Financial Information

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Burglar alarm company was incorporated under the laws of Canada on November 16, 1988 and is primarily engaged in the business of providing residential and commercial electronic alarm monitoring services to subscribers in Canada and the United States of America.

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

(i) The Company earns revenue from residential alarm subscribers for monthly monitoring services and equipment. Revenue from monitoring services is recognized over the term of the subscriber agreement as the services are provided. The subscriber agreements are non-cancelable over a three or four year term with automatic annual renewals thereafter. The maximum period for which subscribers are billed in advance is one year. Unearned revenue represents amounts received from subscribers related to services provided in future periods.

(ii) Revenue and the related costs from the sale of equipment, which consists principally of the sale of alarm equipment, are deferred and recognized over the respective three and four year terms of the subscriber agreement.

Inventories, consisting principally of home alarm equipment and accessories are valued as follows: for used equipment and accessories at the lower of weighted average amortized cost and net realizable value; for new equipment and accessories at the lower of cost on a first-in first-out basis and net realizable value.

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

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

Long-lived assets, including property plant and equipment, intangible assets and deferred charges with finite useful lives are reviewed for impairment on a regular basis or more frequently if events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Impairment exists when the carrying value of assets exceeds the future undiscounted cash flows expected from the related subscriber accounts plus the proceeds of eventual disposition of assets. An impairment loss is measured as the amount by which the carrying amount of the group of assets exceeds it fair value. For the year ended October 31, 2005, the Company recorded no impairment loss and for the year ended October 31, 2004 an impairment loss of $25,600.

Intangible assets consisting of franchise rights are recorded at the cost at which the 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 agreements. In addition, it includes the future tax liability associated with the respective intangible assets, thereby increasing the total net book value of the asset by $1,324,279 in 2005 and $1,585,726 in 2004.

Current income tax expense reflects the estimated income taxes payable for the current year. The company follows the asset and liability method of accounting for income taxes. Under this method future income tax assets and liabilities are recognized to reflect the temporary differences between the carrying amounts of the assets and liabilities and their tax bases.

The future income tax assets and liabilities are measured 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. A valuation allowance is provided to the extent that it is more likely than not that the future income tax assets will not be realized.

Costs incurred in developing the centralized monitoring station and deferred stock compensation costs are capitalized as deferred charges. Amortization is recorded annually as follows:

(i) Deferred development costs are written off on a straight-line basis over 10 years, which represents management’s best estimate of the useful life of the centralized monitoring station.

(ii) Deferred stock compensation cost is written off over the vesting period of four years.

Monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities and the related amortization expenses are translated at historical rates. Revenue and expenses denominated in foreign currencies are translated at the rate of exchange in effect on the date on which the transaction occurs. Exchange gains and losses on translation are included in determination of income. For the year ended October 31, 2005, the exchange loss totalled $35,145 (2004-Nil).

Basic net income per common share is determined using the weighted-average number of common shares outstanding during the respective year. The treasury stock method is used to compute the dilutive effect of options.

The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent asset and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The company has a stock option plan for employers and directors, and it uses the fair value method of accounting for all stock option awards. Under this method the Company recognizes a compensation expense based on the fair value of the options on the date of grant, which is determined by using an option-pricing model. The fair value of the options is recognized over the vesting period of the options granted as compensation expense and paid in capital options. The paid-in capital options balance is reduced as the options are exercised and the amount initially recorded for the options in paid-in capital is credited to capital stock. No compensation expense was recorded for stock options awarded and outstanding prior to November 1, 2003.