Financial Information

Three months ended July 31 Nine months ended July 31   2008 $ 2007 $ 2008 $ 2007 $ OPERATING ACTIVITIES Net Income for the period $553,926 $81,278 $1,757,719 $921,546 Items not involving cash: Amortization: 502,958 397,508 1,559,934 1,274,755 Deferred charges 2,114 2,398 6,343 7,194 Intangible Assets 216,580 207,870 649,739 597,415 Future income taxes 86,775 61,000 (490,725) 179,000 Stock Compensation – – – 12,632 1,362,353 750,054 3,483,010 2,992,542 Change in non-cash components of working capital: Accounts receivable 145,304 53,362 (72,944) 52,388 Inventory 403,661 (458,694) 554,145 (92,702) Prepaid expenses & other assets 27,821 (56,951) (22,820) (122,339) Accounts payable & accrued liabilities (36,491) 1,022,627 (610,299) 697,035 Unearned revenue – – (4,600) (122) Income taxes (152,211) (834,217) 344,135 (1,448,217) Deferred revenue 185,461 77,834 499,167 148,168 573,545 (196,039) 686,784 (765,789) 1,935,898 554,015 4,169,794 2,226,753 INVESTING ACTIVITIES Additions to property, plant & equipment (704,724) (1,184,496) (2,251,194) (2,783,283) Additions to intangible assets – – – (1,350,000)   (704,724) (1,184,496) (2,251,194) (4,133,283) FINANCING ACTIVITIES Repayment of fi xed rate term loan (12,500) (12,500) (37,500) (37,500) Increase/(decrease) in long-term debt (62,500) (121,889) (192,700) 646,028 Proceeds from issue of share capital – 37,800 132,300 37,800 (75,000) (96,589) (97,900) 646,328 Change in cash and cash equivalents 1,156,174 (727,070) 1,820,700 (1,260,202) Cash and cash equivalents, beginning of period 3,144,540 3,376,177 2,480,014 3,909,309 Cash and cash equivalents, end of period $4,300,714 $2,649,107 $4,300,714 $2,649,107 Cash and cash equivalents for the Company are as follows: Cash $2,296,003 $(234,970) $2,296,003 $(234,970) Guaranteed investment certificates $2,004,711 $2,884,077 $2,004,711 $2,884,077 $4,300,714 $2,649,107 $4,300,714 $2,649,107 Supplemental cash flow information: Interest paid $21,158 $28,981 $70,125 $74,374 Income taxes paid $350,727 $820,985 $1,052,181 $1,810,985

See accompanying notes to unaudited consolidated fi nancial statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2008 (Unaudited)

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 leading provider of two-way voice alarm systems and monitoring services and was incorporated under the laws of Canada on November 16, 1988

1. BASIS OF PRESENTATION

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, 2007.

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 nine months ended July 31, 2008, are not necessarily indicative of the results that may be expected for the year ending October 31, 2008

2. ACCOUNTING POLICY DEVELOPMENTS

(i) 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.

(ii) Financial Instruments – Disclosure and Presentation: In December 2006, the CICA issued Section 3862, Financial Instruments Disclosures, and Section 3863, Financial Instruments, presentation. These standards provide additional guidance on disclosing risks related to recognized and unrecognized financial instruments and how those risks are managed. This Section applies to interim and annual financial statements of the Company commencing 2008 fiscal year. See note 8 regarding additional disclosure.

(iii) Capital disclosures: CICA issued Handbook Section 1535, Capital Disclosures, which provides standards for disclosures regarding a company’s capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital is required. These recommendations are effective for fiscal years beginning on or after October 1, 2007 and, therefore, apply to the Company. 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 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.

(iv) 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 and, therefore does apply to the Company. The Company is not affected by these new recommendations.

3. PROPERTY, PLANT AND EQUIPMENT

	July 31, 2008		October 31, 2007
	Cost $	Accumulated Amortization $	Cost $	Accumulated Amortization $
Land Building Rental equipment Computer equipment Computer software Furniture & fixtures Moulding equipment	600,000 2,217,649 20,949,218 696,780 364,121 380,174 57,386	– 247,555 7,714,522 545,268 253,366 255,151 57,386	600,000 2,208,069 19,494,802 652,714 335,075 375,358 57,386	– 164,752 7,023,290 514,074 229,644 233,938 56,888
Net book value	25,265,328 16,192,080	9,073,248	23,723,404 15,500,818	8,222,586

4. LONG-TERM DEBT

	July 31, 2008 $	October 31, 2007 $
Fixed rate term loan Revolving term loans	883,334 645,834	920,834 838,535
Less: Current portion	1,529,168 300,001	1,759,369 305,202
	1,229,167	1,454,167

The Company has unused credit facilities in the aggregate amount of approximately $4,800,000. Revolving term loans made under the respective facilities are repayable over various terms, in monthly installments of principal plus interest at the prime rate plus 0.75% per annum, pursuant to individual contract periods. The Company’s debt consists of a fixed rate term loan in the amount of $1,000,000 at an interest rate of 5.58% obtained in 2006 to finance the acquisition of property consisting of land and building, as well as another term loan of $1,000,000 acquired to finance the purchase of franchise rights. These loans are repayable (principal and interest) in monthly installments, at various interest rates. 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.

5. 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 third quarter ended July 31, 2008 are as follows:

	Number of Shares	Value $
Balance, October 31, 2006 For cash pursuant to option plan	12,088,788 10,000	12,145,585 37,800
Balance, October 31, 2007 Issued during the period ended July 31, 2008: For cash pursuant to stock option plan	12,098,788 35,000	12,183,385 132,300
Balance, July 31, 2008	12,133,788	12,315,685

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 issue 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 as at July 31, 2008 are as follows:

	Options	April 30, 2008 Weighted average exercise price $
Balance, beginning of period	190,000	3.78
Granted Exercised Cancelled	Nil (35,000) Nil	3.78
Balance, end of period (i) Less options not vested (ii)	155,000 0	3.78
Exercisable, end of period	155,000	-

The remaining contractual life and exercise price of options outstanding and options exercisable as at July 31, 2008 are as follows:

Number of Options Outstanding	Remaining Contractual Life (Years)	Exercise Price $	Number of Options Exercisable
155,000	1	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.

6. INCOME TAXES

	July 31, 2008 $	July 31, 2007 $
Current income tax Future income tax	1,396,510 (490,725)	362,999 179,000
	905,785	541,999

7. EARNINGS PER SHARE

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

	July 31, 2008 $	July 31, 2007
Basic earnings available to common shareholders Weighted average number of common shares outstanding – basic Basic earnings per share	$1,757,719 12,111,762 $0.15	$921,546 12,089,521 $0.08
Weighted average number of common shares outstanding Assumed exercise of outstanding dilutive options Shares purchased from proceeds of assumed exercise of options	12,111,762 155,000 (100,670)	12,089,521 190,000 (128,021)
Weighted average number of common shares outstanding – dilutive	12,166,092	12,151,500
Fully diluted earnings per share	$0.15	$0.08

Basic net income per common share is determined using the weighted-average number of common shares outstanding during the respective period. The treasury stock method is used to compute the dilutive effect of options.

8. FINANCIAL INSTRUMENTS

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt.

(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, accounts receivable and long-term debt.

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 cash, cash equivalents, and long term debt. The Company’s objective of managing its cash and cash equivalents are to ensure sufficient funds are maintained on hand at all times to meet day to day requirements and to place any amounts which are considered in excess of day to day requirements in redeemable Guaranteed Investment Certificates (GIC) so they can earn interest. The Company only uses high quality commercial banks to ensure that access to the amounts placed can be obtained on short notice.

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 prime plus 0.75%. The Company is sensitive to fluctuations in interest risk such that a 2% increase or decrease in interest rates would result in a respective $14,200 decrease or increase, to the Company’s income before taxes for the nine months ended July 31, 2008. The Company has not deemed it necessary to use derivative financial instruments to reduce exposure to interest 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. 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 U.S. dollar would result in a respective $152,768 increase or decrease to the Company’s income before taxes for the nine months ended July 31, 2008. The Company does not 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 nine months ended July 31, 2008 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. 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, 2007. The audited consolidated financial statements and management’s discussion and analysis for the year ended October 31, 2007 were reviewed and approved by the Company’s Audit Committee and the Board of Directors.

Operating results for the nine months ended July 31, 2008 are not necessarily indicative of the results that may be expected for the full year ending October 31, 2008. The following discussion is comprised of significant updates since management’s discussion and analysis reported for the year ended October 31, 2007.

2. FORWARD–LOOKING STATEMENTS

This Management’s discussion and analysis contains statements about expected future events and financial and operating results of AlarmForce Industries Inc. that are forward-looking. By their nature, forward-looking statements require the Company to make assumptions and are subject to inherent risks and uncertainties. These forward-looking statements are based on current expectations. There is substantial risk that forward-looking statements will not prove to be accurate. Readers are cautioned not to place undue reliance on the Company’s forward-looking statements as a number of factors including economic conditions, technological change, regulatory change, and competitive factors, could cause actual future results, conditions, actions or events to differ materially from targets, expectations, estimates or intentions expressed in the forward-looking statements; many of which are beyond the Company’s control.

Future events and results may vary significantly from what the Company currently foresees. We are under no obligation to update or alter the forward-looking statements whether as a result of new information, future events or otherwise. For a more detailed discussion of factors that may affect actual results, see the section entitled Trends, Risks and Uncertainties .

3. OVERVIEW

In the third quarter of 2008, the Company reported 19% growth in Revenue and 14% increase in Gross Profit. This is primarily attributable to subscriber growth and improved efficiencies from providing recurring monitoring services to a larger subscriber account base. The Company’s alarm subscribers increased by 2,100, bringing the total number of monitored alarm subscribers to 87,500. Approximately 9% of the Company’s alarm subscriber accounts are located within the United States.

The Company plans to continue growing organically by marketing and distributing its unique Alarm technologies and create awareness through advertising programs in all the major centers across Canada and selected centers in the United States. The Company has not acquired any blocks of accounts from dealers and has increased its account size solely by internal account creation. The cost for the Company to create a new account under its existing programs is much lower than the comparable cost to acquire an existing account, individually or en bloc.

The Company currently installs and services all major centers in Canada and 7 major American centers. Over the next several years, the Company will establish brand recognition by aggressively advertising to these markets by radio, television, print and other media introducing the benefits of the Company’s two-way voice alarm system.

On April 1, 2008, the Company commenced advertising its newest service under the brand name AlarmCare. This Personal Emergency Response System or more commonly known as PERS system is not a security system. It cannot be turned on or off as it is always active to provide assistance in the event of a crisis situation. Although these systems in general are diverse in scope, AlarmCare is specifically tailored to the market segment consisting of elderly and those requiring medical attention. Vital pertinent medical information is maintained and relayed to the responding authorities in the event of an emergency. The AlarmCare system required only nominal changes to infrastructure as the base controller is identical to the salarm security controller with some minor changes to hardware and software. As at July 31, 2008, the Company installed approximately 300 AlarmCare systems.

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 nine months ended July 31, 2008 and the comparative nine months of 2007 below:

	July, 2008 $	July, 2007 $
EBITDA Add: marketing expenditures	4,949,645 6,260,171	3,417,283 6,907,244
EBITDA (excl. marketing expenditures) Less: Amortization of property, plant and equipment Amortization of intangible assets Amortization of deferred charges Interest expense	11,209,816 1,559,934 649,739 6,343 70,125	10,324,527 1,274,755 597,415 7,194 74,374
Income before income taxes Less income taxes	2,663,504 905,785	1,463,545 541,999
Net income	1,757,719	921,546

5. REVIEW OF OPERATIONS: NINE MONTHS ENDED
JULY 31, 2008

Sales Sales for the nine months were $21,993,375 compared to $18,473,210 in the comparative period of 2007, which is an increase of $3,520,165 or 19%. This increase is primarily attributable to monthly recurring monitoring services generated from new subscribers. 90% of the Company’s revenue consists of monthly recurring monitoring revenue.

Cost of sales

Cost of sales for the nine months were $5,286,557 compared to $3,881,931 in the corresponding period of 2007, a total increase of $1,404,626 or 36%. The increase is due to additional technical support staff, general wage augmentations to accommodate the growing subscriber accounts and a relative increase in attrition.

Gross margin

Gross Profit margin in the nine months rose to $16,706,818 compared to $14,591,279 in the corresponding period of 2007, which is an increase of $2,115,539 or 14%. Gross margin as a percentage of total revenue decreased to 76% from 79% in the corresponding period of 2007. This is due to expenses incurred from additional technical support staff and wage augmentations, to facilitate the consistent growth in the subscriber base. Management expects this margin to remain at 76% till the end of the fiscal year as target staffing requirements are met and scale efficiencies are obtained over the growing subscriber accounts.

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

SG&A Expenses were $11,465,691 in the first nine months of 2008 as compared to $11,191,560 in the corresponding period of 2007 which is a marginal increase of $274,131 or 2%.

Selling Expenses were $7,578,134 for the first nine months of 2008 compared to $8,050,593 in the same period of 2007, a decrease of $472,459 or 6%. This decrease was predominantly due to prudent management of marketing expenditures in negotiating advertising contracts in selected centers. Selling Expenses excluding marketing costs increased by $174,614 or 15%. Aside from general wage augmentations, the increase is primarily due to additional sales and marketing staff.

Administrative Expenses were $3,887,557 for the first nine months of 2008 as compared to $3,140,967 in corresponding period of 2007, which is an increase of $746,590 or 24%. Aside from general wage augmentations, the increase in administrative expenses is due to the additional customer care and support staff required to handle inbound non emergency calls typically regarding service, billing and other alarm related issues. In an effort to maintain high levels of customer satisfaction, the Customer Care Department has recently extended its hours of operation to ensure that requests are being handled promptly.

Other expenses

Amortization of property plant and equipment was $1,559,934 for the nine months of 2008 as compared to $1,274,755 in the same period of 2007, which is an increase of $285,179 or 22%. This increase mainly reflects additions made to the rental equipment due to the subscriber growth.

Interest expense was $70,125 for the first nine months of 2008 as compared to $74,374 in the same period in 2007, which is a nominal decrease of $4,249 or 6%. Interest expenses remained relatively stable as the Company did not acquire any new loans in 2008. AlarmForce manages to control the use of debt financing for new growth in subscriber accounts by maintaining a lower cost of creation. The Company uses an organic growth model to build the account base as opposed to acquiring existing accounts, and this has proved effective in reducing the debt-to-equity ratio of the Company.

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

	July 2008	April 2008	January 2008
Net change in alarm subscribers	2,100	2,800	3,400
OPERATIONS:
	$	$	$
Total revenue	7,577,109	7,317,399	7,098,867
Income before taxes	839,217	764,216	1,060,071
Net income	553,926	523,722	680,071
Basic earnings per share	0.05	0.04	0.06
Fully diluted earnings per share	0.05	0.04	0.06
FINANCIAL POSITION:
Total assets	26,889,711	26,414,026	25,975,553
Shareholders’ equity	18,729,694	18,175,768	17,519,746

payable. These activities result in exposure to fluctuations in foreign currency rates as the Company adjusts its foreign exchange rate annually. As at July 31, 2008, the Company experienced a foreign exchange loss of $291,482 resulting from the strengthening of the US dollar.

Income taxes

The future tax liability is reduced by future income tax assets resulting from certain opposite timing differences, which result from the accounting deferral and amortization of sales revenue that are immediately recognized in taxable income at the time that 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. The Company’s US subscribers currently represent 9% of the total alarm subscriber base.

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 July 31, 2008, prepared in accordance with Canadian GAAP and expressed in Canadian currency:

October 2007	July 2007	April 2007	January 2007	October 2006
4,300	3,500	2,700	2,400	3,400
$	$	$	$	$
6,662,915	6,447,655	6,177,635	5,847,920	5,544,640
641,545	129,278	433,167	901,101	838,200
358,626	81,278	274,167	566,101	440,839
0.03	0.01	0.02	0.05	0.04
0.03	0.01	0.02	0.05	0.04
25,251,571	25,825,876	24,712,357	23,421,288	23,880,550
16,839,675	16,481,050	16,361,972	16,087,805	15,521,703

7. LIQUIDITY AND CAPITAL RESOURCES

As at July 31, 2008, the Company had cash and cash equivalents of $4,300,714 and unused credit facilities of approximately $4,800,000 available for future operating and capital requirements.

As at July 31, 2008, the Company’s assets totalled $26,889,711 of which the majority represented revenue generating capital assets including tangible and intangible assets. The outstanding debt at July 31, 2008 consisted of a $883,334 fixed rate term loan for purchase of the property acquired in March 2006, and revolving bank loans of $645,834 under credit facilities that are available to be used by the Company to finance the growth in the subscriber base, which in turn will contribute to additional recurring revenues and cash flows.

The cash flows from operations and financing activities, and cash flows used in financing and investing activities for the nine months of 2008 and the comparative 2007 period are summarized below.

	July, 2008 $	July, 2007 $
Cash flow from operations	4,169,794	2,226,753
Cash flow from (used in) fi nancing activities	(97,900)	646,328
Cash flow used in investing activities	(2,251,194)	(4,133,284)

The Company’s cash flow from operations increased due to a reduction in the marketing expenditures as well as timing differences in corporate tax payments. The cash flow used in financing activities decreased due to repayments of various bank loans. The Company did not enter into any new loan agreements in the third quarter of 2008.

The Company expects to continue investing significantly in growth of the subscriber base especially in the US markets, through marketing programs and in the installation of new security systems in subscriber homes. Security systems are installed under three-year contracts, which are subsequently renewable annually. The Company assembles the equipment that it installs and the assembly process involves purchasing various key components from foreign and domestic manufacturers, and utilizing local subcontractors in certain parts of the assembly process. The Company’s assembly operations are housed in Toronto where the alarm systems are assembled. In addition to the standard system, the Company also manufactures AlarmPlus telephone line-cut technology that is available exclusively to subscribers of AlarmForce, which is the only Canadian alarm company that manufactures and installs AlarmPlus.

8. OUTSTANDING SHARE CAPITAL

The Company is authorized to issue an unlimited number of common shares. The issued common shares of the Company are summarized as follows:

	Number of Shares	Value $
Balance, October 31, 2007	12,098,788	12,183,385
Issued during the period	35,000	132,300
Balance, Apr 30 and Jun 6, 2008	12,133,788	12,315,685

The Company is committed to issuing 155,000 common shares under options that were outstanding at July 31, 2008. 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	1	$3.78

9. DIVIDEND POLICY

The Company does not currently have a policy of declaring or paying dividends on its common shares and intends to retain future earnings for use in its business and does not anticipate paying dividends in the foreseeable future. Any determination to pay any future dividends will remain at the discretion of the Board of Directors of the Company and will be made based on the financial condition and other factors deemed relevant by the Board of Directors. The Company has not paid any dividends since its incorporation.

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.

10. COMMITMENTS AND CONTRACTUAL OBLIGATIONS

There have been no material changes in commitments or contractual obligations from those presented in the most recent annual financial statements.

11. OFF-BALANCE SHEET FINANCING

The Company did not have any off-balance sheet arrangements or obligations other than the operating leases presented in the most recent annual financial statements.

12. RELATED PARTY TRANSACTIONS

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

13. CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements 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 2007 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 the value of long-lived assets for impairment 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.

14. ACCOUNTING POLICIES

(i) 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.

(ii) Financial Instruments– Disclosure and Presentation: In December 2006, the CICA issued Section 3862, Financial Instruments Disclosures, and Section 3863, Financial Instruments, presentation. These standards provide additional guidance on disclosing risks related to recognized and unrecognized financial instruments and how those risks are managed. This Section applies to interim and annual financial statements of the Company commencing 2008 fiscal year. See note 8 of the interim consolidated financial statements regarding additional disclosure.

(iii) Capital disclosures: CICA issued Handbook Section 1535, Capital Disclosures, which provides standards for disclosures regarding a company’s capital and how it is managed. Enhanced disclosure with respect to the objectives, policies and processes for managing capital and quantitative disclosures about what a company regards as capital is required. These recommendations are effective for fiscal years beginning on or after October 1, 2007 and, therefore, apply to the Company. 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 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.

(iv) 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 and, therefore does apply to the Company. The Company is not affected by these new recommendations.

15. 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 period ended July 31, 2008, the CEO and CFO have reviewed and evaluated the Company’s disclosure controls and procedures, and based upon that review and evaluation, concluded that there have been no changes to those disclosure controls and procedures since October 31, 2007, and they meet the requirements thereof.

16. TRENDS, RISKS AND UNCERTAINTIES

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.

Competition: The security industry is highly competitive and fragmented. The Company may encounter competition from other alarm system distributors and/or installers having established marketing and distribution networks and/or greater financial resources. As well, new developments may create new competition. Other than competitive advantages that the Company may enjoy as a result of market penetration and brand recognition, there will not be any significant barriers to the entry into this market by competitors.

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 AlarmForce 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.

Possible Adverse Effect of “False Alarm” Ordinances: Significant concern has arisen in certain municipalities about the high incidence of "false alarms". 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 considered and are considering adopting various measures aimed at reducing the number of false alarms. The Company has determined that the most appropriate and cost- effective method to address these measures is to retain a private dispatch security response team to respond to the alarm signals.

Failure to respond to alarm activations: The nature of the alarm services provided by AlarmForce potentially exposes 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 an adverse effect on the Company.

Technology obsolescence: Our subscribers monitoring service depends upon the use of wireless technology. We may be required to implement new technology, which could require significant expenditures. We may not be able to successfully implement new technologies or adapt existing technologies to changing market demands within the specified time frames. If we are unable to adapt in response to changing technologies, market conditions or customer requirements in a timely manner, such inability could adversely affect our business.

17. 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. The central station will continue to maintain the most advanced two-way voice home security capabilities in the areas that the Company operates in.

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.