INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

For the six months ended April 30, 2010

UNAUDITED CONSOLIDATED BALANCE SHEET AS AT APRIL 30, 2010
(With comparative figures for the fiscal year ended October 31, 2009)

See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED APRIL 30, 2010
(With comparative figures for the six months ended April 30, 2009)

See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENT OF RETAINED EARNINGS AND ACCUMULATED OTHER COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED APRIL 30, 2010
(With comparative figures for the six months ended April 30, 2009)

See accompanying notes to unaudited consolidated financial statements.

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED APRIL 30, 2010

(With comparative figures for the six months ended April 30, 2009)

See accompanying notes to unaudited consolidated financial statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2010
(Unaudited)

1. BASIS OF PRESENTATION

AlarmForce Industries Inc. (the “Company” or “AlarmForce”) is a Canadian company whose core business is to provide security alarm and personal emergency response monitoring and related services to subscribers throughout Canada and selected centers across the United States of America (“US”). AlarmForce is a public company whose shares are listed on the Toronto Stock Exchange under the ticker symbol “AF”. The Company is one of the leading providers of two-way voice security systems in Canada and was incorporated under the laws of Canada on November 16, 1988.

The management of the Company 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, 2009.

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, 2010, are not necessarily indicative of the results that may be expected for the year ending October 31, 2010.

2. ACCOUNTING POLICY DEVELOPMENTS

(i) International Financial Reporting Standards (IFRS): In 2006, Canada’s Accounting Standards Board (“AcSB”) published a new strategic plan of converging Canadian generally accepted accounting principles for publicly accountable enterprises with IFRS. In 2008, the AcSB confirmed that IFRS will be mandatory in Canada for profit-oriented publicly accountable entities for fiscal periods beginning on or after January 1, 2011. The Company will be required to report using these converged standards with its first annual financial statements being for the year ending October 31, 2012, along with the comparative period for 2011. Commencing in the first quarter of fiscal 2012, the Company will prepare and publish unaudited consolidated financial information in accordance with IFRS with comparative figures for 2011. The Company has developed its plan and has completed preliminary identification and assessment of the accounting and reporting differences between existing Canadian GAAP and IFRS. Evaluation of accounting policies and their differences are in progress, however, at this time, the full impact of adopting IFRS is not reasonably estimable or determinable.

(ii) 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 consolidated financial statements.

(iii)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 consolidated financial statements.

(iv)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 consolidated financial statements.

(v)Multiple deliverable revenue arrangements: In December 2009, the Canadian Institute of Chartered Accountants issued EIC-175, Multiple Deliverable Revenue Arrangements, which replaces EIC-142, Revenue Arrangements with Multiple Deliverables. This abstract addresses some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. This new standard will be applicable to financial statements relating to the Company’s fiscal years beginning on or after January 1, 2011. Early adoption is permitted. The Company has not yet determined the impact of the adoption of this new standard on its consolidated financial statements.

3. CAPITAL STRUCTURE

The capital structure of the Company consists principally of shareholders’ 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.

The Company’s objectives when managing capital are:

(i) to ensure sufficient liquidity to pursue its strategy of organic growth;

(ii) to maintain compliance with debt covenants; and

(iii) to deploy a strong and efficient capital base to provide an appropriate return on investment to shareholders and maintain investor, creditor and market confidence.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED APRIL 30, 2010 (unaudited)

Relevant factors impacting the Company’s capital structure are as follows:

The Company manages its capital structure and makes adjustments in light of economic conditions and the risk characteristics of underlying assets. In order to maintain or adjust the capital structure, the Company may consider the purchase of shares for cancellation, the issuance of new shares, or new debt.

The Company repaid all outstanding loans in the first quarter of 2010, thus reducing the total debt to nil.

The Company’s banking facilities are subject to covenants which require the Company to maintain a debt to net worth ratio and a debt servicing coverage ratio. As at April 30, 2010, the Company is in compliance
with these covenants and based on the current business plans and economic conditions, the Company is not aware of any condition or event that would give rise to non-compliance of these covenants.

4. PROPERTY, PLANT AND EQUIPMENT

5. LONG-TERM DEBT

The Company has approximately $5,800,000 in credit facilities available as at January 31, 2010 (January 31, 2009 - $5,200,000). The Company has repaid in full the fixed rate term loan and the revolving demand loan.

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 three months ended January 31, 2010 are as follows:

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, 2010 are as follows:

(i) Outstanding options are subject to vesting provisions of which 20% of the total options granted vest immediately at the date of the grant, and a further 20% on the anniversary over the next four years

(ii) 60,000 options have not yet vested and will be fully vested in 2013.n

20,000 stock options were cancelled on January 5, 2010 and contractual life and exercise price of the remaining options outstanding and options exercisable as at April 30, 2010 are as follows:

7. INCOME TAXES

8. EARNINGS PER SHARE

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

9. FINANCIAL INSTRUMENTS

All financial assets and liabilities are 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.

Like all other businesses, the Company is exposed to risks that arise from its use of financial instruments. 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 accrued liabilities, and long-term debt as other financial liabilities. The nature of these instruments and the Company’s operations expose the Company to credit, interest rate and foreign currency risks.

Management’s objectives are to protect the Company against material economic exposures and certain financial risks including credit risk, liquidity risk, interest rate risk and foreign exchange risk.

(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, approximate 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. The Company’s maximum exposure to credit risk is represented by the carrying amounts reported on the balance sheet.

The Company reduces this risk by maintaining its cash and cash equivalents at reputable financial institutions, from which management believes the risk of loss to be remote. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand.

Credit risk from accounts receivable encompasses the default risk of subscribers and franchisees. Such 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 establishes an allowance for doubtful accounts by examining such factors as the number of overdue days of the subscriber’s balance outstanding as well as the subscriber’s collection history. The Company believes that its allowance for doubtful accounts is sufficient protection against losses resulting from collecting less than full payments from its receivables. Since the Company has a large and diversified subscriber base dispersed throughout its market in Canada and the US, there is no significant concentration of credit risk. The following table provides further details on the Company’s accounts receivable balances:

(c) Interest rate risk

Changes in market interest rates will cause fluctuations in the future cash flows from short-term investments. As at April 30, 2010, the Company did not carry any long-term debt due to the repayment of all such debt in January, 2010, thereby mitigating the Company’s exposure to interest rate risk. While the Company does have credit facilities which it can draw upon if required (note 5), the Company did not draw upon them at any time in the periods ended April 30, 2010 or the corresponding period of 2009, thereby maintaining the Company’s objective of minimizing exposure to such risk. At the present time, the Company does not intend to increase borrowings and therefore does not require the use of derivative financial instruments to reduce future exposure to interest rate risk.

(d) Foreign currency risk

The Company is exposed to foreign currency risk due to its fully integrated US limited partnership. Due to the relatively small size of the partnership, the risk arising from foreign exchange fluctuations is not significant enough to warrant entering a hedge to mitigate the risk. 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 $113,420 increase or decrease to the Company’s income before taxes for the six months ended April 30, 2010.

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. Due to their short-term nature, the risk arising from fluctuations in foreign exchange rates is usually not significant. The Company manages its exposure to foreign currency fluctuations by spreading its US dollar denominated purchases evenly throughout the period. 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. Management closely monitors the foreign exchange rates and will consider a hedging option if the need arises.

(e) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s objective is to ensure sufficient cash flows exist to meet its short and long-term obligations. It also manages liquidity risk through the management of its capital structure (see note 3). Management consistently monitors actual and projected cash flows to maintain its liquidity surplus as well as cash flow requirements according to the needs of the Company and its subsidiary. As at April 30, 2010, the Company had unused credit facilities in the amount of $5,800,000. With the repayments of all long-term debt in the first quarter of fiscal 2010, the Company currently has no long-term debt obligations. Management believes its unused credit facilities, along with its cash flow position, will provide sufficient liquidity to manage its obligations and support working capital requirements. The following table shows the Company’s position of liquidity and debt obligations:

10. SEGMENTED INFORMATION

The Company operates primarily in one industry segment, which is security monitoring, and related services. The Company has operations in North America, specifically in Canada and the US. The following table outlines revenue and capital assets based on the geographic areas of the Company: