Financial Information

Operating expenses

General and Administrative expenses decreased from 2004 to 2005 by $8,143. This decrease was due to the Company’s procedures in effectively controlling expenses, resulting in a marginal decrease.

The Company recorded stock-based compensation expense of $54,747 in 2005 in accordance with the adoption of the new policy in 2004. In 2004, Company recorded stock-based compensation expense of $105,281. The fair value of stock options granted in 2004 was determined based on the Black-Scholes option-pricing model.

Selling expenses increased by $1,153,382 or 24% due to the increase in direct-response marketing costs, primarily due to the additional budget for the US expansion.

Other expenses

Amortization expenses include amortization of the cost of revenue equipment and franchise rights, including the gross up on intangible assets for the respective future tax liability. The increase in amortization was higher due to the added amortization of the future tax liability of the intangibles and growth in the installed subscriber base, as well as the additional expense of approximately $278,000 as a result of change in estimate.

Interest expense decreased by $49,890 due to a reduction in the average borrowing requirement of the Company. There were no net borrowing requirements in 2005. The alarm company managed to control the use of debt financing for new growth in subscriber accounts by maintaining a low cost of creation relative to the industry. The company uses an organic growth model to build the account base as opposed to acquiring existing accounts, and this has proved effective in reducing the debt-to-equity ratio in the company.

Income taxes

The security system company’s effective tax rate was higher than the statutory rate of 36.12% due mainly to the effect of non-deductible expenses as well as restatement of future income taxes for 2004 and prior years. During its review of future income taxes in 2005, the Company decided to make a future tax adjustment for the franchise rights acquired that had a carrying value in excess of their tax value as per CICA Handbook section 3465.37, pertaining to differences expected to reverse in future.

The future tax liability is reduced by future income tax assets resulting from certain opposite timing differences, which result from the accounting deferral and amortization of sales revenue that are immediately recognized in taxable income at the time that the sale is completed. These differences are also expected to reverse in the future.

In addition, certain share issuance costs incurred in 2004 are deductible from taxable income over a period of five years, resulting in timing differences and a future tax asset of approximately $105,000 at the end of 2005. The tax effects of the significant components of temporary differences giving rise to the future tax assets and liabilities are as follows for the years 2003-2005, after restating the prior years for the change in accounting policies in 2004 and 2005.

Subscriber base	2005 Restated	2004 Restated	2003 Restated
	$	$	$
Future tax liability for intangible assets and other depreciable assets	1,533,300	2,056,487	1,149,100
Future tax assets arising from deferred revenue and other miscellaneous items	(712,300)	(629, 720)	(585,200)
Net future tax liability	821,000	1,426,767	563,900

* Restated to reflect the change in accounting policy adopted in 2005

OPERATING RESULTS BY BUSINESS SEGMENTS

The company operated primarily in only one reporting segment in Canada, which is the monitoring of residential security systems. The Company’s US subscribers do not represent a significant geographic segment at the present time.

RELATED PARTY TRANSACTIONS

The Company reviews the carrying value of revenue equipment annually to determine and adjust any change in the estimated useful life of the assets. In 2005, the Company increased the amortization expense and correspondingly decreased the carrying value by approximately $278,000 as a result of revised estimates.

REVIEW OF OPERATIONS

The company did not have any related party transactions as defined in the CICA recommendations.