UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2009

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

For the transition period from to

1-12181-01		1-12181
(Commission file number)		(Commission file number)

PROTECTION ONE, INC.		PROTECTION ONE ALARM MONITORING, INC.
(Exact name of registrant		(Exact name of registrant
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)

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 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 (§ 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 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 of the Exchange Act.

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 o

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

Yes o No x

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.

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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

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

(in thousands, except for per share amounts)

(Unaudited)

	Nine Months Ended September 30,
	2009			2008
Revenue:
Monitoring and related services	$	248,647		$	250,020
Installation and other	29,061			28,014
Total revenue	277,708			278,034

Cost of revenue (exclusive of amortization and depreciation shown below):
Monitoring and related services	76,943			83,766
Installation and other	36,412			36,166
Total cost of revenue (exclusive of amortization and depreciation shown below)	113,355			119,932

Operating expenses:
Selling	38,440			42,133
General and administrative	59,396			59,551
Amortization and depreciation	37,529			50,065
Impairment of trade name	—			475
Total operating expenses	135,365			152,224
Operating income	28,988			5,878
Other expense (income):
Interest expense	33,846			36,876
Interest income	(41		)	(752		)
Loss on retirement of debt	—			12,788
Other	—			(77		)
Total other expense	33,805			48,835
Loss before income taxes	(4,817		)	(42,957		)
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	$	(0.22	)	$	(1.71	)

Weighted average common shares outstanding	25,321			25,308

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,
	2009			2008
Cash flows from operating activities:
Net loss	$	(5,458	)	$	(43,311	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on sale of assets	(98		)	(67		)
Loss on retirement of debt	—			12,788
Impairment of trade name	—			475
Amortization and depreciation	37,529			50,065
Amortization of debt costs, discounts and premium	(398		)	1,705
Amortization of deferred customer acquisition costs in excess of amortization of deferred revenue	23,208			22,815
Stock based compensation expense	424			1,090
Deferred income taxes	90			(144		)
Provision for doubtful accounts	4,752			3,111
Other	338			(52		)
Changes in assets and liabilities
Accounts receivable, net	1,689			(2,956		)
Notes receivable	623			2,148
Other assets	4,669			1,997
Accounts payable	41			1,182
Deferred revenue	(1,964		)	(1,244		)
Accrued interest	(896		)	(823		)
Other liabilities	(1,199		)	(2,415		)
Net cash provided by operating activities	63,350			46,364

Cash flows from investing activities:
Deferred customer acquisition costs	(31,250		)	(49,723		)
Deferred customer acquisition revenue	15,127			22,251
Purchase of rental equipment	(1,685		)	(4,093		)
Purchase of property and equipment	(3,263		)	(4,487		)
Purchases of new accounts	(1,004		)	(695		)
Reduction of restricted cash	60			1,617
Proceeds from disposition of assets and other	249			95
Net cash used in investing activities	(21,766		)	(35,035		)

Cash flows from financing activities:
Payments on long-term debt and capital leases	(3,859		)	(120,170		)
Proceeds from borrowings	—			110,340
Debt issue costs	—			(2,020		)
Net cash used in financing activities	(3,859		)	(11,850		)
Net increase (decrease) in cash and cash equivalents	37,725			(521		)
Cash and cash equivalents:
Beginning of period	38,883			40,999
End of period	$	76,608		$	40,478

Cash paid for interest	$	34,944		$	35,985

Cash paid for income taxes	$	470		$	518

Non-cash investing and financing activity:
Vehicle additions under capital lease	$	387		$	1,696

The accompanying notes are an integral part of these

condensed consolidated financial statements.

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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 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 included in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or the SEC, on March 16, 2009.

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 30, 2009 and 2008 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
Furniture, fixtures and equipment	$	7,485		$	7,061
Data processing and telecommunication	41,151			39,002
Leasehold improvements	8,031			7,544
Vehicles	6,154			6,427
Vehicles under capital leases	9,687			9,572
Buildings and other	6,364			6,320
Rental equipment	14,872			13,318
	93,744			89,244
Less accumulated depreciation	(61,571		)	(53,076		)
Property and equipment, net	$	32,173		$	36,168

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 ended September 30, 2009 and 2008. The amount of fixed asset additions included in accounts payable was $30 thousand and $0.7 million as of September 30, 2009 and December 31, 2008, 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 $3.8 million and $2.6 million was recorded on these assets as of September 30, 2009 and December 31, 2008, respectively. Deferred revenue of $6.3 million was recorded at September 30, 2009 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 30, 2009 and does not 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
2010	1,781
2011	1,401
2012	951
2013	433
2014	71
Total minimum future rental revenue	$	5,087

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3. Goodwill and Intangible Assets:

The Company completed its annual impairment testing during the third quarter of 2009 and determined that goodwill was not impaired. The Company also monitors for events or circumstances that may indicate potential impairment of goodwill and intangible assets each reporting period. There were no such events or circumstances identified during the first nine months of 2009.

During the nine and three months ended September 30, 2009, there 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
	Retail			Wholesale			Multifamily			Total Company
Customer Accounts
Gross carrying amount	$	387,528		$	—		$	51,872		$	439,400
Less: accumulated amortization	(197,540		)	—			(29,709		)	(227,249		)
Carrying amount, end of period	$	189,988		$	—		$	22,163		$	212,151

Dealer Relationships
Gross carrying amount	$	—		$	47,116		$	—		$	47,116
Less: accumulated amortization	—			(11,493		)	—			(11,493		)
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 $28.1 million and $40.6 million for the nine months ended September 30, 2009 and 2008, respectively. Amortization expense was $9.5 million and $13.3 million for the three months ended September 30, 2009 and 2008, respectively. The amount of customer account purchases included in other liabilities was $0.1 million at September 30, 2009 and at December 31, 2008.

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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
Accrued interest	$	5,983	$	6,879
Accrued vacation pay	4,616		4,821
Accrued salaries, bonuses and employee benefits	10,603		11,199
Derivative liability (See Note 6)	6,482		5,562
Other accrued liabilities	9,629		10,561
Total accrued liabilities	$	37,313	$	39,022

5. Debt and Capital Leases:

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

	September 30, 2009			December 31, 2008
Term loan under the Senior Credit Agreement, maturing March 31, 2012, variable at LIBOR + 2.25%	$	289,500		$	291,750
Senior Secured Notes, maturing November 15, 2011, fixed 12.00%, face value	115,345			115,345
Unamortized premium on Senior Secured Notes	5,137			6,713
Unsecured Term Loan, maturing March 14, 2013, variable at Prime + 11.5%	110,340			110,340
Capital leases	3,919			5,140
	524,241			529,288
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		)
Total long-term debt and capital leases	$	519,003		$	523,927

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Senior Credit Agreement

On April 26, 2006, the Company entered into an amended and restated senior credit agreement (“Senior Credit Agreement”) which increased the outstanding term loan borrowings by approximately $66.8 million to $300.0 million. Eurodollar term loan borrowings under the Senior Credit Agreement bear interest at LIBOR plus 2.25%, while base rate borrowings bear interest at the prime rate plus 1.25%. All outstanding term loan borrowings at September 30, 2009 and December 31, 2008 were Eurodollar borrowings. Depending on the Company’s 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 a base rate borrowing and 2.25% to 3.25% for a Eurodollar borrowing. The senior credit facility continues to include a $25.0 million revolving credit facility, of which approximately $18.5 million remained available as of October 31, 2009 after reducing total availability by approximately $4.0 million for an outstanding letter of credit and $2.5 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 weighted average annual interest rate before fees at September 30, 2009 and at December 31, 2008, including the impact of interest rate swaps (see Note 6, “Derivatives”), was 5.0% and 5.1%, respectively. The Senior Credit Agreement requires potential annual prepayments based on a calculation of “Excess Cash Flow,” as defined in the Senior Credit Agreement, commencing with the fiscal year ending December 31, 2008 and due in the first quarter of each subsequent fiscal year. Based on the “Excess Cash Flow” calculation for the fiscal year ended December 31, 2008, the Company was not required to make a prepayment in the first quarter of 2009.

Senior Secured Notes

On April 2, 2007, POAMI completed the exchange offer (the “Exchange Offer”) for up to $125 million aggregate principal amount of the IASG 12% Senior Secured Notes due 2011 (the “IASG Notes”). Pursuant to the terms of the Exchange Offer, validly tendered IASG Notes were exchanged for newly issued 12% Senior Secured Notes of POAMI due 2011 (the “Senior Secured Notes”). Of the $125 million aggregate principal amount of IASG Notes outstanding, $115.3 million were tendered for exchange. Upon the completion of the Exchange Offer, approximately $9.7 million principal amount of IASG Notes was redeemed effective as of May 2, 2007. The redemption price was approximately $11.9 million, including accrued interest and a make-whole adjustment.

The Company has the option to redeem the Senior Secured Notes, in whole or in part, upon not less than 30 nor more than 60 days prior notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on November 15 of the years indicated below (subject to the right of holders on the relevant record date to receive interest due on the related interest payment date):

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 on 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 30, 2009 and December 31, 2008. 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 Stockholders and Arlon Group. Affiliates of the Principal Stockholders collectively owned over 70% of the Company’s common stock as of September 30, 2009, 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 and $1.9 million of related party interest expense for the three months ended September 30, 2009 and 2008, 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 or either direct or indirect observable market inputs at September 30, 2009 and December 31, 2008. At September 30, 2009 and December 31, 2008 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
Senior credit facility	$	273,578	$	195,473	$	289,500	$	291,750
Senior Secured Notes	118,229		92,391		120,482		122,058
Unsecured Term Loan	122,477		94,349		110,340		110,340
	$	514,284	$	382,213	$	520,322	$	524,148

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 30, 2009 and December 31, 2008 was $5.7 million and $4.4 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 30, 2009 (in thousands):

Remainder of 2009	$	732
2010	2,280
2011	1,231
2012	347
2013	2
Total minimum lease payments	4,592
Less: Estimated executory costs	(344		)
Net minimum lease payments	4,248
Less: Amount representing interest	(329		)
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 $2,238 and $1,681, respectively.

Debt Covenants

At September 30, 2009, 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 are maintenance tests and the Consolidated Fixed Charge Coverage Ratios contained in the Senior Secured Notes Indenture and Unsecured Term Loan Agreement are debt incurrence tests. 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 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. These debt instruments also generally restrict the Company’s ability to pay any cash dividends to stockholders.

6. Derivatives:

The Company holds one interest rate cap and three interest rate swaps to protect against increases in interest expense.

In May 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 $0.9 million. The Company’s objective was to protect against increases in interest expense 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%.

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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 accepted accounting principles define fair value, establish a framework for using fair value to measure assets and liabilities and expand disclosures about fair value measurements. A three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows:

Level 1: observable inputs such as quoted prices in active markets

Level 2: inputs other than the quoted prices in active markets that are observable either directly or indirectly

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

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. The Company has classified these assets and liabilities in accordance with the fair value hierarchy. The following table presents financial assets and financial liabilities that the Company measures at fair value on a recurring basis (in thousands).

	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		)

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.

8. Share-Based Employee and Director Compensation:

The Company accounts for stock options 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 $0.1 million and $0.4 million was recorded in general and administrative expense for the three month periods ended September 30, 2009 and 2008, respectively. No tax benefit was recorded because the Company does not have taxable income and is 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 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 first nine months of 2009 or 2008.

For the nine and three months ended September 30, 2009, the Company had no stock options outstanding that represented dilutive potential shares. For the nine and three months ended September 30, 2008, the Company had stock options that represented 0.4 million and 0.2 million dilutive potential common shares, respectively. These securities were not included in the computation of diluted loss per share because to do so would have been anti-dilutive for each of the periods presented.

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9. Commitments and Contingencies:

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.

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 UTPCPL claim carried the risk of treble damages, attorneys’ fees and costs. Plaintiff initially claimed direct and consequential damages in excess of $3 million. Plaintiffs have since claimed damages close to $5 million. The Company’s preliminary objections to the negligence and gross negligence claims were granted by the court in September 2007, and these claims were accordingly dismissed.

The Company notified its liability insurance carriers of the claim and answered the remaining counts. On January 28, 2009, the plaintiffs, in response to the Company’s motion for summary judgment, voluntarily withdrew three of the four remaining claims, including the UTPCPL claim, thereby leaving only one count for breach of a written alarm agreement. However, plaintiffs also asserted, for the first 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 claims. The Court allowed plaintiffs to amend their complaint to assert these claims, and an amended complaint was filed on or about June 25, 2009. The amended complaint improperly included claims against the Company which were previously dismissed. Upon a threat of sanctions and at the Company’s insistence, the plaintiffs served a second amended complaint on August 6, 2009, which did not assert those claims. On October 14, 2009, the Company filed preliminary 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. The preliminary objections were fully briefed by the parties and the parties are awaiting a response from the court.

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, 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 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.

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 granted the Company’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. Consequently the Company anticipates that the plaintiffs intend to appeal and seek a reversal of the Court’s decision in this matter.

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

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, 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.

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. 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
	Retail		Wholesale		Multifamily		Adjustments(1)			Consolidated
Revenue	$	216,899	$	39,006	$	21,803	$	—		$	277,708
Adjusted EBITDA(2)	70,460		9,925		10,565		—			90,950
Amortization and depreciation expense	31,332		3,605		2,592		—			37,529
Amortization of deferred costs in excess of amortization of deferred revenue	21,437		—		1,771		—			23,208
Segment assets	512,270		70,152		49,982		(4,285		)	628,119
Property additions, exclusive of rental equipment	3,030		620		—		—			3,650
Investment in new accounts and rental equipment, net	17,296		—		1,516		—			18,812

	Nine Months Ended September 30, 2008
	Retail		Wholesale		Multifamily		Adjustments(1)			Consolidated
Revenue	$	218,301	$	36,407	$	23,326	$	—		$	278,034
Adjusted EBITDA(2)	64,895		6,496		9,617		—			81,008
Amortization and depreciation expense	39,546		5,913		4,606		—			50,065
Amortization of deferred costs in excess of amortization of deferred revenue	21,316		—		1,499		—			22,815
Segment assets	528,169		73,901		51,187		(8,314		)	644,943
Property additions, exclusive of rental equipment	4,343		1,407		433		—			6,183
Investment in new accounts and rental equipment, net	29,248		—		3,012		—			32,260

	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 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 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.

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

	Consolidated
	Nine Months Ended September 30,						Three Months Ended September 30,
	2009			2008			2009		2008
(Loss) income before income taxes	$	(4,817	)	$	(42,957	)	$	138	$	(11,094	)
Plus:
Interest expense, net	33,805			36,124			11,516		12,044
Amortization and depreciation expense	37,529			50,065			12,580		16,431
Amortization of deferred costs in excess of amortization of deferred revenue	23,208			22,815			7,545		8,515
Stock based compensation expense	424			1,090			71		376
Other costs	801			685			20		374
Loss on retirement of debt	—			12,788			—		—
Impairment of trade name	—			475			—		475
Less:
Other income	—			(77		)	—		(31		)
Adjusted EBITDA	$	90,950		$	81,008		$	31,870	$	27,090

11. Income Taxes:

During the nine and three months ended September 30, 2009, actual effective income tax expense differed from tax expense using the U.S. federal statutory tax rate of 35% primarily due to the impact of the deferred tax valuation allowance. The Company recorded income tax expense related to state income taxes of $0.6 million and $0.4 million for the nine months ended September 30, 2009 and 2008, respectively, and $0.3 million and $50 thousand for the three months ended September 30, 2009 and 2008, 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.

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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	)

Table of Contents

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	)

Table of Contents

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

	Nine months ended September 30,
	2009				2008
Segment	Revenue		Percent		Revenue		Percent
Retail	$	216,899	78.1	%	$	218,301	78.5	%
Wholesale	39,006		14.0		36,407		13.1
Multifamily	21,803		7.9		23,326		8.4
Total	$	277,708	100.0	%	$	278,034	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 $5.5 million and $43.3 million for the nine months ended September 30, 2009 and 2008, respectively. We incurred a net loss of $0.1 million and $11.1 million for the three months ended September 30, 2009 and 2008, respectively. The net loss in the nine and three months ended September 30, 2009 and 2008 reflects substantial charges incurred by us for amortization of customer accounts and previously deferred customer acquisition costs and interest incurred on indebtedness. The reduction in our net loss in the nine months ended September 30, 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 $12.5 million. Improved monitoring and related services margins and less selling expense also contributed to the reduction in our net loss for the nine and three months ended September 30, 2009 compared to the nine and three months ended September 30, 2008. See Note 3 to our Condensed Consolidated Financial Statements, Goodwill and Intangible Assets, for additional information related to the lifing study.

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.

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.

Table of Contents

We believe the presentation of RMR is useful to investors because the measure is widely used in the industry to assess the amount of recurring revenues from customer fees produced by a monitored security alarm company such as ours. The table below reconciles our RMR to revenue reflected on our consolidated statements of operations (in thousands):

	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

	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

(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,
	2009												2008
	Retail			Whole- sale			Multi- family			Total			Retail			Whole- sale			Multi- family			Total
Beginning RMR balance	$	20,543		$	3,998		$	2,205		$	26,746		$	20,628		$	3,615		$	2,463		$	26,706
RMR additions from direct sales	1,335			883			87			2,305			1,784			1,107			86			2,977
RMR from account purchases	35			—			—			35			29			—			—			29
RMR losses (a)	(2,070		)	(752		)	(288		)	(3,110		)	(2,111		)	(694		)	(308		)	(3,113		)
Price increases and other (b)	340			—			11			351			221			10			53			284
Ending RMR balance	$	20,183		$	4,129		$	2,015		$	26,327		$	20,551		$	4,038		$	2,294		$	26,883

	Three Months Ended September 30,
	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.

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):

Table of Contents

	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		%

	Three Months Ended September 30,
	2009												2008
	Retail			Whole- sale			Multi- Family			Total			Retail			Whole- sale			Multi- family			Total
Monitoring and related services revenue	$	62,464		$	13,180		$	6,789		$	82,433		$	64,013		$	12,574		$	7,605		$	84,192
Cost of monitoring and related services (exclusive of depreciation)	16,923			7,096			1,856			25,875			18,737			7,189			2,022			27,948
Gross margin	$	45,541		$	6,084		$	4,933		$	56,558		$	45,276		$	5,385		$	5,583		$	56,244

Gross margin %	72.9		%	46.2		%	72.7		%	68.6		%	70.7		%	42.8		%	73.4		%	66.8		%

For the nine and three months ended September 30, 2009, our total monitoring and related services gross margin percentage increased from the prior period primarily due to reductions in costs. Retail gross margin percentage improved in the nine and three months ended September 30, 2009 compared to the nine and three months ended September 30, 2008 due to the centralization of customer care and field technical support functions. Wholesale gross margin percentage in the nine and three months ended September 30, 2009 compared to the nine and three months ended September 30, 2008 also improved due to labor efficiencies achieved through the integration of our billing and monitoring systems. 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 30, 2009, 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.

Customer Creation and Marketing. Our current customer acquisition strategy for our 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 $0.6 million of new RMR in the three months ended September 30, 2009 and 2008, respectively. The internal sales program for our Wholesale segment generated $0.9 million and $1.1 million of new Wholesale RMR in the nine months ended September 30, 2009 and 2008, respectively, and $0.3 million of new Wholesale RMR in each of the three month periods ended September 30, 2009 and 2008.

We engage in marketing and public relations programs to increase awareness for the Protection One® brand name nationally and to generate new lead sources and opportunities. We are reaching out to targeted customers, both residential and commercial, through a variety of channels, including on-line programs and placements and, to a significantly lesser extent, third-party list purchases, outbound calling and traditional mass communications, such as print and direct mail.

We will continue to analyze opportunities for alliance 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 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 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 30, 2009 and 2008. Improvements in Retail RMR attrition on the acquired IASG portfolio during the third quarter of 2009 were partially offset by an increase in customer attrition for bankruptcy and other financial reasons as well as cancellations for customer non-payment. Wholesale attrition for the third quarter of 2009 increased compared to the third quarter of 2008 due to the cancellation of a large customer. Multifamily experienced a decrease in attrition for the third quarter of 2009 compared to the third quarter of 2008 due to a decrease in large customer cancellations.

	Recurring Monthly Revenue Attrition
	September 30, 2009				September 30, 2008
	Annualized Third Quarter		Trailing Twelve Months		Annualized Third Quarter		Trailing Twelve Months
Retail	13.9	%	13.7	%	14.6	%	13.6	%
Wholesale	27.9	%	24.2	%	26.4	%	23.4	%
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
	Annualized Third Quarter		Trailing Twelve Months		Annualized Third Quarter		Trailing Twelve Months
Retail	10.6	%	10.6	%	11.2	%	10.3	%

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 to elevated attrition levels for the next several quarters, which would have a negative impact on our revenue.

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 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% of our Wholesale monitored sites and 25.2%, or $1.1 million, of Wholesale RMR at

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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 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 financial performance. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies and comparability may be limited. Adjusted EBITDA by segment for the nine and three months ended September 30, 2009 and 2008 was as follows (in thousands):

	For the nine months ended September 30,				For the three months ended September 30,
	2009		2008		2009		2008
Retail	$	70,460	$	64,895	$	24,881	$	21,574
Wholesale	9,925		6,496		3,712		2,555
Multifamily	10,565		9,617		3,277		2,961

Retail Adjusted EBITDA increased $5.6 million for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008 due to improvements in monitoring and service gross margin and lower investment in creating new customers, partially offset by higher general and administrative costs. Retail Adjusted EBITDA increased by $3.3 million for the three months ended September 30, 2009 compared to the three months ended September 30, 2008, due to lower investment in creating customers and lower general and administrative costs. Wholesale Adjusted EBITDA increased $3.4 million and $1.1 million for the nine and three months ended September 30, 2009, respectively, compared to the nine and three months ended September 30, 2008 primarily due to labor efficiencies achieved through the integration of the billing and monitoring systems, combined with higher revenue from this segment’s largest customers. Multifamily Adjusted EBITDA increased $0.9 million and $0.3 million for the nine and three months ended September 30, 2009, respectively, compared to the nine and three months ended September 30, 2008. Decreases in selling and general and administrative costs offset a decline in Multifamily monitoring and service 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,
	2009			2008			2009		2008		2009		2008
	Retail						Wholesale				Multifamily
(Loss) Income before income taxes	$	(17,205	)	$	(46,456	)	$	6,218	$	474	$	6,170	$	3,025
Plus:
Interest expense, net	33,791			36,109			—		3		14		12
Amortization and depreciation expense	31,332			39,546			3,605		5,913		2,592		4,606
Amortization of deferred costs in excess of amortization of deferred revenue	21,437			21,316			—		—		1,771		1,499
Stock based compensation expense	424			1,090			—		—		—		—
Other costs	681			579			102		106		18		—
Loss on retirement of debt	—			12,788			—		—		—		—
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 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 amounts of assets, liabilities, revenue or expenses during the first nine months of 2009.

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 30, 2009 and 2008. 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,
	2009									2008
	Revenue- other			Cost of revenue-other			Selling Expense			Revenue- other			Cost of revenue-other			Selling Expense
Retail segment:
Total amount incurred	$	31,869		$	35,785		$	32,141		$	39,447		$	48,909		$	40,070
Amount deferred	(15,117		)	(21,284		)	(8,440		)	(22,161		)	(32,504		)	(14,117		)
Amount amortized	10,913			19,516			12,834			9,753			17,901			13,168
Amount included in Statement of Operations	27,665			34,017			36,535			27,039			34,306			39,121
Wholesale segment:
Total amount incurred (a)	515			—			1,320			646			—			1,800
Multifamily segment:
Total amount incurred	783			2,030			597			305			3,138			1,423
Amount deferred	(10		)	(1,335		)	(191		)	(90		)	(2,757		)	(345		)
Amount amortized	108			1,700			179			114			1,479			134
Amount included in Statement of Operations	881			2,395			585			329			1,860			1,212
Total company:
Total amount incurred	33,167			37,815			34,058			40,398			52,047			43,293
Amount deferred	(15,127		)	(22,619		)	(8,631		)	(22,251		)	(35,261		)	(14,462		)
Amount amortized	11,021			21,216			13,013			9,867			19,380			13,302
Amount reported in Statement of Operations	$	29,061		$	36,412		$	38,440		$	28,014		$	36,166		$	42,133

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

Protection One Consolidated

Revenue decreased slightly, less than 0.2%, to $277.7 million in the first nine months of 2009 compared to $278.0 million in the first nine months of 2008. Monitoring and related services revenue decreased $1.4 million to $248.6 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 $1.1 million, or 3.7%, to $29.1 million in the first nine months of 2009 compared to $28.0 million in the first nine months of 2008 primarily due to an increase in amortization of previously deferred customer acquisition revenue. Cost of monitoring and related services revenue decreased $6.9 million, or 8.1%, to $76.9 million in the first nine months of 2009 compared

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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,
	2009				2008
Revenue
Monitoring and related services	$	189,234	87.2	%	$	191,262	87.6	%
Installation and other	27,665		12.8		27,039		12.4
Total revenue	216,899		100.0		218,301		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	50,823		23.4		57,027		26.1
Installation and other	34,017		15.7		34,306		15.7
Total cost of revenue (exclusive of amortization and depreciation shown below)	84,840		39.1		91,333		41.8
Operating Expenses
Selling expense	36,535		16.8		39,121		17.9
General and administrative expense	47,606		22.0		45,938		21.1
Amortization of intangibles and depreciation expense	31,332		14.4		39,546		18.1
Total operating expenses	115,473		53.2		124,605		57.1
Operating income	$	16,586	7.7	%	$	2,363	1.1	%

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

	Nine Months Ended September 30,
	2009		2008

Beginning Balance, January 1	574,001		602,519
Customer additions	28,915		39,785
Customer losses	(55,625	)	(60,336	)
Other adjustments	1,153		325
Ending Balance, September 30	548,444		582,293

Revenue decreased $1.4 million, or 0.6%, to $216.9 million in the first nine months of 2009 compared to $218.3 million in the first nine months of 2008. Monitoring and related services revenue was $2.0 million lower in the first nine months of 2009 than the first nine months of 2008 primarily resulting from lower service call volume and slightly 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 first nine months of 2009. Installation and other revenue increased $0.6 million in the first nine months of 2009 compared to the first nine months of 2008 due to an increase of $1.2 million in amortization of previously deferred customer acquisition revenue, partially offset by a decrease of $0.6 million in security system outright equipment sales to commercial

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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,
	2009				2008
Revenue
Monitoring and related services	$	38,491	98.7	%	$	35,761	98.2	%
Other	515		1.3		646		1.8
Total revenue	39,006		100.0		36,407		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	20,724		53.1		20,928		57.5
Operating Expenses
Selling expense	1,320		3.4		1,800		5.0
General and administrative expense	7,139		18.3		7,289		20.0
Amortization of intangibles and depreciation expense	3,605		9.2		5,913		16.2
Total operating expenses	12,064		30.9		15,002		41.2
Operating income (loss)	$	6,218	16.0	%	$	477	1.3	%

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

	Nine Months Ended September 30,
	2009		2008

Beginning Balance, January 1	991,014		865,163
Monitored site additions	241,105		301,964
Monitored site losses	(177,884	)	(162,853	)
Other adjustments	67		673
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 $2.6 million, or 7.1%, to $39.0 million in the first nine months of 2009 compared to $36.4 million in the first nine months of 2008 due to the addition of monitored sites from our largest wholesale dealers. Revenue consists primarily of contractual revenue derived from providing monitoring service, as well as interest and fee income generated from our dealer loan program.

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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.

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

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,
	2009		2008

Beginning Balance, July 1,	219,167		264,699
Monitored site additions	3,359		2,501
Monitored site losses	(5,847	)	(12,360	)
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 $0.7 million, or 9.9%, to $7.0 million in the third quarter of 2009 compared to $7.7 million in the third quarter of 2008 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 $0.1 million, or 2.6%, to $2.6 million in the third quarter of 2009 compared to $2.7 million in the third quarter of 2008. 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 $2.1 million, or 45.9%, to $2.5 million in the third quarter of 2009 compared to $4.6 million in the third quarter of 2008. This decrease is primarily attributable to a decrease in the Multifamily segment’s 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.

In 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.

We have 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; (3) our need to enter the capital markets; and (4) exposure related to our existing insurance policies. Lehman 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 we have not and currently do not expect to draw on our revolving credit facility, we expect that Lehman will not fund any future borrowing requests. We have no reason to believe at this time 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 our revolving credit facility has been effectively reduced by $2.5 million. In spite of the reduced availability, 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. We believe there should be sufficient time for the capital markets to stabilize before we have a need for additional financing. Lastly, we have assessed exposure on our existing insurance policies. While we do hold certain policies with AIG’s state-regulated insurance companies, we have no reason to believe they will not fulfill their obligations under our policies.

Supply chain risk was also considered relative to the recent economic conditions. Two vendors are the principal providers of our security-related products and services for our Retail and Multifamily segments. We believe we can obtain alternative supply in the event such products and services are not available from our existing Retail suppliers. We also believe we have sufficient product on hand for our Multifamily segment to continue to provide ongoing services in the short-term in the event we are unable to obtain products from our primary suppliers to this segment.

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The 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.

The senior credit facility is secured by substantially all of our assets, requires quarterly principal payments of $0.75 million and requires potential annual prepayments based on a calculation of “Excess Cash Flow” as defined in the Senior Credit Agreement, commencing with the year ending December 31, 2008 and due in the first quarter of each subsequent year. We were not required to make a prepayment based on the “Excess Cash Flow” calculation for the year ended December 31, 2008 in the first quarter of 2009. Based upon projected 2009 results, we anticipate that we could be required to make such a mandatory prepayment between $20 million and $30 million depending upon the amount of excess cash flow, as defined under the Senior Credit Agreement, generated in 2009. The excess cash flow mandatory prepayment is an annual requirement under the Senior Credit Agreement, and because the estimated prepayment amount is based on forecasted cash flows for the remainder of the year, the final excess cash flow mandatory prepayment, if any, could ultimately differ materially from our estimate.

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 are accounted for as cash flow hedges.

The Unsecured Term Loan Agreement, the Senior Secured Notes Indenture and the Senior Credit Agreement contain certain covenants and restrictions, including with respect to our ability to incur debt and pay dividends, based on earnings before interest, taxes, depreciation and amortization, or EBITDA. While the definition of EBITDA varies slightly among the Unsecured Term Loan Agreement, the Senior Secured Notes Indenture and the Senior Credit 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.

The following table presents the financial ratios required by our Senior Credit Agreement, Senior Secured Notes Indenture and Unsecured Term Loan Agreement through the third quarter of 2010 and our actual ratios as of September 30, 2009.

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

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At September 30, 2009, 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 Ratios contained in our Senior Secured Notes Indenture and Unsecured Term Loan Agreement are debt incurrence tests. We 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 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 to borrow additional funds under other permitted indebtedness provisions in our Senior Secured Notes Indenture, Unsecured Term Loan Agreement and Senior Credit Agreement would provide us with sufficient liquidity for our currently foreseeable operational needs. 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.

Cash Flow

Operating Cash Flows for the Nine Months Ended September 30, 2009. Our operations provided cash of $63.3 million and $46.4 million in the first nine months of 2009 and 2008, 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 million as of September 30, 2009 compared to a deficit of $1.8 million as of December 31, 2008. The increase in working capital at September 30, 2009 is primarily related to improvements in operating results as well as higher cash balances at September 30, 2009.

Investing Cash Flows for the Nine Months Ended September 30, 2009. We used a net $21.8 million and $35.0 million for our investing activities for the first nine months of 2009 and 2008, respectively. We invested a net $18.8 million in cash to install and acquire new accounts (including rental equipment) and $3.3 million to acquire fixed assets in the first nine months of 2009. We also received $0.2 million from the sale of accounts and other assets. We invested a net $32.3 million in cash to install and acquire new accounts (including rental equipment) and $4.5 million to acquire fixed assets in the first nine months of 2008. During the first nine months of 2008, we received $1.6 million from the reduction of restricted cash.

Financing Cash Flows for the Nine Months Ended September 30, 2009. Financing activities used a net $3.9 million and $11.8 million in the first nine months of 2009 and 2008, respectively. In the first nine months of 2009, we paid $3.9 million for the repayment of borrowings under our senior credit facility and capital leases. In the first nine months of 2008, we paid $120.2 million for the redemption of our Senior Subordinated 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 (inclusive of $21.0 million spent through September 30, 2009) are expected to be $32 million, of which $7 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

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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Off-Balance Sheet Arrangements

We had no off-balance sheet transactions or commitments as of or for the nine months ended September 30, 2009, other 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 2, 2009, our senior credit facility and 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
S & P	BB-	B	Stable
Moody’s	Ba2	B3	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 2, 2009. Our senior credit facility is a variable rate debt instrument, and as of November 2, 2009, we had borrowings of $289.5 million outstanding. 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%.

As of November 2, 2009, the one-month LIBOR was 0.24% and the prime rate was 3.25%. The table below reflects the impact on pre-tax income of changes in LIBOR and the prime rate from their rates on November 2, 2009 (dollars 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	)

ITEM 4. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures. As of September 30, 2009, 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 30, 2009.

ITEM 1. FINANCIAL STATEMENTS.

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

ITEM 4. CONTROLS AND PROCEDURES.

ITEM 1. LEGAL PROCEEDINGS.

ITEM 1A. RISK FACTORS.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

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

ITEM 5. OTHER INFORMATION.

ITEM 6. EXHIBITS.

SIGNATURES

PART I — FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	4
	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)	4
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)	5
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	7
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47
ITEM 4.	CONTROLS AND PROCEDURES	47

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	48
ITEM 1A.	RISK FACTORS	48
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	48
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	48
ITEM 5.	OTHER INFORMATION	48
ITEM 6.	EXHIBITS	48
	SIGNATURES	49

	Exhibit Number		Exhibit Description

	31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
	31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One, Inc.+
	31.3		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Protection One Alarm Monitoring, Inc.+
	31.4		Certification pursuant to Section 302 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.+
	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.+
	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.+

Date:	November 9, 2009	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)