Financial Information

Consolidated Financial Statements For the Second Quarter Ended April 30, 2009

To Our Shareholders:

I am very pleased to report that for the six months ended April 30, 2009, AlarmForce achieved new records for both revenue and net income. The net increase in subscribers during the period represented a 12% annualized increase from the comparative 2008 figure, despite a tough economic climate and great financial challenges for public companies in general. Our total monitored account base increased to 96,000 accounts at the close of the second quarter, which resulted from new subscribers added strictly through organic growth.

Revenue increased to $8,468,000 for the second quarter, up by 16% from $7,317,000 a year ago. This was a record quarterly increase bringing our total consolidated revenues for the six months to $16,750,000, a 16% increase from last year. As a result of the growth in the period, Income before taxes for the six months increased by 38% and Net income increased by 39%. These increases in revenue and earnings are well in excess of the security industry as a whole, which reported a 6% annual increase in recurring monthly revenues.

EBITDA increased from $3.6 million to $4.3 million for the six months, a 17% increase from the corresponding 2008 period. This measure includes the effect of the marketing expenses which results in a charge to expense during the period, thus reducing the operating income. Excluding marketing expenses, EBITDA increased from $7.8 million to $9 million for the six months, a 14% increase from the corresponding 2008 period.

In addition to total revenues, there were corresponding increases in recurring revenues and cash flows for the quarter. In the six month period, the Company’s outstanding balance of debt decreased by $150,000. On a net basis, the company continues to remain debt-free. Cash flows from operations in the six months amounted to $3.4 million before working capital adjustments, of which $1.9 million resulted in net cash flows from operating activities after working capital. The remaining cash resources from operations were reinvested in new subscriber growth, working capital and enhancing shareholder value.

New AlarmCare subscriber accounts were added during the period at a steadily increasing rate, which added to overall subscriber growth. These accounts contribute recurring monthly revenues from subscribers of personal emergency response systems or PERS. Now in the second year, our PERS base is at the stage where the current AlarmVoice base was when we started twenty-one years ago. We expect PERS revenues to grow significantly in the next few years, as a seamless extension of our brand. Our wireless two-way voice communication is a natural fit for our aging population. In particular the retirement segment, which is essentially the key market for AlarmCare, is expected to be one of the fastest growing demographic segments in North America. The exciting growth in our share of this market has already begun and we look forward to potentially higher growth rates in the future. According to projections released by Statistics Canada in 2007, the first baby boom cohort will reach retirement age in 2011 and the rapid aging is expected to last until 2031.

During the period, we purchased 37,130 of our common shares for cancellation under our stock buyback issuer bid, for a total price of $144,540. The issuer bid allows us the opportunity to exercise our option to buy shares at a prudent price and enhance shareholder value, by in effect increasing the proportionate interest of remaining shareholders in the Company. The issuer bid expires in December 2009 and a maximum number of 350,000 shares may be bought back under the issuer bid.

Although the deep financial downturn is cause for caution for even the best managed companies, we see a future that is exceptionally bright for our business. Demographic trends continue to favour our growth outlook. Companies like ours that can innovate and bring the best value to consumers, are positioned to reap the biggest rewards. At the same time, longer life expectancy, smaller households, and more second homes for the baby boom generation approaching retirement age in the next decade, are expected to result in increased demand for our brand of subscriber services.

As wireless devices become smarter and broadband usage becomes more affordable, we are constantly monitoring trends and opportunities to expand our brand into new applications and increased recurring revenues. We expect to continue to leverage our corporate economies of scale and efficient innovation and distribution model to fuel further increases in revenues and earnings in the coming years.

In closing, I would like to thank our team members and shareholders for their continuing support and confidence in our company.

Respectfully submitted on behalf of the Board of Directors

Joel Matlin
President and CEO

Unaudited Consolidated Balance Sheet As At April 30, 2009
(With comparative figures for the fiscal year ended Oct. 31, 2008)

	April 30, 2009	October 31, 2008
ASSETS Current
Cash and cash equivalents	$4,858,579	$5,408,362
Accounts receivable	379,393	427,342
Income taxes receivable	67,313	-
Inventory	3,140,402	3,064,025
Prepaid expenses & other assets	78,300	21,796
	8,523,987	8,921,525
Deferred charges	1,365	2,730
Future income taxes (note 7)	517,000	464,000
Property, plant & equipment (note 4)	17,627,843	16,844,560
Intangible assets	2,645,079	3,078,234
	$29,315,274	$29,311,049
LIABILITIES Current
Accounts payable and accrued liabilities	$2,945,724	$3,763,078
Unearned revenue	716,813	706,569
Income taxes payable	-	491,332
Current portion of long-term debt (note 5)	300,000	300,000
	3,962,537	5,260,979
Deferred revenue	3,231,556	3,313,343
Long-term debt (note 5)	1,004,167	1,154,167
	8,198,260	9,728,489
SHAREHOLDERS EQUITY
Share capital (note 6)	12,278,184	12,315,685
Contributed Surplus	95,101	202,140
Retained earnings	8,743,729	7,064,735
	21,117,014	19,582,560
	$229,315,274	$29,311,049

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statement of Income For Six Months Ended April 30, 2009
(With comparative figures for the six months ended April 30, 2008)

	Three months ended April 30		Six months ended April 30
	2009	2008	2009	2008
Sales	$8,467,849	$7,317,399	$16,749,576	$14,416,266
Cost of Sale	2,081,704	1,852,934	4,088,297	3,406,401
Gross Profit	6,386,145	5,464,465	12,661,279	11,009,865
Expenses Selling	2,769,032	2,635,951	5,576,531	5,056,194
General & administrative	1,556,209	1,235,605	2,832,504	2,324,832
Amortization: Property, plant & equipment	671,470	525,734	1,380,319	1,056,976
Deferred charges	683	2,115	1,365	4,229
Intangible assets	216,579	216,579	433,159	433,159
Interest	15,227	22,801	33,060	48,967
Foreign exchange loss/(gain)	21,934	61,464	(120,462)	261,221
	925,893	828,693	10,136,476	9,185,578
Income before income taxes	1,135,011	764,216	2,524,803	1,824,287
Income taxes (note 7)	378,253	240,494	845,809	620,494
Net Income for the period	$756,758	$523,722	1,678,994	1,203,793
Basic earnings per Share (note 8)	$0.06	$0.04	$0.14	$0.10
Fully diluted Earnings per Share (note 8)	$0.06	$0.04	$0.14	$0.10

See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENT OF RETAINED EARNINGS
For Six Months Ended April 30, 2009

	Three months ended April 30		Six months ended April 30
	2009	2008	2009	2008
Retained earnings, beginning of period	$7,986,971	$5,134,221	$7,064,735	$4,454,150
Net income for the period	756,758	523,722	1,678,994	1,203,793
Retained earnings, end of period	$8,743,729	$5,657,943	$8,743,729	$5,657,943

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statement of Cash Flows For Six Months Ended April 30, 2009
(With comparative figures for six months ended April 30, 2008)

	Three months ended April 30		Six months ended April 30
	2009	2008	2009	2008
OPERATING ACTIVITIES Net Income for the period	$756,758	$523,722	$1,678,994	$1,203,793
Items not involving cash:	525,734	429,969	1,056,976	877,247
Amortization: Property, plant & equipment	671,470	525,734	1,380,319	1,056,976
Deferred charges	683	2,115	1,365	4,229
Intangible assets	216,579	216,579	433,159	433,159
Future income taxes	(9,000)	(378,000)	(53,000)	(577,500)
	1,636,490	890,150	3,440,837	2,120,657
Change in non-cash components of working capital: Accounts receivable	13,267	(109,125)	47,949	(218,248)
Inventory	292,470	185,294	(76,377)	150,484
Prepaid expenses & other assets	28,252	27,820	(56,504)	(50,641)
Accounts payable & accrued liabilities	(599,367)	(466,252)	(817,355)	(573,808)
Unearned revenue	–	–	10,244	(4,600)
Income taxes	36,526	190,507	(558,645)	496,346
Deferred revenue	(89,507)	146,696	(81,787)	313,706
	(318,359)	(25,060)	(1,532,475)	113,239
	1,318,131	865,090	1,908,362	2,233,896
INVESTING ACTIVITIES Additions to property, plant & equipment	(984,865)	(801,090)	(2,163,605)	(1,546,470)
Dispositions of intangible assets	-	55,000	–	-
	(984,865)	(746,090)	(2,163,605)	(1,546,470)
FINANCING ACTIVITIES Repayment of fi xed rate term loan	(16,667)	(12,500)	(25,000)	(25,000)
Increase/(decrease) in long-term debt	(83,334)	(62,500)	(124,999)	(130,200)
Proceeds from issue of share capital	-	132,300	-	132,300
Purchase of shares for cancellation	-	-	(144,540)	-
	(100,001)	57,300	(294,539)	(22,900)
Change in cash and cash equivalents	233,265	176,300	(549,782)	664,526
Cash and cash equivalents, beginning of period	4,625,315	2,968,240	5,408,362	2,480,014
Cash and cash equivalents, end of period	$4,858,580	$3,144,540	$4,858,580	$3,144,540
Cash and cash equivalents for the Company are as follows: Cash	$1,267,391	$1,139,829	$1,267,391	$ 1,139,829
Cash equivalents	$3,591,188	$2,004,711	$3,591,188	$2,004,711
	$4,858,579	$3,144,540	$4,858,579	$3,144,540
Supplemental cash flow information: Interest paid	$15,227	$ 22,801	$33,060	$48,967
Income taxes paid	$350,727	427,792	$1,457,454	$701,454

See accompanying notes to unaudited consolidated financial statements

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED APRIL 30, 2009 (Unaudited)

1. BASIS OF PRESENTATION

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.

The management of AlarmForce Industries Inc. has prepared these interim consolidated financial statements in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Disclosure of the interim financial statements does not conform in all respects to the requirements of GAAP for annual statements. The notes presented in these interim financial statements include only significant events and transactions and do not include all matters normally disclosed in the Company’s audited annual financial statements. These interim financial statements have not been audited or reviewed by the Company’s independent auditors. These statements follow the same accounting policies and methods as the most recent annual audited financial statements and should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2008.

In the opinion of management, all adjustments considered necessary for fair presentation have been included in these interim consolidated financial statements. Operating results for the six months ended April 30, 2009, are not necessarily indicative of the results that may be expected for the year ending October 31, 2009.

2. ACCOUNTING POLICY DEVELOPMENTS

(i) Goodwill and Intangible Assets: In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”. The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new Section is applicable to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. This new Section does not have any impact on the Company’s consolidated financial statements.

(ii) General standards on Financial Statement Presentation: In June 2007, the CICA Handbook Section 1400, “General Standards on Financial Statement Presentation”, has been amended to include requirements to assess and disclose an entity’s ability to continue as a going concern. The changes are effective for interim and annual financial statements beginning on or after January 1, 2008. This new Section does not have any impact on the Company’s consolidated financial statements.

(iii) Inventory: In June 2007, the CICA issued Section 3031, “Inventories” resulting from the convergence with IFRS, which requires inventory to be measured at lower of cost and net realizable value. The standard also provides guidance on the costs that can be capitalized. In addition, previous inventory write-downs are now allowed to be reversed if the economic circumstances have changed to support an increased inventory value. The standard is effective for our annual and interim periods beginning on or after January 1, 2008. This new Section does not have any impact on the Company’s consolidated financial statements.

(iv) International Financial Reporting Standards (IFRS): In 2006, Canada’s Accounting Standards Board adopted a strategy of converging Canadian generally accepted accounting principles for publicly accountable enterprises with International Financial Reporting Standards (IFRS). The Company will be required to report using these converged standards for interim and annual financial statements for fiscal years commencing on or after January 1, 2011. The Company is in the planning phase of this conversion and is currently in the process of evaluating the impacts of this convergence on the consolidated financial statements.

(v) Business Combinations: Section 1582, “Business Combinations”, will be applicable to business combinations for which the acquisition date is on or after the Company’s fiscal years beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Company has not yet determined the impact of the adoption of this new standard on its financial statements.

(vi) Consolidated Financial Statements: Section 1601, “Consolidated financial statements” will be applicable to financial statements relating to the Company’s fiscal years beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for the preparation of consolidated financial statements. The Company has not yet determined the impact of the adoption of this new standard on its financial statements.

(vii) Non-Controlling Interests: Section 1602, “Non-controlling interests” will be applicable to financial statements relating to the Company’s fiscal years beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for noncontrolling interests in a subsidiary in consolidated financial statements subsequent to a business combination. The Company has not yet determined the impact of the adoption of this new standard on its financial statements.

3. CAPITAL STRUCTURE

The capital structure of the Company consists principally of shareholder’s equity comprised of retained earnings and share capital. The Company’s strategy is to minimize the use of debt financing to fund growth and manage its capital structure in light of economic conditions and the risk characteristics of the underlying assets. The Company’s primary uses of capital are to finance noncash working capital requirements and capital expenditures, which are currently funded from its internally generated cash flows. The Company is not subject to any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital. The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth and to deploy capital to provide an appropriate return on investment to its shareholders.

The Company manages the capital structure and makes adjustments to it in light of economic conditions. In order to maintain or adjust the capital structure, the Company may purchase shares for cancellation, issue new shares, issue new debt or issue new debt to replace existing debt with different characteristics.

4. PROPERTY, PLANT AND EQUIPMENT

	April 30, 2009		October 31, 2008
	Cost $	Accumulated Amortization $	Cost $	Accumulated Amortization $
Land Building Rental equipment	600,000 2,300,324 23,593,493	– 333,069 9,041,529	600,000 2,262,296 22,027,645	– 276,511 8,291,238
Computer equipment Computer software Furniture & fixtures Vehicles Moulding equipment	885,871 387,993 396,904 30,809 57,386	626,001 283,082 275,320 8,550 57,386	853,713 373,772 384,751 30,809 57,386	585,816 267,078 263,162 4,621 57,386
Net book value	28,252,780 17,627,843	10,624,937	26,590,372 16,844,560	9,745,812

5. LONG-TERM DEBT

	April 30, 2009 $	October 31, 2008 $
Fixed rate term loan Revolving term loans	845,834 458,333	870,834 583,333
Less: Current portion	1,304,167 300,000	1,454,167 300,000
	1,004,167	1,154,167

The following are the details of the above loans:

1. Fixed rate term loan in the amount of $1,000,000 was acquired in 2006 to finance the acquisition of property consisting of land and building. The loan is repayable (principal and interest) in monthly repayments of $4,167 bearing an interest rate of 5.58% per annum. The loan is due March 2016. This loan has been secured by the Company’s land and building.

2. Revolving term loan in the amount of $1,000,000 was acquired in March 2007 to finance the purchase of franchise rights. The loan is repayable (principal and interest) in monthly instalments of $20,833 over a period of 48 months at a bank rate of prime rate plus 0.25% per annum. The prime rate was 2.25% as at April 30, 2009. A general assignment of book debts, a general security agreement, and an assignment of the proceeds of a $300,000 life insurance policy have been pledged as collateral.

The Company has total credit facilities in the amount of approximately $5,800,000, of which $5,300,000 is available (2008 - $5,100,000).

6. SHARE CAPITAL

The Company is authorized to issue an unlimited number of common shares.

The changes in the issued common shares of the Company during the six months ended April 30, 2009 are as follows:

	Number of Shares	Value $
Balance, October 31, 2007 For cash pursuant to option plan	12,098,788 35,000	12,183,385 132,300
Balance, October 31, 2008 Issued during the period ended Aril 30, 2009: For cash pursuant to stock option plan	12,133,788 Nil	12,315,685 Nil
Cancelled through normal course issuer bid: Purchased for cancellation	(37,130)	(37,501)
Balance, April 30, 2009	12,096,658	12,278,184

Normal course issuer bid

In December 2008, the Toronto Stock Exchange accepted the Company’s notice of intention to make a Normal Course Issuer Bid. Under this bid, the Company is entitled to purchase, for cancellation, up to 350,000 common shares outstanding, which commenced on December 22, 2008 and will terminate on December 21, 2009. The excess of the purchase price over the average stated value of shares purchased for cancellation was charged to contributed surplus. The Company made the following purchases during the six months ended April 30, 2009:

	Purchase Price
	Number of shares	Paid $	Charged to share capital $	Charged to contributed surplus $
Common shares purchased for cancellation
During the period	37,130	144,540	37,501	107,039
Total	37,130	144,540	37,501	107,039

Stock Option Plan

The Company has an incentive stock option plan in place for its directors, officers and employees. Options may be granted for a period not exceeding five years at an option price not less than the market price of the shares at the time the option is granted. The maximum number of common shares which may be set aside for issuance under the plan is 2,250,000, provided that, from time to time, such number may be increased subject to approval of the shareholders of the Company. The maximum number of common shares that may be reserved for issuance to any one person under the plan is 5% of the common shares outstanding at the time of the grant, less the number of shares reserved for issuance to such person.

The changes in the outstanding stock options of the Company during the six months ended April 30, 2009 are as follows:

	Number of Options	April 30, 2009 Weighted average exercise price $
Balance, beginning of period Future income tax	155,000	3.78
Granted	Nil	-
Exercised	Nil	-
Cancelled	Nil	-
Balance, end of period (i) Less options not vested (ii)	155,000 Nil	3.78 -
Exercisable, end of period	155,000

The remaining contractual life and exercise price of options outstanding and options exercisable as at April 30, 2009 are as follows:

Number of Options Outstanding	Remaining Contractual Life (Years)	Exercise Price $	Number of Options Exercisable
155,000	1.25	3.78	155,000

Vesting of Options

(i) Outstanding options are subject to vesting provisions under which 25% of the total options granted vest immediately at the date of the grant, and a further 25% after each of the first, second and third anniversaries.

(ii) All options have fully vested.

7. INCOME TAXES

	April 30, 2009 $	April 30, 2008 $
Current income tax Future income tax	898,809 (53,000)	1,197,994 (577,500)
	845,809	620,494

8. EARNINGS PER SHARE

The following table sets forth the calculation of the basic and fully diluted earnings per share:

	April 30, 2009	April 30, 2008
Basic earnings available to common shareholders Weighted average number of common shares outstanding – basic Basic earnings per share	$1,678,994 12,112,567 $0.14	$1.203,793 12,100,629 $0.10
Weighted average number of common shares outstanding Assumed exercise of outstanding dilutive options Shares purchased from proceeds of assumed exercise of options	12,112,567 155,000 (114,433)	12,100,629 155,000 (97,650)
Weighted average number of common shares outstanding – dilutive	12,153,134	12,157,979
Fully diluted earnings per share	$0.14	$0.10

9. SUBSEQUENT EVENTS

On June 1, 2009, the Company acquired certain franchise rights from a franchise territory situated in Eastern Ontario. Total consideration for the rights amounted to $117,720 and was financed from working capital.

Section 3855 requires all financial assets and liabilities to be classified into one of the following five categories: held for trading; held-to-maturity; loans and receivables; available-for-sale financial assets; and other financial liabilities. All financial instruments are measured on the balance sheet at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are measured at amortized cost. Subsequent measurement and recognition of the changes in fair value of financial instruments depends upon their initial classifications:

Held-for-trading financial assets – are measured at fair value with subsequent changes in fair value recognized in current period net income.

Held-to-maturity assets, loans and receivables and other financial liabilities – are initially measured at fair value and subsequently measured at amortized cost with changes recognized in current period net income.

Available-for-sale financial assets – are measured at fair value with subsequent gains and losses included in other comprehensive income until the asset is removed from the balance sheets.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and long-term debt. The Company measures its cash and cash equivalents as held-for-trading, its accounts receivable as loans and receivables, and its accounts payables and accruals, and long term debt as other financial liabilities.

(a) Fair value

The carrying value of the Company’s financial instruments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their immediate or short-term maturity. The carrying value of the long-term debt approximates fair value as it bears interest at market rate.

(b) Credit risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents and accounts receivable.

Cash and cash equivalents are maintained at major financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal credit risk.

Credit risk from accounts receivable encompasses the default risk of subscribers and franchisees. Credit risk on accounts receivable is minimized as a result of the constant review and evaluation of subscriber account balances beyond a particular age and credit limit. Franchise account balances are secured by the franchisees’ share of the monitoring. The Company does not believe that there is significant credit risk arising from its subscribers and franchisees, as it does not rely on any one major account. The Company also maintains an allowance for doubtful accounts at an estimated amount, allocating sufficient protection against losses resulting from collecting less than full payments from its receivables.

(c) Interest rate risk

The only financial instruments that expose the Company to interest rate risk are its long-term debt. The Company is marginally exposed to fluctuations in interest rates with regards to a longterm debt consisting of a revolving term loan, bearing interest at the bank’s prime plus 0.25% per annum. The Company is sensitive to fluctuations in interest risk such that a 2% increase or decrease in interest rates would result in a respective $7,300 decrease or increase, to the Company’s income before taxes for the six months ended April 30, 2009. The Company has not deemed it necessary to use derivative financial instruments to reduce exposure to interest rate risk.

(d) Foreign currency risk

The Company is exposed to currency risk due to its fully integrated US limited partnership. A certain portion of the Company’s purchases are in US currency, resulting in US dollar denominated accounts payable and accrued liabilities. These activities result in exposure to fluctuations in foreign currency rates between the US dollar and the Canadian dollar. The Company’s sensitivity to these foreign currency fluctuations is such that a 10% strengthening or weakening of the US dollar would result in a respective $147,919 increase or decrease to the Company’s income before taxes for the six months ended April 30, 2009. The Company does not deem it necessary to utilize any financial instruments or cash management policies to mitigate the risks arising from changes in foreign currency rates. 9. FINANCIAL INSTRUMENTS (continued) 14

MANAGEMENT’S DISCUSSION AND ANALYSIS

1. INTRODUCTION

The following Management’s Discussion and Analysis, of operating results and financial position for the six months ended April 30, 2009 is supplementary to, and should be read in conjunction with the interim consolidated financial statements for the quarter, which have not been audited or reviewed by AlarmForce Industries Inc. (the “Company” or “AlarmForce”) independent auditors. Management’s Discussion and Analysis (“MD&A”) is intended to help readers understand the dynamics of our business and the key factors underlying our financial results. The interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada and all amounts, unless otherwise indicated, are expressed in Canadian dollars. Disclosures in the interim statements do not conform in all respects to GAAP for annual statements. These statements follow the same accounting policies and methods as the most recent audited annual statements and should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2008. The audited consolidated financial statements and Management’s Discussion and Analysis for the year ended October 31, 2008 were reviewed and approved by the Company’s Audit Committee and the Board of Directors.

Operating results for the six months ended April 30, 2009 are not necessarily indicative of the results; that may be expected for the full year ending October 31, 2009. The following discussion is comprised of significant updates since management’s discussion and analysis reported for the year ended October 31, 2008.

2. FORWARD–LOOKING STATEMENTS

Certain statements contained herein including (without limitations) financial and business prospects and financial outlooks, may be forward-looking statements which reflect management’s current expectations regarding future plans and intentions, growth, results of operations, performance and business prospects and opportunities. Words such as “may”, “will”, “should”, “could”, “anticipate”, “believe,” “expect, “intend”, “plan”, “potential”, “continue” and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current views with respect to future events or conditions, including prospective results of operations, financial position, and predictions of future actions, plans or strategies. Certain material factors and assumptions were applied in drawing our conclusions and making these forward looking statements. By their nature, those statements reflect management’s current views, beliefs and assumptions and are subject to certain risks and uncertainties, known and unknown, including, without limitation:

• technological change;
• development of new products;
• proper performance of alarm equipment;
• the reliability of our payroll processing services;
• the protection and privacy of personal information which we hold;
• the risks associated with credit;
• the exchange rate of the U.S. currency fluctuations;
• changes in accounting policies and estimates;
• changes in consumer preferences, customer demand for our alarm products and services and our ability to maintain customer relationships;
• disruption to manufacturing and distribution activities due to labour disruptions, bad weather, natural disasters and other unforeseen adverse events;
• recruitment and hiring of competent personnel.

Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by these forward-looking statements. See “Risks and Uncertainties” below. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying our projections or forward-looking statements prove incorrect, our actual results may vary materially from those described in this MD&A as intended, planned, anticipated, believed, estimated or expected. We do not intend and do not assume any obligation to update these forward-looking statements whether as a result of new information, plans, events or otherwise, unless required by law.

3. OVERVIEW

AlarmForce is a public company whose shares are listed on the Toronto Stock Exchange under the ticker symbol “AF”. The Company provides security alarm monitoring and related services to residential and commercial subscribers throughout Canada and selected centers across the United States of America. The Company is one of the leading providers of two-way voice alarm systems in Canada and was incorporated under the laws of Canada on November 16, 1988.

In the first six months of 2009, despite the global economic slowdown, the Company added 5,000 net new subscribers for a total subscriber account base of 96,000. In Canada, we added 2,800 net new subscribers bringing the total Canadian subscribers to 85,000 an increase of 8%, from the corresponding quarter in 2008. In the US we added 2,200 net new subscribers bringing the total US subscribers to 11,000, an increase of 57%, from the corresponding quarter in 2008. In the first six months of 2009, the Company’s gross revenues increased by 16% to $16,749,576 up from $14,416,266 in the corresponding six months of 2008.

The Company has a strong cash position with cash and cash equivalents of $4,858,579 compared to $3,144,540 in the corresponding period of 2008. The Company expects to be able to continue to fund investments in rental equipment, and working capital requirements including marketing expenditures from internally generated cash flows.

In the second half of fiscal 2009, the Company expects to commence development of an application that will provide remote interactive features to the home via video access. Designed for the residential mass market, the wireless system will allow video streaming over the customer’s broadband connection to a smart phone, allowing the user to view and interact with the home from anywhere in the world. The Company expects to engage a software manufacturer to assist with the development of the application that is expected to be completed by the second quarter of 2010. The total expenditure, to be financed from working capital, is expected to be approximately $750,000.

In 2008, the Company introduced its newest service offering under the brand name AlarmCare. AlarmCare is a 24 hour Personal Emergency Response System (“PERS”) that is specifically tailored to the segment of market consisting of the elderly and those wishing to live independently but who require medical assistance. The AlarmCare system required only nominal changes to infrastructure and the base controller remains identical to the alarm security controller with some minor changes to hardware and software. The Company is currently aggressively advertising the AlarmCare system in Canada and selected centers in the United States using the same model that has made the security suite of products so successful. As at April 30, 2009, the Company had installed approximately 1,500 AlarmCare systems.

On December 22, 2008, the Company commenced a normal course issuer bid for one year. Under this bid, the Company is entitled to purchase, for cancellation, up to 350,000 common shares outstanding at the prevailing market price at the time of purchase whereby the daily number of common shares purchased will not exceed 9,315 common shares.

The Company expects to continue growing organically by marketing and distributing its unique technology and create awareness through advertising programs across Canada and the United States. The Company has not acquired any monitoring accounts or blocks of accounts from dealers, but has increased its subscriber account base solely through internal account creation. Under its existing programs, the Company believes it is able to create a new account at a lower cost than its competitors incur in acquiring accounts, individually or en bloc.

4. RECONCILIATION OF ADJUSTED EBITDA TO GAAP EARNINGS

EBITDA is defined as earnings before interest expenses, income taxes, depreciation and amortization. EBITDA is a standard measure used in the security industry to assist in understanding and comparing operating results and is often referred to by our competitors. Management views EBITDA as an important measure of operating performance of the Company; however since it does not have any standardized meaning defined by Canadian GAAP, it may not be considered in isolation of GAAP measures such as net income/loss or cash flows, as a measure of liquidity. Management believes, however, that it is an important measure as it allows the Company to assess its ongoing business without the impact of depreciation or amortization expenses. Since EBITDA is not a defined term under Canadian GAAP, it is unlikely to be comparable to similar measures presented by other issuers.

Most companies in the residential security industry purchase subscriber accounts and capitalize those acquisition costs, amortizing them over the term of the subscriber contract.AlarmForce is one of the few companies whose growth is internally generated and therefore the accounting treatment is not directly comparable. AlarmForce’s annual budget for marketing expenditures has increased steadily, reflecting acceleration of new subscriber account creation and due to the discretionary nature of the marketing budget the Company provides the following reconciliation of adjusted EBITDA to GAAP net income figures reported for the six months ended April 30, 2009 and the comparative six months of 2008 below:

	April, 2009 $	April, 2008 $
EBITDA Add: marketing expenditures	4,252,244 4,656,395	3,628,839 4,205,748
Adjusted EBITDA	8,908,639	7,834,587
Less: Amortization of property, plant and equipment Amortization of intangible assets Amortization of deferred charges Foreign exchange loss (gain) on consolidation Interest expense	1,380,319 433,159 1,365 (120,462) 33,060	1,056,976 433,159 4,229 261,221 48,967
Income before income taxes Less income taxes	2,524,803 845,809	1,824,287 620,494
Net income	1,678,994	1,203,793

5. REVIEW OF OPERATIONS: SIX MONTHS ENDED APRIL 30, 2009

Sales

The Company’s total consolidated revenue for the first six months of 2009 was $16,749,576 compared to $14,416,266 in the comparative period in 2008, which is an increase of $2,333,310 or 16%. This increase is primarily attributable to monthly recurring monitoring services generated from subscriber agreements and is consistent with the increase in the Company subscriber base. Monthly recurring monitoring services compose 89% of total sales.

Cost of sales

Cost of sales was $4,088,297 in the first six months of 2009 compared to $3,406,401 in the corresponding period in 2008, for a total increase of $681,896 or 20% . These costs relate to the purchase of add-on equipment and the cost of personnel that provide monitoring services, technical support and field support services.

Contributing to the increase is additions to staffing requirements and general wage augmentations in each department required to support the expanding subscriber base. In addition, a certain portion of the Company’s purchases are obtained from US suppliers that are denominated in US currency. The strengthening of the US Dollar against the Canadian Dollar adversely affected the cost of these purchases making them unfavorably inflate the cost of sales.

The Company is vertically integrated by manufacturing, installing, monitoring and servicing alarm systems. The alarm system facilitates live two-way voice communication with the Central Station thereby offering immediate response and/or assistance in certain emergencies. The Central Station is located at the Company’s head office in Toronto from which the subscriber accounts are monitored.

Gross margin

Gross Profit was $12,661,279 for the first six months of fiscal 2009 compared to $11,009,865 in the comparative period of fiscal 2008, which was an increase of $1,651,414 or 15%. Gross margin as a percentage of total revenue remained unchanged at 76% in the first six months of 2009, when compared to the comparative period in 2008.

Despite unfavorable changes in the US foreign exchange rate and adverse pressures surrounding the global economy, management expects the gross profit margins to remain relatively stable as the Company continues to experience consistent and stable growth in the subscriber base and target staffing requirements are fulfilled.

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

Selling Expenses amounted to $5,576,531 for the six months ended April 30, 2009 compared to $5,056,194 in the corresponding period of 2008, an increase of $520,337 or 10%. This is predominantly due to an increase in market expenditures of $450,647. The Company intends to continue establishing brand recognition in the US and reinforce branding in Canada. The Company also expects to continue building brand recognition of the AlarmCare product using the same successful marketing model used for the alarm systems. These advertising expenditures in the form of radio, television, print and other media uniquely introduce the benefits of the Company’s products and services. Selling Expenses excluding marketing costs remained relatively constant.

Administrative Expenses totaled $2,832,504 for the first six months of fiscal 2009 compared to $2,324,832 in the corresponding period of 2008, an increase of $507,672 or 22%. The increase is primarily due to a general increase in administrative expenses and uncollectible monitoring fees arising from customer attrition. With downward pressure on subscriber household income in Canada and the United States, the Company expects to see an increase in uncollectible monitoring fees arising from customer attrition.

Other expenses

Amortization of Property Plant and Equipment was $1,380,319 for the first six months of fiscal 2009 compared to $1,056,976 in the comparative period of fiscal 2008, an increase of $323,343 or 31%. This increase mainly reflects additions made to the rental equipment in the first six months of 2009 due to the subscriber growth. Rental equipment refers to alarm equipment installed at a subscriber’s location that remains the property of the Company. This equipment is capitalized under rental equipment as it is expected to have longer useful life than the term of the customer agreement.

Interest expense was $33,060 for the first six months of 2009 compared to $48,967 in the corresponding period of 2008, a decrease of $15,907 or 32%. The Company did not obtain any new loans in 2009 and made principle repayments on existing loans, thereby reducing the interest expense for this period. The Company strictly controls the use of debt financing for new subscriber growth and uses an organic growth model to build the account base as opposed to growth by acquisition. This has proved effective in reducing the Company’s debt to equity ratio.

	April 2009	January 2009	October 2008
Canadian subscribers* US subscribers*	1,400 1,300	1,400 900	2,200 1,600
Total net growth in subscribers	2,700	2,300	3,800
OPERATIONS:
	$	$	$
Total revenue	8,467,849	8,281,727	7,949,010
Income before taxes	1,135,011	1,389,792	1,222,236
Net income	756,758	922,236	852,866
Basic earnings per share	0.06	0.08	0.07
Fully diluted earnings per share	0.06	0.08	0.07
FINANCIAL POSITION:
Total assets	29,315,274	29,347,391	29,311,049
Shareholders’ equity	21,117,014	20,360,256	19,582,560

* Inclusive of Personal Emergency Response subscribers

Foreign exchange loss

The Company is exposed to currency risk due to its US limited partnership, AlarmForce Limited Partnership, and also a certain portion of the Companys purchases are in US currency, resulting in US dollar-denominated accounts payable. These activities result in exposure to fluctuations in foreign currency rates as the Company adjusts its foreign exchange rate annually. As at April 30, 2009, the Company experienced a foreign exchange gain of $120,462 from the fluctuating US dollar. The Company has not deemed it necessary to utilize any financial instruments or cash management policies to mitigate risk.

Income taxes

The future tax liability is reduced by future income tax assets resulting from certain opposite timing differences, which stems from the accounting deferral and amortization of sales revenue that are immediately recognized in taxable income at the time the sale is completed. These differences are also expected to reverse in the future.

Operating results by business segment

The Company operated primarily in only one reporting segment in North America, which is the monitoring of residential security systems.

6. SUMMARY OF QUARTERLY RESULTS

The following table sets out selected financial information for the Company for the eight most recently completed quarters up to April 30, 2009, prepared in accordance with Canadian GAAP and expressed in Canadian currency:

July 2008	April 2008	January 2008	October 2007	July 2007
1,500 1,000	1,700 1,100	2,300 1,100	3,400 900	2,500 1,000
2,500	2,800	3,400	4,300	3,500
$	$	$	$	$
7,577,109	7,317,399	7,098,867	6,662,915	6,447,655
839,217	764,216	1,060,071	641,545	129,278
553,926	523,722	680,071	358,626	81,278
0.05	0.04	0.06	0.03	0.01
0.05	0.04	0.06	0.03	0.01
26,889,711	26,414,026	25,975,553	25,251,571	25,825,876
18,729,694	18,175,768	17,519,746	16,839,675	16,481,050

7. LIQUIDITY AND CAPITAL RESOURCES

As at April 30, 2009, the Company had cash and cash equivalents of $4,858,580 and unused credit facilities of approximately $5,300,000 available for future operating and capital requirements.

As at April 30, 2009, the Company’s assets totalled $29,315,274 of which the majority represented revenue generating capital assets including tangible and intangible assets. The outstanding debt at April 30, 2009 consisted of a $845,834 fixed rate term loan for purchase of the property acquired in March 2006, and revolving bank loans of $458,333 under credit facilities that are available to be used by the Company to finance the growth in the subscriber base.

The cash flows from operations and financing activities, and cash flows used in financing and investing activities for the six months of 2009 and the comparative 2008 period are summarized below:

	April 30, 2009 $	April 30, 2008 $
Cash flow from operations	1,908,362	2,233,896
Cash flow used in financing activities	(294,539)	(22,900)
Cash fl ow used in investing activities	(2,163,605)	(1,546,470)

There is a significant decrease in cash flow from operations due to the increase in marketing expenditures to introduce the AlarmCare product to the market and continue reinforcing the brand of alarm systems. Management intends to stabilize the marketing expenses for the upcoming year thereby allowing the Company to continue to generate sufficient cash flows to sustain the Company’s planned growth in the short and long-term.

The cash flow used in financing activities increased due to the purchase of shares for cancellation pursuant to the normal course issuer bid entered by the Company in December 2008. During the six months ended April 30, 2009, the Company purchased a total of 37,130 common shares at a cost of $144,540. The Company did not enter into any new loan agreements in the first six months of 2009.

The Company expects to continue investing significantly in growth of the subscriber base, through marketing programs and in the installation of new security systems as well as the AlarmCare systems in subscriber homes. Security systems are installed under three-year contracts, which are subsequently renewable annually. The AlarmCare subscribers do not sign a period contract. The Company manufactures the equipment for both the security systems and the AlarmCare systems that it installs and the manufacturing process involves purchasing various key components from foreign and domestic manufacturers, and utilizing local subcontractors in certain phases of the manufacturing process. The Company’s assembly operations are housed in Toronto. The Company also manufactures AlarmPlus telephone line-cut technology that is available exclusively to alarm subscribers of AlarmForce, which is the only Canadian alarm company that manufactures and installs AlarmPlus.

8. OUTSTANDING SHARE CAPITAL

Financing activities

The Company is authorized to issue an unlimited number of common shares. The changes in the issued common shares of the Company during the first six months of 2009 were as follows:

	Number of Shares	Value $
Balance, October 31, 2007 For cash pursuant to option plan	12,098,788 35,000	12,183,385 132,300
Balance, October 31, 2008 Issued during the period ended April 30, 2009:	12,133,788	12,315,685
For cash pursuant to stock option plan Cancelled through normal course issuer bid:	Nil	Nil
Purchased for cancellation	(37,130)	(37,501)
Balance, April 30, 2009	12,096,658	12,278,184

Normal course issuer bid

In December 2008, the Toronto Stock Exchange accepted the Company’s notice of intention to make a Normal Course Issuer Bid. Under this bid, the Company is entitled to purchase, for cancellation, up to 350,000 common shares outstanding, which commenced on December 22, 2008 and will terminate on December 21, 2009. The excess of the purchase price over the average stated value of shares purchased for cancellation was charged to contributed surplus. The Company made the following purchases during the six months ended April 30, 2009:

	Purchase price
	Number of shares	Paid	Charged to share capital	Charged to contributed surplus
		$	$	$
Common shares purchased for cancellation During the period :	37,130	144,540	37,501	107,039
Total	37,130	144,540	37,501	107,039

8. OUTSTANDING SHARE CAPITAL

The Company is committed to issuing 155,000 common shares under options that were outstanding at the end of the second quarter of 2009 fiscal year (155,000 at the end of the second quarter of 2008 fiscal year). Exercise prices under the options and the remaining life of options are summarized below.

Expiry Date	Number of Shares	Remaining Contractual Life (Years}	Exercise Price
July 17, 2009	155,000	0.21	$3.78

9. COMMITMENTS AND CONTRACTUAL OBLIGATIONS

There has not been any material change in commitments or contractual obligations from those presented in the most recent annual financial statements.

10. OFF-BALANCE SHEET FINANCING

The Company did not have any off-balance sheet arrangements or obligations other than the operating leases disclosed above.

11. RELATED PARTY TRANSACTIONS

The Company did not have any related party transactions as defined in the CICA recommendations.

12. SUBSEQUENT EVENT

On June 1, 2009, the Company acquired certain franchise rights from a franchise territory situated in Eastern Ontario. Total consideration for the rights amounted to $117,720 and was financed from working capital.

13. CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on management’s historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources.

Management believes that the accounting policies that require estimation of the useful lives of long-lived assets, the recoverable values of the assets and measurement of impairment of the assets, are most affected by judgments and estimates used in the preparation of the financial statements. For a detailed description of these and other accounting policies, please refer to the Company’s 2008 annual financial statements.

Costs incurred to create long-term subscriber accounts are capitalized and amortized over the estimated useful lives of the respective assets, which principally includes revenue equipment and intangible assets consisting of franchise rights. The carrying value of the assets depends on the estimate made of useful life, which is the period over which the assets are written off. Revenue equipment, which the Company continues to own during and after the term of the subscriber agreement, is written off over the estimated ten-year useful life of the security systems. The use of wireless technology makes the relocation of systems much more cost-effective than traditional wired systems, allowing the Company to relocate or re- deploy the equipment if necessary. Franchise rights are written off over the remaining terms of the respective franchise agreements.

The Company follows the recommendations of CICA Handbook Section 3063, “Impairment of Long- Lived Assets”. The Company reviews for impairment the value of long-lived assets including revenue equipment and intangible assets on a regular basis, at least annually. The value is reviewed more frequently if events or changes in circumstances indicate that the carrying value exceeds fair value, as determined by the undiscounted future cash flows expected from the related subscriber accounts after normal attrition. If the sum of the undiscounted future cash flow expected from the subscriber agreements and eventual disposition of assets is less than the carrying amount, the group of assets is considered to be impaired, and an impairment loss is recorded, measured as the amount by which the carrying amount of the group of assets exceeds its estimated fair market value.

The estimate of the Company’s allowance for doubtful accounts could materially change from period to period, since this allowance is a function of the variations in the Company’s accounts receivable, which occurs on a month-to-month basis. The variations in the accounts receivable balance can arise from variances in accounts receivable collection performance.

Current income tax assets and liabilities are estimated based on the amount of tax that is calculated as being owed to the tax authorities, net of periodic installment payments. Future income tax assets and liabilities are comprised of the tax effects of temporary differences between the carrying amount and tax basis of assets and liabilities. The timing of these temporary differences is estimated. The carrying amounts of the assets and liabilities are based upon the amounts recorded in the financial statements and are therefore subject to accounting estimates that are inherent in those balances. The composition of income tax assets and liabilities may change from period to period because of changes in the estimates of these significant uncertainties.

14. DISCLOSURE CONTROLS AND PROCEDURES

As defined in Multilateral Instrument 52-109, disclosure controls and procedures mean controls and other procedures designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis and in accordance with securities legislation.

As of the six months ended April 30, 2009, the CEO and the CFO reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as it applies to the preparation of the Management discussion and analysis, the Consolidated financial statements and financial reporting. Based upon that review and evaluation, they have concluded that those disclosure controls and procedures are effective at a reasonable assurance level and meet the requirements thereof.

15. ACCOUNTING POLICY DEVELOPMENTS

(i)Goodwill and Intangible Assets: In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”. The new Section establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The new Section is applicable to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2008. This new Section does not have any impact on the Company’s consolidated financial statements.

(ii) General standards on Financial Statement Presentation: In June 2007, the CICA Handbook Section 1400, “General Standards on Financial Statement Presentation”, has been amended to include requirements to assess and disclose an entity’s ability to continue as a going concern. The changes are effective for interim and annual financial statements beginning on or after January 1, 2008. This new Section does not have any impact on the Company’s consolidated financial statements.

(iii) Inventory: In June 2007, the CICA issued Section 3031, “Inventories” resulting from the convergence with IFRS, which requires inventory to be measured at lower of cost and net realizable value. The standard also provides guidance on the costs that can be capitalized. In addition, previous inventory write-downs are now allowed to be reversed if the economic circumstances have changed to support an increased inventory value. The standard is effective for our annual and interim periods beginning on or after January 1, 2008. This new Section does not have any impact on the Company’s consolidated financial statements.

(iv) International Financial Reporting Standards (IFRS): In 2006, Canada’s Accounting Standards Board adopted a strategy of converging Canadian generally accepted accounting principles for publicly accountable enterprises with International Financial Reporting Standards (IFRS). The Company will be required to report using these converged standards for interim and annual financial statements for fiscal years commencing on or after January 1, 2011. The Company is in the planning phase of this conversion and is currently in the process of evaluating the impacts of this convergence on the consolidated financial statements.

(v) Business Combinations: Section 1582, “Business Combinations”, will be applicable to business combinations for which the acquisition date is on or after the Company’s fiscal years beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Company has not yet determined the impact of the adoption of this new standard on its financial statements.

(vi) Consolidated Financial Statements: Section 1601, “Consolidated financial statements” will be applicable to financial statements relating to the Company’s fiscal years beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for the preparation of consolidated financial statements. The Company has not yet determined the impact of the adoption of this new standard on its financial statements.

(vii) Non-Controlling Interests: Section 1602, “Non-controlling interests” will be applicable to financial statements relating to the Company’s fiscal years beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for non-controlling interests in a subsidiary in consolidated financial statements subsequent to a business combination. The Company has not yet determined the impact of the adoption of this new standard on its financial statements.

16. CAPITAL STRUCTURE

The capital structure of the Company consists principally of shareholder’s equity comprised of retained earnings and share capital. The Company’s strategy is to minimize the use of debt financing to fund growth and manage its capital structure in light of economic conditions and the risk characteristics of the underlying assets. The Company’s primary uses of capital are to finance non-cash working capital requirements and capital expenditures, which are currently funded from its internally generated cash flows. The Company is not subject to any externally imposed capital requirements and does not presently utilize any quantitative measures to monitor its capital. The Company’s objectives in managing capital are to ensure sufficient liquidity to pursue its strategy of organic growth and to deploy capital to provide an appropriate return on investment to its shareholders.

The Company manages the capital structure and makes adjustments to it in light of economic conditions. In order to maintain or adjust the capital structure, the Company may purchase shares for cancellation, issue new shares, issue new debt or issue new debt to replace existing debt with different characteristics.

17. RISKS AND UNCERTAINTIES

In light of the current global economic climate, we expect to see continuous weakness in consumer spending and tightening of the credit markets that will lead to an overall deterioration of economic conditions potentially slowing the rate of growth in the subscriber account base. We however, remain optimistic that the Company will be able to continue the momentum in new customer installations through continued investment in creative advertising campaigns directed at prospective subscribers in Canada and selected centers in the US.

In addition to general economic factors, the Company’s business is subject to a number of risk factors including consumer behaviors, technological changes, and competition as further described below. The Company has certain business risks linked to collection of receivables and subscriber attrition risk, which management believes is manageable.

Attrition of accounts

Customer attrition results from a variety of different factors, including relocation of subscribers, financial difficulties experienced by the customer, competition and other socio-economic factors. Any significant increase in the Company’s attrition rates could have a materially adverse effect on the Company’s business, financial condition, liquidity and operating results.

Technological

As technology evolves in the security and telecommunication industries, the Company will attempt to keep abreast of changes in technology, yet there are no assurances that the Company’s products or services will continue to be competitive as a result of such technological advancements. There are also no guarantees that the utility companies or other companies will not enter the security alarm business with improvements in technology.

Some of our monitoring services depend on wireless technology of security alarm systems and should the need arise we may be required to implement new technology, which could require significant expenditures. The Company makes every attempt to fully embrace and implement the new wireless technology. However, we may not be able to successfully implement these new technologies or adapt to changing market demands within the specified time frames. If we are unable to adapt to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

Supply chain

The Company relies on major components to be manufactured on an OEM (Original Equipment Manufacturer) basis. Reliance upon OEMs, as well as industry supply conditions generally involves several risks, including the possibility of defective products (which can adversely affect the Company’s reputation for reliability), a shortage of components and delays in delivery schedules (which can adversely affect the Company’s distribution schedules), and increases in component costs (which can adversely affect the Company’s profitability). The Company has some single-sourced manufacturer relationships, either because alternative sources are not readily or economically available or because the relationship is advantageous due to performance, quality, support, delivery, capacity, or price considerations. If these sources are unable or unwilling to manufacture our products in a timely and reliable manner, the Company could experience temporary distribution interruptions, delays, or inefficiencies, adversely affecting our results of operations. Even where alternative OEMs are available, qualification of the alternative manufacturers and establishment of reliable suppliers could result in delays affecting operating results adversely.

Possible Adverse Effect of "False Alarm" Ordinances

According to American industry sources, approximately 98% of alarm activations that result in the dispatch of police or fire department personnel are not emergencies, and thus are “false alarms”. Significant concern has arisen in certain municipalities about the high incidence of “false alarms”. Although AlarmForce maintains a relatively low number of false alarms by providing live two-way voice communication with the residence and thereby minimizing the number of dispatches, 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 security monitoring services. A number of municipalities have implemented or are considering adopting various measures aimed at reducing the number of false alarms. Such measures include (i) subjecting monitoring companies to fines for transmitting false alarms, (ii) licensing individual security systems and the revocation of such licences following a specified number of false alarms, (iii) imposing fines on security subscribers for false alarms, (iv) imposing limitations on the number of times police will respond to alarms at a particular location after a specified number of false alarms, and (v) requiring further verification of an emergency signal before the police will respond. As a result, the Company has determined that the most appropriate and cost effective method to combat these police service policies is to retain a private dispatch security response team to respond to the alarm signals.

Dependence on Key Personnel

The Company is highly dependent on the experience and personal efforts of management to promote and sell the Company’s products and services, and to manage its operations and growth. The future success of the Company is dependent on the management of the Company. The departure of any of the operations or management personnel or their inability to continue being functional could have a material adverse effect on the Company’s business, financial condition, liquidity and operating results.

Risks of Litigation

The nature of the alarm services provided by AlarmForce potentially exposes it to greater risks of liability for employee acts or omissions or system failures. The Company’s subscriber agreements pursuant to which it distributes its products and services contain provisions limiting liability to subscribers in an attempt to reduce this risk. However, in the event of litigation with respect to such matters, there can be no assurance that these limitations will be enforced, and the costs of such litigation could have a material adverse effect on the Company.

Ability to Maintain Profitability and Manage Growth

There can be no assurances that the Company’s business and growth strategy will enable the Company to remain profitable in the future. The Company’s future operating results will depend on a number of factors, including (i) the efficiency and effectiveness of the Company’s marketing and advertising programs, (ii) the Company’s ability to continuously improve its service to achieve new and enhanced customer benefits, better quality service and reduced costs, (iii) the Company’s ability to successfully identify and respond to emerging trends in the security industry, (iv) the level of competition in the security industry and (v) the ability to manage attrition level and subscriber replacement costs.

There can be no assurance that the Company will be able to effectively manage its growth, and any failure to do so could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.

Competition

The Company competes with larger companies, as well as smaller regional and local companies, in all of its operations. Furthermore, new competitors are continuing to enter the security industry and the Company may encounter additional competition from such future industry newcomers. Some of the Company’s current competitors have, and new competitors may have, greater financial resources than the Company. The effect of such competition may be to reduce the volume of potential subscribers available to the Company, which could adversely affect the Company’s results of operations.

Expansion

The success of the Company’s continued expansion will depend upon many factors, including the ability of the Company to maintain acceptable attrition rates and control of operating costs. There can be no assurance that the Company will be able to grow or achieve its continued expansion. Such risks, if they materialize, could have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.

Effectiveness and Efficiency of Advertising Expenditures

The Company’s future growth and profitability will be dependent in part on the effectiveness and efficiency of the Company’s advertising expenditures, including the ability of the Company to (i) create greater awareness of the Company’s products and services, (ii) determine the appropriate creative message and media mix for future advertising expenditures, and (iii) effectively manage advertising costs in order to maintain acceptable operating margins. There can be no assurance that the Company will experience benefits from advertising expenditures in the future. In addition, no assurance can be given that the Company’s planned advertising expenditures will result in increased sales, will generate sufficient levels of product and service awareness or that the Company will be able to manage such advertising expenditures on a cost-effective basis.

Possible Adverse effect of Future Government Regulations

The Company’s operations are subject to a variety of laws, regulations and licensing requirements of federal, provincial, municipal authorities and ULC. The loss of such licenses, or the imposition of conditions to the granting or retention of such licenses, could have a material adverse effect on the Company. The Company believes that it is in material compliance with applicable laws and regulatory requirements.

18. OUTLOOK

The Company expects continued growth in revenues as it expands its subscriber monitored account base using its mass marketing model and brand recognition, focusing on giving the customer the best value possible through its infrastructure of manufacturing capabilities, customer-focused team culture and financial capital base. The Company is committed to differentiating its position in the industry and controlling all aspects of subscriber service delivery.

Management believes that the Company is well positioned to grow the subscriber account base in the foreseeable future, given that the fundamental drivers for the residential alarm industry are considered sound. These are represented by fine-tuning of the low-cost approach, false alarm minimization and up market features, which are expected to be strong drivers and will continue to differentiate the company’s technology and innovative approach.

Additional information on the Company can be found in other information filed with Canadian regulators on SEDAR at www.sedar.com.