Protection One Alarm Monitoring 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                

1-12181-01	1-12181
(Commission file number)	(Commission file number)
PROTECTION ONE, INC.	PROTECTION ONE ALARM MONITORING, INC.
(Exact name of registrant	(Exact name of registrant
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 August 3, 2009, Protection One, Inc. had outstanding 25,325,255 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.

FORWARD-LOOKING STATEMENTS

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

·our history of losses, which are likely to continue;

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

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

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

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

·limited access to capital, which may affect our ability to invest in the acquisition of new customers;

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

·failure to realize benefits from acquisitions of monitoring contracts;

·inability to maintain supplier relationships;

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

·loss of or changes in senior management;

·the potential for environmental or man-made catastrophes in areas of high customer account concentration;

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

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

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

INTRODUCTION

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

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

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INDEX

PART I – FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	4
	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)	4
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE 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	27
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	44
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	44
ITEM 1A.	RISK FACTORS	44
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	45
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	45
	SIGNATURES	46

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PART I – FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS.

PROTECTION ONE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(Unaudited)

	June 30,			December 31,
	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	66,793		$	38,883
Accounts receivable, net of allowance of $7,021 at June 30, 2009 and $6,199 at December 31, 2008	32,903			39,281
Notes receivable	863			1,143
Inventories, net	3,937			4,973
Prepaid expenses	4,180			4,646
Other	1,438			3,022
Total current assets	110,114			91,948
Restricted cash	2,250			2,245
Property and equipment, net	33,313			36,168
Customer accounts, net	221,199			237,718
Dealer relationships, net	36,281			37,597
Other intangibles, net	106			209
Goodwill	41,604			41,604
Trade names	27,687			27,687
Notes receivable, net of current portion	2,635			3,049
Deferred customer acquisition costs	148,855			150,848
Other	7,981			9,981
Total Assets	$	632,025		$	639,054
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Current portion of long-term debt and capital leases	$	5,202		$	5,361
Accounts payable	3,416			3,315
Accrued liabilities	38,642			39,022
Deferred revenue	45,147			46,027
Total current liabilities	92,407			93,725
Long-term debt and capital leases, net of current portion	520,749			523,927
Deferred customer acquisition revenue	97,897			95,028
Deferred tax liability	1,192			1,166
Other liabilities	3,518			5,458
Total Liabilities	715,763			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, 25,325,255 and 25,316,529 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively	253			253
Additional paid-in capital	181,154			180,800
Accumulated other comprehensive loss	(7,675		)	(9,169		)
Deficit	(257,470		)	(252,134		)
Total stockholders’ equity (deficiency in assets)	(83,738		)	(80,250		)
Total Liabilities and Stockholders’ Equity (Deficiency in Assets)	$	632,025		$	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

(Dollars in thousands, except for per share amounts)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
Revenue:
Monitoring and related services	$	166,214		$	165,829
Installation and other	18,934			18,149
Total revenue	185,148			183,978
Cost of revenue (exclusive of amortization and depreciation shown below):
Monitoring and related services	51,068			55,818
Installation and other	24,018			22,972
Total cost of revenue (exclusive of amortization and depreciation shown below)	75,086			78,790
Operating expenses:
Selling	25,537			27,486
General and administrative	42,243			39,109
Amortization and depreciation	24,949			33,634
Total operating expenses	92,729			100,229
Operating income	17,333			4,959
Other expense (income):
Interest expense	22,316			24,658
Interest income	(28		)	(578		)
Loss on retirement of debt	—			12,788
Other	—			(45		)
Total other expense	22,288			36,823
Loss before income taxes	(4,955		)	(31,864		)
Income tax expense	381			304
Net loss	(5,336		)	(32,168		)
Other comprehensive loss, net of tax:
Unrealized gain on cash flow hedging instruments	1,494			2,124
Comprehensive loss	$	(3,842	)	$	(30,044	)
Basic and diluted per share information:
Net loss per common share	$	(0.21	)	$	(1.27	)
Weighted average common shares outstanding (in thousands)	25,318			25,307

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

(Dollars in thousands, except for per share amounts)

(Unaudited)

	Three Months Ended June 30,
	2009			2008
Revenue:
Monitoring and related services	$	82,681		$	83,003
Installation and other	9,465			9,398
Total revenue	92,146			92,401
Cost of revenue (exclusive of amortization and depreciation shown below):
Monitoring and related services	25,322			27,388
Installation and other	11,977			11,762
Total cost of revenue (exclusive of amortization and depreciation shown below)	37,299			39,150
Operating expenses:
Selling	12,474			14,056
General and administrative	20,920			19,844
Amortization and depreciation	12,600			16,601
Total operating expenses	45,994			50,501
Operating income	8,853			2,750
Other expense (income):
Interest expense	11,196			12,096
Interest income	(11		)	(259		)
Other	—			(23		)
Total other expense	11,185			11,814
Loss before income taxes	(2,332		)	(9,064		)
Income tax expense	203			26
Net loss	(2,535		)	(9,090		)
Other comprehensive loss, net of tax:
Unrealized gain on cash flow hedging instruments	1,153			2,057
Comprehensive loss	$	(1,382	)	$	(7,033	)
Basic and diluted per share information:
Net loss per common share	$	(0.10	)	$	(0.36	)
Weighted average common shares outstanding (in thousands)	25,319			25,307

The accompanying notes are an integral part of these

condensed consolidated financial statements.

6

PROTECTION ONE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended June 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(5,336	)	$	(32,168	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on sale of assets	(46		)	(34		)
Loss on retirement of debt	—			12,788
Amortization and depreciation	24,949			33,634
Amortization of debt costs, discounts and premium	(254		)	1,607
Amortization of deferred customer acquisition costs in excess of amortization of deferred revenue	15,663			14,300
Stock based compensation expense	353			714
Deferred income taxes	30			(52		)
Provision for doubtful accounts	3,416			1,825
Other	299			(45		)
Changes in assets and liabilities
Accounts receivable, net	2,928			257
Notes receivable	727			1,351
Other assets	4,047			2,669
Accounts payable	101			(1,271		)
Deferred revenue	(989		)	(650		)
Accrued interest	(350		)	419
Other liabilities	(148		)	(2,754		)
Net cash provided by operating activities	45,390			32,590
Cash flows from investing activities:
Deferred customer acquisition costs	(20,928		)	(33,686		)
Deferred customer acquisition revenue	10,240			14,983
Purchase of rental equipment	(1,085		)	(2,719		)
Purchase of property and equipment	(2,395		)	(2,446		)
Purchases of new accounts	(743		)	(113		)
Reduction of restricted cash	—			1,513
Proceeds from disposition of assets and other	118			55
Net cash used in investing activities	(14,793		)	(22,413		)
Cash flows from financing activities:
Payments on long-term debt and capital leases	(2,687		)	(118,800		)
Proceeds from borrowings	—			110,340
Debt issue costs	—			(2,020		)
Net cash used in financing activities	(2,687		)	(10,480		)
Net increase (decrease) in cash and cash equivalents	27,910			(303		)
Cash and cash equivalents:
Beginning of period	38,883			40,999
End of period	$	66,793		$	40,696
Cash paid for interest	$	22,920		$	22,623
Cash paid for income taxes	$	410		$	464
Non-cash investing and financing activity:
Vehicle additions under capital lease	$	387		$	1,380

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 six and three months ended June 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 (dollars in thousands):

	June 30, 2009			December 31, 2008
Furniture, fixtures and equipment	$	7,333		$	7,061
Data processing and telecommunication	40,746			39,002
Leasehold improvements	7,784			7,544
Vehicles	6,296			6,427
Vehicles under capital leases	9,761			9,572
Buildings and other	6,332			6,320
Rental equipment	13,992			13,318
	92,244			89,244
Less accumulated depreciation	(58,931		)	(53,076		)
Property and equipment, net	$	33,313		$	36,168

Depreciation expense was $6.2 million and $6.3 million for the six months ended June 30, 2009 and 2008, respectively.  Depreciation expense was $3.2 million and $3.0 million for the three months ended June 30, 2009 and 2008, respectively.  The amount of fixed asset additions included in accounts payable was $0.1 million and $0.7 million as of June 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 $3.6 million and $2.6 million was recorded on these assets as of June 30, 2009 and December 31, 2008, respectively.  Deferred revenue of $6.4 million was recorded at June 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 June 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 (dollars in thousands):

Remainder of 2009	$	862
2010	1,706
2011	1,326
2012	877
2013	360
2014	27
Total minimum future rental revenue	$	5,158

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3.    Goodwill and Intangible Assets:

During the six and three months ended June 30, 2009 and 2008, there was no change in the carrying value of goodwill or trade names, the principal indefinite-lived intangible assets.  The Company evaluates goodwill and trade names for impairment annually as of the beginning of the third quarter.  The Company also monitors for events or circumstances that may indicate potential impairment each reporting period with particular emphasis on the Wholesale reporting unit, which had limited excess of fair value over carrying value as of December 31, 2008.  There were no such events or circumstances identified during the first six months of 2009.

A roll-forward of the Company’s amortizable intangible assets is presented by segment and in total in the following table (dollars in thousands):

	Retail			Wholesale			Multifamily			Total Company
Customer Accounts
Net customer accounts at January 1, 2009	$	213,229		$	—		$	24,489		$	237,718
Purchases of customer accounts	743			—			—			743
2009 amortization expense	(15,711		)	—			(1,551		)	(17,262		)
Net customer accounts at June 30, 2009	$	198,261		$	—		$	22,938		$	221,199
Dealer Relationships
Net dealer relationships at January 1, 2009	$	—		$	37,597		$	—		$	37,597
2009 amortization expense	—			(1,316		)	—			(1,316		)
Net dealer relationships at June 30, 2009	$	—		$	36,281		$	—		$	36,281
Other Intangibles
Net other intangibles at January 1, 2009	$	1		$	208		$	—		$	209
Additions	—			26			—			26
2009 amortization expense	(1		)	(128		)	—			(129		)
Net other intangibles at June 30, 2009	$	—		$	106		$	—		$	106

Amortization expense was $18.7 million and $27.3 million for the six months ended June 30, 2009 and 2008, respectively.  Amortization expense was $9.4 million and $13.6 million for the three months ended June 30, 2009 and 2008, respectively.  Accumulated amortization at June 30, 2009 was $218.5 million for customer accounts, $10.8 million for dealer relationships and $3.9 million for other intangibles.  Accumulated amortization at December 31, 2008 was $201.3 million for customer accounts, $9.5 million for dealer relationships and $3.8 million for other intangibles.  The amount of customer account purchases included in other liabilities was $0.1 million at June 30, 2009.  There were no customer account purchases included in other liabilities at June 30, 2008.

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.

9

The effects of the changes in estimates based on the lifing study decreased depreciation and amortization expense and net loss by $5.2 million and $2.5 million for the six and three months ended June 30, 2009, respectively, compared to the previous estimates.  Basic and diluted loss per share were decreased by $0.21 and $0.10 for the six and three months ended June 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 six months) and each of the four succeeding fiscal years on the existing base of amortizable intangible assets as of June 30, 2009 (dollars in thousands):

	2009		2010		2011		2012		2013
Estimated amortization expense	$	37,691	$	32,197	$	29,217	$	27,845	$	27,575

4.     Accrued Liabilities:

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

	June 30, 2009		December 31, 2008
Accrued interest	$	6,529	$	6,879
Accrued vacation pay	4,808		4,821
Accrued salaries, bonuses and employee benefits	11,514		11,199
Derivative liability (See Note 6)	6,075		5,562
Other accrued liabilities	9,716		10,561
Total accrued liabilities	$	38,642	$	39,022

5.     Debt and Capital Leases:

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

	June 30, 2009			December 31, 2008
Term loans under the Senior Credit Agreement, maturing March 31, 2012, variable at LIBOR + 2.25%	$	290,250		$	291,750
Senior Secured Notes, maturing November 15, 2011, fixed 12.00%, face value	115,345			115,345
Unamortized premium on Senior Secured Notes	5,675			6,713
Unsecured Term Loan, maturing March 14, 2013, variable at Prime + 11.5%	110,340			110,340
Capital leases	4,341			5,140
	525,951			529,288
Less current portion (including $2,202 and $2,361 in capital leases as of June 30, 2009 and December 31, 2008, respectively)	(5,202		)	(5,361		)
Total long-term debt and capital leases	$	520,749		$	523,927

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 June 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 $19.7 million remained available as of June 30, 2009 after reducing total availability by approximately $2.8 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.

10

The weighted average annual interest rate before fees at June 30, 2009 and at December 31, 2008, including the impact of interest rate swaps (see Note 6, “Derivatives”), was 5.0%.  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 the 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 June 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 June 30, 2009, and one of the Company’s former directors is affiliated with Arlon Group.  The Company recorded $3.3 million and $2.3 million of related party interest expense for the six months ended June 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 June 30, 2009 and 2008, respectively.

Fair Value of Debt

The fair value of the Company’s debt instruments are estimated based on quoted market prices or readily observable market inputs at June 30, 2009 and December 31, 2008.  At June 30, 2009 and December 31, 2008 the fair value and carrying amount of the Company’s debt for the years indicated were as follows (dollar amounts in thousands):

	Fair Value				Carrying Value
	June 30, 2009		December 31, 2008		June 30, 2009		December 31, 2008
Senior credit facility	$	271,384	$	195,473	$	290,250	$	291,750
Senior Secured Notes	109,578		92,391		121,020		122,058
Unsecured Term Loan	108,133		94,349		110,340		110,340
	$	489,095	$	382,213	$	521,610	$	524,148

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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 June 30, 2009 and December 31, 2008 was $5.2 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 June 30, 2009 (dollars in thousands):

Remainder of 2009	$	1,426
2010	2,184
2011	1,177
2012	332
2013	2
Total minimum lease payments	5,121
Less: Estimated executory costs	(382		)
Net minimum lease payments	4,739
Less: Amount representing interest	(398		)
Present value of net minimum lease payments (a)	$	4,341

(a)  Reflected in the condensed consolidated balance sheet as current and non-current obligations under debt and capital leases of $2,202 and $2,139, respectively.

Debt Covenants

At June 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%.

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 June 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 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 June 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.

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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 $6.1 million and $5.6 million in accrued liabilities, and $1.4 million and $3.3 million in other liabilities as of June 30, 2009 and December 31, 2008, respectively.  The Company estimates $6.1 million of the net unrealized loss existing at June 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 (dollars in thousands):

Derivative Type	Notional		Fair ValueJune 30, 2009			Fair Value December 31, 2008
Interest Rate Swaps	$	250,000	$	(7,473	)	$	(8,867	)
Interest Rate Cap	75,000		—			—
Total	$	325,000	$	(7,473	)	$	(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 June 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 (dollars in thousands):

	Net (loss) gain in interest expense						OCI gain (loss)
	Six Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009		2008
Interest Rate Swaps	$	(3,450	)	$	(209	)	$	1,394	$	1,974
Interest Rate Cap	(100		)	(139		)	100		150
Total	$	(3,550	)	$	(348	)	$	1,494	$	2,124

	Net (loss) gain in interest expense						OCI gain (loss)
	Three Months Ended June 30,						Three Months Ended June 30,
	2009			2008			2009		2008
Interest Rate Swaps	$	(1,763	)	$	(209	)	$	1,102	$	1,974
Interest Rate Cap	(51		)	(37		)	51		83
Total	$	(1,814	)	$	(246	)	$	1,153	$	2,057

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 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.

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7.  Fair Value Measurements:

Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”) defines fair value, establishes a framework for using fair value to measure assets and liabilities and expands disclosures about fair value measurements.  SFAS No. 157 establishes a three-tier value hierarchy, which 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 set forth in SFAS No. 157.  The following table presents financial assets and financial liabilities that the Company measures at fair value on a recurring basis (dollar amounts in thousands).

	Fair Value Measurements
	At June 30, 2009
	Level 1		Level 2			Level 3		Total
Assets:
Money Market Fund	$	64,716	$	—		$	—	$	64,716
Liabilities:
Derivatives	—		(7,473		)	—		(7,473		)

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 as prescribed by the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payment,” 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 $0.7 million was recorded in general and administrative expense for the six month periods ended June 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 $0.3 million was recorded in general and administrative expense for the three month periods ended June 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 six or three months ended June 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 six months of 2009 or 2008.

For the six and three months ended June 30, 2009, the Company had no stock options outstanding that represented dilutive potential shares.  For the six and three months ended June 30, 2008, the Company had stock options that represented 0.5 million and 0.4 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.

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

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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.

In the amended complaint, plaintiffs asserted three new claims for breach of oral contracts.  Plaintiffs also re-asserted the original six claims, five of which were previously dismissed.  The Company has demanded that plaintiffs correct their amended pleading to remove the five previously dismissed claims.

The Company intends to seek a dismissal of the three new contract claims on various grounds.  Following resolution of the anticipated motion, the Company expects to answer and counterclaim.  Deposition discovery may then be reopened, if necessary, to examine the plaintiffs on the three breaches of the purported oral contracts.  The Company expects that these events will result in a delay of the trial currently 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.

IASG filed a Motion for Sanctions Against Plaintiff for Spoliation of Evidence (the “Motion”) on February 21, 2008.  At a hearing on IASG’s Motion on April 9, 2008, the Court found, among other things, that Thomas Few, Sr. had intentionally spoliated evidence and sanctioned plaintiff by issuing an adverse inference jury instruction concerning the destruction of evidence and by awarding IASG its attorney fees associated with the preparation and filing of the Motion.  Discovery ended on May 29, 2009.  IASG’s motions for summary judgment on its defenses and certain of its counterclaims were denied at a hearing held on August 5, 2009.  Trial in the matter is set for August 17, 2009.

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.

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On June 26, 2009, the Court dismissed Plaintiffs’ complaint without prejudice, due to the Plaintiffs’ failure to comply with discovery orders. Plaintiffs have ninety days from the date of the dismissal to re-file their complaint, provided they first comply with the prior discovery orders and any other outstanding discovery obligations.  The case was not dismissed as to an unrelated defendant.  Therefore, fact and expert discovery are progressing between that defendant and the Plaintiffs, and  IASG and its defendant subsidiaries are continuing to participate in discovery notwithstanding the dismissal.

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.

Trial in the matter commenced on April 6, 2009.  After the plaintiffs concluded their case-in-chief, 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.

Final judgment still has not been entered in the matter.  Upon the entry of a final judgment, the plaintiffs will have 30 days, subject to extension, to provide notice of their intention to appeal the Court’s decision.

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 $3.5 million and $4.2 million at June 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 June 30, 2009 and December 31, 2008, the amount available to dealers under these lines of credit was $0.6 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.

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.

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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 (dollars in thousands):

	Six Months Ended June 30, 2009
	Retail		Wholesale		Multifamily		Adjustments(1)			Consolidated
Revenue	$	144,681	$	25,638	$	14,829	$	—		$	185,148
Adjusted EBITDA(2)	45,579		6,213		7,288		—			59,080
Amortization and depreciation expense	20,811		2,404		1,734		—			24,949
Amortization of deferred costs in excess of amortization of deferred revenue	14,452		—		1,211		—			15,663
Segment assets	518,128		71,638		47,625		(5,366		)	632,025
Property additions, exclusive of rental equipment	2,378		404		—		—			2,782
Investment in new accounts and rental equipment, net	11,237		—		1,279		—			12,516

	Six Months Ended June 30, 2008
	Retail		Wholesale		Multifamily		Adjustments(1)			Consolidated
Revenue	$	144,742	$	23,649	$	15,587	$	—		$	183,978
Adjusted EBITDA(2)	43,320		3,941		6,657		—			53,918
Amortization and depreciation expense	26,577		3,988		3,069		—			33,634
Amortization of deferred costs in excess of amortization of deferred revenue	13,324		—		976		—			14,300
Segment assets	537,990		75,862		52,105		(12,134		)	653,823
Property additions, exclusive of rental equipment	3,120		588		118		—			3,826
Investment in new accounts and rental equipment, net	19,839		—		1,696		—			21,535

	Three Months Ended June 30, 2009
	Retail		Wholesale		Multifamily		Consolidated
Revenue	$	72,014	$	12,875	$	7,257	$	92,146
Adjusted EBITDA(2)	23,746		2,948		3,342		30,036
Amortization and depreciation expense	10,531		1,203		866		12,600
Amortization of deferred costs in excess of amortization of deferred revenue	7,163		—		667		7,830
Property additions, exclusive of rental equipment	1,383		211		—		1,594
Investment in new accounts and rental equipment, net	5,976		—		328		6,304

	Three Months Ended June 30, 2008
	Retail		Wholesale		Multifamily		Consolidated
Revenue	$	72,871	$	11,813	$	7,717	$	92,401
Adjusted EBITDA(2)	22,230		1,735		3,202		27,167
Amortization and depreciation expense	13,081		1,985		1,535		16,601
Amortization of deferred costs in excess of amortization of deferred revenue	6,771		—		458		7,229
Property additions, exclusive of rental equipment	2,121		306		84		2,511
Investment in new accounts and rental equipment, net	9,576		—		661		10,237

(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

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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 (dollars in thousands):

	Consolidated
	Six Months EndedJune 30,						Three Months EndedJune 30,
	2009			2008			2009			2008
Loss before income taxes	$	(4,955	)	$	(31,864	)	$	(2,332	)	$	(9,064	)
Plus:
Interest expense, net	22,288			24,080			11,185			11,837
Amortization and depreciation expense	24,949			33,634			12,600			16,601
Amortization of deferred costs in excess of amortization of deferred revenue	15,663			14,300			7,830			7,229
Stock based compensation expense	353			714			39			348
Other costs	782			311			714			239
Loss on retirement of debt	—			12,788			—			—
Less:
Other income	—			(45		)	—			(23		)
Adjusted EBITDA	$	59,080		$	53,918		$	30,036		$	27,167

11.  Income Taxes:

During the six and three months ended June 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 $0.4 million and $0.3 million for the six months ended June 30, 2009 and 2008, respectively, and $0.2 million and $0.03 million for the three months ended June 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.

12.  New Accounting Standards:

In June 2009, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards No. 168,  the FASB Accounting Standards Codification (the “Codification”), as the single source of authoritative accounting and reporting standards in the United States applicable for all non-governmental entities, with the exception of the SEC and its staff.  The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. All references made to US GAAP will use the new Codification numbering system prescribed by the FASB.  As the Codification is not intended to change or alter existing US GAAP, the Company does not expect that adoption of the Codification during the third quarter of 2009 will have any impact on its consolidated financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statement are issued or available to be issued.  Entities are also required to disclose the date through which subsequent

18

events were evaluated as well as the rationale for the selection of such date.  SFAS 165 is effective for interim and annual periods ending after June 15, 2009.  The Company adopted the provisions of SFAS 165 during the second quarter of 2009 and adoption did not have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1”).  FSP FAS 107-1 expands the fair value disclosures required for all financial instruments within the scope of SFAS 107, Disclosures about Fair Value of Financial Instruments, to interim periods for publicly traded entities. FSP FAS 107-1 is effective for financial statements issued after June 15, 2009.  The Company adopted the provisions of FSP FAS 107-1 during the second quarter of 2009 which resulted in additional fair value disclosures.  Adoption did not have any other impact on the consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”).  FSP EITF 03-6-1 requires that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders.  The Company adopted the provisions of FSP EITF 03-6-1 as of January 1, 2009 and adoption did not have a material impact on its consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities — An Amendment of FASB Statement No. 133 (“SFAS 161”).  SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows.  The Company adopted the provisions of SFAS 161 as of January 1, 2009 and adoption did not have a material impact on its consolidated financial statements.

During February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No.157 (“FSP FAS 157-2”), which delays the effective date of FAS 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008.  Based on this guidance, the Company adopted the provisions of SFAS 157 as they relate to long-lived assets, including goodwill and intangibles, effective January 1, 2009.  The adoption of these provisions did not have a material impact on its consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”).  SFAS 160 establishes accounting and reporting standards that require non-controlling interests in a subsidiary to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and any retained non-controlling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value.  SFAS 160 also establishes reporting requirements that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. The Company adopted the provisions of SFAS 160 as of January 1, 2009 and adoption did not have a material impact on its consolidated financial statements.

13.  Summarized Combined Financial Information of the Subsidiary Guarantors of Debt:

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

19

Condensed Consolidating Balance Sheet

June 30, 2009

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—		$	66,224		$	569		$	—		$	66,793
Accounts receivable, net	—			15,954			16,949			—			32,903
Notes receivable	—			—			863			—			863
Inventories, net	—			2,560			1,377			—			3,937
Prepaid expenses	—			3,899			281			—			4,180
Other	—			3,046			122			(1,730		)	1,438
Total current assets	—			91,683			20,161			(1,730		)	110,114
Restricted cash	—			2,250			—			—			2,250
Property and equipment, net	—			27,797			5,516			—			33,313
Customer accounts, net	—			110,846			110,353			—			221,199
Dealer relationships, net	—			—			36,281			—			36,281
Other intangibles, net	—			—			106			—			106
Goodwill	—			6,142			35,462			—			41,604
Trade names	—			22,987			4,700			—			27,687
Notes receivable, net of current portion	—			115,345			2,635			(115,345		)	2,635
Deferred customer acquisition costs	—			137,572			11,283			—			148,855
Other	—			7,069			912			—			7,981
Accounts receivable (payable) from (to) associated companies	(73,655		)	38,729			34,926			—			—
Investment in POAMI	(8,935		)	—			—			8,935			—
Investment in subsidiary guarantors	—			121,889			—			(121,889		)	—
Total assets	$	(82,590	)	$	682,309		$	262,335		$	(230,029	)	$	632,025
Liabilities and Stockholders’ Equity (Deficiency in Assets)
Current liabilities:
Current portion of long-term debt and capital leases	$	—		$	5,202		$	—		$	—		$	5,202
Accounts payable	—			2,744			672			—			3,416
Accrued liabilities	1,148			34,274			4,950			(1,730		)	38,642
Deferred revenue	—			34,242			10,905			—			45,147
Total current liabilities	1,148			76,462			16,527			(1,730		)	92,407
Long-term debt and capital leases, net of current portion	—			515,074			121,020			(115,345		)	520,749
Deferred customer acquisition revenue	—			97,152			745			—			97,897
Deferred tax liability	—			37			1,155						1,192
Other liabilities	—			2,519			999			—			3,518
Total liabilities	1,148			691,244			140,446			(117,075		)	715,763
Stockholders’ Equity (Deficiency in Assets)
Common stock	253			2			1			(3		)	253
Additional paid in capital	181,154			1,511,014			266,659			(1,777,673		)	181,154
Accumulated other comprehensive loss	(7,675		)	(7,675		)	—			7,675			(7,675		)
Deficit	(257,470		)	(1,512,276		)	(144,771		)	1,657,047			(257,470		)
Total stockholders’ equity (deficiency in assets)	(83,738		)	(8,935		)	121,889			(112,954		)	(83,738		)
Total liabilities and stockholders’ equity (deficiency in assets)	$	(82,590	)	$	682,309		$	262,335		$	(230,029	)	$	632,025

20

Condensed Consolidating Balance Sheet

December 31, 2008

(dollars 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

21

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2009

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors		Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	107,171		$	59,043	$	—		$	166,214
Installation and other	—			17,901			1,033		—			18,934
Total revenue	—			125,072			60,076		—			185,148
Cost of revenue:
Monitoring and related services	—			28,335			22,733		—			51,068
Installation and other	—			22,367			1,651		—			24,018
Total cost of revenue	—			50,702			24,384		—			75,086
Operating expenses:
Selling	—			24,108			1,429		—			25,537
General and administrative	2,191			36,352			3,700		—			42,243
Amortization and depreciation	—			12,714			12,235		—			24,949
Holding company allocation	(1,837		)	1,837			—		—			—
Corporate overhead allocation	—			(8,799		)	8,799		—			—
Total operating expenses	354			66,212			26,163		—			92,729
Operating (loss) income	(354		)	8,158			9,529		—			17,333
Other expense (income):
Interest expense	—			23,345			5,892		(6,921		)	22,316
Interest income	—			(6,949		)	—		6,921			(28		)
Equity loss (income) in subsidiary	4,982			(3,390		)	—		(1,592		)	—
Total other expense	4,982			13,006			5,892		(1,592		)	22,288
(Loss) income before income taxes	(5,336		)	(4,848		)	3,637		1,592			(4,955		)
Income tax expense	—			134			247		—			381
Net (loss) income	$	(5,336	)	$	(4,982	)	$	3,390	$	1,592		$	(5,336	)

22

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2008

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	104,652		$	61,177		$	—		$	165,829
Installation and other	—			17,338			811			—			18,149
Total revenue	—			121,990			61,988			—			183,978
Cost of revenue:
Monitoring and related services	—			33,510			22,308			—			55,818
Installation and other	—			21,548			1,424			—			22,972
Total cost of revenue	—			55,058			23,732			—			78,790
Operating expenses:
Selling	—			25,216			2,270			—			27,486
General and administrative	2,642			32,974			3,493			—			39,109
Amortization and depreciation	—			16,014			17,620			—			33,634
Holding company allocation	(1,928		)	1,739			189			—			—
Corporate overhead allocation	—			(7,511		)	7,511			—			—
Total operating expenses	714			68,432			31,083			—			100,229
Operating (loss) income	(714		)	(1,500		)	7,173			—			4,959
Other expense (income):
Interest expense	—			25,696			5,883			(6,921		)	24,658
Interest income	—			(7,498		)	(1		)	6,921			(578		)
Loss on retirement of debt	—			12,788			—			—			12,788
Other	—			(45		)	—			—			(45		)
Equity loss (income) in subsidiary	31,454			(1,138		)	—			(30,316		)	—
Total other expense	31,454			29,803			5,882			(30,316		)	36,823
(Loss) income before income taxes	(32,168		)	(31,303		)	1,291			30,316			(31,864		)
Income tax expense	—			151			153			—			304
Net (loss) income	$	(32,168	)	$	(31,454	)	$	1,138		$	30,316		$	(32,168	)

23

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2009

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors		Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	53,427		$	29,254	$	—		$	82,681
Installation and other	—			8,956			509		—			9,465
Total revenue	—			62,383			29,763		—			92,146
Cost of revenue:
Monitoring and related services	—			13,969			11,353		—			25,322
Installation and other	—			11,164			813		—			11,977
Total cost of revenue	—			25,133			12,166		—			37,299
Operating expenses:
Selling	—			11,730			744		—			12,474
General and administrative	938			18,194			1,788		—			20,920
Amortization and depreciation	—			6,509			6,091		—			12,600
Holding company allocation	(913		)	913			—		—			—
Corporate overhead allocation	—			(4,753		)	4,753		—			—
Total operating expenses	25			32,593			13,376		—			45,994
Operating (loss) income	(25		)	4,657			4,221		—			8,853
Other expense (income):
Interest expense	—			11,716			2,940		(3,460		)	11,196
Interest income	—			(3,471		)	—		3,460			(11		)
Equity loss (income) in subsidiary	2,510			(1,112		)	—		(1,398		)	—
Total other expense	2,510			7,133			2,940		(1,398		)	11,185
(Loss) income before income taxes	(2,535		)	(2,476		)	1,281		1,398			(2,332		)
Income tax expense	—			34			169		—			203
Net (loss) income	$	(2,535	)	$	(2,510	)	$	1,112	$	1,398		$	(2,535	)

24

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2008

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations			Consolidated
Revenue:
Monitoring and related services	$	—		$	52,553		$	30,450		$	—		$	83,003
Installation and other	—			9,133			265			—			9,398
Total revenue	—			61,686			30,715			—			92,401
Cost of revenue:
Monitoring and related services	—			17,157			10,231			—			27,388
Installation and other	—			11,180			582			—			11,762
Total cost of revenue	—			28,337			10,813			—			39,150
Operating expenses:
Selling	—			12,769			1,287			—			14,056
General and administrative	1,335			16,813			1,696			—			19,844
Amortization and depreciation	—			7,860			8,741			—			16,601
Holding company allocation	(988		)	988			—			—			—
Corporate overhead allocation	—			(2,802		)	2,802			—			—
Total operating expenses	347			35,628			14,526			—			50,501
Operating (loss) income	(347		)	(2,279		)	5,376			—			2,750
Other expense (income):
Interest expense	—			12,621			2,934			(3,459		)	12,096
Interest income	—			(3,718		)	—			3,459			(259		)
Other	—			(23		)	—			—			(23		)
Equity loss (income) in subsidiary	8,743			(2,452		)	—			(6,291		)	—
Total other expense	8,743			6,428			2,934			(6,291		)	11,814
Loss before income taxes	(9,090		)	(8,707		)	2,442			6,291			(9,064		)
Income tax expense	—			36			(10		)	—			26
Net (loss) income	$	(9,090	)	$	(8,743	)	$	2,452		$	6,291		$	(9,090	)

25

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2009

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations		Consolidated
Net cash provided by operating activities	$	101		$	26,201		$	19,088		$	—	$	45,390
Cash flows from investing activities:
Deferred customer acquisition costs	—			(19,642		)	(1,286		)	—		(20,928		)
Deferred customer acquisition revenue	—			10,233			7			—		10,240
Purchase of rental equipment	—			(1,085		)	—			—		(1,085		)
Purchase of property and equipment	—			(1,990		)	(405		)	—		(2,395		)
Purchase of new accounts	—			(743		)						(743		)
Proceeds from disposition of assets and other	—			118			—			—		118
Net cash used in investing activities	—			(13,109		)	(1,684		)	—		(14,793		)
Cash flows from financing activities:
Payments on long-term debt and capital leases	—			(2,687		)	—			—		(2,687		)
To (from) related companies	(101		)	17,201			(17,100		)	—		—
Net cash (used in) provided by financing	(101		)	14,514			(17,100		)	—		(2,687		)
Net increase in cash and cash equivalents	—			27,606			304			—		27,910
Cash and cash equivalents:
Beginning of period	—			38,618			265			—		38,883
End of period	$	—		$	66,224		$	569		$	—	66,793

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2008

(dollars in thousands)

(Unaudited)

	Protection One, Inc.			Protection One Alarm Monitoring, Inc.			Subsidiary Guarantors			Eliminations		Consolidated
Net cash (used in) provided by operating activities	$	(351	)	$	11,074		$	21,867		$	—	$	32,590
Cash flows from investing activities:
Deferred customer acquisition costs	—			(31,900		)	(1,786		)	—		(33,686		)
Deferred customer acquisition revenue	—			14,893			90			—		14,983
Purchase of rental equipment	—			(2,719		)	—			—		(2,719		)
Purchase of property and equipment	—			(1,795		)	(651		)	—		(2,446		)
Purchase of new accounts	—			(113		)	—					(113		)
Reduction of restricted cash	—			679			834					1,513
Proceeds from disposition of assets	—			43			12			—		55
Net cash used in investing activities	—			(20,912		)	(1,501		)	—		(22,413		)
Cash flows from financing activities:
Payments on long-term debt and capital leases	—			(118,800		)	—			—		(118,800		)
Proceeds from borrowings	—			110,340			—					110,340
Debt issue costs	—			(2,020		)	—			—		(2,020		)
To (from) related companies	351			19,632			(19,983		)	—		—
Net cash provided by (used in) financing activities	351			9,152			(19,983		)	—		(10,480		)
Net (decrease) increase in cash and cash equivalents	—			(686		)	383			—		(303		)
Cash and cash equivalents:
Beginning of period	—			40,607			392			—		40,999
End of period	$	—		$	39,921		$	775		$	—	$	40,696

26

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations updates the information provided in, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.

Overview

We believe we are the third largest provider of electronic security installation and monitoring in the United States, as measured by recurring monthly revenue, or RMR.  As of June 30, 2009, we served approximately 775,000 residential and business customers and approximately 1,050,000 sites through our Wholesale operations.  Generating cash flow to fund growth and investment in new customers, as well as for debt service, is essential to our operations.

We organize our operations into the following three business segments:

Retail.  Our Retail segment provides monitoring and maintenance services for electronic security systems directly to residential and business customers. We also sell and install electronic security systems for homes and businesses through our Retail segment in order to meet their security needs. As of June 30, 2009, we served approximately 556,000 retail customers across the nation.  Our Retail segment accounted for 76.7% of our recurring monthly revenue at June 30, 2009, of which 29.8% was attributable to commercial customers.

Wholesale.  We contract with independent security alarm dealers nationwide to provide alarm system monitoring services to their residential and business customers.  As of June 30, 2009, our Wholesale segment served approximately 4,600 dealers by monitoring approximately one million homes and businesses on their behalf.  We also provide business support services and financing assistance for these independent dealers in the form of loans secured by customer accounts.  The top 10 wholesale dealers accounted for 51.6% of Wholesale monitored sites and 41.2% of Wholesale recurring monthly revenue as of June 30, 2009.

Multifamily.  We provide monitoring and maintenance services for electronic security systems to tenants of multifamily residences under long-term contracts with building owners and managers. Multifamily service contracts, which have initial terms that fall within a range of five to ten years and average eight years at inception, tend to provide higher operating margins than Retail or Wholesale contracts due primarily to the highly automated nature of the services. We provided alarm monitoring services to approximately 219,000 units in nearly 475 cities as of June 30, 2009.

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

	Six months ended June 30,
	2009				2008
Segment	Revenue		Percent		Revenue		Percent
Retail	$	144,681	78.1	%	$	144,742	78.7	%
Wholesale	25,638		13.9		23,649		12.8
Multifamily	14,829		8.0		15,587		8.5
Total	$	185,148	100.0	%	$	183,978	100.0	%

	Three months ended June 30,
	2009				2008
Segment	Revenue		Percent		Revenue		Percent
Retail	$	72,014	78.1	%	$	72,871	78.9	%
Wholesale	12,875		14.0		11,813		12.8
Multifamily	7,257		7.9		7,717		8.3
Total	$	92,146	100.0	%	$	92,401	100.0	%

Summary of Significant Matters

Net Loss.  We incurred a net loss of $5.3 million and $32.2 million for the six months ended June 30, 2009 and 2008, respectively.  We incurred a net loss of $2.5 million and $9.1 million for the three months ended June 30, 2009 and 2008, respectively. The net loss reflects substantial charges incurred by us for amortization of customer accounts and other intangibles and interest incurred on indebtedness.  The reduction in our net loss in the six months ended June 30, 2009 compared to the six months

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ended June 30, 2008 is primarily related to a $12.8 million loss on retirement of debt in 2008.  In addition, reduced amortization and depreciation expense as a result of changes in estimates based on our lifing study completed during the fourth quarter of 2008 contributed to the reduction in our net loss for the six and three months ended June 30, 2009 compared to the six and three months ended June 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 six 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 $26.5 million and $26.9 million as of June 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 from our marketing programs and commercial sales force.  In the six and three months ended June 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.

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

	Percentage of Total
	2009				2008
	Recurring Monthly Revenue		Sites		Recurring MonthlyRevenue		Sites
Retail	76.7	%	30.5	%	76.4	%	32.4	%
Wholesale	15.6		57.5		14.7		53.1
Multifamily	7.7		12.0		8.9		14.5
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.

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 (dollars in thousands):

	Six Months Ended June 30,
	2009		2008
Recurring Monthly Revenue at June 30	$	26,484	$	26,915
Amounts excluded from RMR:
Amortization of deferred revenue	1,248		1,126
Installation and other revenue (a)	2,885		2,804
Revenue (GAAP basis):
June	30,617		30,845
January – May	154,531		153,133
Total period revenue	$	185,148	$	183,978

	Three Months Ended June 30,
	2009		2008
Recurring Monthly Revenue at June 30	$	26,484	$	26,915
Amounts excluded from RMR:
Amortization of deferred revenue	1,248		1,126
Installation and other revenue (a)	2,885		2,804
Revenue (GAAP basis):
June	30,617		30,845
April – May	61,529		61,556
Total period revenue	$	92,146	$	92,401

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

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

	Six Months Ended June 30,
	2009												2008
	Retail			Wholesale			Multifamily			Total			Retail			Wholesale			Multifamily			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	881			608			48			1,537			1,190			769			62			2,021
RMR from account purchases	25			—			—			25			7			—			—			7
RMR losses (a)	(1,365		)	(463		)	(218		)	(2,046		)	(1,362		)	(430		)	(184		)	(1,976		)
Price increases and other (b)	213			—			9			222			109			11			37			157
Ending RMR balance	$	20,297		$	4,143		$	2,044		$	26,484		$	20,572		$	3,965		$	2,378		$	26,915

	Three Months Ended June 30,
	2009												2008
	Retail			Wholesale			Multifamily			Total			Retail			Wholesale			Multifamily			Total
Beginning RMR balance	$	20,433		$	3,987		$	2,055		$	26,475		$	20,469		$	3,741		$	2,412		$	26,622
RMR additions from direct sales	431			422			21			874			606			452			24			1,082
RMR from account purchases	25			—			—			25			2			—			—			2
RMR losses (a)	(684		)	(266		)	(33		)	(983		)	(662		)	(236		)	(77		)	(975		)
Price increases and other (b)	92			—			1			93			157			8			19			184
Ending RMR balance	$	20,297		$	4,143		$	2,044		$	26,484		$	20,572		$	3,965		$	2,378		$	26,915

(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 nearly 90% of our total revenue for each of the six and three month periods ended June 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 (dollars in thousands):

	Six Months Ended June 30,
	2009												2008
	Retail			Wholesale			Multifamily			Total			Retail			Wholesale			Multifamily			Total
Monitoring and related services revenue	$	126,770		$	25,311		$	14,133		$	166,214		$	127,250		$	23,187		$	15,392		$	165,829
Cost of monitoring and related services (exclusive of depreciation)	33,901			13,627			3,540			51,068			38,290			13,740			3,788			55,818
Gross margin	$	92,869		$	11,684		$	10,593		$	115,146		$	88,960		$	9,447		$	11,604		$	110,011
Gross margin %	73.3		%	46.2		%	75.0		%	69.3		%	69.9		%	40.7		%	75.4		%	66.3		%

	Three Months Ended June 30,
	2009												2008
	Retail			Wholesale			Multifamily			Total			Retail			Wholesale			Multifamily			Total
Monitoring and related services revenue	$	63,053		$	12,732		$	6,896		$	82,681		$	63,732		$	11,669		$	7,602		$	83,003
Cost of monitoring and related services (exclusive of depreciation)	16,699			6,858			1,765			25,322			18,542			6,937			1,909			27,388
Gross margin	$	46,354		$	5,874		$	5,131		$	57,359		$	45,190		$	4,732		$	5,693		$	55,615
Gross margin %	73.5		%	46.1		%	74.4		%	69.4		%	70.9		%	40.5		%	74.9		%	67.0		%

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For the six and three months ended June 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 six and three months ended June 30, 2009 compared to the six and three months ended June 30, 2008 due to the centralization of customer care and field technical support functions.  Wholesale gross margin percentage in the six and three months ended June 30, 2009 compared to the six and three months ended June 30, 2008 also improved due to labor efficiencies achieved through the integration of the billing and monitoring systems, combined with higher revenue from this segment’s largest customers.  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 six and three months ended June 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 $0.9 million and $1.2 million of new RMR in the six months ended June 30, 2009 and 2008, respectively, and $0.4 million and $0.6 million of new RMR in the three months ended June 30, 2009 and 2008, respectively.  The internal sales program for our Wholesale segment generated $0.6 million and $0.8 million of new Wholesale RMR in the six months ended June 30, 2009 and 2008, respectively, and $0.4 million and $0.5 million of new Wholesale RMR in the three months ended June 30, 2009 and 2008, respectively.

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 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 because it allows investors and lenders to value 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.

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 June 30, 2009 and 2008.  Improvements in Retail RMR attrition on the acquired IASG portfolio during the second quarter of 2009 were 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 second quarter of 2009 increased compared to the second quarter of 2008 due to the cancellation of a large customer.  Multifamily experienced a decrease in attrition for the second quarter of 2009 compared to the second quarter of 2008 due to a decrease in large customer cancellations.

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	Recurring Monthly Revenue Attrition
	June 30, 2009				June 30, 2008
	AnnualizedSecondQuarter		TrailingTwelveMonths		AnnualizedSecondQuarter		TrailingTwelveMonths
Retail	13.4	%	13.8	%	12.9	%	13.6	%
Wholesale	26.1	%	23.8	%	24.5	%	21.9	%
Multifamily	6.5	%	20.9	%	12.9	%	12.3	%

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
	June 30, 2009				June 30, 2008
	AnnualizedSecondQuarter		TrailingTwelveMonths		AnnualizedSecondQuarter		TrailingTwelveMonths
Retail	10.4	%	10.8	%	9.4	%	10.2	%

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.

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 six and three months ended June 30, 2009 and 2008 was as follows (dollars in thousands):

	For the six months ended June 30,				For the three months ended June 30,
	2009		2008		2009		2008
Retail	$	45,579	$	43,320	$	23,746	$	22,230
Wholesale	6,213		3,941		2,948		1,735
Multifamily	7,288		6,657		3,342		3,202

Retail Adjusted EBITDA increased $2.3 million and $1.5 million for the six and three months ended June 30, 2009, respectively, compared to the six and three months ended June 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.  Wholesale Adjusted EBITDA increased $2.3 million and $1.2 million for the six and three months ended June 30, 2009, respectively, compared to the six and three months ended June 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 $0.6 million and $0.1 million for the six and three months ended June 30, 2009, respectively, compared to the six and three months ended June 30, 2008.  Decreases in selling and general and administrative costs offset a decline in Multifamily monitoring and service revenue.

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

	For the six months ended June 30,
	2009			2008			2009		2008			2009		2008
	Retail						Wholesale					Multifamily
(Loss) Income before income taxes	$	(12,978	)	$	(34,421	)	$	3,707	$	(47	)	$	4,316	$	2,604
Plus:
Interest expense, net	22,279			24,072			—		—			9		8
Amortization and depreciation expense	20,811			26,577			2,404		3,988			1,734		3,069
Amortization of deferred costs in excess of amortization of deferred revenue	14,452			13,324			—		—			1,211		976
Stock based compensation expense	353			714			—		—			—		—
Other costs	662			311			102		—			18		—
Loss on retirement of debt	—			12,788			—		—			—		—
Less:
Other income	—			(45		)	—		—			—		—
Adjusted EBITDA	$	45,579		$	43,320		$	6,213	$	3,941		$	7,288	$	6,657

	For the three months ended June 30,
	2009			2008			2009		2008			2009		2008
	Retail						Wholesale					Multifamily
(Loss) Income before income taxes	$	(5,823	)	$	(10,020	)	$	1,687	$	(250	)	$	1,804	$	1,206
Plus:
Interest expense, net	11,180			11,834			—		—			5		3
Amortization and depreciation expense	10,531			13,081			1,203		1,985			866		1,535
Amortization of deferred costs in excess of amortization of deferred revenue	7,163			6,771			—		—			667		458
Stock based compensation expense	39			348			—		—			—		—
Other costs	656			239			58		—			—		—
Less:
Other income	—			(23		)	—		—			—		—
Adjusted EBITDA	$	23,746		$	22,230		$	2,948	$	1,735		$	3,342	$	3,202

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 six months of fiscal 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.

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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.

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 six and three months ended June 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 (dollars in thousands):

	Six Months Ended June 30,
	2009									2008
	Revenue-other			Cost of revenue-other			SellingExpense			Revenue-other			Cost of revenue-other			SellingExpense
Retail segment:
Total amount incurred	$	21,005		$	23,679		$	20,890		$	26,131		$	33,164		$	26,214
Amount deferred	(10,233		)	(14,207		)	(5,435		)	(14,893		)	(22,247		)	(9,653		)
Amount amortized	7,139			12,906			8,685			6,254			10,854			8,724
Amount included in Statement of Operations	17,911			22,378			24,140			$	17,492		$	21,771		$	25,285
Wholesale segment:
Total amount incurred (a)	327			—			1,015			$	462		$	—		$	1,334
Multifamily segment:
Total amount incurred	630			1,612			412			$	211		$	1,810		$	994
Amount deferred	(7		)	(1,133		)	(153		)	(90		)	(1,574		)	(212		)
Amount amortized	73			1,161			123			74			965			85
Amount included in Statement of Operations	696			1,640			382			$	195		$	1,201		$	867
Total company:
Total amount incurred	21,962			25,291			22,317			$	26,804		$	34,974		$	28,542
Amount deferred	(10,240		)	(15,340		)	(5,588		)	(14,983		)	(23,821		)	(9,865		)
Amount amortized	7,212			14,067			8,808			6,328			11,819			8,809
Amount reported in Statement of Operations	$	18,934		$	24,018		$	25,537		$	18,149		$	22,972		$	27,486

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	Three Months Ended June 30,
	2009									2008
	Revenue-other			Cost of revenue-other			SellingExpense			Revenue-other			Cost of revenue-other			SellingExpense
Retail segment:
Total amount incurred	$	10,455		$	11,796		$	10,186		$	13,325		$	16,214		$	13,348
Amount deferred	(5,002		)	(7,019		)	(2,718		)	(7,439		)	(10,633		)	(4,955		)
Amount amortized	3,508			6,393			4,278			3,253			5,625			4,399
Amount included in Statement of Operations	8,961			11,170			11,746			$	9,139		$	11,206		$	12,792
Wholesale segment:
Total amount incurred (a)	143			—			558			$	144		$	—		$	786
Multifamily segment:
Total amount incurred	327			461			143			$	78		$	672		$	528
Amount deferred	(1		)	(290		)	(39		)	—			(567		)	(94		)
Amount amortized	35			636			66			37			451			44
Amount included in Statement of Operations	361			807			170			$	115		$	556		$	478
Total company:
Total amount incurred	10,925			12,257			10,887			$	13,547		$	16,886		$	14,662
Amount deferred	(5,003		)	(7,309		)	(2,757		)	(7,439		)	(11,200		)	(5,049		)
Amount amortized	3,543			7,029			4,344			3,290			6,076			4,443
Amount reported in Statement of Operations	$	9,465		$	11,977		$	12,474		$	9,398		$	11,762		$	14,056

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

In addition to the amounts reflected in the table above relating to our costs incurred to create new accounts, our Retail segment also capitalized purchases of rental equipment in the amount of $1.1 million and $2.7 million for the six months ended June 30, 2009 and 2008, respectively, and $0.5 million and $1.4 million for the three months ended June 30, 2009 and 2008, respectively.  We purchased customer accounts valued at $0.7 million during the six and three months ended June 30, 2009.  We purchased customer accounts valued at $0.1 million during the six months ended June 30, 2008.  No customer accounts were purchased during the three months ended June 30, 2008.  Retail costs incurred during the six and three months ended June 30, 2009 decreased as a result of lower sales volumes due in part to fewer opportunities to sell security systems in the current economic conditions.  In addition, Retail costs incurred during the six months ended June 30, 2008 include expenses related to our analog to digital technology upgrade.

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

Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Protection One Consolidated

Revenue increased $1.1 million, or 0.6%, to $185.1 million in the first six months of 2009 compared to $184.0 million in the first six months of 2008.  Monitoring and related services revenue increased $0.4 million to $166.2 million primarily due to an increase in wholesale customer sites, partially offset by a decline in Retail and Multifamily monitoring and services revenue.  Installation and other revenue increased $0.8 million, or 4.3%, to $18.9 million in the first six months of 2009 compared to $18.1 million in the first six months of 2008 primarily due to an increase in amortization of previously deferred customer acquisition revenue.  Cost of monitoring and related services revenue decreased $4.7 million, or 8.5%, to $51.1 million in the first six months of 2009 compared to $55.8 million in the first six months of 2008.  The decrease is primarily due to the centralization of Retail

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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 $2.0 million, or 7.1%, to $25.5 million in the first six months of 2009 compared to $27.5 million in the first six months of 2008, due to a reduction in costs associated with our marketing programs and a reduction in sales headcount.  General and administrative costs increased $3.1 million, or 8.0%, to $42.2 million in the first six months of 2009 compared to $39.1 million in the first six months of 2008, primarily due to increases in bad debt expense and legal fees.

Amortization and depreciation decreased $8.7 million, or 25.8%, to $24.9 million in the first six months of 2009 compared to $33.6 million in the first six 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 $1.8 million, or 7.4%, to $22.3 million for the first six months of 2009 compared to $24.1 million in the first six months of 2008 due to lower debt discount amortization as a result of refinancing our Senior Subordinated Notes.

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):

	Six Months Ended June 30,
	2009				2008
Revenue
Monitoring and related services	$	126,770	87.6	%	$	127,250	87.9	%
Installation and other	17,911		12.4		17,492		12.1
Total revenue	144,681		100.0		144,742		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	33,901		23.4		38,290		26.5
Installation and other	22,378		15.5		21,771		15.0
Total cost of revenue (exclusive of amortization and depreciation shown below)	56,279		38.9		60,061		41.5
Operating Expenses
Selling expense	24,140		16.7		25,285		17.5
General and administrative expense	34,150		23.6		30,424		21.0
Amortization of intangibles and depreciation expense	20,811		14.4		26,577		18.4
Total operating expenses	79,101		54.7		82,286		56.9
Operating income	$	9,301	6.4	%	$	2,395	1.6	%

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

	Six Months Ended June 30,
	2009		2008
Beginning Balance, January 1	574,001		602,519
Customer additions	19,332		26,914
Customer losses	(38,314	)	(39,336	)
Other adjustments	1,439		426
Ending Balance, June 30	556,458		590,523

Revenue in the first six months of 2009 was consistent with revenue in the first six months of 2008 at $144.7 million.  Monitoring and related services revenue was slightly lower in the first six months of 2009 than the first six months of 2008 primarily resulting from lower service call volume.   See “Summary of Significant Matters—Recurring Monthly Revenue,” above for a roll-forward of RMR and additional information regarding the change in recurring monthly revenue in the first six months of 2009.  Installation and other revenue increased $0.4 million in the first six months of 2009 compared to the first six months of 2008 due to an increase of $0.9 million in amortization of previously deferred customer acquisition revenue, partially offset by a decrease of $0.5 million in security system outright equipment sales to commercial 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.

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Cost of revenue decreased $3.8 million, or 6.3%, to $56.3 million in the first six months of 2009 compared to $60.1 million in the first six months of 2008.  Cost of monitoring and related services decreased $4.4 million in the first six months of 2009 compared to the first six months of 2008 due to centralization of customer care and field technical support functions.  This improvement was partially offset by a $0.6 million increase in installation and other expense primarily due to an increase of $2.1 million in amortization of previously deferred customer costs partially offset by $0.9 million of reduced costs related to gross margin improvement from a lower volume of security system equipment sales to commercial customers in the first six months of 2009 compared to the first six months of 2008.  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 $3.2 million, or 3.9%, to $79.1 million in the first six months of 2009 compared to $82.3 million in the first six 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):

	Six Months Ended June 30,
	2009				2008
Revenue
Monitoring and related services	$	25,311	98.7	%	$	23,187		98.0	%
Other	327		1.3		462			2.0
Total revenue	25,638		100.0		23,649			100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	13,627		53.1		13,740			58.1
Operating Expenses
Selling expense	1,015		4.0		1,334			5.6
General and administrative expense	4,885		19.0		4,634			19.6
Amortization of intangibles and depreciation expense	2,404		9.4		3,988			16.9
Total operating expenses	8,304		32.4		9,956			42.1
Operating income (loss)	$	3,707	14.5	%	$	(47	)	(0.2	)%

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

	Six Months Ended June 30,
	2009		2008
Beginning Balance, January 1	991,014		865,163
Monitored site additions	165,532		206,969
Monitored site losses	(107,230	)	(103,384	)
Other adjustments	67		731
Ending Balance, June 30	1,049,383		969,479

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

Revenue increased $2.0 million, or 8.4%, to $25.6 million in the first six months of 2009 compared to $23.6 million in the first six months of 2008 due to the addition of monitored sites from our largest wholesale dealers.  This 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 six months of 2009 compared to the first six 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 decreased to 53.8% for the first six months of 2009 compared to 59.3% in the first six 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 $1.7 million, or 16.6%, to $8.3 million in the first six months of 2009 compared to $10.0 million in the first six months of 2008 and also decreased as a percentage of revenues for the first six months of 2009 to 32.4% compared to 42.1% for the first six months of 2008.  The improvement is primarily a result of a decrease in amortization and depreciation expense as certain intangible assets became fully amortized, and to a lesser degree, 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):

	Six Months Ended June 30,
	2009				2008
Revenue
Monitoring and related services	$	14,133	95.3	%	$	15,392	98.7	%
Installation and other	696		4.7		195		1.3
Total revenue	14,829		100.0		15,587		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	3,540		23.9		3,788		24.3
Installation and other	1,640		11.0		1,201		7.7
Total cost of revenue (exclusive of amortization and depreciation shown below)	5,180		34.9		4,989		32.0
Operating Expenses
Selling expense	382		2.6		867		5.5
General and administrative expense	3,208		21.6		4,051		26.0
Amortization of intangibles and depreciation expense	1,734		11.7		3,069		19.7
Total operating expenses	5,324		35.9		7,987		51.2
Operating income	$	4,325	29.2	%	$	2,611	16.8	%

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

	Six Months Ended June 30,
	2009		2008
Beginning Balance, January 1,	240,648		277,743
Monitored site additions	4,832		5,340
Monitored site losses	(26,313	)	(18,384	)
Ending Balance, June 30,	219,167		264,699

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

Revenue decreased $0.8 million, or 4.9%, to $14.8 million in the first six months of 2009 compared to $15.6 million in the first six 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 six months of 2009 than the first six 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 six months of 2009 compared to the first six months of 2008 due to an increase in security system 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.

Cost of revenue increased $0.2 million, or 3.8%, to $5.2 million in the first six months of 2009 compared to $5.0 million in the first six 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 equipment sales.  Monitoring and related services cost of revenue decreased by $0.2 million in the first six months of 2009 compared to the first six 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.

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Operating expenses decreased $2.7 million, or 33.3%, to $5.3 million in the first six months of 2009 compared to $8.0 million in the first six months of 2008.  This decrease is primarily attributable to a decrease in Multifamily’s share of corporate shared services, such as human resources and information technology.  An increase in bad debt expense was also offset by lower selling expense.  In addition, amortization of intangibles and depreciation expense decreased $1.4 million, or 43.5%, to $1.7 million in the first six months of 2009 compared to $3.1 million in the first six months of 2008 due to the impact of changes in estimates based on our lifing study in 2008.

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

Protection One Consolidated

Revenue decreased slightly, less than one half of one percent, to $92.1 million in the second quarter of 2009 compared to $92.4 million in the second quarter of 2008.  Monitoring and related services revenue decreased $0.3 million to $82.7 million primarily due to a decline in Retail and Multifamily monitoring and services revenue, partially offset by an increase in wholesale customer sites.  Installation and other revenue increased $0.1 million, or 0.7%, to $9.5 million in the second quarter of 2009 compared to $9.4 million in the second 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 7.5%, to $25.3 million in the second quarter of 2009 compared to $27.4 million in the second 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 $1.6 million, or 11.3%, to $12.5 million in the second quarter of 2009 compared to $14.1 million in the second quarter of 2008, due to a reduction in costs associated with our marketing programs and a reduction in sales headcount.  General and administrative costs increased $1.1 million, or 5.4%, to $20.9 million in the second quarter of 2009 compared to $19.8 million in the second quarter of 2008, primarily due to increases in bad debt expense and legal fees.

Amortization and depreciation decreased $4.0 million, or 24.1%, to $12.6 million in the second quarter of 2009 compared to $16.6 million in the second 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 $0.6 million, or 5.5%, to $11.2 million for the second quarter of 2009 compared to $11.8 million in the second quarter of 2008 primarily due to a decrease in prime rate for our Unsecured Term Loan.

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):

	Three Months Ended June 30,
	2009				2008
Revenue
Monitoring and related services	$	63,053	87.6	%	$	63,732	87.5	%
Installation and other	8,961		12.4		9,139		12.5
Total revenue	72,014		100.0		72,871		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	16,699		23.2		18,542		25.4
Installation and other	11,170		15.5		11,206		15.4
Total cost of revenue (exclusive of amortization and depreciation shown below)	27,869		38.7		29,748		40.8
Operating Expenses
Selling expense	11,746		16.3		12,792		17.5
General and administrative expense	16,512		22.9		15,460		21.2
Amortization of intangibles and depreciation expense	10,531		14.7		13,081		18.0
Total operating expenses	38,789		53.9		41,333		56.7
Operating income	$	5,356	7.4	%	$	1,790	2.5	%

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

	Three Months Ended June 30,
	2009		2008
Beginning Balance, April 1	564,776		596,053
Customer additions	9,557		13,302
Customer losses	(19,533	)	(18,802	)
Other adjustments	1,658		(30	)
Ending Balance, June 30	556,458		590,523

Revenue decreased $0.9 million, or 1.2%, to $72.0 million in the second quarter of 2009 compared to $72.9 million in the second quarter of 2008.  Monitoring and related services revenue decreased $0.7 million in the second quarter of 2009 compared to the second quarter of 2008 due to lower service call volume.   See “Summary of Significant Matters—Recurring Monthly Revenue,” above for a roll-forward of RMR and additional information regarding the change in recurring monthly revenue in the second quarter of 2009.  Installation and other revenue decreased $0.2 million in the second quarter of 2009 compared to the second quarter of 2008 due to a decrease in security system outright equipment sales to commercial customers, partially offset by 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 $1.9 million, or 6.3%, to $27.8 million in the second quarter of 2009 compared to $29.7 million in the second quarter of 2008.  Cost of monitoring and related services decreased $1.8 million in the second quarter of 2009 compared to the second quarter of 2008 due to centralization of customer care and field technical support functions.  Cost of installation and other revenue in the second quarter of 2009 was consistent with the second quarter of 2008.  An increase in amortization of previously deferred customer acquisition costs was offset by a decrease in 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 $2.5 million, or 6.2%, to $38.8 million in the second quarter of 2009 compared to $41.3 million in the second quarter of 2008.  Increases in general and administrative expenses, particularly legal fees and to a lesser degree, 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.   Selling expense decreased in the second quarter of 2009 compared the second quarter of 2008, due to 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):

	Three Months Ended June 30,
	2009				2008
Revenue
Monitoring and related services	$	12,732	98.9	%	$	11,669		98.8	%
Other	143		1.1		144			1.2
Total revenue	12,875		100.0		11,813			100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	6,858		53.3		6,937			58.7
Operating Expenses
Selling expense	558		4.3		786			6.7
General and administrative expense	2,569		20.0		2,354			19.9
Amortization of intangibles and depreciation expense	1,203		9.3		1,985			16.8
Total operating expenses	4,330		33.6		5,125			43.4
Operating income (loss)	$	1,687	13.1	%	$	(249	)	(2.1	)%

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

	Three Months Ended June 30,
	2009		2008
Beginning Balance, April 1	987,748		893,882
Monitored site additions	119,616		135,917
Monitored site losses	(57,981	)	(60,581	)
Other adjustments	—		261
Ending Balance, June 30	1,049,383		969,479

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

Revenue increased $1.1 million, or 9.0%, to $12.9 million in the second quarter of 2009 compared to $11.8 million in the second 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 in the second quarter of 2009 was consistent with cost of revenue in the second quarter of 2008 at $6.9 million.  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 decreased to 53.9% for the second quarter of 2009 compared to 59.4% in the second 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 $0.8 million, or 15.5%, to $4.3 million in the second quarter of 2009 compared to $5.1 million in the second quarter of 2008 and also decreased as a percentage of revenues for the second quarter of 2009 to 33.6% compared to 43.4% for the second 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.  A decrease in selling expense offset a similar increase in general and administrative expenses.

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):

	Three Months Ended June 30,
	2009				2008
Revenue
Monitoring and related services	$	6,896	95.0	%	$	7,602	98.5	%
Installation and other	361		5.0		115		1.5
Total revenue	7,257		100.0		7,717		100.0
Cost of revenue (exclusive of amortization and depreciation shown below)
Monitoring and related services	1,765		24.3		1,909		24.7
Installation and other	807		11.1		556		7.2
Total cost of revenue (exclusive of amortization and depreciation shown below)	2,572		35.4		2,465		31.9
Operating Expenses
Selling expense	170		2.3		478		6.2
General and administrative expense	1,839		25.4		2,030		26.3
Amortization of intangibles and depreciation expense	866		11.9		1,535		19.9
Total operating expenses	2,875		39.6		4,043		52.4
Operating income	$	1,810	25.0	%	$	1,209	15.7	%

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

	Three Months Ended June 30,
	2009		2008
Beginning Balance, April 1,	218,752		268,548
Monitored site additions	2,440		2,853
Monitored site losses	(2,025	)	(6,702	)
Ending Balance, June 30,	219,167		264,699

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

Revenue decreased $0.4 million, or 6.0%, to $7.3 million in the second quarter of 2009 compared to $7.7 million in the second quarter of 2008.  A decrease in monitoring and service revenue due to the declining customer base was offset by an increase in security system equipment sales.  Although site additions exceeded losses of monitored sites in the second quarter of 2009, we do not expect that trend to continue in the remainder of 2009.  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 increased $0.1 million, or 4.3%, to $2.6 million in the second quarter of 2009 compared to $2.5 million in the second quarter of 2008, which is primarily attributable to an increase in installation costs resulting from higher amortization of previously deferred costs.  Monitoring and related services cost of revenue decreased by $0.1 million in the second quarter of 2009 compared to the second quarter 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 $1.1 million, or 28.9%, to $2.9 million in the second quarter of 2009 compared to $4.0 million in the second quarter of 2008.  This decrease is primarily attributable to a decrease in Multifamily’s share of corporate shared services, such as human resources and information technology.  An increase in bad debt expense was also offset by lower selling expense.  In addition, amortization of intangibles and depreciation expense decreased 43.6% to $0.9 million in the second quarter of 2009 from $1.5 million in the second 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 $66.8 million cash and cash equivalents as of June 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 $19.7 million remains available as of August 3, 2009 after reducing total availability by $2.8 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 June 30, 2009.

Debt Instrument	Financial Covenants	Ratio Requirements	Actual Ratio as of June 30, 2009
Senior Credit Agreement	Consolidated Leverage Ratio (consolidated total debt on last day of period/consolidated EBITDA for most recent four fiscal quarters)	Q2 2009 through Q3 2009: Less than 5.75:1.0 Q4 2009 through Q3 2010; less than 5.5:1.0	4.58:1.0
	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	2.46:1.0
Senior Secured Notes Indenture	Consolidated Fixed Charge Coverage Ratio (current fiscal quarter EBITDA/current fiscal quarter interest expense)	Greater than 2.25:1.0	2.74:1.0
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	2.66:1.0

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At June 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.

Cash Flow

Operating Cash Flows for the Six Months Ended June 30, 2009.  Our operations provided cash of $45.4 million and $32.6 million in the first six 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 $17.7 million as of June 30, 2009 compared to a deficit of $1.8 million as of December 31, 2008.  The increase in working capital at June 30, 2009 is primarily related to improvements in operating results as well as higher cash balances at June 30, 2009.

Investing Cash Flows for the Six Months Ended June 30, 2009.  We used a net $14.8 million and $22.4 million for our investing activities for the first six months of 2009 and 2008, respectively.  We invested a net $12.5 million in cash to install and acquire new accounts (including rental equipment) and $2.4 million to acquire fixed assets in the first six months of 2009.  We invested a net $21.5 million in cash to install and acquire new accounts (including rental equipment) and $2.4 million to acquire fixed assets in the first six months of 2008.  During the first six months of 2008, we received $1.5 million from the reduction of restricted cash.

Financing Cash Flows for the Six Months Ended June 30, 2009.  Financing activities used a net $2.7 million and $10.5 million in the first six months of 2009 and 2008, respectively.  In the first six months of 2009, we paid $2.7 million for the repayment of borrowings under our senior credit facility and capital leases.  In the first six months of 2008, we paid $118.8 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.

Capital Expenditures

Assuming we have available funds, net capital expenditures for 2009 (inclusive of $14.9 million spent through June 30, 2009) are expected to be $33 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 June 30, 2009, included $290.3 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.

Off-Balance Sheet Arrangements

We had no off-balance sheet transactions or commitments as of or for the six months ended June 30, 2009, other than as disclosed in this report.

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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 August 3, 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 NotesDue 2011	Outlook
S & P	BB-	B	Negative
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 August 3, 2009.  Our senior credit facility is a variable rate debt instrument, and as of August 3, 2009, we had borrowings of $290.3 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 August 3, 2009, the one-month LIBOR was 0.28% 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 August 3, 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	$	2,318		$	1,214		$	0		$	(1,505	)	$	(3,012	)	$	(4,518	)	$	(6,024	)

ITEM 4.    CONTROLS AND PROCEDURES.

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

PART II - OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS.

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

ITEM 1A.   RISK FACTORS.

Not applicable.

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

None.

ITEM 3.     DEFAULTS UPON SENIOR SECURITIES.

None.

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

Our annual meeting of stockholders was held on June 24, 2009.  The following actions were approved at the meeting:

·Election of nine nominees to the Board of Directors to serve for a term of one year.  Those nominated and elected were Richard Ginsburg, Raymond C. Kubacki, Robert J. McGuire, Jeffrey S. Nordhaus, Alex Hocherman, Thomas J. Russo, Edward Sippel, Michael Weinstock and Arlene M. Yocum.

Stockholders of record as of April 30, 2009 were authorized to vote on the proposed actions.  We did not solicit proxies.  The results of the vote were as follows:

	Votes For	Abstentions or Broker and Other Non-votes
Election of directors:
Richard Ginsburg	17,705,829	7,610,700
Alex Hocherman	17,705,829	7,610,700
Raymond C. Kubacki	17,705,829	7,610,700
Robert J. McGuire	17,705,829	7,610,700
Jeffrey S. Nordhaus	17,705,829	7,610,700
Thomas J. Russo	17,705,829	7,610,700
Edward Sippel	17,705,829	7,610,700
Michael Weinstock	17,705,829	7,610,700
Arlene M. Yocum	17,705,829	7,610,700

No other business was conducted at the annual meeting.

ITEM 5.     OTHER INFORMATION.

None.

ITEM 6.     EXHIBITS.

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

Exhibit Number	Exhibit Description
10.1	2009 Senior Management Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the Company and POAMI dated June 3, 2009)*
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.+

*Each Exhibit marked with an asterisk constitutes a management contract or compensatory plan or arrangement

+ Filed or furnished herewith

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SIGNATURES

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

Date:	August 10, 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)

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