Financial Information

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The company was incorporated under the laws of Canada on November 16, 1988 and is primarily engaged in the business of providing monitoring & security alarm services to subscribers across Canada.

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Inter-company balances and transactions have been eliminated.

(i) The Company earns revenue from subscribers for monthly monitoring services and equipment. Revenue from monitoring services are recognized in equal monthly amounts throughout the term of the customer agreement, corresponding to the monthly subscriber system fee, which is inclusive of equipment, monitoring and service. The maximum period for which subscribers are billed in advance is one year. Unearned revenue represents amounts received from subscribers related to services to be provided in future periods.

(ii) Revenue and the related costs from the sale of equipment, which consists principally of the sale of incidental system features, are deferred and recognized over the four-year term of the rental agreement. This accounting policy was adopted retroactively on November 1, 2003 as explained in note 3(b). Prior to adoption, revenue from the sale was recognized upon installation. Deferred revenue represents sales proceeds less the related cost of sales that are going to be recognized overthe remaining term of the rental agreement.

Inventories, consisting principally of alarm equipment and accessories are valued at the lower of cost on a first-in first-out basis, with cost determined on the average cost basis, and replacement cost.

Short-Term investments consisting of guaranteed investment certificates are carried at the lower of the cost and realizable value.

Property, plant and equipment are recorded at cost. Amortization is provided over the useful lives using the following methods and annual rates:

Intangible assets consisting of franchise rights are recorded at the cost at which the home alarm monitoring company acquired the rights. Amortization is provided on a straight line basis over their estimated useful lives between 5 and 14 years representing the remaining term of the respective franchise agreement and are tested for impairment annually or more frequently when events or changes in circumstances indicate that their carrying amounts may not be recoverable.

Current income tax expense reflects the estimated income taxes payable for the current year before any refunds. The company follows the asset and liability method of accounting for income taxes. Under this method future income taxes are recognized to reflect the temporary differences between the carrying amounts of the assets and liabilities for accounting purposes and the amounts used for tax purposes on an after-tax basis.

We calculate future income taxes using the rates enacted by tax law. The effect of a change in tax rates on future income tax assets and liabilities is included in earnings in the period when the change was enacted. See accompanying notes to financial statements.