Financial Information

5. RESULTS OF OPERATIONS (continued)

Gross margin

Gross Profit was $ 20,005,802 for the fiscal year 2007 compared to $16,458,835 in fiscal 2006, which was an increase of $ 3,546,967 or 22%. Gross margin as a percentage of total revenue increased to 80% in 2007, compared to 79% in 2006, which is consistent with the growth in the subscriber base. Management expects this trend to continue as the subscriber base continues to grow the company will be able to realize scale efficiencies.

Selling General and Administrative Expenses (“SG & A”)

SG&A Expenses are $15,257,901 for 2007 compared to $11,241,676 in 2006 which was an increase of $4,016,225 or 36%. Selling Expenses increased by $3,338,518 or 44% due to the increase in marketing expenditures required to establish brand recognition in the relatively new markets in the United States and reinforce branding in Canada. Selling Expenses less marketing costs increased by $154,838 or 11% as compared to an increase of $251,515 or 21% in 2006. Aside from general wage augmentations, the increase is primarily due to additional sales and marketing staff required to handle inbound sales.

Administrative Expenses totaled $4,308,286 for 2007 compared to $3,630,579 in 2006, an increase of $677,707 or 19%. Aside from general wage augmentations, the increase in Administrative Expenses, in part, is due to the additional customer care and support staff required to handle inbound non emergency calls typically regarding service, billing and other alarm related issues. In 2007, in an effort to maintain high levels of customer satisfaction, the Customer Care Department extended its hours of operation to ensure that requests were being handled promptly at the time of the initial call. The remainder of the increase stems from an increase in legal fees required to resolve outstanding litigation issues.

Other expenses

Amortization of Property Plant and Equipment was $1,922,644 for the fiscal year 2007 compared to $1,821,279 in fiscal 2006 an increase of $101,365 or 6%. This increase mainly reflects additions made to the rental equipment in 2007 due to the subscriber growth.

Interest expense was $102,258 for the fiscal year 2007 compared to $ 82,072 in fiscal 2006 an increase of $20,186 or 25%. The increase is due to the revolving term loan obtained in March 2007 to finance the acquisition of franchise rights in Huronia for $1,000,000 payable over a period of 48 months. AlarmForce 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 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 $ 35,205 at the end of 2007.

5. RESULTS OF OPERATIONS

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 2005-2007:

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 (currently at 6%) at the present time.