Financial Information

The following management’s discussion and analysis of operating results and financial position is supplementary to, and should be read in conjunction with, the audited financial statements for the fiscal year ended October 31, 2004. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada and all amounts, unless otherwise indicated, are expressed in Canadian dollars.

AlarmForce provides Residential security systems and monitoring services in Canada, primarily in the residential market. The majority of revenue is made up of monthly recurring revenue (MRR) derived from four-year subscriber agreements. Under its standard customer contract the company charges a fixed monthly fee for the system including monitoring and service. AlarmForce manufactures and installs alarm equipment which it continues to own under the terms of the subscriber agreement. The company’s base of subscribers has expanded with the addition of new monitored accounts, and as a result the total monthly recurring revenue from subscribers has increased, resulting in growth in revenue, operating margins and cash flows.

Revenue from the sale of add-on equipment, which consists principally of optional system features to new and existing subscribers, is deferred and recognized over the four year term of the subscriber agreement. This accounting policy was adopted on November 1, 2003. Prior to November 1, 2003 revenue from the sale of add-on equipment was recognized upon completion of the sale. Such sales comprised approximately 7% of total revenues in 2004 and 2003.

The Driveway alarm Company continues to be Canada’s largest installer of two-way voice home security systems. The monitored subscriber base has increased from 40,800 accounts at the end of the 2003 fiscal year to 48,700 accounts at the end of the 2004 fiscal year, and MRR has increased correspondingly.

The following summary of selected audited financial information is derived from, and should be read in conjunction with, the company’s audited financial statements, including the notes thereto, for the years ended October 31, 2004, 2003 and 2002:

* Restated to reflect the new accounting policy adopted in 2004
** Debt represents financial liabilities net of cash
*** Earnings Before Interest, Tax, Depreciation and Amortization is a key performance indicator in the security industry and should not be interpreted as a GAAP earnings.

Management believes that EBITDA (Earnings before Interest, Income Tax, Depreciation and Amortization) is a key industry indicator of operating performance and uses this as a measure to benchmark the company’s results. EBITDA is a non-GAAP measure, and the company’s method of calculation may differ and may not be comparable to that used by others. Reconciliation to the GAAP net income figures reported for the five years 2000-2004 is provided below

In 2004, the Company adopted new Canadian accounting standards on a retrospective basis, reflecting the recommendations of CICA Emerging Issues Committee Abstract 142 “Revenue Arrangements with Multiple Deliverables” issued in December 2003, regarding the timing of revenue recognition and the classification of certain items as revenue or expense. This change has the effect of conforming Canadian GAAP to US GAAP.

As a result of the adoption of the new method of accounting, alarm equipment installation revenue and related costs from both new and existing subscribers are deferred and amortized over four years, the term of the customer agreement. Prior to November 1, 2003 these revenues were recognized upon completion of the sale at the time of installation. The result of this change in 2004 is a decrease in revenues of $586,300, a decrease of $369,751 in gross margin and income before taxes respectively, and a decrease of $237,640 in net income. The result of this change in 2003 is a decrease in revenues of $534,762, a decrease of $279,071 in gross margin and income before income taxes respectively, and a decrease of $66,071 in net income. Notably, since this is an accounting change, there is no effect on cash flows nor on the subscriber figures previously reported.

All comparative figures have been restated to reflect the adoption of the new accounting standard.

In addition the company early-adopted the recommendations of CICA Handbook Section 3870 “Stock-Based Compensation and Other Stock-based Payments”, under which it began expensing the fair value of all stock options granted commencing in 2004 on a prospective basis. As a result the company expensed $105,000 in 2004, and will expense a further $97,000 over the future vesting period for the options granted in 2004.