Financial Information

To Our Shareholders:

Seventeen years ago, we started on our mission of offering security to AlarmForce subscribers with our two-way voice technology. In 2005 the company achieved its highest ever growth in subscribers since its inception, up by 16.4% from the previous record achieved last year. A major driving force behind our company’s strong performance and the accompanying financial results continues to be organic expansion of the monitored account base. AlarmForce added more than 13,000 new subscribers to the base of monthly recurring monitoring revenue. This represents a growth rate that is more than twice the average in the North American burglar alarm industry.

As announced last year, during 2005 we launched the first phase of expansion into the United States, where we have now successfully established the early stage of our security alarm business in the State of North Carolina. The Alarmvoice interactive two-way voice technology and the strong AlarmForce brand, which are already established and “top of mind” to Canadians, are now being offered to an increasing market population in the United States. By using our same Canadian business model to offer our service in the United States, we have successfully created a base of new subscribers in three separate centres in North Carolina. We have now secured a license to operate the home alarm business in the State of Ohio and plans to market the AlarmForce brand in this state are on schedule for February 2006.Observing the populations of these two states puts into perspective the potential coverage for our residential security business.

The total 11.4 million population of Ohio added to the 8.5 population of North Carolina represents a combined mass-market opportunity of approximately 20 million people. We believe that the potential market coverage can be increased tremendously without necessarily having to enter several States simultaneously. We are going to focus strategically on niche markets, and will continue to evaluate potential future in home alarm monitoring markets in other States where population density offers attractive opportunities, based on the demographics and density thresholds which have proved successful for AlarmForce security system in Canada.

Other achievements in 2005 consisted of the following milestones:

Financial results and trend

Total revenues in 2005 increased to $17,227,000 representing a 20% increase from the preceding year. Cash flows from operations before working capital increased by 23% to $3,206,000. Due to the expansion of our business into the United States we saw an increased investment in inventory in 2005. At the same time accounts receivable decreased as a result of effective collection procedures and controls. The increases in operating efficiency, recurring monthly revenues and cash flows in 2005 were gratifying and consistent with our expectations.

Net income per share on a diluted basis increased from $0.03 in 2004 to $0.07 in 2005. Income before income taxes increased by 60% to $1,290,000 in 2005, and net income increased by 167% to $810,000. These figures are adjusted for the accounting change as mentioned in the third quarter report, to account for the company’s costs to create accounts organically. Under the new policy the company is expensing all direct-response marketing expenditures as current period expenses. The change has been applied retroactively for all prior years, and reflected consistently in the restated figures for 2004. Notably, there is no change to Revenue, Gross Margin and Cash position as a result of the change in accounting.

In contrast to AlarmForce’s organic model of account creation, most companies in the residential security industry purchase subscriber accounts from dealers or other companies. Organic growth is relatively less significant in their business, and as such they capitalize the purchase price of subscriber accounts on their balance sheet. These capitalized costs are amortized over the useful life. AlarmForce is one of the few whose growth is exclusively internally generated, and therefore the accounting treatment is unique to the extent that certain acquisition costs i.e. marketing are not capitalized. Our annual budget for marketing expenditure has increased steadily, reflecting acceleration of new subscriber account creation and the discretionary nature of marketing budgets. Under the Management’s Discussion and Analysis section, the company is providing a reconciliation of Adjusted EBITDA to earnings under generally accepted accounting policies, based on which the company’s adjusted EBITDA has increased by 36% from 2004 to over $9 million in 2005, before discretionary marketing expenditures.