Financial Information

Reconciliation of adjusted EBITDA to GAAP earnings

EBITDA is defined as earnings before interest expenses, income taxes, depreciation and amortization. EBITDA is a standard measure used in the security industry to assist in understanding and comparing operating results and is often referred to by our competitors. Management views EBITDA as an important measure of operating performance of the Company; however since it does not have any standardized meaning defined by Canadian GAAP, it may not be considered in isolation of GAAP measures such as net income/loss or cash flows, as a measure of liquidity. Management believes, however, that it is an important measure as it allows the Company to assess its ongoing business without the impact of depreciation or amortization expenses. Since EBITDA is not a defined term under Canadian GAAP, it is unlikely to be comparable to similar measures presented by other issuers.

Most companies in the residential security industry purchase subscriber accounts and capitalize those acquisition costs amortizing them over the term of the subscriber contract. AlarmForce is one of the few companies whose growth is internally generated and therefore the accounting treatment is not directly comparable. AlarmForce’s annual budget for marketing expenditure has increased steadily, reflecting an acceleration of new subscriber account creation and due to the discretionary nature of the marketing budget, the Company provides the following reconciliation of Adjusted EBITDA to GAAP net income figures reported for the three years 2004-2006 below.

* Restated to reflect the change in accounting policy in 2005

5. RESULTS OF OPERATIONS

Sales
Total revenues were $20,964,877 in the fiscal year 2006 compared to $17,227,494 in fiscal 2005, which was an increase of $3,737,383 million. The 22% increase is primarily attributable to the increase in monthly recurring revenue that increased by $3,294,879 in the same period in 2005. This is consistent with the increased number of new subscribers in the current year. The number of subscribers during the year increased from approximately 57,000 to 66,300, up 16%.

Cost of sales
Cost of sales was $ 4,506,042 for the fiscal year 2006 compared to $3,688,697 in fiscal 2005, which was an increase of $817,345. The 22% increase is primarily attributable to increases in technical field service expenses, technical support costs and demand for peripheral equipment and add-on equipment as a result of the proportionate increase in the subscriber accounts. The cost of sales as a percentage of revenue remained fixed at 21% for both fiscal year 2006 and 2005.

Certain costs pertaining to the Company’s central monitoring station remain relatively fixed. The Company is vertically integrated and manufactures, installs, monitors and services AlarmVoice alarm systems. The alarm system facilitates live two-way voice communication with the Central Station thereby offering immediate response and/or assistance in certain emergencies. The Central Station is located at the Company’s head office in Toronto from which the subscriber accounts are monitored