
Proceeds from borrowings	—			110,340
Debt issue costs	(61		)	—
Debt issue costs	—			(2,020		)
Net cash used in financing activities	(1,437		)	(1,389		)
Net cash used in financing activities	(3,859		)	(11,850		)
Net increase in cash and cash equivalents	7,185			12,639
Net increase (decrease) in cash and cash equivalents	37,725			(521		)
Cash and cash equivalents:
Beginning of period	3826,~~883~~068			4038,~~999~~883
End of period	$	7633,~~608~~253		$	4051,~~478~~522
Cash paid for interest	$	3414,~~944~~713		$	3512,~~985~~164
Cash paid for income taxes	$	~~470~~295		$	~~518~~98
Non-cash investing and financing activity:
Vehicle additions under capital lease	$	~~387~~182		$	~~1,696~~382

The accompanying notes are an integral part of these

condensed consolidated financial statements.

Table of Contents

PROTECTION ONE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization, Basis of Consolidation and Interim Financial Information:

Protection One, Inc. (the “Company”) is principally engaged in the business of providing security alarm monitoring services, including sales, installation and related servicing of security alarm systems for residential and business customers. The Company also provides monitoring and support services to independent security alarm dealers on a wholesale basis. Affiliates of Quadrangle Group LLC and Monarch Alternative Capital LP (collectively, the “Principal Stockholders”) own approximately 70% of the Company’s common stock.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles, or GAAP, for interim financial information and in accordance with the ~~instructions~~ instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP 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, ~~2008~~2009 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or the SEC, on March 1624, 2010, as amended by the Form 10-K/A ~~2009~~filed by the Company with the SEC on April 30, 2010.

In the opinion of management of the Company, all adjustments consisting of normal recurring adjustments considered necessary for a fair presentation of the financial statements have been included. The results of operations presented for the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009~~ 2010 and ~~2008~~2009 are not necessarily indicative of the results to be expected for the full year. ~~The Company has evaluated subsequent events through the date the financial statements were filed with the SEC.~~

2. Property and Equipment:

The following reflects the Company’s carrying value in property and equipment as of the following periods (in thousands):

	September 30, 2009			December 31, 2008
	March 31, 2010			December 31, 2009
Furniture, fixtures and equipment	$	7,~~485~~480		$	7,~~061~~463
Data processing and telecommunication	4144,~~151~~596			3943,~~002~~889
Leasehold improvements	86,~~031~~564			78,~~544~~123
Vehicles	6,~~154~~106			6,~~427~~122
Vehicles under capital leases	9,~~687~~491			9,~~572~~529
Buildings and other	6,~~364~~440			6,~~320~~403
Rental equipment	14,~~872~~064			1314,~~318~~233
	93,744			89,244
	94,741			95,762
Less accumulated depreciation	(6165,~~571~~734		)	(5363,~~076~~694		)
Property and equipment, net	$	3229,~~173~~007		$	3632,~~168~~068

Depreciation expense was $~~9.4 million and $9.5 million for the nine months ended September 30, 2009 and 2008, respectively. Depreciation expense was $~~3.1 million for each of the three ~~month periods~~ months ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009, respectively. The amount of fixed asset additions included in accounts payable was $300.1 ~~thousand~~million and $0.73 million as of ~~September~~March 3031, ~~2009~~ 2010 and December 31, ~~2008~~2009, respectively.

Fixed Assets under Operating Leases

Rental equipment is comprised of commercial security equipment that does not require monitoring services by the Company and is leased to customers, typically over a 5-year initial lease term. Accumulated depreciation of $34.83 million and $24.64 million was recorded on these assets as of ~~September~~March 3031, ~~2009~~2010 and December 31, ~~2008~~2009, respectively. Deferred revenue of $65.31 million was recorded at ~~September~~March 3031, ~~2009~~2010 and will be amortized to income over the remaining lease term. The following is a schedule, by year, of minimum future rental revenue on non-cancelable operating leases as of ~~September~~March 3031, ~~2009~~2010 and does not ~~include~~ include payments received at the inception of the lease which are deferred and amortized to income over the lease term (in thousands):

Remainder of 2009	$	450
Remainder of 2010	$	762
2010	1,781
2011	762
2011	1,401
2012	583
2012	951
2013	369
2013	433
2014	137
2014	71
2015	3
Total minimum future rental revenue	$	52,~~087~~616

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3. Goodwill and Intangible Assets:

The Company ~~completed~~monitors ~~its~~for ~~annual~~events ~~impairment~~or ~~testing~~circumstances ~~during~~that ~~the~~may ~~third~~indicate ~~quarter~~potential impairment of ~~2009~~goodwill and ~~determined~~intangible ~~that~~assets ~~goodwill~~each ~~was not impaired~~reporting period. ~~The~~There ~~Company~~were ~~also~~no ~~monitors~~such ~~for~~ events or circumstances ~~that~~identified ~~may~~during ~~indicate~~the ~~potential~~first ~~impairment~~quarter of ~~goodwill~~2010. Fair ~~and~~value ~~intangible~~of the trade name in the ~~assets~~Multifamily ~~each~~segment ~~reporting~~was ~~period~~approximately 9% in excess of carrying value. ~~There~~The ~~were no~~carrying ~~such~~value ~~events~~of orthe ~~circumstances~~trade ~~identified~~name ~~during~~was $1.9 million as of March 31, 2010. A change in the ~~first~~discount ~~nine~~rate, ~~months~~projected ofMultifamily revenue or royalty rate could ~~2009~~result in future impairment.

During the ~~nine and~~ three months ended ~~September~~March 3031, 2010 and 2009, there ~~was~~ was no change in the carrying value of goodwill or trade names, the Company’s indefinite-lived intangible assets. There was no change in the carrying value of goodwill for the nine and three months ended September 30, 2008. An impairment charge of $0.5 million was recorded on the Network Multifamily® trade name during the third quarter of 2008.

The Company’s amortizable intangible assets are presented ~~by segment and~~ in ~~total in~~ the following table (in thousands):

	September 30, 2009
	March 31, 2010			December 31, 2009
	Retail			Wholesale			Multifamily			Total Company
Customer Accounts
Customer Accounts
Gross carrying amount	$	439,466		$	439,440
Gross carrying amount	$	387,528		$	—		$	51,872		$	439,400
Less: accumulated amortization	(243,409		)	(235,987		)
Less: accumulated amortization	(197,540		)	—			(29,709		)	(227,249		)
Carrying amount, end of period	$	196,057		$	203,453
Carrying amount, end of period	$	189,988		$	—		$	22,163		$	212,151
Dealer Relationships
Dealer Relationships
Gross carrying amount	$	47,116		$	47,116
Gross carrying amount	$	—		$	47,116		$	—		$	47,116
Less: accumulated amortization	(12,763		)	(12,151		)
Less: accumulated amortization	—			(11,493		)	—			(11,493		)
Carrying amount, end of period	$	34,353		$	34,965
Carrying amount, end of period	$	—		$	35,623		$	—		$	35,623
Other Intangibles
Gross carrying amount	$	1,508		$	2,518		$	—		$	4,026
Less: accumulated amortization	(1,508		)	(2,479		)	—			(3,987		)
Carrying amount, end of period	$	—		$	39		$	—		$	39

	December 31, 2008
	Retail			Wholesale			Multifamily			Total Company
Customer Accounts
Gross carrying amount	$	387,161		$	—		$	51,872		$	439,033
Less: accumulated amortization	(173,933		)	—			(27,382		)	(201,315		)
Carrying amount, end of period	$	213,228		$	—		$	24,490		$	237,718
Dealer Relationships
Gross carrying amount	$	—		$	47,116		$	—		$	47,116
Less: accumulated amortization	—			(9,519		)	—			(9,519		)
Carrying amount, end of period	$	—		$	37,597		$	—		$	37,597
Other Intangibles
Gross carrying amount	$	1,508		$	2,492		$	—		$	4,000
Less: accumulated amortization	(1,507		)	(2,284		)	—			(3,791		)
Carrying amount, end of period	$	1		$	208		$	—		$	209

Amortization expense was $8.0 million and $9.3 million for the three months ended March 31, 2010 and 2009, respectively.

~~Amortization~~The ~~expense~~Company ~~was~~utilizes ~~$28.1~~the ~~million~~declining ~~and~~balance ~~$40.6~~method ~~million~~of amortization for its ~~the~~amortizable ~~nine~~intangible assets. The ~~months~~Company ~~ended~~switches ~~September 30,~~from ~~2009~~the ~~and~~declining ~~2008,~~balance ~~respectively. Amortization~~method ~~expense~~to ~~was~~the ~~$9.5~~straight-line ~~million and~~method ~~$13.3~~in ~~million~~the ~~for~~year the ~~three~~straight-line ~~months~~method ~~ended~~results ~~September 30,~~in ~~2009~~greater ~~and 2008,~~amortization ~~respectively~~expense. ~~The~~Amortization ~~amount~~methods ofand ~~customer~~lives ~~account~~for ~~purchases~~each ~~included~~pool inof ~~other~~intangible ~~liabilities~~assets ~~was~~are ~~$0.1~~described ~~million~~in atthe ~~September 30,~~Company’s Annual Report ~~2009~~on ~~and~~Form 10-K atfor the year ended December 31, ~~2008~~2009.

9The table below reflects the estimated aggregate amortization expense for 2010 (including amounts incurred in the first three months) and each of the four succeeding fiscal years on the existing base of amortizable intangible assets as of March 31, 2010 (in thousands):

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	2010		2011		2012		2013		2014
Estimated amortization expense	$	32,203	$	29,209	$	27,818	$	27,543	$	27,543

The Company completed a lifing study during the fourth quarter of 2008 which resulted in changes in estimates regarding the useful lives used to account for amortization of customer accounts and dealer relationships. The amortization method for each pool is as follows:

Pool		Method (a)
Prior to October 1, 2008
Customer Accounts:
Retail-Protection One		Ten—year 135% declining balance
Retail-IASG		Nine-year 150% declining balance
Multifamily		Nine—year straight-line
Dealer Relationships:
Wholesale		Fifteen year 150% declining balance
After September 30, 2008
Customer Accounts:
Retail-Protection One		Fifteen—year double declining balance
Retail-IASG		Nine-year 150% declining balance
Multifamily		Fifteen—year 180% declining balance
Dealer Relationships:
Wholesale		Twenty-year 140% declining balance

(a) Under declining balance methods, the Company switches from the declining balance method to the straight-line method in the year the straight-line method results in greater amortization expense.

The effects of the changes in estimates based on the lifing study decreased depreciation and amortization expense and net loss by $7.8 million and $2.6 million for the nine and three months ended September 30, 2009, respectively, compared to the previous estimates. Basic and diluted loss per share were decreased by $0.31 and $0.10 for the nine and three months ended September 30, 2009, respectively, as a result of the changes in estimates.

The table below reflects the estimated aggregate amortization expense for 2009 (including amounts incurred in the first nine months) and each of the four succeeding fiscal years on the existing base of amortizable intangible assets as of September 30, 2009 (in thousands):

		2009			2010			2011			2012			2013
Estimated amortization expense		$	37,673		$	32,209		$	29,226		$	27,851		$	27,578

4. Accrued Liabilities:

The following reflects the components of accrued liabilities as of the periods indicated (in thousands):

	September 30, 2009		December 31, 2008
	March 31, 2010		December 31, 2009
Accrued interest	$	~~5,983~~811	$	64,~~879~~912
Accrued vacation pay	4,~~616~~669		4,~~821~~594
Accrued salaries, bonuses and employee benefits	1011,~~603~~102		1110,~~199~~282
Derivative liability (See Note 6)	6,482		5,562
Derivative liability	4,334		5,719
Other accrued liabilities	910,~~629~~223		109,~~561~~126
Total accrued liabilities	$	3731,~~313~~139	$	3934,~~022~~633

5. Debt and Capital Leases:

Long-term debt and capital leases are as follows (in thousands):

	September 30, 2009			December 31, 2008
	March 31, 2010			December 31, 2009
Term loan under the Senior Credit Agreement, maturing March 31, 2012, variable at LIBOR + 2.25%	$	289,500		$	291,750
New and Extending Term Loans under the Senior Credit Agreement, maturing March 31, 2014, variable at LIBOR + 4.25%, subject to a 2% LIBOR floor	$	276,610		$	277,305
Senior Secured Notes, maturing November 15, 2011, fixed 12.00%, face value	115,345			115,345
Non-Extending Term Loans under the Senior Credit Agreement, maturing March 31, 2012, variable at LIBOR + 2.25%	56,218			56,359
Unamortized premium on Senior Secured Notes	5,137			6,713
Unamortized discount on New and Extending Term Loans under the Senior Credit Agreement	(5,015		)	(5,381		)
Unsecured Term Loan, maturing March 14, 2013, variable at Prime + 11.5%	110,340			110,340
Capital leases	32,~~919~~927			53,~~140~~285
	524,241			529,288
	441,080			441,908
Less current portion (including $2,238 and $2,361 in capital leases as of September 30, 2009 and December 31, 2008, respectively)	(5,238		)	(5,361		)
Less current portion (including $1,847 and $2,013 in capital leases as of March 31, 2010 and December 31, 2009, respectively)	(5,192		)	(5,358		)
Total long-term debt and capital leases	$	~~519~~435,~~003~~888		$	~~523~~436,~~927~~550

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Senior Credit Agreement

On ~~April~~November 2617, ~~2006~~ 2009, the Company ~~entered into an~~ amended ~~and restated~~its senior credit agreement (as amended, the “Senior Credit Agreement”) which (i) increased ~~the~~ ~~outstanding~~ term loan borrowings by ~~approximately~~ $~~66.8~~75 million ~~to $300.0~~ ~~million. Eurodollar term loan borrowings~~ under the ~~Senior~~New ~~Credit~~Term ~~Agreement~~Loans ~~bear~~to ~~interest~~an ataggregate ~~LIBOR~~of ~~plus 2~~$364.~~25%,~~5 ~~while base rate borrowings bear interest at the prime rate plus 1.25%. All outstanding term loan borrowings at September 30~~million, ~~2009~~ ~~and December~~(ii) ~~31, 2008 were Eurodollar borrowings. Depending on the Company’s leverage ratio at~~divided ~~the~~all ~~time~~ of ~~borrowing,~~its ~~the~~term ~~applicable~~loans ~~margin~~into ~~with~~Non-Extending ~~respect~~Term toLoans aequal ~~revolving loan may range from 1.25%~~ to 2$86.~~25%~~5 ~~for~~million ~~a base rate borrowing~~ and ~~2.25% to 3.25% for~~ aNew ~~Eurodollar~~and ~~borrowing. The~~Extending ~~senior credit~~Term ~~facility~~Loans ~~continues~~equal to ~~include a~~ $25278.0 million ~~revolving~~and ~~credit facility, of which approximately $18.5 million remained available as of October~~(iii) ~~31,~~replaced ~~2009~~its ~~after reducing total availability by approximately~~ $~~4.0~~25 million ~~for~~revolving ~~an outstanding~~credit ~~letter~~facility ofwith ~~credit~~a ~~and~~ $~~2.5~~15 million ~~held by Lehman Commercial Paper, Inc. (“Lehman”). The~~ revolving credit facility ~~matures on April 18, 2010 and the term loan matures on March 31, 2012~~.

The modification ~~weighted~~to ~~average~~the ~~annual~~extending ~~interest~~term ~~rate~~loans ~~before~~of ~~fees~~$203.0 atmillion ~~September 30,~~was considered a ~~2009~~significant ~~and~~modification atin ~~December 31,~~accordance ~~2008,~~with ~~including~~ASC ~~the~~470-50-40-10 ~~impact~~and ofextinguishment accounting ~~interest~~was ~~rate~~therefore ~~swaps (see~~applied ~~Note~~to 6,$203 ~~“Derivatives”),~~million ~~was~~of ~~5.0%~~the ~~and~~original 5term loans.~~1%, respectively.~~ The ~~Senior~~present ~~Credit~~value ~~Agreement~~of ~~requires~~the cash ~~potential~~flows ~~annual~~of ~~prepayments~~the ~~based~~modified onterm aloans ~~calculation~~was ofdetermined ~~“Excess~~to ~~Cash~~be ~~Flow,”~~more ~~as defined~~than in10% greater than the ~~Senior~~present ~~Credit~~value ~~Agreement,~~of ~~commencing~~the ~~with~~cash flows of the ~~fiscal~~original ~~year~~term ~~ending~~loans ~~December 31,~~primarily ~~2008~~due ~~and~~to ~~due~~the inincreased interest rate on the ~~first~~modified ~~quarter~~debt which includes an increased interest rate margin of ~~each~~2.0% ~~subsequent~~and ~~fiscal~~2.0% ~~year~~LIBOR floor. ~~Based~~The oninterest ~~the~~rate ~~“Excess~~on ~~Cash~~these ~~Flow”~~term ~~calculation~~loans prior ~~for~~to the ~~fiscal~~modification ~~year~~was ~~ended~~2.48%. The interest ~~December~~rate at March 31, ~~2008~~2010, ~~the~~was ~~Company~~6.25% ~~was~~and ~~not~~2.50% ~~required to~~for ~~make~~the aNew ~~prepayment~~and Extending inTerm Loans and the ~~first~~Non-Extending ~~quarter~~Term ofLoans, ~~2009~~respectively.

The New and Extending Term Loans were recorded as new debt at fair value which was determined to be at 98% of par. The fair value determination was based on the 2% discount on the issuance of the $75 million of New Term Loans which have the same terms and conditions as the $203.0 million of extending term loans. Consequently, a debt discount of $5.6 million was recorded on the $278.0 million of New and Extending Term Loans. The $203.0 million of original term loans were deemed to have been retired at the fair value of the modified term loans resulting in an extinguishment gain of $4.1 million which was partially offset by $0.6 million of fees paid directly to the lenders related to the amendment and $1.5 million of debt issue costs associated with the original debt for a net extinguishment gain of $2.0 million. The Company capitalized $3.9 million of debt issue costs associated with the amendment to the Senior ~~Secured~~Credit ~~Notes~~Agreement in 2009.

OnUnder ~~April~~the Senior Credit Agreement, the New and Extending Term Loans are scheduled to mature on March 231, ~~2007~~2014, ~~POAMI~~provided, ~~completed~~however, that the ~~exchange~~New and ~~offer~~Extending ~~(the~~Term ~~“Exchange~~Loans ~~Offer”)~~will ~~for~~mature upon toDecember 14, ~~$125~~2012 ~~million~~if ~~aggregate~~prior ~~principal~~to ~~amount~~December 14, of2012, the ~~IASG~~maturity ~~12%~~date ~~Senior~~of ~~Secured~~the ~~Notes~~unsecured ~~due~~term ~~2011~~loan ~~(the~~facility maturing March 14, 2013 (“~~IASG~~Unsecured ~~Notes~~Term Loan”)~~. Pursuant~~ is not extended to at least 91 days after March 31, 2014 or the ~~terms~~borrowings ofunder the ~~Exchange~~Unsecured ~~Offer,~~Term Loan Agreement are not ~~validly~~refinanced ~~tendered~~with ~~IASG~~permitted ~~Notes~~refinancing ~~were~~indebtedness ~~exchanged~~having ~~for~~a ~~newly~~maturity ~~issued~~date ~~12%~~at least ~~Senior~~91 ~~Secured~~days after March 31, 2014. ~~Notes~~The New and Extending Term Loans bear interest at a margin of ~~POAMI~~4.25% ~~due~~over the ~~2011~~Eurodollar Base Rate (as defined in the “Senior ~~Secured~~Credit ~~Notes”~~Agreement and subject to a 2% floor) for Eurodollar borrowings and 3. Of25% over the ~~$125~~Base ~~million~~Rate ~~aggregate principal~~(as ~~amount~~defined ofin ~~IASG~~the ~~Notes~~Senior ~~outstanding,~~Credit ~~$115.3~~Agreement ~~million~~and ~~were~~subject ~~tendered~~to a 3% floor) for Base Rate ~~exchange~~borrowings. ~~Upon~~ The ~~the~~Non-Extending ~~completion~~Term ~~of the~~Loans ~~Exchange~~are ~~Offer,~~still ~~approximately~~scheduled ~~$9.7~~to ~~million~~mature ~~principal~~on ~~amount~~March 31, of2012 ~~IASG~~and ~~Notes~~bear ~~was redeemed~~interest ~~effective~~at asa margin of ~~May~~ 2~~, 2007~~. ~~The~~25% ~~redemption~~over ~~price~~the ~~was~~Eurodollar ~~approximately~~Base ~~$11.9~~Rate ~~million,~~for ~~including~~Eurodollar ~~accrued interest~~borrowings and 1.25% aover ~~make-whole~~the ~~adjustment~~Base Rate for Base Rate Borrowings.

~~The~~Borrowings ~~Company~~under ~~has~~ the ~~option~~Senior toCredit ~~redeem~~Agreement ~~the~~are ~~Senior~~secured ~~Secured~~by substantially ~~Notes,~~all inassets ~~whole or~~of inthe ~~part,~~Company ~~upon~~and ~~not~~require ~~less~~quarterly ~~than~~principal payments 30of ~~nor~~$0.8 ~~more~~million ~~than~~and 60potential ~~days~~annual ~~prior~~prepayments ~~notice,~~based aton ~~the~~a ~~redemption~~calculation ~~prices~~of ~~(expressed~~“Excess Cash Flow,” as ~~percentages~~defined ofin ~~principal~~the ~~amount)~~Senior ~~set~~Credit ~~forth~~Agreement, ~~below~~due ~~plus~~in ~~accrued~~the ~~and~~first ~~unpaid~~quarter ~~interest~~of ~~thereon~~each tosubsequent ~~the~~fiscal ~~applicable~~year. The ~~redemption date,~~Company ifmade ~~redeemed~~$30.0 ~~during~~million in principal prepayments on the ~~twelve~~Non-~~month~~Extending ~~period~~Term ~~beginning~~Loans onin ~~November~~December ~~15 of~~2009 ~~the~~which ~~years~~were applied ~~indicated~~toward ~~below~~the ~~(subject~~required toExcess ~~the~~Cash ~~right~~Flow ofprepayment, ~~holders~~resulting onin ~~the relevant~~no ~~record~~additional ~~date~~required toprepayment ~~receive~~in ~~interest due on~~ the ~~related~~first ~~interest~~quarter ~~payment~~of ~~date):~~2010.

Year	Percentage
2008	106.0	%
2009	103.0	%
2010	100.0	%

Unsecured Term Loan

~~On March 14, 2008, POAMI borrowed $110.3 million under a new unsecured term loan facility to allow it to redeem all of POAMI’s Senior Subordinated Notes.~~ The Unsecured Term Loan bears interest at the prime rate plus 11.5% per annum and matures onin ~~March 14,~~ 2013. Interest is payable semi-annually in arrears on March 14 and September 14 of each year. The annual interest rate was 14.75% at ~~September~~March ~~30, 2009 and December~~ 31, ~~2008~~2010. A loss of $12.8 million was recorded in connection with the retirement of the Senior Subordinated Notes, which was comprised of the non-cash write-off of $7.0 million in unamortized discount and $5.8 million in make-whole payments and termination fees. The Unsecured Term Loan lenders include, among others, entities affiliated with the ~~Principal~~ Principal Stockholders and Arlon Group. ~~Affiliates~~ Affiliates of the Principal Stockholders collectively owned approximately ~~over~~ 70% of the Company’s common stock as of ~~September~~March 3031, ~~2009~~2010, and one of the Company’s former directors is affiliated with Arlon Group. ~~The Company recorded $5.0 million and $4.1 million of related party interest expense for the nine months ended September 30, 2009 and 2008, respectively.~~ The Company recorded $1.~~7 million~~6 ~~and $1.9~~ million of related party interest expense for each of the three months ended ~~September~~March 3031, ~~2009~~ 2010 and ~~2008~~2009, respectively.

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Fair Value of Debt

The fair value of the Company’s debt instruments are estimated based on quoted market prices orexcept ~~either~~for ~~direct~~the orUnsecured ~~indirect~~Term ~~observable~~Loan, ~~market~~which ~~inputs~~had atno ~~September 30,~~available ~~2009~~quote and ~~December 31,~~was ~~2008~~estimated by the Company based on the terms of the loan and comparison to fair value of its other debt. At ~~September~~March 3031, ~~2009~~ 2010 and December 31, ~~2008~~2009 the fair value and carrying amount of the Company’s debt ~~for the years indicated~~ were as follows (in thousands):

	Fair Value				Carrying Value
	September 30, 2009		December 31, 2008		September 30, 2009		December 31, 2008
	March 31, 2010		December 31, 2009		March 31, 2010		December 31, 2009
Senior credit facility	$	273,578	$	195,473	$	289,500	$	291,750
New and Extending Term Loans under the Senior Credit Agreement	$	276,610	$	273,145	$	271,595	$	271,924
Senior Secured Notes	118,229		92,391		120,482		122,058
Non-Extending Term Loans under the Senior Credit Agreement	55,656		52,977		56,218		56,359
Unsecured Term Loan	122,477		94,349		110,340		110,340
Unsecured Term Loan (a)	110,340		124,684		110,340		110,340
	$	~~514~~442,~~284~~606	$	~~382~~450,~~213~~806	$	~~520~~438,~~322~~153	$	~~524~~438,~~148~~623

(a) The March 31, 2010 fair value of the Unsecured Term Loan is estimated based on the Company’s expectation that the debt will be prepaid at par upon sale of the Company, which is anticipated to be completed in the second quarter of 2010. The December 31, 2009 fair value of the Unsecured Term Loan is estimated by the Company based on the terms of the loan and comparison to fair value of its other debt.

The estimated fair values may not be representative of actual values of the financial instruments that could have been realized at period end or may be realized in the future.

Capital Leases

The Company acquired vehicles through ~~4-year~~ capital lease agreements. Accumulated depreciation on these assets as of ~~September~~March 3031, ~~2009~~2010 and December 31, ~~2008~~2009 was $56.7 6 million and $46.4 2 million, respectively. The following is a schedule of future minimum lease payments under capital leases together with the present value of net minimum lease payments as of ~~September~~March 3031, ~~2009~~2010 (in thousands):

Remainder of 2009	$	732
Remainder of 2010	$	1,707
2010	2,280
2011	1,290
2011	1,231
2012	414
2012	347
2013	5
2013	2
Total minimum lease payments	3,416
Total minimum lease payments	4,592
Less: Estimated executory costs	(240		)
Less: Estimated executory costs	(344		)
Net minimum lease payments	3,176
Net minimum lease payments	4,248
Less: Amount representing interest	(249		)
Less: Amount representing interest	(329		)
Present value of net minimum lease payments (a)	$	2,927
Present value of net minimum lease payments (a)	$	3,919

(a) Reflected in the condensed consolidated balance sheet as current and non-current obligations under debt and capital leases of $21,~~238~~847 and $1,~~681~~080, respectively.

Debt Covenants

At ~~September~~March 3031, ~~2009~~2010, the Company was in compliance with the financial covenants and other maintenance tests for all its debt obligations. The Consolidated Leverage Ratio and Consolidated Interest Coverage Ratio contained in the Senior Credit ~~Agreement~~ Agreement are maintenance tests and the Consolidated Fixed Charge Coverage ~~Ratios~~ Ratio contained in the ~~Senior Secured Notes Indenture and~~ Unsecured Term Loan Agreement ~~are~~is a debt incurrence ~~tests~~ test. The Company cannot be deemed to be in default solely due to failure to meet such debt incurrence tests. However, failure to meet such debt incurrence tests could result in restrictions on the Company’s ability to incur additional ~~ratio~~ ratio indebtedness. The Company believes, that should it fail to meet the minimum Consolidated Fixed Charge Coverage Ratio in its ~~Senior Secured Notes Indenture and~~ Unsecured Term Loan Agreement, its ability to borrow additional funds under other permitted indebtedness provisions of the ~~Senior Secured Notes Indenture,~~ Unsecured Term Loan Agreement and Senior Credit Agreement would provide sufficient liquidity for currently foreseeable operational needs. The ~~These~~Company ~~debt~~is ~~instruments~~prohibited ~~also~~from ~~generally~~paying ~~restrict~~any ~~the~~cash ~~Company’s ability~~dividends to ~~pay~~stockholders ~~any~~under covenants ~~cash~~contained ~~dividends~~in tothe ~~stockholders~~Senior Credit Agreement.

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6. Derivatives:

The Company holds one interest rate cap and three interest rate swaps to ~~protect~~manage ~~against~~interest ~~increases~~rate exposure on its variable rate borrowings. The derivatives are accounted for as economic hedges of the Company’s debt subsequent to their de-designation which is further discussed below. Prior to de-designation, the derivatives were considered cash flow hedges and changes resulting from fair market value adjustments were reflected in accumulated other comprehensive loss in the condensed consolidated balance sheet and as a component of unrealized other comprehensive loss in the condensed consolidated statement of operations and comprehensive loss. Subsequent to de-designation, the derivatives are considered economic hedges and changes in fair value are recorded as interest expense.

InThe ~~May~~ interest rate cap was entered into during the second quarter of 2005, as required by the Company’s then existing credit ~~agreement,~~ ~~the Company entered into two separate interest rate cap agreements for a one-time aggregate cost of $0~~agreement.~~9 million.~~ The ~~Company’s~~ objective was to ~~protect~~manage ~~against increases in~~ interest rate ~~expense~~exposure caused by fluctuation in the LIBOR interest rate. ~~One of the interest rate caps expired in May 2008.~~ The ~~other interest rate~~ cap provides protection on $75 million of the Company’s long term debt over a five-year period ending May 24, 2010 if LIBOR exceeds 6%. In the second quarter of 2008, in connection with the interest rate swaps entered into and described below, the interest rate cap was de-designated as a cash flow hedge. The cap had no fair value at March 31, 2010 or December 31, 2009.

12The Company entered into three interest rate swaps in the second quarter of 2008 to fix the interest rate on $250 million of the variable rate debt under the Company’s then existing credit facility. The interest rate swaps mature from September 2010 to November 2010. The interest rate swaps were de-designated as cash flow hedges in conjunction with the debt refinancing that occurred in the fourth quarter of 2009. See Note 5, “Debt and Capital Leases,” for additional discussion of the debt refinancing.

The fair value of the interest rate swaps are reflected in accrued liabilities. At March 31, 2010 and December 31, 2009, the Company recorded $4.3 million and $5.7 million, respectively, in accrued liabilities. The existing net unrealized loss on the interest rate swaps on the date of de-designation remains in accumulated other comprehensive loss and is amortized to interest expense as interest payments are made. As of December 31, 2009 the amount of accumulated other comprehensive loss attributable to prior cash flow hedge relationships was $6.0 million. During the quarter, $1.9 million of the accumulated loss was reclassified to interest expense. The Company estimates the remaining $4.1 million of net unrealized loss in other comprehensive income at March 31, 2010 will be reclassified to earnings within the next twelve months. The table below is a summary of the Company’s derivative positions as of March 31, 2010 and December 31, 2009 (in thousands):

Derivative Type	Notional		March 31, 2010 Fair Value			December 31, 2009 Fair Value
Interest Rate Swaps	$	250,000	$	(4,334	)	$	(5,719	)
Interest Rate Cap	75,000		0			0
Total	$	325,000	$	(4,334	)	$	(5,719	)

Below is a summary of the amounts charged to interest expense and accumulated other comprehensive loss for the periods indicated (in thousands). No ineffectiveness was recorded for any of the periods presented.

	Loss Reclassified from Accumulated Other Comprehensive Loss to Interest Expense					Loss Recognized in Accumulated Other Comprehensive Loss
Derivatives in ASC 815 Cash	Three Months Ended March 31,					Three Months Ended March 31,
Flow Hedge Relationships	2010		2009			2010		2009

Interest Rate Swaps (a)	$	—	$	(1,687	)	$	—	$	(1,302	)

(a) Interest rate swaps were de-designated as cash flow hedges in the fourth quarter of 2009.

	Amount of Loss on Derivatives Recognized in Interest Expense
Derivatives Not Designated as	Three Months Ended March 31,
Hedging Instruments under ASC 815	2010			2009

Interest Rate Swaps (a)	$	(2,246	)	$	—
Interest Rate Cap (b)	(64		)	(49		)
Total	$	(2,310	)	$	(49	)

(a) Interest rate swaps were de-designated as cash flow hedges in the fourth quarter of 2009.

(b) Interest rate caps were de-designated as cash flow hedges in the second quarter of 2008.

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In the second quarter of 2008, in connection with the interest rate swaps entered into and described below, the interest rate caps were de-designated as hedges. The unexpired cap agreement had no fair market value at September 30, 2009 or at December 31, 2008. Prior to de-designation, changes resulting from fair market value adjustments were reflected in accumulated other comprehensive loss in the condensed consolidated balance sheet and as a component of unrealized other comprehensive loss in the condensed consolidated statement of operations and comprehensive income (loss). Subsequent to de-designation, the interest rate cap is considered an economic derivative and changes in fair value are recorded as interest expense.

The Company has three interest rate swap agreements to fix the variable component of the interest rate on $250 million of its LIBOR-based variable debt under the senior credit facility at 3.15% to 3.19%. The interest rate swaps mature from September 2010 to November 2010. With the applicable margin on the Company’s LIBOR-based borrowings under its senior credit facility at 2.25% at September 30, 2009, the effective interest rate on the swapped debt ranges from 5.40% to 5.44%. The interest rate swaps are accounted for as cash flow hedges.

The fair value of the interest rate swaps are reflected as accrued liabilities and other liabilities based on the timing of discounted expected future cash flows. The Company recorded $6.5 million and $5.6 million in accrued liabilities, and $0.5 million and $3.3 million in other liabilities as of September 30, 2009 and December 31, 2008, respectively. The Company estimates $6.5 million of the net unrealized loss existing at September 30, 2009 will be reclassified to interest expense within the next twelve months. The table below is a summary of the Company’s derivative positions as of the dates indicated (in thousands):

Derivative Type	Notional		Fair Value September 30, 2009			Fair Value December 31, 2008
Interest Rate Swaps	$	250,000	$	(7,009	)	$	(8,867	)
Interest Rate Cap	75,000		—			—
Total	$	325,000	$	(7,009	)	$	(8,867	)

All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction (i.e., until periodic settlements of a variable-rate asset or liability are recorded in interest expense). Any hedge ineffectiveness (the amount by which the changes in fair value of the derivative exceed the variability in cash flows of the forecasted transaction) is recorded in current-period earnings as other income or expense. Changes in the fair value of economic derivatives are reported in current-period earnings as interest expense. There was no ineffectiveness recorded in other income or expense for the periods presented. The Company has assessed counterparty risk with its interest rate cap and swaps as of September 30, 2009 and believes that counterparty default is not probable. Below is a summary of the amounts charged to earnings and other comprehensive income (“OCI”) for the periods indicated (in thousands):

	Net loss in interest expense						OCI gain
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009		2008
Interest Rate Swaps	$	(5,289	)	$	(662	)	$	1,858	$	817
Interest Rate Cap	(153		)	(207		)	153		187
Total	$	(5,442	)	$	(869	)	$	2,011	$	1,004

	Net loss in interest expense						OCI gain (loss)
	Three Months Ended September 30,						Three Months Ended September 30,
	2009			2008			2009		2008
Interest Rate Swaps	$	(1,838	)	$	(453	)	$	464	$	(1,157	)
Interest Rate Cap	(53		)	(68		)	53		37
Total	$	(1,891	)	$	(521	)	$	517	$	(1,120	)

The Company documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific forecasted transactions (e.g., interest payments). The Company also regularly assesses whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The Company uses the dollar offset

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method to perform the analysis. The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item; (2) the derivative expires or is sold, terminated or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate or desired.

When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will carry the derivative at its fair value on the balance sheet, recognizing changes in the fair value in current-period earnings.

7. Fair Value Measurements:

~~Generally~~The ~~accepted~~Company applies ASC 820, Fair Value Measurements and Disclosures, to determine fair value whenever other accounting ~~principles~~pronouncements ~~define~~require or permit assets or liabilities to be measured at fair value,. ASC ~~establish~~820 establishes a ~~framework~~fair ~~for~~value ~~using~~hierarchy that ~~fair~~prioritizes the information used to develop assumptions used to determine ~~value~~the exit price. ASC 820 also establishes valuation techniques that are used to measure ~~assets~~fair value. To increase consistency and ~~liabilities~~comparability in fair value measurements and ~~expand~~related disclosures, ~~about~~the fair value ~~measurements. A~~ ~~three-tier value~~ hierarchy prioritizes the inputs to valuation techniques used into ~~measuring~~measure fair value asinto three ~~follows~~broad levels:

Level 1: ~~observable~~— ~~inputs such as~~ quoted prices in active markets for identical assets or liabilities;

Level 2: ~~inputs~~— ~~other~~directly ~~than~~or ~~the~~indirectly ~~quoted prices in active markets that are~~ observable ~~either~~inputs ~~directly~~other orthan ~~indirectly~~quoted prices; and

Level 3: — unobservable inputs ~~in which there is little or no market data, which requires the Company to develop its own assumptions~~.

~~This~~ASC 820 establishes a hierarchy which requires ~~the~~an ~~Company~~entity to maximize the use ~~observable~~of quoted market ~~data,~~prices ~~when available,~~ and to minimize the use of unobservable inputs ~~when determining fair value~~. ~~The~~An ~~Company~~asset ~~has~~or ~~classified~~liability’s ~~these~~level ~~assets and~~is ~~liabilities~~based inon ~~accordance with~~ the ~~fair~~lowest ~~value~~level ~~hierarchy. The~~of ~~following~~input ~~table~~that ~~presents~~is ~~financial~~significant ~~assets and~~to ~~financial liabilities that~~ the ~~Company measures at~~ fair value ~~on a recurring basis (in thousands)~~measurement.

	Fair Value Measurements
	At September 30, 2009
	Level 1		Level 2			Level 3		Total
Assets:
Money Market Fund	$	76,572	$	—		$	—	$	76,572
Liabilities:
Derivatives	—		(7,009		)	—		(7,009		)

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy at the dates identified (in thousands):

Money market funds are included within cash and cash equivalents. Derivatives are recorded within accrued liabilities and other liabilities and are valued using observable benchmark rates at commonly quoted intervals for the life of the instruments.

	Fair Value Measurements
	Level 1		Level 2			Level 3		Total
Assets:
Money Market Fund
March 31, 2010	$	33,253	$	—		$	—	$	33,253
December 31, 2009	$	25,492	$	—		$	—	$	25,492

Liabilities:
Derivatives
March 31, 2010	$	—	$	(4,334	)	$	—	$	(4,334	)
December 31, 2009	$	—	$	(5,719	)	$	—	$	(5,719	)

Marketable securities are included within cash and cash equivalents in the consolidated balance sheets, which generally consist of money market funds with original maturities less than 90 days and were measured using a level 1 fair value measurement with carrying value equal to fair value. Derivatives consist of interest rate swap agreements and are valued using observable benchmark rates at commonly quoted intervals for the life of the instruments.

8. Share-Based Employee and Director Compensation:

The Company accounts for ~~stock~~share-based ~~options~~awards under generally accepted accounting principles which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. Share-based ~~compensation~~ related to stock options granted to employees and restricted share units granted to independent directors of $0.4 million and $1.1 million was recorded in general and administrative expense for the nine month periods ended September 30, 2009 and 2008, respectively. Share-based compensation ~~related to stock options granted to employees and restricted share units granted to independent directors~~ of $0.12 million and $0.43 million was recorded in general and administrative expense for the three month periods ended ~~September~~March 3031, ~~2009~~ 2010 and ~~2008~~2009, respectively. No tax ~~benefit~~ benefit was recorded because the Company does not have taxable income and is ~~currently~~ currently fully reserving its federal deferred tax assets. There were no amounts capitalized relating to share-based employee compensation in the ~~nine or~~ three months ended ~~September~~March ~~30, 2009 or 2008. The Company granted a total of 65,000 restricted share units to independent directors on June 24, 2009. The Company granted a total of~~ 31,~~900~~ ~~restricted share units to independent directors on June 4, 2008. There were no stock options granted in the~~2010 ~~first nine months of 2009~~ or ~~2008~~2009.

~~For~~On February 22, 2010 the ~~nine~~Company ~~and~~granted ~~three~~equity ~~months~~awards ~~ended~~to ~~September 30~~certain of the Senior Executives, consisting ~~2009~~of (i) an aggregate of 439,160 stock appreciation rights (“SARs”) under the Company’s 2010 Stock Appreciation Rights Plan (the “2010 SAR Plan”), which was adopted by the Company ~~had~~on noFebruary 22, 2010; (ii) an aggregate of 439,160 stock options ~~outstanding~~under ~~that~~the ~~represented~~2008 ~~dilutive~~Long ~~potential~~Term Incentive Plan (the “2008 LTIP”); and (iii) restricted share awards for an aggregate of 100,000 shares of restricted stock under the 2008 LTIP (collectively, the “equity awards”). ~~For~~The exercise price for each stock option is $9.50, the closing ~~nine~~price ~~and~~of ~~three~~the ~~months~~Company’s common stock on the date of grant. The ~~ended~~payout ~~September~~for each SAR is equal to the difference between (x) 30$7.50, ~~2008~~and (y) the lesser of: (i) $9.50, the closing price of the Company’s ~~had~~common stock ~~options~~on the ~~that~~date ~~represented~~of grant, and (ii) the value of a share of Company common stock 0on the date of exercise.4 The ~~million~~equity awards vest in one-half increments on each of the second and 0third anniversary of the grant date so long as the Executive is employed with the Company.2 Vesting ~~million~~of ~~dilutive~~the ~~potential~~equity ~~common~~awards ~~shares,~~will accelerate upon a change of control of the ~~respectively~~Company if (x) the Executive is employed with the Company at the time of the change of control or (y) the change of control occurs within two years of the date of grant and within 90 days of the Executive’s termination that is a qualifying termination (as defined in each Senior Executive’s amended and restated employment agreement). ~~These~~Both ~~securities~~the ~~were~~stock ~~not~~options and the restricted ~~included~~shares inare subject to all the ~~computation~~terms and conditions of ~~diluted~~the ~~loss~~2008 ~~per~~LTIP ~~share~~as ~~because~~well as the individual award agreements. The SARs are subject to doall soof ~~would~~the ~~have~~terms ~~been~~and ~~anti-dilutive~~conditions ~~for~~of ~~each~~the of2010 SAR Plan as well as the ~~periods~~individual ~~presented~~grant agreements.

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The Company estimated fair value of the SARs using a Monte Carlo simulation valuation technique. The Black-Scholes option-pricing model was used to estimate the fair value of options. Key inputs in the valuation of the SARs and options were stock price volatility, expected term, and risk free rate. The fair value of the awards granted totaled $2.7 million and will be recognized using a graded vesting method over the vesting period. The SARs are liability awards and the fair value and related expense will be updated each reporting period. Restricted shares were valued using the stock price on the date of grant.

For the three months ended March 31, 2010, the Company had 0.5 million share-based awards outstanding that represented dilutive potential shares. These securities were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for the period. For the three months ended March 31, 2009, the Company had no stock options outstanding that represented dilutive potential shares.

9. Commitments and Contingencies:

~~The~~In addition to the matters described below, the Company is a defendant in a number of pending legal proceedings incidental to the normal course of its business and operations. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on the Company’s financial condition, results of operations or liquidity. ~~An estimate of the probable loss, if any, or the range of loss cannot be made for the following cases, and therefore, the Company has not accrued loss contingencies related to the following matters.~~

An estimate of the probable loss, if any, or the range of loss cannot be made for the following cases, and therefore, the Company has not accrued loss contingencies related to the following matters.

Scardino Litigation

On April 17, 2006, the Company was named a defendant in a litigation proceeding brought by Frank and Anne Scardino arising out of a June 2005 fire at their home in Villanova, Pennsylvania. (Frank and Anne Scardino v. Eagle Systems, Inc., Eagle Monitoring, Inc. and Protection One Alarm Monitoring, Inc. d/b/a Dynawatch, Delaware County, Pennsylvania Court of Common Pleas, Cause No. 06-4485). The original complaint asserted six counts for negligence, gross negligence, breach of contract, breach of implied warranty of merchantability, breach of implied warranty of fitness for a particular purpose and violation of the Unfair Trade Practices and Consumer Protection Law (“UTPCPL”). ~~The~~After ~~UTPCPL~~extensive ~~claim~~discovery, ~~carried~~motion ~~the~~practice and ~~risk~~multiple ofamendments ~~treble damages,~~to ~~attorneys~~the plaintiffs’ ~~fees~~complaint, ~~and~~the ~~costs.~~ Company successfully ~~Plaintiff~~reduced ~~initially~~the ~~claimed~~plaintiffs’ ~~direct~~claims ~~and~~to ~~consequential~~one ~~damages~~count infor ~~excess~~ breach of $3a ~~million. Plaintiffs~~written ~~have since~~contract ~~claimed~~and ~~damages~~three ~~close~~counts tofor $5breach ~~million.~~of ~~The~~purported ~~Company’s~~oral ~~preliminary~~agreements. Plaintiffs ~~objections~~initially ~~to the~~claimed ~~negligence~~direct and consequential ~~gross~~damages ~~negligence~~in ~~claims~~excess ~~were~~of ~~granted~~$3 bymillion ~~the~~but ~~court~~later inclaimed ~~September 2007,~~damages close ~~and~~to ~~these~~$5 ~~claims were accordingly dismissed~~million.

The Company notified its liability insurance carriers of the claim and ~~answered~~was defending the remaining counts. ~~On January 28,~~A ~~2009,~~settlement ~~the~~conference ~~plaintiffs,~~was inheld ~~response~~on ~~to the Company’s motion for summary judgment~~March 1, ~~voluntarily~~ ~~withdrew three of the four remaining claims~~2010, ~~including~~at ~~the~~which ~~UTPCPL claim, thereby leaving only one count for breach of~~ a ~~written~~settlement ~~alarm~~was ~~agreement. However,~~reached ~~plaintiffs also asserted,~~ for ~~the~~an ~~first~~immaterial time, that the complaint actually includes three additional claims for breach of oral contracts and that, alternatively, plaintiffs should be permitted to amend their complaint to include these new claimsamount. The ~~Court allowed plaintiffs to amend their~~ ~~complaint~~settlement toresolves ~~assert~~all ~~these~~ claims, and ~~an amended complaint was filed on or about June 25, 2009~~counterclaims. The ~~amended complaint~~terms ~~improperly~~of ~~included claims against~~ the ~~Company~~settlement ~~which~~ were ~~previously dismissed. Upon~~agreed ~~a threat of sanctions~~in writing and at the ~~Company’s~~parties ~~insistence,~~have ~~the~~signed ~~plaintiffs~~and ~~served~~exchanged a ~~second~~settlement ~~amended complaint~~agreement ~~on August 6, 2009, which did not assert those claims. On October 14, 2009, the Company filed~~and ~~preliminary~~mutual ~~objections to the three new claims for breach of oral contracts, contending that the three new claims in the second amended complaint are insufficient as a matter of law and contractually time barred~~release. The ~~preliminary~~litigation ~~objections~~was ~~were fully briefed~~dismissed bywith ~~the~~prejudice ~~parties~~on ~~and~~May 11, ~~the parties are awaiting a response from the court~~2010.

Following resolution of the preliminary objections, the Company expects to answer and file counterclaims. Deposition discovery may then be reopened, if necessary, to examine the plaintiffs on the three breaches of the purported oral contracts. These events have resulted in a delay of the trial previously scheduled for October 2009.

The Company does not believe that it breached its contractual obligations or otherwise violated its duties in connection with this matter.

Few Litigation

On June 26, 2006, Thomas J. Few, Sr., the former president of Integrated Alarm Services Group, Inc. (“IASG”), initiated litigation against IASG, seeking a monetary award for amounts allegedly due to him under an employment agreement. The claim was filed in the Superior Court of New Jersey, in the Bergen County Law Division. (Thomas J. Few, Sr. v. Integrated Alarm Service Group, Inc., Superior Court of the State of New Jersey, Bergen County Division, Docket No. BER-L-4573-06). Mr. Few alleged that he was owed up to 36 months of pay as well as an amount representing accrued but unused vacation as a result of his resignation following the alleged breach of the employment agreement. IASG denies various allegations in the complaint and has asserted various affirmative defenses and counterclaims against Mr. Few, including breach of the terms of his employment agreement, violation of various restrictive covenants and breach of fiduciary duty.

Discovery proceedings commenced as ordered by the Bergen County Law Division. Mr. Few died on July 18, 2007, and on October 3, 2007, his estate was formally substituted as the plaintiff in the proceeding.

On August 11, 2009, the matter was settled by the mutual agreement of the parties, and stipulations of dismissal, with prejudice, were filed by both parties. No payments were made or are required to be made by the Company in the settlement of the matter, except to satisfy the Company’s own legal expense to defend the claim.

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By the Carat, Inc. Litigation

On April 30, 2007, IASG and certain of its subsidiaries, Criticom International Corporation and Monital Signal Corporation (collectively, the “Company defendants”), were served in a lawsuit brought by By the Carat, Inc. and John P. Humbert, Jr. and his wife, Valery Humbert, its owners, in connection with a December 2004 armed robbery of their jewelry business. (By the Carat, Inc., John P. Humbert, Jr. and Valery Humbert v. Knightwatch Security Systems, Criticom International Corporation, Monital Signal Corporation, Integrated Alarm Services Group, Inc., et al, Superior Court of New Jersey, Monmouth County Law Division, Docket No.: MON-L-5830-06.) The complaint sought unspecified damages for alleged bodily injury and property losses based on various causes of action, including breach of contract, breach of the covenant of good faith and fair dealing, consumer fraud, intentional and negligent infliction of emotional distress, breach of warranty and gross negligence.

On June 26, 2009, the Court dismissed plaintiffs’ complaint without prejudice, due to the plaintiffs’ failure to comply with discovery orders. Since the dismissal, plaintiffs have replaced their original counsel with new attorneys. The new attorneys ~~have~~ assisted the plaintiffs in complying with the outstanding discovery and ~~made~~ ~~a motion to reinstate~~ the complaint~~. The~~ ~~complaint~~was ~~is likely to be~~ reinstated. In the meantime, fact and expert discovery have been progressing. Because more discovery is required, the parties have submitted a joint motion to extend the discovery schedule. It is anticipated that the Court will extend the schedule to allow the parties to take one or two remaining fact depositions and a series of expert depositions. The parties have also agreed to attempt to resolve the dispute through mediation. The mediation is expected to occur in late November or early December 2009. Depending on the outcome of the mediation, it is expected that discovery will be completed in January 2010.

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Fact and expert discovery are complete. In January 2010, the parties attempted to resolve the dispute through mediation. The mediation was not successful, but the parties may revisit mediation in the future. Subsequent to mediation, the Company defendants brought a motion for partial summary judgment as to plaintiffs’ property damage and consumer fraud claims. The Court denied the motion for summary judgment on April 16, 2010. The Court also denied a similar motion brought by the co-defendant. Notably, the Company defendants have a contractual indemnification claim pending against that co-defendant. In addition to its indemnification claim, the Company defendants have a number of defenses that it intends to pursue vigorously. A trial date has not been set.

Paradox Litigation

On March 13, 2008, plaintiffs Paradox Security Systems, LTD., Samuel Hershkovitz and Pinhas Shpater filed a Second Amended Complaint in Civil Action No. 2:06-cv-462 in the Eastern District of Texas, Marshall Division, and added the Company as a defendant. The complaint alleges that the Company infringes U.S. Patent No. 5,751,803 and U.S. Reissue Patent No. 39,406 (collectively, the “Patents-in-Suit”), by its sale and use of certain control panels made by Digital Security Controls, LTD. (“DSC”). The Company ~~has retained counsel and has~~ answered the complaint by denying infringement, alleging invalidity and unenforceability of the Patents-in-Suit, and asserting other defenses and related declaratory judgment counterclaims.

At the April 2009 trial, the Court determined that the plaintiffs had not presented sufficient evidence to support plaintiffs’ allegations against the Company and the other defendants, and granted the ~~Company~~defendants’s motions for judgment of non-infringement as a matter of law.

On September 14, 2009, final judgment was entered by the court, and on September 23, 2009, plaintiffs filed a notice of appeal to the Federal Circuit Court. ~~Consequently~~On ~~the~~December 21, 2009, ~~Company~~plaintiffs ~~anticipates~~filed their opening appellate brief, wherein they asserted that the ~~plaintiffs~~ ~~intend~~trial tocourt ~~appeal~~erred ~~and~~in ~~seek~~entering judgments as a ~~reversal~~matter of law in favor of the ~~Court~~defendants. The Company’s ~~decision~~reply brief, and the reply briefs of the other defendants, was filed in ~~this~~February 2010. Oral arguments are scheduled to be conducted ~~matter~~on June 7, 2010, and a final decision by the Federal Circuit Court is expected in late 2010.

Contract Settlement

The Company settled and accelerated termination of an existing operating lease agreement with the landlord at one of its branch facilities. The Company has agreed to pay the landlord $1.525 million in satisfaction of all obligations under the lease agreement as a part of the settlement. In connection with the exit of the lease agreement, the Company recorded an impairment charge of approximately $1.0 million primarily related to leasehold improvements at the facility during the three months ended March 31, 2010.

Shareholder Litigation

On May 6, 2010, Donald Rensch, a purported stockholder of Protection One, filed a complaint (the “Rensch Complaint”) on behalf of himself and as a putative class action on behalf of the Company’s public stockholders, against the Company, each member of the Company’s board of directors, Quadrangle Group LLC, POI Acquisition L.L.C., Monarch Alternative Capital LP, Protection Holdings, LLC, Protection Acquisition Sub, Inc. and GTCR Golder Rauner II, L.L.C. in the Court of Chancery of the State of Delaware (Donald Rensch v. Protection One, Inc. et al, C.A. No. 5468-VCS). On May 10, 2010, Trading Strategies Fund, a purported stockholder of the Company, filed a complaint (the “TSF Complaint”) on behalf of itself and as a putative class action on behalf of the Company’s public stockholders, against the Company, each member of the Company’s board of directors and GTCR Golder Rauner II, L.L.C. in the district court of Douglas County, Kansas. On May 12, 2010, The Law Offices of Mark Kotlarsky Pension Plan, a purported stockholder of the Company, filed a complaint (the “Pension Plan Complaint”) on behalf of itself and as a putative class action on behalf of the Company’s public stockholders against the Company, each member of the Company’s board of directors, Quadrangle Group LLC, POI Acquisition, L.L.C., Monarch Alternative Capital LP, Protection Holdings, LLC, Protection Acquisition Sub, Inc. and GTCR Golder Rauner II, L.L.C. in the Court of Chancery of the State of Delaware. These complaints allege that the defendants breached their fiduciary duties or aided and abetted the alleged breach of fiduciary duties in connection with the Offer and the Merger contemplated by the Merger Agreement and alleges that the disclosures contained in the documents filed with the United States Securities and Exchange Commission by the Company (and Purchaser in the case of the Rensch Complaint) are materially misleading and omit material facts. None of the complaints state how many shares of Company common stock are purportedly held by the respective plaintiffs. The TSF Complaint seeks, among other things, declarations that the action brought by the complaint is properly maintainable as a class action, that certain of the defendants have breached their fiduciary duties to the named plaintiff and the class, that certain of the defendants aided and abetted breaches of fiduciary duty by other defendants, awarding of appropriate damages to the plaintiff and other members of the class, and awarding the plaintiff’s costs, including attorneys’ and experts’ fees. The Rensch Complaint and the Pension Plan Complaint seek the same relief, and in addition, an order enjoining the transactions contemplated by the Merger Agreement. The Company believes that the Rensch Complaint, the TSF Complaint and the Pension Plan Complaint are wholly without merit and intends to defend the cases vigorously.

Consumer Complaints

The Company occasionally receives notices of consumer complaints filed with various state agencies. The Company has developed a dispute resolution process for addressing these administrative complaints. The ultimate outcome of such matters cannot presently be determined; however, in the opinion of management, the resolution of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

~~Funding Commitment~~14

Notes receivable were $3.6 million and $4.2 million at September 30, 2009 and December 31, 2008, respectively, and represent loans to dealers collateralized by the dealers’ portfolios of customer monitoring contracts. The Company has obligations to provide open lines of credit to dealers, subject to the terms of the agreements with the dealers. At September 30, 2009 and December 31, 2008, the amount available to dealers under these lines of credit was $0.2 million and $0.5 million, respectively.

Westar Tax Sharing Agreement and Contingent Liability

The Company is potentially entitled to certain contingent payments, depending on whether the Company’s former owner, Westar Energy, Inc. (“Westar”), claims and receives certain additional tax benefits in the future with respect to the sale of the Company to the Principal Stockholders on February 17, 2004. In January 2009, Westar reached a settlement with the IRS related to the re-characterization of the loss they incurred on the sale of the Company from a capital loss to an ordinary loss, resulting in a net earnings benefit to Westar of $32.5 million. Under an agreement relating to the sale of the Company, Westar agreed to pay the Company an amount equal to 50% of the net tax benefit (less certain adjustments) that Westar receives from the net operating loss carry-forward arising from the sale. Due to the uncertainty of when Westar will claim and receive the tax benefits, the Company has not recorded any benefit with respect to any such potential contingent payments. There can be no assurance regarding the amount or timing of any payment to the Company.

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~~Additionally,~~Funding Westar has claimed that the Company should reimburse Westar for as much as $1.2 million plus accrued interest for an allocation of the costs incurred by Westar in the development of the application systems shared with the Company under the administrative service agreement.Commitment

Notes receivable were $2.8 million and $2.9 million at March 31, 2010 and December 31, 2009, respectively, and represent loans to dealers collateralized by the dealers’ portfolios of customer monitoring contracts. The Company has obligations to provide open lines of credit to dealers, subject to the terms of the agreements with the dealers. At March 31, 2010 and December 31, 2009, the amount available to dealers under these lines of credit was $0.3 million and $0.2 million, respectively.

10. Segment Reporting:

The Company organizes its operations into three business segments: Retail, Wholesale and Multifamily. The Company’s operating segments are defined as components for which separate financial information is available that is evaluated regularly by the chief operating decision maker. The operating segments are managed separately because each operating segment represents a strategic business unit that serves different markets. All of the Company’s reportable segments operate in the United States of America.

The Company’s Retail segment provides security alarm monitoring services, which include sales, installation and related servicing of security alarm systems for residential and business customers. The Company’s Wholesale segment provides monitoring, financing and business support services to independent security alarm dealers. The Company’s Multifamily segment 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 Annual Report on Form 10-K for the year ended December 31, ~~2008~~2009. The Company manages its business segments based on earnings before interest, income taxes, depreciation, amortization (including amortization of deferred customer acquisition costs and revenue) and other items, referred to as Adjusted EBITDA.

Reportable segments (in thousands):

Nine Months Ended September 30, 2009

Three Months Ended March 31, 2010

Retail

Wholesale

Multifamily

Adjustments(1)

Consolidated

Revenue

~~216~~71,~~899~~801

3910,~~006~~149

216,~~803~~365

—

~~277~~88,~~708~~315

Adjusted EBITDA(2)

7023,~~460~~336

92,~~925~~682

103,~~565~~265

—

9029,~~950~~283

Amortization and depreciation expense

319,~~332~~323

31,~~605~~054

~~2,592~~741

—

3711,~~529~~118

Amortization of deferred costs in excess of amortization of deferred revenue

216,~~437~~747

—

~~1,771~~519

—

237,~~208~~266

Segment assets

~~512~~450,~~270~~290

7072,~~152~~393

4944,~~982~~971

(4,~~285~~801

)

~~628~~562,~~119~~853

Property additions, exclusive of rental equipment

~~3,030~~637

~~620~~296

—39

—

~~3,650~~972

Investment in new accounts and rental equipment, net

175,~~296~~289

—

~~1,516~~95

—

185,~~812~~384

Nine Months Ended September 30, 2008

Three Months Ended March 31, 2009

Retail

Wholesale

Multifamily

Adjustments(1)

Consolidated

Revenue

~~218~~72,~~301~~667

3612,~~407~~763

237,~~326~~572

—

~~278~~93,~~034~~002

Adjusted EBITDA(2)

6421,~~895~~832

63,~~496~~265

93,~~617~~947

—

8129,~~008~~044

Amortization and depreciation expense

3910,~~546~~280

51,~~913~~201

~~4,606~~868

—

5012,~~065~~349

Amortization of deferred costs in excess of amortization of deferred revenue

217,~~316~~289

—

~~1,499~~544

—

227,~~815~~833

Segment assets

~~528~~521,~~169~~875

73,~~901~~674

5148,~~187~~922

(812,~~314~~011

)

~~644~~632,~~943~~460

Property additions, exclusive of rental equipment

~~4,343~~995

~~1,407~~193

~~433~~—

—

61,~~183~~188

Investment in new accounts and rental equipment, net

295,~~248~~261

—

~~3,012~~951

—

326,~~260~~212

	Three Months Ended September 30, 2009
	Retail		Wholesale		Multifamily		Consolidated
Revenue	$	72,219	$	13,367	$	6,974	$	92,560
Adjusted EBITDA(2)	24,881		3,712		3,277		31,870
Amortization and depreciation expense	10,520		1,201		859		12,580
Amortization of deferred costs in excess of amortization of deferred revenue	6,984		—		561		7,545
Property additions, exclusive of rental equipment	652		216		—		868
Investment in new accounts and rental equipment, net	6,059		—		237		6,296

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	Three Months Ended September 30, 2008
	Retail		Wholesale		Multifamily		Consolidated
Revenue	$	73,559	$	12,758	$	7,739	$	94,056
Adjusted EBITDA(2)	21,574		2,555		2,961		27,090
Amortization and depreciation expense	12,968		1,925		1,538		16,431
Amortization of deferred costs in excess of amortization of deferred revenue	7,994		—		521		8,515
Property additions, exclusive of rental equipment	1,223		819		315		2,357
Investment in new accounts and rental equipment, net	9,409		—		1,316		10,725

(1) Adjustment to eliminate inter-segment accounts receivable.

(2) Adjusted EBITDA, which is a non-GAAP measure, is used by the Company’s management and reviewed by the Board of Directors in evaluating segment performance and determining how to allocate resources across segments for investments in customer acquisition activities, capital expenditures and spending in general. The Company believes it is also utilized by the investor community which follows the security monitoring industry. Adjusted EBITDA is useful because it allows investors and management to evaluate and compare ~~operating~~ operating results from period to period in a meaningful and consistent manner in addition to standard GAAP financial measures. Specifically, Adjusted EBITDA allows the chief operating decision maker to evaluate segment results of operations, including operating performance of monitoring and service activities, effects of investments in creating new customer relationships, and sales and installation of security systems, without the effects of non-cash amortization and depreciation. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP, such as loss before income taxes or cash flow from operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing the consolidated financial performance of the Company. See the table below for the reconciliation of Adjusted EBITDA to consolidated loss before income taxes. The Company’s calculation of Adjusted EBITDA may be different from the calculation used by other companies and comparability may be limited.

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cash amortization and depreciation. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP, such as loss before income taxes or cash flow from operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing the consolidated financial performance of the Company. See the table below for the reconciliation of Adjusted EBITDA to consolidated loss before income taxes. The Company’s calculation of Adjusted EBITDA may be different from the calculation used by other companies and comparability may be limited.

Reconciliation of loss before income taxes to Adjusted EBITDA (in thousands):

	Consolidated
	Nine Months Ended September 30,						Three Months Ended September 30,
	Three Months Ended March 31,
	2009			2008			2009		2008
	2010			2009
(Loss) income before income taxes	$	(4,817	)	$	(42,957	)	$	138	$	(11,094	)
Loss before income taxes	$	(4,037	)	$	(2,623	)
Plus:
Interest expense, net	3311,~~805~~872			3611,~~124~~103			~~11,516~~		~~12,044~~
Amortization and depreciation expense	3711,~~529~~118			5012,~~065~~349			~~12,580~~		~~16,431~~
Amortization of deferred costs in excess of amortization of deferred revenue	237,~~208~~266			227,~~815~~833			~~7,545~~		~~8,515~~
Stock based compensation expense	~~424~~192			~~1,090~~314			71		~~376~~
Other costs	801			685			20		374
Other costs (a)	2,872			68
Loss on retirement of debt	—			12,788			—		—
Adjusted EBITDA	$	29,283		$	29,044
Impairment of trade name	—			475			—		475
Less:
Other income	—			(77		)	—		(31		)
Adjusted EBITDA	$	90,950		$	81,008		$	31,870	$	27,090

(a) Other costs in 2010 include $2.1 million related to the contract settlement as discussed in Note 9, Commitments and Contingencies.

11. Income Taxes:

During the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009~~2010, actual ~~effective~~ effective income tax expense differed from tax expense using the U.S. federal ~~statutory~~ statutory tax rate of 35% primarily due to the impact of the deferred tax ~~valuation~~ valuation allowance. The Company recorded income tax expense ~~related to state income taxes~~ of $0.67 million and ~~$0.4~~ ~~million for the nine months ended September 30, 2009 and 2008, respectively, and~~ $0.32 million ~~and $50 thousand~~ for the three months ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009, respectively.

Management believes the Company’s net federal deferred tax assets, including those related to net operating losses, are not likely realizable and therefore its net federal deferred tax assets are fully reserved. In assessing whether deferred taxes are realizable, management considers whether it is more likely than not that some portion or all deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the Company’s projected future taxable income and tax planning strategies in making this assessment.

18The Company has indefinite-lived intangible assets consisting of trade names and goodwill which are not amortized for financial reporting purposes. These indefinite-lived intangible assets are tax deductible, and therefore, are amortized over fifteen years for tax purposes. The tax-deductibility of these indefinite-lived intangible assets results in a deferred tax liability which only reverses at the time of impairment of the related asset or ultimate sale of the underlying intangible asset. Due to the uncertain timing of this reversal, the difference cannot be considered as a source of future taxable income and cannot be used to offset the Company’s deferred tax assets. As a result, the Company does not net such deferred tax liabilities against the Company’s deferred tax assets, which related primarily to net operating loss carry-forwards, when determining its valuation allowance.

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12. New Accounting Standards:

In ~~September~~November 2009, the Financial Accounting Standards Board (the “FASB”) ~~ratified~~issued ~~two~~Accounting ~~final~~Standards ~~Emerging~~Update ~~Issue Task Force~~ (“~~EITF~~ASU”) ~~consensuses~~2009-13 and ASU 2009-14 on revenue arrangements with multiple deliverables and software revenue recognition. ~~Issue~~ASU 082009-1,13 ~~Revenue Arrangements with Multiple Deliverables,~~ addresses the unit of accounting for arrangements involving multiple deliverables. ~~Issue~~The guidance revises the determination of 09when the individual deliverables included in a multiple-3,element ~~Applicability~~arrangement ofmay be ~~AICPA~~treated ~~Statement~~as separate units of ~~Position~~accounting. The ~~97-2~~guidance toalso ~~Certain~~revises ~~Arrangements~~the manner in which the transaction ~~That~~consideration ~~Include~~is ~~Software~~allocated ~~Elements,~~across the separately identified deliverables. ASU 2009-14 addresses revenue arrangements that contain both hardware elements and software elements. ~~Issue~~ ASU 082009-113 and ~~Issue~~ASU 092009-314 are effective for fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact, if any, adoption of ~~Issue~~ASU 082009-113 and ~~Issue~~ASU 092009-3 14 will have on its consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05 to provide guidance on measuring the fair value of liabilities. The Company adopted ASU 2009-05 during the third quarter of 2009 and adoption did not have a material impact on its consolidated financial statements.16

In June 2009, the FASB issued Accounting Standards Codification (“ASC”) 105, the FASB Accounting Standards Codification (the “Codification”), as the single source of authoritative accounting and reporting standards in the United States applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. All references made to US GAAP will use the new Codification numbering system prescribed by the FASB. The Codification is not intended to change or alter existing US GAAP. The Company adopted the Codification during the third quarter of 2009 and adoption did not have any impact on its consolidated financial statements.

In May 2009, the FASB issued additional guidance ASC 855, Subsequent Events. ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statement are issued or available to be issued. Entities are also required to disclose the date through which subsequent events were evaluated as well as the rationale for the selection of such date. The additional provisions of ASC 855 are effective for interim and annual periods ending after June 15, 2009. The Company adopted the additional provisions of ASC 855 during the second quarter of 2009 and adoption did not have a material impact on its consolidated financial statements.

In April 2009, the FASB issued ASC 820-10-50, Interim Disclosures about Fair Value of Financial Instruments. ASC 820-10-50 expands the fair value disclosures required for all financial instruments to interim periods for publicly traded entities. ASC 820-10-50 is effective for financial statements issued after June 15, 2009. The Company adopted the provisions of ASC 820-10-50 during the second quarter of 2009 which resulted in additional fair value disclosures. Adoption did not have any other impact on the consolidated financial statements.

In June 2008, the FASB issued ASC 260-10-45-60, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. ASC 260-10-45-60 requires that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. The Company adopted the provisions of ASC 260-10-45-60 as of January 1, 2009 and adoption did not have a material impact on its consolidated financial statements.

In March 2008, the FASB issued ASC 815-10-50, Disclosures about Derivative Instruments and Hedging Activities. ASC 815-10-50 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The Company adopted the provisions of ASC 815-10-50 as of January 1, 2009 and adoption did not have a material impact on its consolidated financial statements.

During February 2008, the FASB issued additional guidance in ASC 820, which delays the effective date for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. Based on this guidance, the Company adopted the additional provisions of ASC 820 as they relate to long-lived assets, including goodwill and intangibles, effective January 1, 2009. The adoption of these provisions did not have a material impact on its consolidated financial statements.

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~~In December 2007, the FASB issued additional guidance in ASC 810, Non-controlling Interests in Consolidated Financial Statements~~13. ASC 810 establishes accounting and reporting standards that require non-controlling interests in a subsidiary to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained non-controlling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. ASC 810 also establishes reporting requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The Company adopted the additional provisions of ASC 810 as of January ~~1, 2009 and adoption did~~ ~~not~~Subsequent ~~have a material impact on its consolidated financial statements.~~Events:

13On April 26, 2010, the Company entered into a definitive agreement to be acquired by Protection Holdings, LLC, an affiliate of GTCR. Under the terms of the Merger Agreement, Protection Acquisition Sub, Inc., a newly formed entity and ~~Summarized~~wholly ~~Combined~~owned ~~Financial~~subsidiary ~~Information~~of Protection Holdings, LLC, commenced a tender offer on May 3, 2010 to acquire all of the ~~Subsidiary~~Company’s ~~Guarantors~~outstanding common stock for $15.50 per share in cash, to be followed by a Merger to acquire all remaining outstanding shares at the same price paid in the tender offer. The completion of ~~Debt:~~the Offer and Merger are subject to certain conditions and termination rights of the parties set forth in the Merger Agreement.

Protection One Alarm Monitoring, Inc., a wholly owned subsidiary of Protection One, Inc., has debt securities outstanding (see Note 5, “Debt and Capital Leases”) that are fully and unconditionally guaranteed by Protection One, Inc. and wholly owned subsidiaries of Protection One Alarm Monitoring, Inc. The following tables present condensed consolidating financial information for Protection One, Inc., Protection One Alarm Monitoring, Inc., and all other subsidiaries. Condensed financial information for Protection One, Inc. and Protection One Alarm Monitoring, Inc. on a stand-alone basis is presented using the equity method of accounting for subsidiaries in which they own or control twenty percent or more of the voting securities.

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Condensed Consolidating Balance Sheet

September 30, 2009

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	76,576		$	32		$	—		$	76,608
Accounts receivable, net	—			17,456			15,386			—			32,842
Notes receivable	—			—			823			—			823
Inventories, net	—			2,475			1,784			—			4,259
Prepaid expenses	—			3,048			343			—			3,391
Other	—			6,582			31			(5,191		)	1,422
Total current assets	—			106,137			18,399			(5,191		)	119,345
Restricted cash	—			2,191			—			—			2,191
Property and equipment, net	—			27,042			5,131			—			32,173
Customer accounts, net	—			106,544			105,607			—			212,151
Dealer relationships, net	—			—			35,623			—			35,623
Other intangibles, net	—			—			39			—			39
Goodwill	—			6,142			35,462			—			41,604
Trade names	—			22,987			4,700			—			27,687
Notes receivable, net of current portion	—			115,345			2,746			(115,345		)	2,746
Deferred customer acquisition costs	—			136,287			10,905			—			147,192
Other	—			6,533			835			—			7,368
Accounts receivable (payable) from (to) associated companies	(73,520		)	26,029			47,491			—			—
Investment in POAMI	(8,469		)	—			—			8,469			—
Investment in subsidiary guarantors	—			124,046			—			(124,046		)	—
Total assets	$	(81,989	)	$	679,283		$	266,938		$	(236,113	)	$	628,119
Liabilities and Stockholders’ Equity (Deficiency in Assets)
Current liabilities:
Current portion of long-term debt and capital leases	$	—		$	5,238		$	—		$	—		$	5,238
Accounts payable	—			2,784			573			—			3,357
Accrued liabilities	1,284			32,675			8,545			(5,191		)	37,313
Deferred revenue	—			33,781			10,550			—			44,331
Total current liabilities	1,284			74,478			19,668			(5,191		)	90,239
Long-term debt and capital leases, net of current portion	—			513,866			120,482			(115,345		)	519,003
Deferred customer acquisition revenue	—			97,619			708			—			98,327
Deferred tax liability	—			57			1,195						1,252
Other liabilities	—			1,732			839			—			2,571
Total liabilities	1,284			687,752			142,892			(120,536		)	711,392
Stockholders’ Equity (Deficiency in Assets)
Common stock	253			2			1			(3		)	253
Additional paid in capital	181,224			1,511,014			266,659			(1,777,673		)	181,224
Accumulated other comprehensive loss	(7,158		)	(7,158		)	—			7,158			(7,158		)
Deficit	(257,592		)	(1,512,327		)	(142,614		)	1,654,941			(257,592		)
Total stockholders’ equity (deficiency in assets)	(83,273		)	(8,469		)	124,046			(115,577		)	(83,273		)
Total liabilities and stockholders’ equity (deficiency in assets)	$	(81,989	)	$	679,283		$	266,938		$	(236,113	)	$	628,119

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Condensed Consolidating Balance Sheet

December 31, 2008

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	38,618		$	265		$	—		$	38,883
Accounts receivable, net	—			20,489			18,792			—			39,281
Notes receivable	—			—			1,143			—			1,143
Inventories, net	—			3,149			1,824			—			4,973
Prepaid expenses	—			4,278			368			—			4,646
Other	50			4,301			401			(1,730		)	3,022
Total current assets	50			70,835			22,793			(1,730		)	91,948
Restricted cash	—			2,245			—			—			2,245
Property and equipment, net	—			29,756			6,412			—			36,168
Customer accounts, net	—			117,873			119,845			—			237,718
Dealer relationships, net	—			—			37,597			—			37,597
Other intangibles, net	—			—			209			—			209
Goodwill	—			6,142			35,462			—			41,604
Trade names	—			22,987			4,700			—			27,687
Notes receivable, net of current portion	—			115,345			3,049			(115,345		)	3,049
Deferred customer acquisition costs	—			139,524			11,324			—			150,848
Other	—			8,584			1,397			—			9,981
Accounts receivable (payable) from (to) associated companies	(73,756		)	55,931			17,825			—			—
Investment in POAMI	(5,447		)	—			—			5,447			—
Investment in subsidiary guarantors	—			118,499			—			(118,499		)	—
Total assets	$	(79,153	)	$	687,721		$	260,613		$	(230,127	)	$	639,054
Liabilities and Stockholders’ Equity (Deficiency in Assets)
Current liabilities:
Current portion of long-term debt and capital leases	$	—		$	5,361		$	—		$	—		$	5,361
Accounts payable	—			3,111			204			—			3,315
Accrued liabilities	1,097			34,179			5,476			(1,730		)	39,022
Deferred revenue	—			34,744			11,283			—			46,027
Total current liabilities	1,097			77,395			16,963			(1,730		)	93,725
Long-term debt and capital leases, net of current portion	—			517,214			122,058			(115,345		)	523,927
Deferred customer acquisition revenue	—			94,207			821			—			95,028
Deferred tax liability	—			—			1,166			—			1,166
Other liabilities	—			4,352			1,106			—			5,458
Total Liabilities	1,097			693,168			142,114			(117,075		)	719,304
Stockholders’ Equity (Deficiency in Assets)
Common stock	253			2			1			(3		)	253
Additional paid in capital	180,800			1,511,013			266,659			(1,777,672		)	180,800
Accumulated other comprehensive loss	(9,169		)	(9,169		)	—			9,169			(9,169		)
Deficit	(252,134		)	(1,507,293		)	(148,161		)	1,655,454			(252,134		)
Total stockholders’ equity (deficiency in assets)	(80,250		)	(5,447		)	118,499			(113,052		)	(80,250		)
Total liabilities and stockholders’ equity (deficiency in assets)	$	(79,153	)	$	687,721		$	260,613		$	(230,127	)	$	639,054

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Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2009

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors		Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	160,400		$	88,247	$	—		$	248,647
Installation and other	—			27,651			1,410		—			29,061
Total revenue	—			188,051			89,657		—			277,708
Cost of revenue:
Monitoring and related services	—			42,654			34,289		—			76,943
Installation and other	—			33,999			2,413		—			36,412
Total cost of revenue	—			76,653			36,702		—			113,355
Operating expenses:
Selling	—			36,487			1,953		—			38,440
General and administrative	3,256			50,666			5,474		—			59,396
Amortization and depreciation	—			19,224			18,305		—			37,529
Holding company allocation	(2,832		)	2,832			—		—			—
Corporate overhead allocation	—			(12,423		)	12,423		—			—
Total operating expenses	424			96,786			38,155		—			135,365
Operating (loss) income	(424		)	14,612			14,800		—			28,988
Other expense (income):
Interest expense	—			35,408			8,819		(10,381		)	33,846
Interest income	—			(10,422		)	—		10,381			(41		)
Equity loss (income) in subsidiary	5,034			(5,547		)	—		513			—
Total other expense	5,034			19,439			8,819		513			33,805
(Loss) income before income taxes	(5,458		)	(4,827		)	5,981		(513		)	(4,817		)
Income tax expense	—			207			434		—			641
Net (loss) income	$	(5,458	)	$	(5,034	)	$	5,547	$	(513	)	$	(5,458	)

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Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2008

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	157,956		$	92,064		$	—		$	250,020
Installation and other	—			26,879			1,135			—			28,014
Total revenue	—			184,835			93,199			—			278,034
Cost of revenue:
Monitoring and related services	—			49,108			34,658			—			83,766
Installation and other	—			34,014			2,152			—			36,166
Total cost of revenue	—			83,122			36,810			—			119,932
Operating expenses:
Selling	—			39,037			3,096			—			42,133
General and administrative	4,019			49,899			5,633			—			59,551
Amortization and depreciation	—			24,009			26,056			—			50,065
Impairment of trade name	—			—			475			—			475
Holding company allocation	(2,929		)	2,740			189			—			—
Corporate overhead allocation	—			(10,488		)	10,488			—			—
Total operating expenses	1,090			105,197			45,937			—			152,224
Operating (loss) income	(1,090		)	(3,484		)	10,452			—			5,878
Other expense (income):
Interest expense	—			38,434			8,824			(10,382		)	36,876
Interest income	—			(11,133		)	(1		)	10,382			(752		)
Loss on retirement of debt	—			12,788			—			—			12,788
Other	—			(68		)	(9		)	—			(77		)
Equity loss (income) in subsidiary	42,221			(1,462		)	—			(40,759		)	—
Total other expense	42,221			38,559			8,814			(40,759		)	48,835
(Loss) income before income taxes	(43,311		)	(42,043		)	1,638			40,759			(42,957		)
Income tax expense	—			178			176			—			354
Net (loss) income	$	(43,311	)	$	(42,221	)	$	1,462		$	40,759		$	(43,311	)

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Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2009

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors		Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	53,230		$	29,203	$	—		$	82,433
Installation and other	—			9,750			377		—			10,127
Total revenue	—			62,980			29,580		—			92,560
Cost of revenue:
Monitoring and related services	—			14,319			11,556		—			25,875
Installation and other	—			11,632			761		—			12,393
Total cost of revenue	—			25,951			12,317		—			38,268
Operating expenses:
Selling	—			12,379			524		—			12,903
General and administrative	1,066			14,315			1,774		—			17,155
Amortization and depreciation	—			6,510			6,070		—			12,580
Holding company allocation	(995		)	995			—		—			—
Corporate overhead allocation	—			(3,624		)	3,624		—			—
Total operating expenses	71			30,575			11,992		—			42,638
Operating (loss) income	(71		)	6,454			5,271		—			11,654
Other expense (income):
Interest expense	—			12,063			2,926		(3,460		)	11,529
Interest income	—			(3,473		)	—		3,460			(13		)
Equity loss (income) in subsidiary	51			(2,157		)	—		2,106			—
Total other expense	51			6,433			2,926		2,106			11,516
(Loss)Income before income taxes	(122		)	21			2,345		(2,106		)	138
Income tax expense	—			72			188		—			260
Net (loss) income	$	(122	)	$	(51	)	$	2,157	$	(2,106	)	$	(122	)

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Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2008

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	53,305		$	30,887		$	—		$	84,192
Installation and other	—			9,540			324			—			9,864
Total revenue	—			62,845			31,211			—			94,056
Cost of revenue:
Monitoring and related services	—			15,598			12,350			—			27,948
Installation and other	—			12,466			728			—			13,194
Total cost of revenue	—			28,064			13,078			—			41,142
Operating expenses:
Selling	—			13,821			826			—			14,647
General and administrative	1,377			16,924			2,141			—			20,442
Amortization and depreciation	—			7,995			8,436			—			16,431
Impairment of trade name	—			—			475						475
Holding company allocation	(1,001		)	1,001			—			—			—
Corporate overhead allocation	—			(2,977		)	2,977			—			—
Total operating expenses	376			36,764			14,855			—			51,995
Operating (loss) income	(376		)	(1,983		)	3,278			—			919
Other expense (income):
Interest expense	—			12,739			2,940			(3,460		)	12,219
Interest income	—			(3,635		)	—			3,460			(175		)
Other	—			(22		)	(9		)	—			(31		)
Equity loss (income) in subsidiary	10,768			(324		)	—			(10,444		)	—
Total other expense	10,768			8,758			2,931			(10,444		)	12,013
Loss before income taxes	(11,144		)	(10,741		)	347			10,444			(11,094		)
Income tax expense	—			27			23			—			50
Net (loss) income	$	(11,144	)	$	(10,768	)	$	324		$	10,444		$	(11,144	)

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Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2009

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations		Consolidated
Net cash provided by operating activities	$	235		$	31,547		$	31,568		$	—	$	63,350
Cash flows from investing activities:
Deferred customer acquisition costs	—			(29,724		)	(1,526		)	—		(31,250		)
Deferred customer acquisition revenue	—			15,117			10			—		15,127
Purchase of rental equipment	—			(1,685		)	—			—		(1,685		)
Purchase of property and equipment	—			(2,643		)	(620		)	—		(3,263		)
Purchase of new accounts	—			(1,004		)	—			—		(1,004		)
Reduction of restricted cash	—			60			—			—		60
Proceeds from disposition of assets and other	—			248			1			—		249
Net cash used in investing activities	—			(19,631		)	(2,135		)	—		(21,766		)
Cash flows from financing activities:
Payments on long-term debt and capital leases	—			(3,859		)	—			—		(3,859		)
To (from) related companies	(235		)	29,901			(29,666		)	—		—
Net cash (used in) provided by financing activities	(235		)	26,042			(29,666		)	—		(3,859		)
Net increase in cash and cash equivalents	—			37,958			(233		)	—		37,725
Cash and cash equivalents:
Beginning of period	—			38,618			265			—		38,883
End of period	$	—		$	76,576		$	32		$	—	76,608

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2008

(in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations		Consolidated
Net cash provided by operating activities	$	11		$	12,124		$	34,229		$	—	$	46,364
Cash flows from investing activities:
Deferred customer acquisition costs	—			(46,620		)	(3,103		)	—		(49,723		)
Deferred customer acquisition revenue	—			22,161			90			—		22,251
Purchase of rental equipment	—			(4,093		)	—			—		(4,093		)
Purchase of property and equipment	—			(2,842		)	(1,645		)	—		(4,487		)
Purchase of new accounts	—			(695		)	—					(695		)
Reduction of restricted cash	—			783			834					1,617
Proceeds from disposition of assets	—			78			17			—		95
Net cash used in investing activities	—			(31,228		)	(3,807		)	—		(35,035		)
Cash flows from financing activities:
Payments on long-term debt and capital leases	—			(120,170		)	—			—		(120,170		)
Proceeds from borrowings	—			110,340			—					110,340
Debt issue costs	—			(2,020		)	—			—		(2,020		)
To (from) related companies	(11		)	30,961			(30,950		)	—		—
Net cash provided by (used in) financing activities	(11		)	19,111			(30,950		)	—		(11,850		)
Net (decrease) increase in cash and cash equivalents	—			7			(528		)	—		(521		)
Cash and cash equivalents:
Beginning of period	—			40,607			392			—		40,999
End of period	$	—		$	40,614		$	(136	)	$	—	$	40,478

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14. Subsequent Events:

On October 2, 2009, the Company entered into an agreement with Apx Alarm Security Solutions, Inc. (APX) under which APX assumed operating control of the Company’s monitoring center in South St. Paul, Minnesota, effective November 1, 2009. As a result of this arrangement, APX will now provide the monitoring services to their customer base that the Company previously provided through its South St. Paul, Minnesota facility (the “Facility”). The Company agreed to among other things, (i) license to APX certain intellectual property used in the operation of the Facility, (ii) assign ownership to APX of the fixed assets at the Facility, and (iii) provide certain support services to APX, including emergency technical services and disaster recovery planning and recovery services, though December 31, 2010, all in exchange for a monthly service fee. In addition, APX agreed to assume the lease for the Facility and to offer employment under similar terms to certain personnel working at the Facility. The Company will cease providing any services to APX after December 31, 2010. APX accounted for 35.2% of the Company’s Wholesale monitored sites and 25.2%, or $1.1 million, of Wholesale RMR at September 30, 2009.

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 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, ~~2008~~2009.

Overview

We believe we are the third largest provider of electronic security installation and monitoring in the United States, as measured by recurring monthly revenue, or RMR. As of ~~September~~March 3031, ~~2009~~2010, we served ~~approximately~~ ~~765~~approximately 745,000 residential and business customers and monitored approximately 1680,~~054,~~000 sites through our Wholesale operations. Generating cash flow to fund growth and investment in new customers, as well as for debt service, is essential to our operations.

We organize our operations into the following three business segments:

Retail. Our Retail segment provides monitoring and maintenance services for electronic security systems directly to residential and business customers. We also sell and install electronic security systems for homes and businesses ~~through~~ through our Retail segment in order to meet their security needs. As of ~~September~~March 3031, ~~2009~~ 2010, we served approximately ~~548~~534,000 ~~retail~~ retail customers across the nation, with no single customer comprising more than 1% of our total consolidated revenue. Our Retail segment accounted for 7680.72% of our recurring monthly revenue at ~~September~~March 3031, ~~2009~~2010, of which approximately 30.4% was attributable to commercial customers.

Wholesale. We contract with independent security alarm dealers nationwide to provide alarm system monitoring services to their residential and business customers. As of ~~September~~March 3031, ~~2009~~2010, our Wholesale segment served approximately 4,~~600~~100 dealers by monitoring ~~over one~~ ~~million~~approximately 680,000 homes and businesses on their behalf. We also provide business support services for these independent dealers including, in certain instances, financing in the form of loans secured by customer accounts. ~~The~~ Our top ten wholesale ~~dealers~~ ~~accounted for 53.4% of Wholesale monitored sites and 39.6% of Wholesale recurring monthly revenue as of September 30~~dealers, ~~2009. Pursuant~~based toon ~~an agreement with Apx Alarm Security Solutions~~RMR, ~~Inc.~~ ~~(“APX”), effective November 1, 2009, APX assumed operational control of our wholesale monitoring center in South St. Paul, Minnesota. Excluding APX, the top ten Wholesale dealers~~ accounted for 28.59% of Wholesale monitored sites and 14.13% of Wholesale recurring monthly revenue as of ~~September~~March 3031, ~~2009. See~~ ~~“Summary of Important Matters, APX Agreement”, below, for additional information related to the agreement~~2010.

Multifamily. We provide monitoring and maintenance services for electronic security systems to tenants of multifamily residences, ~~under~~including ~~long-term contracts with building owners and managers. Multifamily service contracts~~apartments, ~~which~~condominiums ~~have initial terms that fall within a range of five to ten years~~ and ~~average~~other ~~eight~~multifamily ~~years at inception~~dwellings, ~~tend~~under ~~to provide higher operating~~long-term ~~margins than Retail or Wholesale~~ contracts ~~due~~with ~~primarily~~building toowners ~~the~~and ~~highly automated nature of the services~~managers. We provided alarm monitoring services to approximately ~~217~~211,000 units in nearly 475 cities as of ~~September~~March 3031, ~~2009~~2010.

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The table below identifies our consolidated revenue by segment for the periods presented (dollars in thousands):

	Nine months ended September 30,
	Three months ended March 31,
	2009				2008
	2010				2009
Segment	Revenue		Percent		Revenue		Percent
Retail	$	~~216~~71,~~899~~801	7881.13	%	$	~~218~~72,~~301~~667	78.51	%
Wholesale	3910,~~006~~149		1411.05		3612,~~407~~763		13.17
Multifamily	216,~~803~~365		7.92		237,~~326~~572		8.42
Total	$	~~277~~88,~~708~~315	100.0	%	$	~~278~~93,~~034~~002	100.0	%

	Three months ended September 30,
	2009				2008
Segment	Revenue		Percent		Revenue		Percent
Retail	$	72,219	78.0	%	$	73,559	78.2	%
Wholesale	13,367		14.5		12,758		13.6
Multifamily	6,974		7.5		7,739		8.2
Total	$	92,560	100.0	%	$	94,056	100.0	%

Summary of Important Matters

Net Loss. We incurred a net loss of $54.58 million and $432.38 million for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009, respectively. We ~~incurred~~The a net loss ~~of $0.1~~in ~~million and $11.1 million for~~ the three months ended ~~September~~March 3031, ~~2009~~ ~~and~~2010 ~~2008, respectively. The net loss in the nine~~ and ~~three months ended September 30,~~ 2009 ~~and 2008~~ reflects (1) substantial charges incurred by us for amortization of customer accounts and previously deferred customer acquisition costs and interest incurred on indebtedness~~. The reduction~~ inand ~~our net loss~~ (2) in the ~~nine~~first ~~months~~quarter ~~ended~~of ~~September 30~~2010, ~~2009 compared to the nine months ended September 30, 2008 is primarily related to~~ a ~~$12.8 million~~ loss ~~on retirement~~ of ~~debt in 2008 as well as reduced amortization and depreciation expense of~~ $122.51 million~~. Improved~~ ~~monitoring and related services margins and less selling expense also contributed to the reduction~~ in ~~our~~connection ~~net loss~~with ~~for~~an ~~the~~early ~~nine~~termination ~~and~~of ~~three~~a ~~months ended September 30, 2009 compared to~~lease ~~the~~agreement ~~nine~~ and ~~three~~related ~~months~~settlement ~~ended~~payment ~~September 30, 2008. See Note 3 to our Condensed Consolidated Financial Statements, Goodwill~~ and ~~Intangible~~leasehold ~~Assets,~~asset ~~for additional information related to the lifing study~~impairment.

We believe business and consumer concerns regarding the decline in U.S. economic activity as well as their limited access to credit contributed to our identification of fewer opportunities to sell security systems in the first nine months of 2009 compared to one year earlier. As a result of lower sales, our investment in new customers declined. We also believe that high unemployment and instability in the housing and credit markets could contribute to elevated attrition levels for the next several quarters, which would have a negative impact on our revenue.17

Recurring Monthly Revenue. At various times during each year, we measure all of the RMR we are entitled to receive under contracts with customers in effect at the end of the period. Our computation of RMR may not be comparable to other similarly titled measures of other companies, and RMR should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles, or GAAP. RMR was $26.3 million and $26.9 million as of September 30, 2009 and 2008, respectively. We believe that achieving consistent increases in RMR will require lower attrition on the RMR acquired from IASG and continued improvement in attrition for the remaining base, prudent price increases, and more RMR additions generated from our marketing programs and commercial sales force. In the nine and three months ended September 30, 2009, RMR cancellations were greater than RMR additions from direct sales. We expect RMR additions for the remainder of 2009 to be lower than RMR additions in 2008. See “APX Agreement”, below, for information related to a $1.1 million decrease in our Wholesale RMR subsequent to September 30, 2009.

Each segment’s share of our total RMR and monitored sites at September 30 for the years presented were as follows:

	Percentage of Total
	2009				2008
	Recurring Monthly Revenue		Sites		Recurring Monthly Revenue		Sites
Retail	76.7	%	30.1	%	76.5	%	31.6	%
Wholesale	15.7		58.0		15.0		54.6
Multifamily	7.6		11.9		8.5		13.8
Total	100.0	%	100.0	%	100.0	%	100.0	%

Our RMR includes amounts billable to customers with past due balances which we believe are collectible. We seek to preserve the revenue stream associated with each customer contract, primarily to maximize our return on the investment we made to generate each contract. As a result, we actively work to collect amounts owed to us and to retain the customer at the same time. As a general rule, we accrue for the cancellation of customer RMR when a balance of more than one times the customer’s RMR becomes 120 days past due. Exceptions to this rule are made when an evaluation of the ongoing customer relationship indicates that payment for the past due balance is likely to be received.

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WeDue ~~believe the presentation of RMR is useful~~ to ~~investors~~business ~~because~~and ~~the measure~~consumer isconcerns ~~widely~~regarding ~~used in~~ the ~~industry~~U.S. toeconomy ~~assess the amount of recurring~~as ~~revenues~~well ~~from~~as ~~customer~~limited ~~fees~~access ~~produced~~to byconsumer acredit, ~~monitored~~we ~~security~~identified ~~alarm~~fewer ~~company~~opportunities ~~such~~to assell ~~ours. The~~security ~~table~~systems ~~below~~in ~~reconciles~~2009 ~~our RMR~~compared to ~~revenue~~previous ~~reflected~~periods. We onbelieve ~~our~~security ~~consolidated~~system ~~statements~~sales ofhave stabilized ~~operations~~thus (far in ~~thousands):~~ 2010.

	Nine Months Ended September 30,
	2009		2008
Recurring Monthly Revenue at September 30	$	26,327	$	26,883
Amounts excluded from RMR:
Amortization of deferred revenue	1,285		1,211
Installation and other revenue (a)	3,267		3,232
Revenue (GAAP basis):
September	30,879		31,326
January — August	246,829		246,708
Total period revenue	$	277,708	$	278,034

Recurring Monthly Revenue. We measure all of the RMR we are entitled to receive under contracts with customers in effect at the end of each reporting period. Our computation of RMR may not be comparable to other similarly titled measures of other companies. RMR should not be viewed by investors as an alternative to actual monthly revenue, as determined in accordance with generally accepted accounting principles, or GAAP, and is a non-GAAP measure. RMR was $24.9 million and $26.5 million as of March 31, 2010 and 2009, respectively. A significant portion of the decrease in RMR as of March 31, 2010 is a result of our agreement with APX, which resulted in a reduction of Wholesale RMR, as well as lower Retail investment in customer acquisition activities.

	Three Months Ended September 30,
	2009		2008
Recurring Monthly Revenue at September 30	$	26,327	$	26,883
Amounts excluded from RMR:
Amortization of deferred revenue	1,285		1,211
Installation and other revenue (a)	3,267		3,232
Revenue (GAAP basis):
September	30,879		31,326
July - August	61,681		62,730
Total period revenue	$	92,560	$	94,056

Each segment’s share of our total RMR and monitored sites at March 31 for the years presented were as follows:

	Percentage of Total
	2010				2009
	RMR		Sites		RMR		Sites
Retail	80.2	%	37.5	%	77.2	%	31.9	%
Wholesale	12.2		47.7		15.0		55.8
Multifamily	7.6		14.8		7.8		12.3
Total	100.0	%	100.0	%	100.0	%	100.0	%

Even though our proportions of Retail, Wholesale and Multifamily RMR may differ significantly from other companies’ RMR mix, and contributions from each type of RMR vary, we believe the presentation of RMR is useful to investors because the measure is used by investors and lenders to value companies such as ours with recurring revenue streams. Management monitors RMR, among other things, to evaluate our ongoing performance. In order to enhance the investors’ understanding of the components of our RMR, we include roll-forwards for each segment below. The table below reconciles our RMR to revenue reflected on our consolidated statements of operations (in thousands):

	Three Months Ended March 31,
	2010		2009
Recurring Monthly Revenue at March 31	$	24,949	$	26,475
Amounts excluded from RMR:
Amortization of deferred revenue	1,270		1,194
Installation and other revenue (a)	3,445		3,322
Revenue (GAAP basis):
March	29,664		30,991
January - February	58,651		62,011
Total period revenue	$	88,315	$	93,002

(a) Revenue that is not pursuant to monthly contractual billings.

The following table identifies RMR by segment and in total for the periods indicated (in thousands):

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009												2008
	2010												2009
	Retail			Whole- sale			Multi- family			Total			Retail			Whole- sale			Multi- family			Total
Beginning RMR balance	$	20,~~543~~107		$	3,~~998~~031		$	21,~~205~~919		$	2625,~~746~~057		$	20,~~628~~543		$	3,~~615~~998		$	2,~~463~~205		$	26,~~706~~746
RMR additions from direct sales	~~1,335~~423			~~883~~—			878			~~2,305~~431			~~1,784~~450			~~1,107~~—			8627			~~2,977~~477
RMR from account purchases	353			—			—			353			29—			—			—			29—
RMR losses (a)	(~~2,070~~600		)	~~(752~~—		)	(~~288~~31		)	(~~3,110~~631		)	(~~2,111~~682		)	~~(694~~—		)	(~~308~~185		)	(~~3,113~~867		)
Price increases and other (b)	340			—			11			351			221			10			53			284
Net change in wholesale	—			16			—			16			—			(11		)	—			(11		)
Ending RMR balance	$	20,183		$	4,129		$	2,015		$	26,327		$	20,551		$	4,038		$	2,294		$	26,883
Price increases and other	68			—			5			73			122			—			8			130
	Three Months Ended September 30,
Ending RMR balance	$	20,001		$	3,047		$	1,901		$	24,949		$	20,433		$	3,987		$	2,055		$	26,475
	2009												2008
	Retail			Whole- sale			Multi- family			Total			Retail			Whole- sale			Multi- family			Total
Beginning RMR balance	$	20,297		$	4,143		$	2,044		$	26,484		$	20,572		$	3,965		$	2,378		$	26,915
RMR additions from direct sales	454			275			39			768			594			337			24			955
RMR from account purchases	10			—			—			10			23			—			—			23
RMR losses (a)	(705		)	(289		)	(70		)	(1,064		)	(749		)	(264		)	(124		)	(1,137		)
Price increases and other	127			—			2			129			111			—			16			127
Ending RMR balance	$	20,183		$	4,129		$	2,015		$	26,327		$	20,551		$	4,038		$	2,294		$	26,883

(a) RMR losses include price decreases

~~(b) 2008 Retail price increases and other include the impact of cancellations related to our analog to digital wireless upgrade.~~18

Monitoring and Related Services Margin. Monitoring and related services revenue comprised approximately 90% of our total revenue for each of the nine and three month periods ended September 30, 2009 and 2008. The table below identifies the monitoring and related services gross margin and gross margin as a percentage of monitoring and related services revenue for the presented periods (in thousands):

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	Nine Months Ended September 30,
	2009												2008
	Retail			Whole- sale			Multi- family			Total			Retail			Whole- sale			Multi- family			Total
Monitoring and related services revenue	$	189,234		$	38,491		$	20,922		$	248,647		$	191,262		$	35,761		$	22,997		$	250,020
Cost of monitoring and related services (exclusive of depreciation)	50,823			20,724			5,396			76,943			57,027			20,928			5,811			83,766
Gross margin	$	138,411		$	17,767		$	15,526		$	171,704		$	134,235		$	14,833		$	17,186		$	166,254
Gross margin %	73.1		%	46.2		%	74.2		%	69.1		%	70.2		%	41.5		%	74.7		%	66.5		%

Monitoring and Related Services Margin. Monitoring and related services revenue comprised more than 85% of our total revenue for each of the three month periods ended March 31, 2010 and 2009. The table below identifies the monitoring and related services gross margin and gross margin as a percentage of monitoring and related services revenue for the presented periods (in thousands):

	Three Months Ended September 30,
	Three Months Ended March 31,
	2009												2008
	2010												2009
	Retail			Whole- sale			Multi- Family			Total			Retail			Whole- sale			Multi- family			Total
Monitoring and related services revenue	$	62,~~464~~017		$	139,~~180~~270		$	6,~~789~~163		$	8277,~~433~~450		$	6463,~~013~~717		$	12,~~574~~579		$	7,~~605~~237		$	8483,~~192~~533
Cost of monitoring and related services (exclusive of depreciation)	16,~~923~~836			74,~~096~~807			1,~~856~~713			2523,~~875~~356			1817,~~737~~203			76,~~189~~769			21,~~022~~774			2725,~~948~~746
Gross margin	$	45,~~541~~181		$	64,~~084~~463		$	4,~~933~~450		$	5654,~~558~~094		$	4546,~~276~~514		$	5,~~385~~810		$	5,~~583~~463		$	5657,~~244~~787
Gross margin %	72.9		%	4648.21		%	72.72		%	6869.68		%	7073.70		%	4246.82		%	7375.45		%	6669.82		%

For the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009~~2010, our total ~~monitoring~~ monitoring and related services gross margin percentage increased slightly from the ~~prior~~ prior period primarily due to reductions in costs. Retail gross margin percentage for ~~improved in~~ the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009 compared~~2010, toremained ~~the~~consistent ~~nine~~with ~~and~~ the three months ended ~~September~~March 3031, ~~2008 due to the centralization of customer care and field technical support functions~~2009. Wholesale gross margin percentage improved in the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009~~ 2010 compared to the ~~nine and~~ three months ended ~~September~~March 3031, ~~2008~~2009 ~~also~~primarily ~~improved~~because ~~due~~gross margin toon ~~labor~~the ~~efficiencies achieved~~APX ~~through~~accounts ~~the~~was ~~integration~~typically oflower ~~our~~than ~~billing~~average ~~and~~gross margin in those periods that included monitoring ~~systems~~of APX accounts. See “-APX Agreement.” The Wholesale gross margin percentage is typically lower than Retail and Multifamily gross margin percentages due to the reduced number of services we provide to dealers compared to services provided to our Retail and Multifamily customers. Acquisition costs per monitored wholesale site are also significantly lower. For the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009~~ 2010, monitoring and related services gross margin percentage in our Multifamily segment was ~~slightly~~ lower than in the prior period because revenue in this segment decreased faster than we were able to reduce costs. Multifamily monitoring and related services revenue for the first three months of 2009 also included higher than normal revenue resulting from accelerated billing for cancellations prior to contractual maturity in monitoring and related services revenue.

Customer Creation and Marketing. Our current customer acquisition strategy for our ~~Retail~~ Retail segment relies primarily on internally generated sales, utilizing personnel in our existing branch infrastructure. The internal sales program for our Retail segment generated $~~1.3 million and $1.8 million of new RMR in the nine months ended September 30, 2009 and 2008, respectively, and $~~0.4 million and $0.65 million of new RMR in the three months ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009, respectively. ~~The~~We ~~internal~~operate ~~sales~~a ~~program~~dedicated ~~for~~telesales ~~our~~center ~~Wholesale~~from ~~segment~~which ~~generated~~we ~~$0.9~~respond ~~million~~to ~~and~~questions ~~$1.1~~that ~~million~~customers ofor ~~new~~potential ~~Wholesale~~customers ~~RMR~~have ~~in the~~about ~~nine~~our ~~months~~services ~~ended~~and ~~September 30,~~provide ~~2009~~quality ~~and~~control ~~2008,~~follow-up ~~respectively,~~calls ~~and~~to ~~$0.3~~customers for whom ~~million~~we ofrecently ~~new~~provided ~~Wholesale~~installation ~~RMR~~or inmaintenance ~~each~~services. In oflate ~~the~~2009 ~~three~~we ~~month~~created ~~periods~~an ~~ended~~internal ~~September 30,~~sales ~~2009~~group to sell systems and ~~2008~~services over the phone.

WeOur ~~engage~~integrated in marketing ~~and public relations~~ programs tofocus ~~increase~~ on awareness for the Protection One® brand name nationally and tothe ~~generate~~generation of new lead sources and opportunities. We ~~are reaching~~reach out to targeted customers, both residential and commercial, through a variety of mediums in a planned and sequenced manner. These channels include, ~~including~~but are not limited to, on-line programs and placements ~~and~~, ~~to a~~ ~~significantly lesser extent,~~ third-party ~~list~~ purchases, and outbound calling and traditional mass communications, such as radio, print and direct mail.

We ~~will~~expect to continue to analyze opportunities for alliance ~~partnerships~~ partnerships which benefit our Retail segment. We are disciplined in our assessment of alliance opportunities, taking into account many factors such as brand impact, sales channel consideration and ~~financial~~ financial return.

RMR Attrition. Attrition has a direct impact on our results of operations since it affects our revenue, amortization expense and cash flow. We monitor attrition on a quarterly annualized and trailing twelve-month basis. This method utilizes each segment’s average RMR base for the applicable period in measuring attrition. Therefore, in periods of RMR growth, the computation of RMR attrition may result in a number less than would be expected in periods when RMR remains stable. In periods of RMR decline, the computation of RMR attrition may result in a number greater than would be expected in periods when RMR remains stable. We believe the presentation of RMR attrition is useful to investors and lenders in valuing companies such as ours with recurring revenue streams. In addition, we believe RMR attrition information is more useful than customer account attrition because it reflects the economic impact of customer losses.

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In the table below, we define attrition as a ratio, the numerator of which is the gross amount of lost RMR, which includes price decreases, for a given period, net of the adjustments described below, and the denominator of which is the average amount of RMR for a given period. In some instances, we use estimates to derive attrition data. In the calculations directly below, we do not reduce the gross RMR lost during a period by RMR ~~added~~ added from “new owner” accounts, which are accounts where a new customer moves into a location installed with our security system and vacated by a prior customer, or from “relocation” accounts, which are accounts where an existing customer moves and transfers service to their new location. The Retail attrition calculations for 2008 exclude the impact of cancellations related to our analog to digital wireless upgrade as such cancellations did not have a material impact on our monitoring and service margins.

As defined above, RMR gross attrition by business segment is summarized at ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009. Our ~~Improvements in~~ Retail ~~RMR~~gross attrition onimproved in the ~~acquired~~first ~~IASG~~three ~~portfolio during~~months of 2010 compared to the ~~third~~first ~~quarter~~three months of 2009 ~~were~~due ~~partially~~to ~~offset~~a bydecrease ~~an increase~~ in ~~customer~~ ~~attrition~~cancellations for non-payment ~~bankruptcy~~ and other financial reasons ~~as well as cancellations for customer non-payment~~. ~~Wholesale~~Multifamily attrition ~~for~~was lower in the ~~third~~first quarter of ~~2009~~2010 ~~increased~~ compared to the ~~third~~first quarter of ~~2008~~2009 ~~due~~because to the ~~cancellation~~first ~~of a large customer. Multifamily experienced a decrease in attrition for the third~~ quarter of 2009 ~~compared~~includes to the termination ~~third quarter~~ of ~~2008 due~~several tolarge acustomers ~~decrease~~for infinancial ~~large customer cancellations~~reasons.

	Recurring Monthly Revenue Attrition
	September 30, 2009				September 30, 2008
	March 31, 2010				March 31, 2009
	Annualized Third Quarter		Trailing Twelve Months		Annualized Third Quarter		Trailing Twelve Months
	Annualized First Quarter		Trailing Twelve Months		Annualized First Quarter		Trailing Twelve Months
Retail	1312.90	%	13.70	%	1413.63	%	13.67	%
Wholesale	27.9	%	24.2	%	26.4	%	23.4	%
Multifamily	6.4	%	12.2	%	34.9	%	22.7	%
Multifamily	13.8	%	19.0	%	21.2	%	15.2	%

In the table below, in order to enhance the comparability of our Retail segment attrition results with those of other industry participants, many of which report attrition net of new owner and relocation accounts and exclude price decreases, we define the denominator the same as above but define the numerator as the gross amount of lost RMR, excluding price decreases, for a given period reduced by RMR added from new owners and relocation accounts.

	Recurring Monthly Revenue Attrition
	September 30, 2009				September 30, 2008
	March 31, 2010				March 31, 2009
	Annualized Third Quarter		Trailing Twelve Months		Annualized Third Quarter		Trailing Twelve Months
	Annualized First Quarter		Trailing Twelve Months		Annualized First Quarter		Trailing Twelve Months
Retail	109.60	%	109.69	%	1110.26	%	10.35	%

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, cost and other financial issues. A portion of our 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. ~~To a much greater extent than Retail, Wholesale attrition can be affected by the decisions of its largest dealers.~~ We also believe that high unemployment ~~and instability in the housing and credit markets~~ could ~~contribute~~ contribute to elevated attrition levels for the next several quarters, which would have a negative impact on our revenue.

We evaluate the Wholesale segment based on the net change in RMR because added RMR typically does not require an up-front investment by us. Wholesale RMR fluctuates as our customers, the independent dealers, add and lose their customers for whom we are providing monitoring and other services. The net change in Wholesale RMR did not vary significantly during the first three months of 2010 or 2009, however Wholesale RMR as of March 31, 2010 is significantly lower due to the impact of the APX ~~Agreement~~agreement discussed below. The net change in Wholesale RMR for the first three months of 2010 was an increase of $16,000, or a 0.5% increase, in RMR for the period. The net change in RMR for the first three months of 2009 was a decrease of $11,000, or a 0.3% decrease, in RMR for the period.

APX Agreement. On October 2, 2009, we entered into an agreement with Apx Alarm Security Solutions, Inc. (“APX”) under which APX assumed operating control of our monitoring center located in South St. Paul, Minnesota, effective November 1, 2009. As a result of this arrangement, APX ~~will~~ now ~~provide~~provides the monitoring services to their customer base that we previously provided through our South St. Paul, Minnesota facility (the “Facility”). We agreed to, among other things, (i) license to APX certain intellectual property used in the operation of the Facility, (ii) assign ownership to APX of the fixed assets at the Facility, and (iii) provide support services to APX, including emergency technical services and disaster recovery planning and recovery services, through December 31, 2010, all in exchange for a monthly service fee. ~~In addition, APX agreed to assume the lease for the Facility and to offer employment under similar terms to certain personnel working at the Facility.~~ We will cease providing any services to APX after December 31, 2010. APX accounted for ~~35.2%~~approximately 283,000 of our Wholesale monitored sites and ~~25.2%, or~~ $10.18 million, of Wholesale RMR at March 31, 2009. Wholesale monitoring revenue and cost of monitoring revenue have declined as a result of this arrangement, although other revenue has increased.

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September 30, 2009 and $9.7 million and $3.9 million of Wholesale segment revenue during the nine and three month periods ended September 30, 2009, respectively. Although we expect a decline in Wholesale monitoring revenue as a result of this arrangement, we do not expect that our quarterly operating income and net cash flows will decrease materially through December 31, 2010 because the revenue from the monthly service fee under the arrangement is expected to be at significantly higher margins since the Facility costs (including Facility personnel costs) will no longer be included in our results of operations.

Adjusted EBITDA

Adjusted EBITDA, which is a non-GAAP measure, is used by management and reviewed by the Board of Directors in evaluating segment performance and determining how to allocate resources across segments for investments in customer acquisition activities, capital expenditures and spending in general. We believe it is also utilized by the investor community that follows the security monitoring industry. Adjusted EBITDA is useful because it allows investors and management to evaluate and compare operating results from period to period in a meaningful and consistent manner in addition to standard GAAP financial measures. Specifically, Adjusted EBITDA allows management to evaluate segment results of operations, including operating performance of monitoring and service activities, effects of investments in creating new customer relationships, and sales and installation of security systems, without the effects of non-cash amortization and depreciation. This information should not be considered as an alternative to any measure of performance as promulgated under GAAP, such as loss before income taxes or cash flow from operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our ~~consolidated~~ consolidated financial performance. Our ~~calculation~~ calculation of Adjusted EBITDA may be different from the calculation used by ~~other~~ other companies and comparability may be limited. Adjusted EBITDA by segment for the ~~nine~~ ~~and~~ three months ended ~~September~~March 3031, ~~2009~~2010 and ~~2008~~2009 was as follows (in thousands):

For the nine months ended September 30,

For the three months ended September 30,

For the three months ended March 31,

2009

2008

2009

2008

2010

2009

Retail

7023,~~460~~336

6421,~~895~~832

~~24,881~~

~~21,574~~

Wholesale

92,~~925~~682

63,~~496~~265

~~3,712~~

~~2,555~~

Multifamily

103,~~565~~265

93,~~617~~947

~~3,277~~

~~2,961~~

Retail Adjusted EBITDA increased $51.65 million for the ~~nine~~three months ~~ended~~ ~~September~~ended March 3031, ~~2009~~2010, compared to the ~~nine~~three months ended ~~September~~March 3031, ~~2008~~2009 due to ~~improvements~~a indecrease ~~monitoring and service gross margin and lower investment~~ in ~~creating new customers, partially offset by higher~~ general and administrative costs~~. Retail~~ ~~Adjusted EBITDA~~partially ~~increased~~offset by ~~$3.3 million for the three months ended September 30,~~ ~~2009~~a ~~compared~~decline ~~to the three months ended September 30, 2008, due to lower investment~~ in ~~creating~~monitoring ~~customers~~ and ~~lower~~related ~~general~~services ~~and~~gross ~~administrative costs~~margin. Wholesale Adjusted EBITDA ~~increased~~ ~~$3.4~~decreased ~~million and~~ $10.16 million for the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009,~~ ~~respectively~~2010, compared to the ~~nine and~~ three months ended ~~September~~March 3031, ~~2008~~ 2009 primarily due to ~~labor~~a ~~efficiencies~~decrease ~~achieved~~in ~~through~~monitoring ~~the~~and ~~integration of~~related ~~the~~services ~~billing~~gross ~~and~~margin ~~monitoring~~partially ~~systems,~~offset ~~combined~~by ~~with~~an ~~higher~~increase in other revenue ~~from~~for ~~this~~the ~~segment’s~~APX ~~largest customers~~agreement. Multifamily ~~Adjusted~~ Adjusted EBITDA ~~increased~~decreased $0.97 million ~~and $0.3 million~~ for the ~~nine and~~ three months ended ~~September~~March 3031, ~~2009~~2010, ~~respectively,~~ compared to the ~~nine and~~ three months ended ~~September~~March 3031, ~~2008. Decreases~~2009, inprimarily ~~selling~~due ~~and~~to ~~general and administrative costs offset~~ a ~~decline~~decrease in ~~Multifamily~~ monitoring and ~~service~~related services revenue.

The following table provides a reconciliation of loss before income taxes to Adjusted EBITDA by segment (in thousands):

	For the nine months ended September 30,
	For the three months ended March 31,
	2009			2008			2009		2008		2009		2008
	2010			2009			2010		2009		2010		2009
	Retail						Wholesale				Multifamily
(Loss) Income before income taxes	$	(17,205	)	$	(46,456	)	$	6,218	$	474	$	6,170	$	3,025
(Loss) income before income taxes	$	(7,666	)	$	(7,155	)	$	1,628	$	2,020	$	2,001	$	2,512
Plus:
Interest expense, net	3311,~~791~~868			3611,~~109~~098			—		3—		144		125
Amortization and depreciation expense	319,~~332~~323			3910,~~546~~280			31,~~605~~054		51,~~913~~201		~~2,592~~741		~~4,606~~868
Amortization of deferred costs in excess of amortization of deferred revenue	216,~~437~~747			217,~~316~~289			—		—		~~1,771~~519		~~1,499~~544
Stock based compensation expense	~~424~~192			~~1,090~~314			—		—		—		—
Other costs	~~681~~2,872			~~579~~6			~~102~~—		~~106~~44		18—		—18
Loss on retirement of debt	—			12,788			—		—		—		—
Adjusted EBITDA	$	23,336		$	21,832		$	2,682	$	3,265	$	3,265	$	3,947
Impairment of trade name	—			—			—		—		—		475
Less:
Other income	—			(77		)	—		—		—		—
Adjusted EBITDA	$	70,460		$	64,895		$	9,925	$	6,496	$	10,565	$	9,617

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	For the three months ended September 30,
	2009			2008			2009		2008		2009		2008
	Retail						Wholesale				Multifamily
(Loss) Income before income taxes	$	(4,226	)	$	(12,038	)	$	2,511	$	521	$	1,853	$	423
Plus:
Interest expense, net	11,512			12,037			—		3		4		4
Amortization and depreciation expense	10,520			12,968			1,201		1,925		859		1,538
Amortization of deferred costs in excess of amortization of deferred revenue	6,984			7,994			—		—		561		521
Stock based compensation expense	71			376			—		—		—		—
Other costs	20			268			—		106		—		—
Impairment of trade name	—			—			—		—		—		475
Less:
Other income	—			(31		)	—		—		—		—
Adjusted EBITDA	$	24,881		$	21,574		$	3,712	$	2,555	$	3,277	$	2,961

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2008~~2009 includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial results. There have been no material changes to the critical accounting policies that impacted our ~~reported~~ reported amounts of assets, liabilities, revenue or expenses during the first ~~nine~~ three months of ~~2009~~2010.

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Revenue and Expense Recognition

Revenue is recognized when security services are provided. System installation revenue, sales revenue on equipment upgrades and direct and incremental costs of installations and sales are deferred for residential customers with monitoring service contracts. For commercial customers and our national account customers, revenue recognition is dependent upon each specific customer contract. In instances when we pass title to a system, we recognize the associated revenue and costs related to the sale of the equipment in the period that title passes regardless of whether the sale is accompanied by a service agreement. In cases where we retain title to the system, we defer and amortize revenue and direct costs.

Deferred system and upgrade installation revenue are recognized over the estimated life of the customer utilizing an accelerated method for our Retail customers. We amortize deferred revenue from customer acquisitions related to our Retail customers over a fifteen-year period on an accelerated basis. The associated deferred customer acquisition costs are amortized, annually and in total, over a fifteen-year period on an accelerated basis in amounts that are equal to the amount of revenue amortized, annually and in total, over the fifteen-year period. The deferred customer acquisition costs in excess of the deferred customer acquisition revenue are amortized over the initial term of the contract.

We amortize deferred customer acquisition costs and revenue related to our Retail customers using an accelerated basis because we believe this method best approximates the results that would be obtained if we accounted for these deferred costs and revenue on a specific contract basis utilizing a straight-line amortization method with write-off upon customer termination. We do not track deferred customer acquisition costs and revenue on a contract by contract basis in our Retail segment, and as a result, we are not able to write-off the remaining balance of a specific contract when the customer relationship terminates. Deferred customer acquisition costs and revenue are accounted for using pools, with separate pools based on the month and year of acquisition.

We periodically perform a lifing study with the assistance of a third-party appraisal firm to estimate the average expected life and attrition pattern of our customers. The lifing study is based on historical customer terminations. The results of our lifing studies indicate that our customer pools can expect a declining revenue stream. We evaluate the differing rates of declining revenue streams for each customer pool and select an amortization rate that closely matches the respective decline curves. Such analysis is used to establish the amortization rates of our customer account pools in order to reflect the pattern of future benefit.

Given that the amortization lives and methods are developed using historical attrition patterns and consider actual customer termination experience, we believe such amortization lives and methods approximate the results of amortizing on a specific contract basis with write-off upon termination.

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For our Multifamily segment, we track the deferred revenues on a contract by contract basis which are recognized over the estimated life of the customer utilizing a straight-line method. The deferred customer acquisition costs in excess of the deferred customer acquisition revenues are amortized over the initial term of the contract. We write off the unamortized portion of the Multifamily deferred customer acquisition revenues and costs when the customer relationship terminates.

The tables below reflect the impact of our accounting policy on the respective line items of the Statement of Operations for the ~~nine and~~ three months ended ~~September~~ March 3031, ~~2009~~2010 and ~~2008~~2009. The “Total Amount Incurred” line represents the current amount of billings that were made and the current costs that were incurred for the period. We then subtract the deferral amount and add back the amortization of previous deferral amounts to determine the amount we report in the Statement of Operations (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

2009

2008

2010

2009

Revenue- other

Cost of revenue-other

Selling Expense

Revenue- other

Cost of revenue-other

Selling Expense

Retail segment:

Total amount incurred

3110,~~869~~237

3512,~~785~~223

3210,~~141~~003

3910,~~447~~549

4811,~~909~~881

4010,~~070~~705

Amount deferred

(154,~~117~~206

)

(216,~~284~~664

)

(82,~~440~~340

)

(225,~~161~~231

)

(327,~~504~~187

)

(142,~~117~~718

)

Amount amortized

103,~~913~~753

196,~~516~~565

123,~~834~~935

93,~~753~~632

176,~~901~~514

134,~~168~~407

Amount included in Statement of Operations

279,~~665~~784

3412,~~017~~124

3611,~~535~~598

278,~~039~~950

3411,~~306~~208

3912,~~121~~394

Wholesale segment:

Total amount incurred (a)

~~515~~879

—

~~1,320~~520

~~646~~184

—

~~1,800~~457

Multifamily segment:

Total amount incurred

~~783~~168

~~2,030~~217

~~597~~120

~~305~~304

31,~~138~~152

~~1,423~~269

Amount deferred

~~(10~~—

)

(~~1,335~~76

)

(~~191~~19

)

(906

)

(~~2,757~~843

)

(~~345~~114

)

Amount amortized

~~108~~34

~~1,700~~496

~~179~~57

~~114~~37

~~1,479~~524

~~134~~57

Amount included in Statement of Operations

~~881~~202

~~2,395~~637

~~585~~158

~~329~~335

~~1,860~~833

1,212

Total company:

Total amount incurred

3311,~~167~~284

3712,~~815~~440

3410,~~058~~643

4011,~~398~~037

5213,~~047~~033

4311,~~293~~431

Amount deferred

(154,~~127~~206

)

(226,~~619~~740

)

(82,~~631~~359

)

(225,~~251~~237

)

(358,~~261~~030

)

(142,~~462~~832

)

Amount amortized

113,~~021~~787

217,~~216~~061

133,~~013~~992

93,~~867~~669

197,~~380~~038

134,~~302~~464

Amount reported in Statement of Operations

2910,~~061~~865

3612,~~412~~761

3812,~~440~~276

289,~~014~~469

3612,~~166~~041

4213,~~133~~063

	Three Months Ended September 30,
	2009									2008
	Revenue- other			Cost of revenue-other			Selling Expense			Revenue- other			Cost of revenue-other			Selling Expense
Retail segment:
Total amount incurred	$	10,865		$	12,106		$	11,251		$	13,315		$	15,744		$	13,855
Amount deferred	(4,884		)	(7,078		)	(3,005		)	(7,268		)	(10,257		)	(4,464		)
Amount amortized	3,774			6,609			4,149			3,499			7,048			4,445
Amount included in Statement of Operations	9,755			11,637			12,395			9,546			12,535			13,836
Wholesale segment:
Total amount incurred (a)	187			—			304			184			—			466
Multifamily segment:
Total amount incurred	153			417			186			94			1,328			431
Amount deferred	(3		)	(201		)	(38		)	—			(1,182		)	(134		)
Amount amortized	35			540			56			40			513			48
Amount included in Statement of Operations	185			756			204			134			659			345
Total company:
Total amount incurred	11,205			12,523			11,741			13,593			17,072			14,752
Amount deferred	(4,887		)	(7,279		)	(3,043		)	(7,268		)	(11,439		)	(4,598		)
Amount amortized	3,809			7,149			4,205			3,539			7,561			4,493
Amount reported in Statement of Operations	$	10,127		$	12,393		$	12,903		$	9,864		$	13,194		$	14,647

(a) The wholesale segment revenue-other represents interest and fee income generated from our dealer loan program.

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In(a) The ~~addition~~wholesale ~~to the amounts reflected in the table above relating to our costs incurred to create new accounts, our Retail~~ segment ~~also capitalized purchases of rental equipment~~revenue-other inrepresents ~~the~~interest ~~amount of $1.7 million~~ and ~~$4.1~~fee ~~million~~income ~~for~~generated ~~the~~from ~~nine~~our ~~months~~dealer ~~ended~~loan ~~September 30, 2009~~program and ~~2008~~, ~~respectively, and $0.6 million and $1.4 million for the three~~ months ended September 30, 2009 and 2008, respectively. We purchased customer accounts valued at $1.0 million and $0.3 million during the nine and three months ended September 30, 2009, respectively. We purchased customer accounts valued at $0.7 million and $0.6 million during the nine and three months ended September 30, 2008, respectively. Retail costs incurred during the nine and three months ended September 30, 2009 decreased as a result of lower sales volumes due in ~~part to fewer opportunities to sell security systems in the current economic conditions. In addition~~2010, ~~Retail~~income ~~costs~~recorded ~~incurred~~under ~~during~~ the ~~nine~~APX ~~months ended September 30, 2008 include expenses related to our analog to digital technology upgrade~~Agreement.

~~Valuation~~In addition to the amounts reflected in the table above relating to our costs incurred to create new accounts, our Retail segment also capitalized purchases of ~~Goodwill~~rental equipment in the amount of $0.5 million and ~~Other~~$0.6 ~~Indefinite-Lived~~million ~~Intangible~~for ~~Assets~~the three months ended March 31, 2010 and 2009, respectively. We purchased customer accounts valued at $25 thousand during the three months ended March 31, 2010. We did not purchase any customer accounts during the three months ended March 31, 2009.

We evaluate goodwill for impairment annually as of the beginning of the third quarter and any time an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value in accordance with Accounting Standards Codification 350, Intangibles-Goodwill and Other.

Goodwill is recorded in the Retail, Wholesale and Multifamily operating segments, which are also our reporting units for purposes of evaluating our recorded goodwill for impairment. Goodwill was $41.6 million as of September 30, 2009 and December 31, 2008. We completed our annual impairment testing during the third quarter of 2009 and determined that goodwill was not impaired.

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered potentially impaired and we must complete the second step of the goodwill impairment test. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, we would allocate the fair value to all of the assets and liabilities of the reporting unit, including internally developed intangible assets with a zero carrying value, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would recognize an impairment charge for the difference.

The fair value of our reporting units is determined using a combined income and market approach. The income approach uses a reporting unit’s projection of estimated cash flows discounted using a weighted-average cost of capital analysis that reflects current market conditions. The market approach may involve use of the guideline transaction method, the guideline company method, or both. The guideline transaction method makes use of available transaction price data of companies engaged in the same or a similar line of business as the respective reporting unit. The guideline company method uses market multiples of publicly traded companies with operating characteristics similar to the respective reporting unit. We consider value indications from both the income approach and market approach in estimating the fair value of each reporting unit.

The income approach was given significant weight for all three reporting units because management considers this method a reasonable indicator of fair value. The market transaction method was also given significant weight for all three reporting units because transactions in the industry are commonly valued as a multiple of RMR. Based on management’s experience along with a review of recent industry transactions, management concluded the weighting of the market transaction method was appropriate. The market guideline company method was given a small weight for Retail because, although the guideline companies are generally comparable, they are not similar enough to warrant a significant weight in estimating fair value. The market guideline company method was given no weight for the Wholesale and Multifamily reporting units because management determined that there were no sufficiently comparable companies or there was a lack of market data for businesses engaged in these specialized monitored security operations.

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The weighting for each of the methods used in connection with our annual goodwill impairment testing for 2009 was the same as that used in the prior year and is detailed in the table below:

	Income Approach		Market - Guideline		Market - Transaction
Retail	60	%	10	%	30	%
Wholesale	50	%	0	%	50	%
Multifamily	50	%	0	%	50	%

Management judgment is a significant factor in determining whether an indicator of impairment has occurred. Management relies on estimates in determining the fair value of each reporting unit, which include the following critical quantitative factors:

Anticipated future cash flows and terminal value for each reporting unit. The income approach to determining fair value relies on the timing and estimates of future cash flows, including an estimate of terminal value. The projections use management’s estimates of economic and market conditions over the projected period including growth rates in revenue, customer attrition and estimates of expected changes in operating margins. Our projections of future cash flows are subject to change as actual results are achieved that differ from those anticipated. Because management frequently updates its projections, we would expect to identify on a timely basis any significant differences between actual results and recent estimates. We are not expecting actual results to vary significantly from estimates.

Selection of an appropriate discount rate. The income approach requires the selection of an appropriate discount rate, which is based on a weighted average cost of capital analysis. The discount rate is affected by changes in short-term interest rates and long-term yield as well as variances in the typical capital structure of marketplace participants in the security monitoring industry. The discount rate is determined based on assumptions that would be used by marketplace participants, and for that reason, the capital structure of selected marketplace participants was used in the weighted average cost of capital analysis. Given the current volatile economic conditions, it is possible that the discount rate will fluctuate in the near term.

Identification of comparable transactions within the industry. The market approach relies on a calculation that uses a multiple of RMR based on actual transactions involving industry participants. RMR multiples are a commonly used valuation metric in the security monitoring industry. The market approach estimates fair value by applying RMR multiples to the reporting unit’s RMR balance as of the testing date. Although RMR multiples are subject to change, there has not been a noticeable deterioration in transaction values compared to prior years.

We also performed a sensitivity analysis on our estimated fair value determined using the income and market approach. A key assumption for the income approach is the discount rate. We selected a weighted average cost of capital of 12.0% for the Retail and Wholesale reporting units and 11.3% for the Multifamily reporting unit. We determined, assuming all other valuation assumptions remained constant, that an increase in the weighted average cost of capital of over 500 basis points for the Retail reporting unit, 300 basis points for the Wholesale reporting unit and 270 basis points for the Multifamily reporting unit would be needed before the estimate of fair value using the income approach would be less than the carrying value.

Our principal indefinite-lived intangible assets are trade names which had a book value of $27.7 million as of September 30, 2009 and December 31, 2008. Trade name values were based on the identifiable revenue associated with each segment. Fair value is determined based on the income approach using the relief from royalty method, which requires assumptions related to projected revenues and assumptions regarding the royalty rate and discount rate.

New accounting standards

See Note 12 of the Condensed Consolidated Financial Statements for new accounting standards, including the expected dates of adoption and estimated effects on our Condensed Consolidated Financial Statements, included in Part I of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

Operating Results

~~Nine~~Three Months Ended ~~September~~March 3031, ~~2009~~2010 Compared to ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2008~~2009

Protection One Consolidated

Revenue decreased ~~slightly~~$4.7 million, ~~less~~or ~~than 0~~5.20%, to $~~277~~88.7 3 million in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010 compared to $~~278~~93.0 million in the first ~~nine~~quarter ~~months~~ of ~~2008~~ 2009. Monitoring and related services revenue decreased $16.41 million, to $~~248~~77.65 million, primarily due to athe ~~decline~~impact of inthe ~~Retail~~APX ~~and~~agreement ~~Multifamily~~on Wholesale monitoring and related services revenue, as ~~partially~~well ~~offset~~as bya ~~growth~~decline in ~~the~~Retail ~~Wholesale~~and ~~segment~~Multifamily monitoring and services revenue. Installation and other revenue increased $1.14 million, or 314.7%, to $2910.19 million in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010 compared to $289.05 million in the first ~~nine~~quarter ~~months~~ of ~~2008~~2009 primarily due to an increase in ~~amortization~~ sales of ~~previously~~equipment ~~deferred~~to ~~customer~~commercial ~~acquisition~~customers ~~revenue. Cost of monitoring~~ and ~~related services revenue decreased $6.9 million, or 8.1%, to $76.9 million in~~ the ~~first~~APX ~~nine months of 2009 compared~~agreement.

Cost of revenue decreased $1.7 million, or 4.4%, to $36.1 million in the first quarter of 2010 compared to $37.8 million in the first quarter of 2009. The decrease is primarily due to the decrease in Wholesale monitoring costs related to the APX agreement partially offset by an increase in system equipment sales to commercial customers.

Amortization and depreciation decreased $1.2 million, or 10.0%, to $11.1 million in the first quarter of 2010 compared to $12.3 million in the first quarter of 2009 due to use of a declining balance method of amortization for our amortizable intangible assets.

Net interest expense increased $0.8 million, or 6.9%, to $11.9 million for the first quarter of 2010 compared to $11.1 million in the first quarter of 2009 primarily due to amortization of our debt discount on the New and Extending Term Loans issued in the fourth quarter of 2009.

Net loss of $4.8 million, or loss per diluted share of common stock of $0.19, was recorded in the first quarter of 2010 compared to a net loss of $2.8 million, or loss per diluted share of common stock of $0.11, in the first quarter of 2009 due primarily to the decline in revenue and cost of revenue previously mentioned. Selling expense decreased by $0.8 million, or 6.0%, to $12.3 million in the first quarter of 2010 compared to $13.1 million in the first quarter of 2009, due to a reduction in costs associated with an annual sales reward program and a reduction in amortization of previously deferred sales expense. General and administrative costs reflected a slight decrease of $0.3 million, or 1.7%, to $21.0 million in the first quarter of 2010 compared to $21.3 million in the first quarter of 2009

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to $83.8 million in the first nine months of 2008. The decrease is primarily due to the centralization of Retail customer care and field technical support functions and labor efficiencies achieved through the integration of Wholesale’s billing and monitoring systems. Selling expense decreased by $3.7 million, or 8.8%, to $38.4 million in the first nine months of 2009 compared to $42.1 million in the first nine months of 2008, due to a reduction in costs associated with our marketing programs and a reduction in sales headcount. General and administrative costs decreased slightly, less than one half of one percent, in the first nine months of 2009 compared the first nine months of 2008.

Amortization and depreciation decreased $12.6 million, or 25.0%, to $37.5 million in the first nine months of 2009 compared to $50.1 million in the first nine months of 2008. The decrease is primarily a result of changes in estimates based on our lifing studies conducted in the fourth quarter of 2008 as well as certain intangible assets becoming fully amortized. See Note 3 to our Condensed Consolidated Financial Statements, Goodwill and Intangible Assets, for additional information related to the lifing study.

Net interest expense decreased $2.3 million, or 6.4%, to $33.8 million for the first nine months of 2009 compared to $36.1 million in the first nine months of 2008 due to lower debt discount amortization as a result of refinancing our Senior Subordinated Notes in March 2008.

Retail Segment

The table below presents operating results for our Retail segment for the periods presented. Next to each period’s results of operations, we provide the relevant percentage of total revenue so you can make comparisons about the relative changes in revenue and expenses (dollars in thousands):

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009				2008
	2010				2009
Revenue
Monitoring and related services	$	~~189~~62,~~234~~017	8786.24	%	$	~~191~~63,~~262~~717	87.67	%
Installation and other	279,~~665~~784		1213.86		278,~~039~~950		12.43
Total revenue	~~216~~71,~~899~~801		100.0		~~218~~72,~~301~~667		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	5016,~~823~~836		23.4		5717,~~027~~203		2623.17
Installation and other	3412,~~017~~124		1516.79		3411,~~306~~208		15.74
Total cost of revenue (exclusive of amortization and depreciation shown below)	8428,~~840~~960		3940.13		9128,~~333~~411		4139.81
Operating Expenses
Selling expense	3611,~~535~~598		16.82		3912,~~121~~394		17.91
General and administrative expense	4717,~~606~~718		2224.06		4517,~~938~~638		2124.13
Amortization of intangibles and depreciation expense	319,~~332~~323		1413.40		3910,~~546~~280		1814.1
Total operating expenses	~~115~~38,~~473~~639		53.28		~~124~~40,~~605~~312		5755.15
Operating income	$	164,~~586~~202	75.79	%	$	23,~~363~~944	15.14	%

The change in our Retail segment customer base for the period is shown below.

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009		2008
	2010		2009
Beginning Balance, January 1	~~574~~540,~~001~~968		~~602~~574,~~519~~001
Customer additions	288,~~915~~551		399,~~785~~775
Customer losses	(5515,~~625~~704	)	(6018,~~336~~781	)
Other adjustments	~~1,153~~228		~~325~~(219	)
Ending Balance, September 30	548,444		582,293
Ending Balance, March 31	534,043		564,776

Revenue decreased $10.49 million, or 01.62%, to $~~216~~71.98 million in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010 compared to $~~218~~72.37 million in the first ~~nine months~~quarter of ~~2008~~ 2009. Monitoring and related ~~services~~ services revenue ~~was~~decreased $21.07 million ~~lower~~ in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010 ~~than the~~compared to the first ~~nine~~quarter ~~months~~ of ~~2008~~2009 ~~primarily~~due ~~resulting~~to ~~from~~ lower ~~service~~monitoring ~~call volume~~revenue and ~~slightly~~the related decline in Retail RMR as well as lower ~~monitoring~~service ~~revenue~~call volume. See “Summary of Important Matters—Recurring Monthly Revenue,” above for a roll-forward of RMR and additional information regarding the change in recurring monthly revenue in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010. Installation and other revenue increased $0.68 million in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010 compared to the first ~~nine~~quarter ~~months~~ of ~~2008~~ ~~due~~2009 due to an increase in revenue from sales of $1equipment to commercial customers. Revenue consists primarily of (1) contractual revenue derived from providing monitoring and maintenance service, (2) revenue from ~~million~~our ininstallations ~~amortization~~of new alarm systems, consisting primarily of ~~previously~~sales ~~deferred~~of ~~customer~~burglar ~~acquisition~~alarm, ~~revenue~~CCTV, ~~partially~~fire ~~offset~~alarm byand acard ~~decrease~~access ofcontrol ~~$0.6~~systems ~~million~~to incommercial ~~security~~customers ~~system~~and ~~outright~~(3) amortization ~~equipment~~of ~~sales~~previously todeferred ~~commercial~~revenue.

38Cost of revenue increased $0.6 million, or 1.9%, to $29.0 million in the first quarter of 2010 compared to $28.4 million in the first quarter of 2009. Cost of monitoring and related services decreased $0.3 million in the first quarter of 2010 compared to the first quarter of 2009 due to the reduction in monitoring and related revenues. Cost of installation and other revenue increased $0.9 million, or 8.2%, in the first quarter of 2010 compared to the first quarter of 2009 due to an increase in system equipment sales to commercial customers. Cost of revenue includes the costs of monitoring, billing, customer service, field operations, and equipment and labor charges to install alarm systems, CCTV, fire alarms and card access control systems sold to our commercial customers, as well as amortization of previously deferred customer acquisition costs.

Operating expense decreased $1.7 million, or 4.2%, to $38.6 million in the first quarter of 2010 compared to $40.3 million in the first quarter of 2009. Amortization and depreciation decreased $1.0 million in the first quarter of 2010 compared to the first quarter of 2009 due to use of a declining balance method of amortization for amortizable intangible assets. Selling expense decreased $0.8 million in the first quarter of 2010 compared to the first quarter of 2009as a result of a reduction in costs associated with an annual sales reward program and a reduction in amortization of previously deferred sales expense. General and administrative expenses were consistent.

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customers. Revenue consists primarily of (1) contractual revenue derived from providing monitoring and maintenance service, (2) revenue from our installations of new alarm systems, consisting primarily of sales of burglar alarm, CCTV, fire alarm and card access control systems to commercial customers and (3) amortization of previously deferred revenue.

Cost of revenue decreased $6.5 million, or 7.1%, to $84.8 million in the first nine months of 2009 compared to $91.3 million in the first nine months of 2008. Cost of monitoring and related services decreased $6.2 million in the first nine months of 2009 compared to the first nine months of 2008 due to centralization of customer care and field technical support functions. Cost of revenue includes the costs of monitoring, billing, customer service, field operations, and equipment and labor charges to install alarm systems, CCTV, fire alarms and card access control systems sold to our commercial customers, as well as amortization of previously deferred customer acquisition costs.

Operating expense decreased $9.1 million, or 7.3%, to $115.5 million in the first nine months of 2009 compared to $124.6 million in the first nine months of 2008. Increases in general and administrative expenses, particularly legal fees and bad debt expense, were offset by a decrease in amortization of customer accounts resulting partially from changes in estimates based on our lifing study in 2008 as well as a reduction in costs associated with our marketing programs and a reduction in sales headcount.

Wholesale Segment

The following table provides information for comparison of the Wholesale segment operating results for the periods presented. Next to each period’s results of operations, we provide the relevant percentage of total revenue so that you can make comparisons about the relative changes in revenue and expenses (dollars in thousands):

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009				2008
	2010				2009
Revenue
Monitoring and related services	$	389,~~491~~270	9891.73	%	$	3512,~~761~~579	98.26	%
Other	~~515~~879		18.37		~~646~~184		1.84
Total revenue	3910,~~006~~149		100.0		3612,~~407~~763		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	204,~~724~~807		5347.14		206,~~928~~769		5753.51
Operating Expenses
Selling expense	~~1,320~~520		35.41		~~1,800~~457		53.06
General and administrative expense	72,~~139~~140		1821.31		72,~~289~~316		2018.01
Amortization of intangibles and depreciation expense	31,~~605~~054		910.24		51,~~913~~201		169.24
Total operating expenses	123,~~064~~714		3036.96		153,~~002~~974		4131.21
Operating income (loss)	$	6,218	16.0	%	$	477	1.3	%
Operating income	$	1,628	16.0	%	$	2,020	15.8	%

The change in our Wholesale segment monitored site base for the period is shown below.

	Nine Months Ended September 30,
	Three Months Ended March 31,
	2009		2008
	2010		2009
Beginning Balance, January 1	~~991~~677,~~014~~286		~~865~~991,~~163~~014
Monitored site additions	~~241~~32,~~105~~338		~~301~~45,~~964~~916
Monitored site losses	(~~177~~29,~~884~~613	)	(~~162~~49,~~853~~249	)
Other adjustments	67—		~~673~~67
Ending Balance, September 30	1,054,302		1,004,947
Ending Balance, March 31	680,011		987,748

For a roll-forward of Wholesale segment RMR, please see the segment table in the “Summary of Important Matters—Recurring Monthly Revenue,” above. ~~Pursuant~~Wholesale toending ~~an agreement~~RMR ~~with APX~~at March 31, ~~effective~~2010 ~~November 1,~~was ~~2009,~~significantly ~~APX~~lower ~~assumed~~than ~~operational control~~as of ~~our~~March 31, ~~wholesale~~2009 ~~monitoring~~due to ~~center~~the inimpact ~~South~~of ~~St.~~the ~~Paul,~~APX ~~Minnesota~~agreement. See “Summary of Important Matters-APX Agreement”, above, for additional information related to the agreement.

Revenue ~~increased~~decreased $2.6 million, or 720.15%, to $3910.02 million in the first ~~nine~~quarter ~~months~~ of ~~2009~~2010 compared to $3612.48 million in the first ~~nine months~~quarter of 2009 ~~2008~~primarily due to the ~~addition~~APX agreement. We recorded $0.8 million of ~~monitored~~other ~~sites~~revenue ~~from~~as ~~our~~a ~~largest~~result of the APX ~~wholesale~~agreement, ~~dealers~~which was offset by a decrease in monitoring and related services revenue. Revenue consists primarily of contractual revenue derived from providing monitoring service, as well as interest and fee income generated from our dealer loan program.

39Cost of revenue decreased $2.0 million, or 29.0%, to $4.8 million in the first quarter of 2010 compared to $6.8 million in the first quarter of 2009 due to the APX agreement. These costs generally relate to the cost of providing monitoring service, including the costs of monitoring and dealer care. Cost of monitoring and related services revenue as a percent of the related revenue improved to 51.9% for the first quarter of 2010 compared to 53.1% in the first quarter of 2009 due to the APX agreement.

~~Table~~Operating expense decreased $0.3 million or 6.5%, to $3.7 million in the first quarter of ~~Contents~~2010 compared to $4.0 million in the first quarter of 2009 but increased as a percentage of revenue for the first quarter of 2010 to 36.6% compared to 31.1% for the first quarter of 2009 due to lower revenue discussed above.

Cost of revenue decreased slightly, less than one percent, in the first nine months of 2009 compared to the first nine months of 2008. These costs generally relate to the cost of providing monitoring service, including the costs of monitoring and dealer care. Cost of monitoring and related services revenue as a percent of the related revenue improved to 53.8% for the first nine months of 2009 compared to 58.5% in the first nine months of 2008 due to a more efficient operating structure from consolidating our monitoring centers onto a common monitoring and billing platform.

Operating expense decreased $2.9 million, or 19.6%, to $12.1 million in the first nine months of 2009 compared to $15.0 million in the first nine months of 2008 and also decreased as a percentage of revenue for the first nine months of 2009 to 30.9% compared to 41.2% for the first nine months of 2008. The improvement is primarily a result of a decrease in amortization and depreciation expense as certain intangible assets became fully amortized as well as the impact of changes in estimates based on our lifing study in 2008.

Multifamily Segment

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

	Nine Months Ended September 30,
	2009				2008
Revenue
Monitoring and related services	$	20,922	96.0	%	$	22,997	98.6	%
Installation and other	881		4.0		329		1.4
Total revenue	21,803		100.0		23,326		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	5,396		24.7		5,811		24.9
Installation and other	2,395		11.0		1,860		8.0
Total cost of revenue (exclusive of amortization and depreciation shown below)	7,791		35.7		7,671		32.9
Operating Expenses
Selling expense	585		2.7		1,212		5.2
General and administrative expense	4,651		21.3		6,324		27.1
Amortization of intangibles and depreciation expense	2,592		11.9		4,606		19.8
Impairment of trade name	—		—		475		2.0
Total operating expenses	7,828		35.9		12,617		54.1
Operating income	$	6,184	28.4	%	$	3,038	13.0	%

The change in our Multifamily segment monitored site base for the period is shown below.

	Nine Months Ended September 30,
	2009		2008
Beginning Balance, January 1,	240,648		277,743
Monitored site additions	8,191		7,841
Monitored site losses	(32,160	)	(30,744	)
Ending Balance, September 30,	216,679		254,840

For a roll-forward of Multifamily segment RMR, please see the segment table in the “Summary of Important Matters—Recurring Monthly Revenue,” above.

Revenue decreased $1.5 million, or 6.5%, to $21.8 million in the first nine months of 2009 compared to $23.3 million in the first nine months of 2008. This decrease is the result of the decline in our customer base and related monitoring and service revenue. The Multifamily segment monitored site losses continue to exceed monitored site additions. Losses of monitored sites were higher in the first nine months of 2009 than the first nine months of 2008 due to the termination of services by several large customers due to financial hardship. Installation and other revenue increased in the first nine months of 2009 compared to the first nine months of 2008 due to an increase in security system outright equipment sales. Revenue consists primarily of contractual revenue derived from providing monitoring and maintenance service, the installation of alarm systems and amortization of previously deferred customer acquisition revenue.

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Cost of revenue increased $0.1 million, or 1.6%, to $7.8 million in the first nine months of 2009 compared to $7.7 million in the first nine months of 2008, which is primarily attributable to an increase in installation costs resulting from higher amortization of previously deferred costs as well as the increase in security system outright equipment sales. Monitoring and related services cost of revenue decreased by $0.4 million in the first nine months of 2009 compared to the first nine months of 2008 due to the decline in the Multifamily customer base. Cost of revenue includes monitoring, billing, customer service and field operations related to providing our monitoring services, as well as the cost to install access control systems and amortization of previously deferred costs.

	Three Months Ended March 31,
	2010				2009
Revenue
Monitoring and related services	$	6,163	96.8	%	$	7,237	95.6	%
Installation and other	202		3.2		335		4.4
Total revenue	6,365		100.0		7,572		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	1,713		26.9		1,774		23.4
Installation and other	637		10.0		833		11.0
Total cost of revenue (exclusive of amortization and depreciation shown below)	2,350		36.9		2,607		34.4
Operating Expenses
Selling expense	158		2.5		212		2.8
General and administrative expense	1,111		17.5		1,369		18.1
Amortization of intangibles and depreciation expense	741		11.6		868		11.5
Total operating expenses	2,010		31.6		2,449		32.4
Operating income	$	2,005	31.5	%	$	2,516	33.2	%

Operating expenses decreased $4.8 million, or 38.0%, to $7.8 million in the first nine months of 2009 compared to $12.6 million in the first nine months of 2008. An increase in bad debt expense was more than offset by a decrease in the Multifamily segment’s share of corporate shared services, such as human resources and information technology, lower selling expense and a decrease in amortization of intangibles and depreciation expense due to the impact of changes in estimates based on our lifing study in 2008.

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

Protection One Consolidated

Revenue decreased $1.5 million, or 1.6%, to $92.6 million in the third quarter of 2009 compared to $94.1 million in the third quarter of 2008. Monitoring and related services revenue decreased $1.8 million to $82.4 million primarily due to a decline in Retail and Multifamily monitoring and services revenue, partially offset by growth in the Wholesale segment. Installation and other revenue increased $0.2 million, or 2.7%, to $10.1 million in the third quarter of 2009 compared to $9.9 million in the third quarter of 2008 primarily due to an increase in amortization of previously deferred customer acquisition revenue. Cost of monitoring and related services revenue decreased $2.1 million, or 7.4%, to $25.8 million in the third quarter of 2009 compared to $27.9 million in the third quarter of 2008. The decrease is primarily due to the centralization of Retail customer care and field technical support functions and Wholesale labor efficiencies. Selling expense decreased by $1.7 million, or 11.9%, to $12.9 million in the third quarter of 2009 compared to $14.6 million in the third quarter of 2008, due to a reduction in costs associated with our marketing programs and a reduction in sales headcount. General and administrative costs decreased $3.3 million, or 16.1%, to $17.1 million in the third quarter of 2009 compared to $20.4 million in the third quarter of 2008 due to reductions in employee compensation and benefits, non-recurring severance payments and other employment-related costs.

Amortization and depreciation decreased $3.8 million, or 23.4%, to $12.6 million in the third quarter of 2009 compared to $16.4 million in the third quarter of 2008. The decrease is primarily a result of changes in estimates based on our lifing studies conducted in the fourth quarter of 2008 as well as certain intangible assets becoming fully amortized. See Note 3 to our Condensed Consolidated Financial Statements, Goodwill and Intangible Assets, for additional information related to the lifing study.

Net interest expense decreased $0.5 million, or 4.4%, to $11.5 million for the third quarter of 2009 compared to $12.0 million in the third quarter of 2008 primarily due to a decrease in the prime rate for our Unsecured Term Loan.

Retail Segment

	Three Months Ended September 30,
	2009				2008
Revenue
Monitoring and related services	$	62,464	86.5	%	$	64,013		87.0	%
Installation and other	9,755		13.5		9,546			13.0
Total revenue	72,219		100.0		73,559			100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	16,923		23.4		18,737			25.5
Installation and other	11,637		16.1		12,535			17.0
Total cost of revenue (exclusive of amortization and depreciation shown below)	28,560		39.5		31,272			42.5
Operating Expenses
Selling expense	12,395		17.2		13,836			18.8
General and administrative expense	13,458		18.6		15,514			21.1
Amortization of intangibles and depreciation expense	10,520		14.6		12,968			17.6
Total operating expenses	36,373		50.4		42,318			57.5
Operating income (loss)	$	7,286	10.1	%	$	(31	)	0.0	%

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The change in our Retail segment customer base for the period is shown below.

	Three Months Ended September 30,
	2009		2008
Beginning Balance, July 1	556,458		590,523
Customer additions	9,583		12,871
Customer losses	(17,311	)	(21,000	)
Other adjustments	(286	)	(101	)
Ending Balance, September 30	548,444		582,293

Revenue decreased $1.4 million, or 1.8%, to $72.2 million in the third quarter of 2009 compared to $73.6 million in the third quarter of 2008. Monitoring and related services revenue decreased $1.5 million in the third quarter of 2009 compared to the third quarter of 2008 due to lower service call volume and lower monitoring revenue. See “Summary of Important Matters—Recurring Monthly Revenue,” above for a roll-forward of RMR and additional information regarding the change in recurring monthly revenue in the third quarter of 2009. Installation and other revenue increased $0.2 million in the third quarter of 2009 compared to the third quarter of 2008 due to an increase in amortization of previously deferred customer acquisition revenue. Revenue consists primarily of (1) contractual revenue derived from providing monitoring and maintenance service, (2) revenue from our installations of new alarm systems, consisting primarily of sales of burglar alarm, CCTV, fire alarm and card access control systems to commercial customers and (3) amortization of previously deferred revenue.

Cost of revenue decreased $2.7 million, or 8.7%, to $28.6 million in the third quarter of 2009 compared to $31.3 million in the third quarter of 2008. Cost of monitoring and related services decreased $1.8 million in the third quarter of 2009 compared to the third quarter of 2008 due to centralization of customer care and field technical support functions. Cost of installation and other revenue decreased $0.9 million, or 7.2%, in the third quarter of 2009 compared to the third quarter of 2008 due to decreases in amortization of previously deferred customer acquisition costs and the cost of security system outright equipment sales to commercial customers. Cost of revenue includes the costs of monitoring, billing, customer service, field operations, and equipment and labor charges to install alarm systems, CCTV, fire alarms and card access control systems sold to our commercial customers, as well as amortization of previously deferred customer acquisition costs.

Operating expense decreased $5.9 million, or 14.0%, to $36.4 million in the third quarter of 2009 compared to $42.3 million in the third quarter of 2008 due to decreases in general and administrative expense, amortization of customer accounts and selling expense. General and administrative expenses declined due to reductions in employee compensation and benefits and other employment-related costs. The decrease in amortization of customer accounts partially results from changes in estimates based on our lifing study in 2008. The decrease in selling expense results from a reduction in costs associated with our marketing programs and a reduction in sales headcount.

Wholesale Segment

	Three Months Ended September 30,
	2009				2008
Revenue
Monitoring and related services	$	13,180	98.6	%	$	12,574	98.6	%
Other	187		1.4		184		1.4
Total revenue	13,367		100.0		12,758		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	7,096		53.1		7,189		56.3
Operating Expenses
Selling expense	304		2.3		466		3.7
General and administrative expense	2,255		16.8		2,655		20.8
Amortization of intangibles and depreciation expense	1,201		9.0		1,925		15.1
Total operating expenses	3,760		28.1		5,046		39.6
Operating income	$	2,511	18.8	%	$	523	4.1	%

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The change in our Wholesale segment monitored site base for the period is shown below.

	Three Months Ended September 30,
	2009		2008
Beginning Balance, July 1	1,049,383		969,479
Monitored site additions	75,573		94,995
Monitored site losses	(70,654	)	(59,469	)
Other adjustments	—		(58	)
Ending Balance, September 30	1,054,302		1,004,947

For a roll-forward of Wholesale segment RMR, please see the segment table in the “Summary of Important Matters—Recurring Monthly Revenue,” above. Pursuant to an agreement with APX, effective November 1, 2009, APX assumed operational control of our wholesale monitoring center in South St. Paul, Minnesota. See “Summary of Important Matters-APX Agreement”, above, for additional information related to the agreement.

Revenue increased $0.6 million, or 4.8%, to $13.4 million in the third quarter of 2009 compared to $12.8 million in the third quarter of 2008 due to the addition of monitored sites from our largest wholesale dealer. Revenue consists primarily of contractual revenue derived from providing monitoring service, as well as interest and fee income generated from our dealer loan program.

Cost of revenue decreased $0.1 million, or 1.3%, to $7.1 million in the third quarter of 2009 compared to $7.2 million in the third quarter of 2008. These costs generally relate to the cost of providing monitoring service, including the costs of monitoring and dealer care. Cost of monitoring and related services revenue as a percent of the related revenue improved to 53.8% for the third quarter of 2009 compared to 57.2% in the third quarter of 2008 due to a more efficient operating structure from consolidating our monitoring centers onto a common monitoring and billing platform.

Operating expense decreased $1.3 million, or 25.5%, to $3.8 million in the third quarter of 2009 compared to $5.1 million in the third quarter of 2008 and also decreased as a percentage of revenue for the third quarter of 2009 to 28.1% compared to 39.6% for the third quarter of 2008. The improvement is primarily a result of a decrease in amortization and depreciation expense as certain intangible assets became fully amortized as well as the impact of changes in estimates based on our lifing study in 2008.

Multifamily Segment

	Three Months Ended September 30,
	2009				2008
Revenue
Monitoring and related services	$	6,789	97.3	%	$	7,605	98.3	%
Installation and other	185		2.7		134		1.7
Total revenue	6,974		100.0		7,739		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	1,856		26.6		2,022		26.1
Installation and other	756		10.8		659		8.5
Total cost of revenue (exclusive of amortization and depreciation shown below)	2,612		37.4		2,681		34.6
Operating Expenses
Selling expense	204		2.9		345		4.5
General and administrative expense	1,442		20.7		2,273		29.4
Amortization of intangibles and depreciation expense	859		12.3		1,538		19.9
Impairment of trade name	—		—		475		6.1
Total operating expenses	2,505		35.9		4,631		59.9
Operating income	$	1,857	26.7	%	$	427	5.5	%

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The change in our Multifamily segment monitored site base for the period is shown below.

	Three Months Ended September 30,
	Three Months Ended March 31,
	2009		2008
	2010		2009
Beginning Balance, July 1,	219,167		264,699
Beginning Balance, January 1,	213,025		240,648
Monitored site additions	~~3,359~~707		2,~~501~~392
Monitored site losses	(52,~~847~~960	)	(1224,~~360~~288	)
Ending Balance, September 30,	216,679		254,840
Ending Balance, March 31,	210,772		218,752

Multifamily experienced elevated site losses in 2009 arising from the termination of several large customers for financial reasons. For a roll-forward of Multifamily segment RMR, please see the segment table in the “Summary of Important Matters—Recurring Monthly Revenue,” above.

Revenue decreased $01.72 million, or 915.9%, to $76.04 million in the ~~third~~first quarter of ~~2009~~2010 compared to $7.76 million in the ~~third~~first quarter of ~~2008~~2009 due to a decline in monitoring and service revenue from a declining customer base. This revenue consists primarily of contractual revenue derived from providing monitoring and maintenance service, the installation of alarm systems and amortization of previously deferred customer acquisition revenue.

Cost of revenue decreased $0.13 million, or 29.69%, to $2.63 million in the ~~third~~first quarter of ~~2009~~2010 compared to $2.76 million in the ~~third~~first quarter of 2009 ~~2008~~primarily due to the decline in monitoring and related services revenue. Cost of revenue includes monitoring, billing, customer service and field operations related to providing our monitoring services, as well as the cost to install access control systems and amortization of previously deferred costs.

Operating expenses decreased $20.14 million, or 4517.9%, to $2.50 million in the ~~third~~first quarter of ~~2009~~2010 compared to $42.64 million in the ~~third~~first quarter of ~~2008~~2009. This decrease is primarily attributable to adecreases ~~decrease~~ in ~~the~~bad ~~Multifamily~~debt ~~segment’s~~expense ~~share of corporate shared services, such as human resources~~ and ~~information technology, and a $0.5 million impairment charge in the third quarter of 2008. In addition,~~ amortization ~~of intangibles and depreciation~~ expense ~~decreased 44~~.~~1% to $0.9 million in the third quarter of 2009 from $1.5 million in the third quarter of 2008 due to the impact of changes in estimates based on our lifing study in 2008.~~

Liquidity and Capital Resources

We expect to generate cash flow in excess of that required for operations and interest and principal payments required under all of our debt obligations during the twelve months following the date of the financial statements included in this report.

InCredit response to the recent economic conditions, we have assessed the liquidity of our investments. Our cash and cash equivalents are deposited in mutual funds invested primarily in U.S. Treasury securities. Although the mutual funds are permitted seven days to satisfy withdrawal requests, in our experience, the financial institutions have never exercised the provision. We believe, based on information available to management at this time, that there is minimal risk regarding liquidity of our approximately $76.6 million cash and cash equivalents as of September 30, 2009.Risk

WeOur ~~have~~cash also assessed our credit exposure to various other factors including (1) our ability to draw funds under our revolving credit facility; (2) counterparty default risk associated with our interest rate cap and ~~swaps;~~cash ~~(3) our~~equivalents ~~need~~are todeposited ~~enter~~in ~~the~~a ~~capital~~mutual ~~markets;~~fund ~~and (4) exposure~~invested ~~related~~exclusively toin ~~our~~U.S. ~~existing~~Treasury ~~insurance policies~~securities. ~~Lehman~~Although ~~Commercial Paper, Inc. (“Lehman”) is a party to our revolving credit facility with a commitment to fund 10% of our borrowings under~~ the ~~facility. Although~~mutual ~~we have not and currently do not expect to draw on our revolving credit facility, we expect that Lehman will not~~ fund ~~any~~is ~~future~~permitted ~~borrowing~~seven ~~requests. We~~days ~~have no reason~~ to ~~believe~~satisfy ~~at this time~~withdrawal ~~that the other lenders to our revolving credit facility will not fulfill their respective contractual obligations to fund any of our future borrowing~~ requests~~. As a result~~, ~~we believe~~ the ~~availability~~ ~~under~~financial ~~our~~institution ~~revolving credit facility~~ has ~~been~~never ~~effectively~~exercised ~~reduced by $2.5 million. In spite of~~ the ~~reduced availability,~~provision ~~we believe we have sufficient liquidity for our currently foreseeable operational needs. We have also assessed counterparty credit risk~~ with ~~our interest rate swaps and cap and~~ ~~believe that counterparty default is not probable~~us. We believe, ~~there~~based ~~should~~on ~~be sufficient time~~information ~~for~~available ~~the capital markets~~ to ~~stabilize~~management ~~before~~at wethis ~~have~~time, athat ~~need~~there ~~for~~is ~~additional financing. Lastly,~~minimal werisk ~~have assessed~~regarding ~~exposure~~liquidity onof our ~~existing~~approximately ~~insurance policies~~$33. ~~While~~3 wemillion docash ~~hold~~and ~~certain~~cash ~~policies~~equivalents ~~with~~as ~~AIG’s~~of ~~state-regulated insurance companies~~March 31, ~~we have no reason to believe they will not fulfill their obligations~~ ~~under our policies~~2010.

~~Supply~~We ~~chain~~have ~~risk~~also ~~was~~assessed ~~also~~our ~~considered~~credit ~~relative~~exposure to ~~the~~various ~~recent~~other ~~economic~~factors ~~conditions. Two~~including ~~vendors~~(1) our ~~are~~ability ~~the principal~~to ~~providers~~draw offunds under our ~~security-related~~revolving ~~products~~credit facility; ~~and~~(2) counterparty ~~services~~default ~~for~~risk ~~our Retail~~associated ~~and~~with ~~Multifamily~~our ~~segments. We~~interest rate ~~believe~~cap weand ~~can~~swaps; ~~obtain~~(3) our ~~alternative~~need ~~supply~~to inenter the ~~event~~capital ~~such~~markets; ~~products~~ and (4) exposure ~~services~~related ~~are~~to ~~not available from~~ our existing ~~Retail~~insurance ~~suppliers~~policies. We ~~also~~ believe we have sufficient ~~product on~~ ~~hand~~liquidity for our ~~Multifamily~~currently ~~segment~~foreseeable tooperational ~~continue~~needs. With respect to ~~provide~~our ~~ongoing~~interest ~~services~~rate inswaps ~~the~~and ~~short-term~~cap, inwe ~~the~~believe ~~event~~that wecounterparty ~~are~~default ~~unable~~is tonot ~~obtain~~probable. Lastly, ~~products~~we ~~from~~have ~~our~~assessed ~~primary~~exposure on our ~~suppliers~~existing toinsurance ~~this~~policies ~~segment~~and believe the insurers are financially solvent and well-capitalized.

We have three interest rate swap agreements to fix the variable component of the interest rate on $250 million of our LIBOR-based variable debt under the senior credit facility at 3.15% to 3.19%. The interest rate swaps mature from September 2010 to November 2010. With the current applicable margin on our LIBOR-based borrowings under our senior credit facility at 2.25%, the effective interest rate on the swapped debt ranges from 5.40% to 5.44%. The interest rate swaps were de-designated as cash flow hedges in conjunction with the debt refinancing that occurred in the fourth quarter of 2009.

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~~The~~Debt senior credit facility includes a $25.0 million revolving credit facility, of which $18.5 million remains available as of November 2, 2009 after reducing total availability by $4.0 million for an outstanding letter of credit and $2.5 million in commitments from Lehman. In the first quarter of 2007, the applicable margins with respect to the term loan under the senior credit facility were reduced to 1.25% for base rate borrowing and 2.25% for Eurodollar borrowing. Depending on our leverage ratio at the time of borrowing, the applicable margin with respect to a revolving loan may range from 1.25% to 2.25% for base rate borrowing and 2.25% to 3.25% for Eurodollar borrowing. The revolving credit facility matures on April 18, 2010 and the term loan matures on March 31, 2012. We intend to refinance our revolving credit facility prior to its maturity on April 18, 2010, however, we cannot provide any assurances that we will be able to do so on favorable terms or at all. We do not believe an inability to refinance our revolving credit facility would have a material impact on our liquidity, operations or consolidated financial statements.Obligations

~~The~~On ~~senior~~November 17, ~~credit~~2009, ~~facility~~we isamended ~~secured~~our bysenior ~~substantially~~credit ~~all~~agreement ~~of our~~which ~~assets,~~(i) increased ~~requires~~term ~~quarterly~~loan ~~principal~~borrowings ~~payments~~by of $0.75 million ~~and~~under ~~requires potential~~the ~~annual~~New ~~prepayments~~Term ~~based~~Loans to onan aaggregate ~~calculation~~ of ~~“Excess~~$364.5 ~~Cash Flow” as defined in the Senior Credit Agreement~~million, ~~commencing with the year ending December~~(ii) ~~31, 2008~~divided ~~and~~all ~~due in the first quarter~~ of ~~each~~our ~~subsequent~~term ~~year. We~~loans ~~were not required to make a prepayment~~into ~~based~~Non-Extending onTerm ~~the~~Loans ~~“Excess~~equal ~~Cash~~to ~~Flow”~~$86.5 ~~calculation~~million ~~for~~and ~~the~~New ~~year~~and ~~ended~~Extending ~~December 31,~~Term ~~2008~~Loans inequal ~~the first quarter of 2009. Based upon projected 2009 results, we anticipate that we could be required~~ to ~~make such a mandatory prepayment between~~ $20278.0 million and (iii) replaced our $3025 million ~~depending upon~~revolving ~~the~~credit ~~amount~~facility ofwith ~~excess~~a ~~cash~~$15 ~~flow,~~million asrevolving ~~defined~~credit ~~under the Senior Credit Agreement, generated in 2009~~facility. ~~The~~We ~~excess~~intend ~~cash~~to ~~flow mandatory~~use ~~prepayment~~any isborrowings ~~an annual requirement~~ under the ~~Senior Credit~~ ~~Agreement,~~revolving ~~and~~credit ~~because the estimated prepayment amount is based on forecasted cash flows for the remainder of the year~~facility, ~~the~~from ~~final~~time ~~excess~~to ~~cash flow mandatory prepayment~~time, iffor ~~any,~~working ~~could~~capital ~~ultimately~~and ~~differ~~general ~~materially from our estimate~~corporate purposes.

WeThe ~~have~~New ~~three~~and ~~interest~~Extending ~~rate~~Term ~~swap~~Loans ~~agreements~~are scheduled to ~~fix~~mature ~~the~~on ~~variable~~March 31, ~~component~~2014, ofprovided, however, that the ~~interest~~New ~~rate~~and Extending Term Loans will mature on ~~$250~~December 14, 2012 ~~million~~if ofprior to December 14, 2012 the maturity date for our ~~LIBOR-based~~Unsecured Term ~~variable~~Loan ~~debt~~Agreement is not extended to at least 91 days after March 31, 2014 or the borrowings under the ~~senior~~Unsecured ~~credit~~Term ~~facility~~Loan Agreement are not refinanced with permitted refinancing indebtedness having a maturity date at least 391 days after March 31, 2014.15 The New and Extending Term Loans bear interest at a margin of 4.25% over the Eurodollar Base Rate (as defined in the Senior Credit Agreement and subject to a 2% floor) for Eurodollar borrowings and 3.1925% over the Base Rate (as defined in the Senior Credit Agreement and subject to a 3% floor) for Base Rate borrowings. The ~~interest~~Non-Extending ~~rate~~Term ~~swaps~~Loans are scheduled to mature ~~from~~on ~~September~~March ~~2010~~31, 2012 and bear interest at a margin of to2.25% ~~November 2010~~over the Eurodollar Base Rate for Eurodollar borrowings and 1. ~~With~~25% over the ~~current~~Base Rate for Base Rate Borrowings. ~~applicable~~Prior ~~margin~~to onthe ~~our~~amendment ~~LIBOR-based~~of the senior credit facility in November of 2009, our borrowings under ~~our~~the senior credit ~~facility~~ agreement bore interest at a margin of 2.25%, over the ~~effective~~Eurodollar ~~interest~~Base ~~rate~~Rate onfor Eurodollar borrowings and 1.25% over the ~~swapped~~Base ~~debt~~Rate ~~ranges~~for ~~from~~Base Rate Borrowings. The interest rate at March 31, 2010, was 56.4025% toand 52.4450% for the New and Extending Term Loans and the Non-Extending Tern Loans, respectively, not including the impact of interest rate swaps. The interest rate ~~swaps~~at December 31, 2009, ~~are~~was ~~accounted~~6.25% and 2.48% for asthe ~~cash~~New ~~flow~~and ~~hedges~~Extending Term Loans and the Non-Extending Tern Loans, respectively, not including the impact of interest rate swaps.

The ~~Unsecured~~revolving ~~Term~~credit ~~Loan~~facility ~~Agreement,~~is ~~the~~scheduled ~~Senior~~to ~~Secured~~mature ~~Notes~~on ~~Indenture~~March 31, ~~and~~2013, ~~the~~provided, ~~Senior~~however, ~~Credit~~that ~~Agreement~~the ~~contain~~revolving ~~certain~~credit ~~covenants~~facility ~~and~~will ~~restrictions~~mature on December 14, ~~including~~2012 ~~with~~if ~~respect~~prior to ~~our~~December 14, ~~ability~~2012 tothe ~~incur~~maturity ~~debt~~date ~~and~~of ~~pay~~our ~~dividends,~~Unsecured ~~based on~~Term ~~earnings~~Loan ~~before~~Agreement ~~interest,~~is ~~taxes,~~not ~~depreciation~~extended ~~and~~to ~~amortization,~~at orleast ~~EBITDA. While~~91 ~~the~~days ~~definition~~after ofMarch 31, ~~EBITDA~~2014 ~~varies~~or ~~slightly~~the ~~among~~borrowings under the Unsecured Term Loan Agreement are not refinanced with permitted refinancing indebtedness having a maturity date at least 91 days after March 31, 2014. Borrowings under the ~~Senior~~revolving ~~Secured~~credit ~~Notes~~facility will bear interest at a margin of 4.25% ~~Indenture~~over the Eurodollar Base Rate for Eurodollar borrowings and 3.25% over the ~~Senior~~Base Rate ~~Credit~~for ~~Agreement,~~Base ~~EBITDA~~Rate isborrowings. The revolving ~~generally~~credit ~~derived~~facility ~~by adding~~includes an unused commitment fee equal to ~~income~~1.0%. We ~~(loss)~~may ~~before~~request ~~income~~letters ~~taxes,~~of credit to be issued under the ~~sum~~revolving credit facility of ~~interest~~up ~~expense~~to $7.5 million, with any outstanding ~~depreciation~~letters ~~and~~of ~~amortization~~credit ~~expense,~~reducing ~~including~~the ~~amortization~~total ofamount ~~deferred~~available for borrowing under the ~~customer~~revolving ~~acquisition~~credit ~~costs~~facility. Approximately $11.0 ~~less~~million ~~amortization~~remained available for borrowing under our revolving credit facility as of ~~deferred~~May 11, ~~customer~~2010 ~~acquisition~~after reducing total availability by approximately ~~revenue~~$4.0 million for an outstanding letter of credit.

~~The~~On ~~following~~March 14, ~~table~~2008, ~~presents~~we ~~the~~borrowed ~~financial~~approximately ~~ratios~~$110.3 ~~required~~million ~~by our~~under ~~Senior~~an ~~Credit~~unsecured ~~Agreement,~~term ~~Senior~~loan ~~Secured~~facility ~~Notes~~to ~~Indenture~~allow ~~and~~us to redeem all of the senior subordinated notes then outstanding. The Unsecured Term Loan ~~Agreement~~ ~~through~~bears ~~the~~interest ~~third~~at ~~quarter~~the ofprime ~~2010~~rate ~~and~~plus ~~our~~11.5% ~~actual~~per ~~ratios~~annum asand matures ofin ~~September 30, 2009~~2013.

Debt Instrument	Financial Covenants	Ratio Requirements	Actual Ratio as of September 30, 2009
Senior Credit Agreement	Consolidated Leverage Ratio (consolidated total debt on last day of period/consolidated EBITDA for most recent four fiscal quarters)	Q3 2009: Less than 5.75:1.0 Q4 2009 through Q3 2010; less than 5.5:1.0	4.39:1.0
	Consolidated Interest Coverage Ratio (consolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters)	Greater than 2.0:1.0	2.59:1.0
Senior Secured Notes Indenture	Consolidated Fixed Charge Coverage Ratio (current fiscal quarter EBITDA/current fiscal quarter interest expense)	Greater than 2.25:1.0	2.82:1.0
Unsecured Term Loan Agreement	Consolidated Fixed Charge Coverage Ratio (consolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters)	Greater than 2.25:1.0	2.86:1.0

The senior credit facility is secured by substantially all of our assets, requires quarterly principal payments of $0.8 million and requires potential annual prepayments based on a calculation of “Excess Cash Flow,” as defined in the Senior Credit Agreement, due in the first quarter of the subsequent year. We made $30.0 million in principal prepayments on the Non-Extending Term Loans in December 2009 which were applied to offset any required Excess Cash Flow prepayment. As a result, we were not required to make additional principal prepayments in the first quarter of 2010. We are currently not able to estimate whether any Excess Cash Flow prepayment will be required for the year ending December 31, 2010.

45The Senior Credit Agreement and Unsecured Term Loan Agreement contain certain covenants and restrictions, including with respect to our ability to incur debt, based on earnings before interest, taxes, depreciation and amortization, or EBITDA. While the definition of EBITDA varies slightly among the Senior Credit Agreement and Unsecured Term Loan Agreement, EBITDA is generally derived by adding to income (loss) before income taxes, the sum of interest expense, depreciation and amortization expense, including amortization of deferred customer acquisition costs less amortization of deferred customer acquisition revenue.

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AtThe ~~September 30,~~following ~~2009,~~table wepresents ~~were in compliance with~~ the financial ~~covenants~~ ~~and~~ratios ~~other~~required ~~maintenance~~by ~~tests for all~~ our ~~debt obligations. The Consolidated Leverage Ratio and~~ ~~Consolidated Interest Coverage Ratio contained in our~~ Senior Credit Agreement ~~are maintenance tests~~ and ~~the Consolidated Fixed Charge Coverage Ratios contained in our Senior Secured Notes Indenture and~~ Unsecured Term Loan Agreement ~~are debt~~through ~~incurrence tests. We cannot be deemed to be in default solely due to failure to meet such debt incurrence tests. However~~December 31, ~~failure to meet such~~ ~~debt~~2010 incurrence tests could result in restriction on our ability to incur additional ratio indebtedness. We believe that should we fail to meet the minimum Consolidated Fixed Charge Coverage Ratios in our Senior Secured Notes Indenture and ~~Unsecured Term Loan Agreement,~~ our ~~ability~~actual toratios ~~borrow~~as ~~additional~~of ~~funds under other permitted indebtedness provisions in our Senior Secured Notes Indenture~~March 31, ~~Unsecured Term Loan Agreement and Senior Credit Agreement would provide us with sufficient liquidity for our currently foreseeable operational needs~~2010. ~~Our outstanding debt instruments also generally restrict our ability to pay any cash dividends to stockholders, but do not otherwise restrict our ability to fund cash obligations.~~

We are in discussions with our existing lenders under our senior credit facility to extend the maturity date of the existing Senior Credit Agreement and amend certain other terms. Included among the possible amendments are an extension of the maturity date of our revolving credit facility (currently scheduled to mature in March 2010) and a reduction in the maximum amount available for borrowing under our revolving credit facility to $15 million from $25 million. We are also discussing with our existing lenders and potential new lenders the possibility of increasing the size of the term loan facility by up to $75 million (for aggregate term loans of $364.5 million). The additional proceeds, together with available cash on hand would be used to redeem our Senior Secured Notes due November 15, 2011. We can give no assurance that we will be successful in completing this refinancing on the terms being discussed or at all.

Debt Instrument	Financial Covenants	Ratio Requirements	Actual Ratio as of March 31, 2010
Senior Credit Agreement	Consolidated Leverage Ratio (consolidated total debt on last day of period/consolidated EBITDA for most recent four fiscal quarters)	Q4 2009 through Q3 2010: Less than 5.5:1.0 Q4 2010; less than 5.25:1.0	3.09:1.0

	Consolidated Interest Coverage Ratio (consolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters)	Q4 2009 through Q3 2010: Greater than 2.0:1.0 Q4 2010; Greater than 2.05:1.0	3.26:1.0

Unsecured Term Loan Agreement	Consolidated Fixed Charge Coverage Ratio (consolidated EBITDA for most recent four fiscal quarters/consolidated interest expense for most recent four fiscal quarters)	Greater than 2.25:1.0	2.95:1.0

At March 31, 2010, we were in compliance with the financial covenants and other maintenance tests for all our debt obligations. The Consolidated Leverage Ratio and Consolidated Interest Coverage Ratio contained in our Senior Credit Agreement are maintenance tests and the Consolidated Fixed Charge Coverage Ratio contained in our Unsecured Term Loan Agreement is a debt incurrence test. We cannot be deemed to be in default solely due to failure to meet debt incurrence tests. However, failure to meet debt incurrence tests could result in restriction on our ability to incur additional ratio indebtedness. We believe that should we fail to meet the minimum Consolidated Fixed Charge Coverage Ratios in our Unsecured Term Loan Agreement, our ability to borrow additional funds under other permitted indebtedness provisions in our Unsecured Term Loan Agreement and Senior Credit Agreement would provide us with sufficient liquidity for our currently foreseeable operational needs. We are prohibited from paying cash dividends to our stockholders under covenants contained in our Senior Credit Agreement.

Cash Flow

Operating Cash Flows for the ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2009~~2010. Our operations provided cash of $6314.37 million and $4621.40 million in the first ~~nine~~three months of ~~2009~~2010 and ~~2008~~2009, respectively. We expect to continue to generate cash from operating activities in excess of the cash required for operations and interest payments due in the twelve months following the date of the financial statements included in this report. Working capital was ~~$29.1~~a ~~million~~deficit as of ~~September 30,~~$7.6 ~~2009~~million ~~compared to~~and ~~a deficit of~~ $118.84 million as of March 31, 2010 and December 31, ~~2008~~2009, respectively. The ~~increase~~improvement in the working capital deficit at ~~September~~March 3031, ~~2009~~ is2010 is primarily related to improvements in operating results asincluding ~~well as~~ higher cash balances at ~~September~~March 3031, ~~2009~~2010.

Investing Cash Flows for the ~~Nine~~ Three Months Ended ~~September~~March 3031, ~~2009~~2010. We used a net $216.81 million and $357.0 million for our investing activities for the first ~~nine~~three months of ~~2009~~2010 and ~~2008~~2009, respectively. We invested a net $185.84 million in cash to install and acquire new accounts (including rental equipment) and $30.38 million to acquire fixed assets in the first ~~nine~~three months of ~~2009~~2010. We also received $0.21 million from the sale of accounts and other assets. We invested a net $326.32 million in cash to install and acquire new accounts (including rental equipment) and $40.58 million to acquire fixed assets in the first ~~nine~~three months of ~~2008~~2009. ~~During the first nine months of 2008, we received $1.6 million from the reduction of restricted cash.~~

Financing Cash Flows for the ~~Nine~~ Three Months Ended ~~September~~March 3031, ~~2009~~2010. Financing activities used a net $31.94 million ~~and $11.8 million~~ in ~~the~~each ~~first nine months~~ of ~~2009 and 2008, respectively. In~~ the first ~~nine~~three months of ~~2009, we paid $3.9 million for the repayment~~ of ~~borrowings~~2010 ~~under our senior credit facility~~ and ~~capital leases. In the first nine months of 2008~~2009, ~~we paid $120.2 million for the redemption of our~~respectively, ~~Senior~~related ~~Subordinated~~to ~~Notes and~~ the repayment of borrowings under our senior credit facility and capital leases~~, $2~~.~~0 million for debt issuance costs and received $110.3 million of proceeds from borrowings under our Unsecured Term Loan.~~

Capital Expenditures

Assuming we have available funds, net capital expenditures for ~~2009~~2010 (inclusive of $216.02 million spent through ~~September~~March 3031, ~~2009~~2010) are expected to be $3243 million, of which $76 million, is expected to be used for fixed asset purchases, with the balance to be used for net customer acquisition costs and non-monitored leased equipment. These estimates are prepared for planning purposes and are revised from time to time. Actual expenditures for these and other items not presently anticipated may vary materially from these estimates during the course of the years presented.

~~Material Commitments~~28

Our contractual cash obligations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. There were no significant changes in these commitments from that reported in our Annual Report on Form 10-K for the year ended December 31, 2008. We have future, material, long-term commitments, which, as of September 30, 2009, included $289.5 million related to the senior credit facility, $110.3 million related to the Unsecured Term Loan and $115.3 million related to the Senior Secured Notes.

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Material Commitments

Our contractual cash obligations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009. There were no significant changes in these commitments from that reported in our Annual Report on Form 10-K for the year ended December 31, 2009. We have future, material, long-term commitments, which, as of March 31, 2010, included $332.8 million related to the senior credit facility and $110.3 million related to the Unsecured Term Loan.

Off-Balance Sheet Arrangements

We had no off-balance sheet transactions or commitments as of or for the ~~nine~~three months ended ~~September~~March 3031, ~~2009~~2010, other ~~than~~ than as disclosed in this report.

Credit Ratings

Standard & Poor’s (S&P) and Moody’s Investors Service (Moody’s) are independent credit-rating agencies that rate our debt securities. As of ~~November~~May 211, ~~2009~~2010, our ~~senior~~ senior credit facility ~~and~~was ~~our Senior Secured Notes were~~ rated as follows (our Unsecured Term Loan is not rated).

	Senior Credit Facility	~~12.0% Senior Secured Notes Due 2011~~Outlook	~~Outlook~~
S & P	BB-	BStable	~~Stable~~
Moody’s	~~Ba2~~Ba3	B3Stable	~~Stable~~

In general, revenue declines and changes in operating margin leave our credit ratings susceptible to downgrades, which make debt financing more costly and more difficult to obtain.

Tax Matters

We generally do not expect to be in a position to record tax benefits for losses incurred in the future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our Unsecured Term Loan is a variable rate debt instrument with borrowings of $110.3 million outstanding as of ~~November~~May 211, ~~2009~~2010. Our senior credit facility is a variable rate debt instrument, and as of ~~November~~May 211, ~~2009~~2010, we had borrowings of $~~289~~332.58 million outstanding. WeThe ~~have~~New ~~three~~and ~~interest~~Extending ~~rate~~Term ~~swap~~Loans ~~agreements~~of ~~to fix~~ the ~~variable~~senior ~~component~~credit offacility ~~the~~bear interest ~~rate~~ onat ~~$250~~a ~~million~~margin of 4.25% ~~our~~over ~~LIBOR-based~~the ~~variable~~Eurodollar ~~debt~~Base ~~under~~Rate ~~the~~(subject ~~senior~~to ~~credit facility~~a at2.0% LIBOR floor) and 3.1525% over the Base Rate (subject to a 3.190% Prime Rate floor). ~~The~~We ~~interest rate~~have ~~swaps~~three ~~mature~~interest ~~from~~rate ~~September 2010~~swap agreements to ~~November 2010. With~~fix the ~~current~~interest ~~applicable~~rate ~~margin~~of on$250 million of our ~~LIBOR-based~~ ~~borrowings~~variable ~~under~~rate ~~our~~debt under the senior credit facility, atwhich ~~2.25%,~~fix the ~~effective~~ interest rate onat ~~the~~a ~~swapped~~one ~~debt~~month ~~ranges~~LIBOR ~~from~~rate of 53.4015% to 53.4419%. The interest rate swaps were de-designated as cash flow hedges in conjunction with the debt refinancing that occurred in the fourth quarter of 2009.

As of ~~November~~May 211, ~~2009~~2010, the one-month LIBOR was 0.2434% and the ~~prime~~ prime rate was 3.25%. The table below ~~reflects~~ reflects the impact on pre-tax income of changes in the rates at May 11, 2010 in LIBOR and the prime rate on our debt and the impact on pre-tax income of ~~from~~changes ~~their~~in ~~rates~~LIBOR on ~~November 2,~~the ~~2009~~interest ~~(dollars~~rate swaps (in thousands):

(Decrease) Increase in index rate	(2.00		)%	(1.00		)%	0.00		%	1.00		%	2.00		%	3.00		%	4.00		%
Increase (Decrease) in pre-tax income	$	2,302		$	1,199		$	0		$	(1,498	)	$	(2,997	)	$	(4,495	)	$	(5,994	)
Increase (Decrease) in pre-tax income:
Debt	$	2,398		$	1,295		$	0		$	(1,666	)	$	(4,272	)	$	(8,703	)	$	(13,135	)
Interest rate swaps	(549		)	(549		)	0			1,537			3,073			4,610			6,147
Net increase (decrease) in pre-tax income:	$	1,849		$	746		$	0		$	(129	)	$	(1,199	)	$	(4,093	)	$	(6,988	)

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures. As of ~~September~~March 3031, ~~2009~~2010, the end of the period covered by this report, the Company’s management, under the supervision and with the participation of our chief executive officer and our chief financial officer, concluded that its disclosure controls and procedures are effective (a) to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting during the quarter ended ~~September~~March 3031, ~~2009~~2010.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Information relating to legal proceedings is set forth in Note 9 of the Notes to Condensed Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

ITEM 1A. RISK FACTORS.

~~Not~~The ~~applicable~~market price of our common stock has been, and may continue to be, materially affected by the proposed Offer and Merger and could be materially affected by the termination of the Merger Agreement.

The current market price of our common stock may reflect, among other things, the commencement and anticipated completion of the Offer and Merger. The current market price is higher than the price before the proposed Offer was announced on April 26, 2010 and higher than the price before we announced the commencement of the process to explore and evaluate strategic alternatives. The completion of the Offer and Merger are subject to conditions and termination rights contained in the Merger Agreement. Accordingly, there can be no assurance that the proposed Offer and Merger will be completed. In the event that the Offer and Merger are not completed, our stock price may be materially and adversely affected.

Litigation and uncertainties associated with the transactions contemplated by the Merger Agreement may have a material adverse effect on our ability to complete the transaction.

Litigation has been instituted by purported stockholders of ours, on behalf of themselves and as putative class actions, against us and our board of directors, among others involved, as a result of the proposed transactions. See Note 9 “Commitments and Contingencies — Shareholder Litigation” to our Condensed Consolidated Financial Statements for additional information. Also, various law firms have announced that they are investigating possible claims against our board of directors as a result of the proposed transactions which may result in new litigation relating to the proposed transactions. Litigation relating to the proposed transactions may require us to expend significant amounts of money, may require significant time from our management, and may result in an adverse settlement, injunction barring or delaying the proposed transactions, or judgment against us or our directors which could have a material adverse effect on our ability to complete the transactions which could be detrimental to our stockholders.

In addition, the following uncertainties, among others, could have a material adverse effect on our business operations and financial results which could be detrimental to our stockholders if the Offer and Merger are not completed:

· the uncertainty associated with a potential change in control of our Company could negatively affect our ability to retain and attract key management, sales, marketing and other personnel which we rely on to operate our business;

· our customers, suppliers and marketing partners may delay or defer decisions relating to their ongoing and future relationships with us or terminate their relationships with us, which could negatively affect our revenues, earnings and cash flows;

· we will incur significant costs, including financial and legal advisory fees, relating to the proposed Offer and Merger even if the proposed transactions are not completed; and

· under the Merger Agreement, we may be required to pay to Protection Holdings, LLC a termination fee of $8.0 million if the Merger Agreement is terminated under certain circumstances.

The Merger Agreement contains restrictive covenants that may limit our ability to respond to changes in market conditions or pursue business opportunities.

The Merger Agreement contains restrictive covenants that limit our ability to take certain actions during the period prior to the completion of the proposed Offer and Merger. Although the Merger Agreement provides that Protection Holdings, LLC will not unreasonably withhold its consent to us taking otherwise prohibited actions, there can be no assurances that Protection Holdings, LLC will grant such consent. These restrictions include limitations on our ability to, among other things, make certain acquisitions, incur additional indebtedness, terminate, amend or enter into any material contract, make capital expenditures or enter into new lines of business, each of which may materially adversely affect our ability to react to changes in market conditions or take advantage of business opportunities, which could be detrimental to our stockholders in the event the Offer and Merger are not completed.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

Exhibits. The following exhibits are filed or furnished with this Quarterly Report on Form 10-Q:

Exhibit Number	~~Exhibit Number~~	Exhibit Description	~~Exhibit Description~~
	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
2.1		Agreement and Plan of Merger, dated as of April 26, 2010, by and among Protection Holdings, LLC, Protection Acquisition Sub, Inc. and Protection One, Inc. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K dated April 26, 2010).
	31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
2.2		Tender and Support Agreement, dated as of April 26, 2010, by and among POI Acquisition, L.L.C., Protection Holdings, LLC and Protection Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.2 of the Current Report on Form 8-K dated April 26, 2010).
	31.3		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One Alarm Monitoring, Inc.+
2.3		Tender and Support Agreement, dated as of April 26, 2010, by and among Monarch Alternative Capital LP, Protection Holdings, LLC and Protection Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.3 of the Current Report on Form 8-K dated April 26, 2010).
	31.4		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One Alarm Monitoring, Inc.+
2.4		Guaranty dated as of April 26, 2010, by GTCR Fund IX/A, L.P. in favor of Protection One, Inc. (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated April 26, 2010).
	32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
2.5		Letter Agreement, dated as of April 26, 2010, by and among POI Acquisition, L.L.C., Monarch Alternative Capital, LP and the Company (incorporated by reference to Exhibit (e)(7) of the Schedule 14D-9 filed on May 3, 2010).
	32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
	32.3		Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Protection One Alarm Monitoring, Inc.+
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
	32.4		Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Protection One Alarm Monitoring, Inc.+
32.1		Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+

+ Filed or furnished herewith

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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:	~~November~~May 913, ~~2009~~2010	PROTECTION ONE, INC.
		PROTECTION ONE ALARM MONITORING, INC.
		By:	/s/ Darius G. Nevin
			Darius G. Nevin, Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)

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