1-800-267-2001

Financial Information

Consolidated Financial Statements For the Third Quarter Ended January 31, 2009

To Our Shareholders:

I am pleased to report that AlarmForce closed the first quarter of 2009 with a total subscriber base of 93,200 accounts and marked our 21st year in business with record total revenues. Our total revenues for the three months ended January 31 increased from $7,099,000 in 2008 to $8,282,000 in 2009, a 17% increase. Net income also increased from $680,000 to a record $922,000 for the three months, representing a 36% increase from the comparative quarter in 2008. And in setting the new record, we met another of our goals which is for growth in earnings to outpace growth in revenues, as the company increases its account size.

Despite economic indicators that continued to deteriorate in the first quarter, impacting virtually all sectors and companies, AlarmForce continued to increase its subscriber base and recurring revenues. Our investment in marketing and brand development increased, and we remain very confident of sound returns on investment in new subscribers. Although marketing expenses increased, all our marketing programs are continuing to be funded entirely from internal cash flows. Three-month EBITDA increased from $2,036,000 in 2008 to $2,191,000 in 2009, an 8% increase. Another measure of operating results, which is EBITDA before marketing expenses, also showed an increase. Because we write off marketing expenses immediately against earnings, comparisons with competitors who purchase and capitalize subscriber accounts can look deceptive or confusing. Excluding the marketing expenses, EBITDA increased by 13% from $4,042,000 to $4,578,000, also a record for quarterly results.

Future Outlook

Unpredictable as the future appears to be, we are cautiously optimistic about the outlook for 2009. Historically, whenever the economy has encountered profound reversals or challenging credit conditions, the gap between strong and weak players has tended to widen. Today this is particularly apparent for companies that are leveraged and are facing difficulty sustaining their businesses. Our cash financial position and liquidity are significant success factors giving AlarmForce a competitive edge, based on fundamentals. Our cash on hand exceeds our total debt, meaning that on a net basis we are debt-free. We are ambitiously aligned towards market opportunities and recession-resistant growth during the remainder of the year.

Despite the fact that the economy in North America faces prospects of continued contraction, we are aiming to continue net subscriber growth. We believe that our position in the industry will allow us to continue to thrive, having been built on strong branding and the trust of consumers earned through consistent excellence in service. Our name recognition continues to expand as a brand that is synonymous with exceptional, affordable value for consumers.

Our future results are expected to benefit from the growth in both alarm subscribers and AlarmCare subscribers, through incremental revenue growth in our Canadian and US markets. We are continuing to manage and maintain low costs relative to industry benchmarks, while leveraging our central station and administration overhead costs, as the AlarmForce account size continues to grow at a double-digit compounded annual rate of growth.

Cash Resources

Cash flows from operations in the first quarter amounted to $1,804,000 before working capital adjustments, of which $590,000 resulted in net cash flows from operating activities after working capital. The remaining cash resources from operations were reinvested in new subscriber growth and higher recurring monthly revenues.

The Company’s outstanding balance of debt at January 31, 2009 consisted of a $862,000 fixed rate term loan for purchase of property acquired by the Company in March 2006, and revolving bank loans of $542,000 under credit facilities used to finance the growth in the subscriber base. We reduced debt by $50,000 in the quarter, continuing the same trend as that in the previous year. We believe that the company’s cash resources and credit facilities are adequate for the foreseeable future.

In closing I would like to thank our employees, partners and shareholders for your continuing support and look forward to another outstanding year for the company.

Respectfully submitted on behalf of the Board of Directors

Joel Matlin
President & Chief Executive Officer

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

	January 31, 2009	October 31, 2008
ASSETS Current	$	$
Cash and cash equivalents	4,625,315	5,408,362
Accounts receivable	392,660	427,342
Income taxes recoverable	103,839	-
Inventory	3,432,872	3,064,025
Prepaid expenses & other assets	106,552	21,796
	8,661,238	8,921,525
Deferred charges	2,047	2,730
Future income taxes	508,000	464,000
Property, plant & equipment (note 4)	17,314,448	16,844,560
Intangible assets	2,861,658	3,078,234
	29,347,391	29,311,049
LIABILITIES Current
Accounts payable and accrued liabilities	3,545,091	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
	4,561,904	5,260,979
Deferred revenue	3,321,063	3,313,343
Long-term debt (note 5)	1,104,168	1,154,167
	8,987,135	9,728,489

SHAREHOLDERS’ EQUITY
Share capital (note 6)	12,278,184	12,315,685
Paid-in capital - options	95,101	202,140
Retained earnings	7,986,971	7,064,735
	20,360,256	19,582,560
	29,347,391	29,311,049

See accompanying notes to unaudited consolidated financial statements.

Unaudited ConsolidatedStatement of Income For Three Months Ended January 31, 2009
(With comparative figures for six months ended Jan. 31, 2008)

Three months ended
	January 31, 2009	January 31, 2008
	$	$
Sales	8,281,727	7,098,867
Cost of sales	2,006,593	1,553,467
Gross profit	6,275,134	5,545,400
Expenses
Selling	2,807,499	2,420,243
General and administrative	1,276,295	1,089,227
Amortization:
Property, plant and equipment	708,849	531,242
Deferred charges	682	2,114
Intangible assets	216,580	216,580
Interest	17,833	26,166
Foreign exchange loss/(gain)	(142,396)	199,757
	4,885,342	4,485,329
Income before income taxes	1,389,792	1,060,071
Income taxes (note 7)	467,556	380,000
Net income for the period	922,236	680,071
Basic earnings per share (note 8)	0.08	0.06
Fully diluted earnings per share
(note 8)	0.08	0.06
Retained earnings, beginning of period	7,064,735	4,454,150
Net income for the period	922,236	680,071
Retained earnings, end of period	7,986,971	5,134,221
OPERATING ACTIVITIES
Net income for the period Items not involving cash:	922,236	680,071
Amortization:
Property, plant and equipment	708,849	531,242
Deferred charges	682	2,114
Intangible assets	216,580	216,580
Future income taxes	(44,000)	(199,500)
	1,804,347	1,230,507
Change in non-cash components of working capital:
Accounts receivable	34,682	(109,123)
Inventory	(368,847)	(34,810)
Prepaid expenses and other assets	(84,756)	(78,461)
Accounts payable and accrued liabilities	(217,988)	(107,556)
Unearned revenue	10,244	(4,600)
Income taxes	(595,171)	305,839
Deferred revenue	7,720	167,010
	(1,214,116)	138,299
	590,231	1,368,806
INVESTING ACTIVITIES
Additions to property, plant and equipment	(1,178,740)	(745,380)
Additions to intangible assets	-	(55,000)
	(1,178,740)	(800,380)
FINANCING ACTIVITIES
Repayment of fixed rate term loan	(8,333)	(12,500)
Increase/(decrease) in long-term debt	(41,665)	(67,700)
Purchase of shares for cancellation	(144,540)	-
	(194,538)	(80,200)
Change in cash and cash equivalents	(783,047)	488,226
Cash and cash equivalents, beginning of the period	5,408,362	2,480,014
Cash and cash equivalents, end of the period	4,625,315	2,968,240
Cash and cash equivalents for the Company are as follows:
Cash
Cash equivalents
	4,625,315	2,968,240
Supplemental cash flow information:
Interest paid	17,833	26,166
Income taxes paid	1,106,727	273,662

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JANUARY 31, 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. 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 three months ended January 31, 2009, are not necessarily indicative of the results that may be expected for the year ending October 31, 2009.

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 three months ended January 31, 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: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 currently in the process of evaluating the impacts of this convergence on the consolidated financial statements.

(v) Business Combinations: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 currently in the process of evaluating the impacts of this convergence on the consolidated 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 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.

4. PROPERTY, PLANT AND EQUIPMENT

	January 31, 2009		October 31, 2008
	Cost $	Accumulated Amortization $	Cost $	Accumulated Amortization $
Land	600,000	-	600,000	-
Building	2,295,174	304,790	2,262,296	276,511
Rental equipment	22,906,016	8,688,547	22,027,645	8,291,238
Computer equipment	858,415	605,908	853,713	585,816
Computer software	384,359	275,080	373,772	267,078
Furniture & fixtures	389,826	269,241	384,751	263,162
Vehicles	30,809	6,585	30,809	4,621
Moulding equipment	57,386	57,386	57,386	57,386
	27,521,985	10,207,537	26,590,372	9,745,812
Net book value	17,314,448		16,844,560

5. LONG-TERM DEBT

	January 31, 2009 $	October 31, 2008 $
Fixed rate term loan Revolving term loans	862,501 541,667	870,834 583,333
Less: Current portion	1,404,168 300,000	1,454,167 300,000
	1,104,168	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 3.0% as at January 31, 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 $5,200,000 is available (2008 - $4,900,000).

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 three months ended January 31, 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	12,133,788 300,000	12,315,685 300,000
Issued during the period ended January 31, 2009: For cash pursuant to stock option plan	Nil	Nil
Cancelled through normal course issuer bid: Purchased for cancellation	(37,130)	(37,501)
Balance, January 31, 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 three months ended January 31, 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 three months ended January 31, 2009 are as follows:

	Number of Options	January 31, 2009 Weighted average exercise price $
Balance, beginning of period	155,000	3.78
Granted	Nil	-
Exercised	Nil	-
Cancelled	Nil	-
Balance, end of period (i)	155,000	3.78
Less options not vested (ii)	Nil	-
Exercisable, end of period	155,000

The remaining contractual life and exercise price of options outstanding and options exercisable as at January 31, 2009 are as follows:

Number of Options Outstanding	Remaining Contractual Life (Years)	Exercise Price $	Number of Options Exercisable
155,000	.46	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

	January 31, 2009 $	January 31, 2008 $
Current income tax Future income tax	511,556 (44,000)	579,500 (199,500)
	467,556	380,000

8. EARNINGS PER SHARE

	January 31, 2009	January 31, 2008
Basic earnings available to common shareholders	$922,236
Weighted average number of common shares outstanding – basic	12,127,958
Basic earnings per share	$0.08
Weighted average number of common shares outstanding	12,127,958
Assumed exercise of outstanding dilutive options Shares purchased from proceeds of assumed exercise of options	155,000 (136,893)	190,000 (134,747)
Weighted average number of common shares outstanding – dilutive	12,146,065	12,154,041
Fully diluted earnings per share	$0.08	$0.06

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

9. FINANCIAL INSTRUMENTS

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 in-struments consisting of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value due to their im-mediate 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 long-term 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 $2,600 decrease or increase, to the Company’s income before taxes for the three months ended January 31, 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 $103,977 increase or decrease to the Company’s income before taxes for the three months ended January 31, 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.

MANAGEMENT DISCUSSION AND ANALYSIS

1. INTRODUCTION

The following Management’s Discussion and Analysis, of operating results and ﬁnancial position for the three months ended January 31, 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 the Company’s independent auditors.Manage-ment’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 conjunc-tion 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 three months ended January 31, 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; and
- 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 Industries Inc. (the “Company” or “AlarmForce”) 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 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.

Despite the current global economic slowdown, in the ﬁrst quarter of 2009, the total number of Canadian subscribers increased by 7% to 83,600, up from 76,700 subscribers in the corresponding quarter of 2008. In the US, the total subscribers increased by 63% to 9,600, up from 5,900 in the comparative quarter of 2008. In addition, we increased our net subscribers by 1,400 in Canada and 900 in the US. In the ﬁrst quarter of 2009, the Company’s gross revenues also increased by 17% to $8,281,727 up from $7,098,867 in the corresponding ﬁrst quarter of 2008. The Company’s total subscribers increased by 2,300 accounts; bringing the total number of subscribers to 93,200.

The Company has a signiﬁcantly strong cash position in the ﬁrst quarter of 2009 with cash and cash equivalents of $4,625,315 compared to $2,968,240 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 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 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 January 31, 2009, the Company had installed approximately 1,000 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. Management believes that the current market price of the common shares do not reﬂect the inherent value of the Company and a repurchase is an attractive and appropriate use of corporate funds in light of potential beneﬁts to remaining shareholders.

The Company will continue to grow 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 signiﬁcantly lower cost than its comparable competitors cost to acquire accounts, individually or en bloc.

4. RECONCILIATION OF 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 three months ended January 31, 2009 and the comparative three months of 2008 below:

	January 31, 2009 $	January 31, 2008 $
EBITDA Add: marketing expenditures	2,191,340 2,386,559	2,035,930 2,005,587
Adjusted EBITDA Less: Amortization of property, plant and equipment Amortization of intangible assets Amortization of deferred charges Foreign exchange loss (gain) on consolidation Interest expense	4,577,899 708,849 216,580 682 (142,396) 17,833	4,041,517 531,242 216,580 2,114 199,757 26,166
Income before income taxes Less income taxes	1,389,792 467,556	1,060,071 380,000
Net income	922,236	680,071

5. REVIEW OF OPERATIONS: THREE MONTHS ENDED JANUARY 31, 2009

Sales

The Company’s total consolidated revenue for the ﬁrst three months of 2009 was $8,281,727 compared to $7,098,867 in the comparative period in 2008, which is an increase of $1,182,860 or 17%. This increase is primarily attributable to monthly recurring monitoring services generated from the increasing subscriber base. Monthly recurring monitoring services make up 88% of total sales. Cost of sales

Cost of sales was $2,006,593 in the ﬁrst quarter of 2009 compared to $1,553,467 in the corresponding quarter of 2008, for a total increase of $453,126 or 29%. 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 the additional 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 affects the cost of these purchases making them unfavorably inﬂate the cost of sales.

Certain costs pertaining to the Company’s central monitoring station remain relatively ﬁxed as the Company is vertically integrated, and manufactures, installs, monitors and services 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 $6,275,134 for the ﬁrst quarter of ﬁscal 2009 compared to $5,545,400 in the comparative quarter of ﬁscal 2008, which was an increase of $729,734 or 13%. Gross margin as a percentage of total revenue decreased to 76% in the ﬁrst three months of 2009, compared to 78% in the comparative period in 2008. Management expects the gross proﬁt margins to increase going forward as target stafﬁng requirements are fulﬁlled and scale efﬁciencies obtained over the growing subscriber accounts.

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

Selling Expenses amounted to $2,807,499 for the three months ended January 31, 2009 compared to $2,420,243 in the corresponding period of 2008, an increase of $387,256 or 16%. This is predominantly due to an increase in market expenditures of $380,972. The Company intends to build brand recognition for its newly introduced AlarmCare product, a personal emergency response system, which was launched in the market in April 2008; 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. The Company plans to continue establishing brand recognition in the United States and reinforce branding in Canada. Selling Expenses excluding marketing costs remained relatively stable.

Administrative Expenses totaled $1,276,295 for the ﬁrst three months of ﬁscal 2009 compared to $1,089,227 in the corresponding period of 2008, an increase of $187,068 or 17%. 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 $708,849 for the ﬁrst three months of ﬁscal 2009 compared to $531,242 in the comparative period of ﬁscal 2008, an increase of $177,607 or 33%. This increase mainly reﬂects additions made to the rental equipment in the ﬁrst quarter 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 a longer useful life than the term of the customer agreement.

Interest expense was $17,833 for the ﬁrst three months of 2009 compared to $26,166 in the corresponding period of 2008, a decrease of $8,333 or 32%. The Company did not obtain any new loans in 2009, thereby reducing the interest expense for this quarter. 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.

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 Company’s purchases are in US currency, resulting in US dollar-denominated accounts

	January 2009	October 2008	July 2008
Canadian subscribers* US subscribers*	1,400 900	2,200 1,600	1,500 1,000
Total net growth in subscribers	2,300	3,800	2,500
OPERATIONS:
	$	$	$
Total revenue	8,281,727	7,949,010	7,577,109
Income before taxes	1,389,792	1,222,236	839,217
Net income	922,236	852,866	553,926
Basic earnings per share	0.08	0.07	0.05
Fully diluted earnings per share	0.08	0.07	0.05
FINANCIAL POSITION:
Total assets	29,347,391	29,311,049	26,889,711
Shareholders’ equity	20,360,256	19,582,560	18,729,694

payable. These activities result in exposure to ﬂuctuations in foreign currency rates as the Company adjusts its foreign exchange rate annually. As at October 31, 2008, the Company experienced a foreign exchange gain of $142,396 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 Canada, 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 January 31, 2009, prepared in accordance with Canadian GAAP and expressed in Canadian currency:

April 2008	January 2008	October 2007	July 2007	April 2007
1,700	2,300	3,400	2,500	2,100
1,100	1,100	900	1,000	600
2,800	3,400	4,300	3,500	2,700

$	$	$	$	$
7,317,399	7,098,867	6,662,915	6,447,655	6,177,635
764,216	1,060,071	641,545	129,278	433,167
523,722	680,071	358,626	81,278	274,167
0.04	0.06	0.03	0.01	0.02
0.04	0.06	0.03	0.01	0.02

26,414,026	25,975,553	25,251,571	25,825,876	24,712,357
18,175,768	17,519,746	16,839,675	16,481,050	16,361,972

7. LIQUIDITY AND CAPITAL RESOURCES

As at January 31, 2009, the Company had cash and cash equivalents of $4,625,315 and unused credit facilities of approximately $5,200,000 available for future operating and capital requirements.

As at January 31, 2009, the Company’s assets totalled $29,347,391 of which the majority represented revenue generating capital assets including tangible and intangible assets. The outstanding debt at January 31, 2009 consisted of a $862,501 ﬁxed rate term loan for purchase of the property acquired in March 2006, and revolving bank loans of $541,667 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 three months of 2009 and the comparative 2008 period are summarized below:

	January 31, 2009 $	January 31, 2008 $
Cash flow from operations	590,231	1,368,806
Cash flow from (used in) financing activities	(194,538)	(80,200)
Cash flow used in investing activities	(1,178,740)	(800,380)

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 three months ended January 31, 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 quarter 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 three months of 2009 were as follows:

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

Normal course issuer bid

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

The Company is committed to issuing 155,000 common shares under options that were outstanding at the end of the ﬁrst quarter of 2009 ﬁscal year (190,000 at the end of the ﬁrst quarter of 2008 ﬁscal year). Exercise prices under the options and the remaining life of options are summarized below.

Number of options outstanding	Remaining Contractual Life (Years)	Exercise Price	Number of options exercisable
155,000	0.46	$3.78	155,000

Dividend policy

The Company does not currently have a policy of declaring or paying dividends on the Common Shares and intends to retain future earnings for use in its business and does not anticipate paying dividends on its Common Shares in the foreseeable future. Any determination to pay any future divi-dends will remain at the discretion of the Board of Directors of the Company (the “Board”) and will be made based of the Company’s earnings and ﬁnancial requirements, cov-enant restrictions and other prevailing conditions. There are currently no restrictions which prevent the Company from paying dividends. The Company has not paid any dividends since its inception.

The existing cash reserves, cash from operations and credit facilities are believed to be adequate to ﬁnance growth as well as operating requirements in the foreseeable future.

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. 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 redeploy 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 Hand-book 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 im-paired, 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 instalment 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.

13. 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 three months ended January 31, 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.

14. 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 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.

15. 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.

16. 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 em-ployee 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 new comers. 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.

17. OUTLOOK

The Company expects continued growth in revenues as it ex-pands 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 dif-ferentiating its position in the industry and controlling all as-pects 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 oth-er information ﬁled with Canadian regulators on SEDAR at www.sedar.com.

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