Financial Information

Notes to Consolidated Financial Statements For The Years Ended October 31, 2009 and 2008

1. NATURE OF BUSINESS

AlarmForce Industries Inc., (the “Company”) is a public company whose shares are listed on the Toronto Stock Exchange. The Company provides security alarm monitoring and related services to residential and commercial subscribers throughout Canada and in selected states of the United States of America. The Company is a provider of two-way voice alarm systems and monitoring services and was incorporated under the laws of Canada on November 16, 1988.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada.

(a) Basis of Consolidation

These consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, AlarmForce NC Inc. and AlarmForce LP, a limited partnership, operating in the U.S. Inter-company balances and transactions have been eliminated on consolidation.

(b) Revenue Recognition

The Company’s revenue is derived from monitoring services and sale of equipment.

(i) MONITORING REVENUE: The Company earns the majority of its revenue from subscribers for monitoring services. Revenue from monitoring services is earned as the service is provided pursuant to the term of the subscriber agreement. The alarm subscriber agreements are non-cancellable over a three or four year term with automatic annual renewals thereafter.

(ii) UNEARNED REVENUE: Unearned revenue results from subscribers who are billed for monitoring services in advance of the period in which such services are provided, either on a bi-monthly, quarterly, semi-annual or annual basis. Revenues from monitoring services are recognized in the period such services are provided. The maximum period for which subscribers are billed in advance is one year.

(iii) DEFERRED EQUIPMENT REVENUE: Revenue from the sale of additional equipment and the associated costs are deferred and recognized on a straight-line basis over the term of the subscriber agreement.

(c) Inventory

Inventory consists of subscriber equipment and accessories, which are held for installation. Raw materials and work in progress goods are valued at the lower of cost on a first-in, first-out basis and net realizable value. When the finished goods (subscriber equipment) are installed, they are transferred to rental equipment (property, plant and equipment) and amortized over its useful life. Finished goods are valued at the lower of the weighted average unamortized cost and net realizable value.

(d) Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term guaranteed investment certificates, which are carried at the lower of cost and fair value. These cash equivalents are highly liquid and mature within a 90-day period from the date of purchase.

e) Property, Plant and Equipment

Property, plant and equipment are recorded at cost. When assets are replaced or disposed of, the cost and accumulated depreciation are removed from the accounts and the gains or losses are recognized in the period realized. Repairs and maintenance costs are expensed as incurred. Amortization is provided over the estimated useful lives using the following methods and annual rates: