I think an Arduino alarm system is a great application!
First off, I would probably get some multiplexed inputs, that would increase the number of zones you could monitor (window switches, door switches, motion sensors)... also perhaps the Xbee for wireless sensors. The LCD/keypad displays would be a snap too.
Getting an alarm company to monitor the system might be an issue, you may need to figure out what kind of strings they need on the modem.