Summary of ALR TECHNOLOGIES INC

ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

General

The Company's business is focused on enhancement of disease and healthcare management programs through improved medication adherence through our patient reminder products, monitoring of medication compliance, and intervention systems when lack of compliance puts the patient at risk. The Company's primary business markets are the providers of health insurance and the providers of disease and case management services, including the home care industry. Health and disease management and home care cannot achieve desired results unless the targeted individuals are compliant with their medications and unless there is timely intervention when they are not compliant and deemed at risk.

The largest potential for sustainable long term growth and value generation lies with the market segments that have the most influence on the end-user and the most to gain from improved healthcare results. These market segments are the health insurance providers the medical clinics and physicians who provide the care for people with chronic disease. Our focus is currently on medical clinics as well as the self insured corporations and their provider partners with the diabetics and those with respiratory disease being the initial targets. The health insurance provider industry has the potential of reducing costs substantially through successful patient compliance programs. Industry data reports indicate that over $300 billion annually in health care costs are due to people not taking medications as directed.

The disease management compliance and home health monitoring markets that our products and services address are in the early stages of development. This situation provides significant upside potential due to it being new market with cost savings benefits to be achieved by the groups we are targeting. Many in the US and around the world can benefit from such systems and products. Substantial savings could be realized by the industry and once a segment of the industry adopts comprehensive health management compliance then growth could develop rapidly. The attention being given to rising healthcare costs and the aging of the US population with "baby boomers" now approaching retirement age is fueling attention to this opportunity, as well as the growing prevalence of diabetes.

Revenue

Revenues for the year ended December 31, 2008 decreased by $181,948 to $12,848 in 2008 from $194,796 for 2007. The Company has been devoting its efforts for the past two years to developing the Constant Health Companion (CHC) patient compliance system and more specifically for this past year, 2008, to developing a communications platform to allow health professionals and case managers to communicate as needed to the patient and/or to other health professionals. A considerable amount of focus was also placed on completion of the ALRT Diabetes Health Management System. The market needs dictated the Company's development efforts and as such the Company did not initiate selling efforts of the CHC system which the Company expect will generate substantial sales revenue. The Company's focus on the CHC also resulted in no active selling efforts of the Company's other compliance reminder products but the Company did receive reorders for these products from existing customers.

Product Development

With the completions of the diabetes and respiratory monitoring system and commercial launch in planning with the two companies we are in negotiations with, the Company expects to add additional home monitoring capabilities, including monitoring the essential diagnostic readings such as blood pressure, peak flow, weight, A1c and more are in development with completion expected later in 2009 or 2010.

The Company has filed patents to cover its compliance monitoring systems that work specifically with nebulizers and patent applications are also being prepared to cover other elements of our comprehensive HealthEConnect system. The Company has been granted patents that cover the primary ease-of-use feature and one button programming. One-button programming is an important element in many of our Compliance Reminder products.

Operating Capital

The Company's revenue from sales is not at a level to pay for operating costs and as such the management have volunteered to have their compensation deferred until cash flow allows for payment and creditors have agreed to additional stock option grants in return for deferred payment on interest in some cases and agreements of note extensions in other cases. Although cash flow from sales of products and services are expected to improve through 2009, there is no certainty of this, and if sales do continue to increase there is no certainly that it will reach the level necessary to cover operating costs and debt load.

Management Compensation

Management has accepted deferred payment on compensation, deferred payment on interest on loans they have made to the Company and have paid Company bills and expenses without repayment; all to help ensure the Company's survival. In return, the Company's directors have rewarded the participating personnel with stock options.

Operating Issues

The Company has expended significant efforts introducing its human medication and treatment reminder products to specified retail chains, pharmaceutical manufacturers, Contract Research Organizations, Health Management Organizations, Pharmacy Benefits Managers and certain clinics treating specific disease conditions. Sales to December 31, 2008 have not been sufficient for the Company to realize its investment in its inventories. Management plans to recover its investment through sales of Constant Health Companion and the ALRT Diabetes Health Management System.

If management is not successful in its plans, they may be required to raise additional funds from its existing and prospective shareholders.

Results of Operations

December 31, 2008 compared to December 31, 2007

Sales for the year ended December 31, 2008 were $12,848 and cost of goods sold was $1,199 as compared to $194,796 and $25,558 respectively for the year ended December 31, 2007. Sales were down in fiscal 2008 as a result of the decision to de-emphasize sales and marketing activities of focus resources on development of the Constant Health Companion (CHC) and development of business network of pilot programs.

Product development costs were $414,546 for the year ended December 31, 2008 versus $270,966 for the year ended December 31, 2007. Product development costs include $228,001 (December 31, 2007 - $47,391) for a non-cash amount related to the value of stock options committed to be issued for services in the year. This increase relates primarily to the development of the ALRT Health-E-Connect SystemTM reaching the final stage.

Interest expense was $773,363 for the year ended December 31, 2008 as compared with $691,357 for the year ended December 31, 2007 as the Company continued to rely on loans for funding the Company's operation. Included in the total reported interest is a non-cash amounts $71,190 (2007 -$12,458) related to stock options committed to be issued in consideration of promissory notes.

The Company incurred professional fees of $101,138 for the year ended December 31, 2008 as compared with $97,381 for the year ended December 31, 2007.

Rent increased slightly in fiscal 2008 to $49,202 from $42,485 for the year ended December 31, 2007.

The selling, general and administrative expenses were $605,567 for the year ended December 31, 2008 as compared to $643,909 for the year ended December 31, 2007. These totals include $Nil (December 31, 2007 - $39,838) for a non-cash amount related to the value of stock options committed to be issued for selling, general and administrative services in the year. The cash portion of the selling, general and administrative expenses were increased by only $1,497.

Accounts receivable were $5,048 at December 31, 2008 as compared with $4,221 at December 31, 2007.

Accounts payable and accrued liabilities decreased to $1,088,256 at December 31, 2008 from $1,119,545 at December 31, 2007 while payroll payable decreased to $18,050 at December 31, 2008 from $18,458 at December 31, 2007.

During the year ended December 31, 2008, the Company arranged $519,328 in debt financing in comparison with $75,000 during the year ended December 31, 2007.

Liquidity and Capital Resources

Cash Balances

At December 31, 2008, the Company's cash balance was $7,901 compared to $2,973 at December 31, 2007.

Short and Long Term Liquidity

With respect to the Company's short-term liquidity, the Company's "current ratio" (current assets divided by current liabilities) as of December 31, 2008 was 0.01, unchanged from December 31, 2007. The greater the current ratio, the greater is the short-term liquidity of the Company.

The Company raised $519,328 debt financing in 2008 for working capital.

The Company plans additional debt financing in the short run. These proceeds will be put toward working capital.

All of the Company's debt financing is due on demand. The Company will seek to obtain creditors' consent to delay repayment of these loans until it is able to replace this financing with funds generated by operations, replacement debt or from equity financings through private placements or the exercise of options and warrants. While the Company's creditors have agreed not to demand immediate payment or to extend repayment deadlines in the past, there is no assurance that they will continue to do so in the future. Failure to obtain either replacement financing or creditor consent to delay the repayment of existing financing could result in the Company having to cease operations.

Cash Used in Operating Activities

Cash used by the Company in operating activities during the year ended December 31, 2008 totalled $511,047. The Company incurred a net loss of $1,899,110 for the year ended December 31, 2008 as compared to a loss of $1,579,506 for the year ended December 31, 2007. Cash used by the Company in operating activities during the year ended December 31, 2007 totalled $80,444.

Cash Proceeds from Financing Activities

During the year ended December 31, 2008, the Company arranged $519,328 in debt financing. In consideration for these loans, the Company has committed to issue options to acquire a total of 2,278,000 shares of the Company at $0.25 per share exercisable for a period of five years. The fair value of these options has been estimated and recognized in the financial statements in interest expense.

During the year ended December 31, 2007, the Company arranged $75,000 in debt financing. In consideration for these loans, the Company has committed to issue options to acquire a total of 300,000 shares of the Company at $0.25 per share exercisable for a period of ten years. The fair value of these options has been estimated and recognized in the financial statements in interest expense.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the accounting polices that are most critical to its financial condition and results of operations and involve management's judgment and/or evaluation of inherent uncertain factors are as follows:

Basis of Presentation. The consolidated financial statements have been prepared on the going concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of operations. If the Company were not to continue as a going concern, it would likely not be able to realize on its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the preparation of the consolidated financial statements. As described elsewhere in this annual report, at December 31, 2008 there are certain conditions that exist which raise substantial doubt about the validity of this assumption. The Company's ability to continue as a going concern is dependent upon continued financial support of its creditors and its ability to obtain financing to repay its current obligations and fund working capital and its ability to achieve profitable operations. The Company will seek to obtain creditors' consent to delay repayment of its outstanding promissory notes payable until it is able to replace this financing with funds generated from operations, replacement debt or from equity financing through private placements or the exercise of options. While the Company's creditors have agreed to extend repayment deadlines in the past, there is no assurance that they will continue to do so in the future. Management plans to obtain financing through the issuance of additional debt, the issuance of shares on the exercise of options and through future common share private placements. Management hopes to realize sufficient sales in future years to achieve profitable operations. Failure to achieve management's plans may result in the Company curtailing operations or writing assets and liabilities down to liquidation values, or both.

Inventories. Inventories are recorded at the lower of cost, determined on a weighted average cost basis, and net realizable value.

Options and warrants issued in consideration for debt. The Company allocates the proceeds received from long-term debt between the liability and the options and warrants issued in consideration for the debt, based on their relative fair values, at the time of issuance. The amount allocated to the options or warrants is recorded as additional paid in capital and as a discount to the related debt. The discount is amortized to interest expense on a yield basis over the term of the related debt.

Revenue recognition. The Company recognizes sales revenue at the time of delivery when title has transferred to the customer, persuasive evidence of an arrangement exists, the fee is fixed and determinable and the sales proceeds are collectible. Provisions are recorded for product returns based on historical experience. Sales revenue, in transactions for which the Company does not have sufficient historical experience, are recognized when the return privilege period has expired.

Stock-based compensation. The Company follows Statement of Financial Accounting Standards No. 123R, "Share Based Payment" ("SFAS 123R"). SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company's consolidated financial statements. Stock-based compensation recognized during the period is based on the value of the portion of the stock-based payment awards that are ultimately expected to vest during the period. The Company estimates the fair value of the stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS 123R. The Black-Scholes valuation model requires the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. The expected stock price volatility assumption was determined using historical volatility of the Company's common stock.

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS 141(R)), which replaces SFAS 141. SFAF 141(R) requires assets and liabilities acquired in a business combination, contingent consideration and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS 141(R) also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. SFAS 141(R) is effective for business combinations entered into after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160, "Non-Controlling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51". SFAS 160 clarifies the accounting for non-controlling interests and establishes accounting and reporting standards for the non-controlling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have any minority interests.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133," as amended and interpreted, which requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format provides a more complete picture of the location in an entity's financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Entities are required to provide enhanced disclosures about:
(a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of SFAS No. 161 will have a material impact on its financial position.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with generally accepted accounting principles. The current generally accepted accounting principles hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the generally accepted accounting principles hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The adoption of FASB 162 is not expected to have a material impact on the Company's consolidated financial position.

In June 2008, the FASB issued FASB SP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities." SP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the computation of earnings per share under the two-class method as described in SFAS No. 128, "Earnings per Share." SP EITF 03-6-1 is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and earlier adoption is prohibited. The Company is required to adopt SP EITF 03-6-1 in the first quarter of 2009 and does not expect SP EITF 03-6-1 to have a material impact on the Company's financial position.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; however, for some entities the application of this statement will change current practice. The Company adopted SFAS No. 157 effective January 1, 2008 and did not have a material impact on the Company's consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of SFAS No. 109". The interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes". The evaluation of a tax position in accordance with this interpretation is a two-step process. Under the recognition step, an enterprise determines whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. Under the measurement step, a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company adopted FIN 48 effective January 1, 2007.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". This statement permits companies to choose to measure many financial instruments and certain other items at fair value. This statement expands the use of fair value measurement and applies to companies that elect the fair value option. The fair value option established by this statement permits all entities to choose to measure eligible items at fair value at specified election dates. The Company adopted SFAS No. 159 effective January 1, 2008 and did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.