S-1/A 1 b325529_s1a.txt FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 2003. REGISTRATION NO. 333-101159 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- AMENDMENT No. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- INTEGRATED ALARM SERVICES GROUP, INC. (Exact name of registrant as specified in charter)

Delaware 7382 42-1578199 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)

-------------------- One Capital Center 99 Pine Street 3rd Floor Albany, New York 12207 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Timothy M. McGinn Chief Executive Officer One Capital Center 99 Pine Street 3rd Floor Albany, New York 12207 (518) 426-1515 (518) 426-0953 (FAX) (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------- COPIES TO:

Arthur S. Marcus, Esq. Edward S. Best, Esq. Gersten, Savage, Kaplowitz, Mayer, Brown, Rowe & Maw Wolf & Marcus, LLP 190 South LaSalle 101 East 52nd Street -- 9th Floor Chicago, Illinois 60603 New York, New York 10022 (312) 782-0600 (212) 752-9700 (312) 701-7711 (FAX) (212) 813-9768 (FAX)

-------------------- Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after the registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. |X| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_| If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_| (Cover continued on next page) THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. =============================================================================== CALCULATION OF REGISTRATION FEE

Proposed Maximum Proposed Maximum Title of Each Class of Amount to be Offering Aggregate Amount of Securities to be Registered Registered Price Per Security Offering Price (1) Registration Fee Common stock of the registrant, par value $.001 per share (2).......................................... 25,300,000 $11.00 $ 278,300,000 $22,514.47 ----------------------------------------------------------------------------------------------------------------------------------- Common Stock underlying selling shareholders' Convertible Notes.................................. 733,333 $ 7.50 $5,500,002.75 $ 444.95 ----------------------------------------------------------------------------------------------------------------------------------- Total ............................................... $22,959.42(3)

(1) Estimated solely for the purpose of calculating the registration fee. (2) Includes shares of common stock subject to an option granted to the underwriters solely to cover over-allotments, if any. (3) Of which $18,462.15 has previously been paid. EXPLANATORY NOTE This Registration Statement contains two forms of prospectus: one to be used in connection with an initial public offering of 22,000,000 shares of our common stock (the "Prospectus") and one to be used in connection with the potential resale of an aggregate of 733,333 shares of common stock by certain selling stockholders (the "Selling Stockholder Prospectus"). The Prospectus and Selling Stockholder Prospectus will be identical in all respects except for the alternate pages for the Selling Stockholder Prospectus included herein which are labeled "Alternate Page for Selling Stockholder Prospectus." i SUBJECT TO COMPLETION, JUNE 27, 2003 22,000,000 SHARES OF COMMON STOCK [GRAPHIC OMITTED] ---------------- We are selling 22,000,000 shares of our common stock. We have granted the underwriters an option to purchase up to an additional 3,300,000 shares of our common stock at the public offering price to cover over-allotments, if any. This is the initial public offering of our common stock. We currently expect the initial public offering price to be between $9.00 and $11.00 per share. We have applied to list our common stock on the NASDAQ National Market under the symbol "IASG." ---------------- Investing in our common stock involves risks. Please see "Risk Factors" beginning on page 6. ----------------

Per Share Total ----- ----- Public offering price....................... $ $ Underwriting discounts and commissions...... $ $ Proceeds, before expenses, to us(1)......... $ $

--------------- (1) Before deduction of our other expenses related to this offering, estimated at $1,600,000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. Concurrently with this offering, 733,333 shares of common stock have been registered under the Securities Act of 1933, as amended, on behalf of certain holders of convertible promissory notes, pursuant to a selling shareholder prospectus included within the Registration Statement of which this prospectus forms a part. The selling shareholders' shares are not part of this underwritten offering. The selling shareholders' shares may not be sold prior to 270 days from the effective date of the Registration Statement, without the prior written consent of Friedman, Billings, Ramsey & Co., Inc. The selling shareholders' shares are issuable upon conversion of an aggregate of $5.5 million of our promissory notes. The underwriters expect to deliver the shares to purchasers on or about , 2003. ---------------- FRIEDMAN BILLINGS RAMSEY STIFEL, NICOLAUS & COMPANY Incorporated WELLS FARGO SECURITIES, LLC The date of this Prospectus is , 2003. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. TABLE OF CONTENTS

Page ---- Prospectus Summary ..................................................................... 1 Risk Factors ........................................................................... 6 Special Note Regarding Forward-Looking Statements ...................................... 11 Use of Proceeds ........................................................................ 12 Dividend Policy ........................................................................ 14 Capitalization ......................................................................... 14 Dilution ............................................................................... 15 Selected Financial Data ................................................................ 16 Pro Forma Combined Financial Information ............................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations .. 25 Business ............................................................................... 46 Management ............................................................................. 58 Certain Relationships and Related Transactions ......................................... 64 Principal Stockholders ................................................................. 68 Description of Capital Stock ........................................................... 69 Description of Other Securities ........................................................ 70 Shares Eligible for Future Sale ........................................................ 72 Underwriting ........................................................................... 73 Concurrent Registration of Common Stock ................................................ 75 Legal Matters .......................................................................... 75 Experts ................................................................................ 75 Where You Can Find More Information .................................................... 75 Index to KC Acquisition Financial Statements ........................................... F-2 Report of Independent Accountants for KC Acquisition Corporation and Subsidiaries ...... F-3 Financial Statements for KC Acquisition Corporation and Subsidiaries ................... F-4 Index to IASI Financial Statements ..................................................... F-42 Report of Independent Accountants for IASI and Affiliates .............................. F-43 Combined Financial Statements for IASI and Affiliates .................................. F-44 Report of Independent Accountants for Criticom International Corporation ............... F-64 Financial Statements for Criticom International Corporation ............................ F-65

The trademark or trade names referred to in this prospectus are the property of their respective owners. Until , 2003 (25 days after commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions. i Prospectus Summary The following summary is qualified in its entirety by reference to the more detailed information and combined financial statements appearing elsewhere in this prospectus. In this prospectus, "we", "us", and "our" refer to Integrated Alarm Services Group, Inc. and its predecessor, KC Acquisition Corporation Inc., in addition to our wholly-owned subsidiaries, which include Integrated Alarm Services, Inc., which we refer to as IASI, and Criticom International Corporation, unless the context requires otherwise. Please see the chart on page 2 of this prospectus for identification of each of our subsidiaries. Pro forma information in this prospectus gives effect to the acquisition of Criticom in September 2002 and IASI and its affiliates in January 2003. Unless otherwise indicated, all share amounts assume the consummation of a one for two reverse stock split effected in April 2003 and no exercise of the over-allotment option or the conversion of the convertible debentures. BUSINESS INTEGRATED ALARM SERVICES GROUP, INC. We provide an integrated solution to independent security alarm dealers, which we refer to as "Dealers," to assist them in competing in the residential and commercial security alarm market. Our services include wholesale alarm monitoring and financing solutions, including purchasing Dealers' alarm monitoring contracts for our own portfolio and providing loans to Dealers collateralized by alarm monitoring contracts. We also provide support for our Dealers including billing, collection, marketing and access to equipment discount programs. We believe our package of services allows Dealers to compete more effectively against self-monitoring national security alarm companies by giving them access to technical sophistication, financing, back office and other services that they would not otherwise have, while allowing them to remain the local and visible contact with their customer, the end-user of the alarm. We believe we are the largest wholesale alarm monitoring company in the United States, as measured by the number of wholesale alarm accounts we monitor. Wholesale alarm monitoring providers enable Dealers to outsource the monitoring of residential or commercial accounts while continuing to hold the underlying alarm monitoring contract with the end-user. We monitor approximately 500,000 alarm systems on behalf of approximately 5,000 Dealers. Our alarm monitoring service is provided from three state-of-the-art, redundant alarm monitoring centers located in New Jersey, Minnesota and California. We are also a significant provider of capital to Dealers. Since 1993, we have provided financing to Dealers in the form of loans or alarm monitoring contract purchases of approximately $350 million in the aggregate. In addition to our wholesale business, we currently hold and monitor approximately 39,000 alarm monitoring contracts in our own portfolio. We also hold over 8,000 contracts as collateral against loans we have made to Dealers. Our alarm monitoring contract acquisition and financing programs and monitoring services complement one another and drive growth in other areas of our business. We generally require the Dealers we provide financing to, or acquire contracts from, to use our monitoring services for all of the alarm monitoring contracts they continue to own. We typically also require that these Dealers use our billing and collection services, enabling us to gain an additional level of control over the reliability of the alarm monitoring contracts' cash flows. This places us in a unique position to minimize alarm monitoring contract attrition because we can control the quality of the monitoring, billing and collection. For the year ended December 31, 2002 and the quarter ended March 31, 2003, we had a pro forma net loss of $19,326,860 and $12,315,600, respectively and a pro forma as adjusted net loss of $11,025,182 and $10,263,430, respectively. The pro forma information gives effect to the acquisition of Criticom in September 2002 and IASI and its affiliates in January 2003. The pro forma as adjusted information was calculated after giving effect to the sale of 22,000,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share and the repayment of $80.1 million of debt. For the year ended December 31, 2002 and the quarter ended March 31, 2003, we had pro forma revenue of $42,641,694 and $9,749,254, respectively. At March 31, 2003, we had a pro forma as adjusted accumulated deficit of $33,758,965. There can be no assurance that we will achieve profitability. For the year ended December 31, 2002, we derived approximately 58% of our pro forma revenues from the provision of monitoring services for third parties, including GPS monitoring, 37% from the monitoring fees on alarm monitoring contracts that we hold in our own portfolio and 5% from alarm contract financing and other related services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 1 We were formed as King Central, Inc. in 1985 and subsequently changed our name to KC Acquisition Corporation. Virtually all of our monitoring services are performed by KC Acquisition, now known as Integrated Alarm Services Group, Inc. We also conduct activities through subsidiaries -- including Criticom, a wholesale monitoring company which we acquired in September 2002, and IASI, which we acquired in January 2003, and through which we conduct the majority of our financing activities. Prior to its acquisition, Criticom was principally owned by Curtis Quady, an Executive Vice President. IASI was previously owned by Timothy McGinn, our Chairman and Chief Executive Officer, Thomas Few, Sr., our Vice Chairman, President and Chief Operating Officer, and David Smith, a Director. In May 2000, we acquired Monital Signal Corporation, a wholesale monitoring company, which was owned by two non-affiliated entities. We conduct a portion of our wholesale monitoring business through our Monital subsidiary. In January 2003, we acquired Morlyn Financial Group, LLC. Morlyn provides alarm contract acquisition and lending services related to the financing portion of our business. Morlyn was owned by Messrs. McGinn, Few, Sr. and Smith. Prior to the acquisition of IASI, Messrs. McGinn and Smith controlled 41 trusts which were principally created to acquire alarm monitoring contracts. Approximately 62% of the trust certificates of the 41 trusts were exchanged for promissory notes of IASI and will be repaid with proceeds from the offering. Approximately 38% of the trust certificates were not exchanged and will also be repaid out of the proceeds of the offering. An additional $9.5 million is bank debt relating to these contract acquisitions and will also be repaid out of the proceeds of the offering. Messrs. McGinn and Smith were residual beneficiaries of these trusts but have contributed their residual benefits in the trusts to us. Palisades Group, LLC, Payne Security Group, LLC and Guardian Group, LLC, were acquired by us in January 2003 and are now our wholly-owned subsidiaries. Palisades, Payne and Guardian were owned by Messrs. McGinn, Smith and Few. Palisades, Payne and Guardian were formed to hold alarm monitoring contracts. For a more detailed description of our history, see "Business -- History". In the aggregate 64.7% of the $80.1 million in debt being repaid out of the net proceeds of this offering was incurred by entities that were affiliated with us prior to our acquisition of such entities. Our corporate structure is illustrated below: [GRAPHIC OMITTED] (1) 0.8% of Monital is owned by the former shareholders of Griptight Holdings, Inc., a non-affiliated entity and a former owner of Monital shares. For a chart outlining the ownership of each of these entities prior to our acquisition, see "Certain Relationships and Related Transactions". Our Industry The security alarm industry is characterized by a large number of privately owned companies involved in security alarm sales, leasing, installation, repair and monitoring. In 2001, approximately 10,000 such Dealers were active in the United States. Based on information from Security Distributing and Marketing magazine ("SDM"), approximately 75% of this market is served by smaller companies not included in the 100 largest companies. The top 100 companies include large self-monitoring national providers such as ADT, a subsidiary of Tyco International, Inc., and Brinks Home Security, Inc., a subsidiary of The Brink's Company. The Freedonia Group, Inc., an independent business research company, estimated the 2001 residential security alarm monitoring market to be $6.5 billion and forecasts that the market will grow to $8.2 billion by 2006 and $10.3 billion by 2011. The Freedonia Group also estimates that 18% of all homes in North America currently have alarm systems and expects that number to exceed 20% by 2006. Our target market is the portion of the market served by the roughly 10,000 Dealers outside of the top 100 companies, or approximately 75% of the overall alarm monitoring market. 2 GROWTH INITIATIVES Acquisition of Alarm Monitoring Contracts We intend to expand our acquisition of alarm monitoring contracts. We believe that we will be able to acquire additional alarm monitoring contracts on terms which will provide us with incremental cash flow and earnings. Our strategy is to acquire approximately 80,000 additional alarm monitoring contracts in 2003. We currently have letters of intent to acquire approximately 17,000 retail customer contracts, enter into dealer loans with 4,000 contracts as collateral and purchase wholesale dealer relationships for monitoring 32,500 alarms. Our ability to acquire additional contracts with the requisite economics is dependent upon market forces which will determine pricing as well as the availability and cost of capital. The impact of the acquired contracts on revenue and profitability will be affected by the attrition rates of acquired portfolios, as well as the variable expenses relating to such acquisitions including billing, collection and servicing. Building Additional Wholesale Monitoring Relationships with Dealers We intend to expand the number of our Dealer relationships through acquisitions of other wholesale alarm monitoring companies and internally generated growth. The opportunities to acquire other wholesale alarm monitoring companies will be dependent upon the pricing expectations of sellers of such businesses as well as the availability and cost of capital. The impact to profitability of any such acquisition will be dependent upon our ability to efficiently integrate the acquired business and cost structure into our existing platforms. Cross-Selling Opportunities We will target opportunities to provide financing solutions to the Dealers who use our monitoring and/or administrative services. We also plan to expand the services which we provide to our Dealers' end-users. Effective marketing and servicing are essential in order to realize cross-sale benefits. The cost of effectively marketing new products and services to end-users through Dealers may be greater than anticipated, which could negatively affect profitability. New Business Opportunities We plan to leverage our existing infrastructure to expand in emerging applications such as global positioning systems, asset tracking, personal emergency response services and telemedicine. We have entered into contracts to monitor global positioning systems to provide asset tracking services, which in certain instances include the installation of emergency buttons in vehicles. In addition, we have begun to provide personal emergency response services to many of our existing traditional alarm monitoring customers for emergency or medical alert services. We believe that these emerging applications provide additional opportunities to leverage our existing infrastructure and increase revenues. The timing and economic impact of introducing new services to undeveloped market segments is difficult to forecast. These activities accounted for approximately 6.4% of our revenues in 2002. 3 Our Principal Offices Our principal offices are located at One Capital Center, 99 Pine Street, 3rd Floor, Albany, New York 12207 and our telephone number is (518) 426-1515. Our World Wide Web address is www.KingCentral.com. Information contained on our Internet site is not incorporated by reference into this prospectus and you should not consider information contained on our Internet site to be a part of this prospectus. The Offering Common stock offered by us: . . . . . . 22,000,000 shares Common stock to be outstanding after this offering: . . . . . . . . . . . . 23,590,911 shares (1) Use of proceeds:. . . . . . . . . . . . We estimate that we will receive net proceeds of $203 million in this offering. We intend to use $80.1 million of the net proceeds to repay debt ($7.5 million of which will be paid to affiliated parties) and $119.9 million to purchase portfolios of alarm monitoring contracts. Of the $80.1 million to be repaid, approximately 64.7% of such debt was incurred by entities affiliated with us prior to our acquisition of such entities in January 2003. The remainder will be used for working capital purposes. See "Use of Proceeds." NASDAQ symbol:. . . . . . . . . . . . . IASG (1) Does not include: o Shares issuable upon exercise of the underwriters' over-allotment option, o Up to 733,333 shares that may be issued upon the conversion of our convertible promissory notes, which shares are being registered concurently with this offering, o 150,000 shares issuable upon exercise of options that may be issued under our 2003 Stock Option Plan, o 1,900,000 shares issuable upon exercise of options to be granted to certain shareholders concurrent with this offering (the "Shareholder Options"), see "Certain Relationships and Related Transactions," o 48,000 shares issuable upon exercise of options to be granted concurrent with this offering to our non-executive directors (the "Director Options"), see "Management--Director Compensation" or o Up to 68,182 shares that may be issued to the former owners of Criticom upon the achievement of certain performance criteria based on 2003 results of operations. 4 SUMMARY FINANCIAL DATA The following summary combined financial data has been derived from the IASG (successor to KC Acquisition) audited combined financial statements for the years ended December 31, 2000, 2001 and 2002 and from the unaudited combined financial statements for the three months ended March 31, 2002 and unaudited consolidated financial statements for the three months ended March 31, 2003 and the related notes appearing elsewhere in this prospectus. The following data should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and related notes elsewhere in this prospectus. The following pro forma financial data combine the historical combined financial statements IASG, IASI, and affiliates (41 trusts and three limited liability companies) and Criticom. The pro forma financial data give effect to our acquisition of IASI and affiliates and Criticom through mergers using the purchase method of accounting. The pro forma financial data also give effect to the conversion of IASG from an S corporation to a C corporation for federal income tax purposes. See "Unaudited Pro Forma Combined Financial Information." The pro forma as adjusted financial data also give effect to the sale of the 22,000,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $10.00 per share and the repayment of $80.1 million of debt. See "Use of Proceeds."

Year ended Three months ended December 31, March 31, ----------------------------------------- -------------------------- 2000 2001 2002 2002 2003 ------------ ----------- ----------- ----------- ------------ Statement of operations data:(1) Revenue .................................. $ 18,774,517 $20,569,037 $23,495,607 $ 5,378,197 $ 8,753,637 Total operating expenses, inclusive of cost of revenue ......................... 19,455,562 19,691,838 24,267,532 5,564,015 12,479,075 ------------ ----------- ----------- ----------- ------------ Income (loss) from operations ............ (681,045) 877,199 (771,925) (185,818) (3,725,438) Other (expense), net ..................... (3,824,867) (3,914,509) (5,556,730) (1,473,706) (3,719,874) ------------ ----------- ----------- ----------- ------------ Loss before benefit from income taxes .... (4,505,912) (3,037,310) (6,328,655) (1,659,524) (7,445,312) Benefit (expense) from income taxes ...... 4,793,725 703,784 681,443 89,789 (3,417,288) ------------ ----------- ----------- ----------- ------------ Net (loss) income ........................ $ 287,813 $(2,333,526) $(5,647,212) $(1,569,735) $(10,862,600) ============ =========== =========== =========== ============ Basic and diluted net income (loss) per share ................................... $ 0.52 $ (4.21) $ (9.53) $ (2.83) $ (8.44) Shares used computing basic and diluted net income (loss) per common share (2) (3) ..................................... 553,808 553,808 592,785 553,808 1,287,389 Other financial data: Cash provided by (used in) operating activities .............................. (1,331,125) 1,012,251 2,691,844 (265,593) (3,486,593) Cash used in investing activities ........ (11,086,367) (1,705,428) (8,863,018) (5,256,920) 8,260,291 Cash provided by financing activities .... 12,851,242 765,875 5,389,221 4,668,579 1,573,444

Year ended Three months ended December 31, 2002 March 31, 2003 --------------------------- --------------------------- Pro Forma Pro Forma Pro Forma As Adjusted Pro Forma As Adjusted ------------ ------------ ------------ ------------ Statement of operations data:(1) Revenue .................................. $ 42,641,694 $ 42,641,694 $ 9,749,254 $ 9,749,254 Total operating expenses, inclusive of cost of revenue ......................... 44,500,492 44,500,492 13,859,618 13,859,618 ------------ ------------ ------------ ------------ Income (loss) from operations ............ (1,858,798) (1,858,798) (4,110,364) (4,110,364) Other (expense), net ..................... (17,848,062) (9,274,384) (4,703,772) (2,580,602) ------------ ------------ ------------ ------------ Loss before benefit from income taxes .... (19,706,860) (11,133,182) (8,814,136) (6,690,966) Benefit (expense) from income taxes ...... 380,000 108,000 (3,501,464) (3,572,464) ------------ ------------ ------------ ------------ Net (loss) income ........................ $(19,326,860) $(11,025,182) $(12,315,600) $(10,263,430) ============ ============ ============ ============ Basic and diluted net income (loss) per share ................................... $ (12.15) $ (0.98) $ (7.74) $ (0.91) Shares used computing basic and diluted net income (loss) per common share (2) (3) ..................................... 1,590,911 11,300,911 1,590,911 11,300,911 Other financial data: Cash provided by (used in) operating activities .............................. -- -- -- -- Cash used in investing activities ........ -- -- -- -- Cash provided by financing activities .... -- -- -- --

As of March 31, 2003 --------------------------- Pro Forma Balance sheet data: Actual As Adjusted ------------ ------------ Cash, cash equivalents and short-term investments...... $ 9,789,224 $135,582,137 Total assets........................................... 146,584,626 268,057,579 Long-term debt......................................... 165,379,437 83,446,104 Capital lease obligations.............................. 470,193 470,193 Total stockholders' equity (deficit)................... (32,330,327) 171,075,959 Working capital (deficit).............................. (16,405,732) 117,822,203

--------------- (1) Results of operations for acquired companies are included from the date of acquisition. As a result comparability of periods presented has been affected by our acquisitions. For more information about our acquisition history, see "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 10 and 14 to our combined financial statements included elsewhere in this Prospectus. (2) On January 8, 2003, the Company's Board of Directors approved a 6,033 for one common stock split, as a result, share data has been retroactively restated for all periods presented. (3) On April 17, 2003, the Company's Board of Directors approved a one for two reverse common stock split, as a result, share data has been retroactively restated for all periods presented. 5 RISK FACTORS In addition to the other information set forth in this Prospectus, prospective investors should consider carefully the following factors. Risks Related To Our Business We have historically incurred losses and we may not achieve profitability. On a pro forma basis, we incurred a net loss of $19.3 million in 2002 and $12.3 million for the quarter ended March 31, 2003. At March 31, 2003, we had, on a pro forma as adjusted basis, an accumulated deficit of $33.8 million. We intend to continue to make significant investments in wholesale monitoring, alarm monitoring contract acquisition and financing, marketing, services and sales operations. Associated expenses could precede any revenues generated by the increased spending. As a result, we may continue to experience losses and negative cash flow from operations in future quarters. There can be no assurance when and if we will become profitable. If we do become profitable, we may not be able to sustain or increase our profitability. Significant attrition of Dealers or non-renewal of end-user alarm monitoring contracts could materially adversely effect our results of operations. We experience attrition of Dealer customer relationships and alarm monitoring contracts as a result of several factors including relocation of end-users, adverse financial and economic conditions and competition from other alarm service companies. In addition, we may lose or experience non-renewal of certain alarm monitoring contracts of Dealers, particularly acquired Dealer customer relationships and alarm monitoring contracts, if we do not service those alarm monitoring contracts adequately or do not successfully integrate new alarm monitoring contracts into our operations. A significant increase in attrition or the non-renewal of alarm monitoring contracts could have a material adverse effect on our revenues and earnings. We engaged Standard & Poor's Corporate Value Consulting to perform attrition analyses of certain identified customer relationship groups. As a result of the study, we identified our historic end-user attrition rates to be 17.2% and 15.4% for the years ending December 31, 2000 and 2001, respectively. In 2000, the majority of the alarm monitoring contracts we acquired were by foreclosure from Dealers to whom we had made loans. As a result, our attrition rate was adversely affected in 2000, with carryover into 2001. The Standard & Poor's study presents data for accounts acquired by bulk purchase, which represents the majority of our end-user alarm monitoring contracts, which suggests that the maximum expected amortizable life of alarm monitoring contracts purchased in bulk is approximately 18 years. The maximum expected life is defined as that period in which the very last contract in a homogeneous pool would attrit. Annual attrition would cause the surviving population in the pool to diminish in each year from the date of acquisition. The Standard & Poor's study further suggests that the historic weighted average life for our residential security alarm contracts has ranged from 4 to 8 years. To the extent that actual attrition exceeds our expectations, our revenues, profitability, cashflow and earnings would be adversely effected. We intend to employ, for prospective contracts purchased in bulk subsequent to January 31, 2003, an amortization methodology which is the total of the charges calculated by a straight line, 18 year life; together with charges incurred as a result of actual account attrition. For previously acquired contracts, purchased in bulk, we will employ an amortization methodology which uses 150% declining balance over a life of 8 years. Attrition for acquired Dealer customer relationships and alarm monitoring contracts may be greater in the future than the attrition rate assumed or historically incurred by us. In addition, because some Dealer customer relationships and acquired alarm monitoring contracts are prepaid on an annual, semi-annual or quarterly basis, attrition may not become evident for some time after an acquisition is consummated. We face significant competition in the security alarm industry, which could make it more difficult for us to succeed in securing relationships with Dealers and reduce the number of alarm monitoring contracts we are able to acquire. We are dependent on entering into and maintaining relationships with Dealers who will either sell their alarm monitoring contracts directly to us, borrow from us, or enter into alarm monitoring contracts for us to provide monitoring services for the alarm monitoring contracts retained by them. While we do not typically compete directly with many of the larger companies in the industry because we do not sell and install security systems, we are nonetheless impacted by the competitive challenge these entrants present to Dealers. There is the potential that larger companies in the industry may generate alarm monitoring contracts offering "zero down" on equipment purchases and installation. The independent Dealer may have to offer the same "zero down" deal in order to effectively compete. Since the end-users attracted to "zero-down" 6 promotions are often of lower credit standing and thereby are more likely to default, we will only purchase these contracts if they have been outstanding for periods longer than 12 months and exhibit acceptable payment patterns as well as acceptable responses to quality control calls, thus potentially limiting the available alarm monitoring contracts which meet our due diligence standards. We also compete with several companies that have alarm monitoring contract acquisition and loan programs for Dealers and some of those competitors may be larger and better capitalized than we are. Some of these companies may be able to pay higher multiples of recurring monthly revenue for the portfolios they acquire than we can. We may be required to offer higher prices for such acquisitions than we have in the past, thus making these acquisitions less financially advantageous. There is also the potential for other entities such as banks or finance companies to become more active as a source of competition for the Dealer finance portions of our business. We may not be able to obtain all of the benefits of the security alarm monitoring contracts we purchase. A principal element of our business strategy is to acquire portfolios of alarm monitoring contracts. Acquisitions of end- user alarm monitoring contracts involve a number of risks, including the possibility that we will not be able to realize the recurring monthly revenue stream we contemplated at the time of acquisition because of higher than expected attrition rates or fraud. Although we complete an extensive due diligence process prior to acquiring alarm monitoring contracts and obtain representations and warranties from the seller, we may not be able to detect fraud on the part of the seller, including the possibility that the seller has misrepresented the historical attrition rates of the sold contracts or has sold or pledged the contracts to a third party. If the sale of alarm monitoring contracts involves fraud or the representations and warranties are otherwise inaccurate, we may not be able to recover from the seller damages in the amount sufficient to fully compensate us for any resulting losses. In such event, we may incur significant costs in litigating ownership or breach of acquisition contract terms. We may pursue acquisitions of alarm monitoring call centers that by their nature present risks and may not be successful. An element of our business strategy is to acquire additional alarm monitoring call centers. The following are some of the risks associated with these acquisitions: o We may be unable to achieve anticipated revenues, earnings or cash flow because of higher than expected attrition rates or other reasons. o We may be unable to integrate acquired call centers successfully and realize anticipated economic, operational and other benefits in a timely manner. If we are unable to integrate acquired call centers successfully, we could incur substantial costs and delays or other operational, technical or financial problems. o If we are not successful in integrating acquired call centers, we could have increased attrition of end-users because of service-related problems. o Acquisitions could disrupt our ongoing business, distract management, divert resources and make it difficult to maintain our current business standards, controls and procedures. We also face competition in identifying and purchasing suitable alarm monitoring call centers. We would be competing with other firms, many of which have greater financial and other resources than we do. Should this competition increase, it will be more difficult to acquire additional alarm monitoring call centers. Our ability to continue to grow our business is dependent upon our ability to obtain additional financing. We intend to continue to pursue growth through the acquisition of end-user alarm monitoring contracts and wholesale monitoring businesses. We will be required to seek additional funding from third party lenders and/or from the possible sale of additional securities, which may lead to higher leverage or the dilution of then existing stockholders. Any inability to obtain funding through third party financing is likely to adversely effect our ability to continue or increase our acquisition activities. Third party funding may not be available to us on attractive terms or at all. Our debt obligations burden our cashflow and could hinder our ability to obtain additional financing. Just prior to the offering, we expect to have an aggregate of $161.5 million in indebtedness, inclusive of prepayment fees and net of debt service reserve funds on that debt which will be repaid with the net proceeds from this offering. Immediately following the offering, we expect to have an aggregate of 7 approximately $81.4 million in indebtedness, assuming the repayment of $80.1 million of debt. We may incur additional indebtedness as we acquire additional wholesale monitoring businesses and alarm monitoring contracts. We expect that this additional debt will be serviced by the cash flows on the alarm monitoring contracts and wholesale monitoring businesses we acquire. Our ability to continue to service our indebtedness will be subject to various business, financial and other factors, many of which are beyond our control. In October 2002, the Company renegotiated approximately $26,380,000 of promissory notes payable to a bank. A balloon payment of approximately $11,125,000 originally due in March 2003 was extended to June 2004. Absent the offering proceeds, this debt may need to be again extended. At times we have been in default of various debt covenants and have been required to obtain bank waivers (most recently we obtained bank waivers on May 9, 2003, May 14, 2003 and June 19, 2003) of such defaults. In the event that we experience defaults in the future, there can be no assurance that we will be able to obtain bank waivers. If the waivers of May 9, 2003, May 14, 2003 and June 19, 2003 had not been obtained, approximately $17,600,000, $8,719,000 and $23,139,000, respectively, of long-term bank debt would have been reclassified as a current liability. Our debt obligations may have important consequences to holders of our common stock, including our ability to obtain additional financing in the future for working capital, acquisitions of alarm monitoring contract portfolios and monitoring call centers, capital expenditures, general corporate purposes or other purposes. Should our access to capital be impaired, we may be more vulnerable to a downturn in our business or the economy generally, and our ability to grow or compete against other less leveraged companies may be adversely effected. Rising interest rates could negatively effect our profitability. The interest rate of our financing is generally tied to prevailing market rates. In the event that interest rates rise, the spread between our cost of capital and the amount that we can charge Dealers who borrow from us may decrease, which will negatively effect our profitability. We could face liability for our failure to respond adequately to alarm activations. The nature of the services we provide potentially exposes us to risks of liability for employee acts or omissions or system failures. In an attempt to reduce this risk, our alarm monitoring agreements and other agreements pursuant to which we sell our products and services contain provisions limiting liability to end-users and Dealers. However, in the event of litigation with respect to such matters, there can be no assurance that these limitations will continue to be enforced. In addition, the costs of such litigation could have an adverse effect on us. We may face additional costs and potential liability as a result of "false alarm" ordinances. Significant concern has arisen in certain municipalities about the high incidence of false alarms. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services. A number of local governmental authorities have considered or adopted various measures aimed at reducing the number of false alarms. Such measures include subjecting alarm monitoring companies to fines or penalties for transmitting false alarms, licensing individual alarm systems and the revocation of such licenses following a specified number of false alarms, imposing fines on alarm end-users for false alarms, imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms and requiring sufficient further verification of an alarm signal before the police will respond. Enactment of such measures could increase our costs and thus adversely effect our future results of operations. Future government or other organization regulations and standards could have an adverse effect on our operations. Our operations are subject to a variety of laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, we are required to obtain licenses or permits, to comply with standards governing employee selection and training and to meet certain standards in the conduct of our business. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have an adverse effect on us. We believe that we are in material compliance with applicable laws and licensing requirements. In the event that these laws, regulations and/or licensing requirements change, it could require us to modify our operations or to utilize resources to maintain compliance with such rules and regulations. There can be no assurance as to what new regulations will be enacted and what effect they may have on us. 8 The loss of our Underwriters Laboratories listing could negatively impact our competitive position. All of our monitoring call centers are Underwriters Laboratories(R) ("UL") listed. To obtain and maintain a UL listing, an alarm monitoring call center must be located in a building meeting UL's structural requirements, have back-up and uninterruptible power supply, have secure telephone lines and maintain redundant computer systems. UL conducts periodic reviews of monitoring call centers to ensure compliance with their regulations. Non-compliance could result in a suspension of our UL listing. The loss of our UL listing could negatively impact our competitive position. We rely on technology which may become obsolete. Our monitoring services depend upon the technology (hardware and software) of security alarm systems. We may be required to upgrade or implement new technology which could require significant capital expenditures. There can be no assurance that we will be able to successfully implement new technologies or adapt existing technologies to changing market demands. If we are unable to adapt in a timely manner in response to changing market conditions or customer requirements, such inability could adversely effect our business. In the event that adequate insurance is not available or our insurance is not deemed to cover a claim we could face liability. We carry insurance of various types, including general liability and errors and omissions insurance. Our loss experience and that of other security service companies may effect the availability and cost of such insurance. Certain of our insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability arising from gross negligence. To the extent that insurance was not available, or a particular claim was not covered or exceeded our coverage, we could be exposed to material costs. Our current stockholders may exercise significant influence over us following this offering. Before this offering, our directors, executive officers and principal stockholders beneficially owned approximately 95% of the outstanding shares of our common stock. Following this offering, they will beneficially own approximately 6.4% of our outstanding shares, or approximately 5.6% if the over-allotment option is exercised in full, and as a result, may have significant influence over our company. Any conflict of interest between us and various affiliates of our senior management could hurt our business or prospects. There is a possibility that conflicts of interest will arise between some affiliates of our senior management and us in various areas relating to our past and ongoing relationships. Potential factors that may create a conflict of interest include: Approximately 64.7% of the $80.1 million in net proceeds being used to repay indebtedness was incurred by entities affiliated with us prior to our acquisition of such entities in January 2003. To the extent that such entities were responsible for such indebtedness prior to their acquisition by us, the prior owners of these entities benefit by the repayment of such amounts out of the net proceeds of this offering. We lease our executive offices in Albany, New York from Pine Street Associates, LLC, an entity 50% owned by Timothy M. McGinn, our Chairman and Chief Executive Officer, and David L. Smith, one of our Directors. We lease 4,520 square feet and pay a monthly rent of $4,326. The lease expires in 2007. We may enter into leases for additional space at this location as our business grows. Any such action will be approved by a majority of the independent and disinterested members of our Board of Directors, in accordance with our policy regarding transactions with affiliates. Timothy M. McGinn, our CEO, is a Director of McGinn, Smith & Co., Inc., and David L. Smith, one of our Directors, is President and a Director of McGinn, Smith & Co., Inc. For the period January 1, 2000 to January 31, 2003, McGinn, Smith & Co., Inc. has acted as either a placement agent or investment banker in connection with various financings, as well as an investment banker in connection with certain acquisitions. McGinn, Smith & Co., Inc., an NASD registered broker dealer, received commissions and/or investment banking fees of $4.5 million for acting in such capacity. McGinn, Smith & Co., Inc., is acting as an underwriter in this offering. Subject to our policy on interested party transactions, McGinn, Smith & Co., Inc. may in the future act as an underwriter to us. Our policy provides that any future transactions with affiliates, including without limitation, our officers, directors or principal stockholders will be on terms no less favorable than we could have obtained from unaffiliated third parties. Any such transactions will be approved by a majority of the independent and disinterested members of our board of directors. 9 McGinn Smith is acting as an underwriter in this offering. To the extent that principals of McGinn Smith are shareholders of ours, they may have additional interest in the successful completion of the offering that a traditional underwriter would not have. However, Friedman, Billings, Ramsey is acting as managing underwriter of the offering and is performing the role of a qualified independent underwriter which we believe will mitigate any potential conflicts arising from McGinn Smith's role as an underwriter. We are dependent upon our senior management. The success of our business is largely dependent upon the active participation of our executive officers, who have extensive experience in the industry. As a result, we have entered into employment agreements with each of our executive officers. The loss of the services of one or more of such officers for any reason may have an adverse effect on our business. Investors will experience immediate and substantial dilution of the common stock's net tangible book value. If you purchase our common stock in this offering, the net tangible book value of your common stock will experience immediate and substantial dilution from the initial public offering price. We estimate that this dilution will be approximately $(7.84) per share, or approximately $(172.5) million. See "Dilution." Stockholders should not expect dividends. We do not intend to pay any cash dividends in the foreseeable future. Risks Related To The Offering Our common stock price may fall upon the future sale of additional shares of our common stock. Future sales of our common stock in the public market, or even the possibility of such sales, may materially and adversely effect the market price of our common stock. There were 1,590,911 shares of common stock outstanding before this offering. All of such shares are "restricted securities" within the meaning of Rule 144 of the Securities Act of 1933. All of these restricted shares of our common stock will become eligible for resale under Rule 144 one year after issuance, subject to volume and manner of sale limitations, provided that we are current in our filing requirements under the Securities Exchange Act of 1934 for at least 90 days prior to the proposed date of sale, and will be eligible for resale without restrictions two years after their date of issue, except for shares owned by our affiliates which will remain subject to the volume and manner of sale limitations. Of the 1,590,911 shares, 553,808 were issued more than two years ago and are held by our affiliates, 155,911 were issued in September 2002 and 881,192 were issued in January 2003. Of the shares issued in September 2002 and January 2003, 962,836 are owned by our affiliates. In addition, 733,333 shares of common stock have been registered for sale in connection with the possible conversion of the Convertible Notes which shares, if converted, would be immediately eligible for sale subject to the underwriter's 270 day lock-up. Our common stock price could be volatile. The stock market has from time to time experienced extreme price and volume fluctuations that have been unrelated to the operating performance of particular companies. The market price of our common stock may be significantly effected by quarterly variations in our operating results, changes in financial estimates by securities analysts or failures by us to meet such estimates, litigation involving us, general trends in the security alarm industry, actions by governmental agencies, national economic and stock market conditions, industry reports and other factors, many of which are beyond our control. Certain antitakeover effects in Delaware law and our charter documents could prevent a potential opportunity that might benefit stockholders. Certain provisions of Delaware law could delay or prevent a change in control of us, discourage acquisition proposals or diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market value of our common stock or over a stockholder's cost basis in our common stock. In addition, our Board of Directors, without further stockholder approval, may issue preferred stock, which could have the effect of delaying, deferring or preventing a change in control of us. The issuance of preferred stock could also adversely effect the voting power of the holders of common stock, including the loss of voting control to others. 10 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements. The forward-looking statements involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: general economic and business conditions; our business strategy for expanding our presence in our industry; anticipated trends in our financial condition and results of operations; the impact of competition and technological change; existing and future regulations effecting our business; and other risk factors set forth under "Risk Factors" in this prospectus. You can identify forward-looking statements generally by the use of forward- looking terminology such as "believes," "expects," "may," "will," "intends," "plans," "should," "could," "seeks," "pro forma," "anticipates," "estimates," "continues," or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," as well as under other captions elsewhere in this prospectus. These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements contained in this prospectus are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. 11 USE OF PROCEEDS We estimate that we will receive net proceeds from this offering of approximately $203.0 million, or $233.7 million if the underwriters exercise their over-allotment option in full. Such estimates are based on an initial public offering price of $10.00 per share. The amounts listed below include balances as of July 2, 2003 and take into account prepayment fees. We intend to use the net proceeds of this offering as follows:

o Repayment of promissory notes issued upon exchange of trust certificates of seven trusts, due in June and July 2005, bearing interest at 12% per annum. The seven trusts were originally controlled by affiliates of ours. The trusts were formed for the purpose of acquiring monitoring contracts. The note holders are comprised of non-affiliated investors. All of such indebtedness was incurred by IASI. $ 25.2 million o Repayment of bank debt, due through May 1, 2005, bearing interest at various rates from 8.0% to 12.5% per annum. The debt is due to Key Bank, N.A. and was incurred for the purpose of acquiring central stations, wholesale monitoring contracts, and for working capital. All of such indebtedness was incurred by KC Acquisition. $ 24.7 million o Repayment of subordinated debt, due on dates ranging from April 1, 2005 to April 1, 2007, bearing interest at rates ranging from 10.10% to 12.50% per annum. The subordinated debt is from a collection of investment trusts created for the purchase of monitoring contracts, and were originally controlled by affiliates of ours. The debt is payable to non-affiliated investors. All of such indebtedness was incurred by IASI. $ 9.2 million o Repayment of subordinated debt, due on June 1, 2006, bearing interest at 12.5% per annum. This debt is from an investment trust controlled by an affiliate of ours. The trust was formed for the purpose of acquiring monitoring contracts. The debt is payable to non-affiliated accredited investors. All of such indebtedness was incurred by IASI. $ 6.2 million o Repayment of promissory notes to Lynn A. Smith, the wife of one of our directors, bearing interest at 6.25% and 12% per annum, and due in March 2004 and January 2004, respectively. One of the notes ($3.0 million) is debt incurred by KC Acquisition, and the other ($3.0 million) is debt incurred by IASI prior to its acquisition in January. A portion ($2.0 million) of the proceeds of the $3.0 million indebtedness incurred by IASI was loaned by IASI to KC Acquisition. $ 6.0 million o Repayment of debt, due on December 1, 2005, bearing interest at a variable interest rate, which is currently 6.75%. This debt is due to Security Leasing Partners, L.P., an unaffiliated third-party, and was created for the purpose of acquiring monitoring contracts. This indebtedness was incurred by IASI. $ 3.7 million o Repayment of debt to various lenders, due on dates ranging from May 1, 2003 to April 1, 2006, bearing interest at rates ranging from 8.0% to 12.0% per annum. The debt is due to Key Bank, N.A., BSB Bancorp, and 15 investment trusts not exchanged for promissory notes of IASI. In the aggregate 38% of the 41 trusts' certificates were not exchanged for promissory notes. The investment trusts were created for the purchase of monitoring contracts, and were originally controlled by affiliates of ours. The debt is payable to non-affiliated investors. All of such indebtedness was incurred by IASI. $ 3.6 million o Repayment of debt to M&S Partners, an entity controlled by Messrs. Smith and McGinn. This indebtedness was assumed from M&S Partners by IASI. $ 0.9 million

12

o Repayment of debt to Royal Thoughts, LLC, due in January, 2004, bearing interest of 9.0% per annum. Curt Quady, an Executive Vice President and his family own a majority of Royal Thoughts. This indebtedness was incurred by KC Acquisition in connection with the acquisition of the 5.3% interest in Royal Thoughts. $ 0.6 million -------------- Total repayment of debt: $ 80.1 million -------------- Proceeds intended for purchases of alarm monitoring contracts. This represents the estimated cash portion of the net proceeds that management believes it will expend to acquire additional alarm monitoring contracts. The cost of the alarm monitoring contracts to be acquired will be determined by arms length negotiations between management and the owners of such contracts. None of such contracts is owned by any of our affiliates. $119.9 million Working capital and general corporate purposes $ 3.0 million -------------- Total Uses: $203.0 million ==============

All of the debt to be repaid from the proceeds of this offering is related to the purchase of alarm monitoring contracts, central stations, Dealer relationships or was utilized for working capital. Other than Royal Thoughts, Lynn A. Smith, and M&S Partners, none of the holders of our debt to be repaid from the proceeds of this offering is an affiliate of ours or related to one of our affiliates. In total, 64.7% of the debt to be repaid with this offering was incurred by entities that were affiliated with us prior to their acquisition in January. Management will have broad discretion in the application of the net proceeds allocated to working capital and other general corporate purposes. 13 DIVIDEND POLICY We currently expect to retain all of our future earnings, if any, to support the development of our business and do not anticipate paying any cash or non- cash dividends in the foreseeable future. CAPITALIZATION The following table sets forth our cash and capitalization as of March 31, 2003 on (i) an actual basis, IASG (successor to KC Acquisition) and (ii) on a pro forma as adjusted basis to reflect the sale of 22,000,000 shares of our common stock at an assumed offering price of $10.00 per share and the application of the proceeds therefrom to repay $80.1 million of debt. You should read this table in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included in this prospectus.

As of March 31, 2003 --------------------------- Pro forma Actual as adjusted ------------ ------------ Cash and cash equivalents....................................... $ 6,789,224 $132,582,137 Restricted cash and cash equivalents............................ 3,992,913 1,100,000 ------------ ------------ Total cash...................................................... $ 10,782,137 $133,682,137 ============ ============ Short term-Related Party........................................ $ 1,683,853 $ 761,862 Short term-Unrelated............................................ 15,273,182 7,760,151 ------------ ------------ Total Short term debt........................................... 16,957,035 8,522,013 Long term-Related Party......................................... 12,395,240 5,810,240 Long term-Unrelated............................................. 136,027,162 69,113,851 ------------ ------------ Total Long term debt............................................ 148,422,402 74,924,091 Total Debt .................................................... 165,379,437 83,446,104 Stockholders' equity: Common stock ($0.001 par value; authorized 100,000,000 shares, 1,590,911 shares issued actual and 23,590,911 shares issued pro forma as adjusted) (1)................................... 1,591 23,591 Paid-in capital ............................................... -- 204,811,333 Accumulated deficit ........................................... (32,331,918) (33,758,965) ------------ ------------ Total stockholders' equity (deficit)............................ (32,330,327) 171,075,959 ------------ ------------ Total capitalization............................................ $133,049,110 $254,522,063 ============ ============

(1) Does not include: o Shares issuable upon exercise of the underwriters' over-allotment option, o Up to 733,333 shares that may be issued upon the conversion of our convertible promissory notes, which shares are being registered concurently with this offering, o 150,000 shares issuable upon exercise of options that may be issued under our 2003 Stock Option Plan, o 1,900,000 shares issuable upon exercise of the Shareholder Options to be granted concurrent with this offering, see "Certain Relationships and Related Transactions," o 48,000 shares issuable upon exercise of the Director Options to be granted concurrent with this offering, see "Management--Director Compensation," or o Up to 68,182 shares that may be issued to the former owners of Criticom upon the achievement of certain performance criteria based on 2003 results of operations. 14 DILUTION The historical net tangible deficit of IASG (successor to KC Acquisition) on March 31, 2003, was approximately $(153,848,337), or $(96.70) per share of common stock based on the number of shares of common stock outstanding. Historical net tangible book value per share is equal to the amount of our total tangible assets, which excludes goodwill, retail customer contracts, Dealer relationships and debt issuance costs less total liabilities, divided by the number of shares of common stock. Pro forma net tangible book value per share represents the amount of our total pro forma tangible assets less total liabilities divided by the pro forma number of shares of common stock outstanding. Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of our common stock afterwards. After giving effect to the sale of 22,000,000 shares of common stock offered by this prospectus at an initial public offering price of $10.00 per share, assuming the underwriters' over-allotment option is not exercised, and after deducting the underwriting discount and offering expenses, our pro forma net tangible book value at March 31, 2003, would have been approximately $50,984,996 or $2.16 per share. This represents an immediate dilution to investors of $(7.84) per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution on a per share basis:

Assumed initial public offering price per share .................... $10.00 Net tangible deficit value per share as of March 31, 2003 .......... $(96.70) Increase in pro forma net tangible book value per share attributable to investing in this offering ........................ 98.86 ------- Pro forma net tangible book value per share after this offering .... 2.16 ------ Dilution per share to new investors ................................ $(7.84) ======

The following table sets forth, as of March 31, 2003, on a pro forma basis, the number of shares of common stock purchased, the total consideration paid and the average price per share paid by existing and new stockholders, before deducting underwriting discounts and commissions and our offering expenses payable:

Shares purchased Total consideration -------------------- ---------------------- Number Percent Number Percent ---------- ------- ------------ ------- Existing stockholders........................ 1,590,911 6.74% $ 2,125,000 .96% New investors................................ 22,000,000 93.26% $220,000,000 99.04% ========== ====== ============ ====== Total ...................................... 23,590,911 100.00% $222,125,000 100.00% ========== ====== ============ ======

The foregoing discussion does not include 1,900,000 shares issuable upon exercise of the Shareholder Options, 48,000 shares issuable upon exercise of options granted to our non-executive Directors, 3,300,000 shares issuable upon exercise of the over-allotment option, 150,000 options that may be issued under our 2003 Stock Option Plan, 733,333 shares issuable upon conversion of the Convertible Notes or up to 68,182 shares that may be issued to the former owners of Criticom upon the achievement of certain performance criteria. 15 SELECTED FINANCIAL DATA The following selected combined (except for the three months ended and as of March 31, 2003 which is consolidated) financial data as of December 31, 1998, March 31, 2002 and March 31, 2003 and for the year ended December 31, 1998 and for the three months ended March 31, 2002 and 2003 has been derived from the IASG unaudited financial statements. The following selected combined financial data as of December 31, 2001 and 2002 and for the years ended December 31, 2000, 2001 and 2002 have been derived from the IASG audited combined financial statements, and the related notes, appearing elsewhere in this prospectus. The selected combined financial data as of December 31, 1999 and 2000 and for the year ended December 31, 1999 has been derived from the IASG audited combined financial statements and the related notes for such periods. The following data should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our combined financial statements and related notes appearing elsewhere in this prospectus.

Three months ended March 31, Year ended December 31, (unaudited) ------------------------------------------------------------------------ --------------------------- 1998 1999 2000 2001 2002 2002 2003 ---- ---- ---- ---- ---- ---- ---- Statement of operations data (1): Revenue............ $ 10,596,348 $12,721,583 $ 18,774,517 $20,569,037 $ 23,495,607 $ 5,378,197 $ 8,753,637 Total operating expenses, inclusive of cost of revenue........ 8,736,968 13,337,323 19,455,562 19,691,838 24,267,532 5,564,015 12,479,075 ------------ ----------- ------------ ----------- ------------ ------------ ------------ Income (loss) from operations........ 1,859,380 (615,740) (681,045) 877,199 (771,925) (185,818) (3,725,438) Other (expense), net............... (3,558,972) (2,475,054) (3,824,867) (3,914,509) (5,556,730) (1,473,706) (3,719,874) ------------ ----------- ------------ ----------- ------------ ------------ ------------ Loss before (provision) benefit for income taxes............. (1,699,592) (3,090,794) (4,505,912) (3,037,310) (6,328,655) (1,659,524) (7,445,312) (Provision) benefit for income taxes.. (13,975) -- 4,793,725 703,784 681,443 89,789 (3,417,288) ------------ ----------- ------------ ----------- ------------ ------------ ------------ Net (loss) income.. $ (1,713,567) $(3,090,794) $ 287,813 $(2,333,526) $ (5,647,212) $ (1,569,735) $(10,862,600) ============ =========== ============ =========== ============ ============ ============ Basic and diluted net (loss) income per share......... $ (3.09) $ (5.58) $ 0.52 $ (4.21) $ (9.53) $ (2.83) $ (8.44) ============ =========== ============ =========== ============ ============ ============ Shares used computing basic and diluted net (loss) income per common share (2) (4)............... 553,808 553,808 553,808 553,808 592,785 553,808 1,287,389 Pro forma income tax to give effect as if a C corporation (3): Loss before benefit from income taxes. $ (4,505,912) $(3,037,310) $ (6,328,655) $ (1,659,524) $ (7,445,312) Benefit from income taxes............. 1,519,990 955,569 2,871,573 662,438 199,200 ------------ ----------- ------------ ------------ ------------ Net loss........... $ (2,985,922) $(2,081,741) $ (3,457,082) $ (997,086) $ (7,246,112) ============ =========== ============ ============ ============ Net loss per share. $ (5.39) $ (3.76) $ (5.83) $ (1.80) $ (5.63) ============ =========== ============ ============ ============ Balance sheet data: Cash, cash equivalents and short-term investments....... $ 1,107,718 $ 717,586 $ 1,151,337 $ 1,224,035 $ 3,442,082 $ 370,102 $ 9,789,224 Total assets....... 23,264,759 24,350,032 38,113,543 36,830,768 45,627,797 40,726,719 146,584,626 Long-term debt..... 17,908,964 22,319,837 35,599,770 37,122,449 45,061,363 41,998,577 165,379,437 Capital lease obligations....... 380,254 258,021 145,355 32,549 507,858 -- 470,193 Total stockholders' (deficit)......... (3,935,072) (7,025,866) (7,067,197) (9,345,667) (11,562,881) (11,390,809) (32,330,327) Working capital (deficit)......... (1,913,519) (3,975,589) (5,240,872) (7,798,161) (8,076,758) (19,887,153) (16,405,732) Other financial data: Cash provided by (used in) operating activities........ 2,281,447 (32,010) (1,331,125) 1,012,251 2,691,844 (265,593) (3,486,593) Cash provided by (used in) investing activities........ (15,457,268) (3,878,468) (11,086,367) (1,705,428) (8,863,018) (5,256,920) 8,260,291 Cash provided (used in) financing activities........ 13,809,146 3,520,347 12,851,242 765,875 5,389,221 4,668,579 (16,405,732)

--------------- (1) Results of operations for acquired companies are included from the date of acquisition. As a result comparability of periods presented has been effected by our acquisitions. For more information about our acquisition history, see "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 10 and 14 to our combined financial statements and certain other pro forma adjustments, more fully described elsewhere in this Prospectus. (2) On January 8, 2003, our Board of Directors approved a 6,033-for-one stock split, as a result, share data has been retroactively restated for all periods presented. (3) To give effect to the conversion of KC Acquisition from an S corporation to a C corporation for federal income tax purposes. The tax provision was prepared as if we had a combined federal and state effective tax rate of 40% and giving effect for permanent differences. (4) On April 17, 2003, the Company's Board of Directors approved a one for two reverse common stock split, as a result, share data has been retroactively restated for all periods presented. 16 PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined (consolidated after December 31, 2002) financial statements combine the historical financial statements of IASG (successor to KC Acquisition), IASI and affiliates (41 trusts and three limited liability companies) and Criticom. KC Acquisition acquired 100% of the outstanding stock of Criticom during September 2002 and recorded the acquisition using the purchase method of accounting. IASG acquired 100% of the outstanding stock of IASI and affiliates on January 31, 2003 and recorded the acquisition using the purchase method of accounting. We derived the unaudited pro forma balance sheet as of March 31, 2003 from our historical balance sheet as of March 31, 2003, as adjusted for the proposed offering (more fully described in Note 1). We derived the unaudited pro forma statements of operations for the three months ended March 31, 2003 and year ended December 31, 2002 from our financial statements for the three months ended March 31, 2003 and the year ended December 31, 2002, the combined financial statements of IASI and the trusts and limited liability companies for the year ended December 31, 2002 and the month of January 2003 and the financial statements of Criticom for the period from January 1, 2002 to September 25, 2002. The historical financial statements used in preparing the pro forma financial data are summarized and should be read in conjunction with our, IASI's and the trusts' and limited liability companies' and Criticom's complete historical financial statements that are included elsewhere in this prospectus. The pro forma combined statements of operations for the three months ended March 31, 2003 and for the year ended December 31, 2002 gives effect to the acquisitions using the purchase method of accounting as if the acquisitions had been consummated on January 1, 2002 and January 1, 2003, respectively. We are providing the pro forma combined financial information for illustrative purposes only. The companies may have performed differently had they been combined during the periods presented. You should not rely on the unaudited pro forma combined financial information as being indicative of the historical results that would have been achieved had the companies actually been combined during the periods presented or the future results that the combined company will experience. The unaudited pro forma combined statements of operations do not give effect to any cost savings or operating synergies expected to result from the acquisitions or the costs to achieve such cost savings or operating synergies. 17 INTEGRATED ALARM SERVICES GROUP, INC. PRO FORMA CONSOLIDATED BALANCE SHEET As of March 31, 2003 (unaudited)

Offering Pro forma IASG proceeds as adjusted ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents ....................... $ 6,789,224 $125,792,913(1) $132,582,137 Short-term investments .......................... 3,000,000 3,000,000 Current portion of notes receivable ............. 1,294,758 1,294,758 Accounts receivable less allowance for doubtful accounts ....................................... 1,151,162 1,151,162 Prepaid expenses ................................ 87,135 87,135 Due from related party .......................... 173,340 173,340 ------------ ------------ ------------ Total current assets.......................... 12,495,619 125,792,913 138,288,532 ------------ ------------ ------------ Notes receivable net of current portion and reserves ........................................ 4,895,973 4,895,973 Property and equipment, net....................... 2,503,280 2,503,280 Dealer relationships and customer contracts, net.. 66,942,286 66,942,286 Goodwill.......................................... 50,234,338 50,234,338 Debt issuance costs, net.......................... 4,341,386 (1,427,047)(2) 2,914,339 Restricted cash and cash equivalents.............. 3,992,913 (2,892,913)(1) 1,100,000 Other assets...................................... 1,178,831 1,178,831 ------------ ------------ ------------ Total assets................................... $146,584,626 $121,472,953 $268,057,579 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt, related party $ 1,683,853 $ (921,991)(1)$ 761,862 Current portion of long-term debt ............... 15,273,182 (7,513,031)(1) 7,760,151 Current portion of capital lease obligations .... 145,842 145,842 Accounts payable and accrued expenses ........... 6,931,199 6,931,199 Other liabilities ............................... 312,327 312,327 Current portion of deferred revenue ............. 4,554,948 4,554,948 ------------ ------------ ------------ Total current liabilities..................... 28,901,351 (8,435,022) 20,466,329 ------------ ------------ ------------ Long-term liabilities: Long-term debt, net of current portion, related party .......................................... 12,395,240 (6,585,000)(1) 5,810,240 Long-term debt, net of current portion .......... 136,027,162 (66,913,311)(3) 69,113,851 Capital lease obligations, net of current portion ........................................ 324,351 324,351 Deferred revenue, net of current portion ........ 389,422 389,422 Deferred income taxes ........................... 830,974 830,974 Due to related party ............................ 46,453 46,453 ------------ ------------ ------------ Total long-term liabilities................... 150,013,602 (73,498,311) 76,515,291 ------------ ------------ ------------ Total liabilities............................. 178,914,953 (81,933,333) 96,981,620 ------------ ------------ ------------ Commitments and contingencies Stockholders' equity (deficit): Common stock .................................... 1,591 22,000 (1) 23,591 Paid-in capital ................................. -- 204,811,333 (4) 204,811,333 Accumulated deficit ............................. (32,331,918) (1,427,047)(2) (33,758,965) ------------ ------------ ------------ Total stockholders' equity (deficit).......... (32,330,327) 203,406,286 171,075,959 ------------ ------------ ------------ Total liabilities and stockholders' equity.... $146,584,626 $121,472,953 $268,057,579 ============ ============ ============

18 INTEGRATED ALARM SERVICES GROUP, INC. Notes to Pro Forma Consolidated Balance Sheet As of March 31, 2003 (unaudited) (1) KC Acquisition merged with KC Alarm Services Group, Inc. (a newly formed entity, which subsequently changed its name to Integrated Alarm Services Group, Inc. ("IASG")) in January 2003. This adjustment records the use of the proceeds from the issuance of common stock and the corresponding changes in the equity accounts. The pro forma as adjusted columns give effect to the sale by IASG of 22,000,000 shares of common stock at an assumed offering price of $10.00 per share, the midpoint of the range set forth on the cover of this prospectus, and the application of the offering proceeds, after deducting underwriting discounts, and estimated offering expenses of $1,600,000. Adjustments include: the reduction of long-term debt, increase in cash and cash equivalents and the issuance of 22,000,000 shares of common stock in this offering.

Proceeds: 22,000,000 shares at $10.00 ................................... $220,000,000 Offering costs (7%+$1,600,000) ................................ 17,000,000 ------------ Net proceeds of offering ...................................... $203,000,000 ============ Used for: Cash and cash equivalents ..................................... 122,900,000 Current portion of long-term debt, related party .............. $ 921,991 Long-term debt, net of current portion, related party ......... 6,585,000 Current portion of long-term debt ............................. 7,513,031 Long-term debt, net of current portion (note 3) ............... 65,079,978 80,100,000 ------------ ------------ $203,000,000 ============ Equity accounts: Par $.001 x 22,000,000 ........................................ 22,000 Additional paid-in capital .................................... 202,978,000 see note 4 ------------ Total ......................................................... $203,000,000 ------------ Cash adjustment: Cash from offering proceeds ................................... $122,900,000 Restrictions removed by repayment of debt ..................... 2,892,913 ------------ Total cash adjustment ......................................... $125,792,913 ------------

(2) Elimination of debt issuance costs of $1,427,047 that were a result of the debt that is being paid-off with the initial public offering proceeds. These costs will be charged to expense at the time the debt is redeemed. However the unamortized portion of the debt issuance costs have been removed from the balance sheet and charged to accumulated deficit. (3) In September 2002, IASG, a pre-existing Delaware company which has been subsequently dissolved, issued an aggregate of $5.5 million principal amount of convertible notes, which we assumed in January, 2003. These notes contain a beneficial conversion feature whereby they can be converted to common stock at a 25 percent discount from the initial public offering price. The common stock purchased at a discounted price ($10.00 x .75 = $7.50) would have a market value of $7,333,333. The beneficial conversion feature will be recorded at the $1,833,333 spread (reduction of long-term debt) and amortized straight-line over the three-year life of the notes. The resulting interest expense will be $611,111 per year. Combined with the repayment of $65,079,978 with the offering proceeds, long-term debt, net of current portion will decrease by $66,913,311. 19 INTEGRATED ALARM SERVICES GROUP, INC. Notes to Pro Forma Consolidated Balance Sheet As of March 31, 2003 (unaudited) (4) Additional paid-in capital was adjusted for the following items:

Offering proceeds -------- To record the effect of issuing initial public offering shares .............. note 1 $202,978,000 To book beneficial conversion feature of debt ............................... note 3 1,833,333 ------------ Total adjustment to additional paid-in capital .............................. $204,811,333 ------------

20 INTEGRATED ALARM SERVICES GROUP, INC. PRO FORMA COMBINED STATEMENT OF OPERATIONS For the Year Ended December 31, 2002 (unaudited)

Pro forma Offering IASG IASI Criticom adjustments Pro forma proceeds ----------- ------------ ---------- ------------ ------------ ---------- Revenue .................................. $23,495,607 $ 18,889,140 $5,202,771 $(4,945,824)(1) $ 42,641,694 -- Cost of revenue (excluding depreciation and amortization) ....................... 15,424,912 -- 3,230,179 -- 18,655,091 -- ----------- ------------ ---------- ------------ 8,070,695 18,889,140 1,972,592 23,986,603 ----------- ------------ ---------- ------------ Operating expenses: Selling and marketing ................... 736,866 -- 439,316 -- 1,176,182 -- Depreciation and amortization ........................... 5,580,985 8,850,386 234,597 182,904(2) 14,848,872 -- Monitoring expense ...................... -- 1,609,795 -- (1,358,126)(3) 251,669 -- General and administrative .............. 2,524,769 6,129,306 1,241,493 (326,890)(4) 9,568,678 -- ----------- ------------ ---------- ------------ Total operating expenses .............. 8,842,620 16,589,487 1,915,406 25,845,401 ----------- ------------ ---------- ------------ Income (loss) from operations ............ (771,925) 2,299,653 57,186 -- (1,858,798) -- Other income ............................. 656,299 -- 92,823 -- 749,122 -- Amortization of debt issuance costs ...... 1,619,086 2,667,495 -- -- 4,286,581 (439,489)(6) Interest expense, net .................... 4,593,943 11,856,249 211,882 (2,351,471)(5) 14,310,603 (8,134,189)(6) ----------- ------------ ---------- ------------ (Loss) before income taxes ............... (6,328,655) (12,224,091) (61,873) (19,706,860) Provision (benefit) for income taxes ..... (681,443) 301,443(7) (380,000) 272,000 (8) ----------- ------------ ---------- ------------ Net loss ................................. $(5,647,212) $(12,224,091) $ (61,873) $(19,326,860) =========== ============ ========== ============ Net loss per share ....................... $ (12.15) ============ Weighted average number of common shares outstanding ............................. 1,590,911 (9) ============

Pro forma as adjusted ------------ Revenue .................................. $ 42,641,694 Cost of revenue (excluding depreciation and amortization) ....................... 18,655,091 ------------ 23,986,603 ------------ Operating expenses: Selling and marketing ................... 1,176,182 Depreciation and amortization ........................... 14,848,872 Monitoring expense ...................... 251,669 General and administrative .............. 9,568,678 ------------ Total operating expenses .............. 25,845,401 ------------ Income (loss) from operations ............ (1,858,798) Other income ............................. 749,122 Amortization of debt issuance costs ...... 3,847,092 Interest expense, net .................... 6,176,414 ------------ (Loss) before income taxes ............... (11,133,182) Provision (benefit) for income taxes ..... (108,000) ------------ Net loss ................................. $(11,025,182) ============ Net loss per share ....................... $ (0.98) ============ Weighted average number of common shares outstanding ............................. 11,300,911 ============

(1) This adjustment eliminates intercompany revenue for interest, monitoring fees and financial advisory fees, and also reclassifies interest income of IASI down to interest expense, net.

Interest income ............................................. $1,465,191 Interest income, related party .............................. 886,280 Monitoring revenue .......................................... 1,358,126 Financial advisory fees ..................................... 1,236,227 ---------- Decrease in revenue ........................................ $4,945,824 ----------

(2) The contract rights for IASI were decreased by $1,142,490 to fair value based on current industry benchmarks. Amortization is being decreased by $122,018 based on the rates currently being used by the various portfolios. Amortization of $304,922 is being recorded on the $6,098,443 fair value of dealer relationships acquired by KC Acquisition in the Criticum merger. The net increase for the year is $182,904. (3) KC Acquisition has provided central station monitoring services to IASI. This adjustment eliminates the offsetting $1,358,126 that IASI has recorded as monitoring expense for the year. (4) Executive salaries and benefits have been adjusted to increase compensation to what it would have been if new employment agreements had been in effect at the beginning of the period presented. Salaries are being increased by $794,484 and benefits by $114,853. Administrative costs are being decreased by $1,236,227 to eliminate intercompany financial advisory fees (note 1) IASI paid to KC Acquisition. The net impact of these items is a decrease in general and administrative expense of $326,890. (5) This adjustment eliminates intercompany interest expense charged to KC Acquisition and Criticom by IASI. The amount charged KC Acquisition was $621,155 and for Criticom it was $265,125 for a total of $886,280 for the year. Prior to its acquisition, IASI provided financing to dealers as an integral part of its business. Although we may continue to provide such financing in limited circumstances in the future, it is likely to not be a significant component of our business. Therefore, non-related party interest income of IASI totaling $1,465,191 has been reclassified from revenue to interest expense, net. The total interest expense (net) adjustment is $2,351,471. 21 INTEGRATED ALARM SERVICES GROUP, INC. PRO FORMA COMBINED STATEMENT OF OPERATIONS For the Year Ended December 31, 2002 (unaudited) (6) This adjustment reduces interest expense pertaining to the repayment of $80,100,000 of debt (from the offering proceeds) using a weighted average interest rate of 10.9% ($8,745,300) and recognizes a charge to earnings for debt convertible at a 25% discount to the initial public offering price. The beneficial conversion feature results in a value of $1,833,333 amortizable over the three year conversion period or interest expense of $611,111 for the year ended December 31, 2002. The net interest expense reduction is $8,134,189. Amortization of debt issuance costs includes both costs for the above debt to be paid-off in 2003 and one-time charges in 2002 for other debt paid-off before maturity. An adjustment of $439,489 has been recorded to eliminate the expense on debt being paid-off. (7) Income tax benefit has been adjusted to reflect a full valuation allowance against deferred tax assets. The remaining income tax benefit of $380,000 represents the change in the state deferred tax liability of IASG which can not be offset by the state deferred tax asset of IASI due to the companies being subject to state taxes in different state tax jurisdictions. (8) Income tax benefit has been adjusted to reflect the state deferred tax effect on the reduction of interest expense and debt issuance costs pertaining to the repayment of IASG debt. (9) There are 23,590,911 shares of common stock issued and outstanding following this offering. For pro forma purposes we used the $122,900,000 of excess proceeds from the proposed offering to reduce the outstanding shares (purchase treasury shares) for the net loss per share calculation. The number of outstanding shares have been reduced to 11,300,911 shares. 22 INTEGRATED ALARM SERVICES GROUP, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Three Months Ended March 31, 2003 (unaudited)

Pro forma Offering Pro forma IASG IASI adjustments Pro forma proceeds as adjusted ------------ ----------- ----------- ------------ ---------- ------------ Revenue .................................. $ 8,753,637 $ 1,445,104 $(449,486)(1) $ 9,749,254 -- $ 9,749,254 Cost of revenue (excluding depreciation and amortization ........................ 3,820,899 -- -- 3,820,899 -- 3,820,899 ------------ ----------- ------------ ------------ 4,932,738 1,445,104 -- 5,928,355 -- 5,928,355 ------------ ----------- ------------ ------------ Operating expenses: Selling and marketing ................... 265,066 -- -- 265,066 -- 265,066 Depreciation and amortization ........... 2,870,521 663,175 (10,305)(2) 3,523,390 -- 3,523,390 Monitoring expense ...................... 44,707 106,230 (140,985)(3) 9,951 -- 9,951 General and administrative .............. 5,477,882 800,331 (37,901)(4) 6,240,312 -- 6,240,312 ------------ ----------- ------------ ------------ Total operating expenses .............. 8,658,176 1,569,736 -- 10,038,719 -- 10,038,719 ------------ ----------- ------------ ------------ Loss from operations ..................... (3,725,438) (124,632) -- (4,110,364) -- (4,110,364) Other expense ............................ 142,008 -- -- 142,008 -- 142,008 Amortization of debt issuance costs ...... 377,675 133,714 -- 511,389 (109,872)(6) 401,517 Interest expense, net .................... 3,200,191 1,033,246 (183,063)(5) 4,050,374 (2,013,297)(6) 2,037,077 ------------ ----------- ------------ ------------ Loss before income taxes ................. (7,445,312) (1,291,592) -- (8,814,136) -- (6,690,966) Provision (benefit) for income taxes ..... 3,417,288 -- 84,176 (7) 3,501,464 71,000 (8) 3,572,464 ------------ ----------- ------------ ------------ Net loss ................................. $(10,862,600) $(1,291,592) -- $(12,315,600) -- $(10,263,430) ============ =========== ============ ============ Net loss per share ....................... $ (7.74) $ (0.91) ============ ============ Weighted average number of common shares outstanding ............................. 1,590,911 (9) 11,300,911 ============ ============

(1) This adjustment eliminates intercompany revenue for interest, monitoring fees and financial advisory fees, and also reclassifies interest income of IASI down to interest expense, net.

Interest income ............................................... $115,703 Interest income, related party ................................ 67,360 Monitoring revenue ............................................ 140,985 Financial advisory fees ....................................... 125,438 -------- Decrease in revenue .......................................... $449,486 --------

(2) The contract rights for IASI were decreased by $3,142,490 to fair value based on current industry benchmarks. Amortization is being decreased by $10,305 for January 2003 based on the rates currently being used by the various portfolios. (3) IASG has provided central station monitoring services to IASI. This adjustment eliminates the offsetting $140,985 that IASI has recorded as monitoring expense for January 2003. (4) Executive salaries and benefits have been adjusted to increase compensation to what it would have been if new employment agreements had been in effect at the beginning of the period presented. Salaries are being increased by $77,058 and benefits by $10,479. Administrative costs are being decreased by $125,438 to eliminate intercompany financial advisory fees (note 1) IASI paid to IASG. The net impact of these items is a decrease in general and administrative expense of $37,901. (5) This adjustment eliminates intercompany interest expense charged to IASG and Criticom by IASI. The amount charged IASG was $39,853 and for Criticom it was $27,507 for a total of $67,360 for the month of January 2003. Prior to its acquisition, IASI provided financing to dealers as an integral part of its business. Although we may continue to provide such financing in limited circumstances in the future, it is likely to not be a significant component of our business. Therefore, non-related party interest income of IASI totaling $115,703 has been reclassified from revenue to interest expense, net. The total interest expense (net) adjustment is $183,063. 23 INTEGRATED ALARM SERVICES GROUP, INC. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS For the Three Months Ended March 31, 2003 (unaudited) (6) This adjustment reduces interest expense pertaining to the repayment of $80,100,000 of debt (from the offering proceeds) using a weighted average interest rate of 10.9% ($2,166,075) and recognizes a charge to earnings for debt convertible at a 25% discount to the initial public offering price. The beneficial conversion feature results in a value of $1,833,333 amortizable over the three year conversion period or interest expense of $152,778 for the three months ended March 31, 2003. The net interest expense reduction is $2,013,297. Amortization of debt issuance costs includes both costs for the above debt to be paid-off in 2003 and one-time charges in 2002 for other debt paid-off before maturity. An adjustment of $109,872 has been recorded to eliminate the expense on debt being paid-off. (7) Income tax expense has been adjusted to reflect a full valuation allowance against deferred tax assets. The remaining income tax expense of $3,501,464 represents the change in the state deferred tax liability of IASG of $(72,566) which can not be offset by the state deferred tax asset of IASI due to the companies being subject to state taxes in different state tax jurisdictions and the impact of the change in tax status on January 1, 2003 of $3,574,030. (8) Income tax expense has been adjusted to reflect the state deferred tax effect on the reduction of interest expense and debt issuance costs pertaining to the repayment of IASG debt. (9) There are 23,590,911 shares of common stock issued and outstanding following this offering. For pro forma purposes we used the $122,900,000 of excess proceeds from the proposed offering to reduce the outstanding shares (purchase treasury shares) for the net loss per share calculation. The number of outstanding shares have been reduced to 11,300,911 shares. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included in another part of this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Overview We provide an integrated solution to independent security alarm Dealers, to assist them in competing in the residential and commercial security alarm market. Our services include wholesale alarm monitoring and financing solutions, including purchasing Dealers' alarm monitoring contracts for our own portfolio and providing loans to Dealers collateralized by those alarm monitoring contracts. We also provide support for our Dealers including billing, collection, marketing and access to equipment discount programs. We believe our package of services allows Dealers to compete against self- monitoring national providers in the security alarm market by giving them access to technical sophistication, financing, back office and other services that they would not otherwise have, while allowing them to remain the local and visible contact with their customer, the end-user of the alarm. We believe we are the largest wholesale alarm monitoring company in the United States, monitoring approximately 500,000 alarm systems on behalf of approximately 5,000 Dealers. Our alarm monitoring service is provided through three state-of-the-art alarm monitoring centers located in New Jersey, Minnesota and California. Our operators respond to approximately 335,000 alarm activations per month. We are also one of the largest providers of capital to Dealers. Since 1993, we have provided financing to the alarm industry in the form of loans or the purchase of alarm monitoring contracts of approximately $350 million in the aggregate. We currently hold and monitor approximately 39,000 alarm monitoring contracts in our own portfolio. Our revenues are derived primarily from providing alarm monitoring services to Dealers for the benefit of the end-user of the alarm system. We typically enter into contracts with our Dealers to provide alarm monitoring services for periods ranging from one to five years. The majority of monitoring contracts entered into by end-users with our Dealers generally permit cancellation with notice of 30-60 days before the end of the original, or any renewal, contract term. Some alarm monitoring contracts with Dealers have longer, more definitive terms. However, essentially all alarm monitoring contracts may be broken for non-performance. Our alarm monitoring contracts with Dealers may require the Dealer to place its entire portfolio of end-user alarm monitoring contracts in our monitoring facilities. Our revenues will fluctuate based upon changes in the net number of end-user alarm monitoring contracts and the timing of connections and disconnections that any one Dealer has with us. Our revenues will also fluctuate based upon the number of Dealers that are added or lost during any particular period. We may gain or lose Dealers based upon the quality, range or price of the services we provide relative to what is provided by our competitors and the effectiveness of our sales and marketing efforts. Our revenues may also be affected by the application of various pricing strategies we may choose to use with our Dealers. In addition to our organic revenue growth, our revenues may increase because of any acquisitions of wholesale alarm monitoring businesses (i.e. call centers or central stations) we may make during any particular period. Our recurring monthly revenues derived from acquired businesses are also subject to the standard risks associated with any acquisition and subsequent integration. We may suffer attrition because of differences in, among other things, the application of policies and procedures, or disruption caused by any conversion or consolidation activity. The cost of services is primarily a function of labor, telecommunication, data processing and technical support costs. Labor costs are driven in part by the number and productivity of operators, supervisors and management within our call centers that provide alarm monitoring services on behalf of our Dealer customers. Labor costs are also a function of the quality of our data processing, customer service and quality management functions. Labor costs also reflect the number of technical staff required to maintain and develop our state-of-the-art monitoring systems. Telecommunication costs reflect, among other things, the number of 25 signals processed, the time required to process any particular signal, the number and type of lines, the design and functionality of our telecommunications network and the negotiated rate with our chosen telecommunication providers. We are constantly evaluating how to improve the quality of our services while lowering the cost of providing those services. We estimate that we presently have sufficient capacity to provide alarm monitoring services to approximately 750,000 end-users. Our operating expenses are primarily comprised of general and administrative, selling and marketing and depreciation and amortization expenses. General and administrative expenses are comprised primarily of officer salaries, rent and professional fees. Fluctuations in general and administrative expenses generally reflect net increases in staff associated with acquisitions, changes in professional fees primarily associated with acquisition activity and audits of our books and records and merit compensation increases. Selling and marketing expenses are primarily driven by the size of our sales force, commissions based upon successful selling activities, travel and advertising. Depreciation and amortization expenses are primarily a function of the acquisition of Dealer relationships. Streamlining of Operations. We have completed the consolidation of two alarm monitoring facilities to improve operating efficiencies. During 2001, we commenced the process of consolidating our Van Nuys, California alarm monitoring facility into our alarm monitoring facility i