Financial Information

4. SELECTED ANNUAL INFORMATION (continued)

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 expenditures has increased steadily, reflecting 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 2005-2007 below.

5. RESULTS OF OPERATIONS

Sales

Total revenue was $25,136,125 in 2007 compared to $20,964,877 in 2006, which is an increase of $4,171,248 or 20%. The increase is primarily attributable to monthly recurring monitoring services generated from the increasing subscriber base. The total number of subscribers in 2007 increased by 20% to 79,200 up from 66,300 compared to the prior year 2006. In addition, new subscribers grew by 21% in 2007 as compared to 13% in 2006. Monthly recurring monitoring services make up 89% of Sales.

Cost of sales

Cost of sales was $5,130,323 in 2007 compared to $4,506,042 in 2006, for a total increase of $624,281 or 14%. The increase is primarily due to the growth in the subscriber base translating to a higher cost of installation and maintenance cost of existing subscribers. In 2006, the Company relocated from its formerly leased space to its newly acquired building and continues to make every effort to minimize costs and maximize efficiencies and economies as the scale of the subscriber base continues to grow.

Certain costs pertaining to the Company’s central monitoring station remain relatively fixed as 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.