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Tenant breaking lease prior to move in

I have a tenant that decided to rent my house.  He signed the lease and paid a security deposit for me to hold the house until he was moving in 3 weeks later.  He then EMAILS me a few days ago to say his girlfriend has a change of heart and doesn't want to live with him so he wants to cancel the lease.  I try working with him to explain I will try to get it rented ASAP because right now he is still bound by the lease.  He then calls back to say she had another change of heart and wants to sign again, I plan a meeting which she doesn't bother to show up to.  The next day I decide enough is enough and move forward with finding other tenants.  Now they are demanding their security deposit back!  I don't think they deserve it back since I have held the house for them for over a month and could never commit to following through on this.  I was nice enough to offer a partial refund - the sec deposit less the lost rent until I can get a new tenant in the house.  Am I wrong to keep it?
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I am not sure what the answer is in your current situation and will watch what someone with experience answers.  However I have thought through this situation and here is my plan.  I am asking for first and last months rent at the signing of the lease.  This way I have their "rent".  As I think a deposit is intended for damage done after they move in.  Then if your situation happens I can use their rent until I find a replacement.  I am concerned the deposit may not work that way.   Either way you do have a signed lease of which you can collect on them via court.  They owe you rent until you find another tenant.
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