UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 (Mark
      One)x
                ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended September 30, 2009ORo
                TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the transition period from to
 Commission file number:
0-23153
 
 REMOTEMDX,
INC.
 (Exact
name of registrant as specified in its charter)
 Utah
                
                87-0543981(State
      or other jurisdiction of
                  incorporation
      or organization)
                
                (I.R.S.
      Employer
                  Identification
      No.)
  150
West Civic Center Drive, Suite 400, Sandy, Utah 84070
 (Address
of principal executive offices, Zip Code)
  (801)
451-6141
 (Registrant's
telephone number, including area code)
  Securities registered pursuant to
Section 12(b) of the Act:None
 Securities registered pursuant to
Section 12(g) of the Act: Common Stock, $0.0001 par
value
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o  No x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x  No o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes oNo o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
 
 Large
      accelerated filer o
                
                Accelerated
      filer o
                
                Non-accelerated
      filer o
                
                Smaller
      reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o    No x
 
 There
were 211,765,988 shares of the registrant's common stock outstanding as of
December 29, 2009. The aggregate market value of common stock held by
non-affiliates of the registrant as of December 29, 2009 was approximately
$28,530,000.
  
  REMOTEMDX, INC.
   FORM
10-K
  For the
Fiscal Year Ended September 30, 2009
   INDEX
  PagePart
      IItem
      1
                Business
                3Item
      1A
                Risk
      Factors
                11Item
      2
                Properties
                15Item
      3
                Legal
      Proceedings
                16Item
      4
                Submission
      of Matters to a Vote of Security Holders
                16Part
      IIItem
      5
                Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                17Item
      7
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                21Item
      8
                Financial
      Statements and Supplementary Data
                30Item
      9
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                30Item
      9A(T)
                Controls
      and Procedures
                30Item
      9B
                Other
      Information
                31Part
      IIIItem
      10
                Directors,
      Executive Officers and Corporate Governance
                31Item
      11
                Executive
      Compensation
                34Item
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                40Item
      13
                Certain
      Relationships and Related Transactions, and Director
      Independence
                41Item
      14
                Principal
      Accounting Fees and Services
                43Part
      IVItem
      15
                Consolidated
      Financial Statements and Exhibits
                44Signatures
 
  2
  PART
I
  Item 1.    Business
  The statements contained in this Report
on Form 10-K that are not purely historical are considered to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These statements represent our
expectations, beliefs, anticipations, commitments, intentions, and strategies
regarding the future, and include, but are not limited to the risks and
uncertainties outlined in Item 1A “Risk Factors”, and Item 7
“Management's Discussion and Analysis of Financial Condition and Results of
Operations.” Readers are cautioned that actual results could differ materially
from the anticipated results or other expectations that are expressed in
forward-looking statements within this Report.
  General
 
 Unless
the context otherwise requires, all references in this report to "registrant,"
"we," "us," "our," "RemoteMDx" or the "Company" refer to RemoteMDx, Inc., a Utah
corporation and its subsidiary corporations.
 
 RemoteMDx
and subsidiaries market and deploy offender management programs, combining
patented GPS (Global
Positioning System) tracking technologies, fulltime 24/7/365
intervention-based monitoring capabilities and case management
services.  Our vision is to be the market leader for delivering
offender management solutions that integrate interaction
technologies.  We believe that we currently deliver the only offender
management technology which integrates GPS, RF (Radio Frequency) and an
interactive 3-way voice communication system into a single device, deployable on
offenders worldwide.  Through our patented electronic monitoring
technologies and services, we empower law enforcement, corrections and
rehabilitation professionals with offender, defendant, probationer and parolee
programs, which grant convicted criminals and pre-trial suspects an accountable
opportunity to be “free from prison,” while providing for greater public safety
at a lower cost to incarceration or traditional resource-intensive
alternatives.
 
 TrackerPALTM
II and TrackerPALTM IIe (“enhanced”), now manufactured in the USA – The
TrackerPALTM portfolio of products, e-Arrest Beacons and monitoring services are
designed to create “Jails without Walls,” customizable by offender types (e.g.,
domestic abusers, sexual predators, gang members, pre-trial defendants, juvenile
offenders, etc.).  Additionally, our proprietary software and device
firmware support the dynamic accommodation of agency-established monitoring
protocols, victim protection imperatives, geographic boundaries, work
environments, school attendance, rehabilitation programs and sanctioned home
restrictions.  TrackerPALTM IIe is designed for federal, state and
local agencies to provide location tracking of select individuals in the
criminal justice system.  The TrackerPALTM IIe device fastens to the
offender's ankle with a tamper resistant strap (steel cabling with optic fiber)
that can only be adjusted or removed without detection by a supervising officer
through services provided by our SecureAlert Monitoring Center (or other
monitoring centers).  This monitoring and intervention center acts as
an important link between the offender and the supervising officer as
intervention specialists persistently track and monitor the offender, initiating
contact at the direction of the supervising agency and/or when the offender is
in violation of any established restrictions or protocols.  An
intelligent device with integrated computer circuitry and constructed from
case-hardened plastics, the TrackerPALTM IIe unit promptly notifies the
monitoring center if any attempt is made to breach protocols or to remove or
otherwise tamper with the device or optical strap housing.
 
 According
to the Bureau of Justice Statistics annual report March 2009 (available online
at http://bjs.ojp.usdoj.gov/), it is currently estimated that over 2.3 million
inmates, or one in every 131 U.S. residents, were held in custody in state or
federal prisons or in local jails. Nearly 5.1 million adults were under
community supervision at year-end 2008—the equivalent of about 1 in every 45
adults in the United States.  Probationers (4,270,917) represented the
majority (84%) of the community supervision population in 2008; parolees
(828,169) accounted for a smaller share (16%).  Sadly, approximately
7.4 million people are now either incarcerated (State or Federal prisons or
local jails) or on parole or probation.  The average cost of
incarcerating an inmate ranges from $65 to $175 (plus) per day dependent upon
facility type, security level, amenities and jurisdiction.  But this
annualized “equivalency” number pales in comparison to actual populations. The
Bureau of Justice Statistics also reports that over one-third of all inmates
held in custody at midyear 2008 were in local jails.  More than half
(52%) were housed in the 180 largest jail facilities, with average daily
populations of 1,000 inmates or more.  Overall, an estimated 13.6
million inmates were admitted to local jails during the 12-month period ending
June 30, 2008.  Statistics for 2009 have not been published, but we
believe this number continues to grow and to push capacity and resource
levels.
  Due to
ever-growing economic pressures, it is widely recognized that these costs are
unsustainable with ongoing state and federal budget reductions,
facility-specific overcrowding concerns, increased rehabilitation imperatives
and politicized re-socialization agendas. Thus, electronic monitoring
alternatives to incarceration for low and moderate risk offenders (adult and
juveniles), early release for good behavior initiatives, work release programs,
sentencing diversions and accelerated halfway house deployments are now strongly
encouraged and seriously considered by legislative and judicial branches of
government in many jurisdictions.  For between 10% to 15% of the
traditional costs of incarceration or for roughly (1/3) one-third the variable
costs (inmate daily food, laundry, uniforms, medical, guard overtime, etc.), our
TrackerPALTM monitoring and intervention center and patented TrackerPALTM IIe
devices can monitor offenders continuously, providing real-time location
tracking, interactive voice access and intervention-based contact, thus reducing
the potential for subsequent or repeat offenses (recidivism).
  3
  The
ongoing budget crisis and the “Great Recession” have forced many jurisdictions
to embrace or reconsider embracing “offender pay”, “parent pay” and/or “partial
pay” programs, and in doing so, shifting the burden of the tracking and
monitoring costs in whole or part to the offender directly, defraying the cost
to the public.  We estimate that approximately 30% of our gross
revenues (up from 20% in 2008) come from offender payments directly under court
order and threat of re-incarceration for non-payment; the majority of these
accounts remain in compliance because of the severe consequences of
non-payment.  This aspect of our business is growing significantly and
we expect that it will outpace traditional tax-payer obligated payment
programs.
  Strategically,
and in continued support of ever-growing rehabilitation and re-socialization
efforts, we embrace a broader services charter, necessary to support and
encourage many evolving rehabilitation initiatives.  Our “C.A.R.E.”
programs support Corrections and Accountability objectives in concert with
Rehabilitation and Empowerment agendas.  Specifically, our technology
facilitates a stringent protocol enforcement capability, incorporating
restricted movement provisions, coupled with enablement of positive
reinforcement communications, all in support of social worker interactions,
ongoing ministry options and proactive access by authorized counselors and/or
sponsors.  We believe that our programs are uniquely positioned to
allow for regular, frequent, and positive interactions and daily affirmations
with offenders, as they strive to again become responsible and contributing
members of society, while living within the virtual “electronic fence”
boundaries established through our proprietary technologies.  As it
stands, according to the Bureau of Justice Statistics’ report on recidivism, 65%
of offenders recommit a violation within three years of release and re-entry
(recidivism), which we believe can be dramatically reduced through the
utilization of monitoring services, intervention and interaction
technologies.
  Critically,
we must focus on a reduction in recidivism and leveraging our technologies and
services to provide frameworks and foundations for stopping repeat and new
offenses of those offenders on our programs.  For example, according
to the Bureau of Justice Statistics’ report on recidivism, of the 272,111
persons released from prisons in 15 states in 1994, an estimated 67.5% were
rearrested for a felony or serious misdemeanor within 3 years, 46.9% were
reconvicted, and 25.4% resentenced to prison for a new crime. Incredibly, after
15 years, the 272,111 offenders discharged in 1994 accounted for nearly
4,877,000 arrest charges over their recorded careers.  Society simply
cannot sustain these financial costs or the victimization or re-victimization of
the public, which is why our programs are strategically and tactically
positioned to impact this number measurably.
  As
identified, the offender marketplace today provides significant opportunity for
growth, as local agencies, county governments and state legislators are
confronted with ever-growing offender populations, pre-trial overcrowding,
resource limitations and economic crises.  Importantly, we are
strategically positioned to capitalize on these public sector challenges. We
offer offender service offerings and tools to provide enhanced effectiveness and
coverage for agencies with reduced resources. This results in a force multiplier
effect that allows smaller or understaffed agencies to grow while reducing the
number of offenders using valuable resources. We are also attracting new
customers to the industry, who historically have only leveraged now obsolete
“home arrest” technologies, and are now seeking GPS tracking and fulltime
monitoring alternatives.  Additionally, we are very encouraged by the
interest and expansion of many rehabilitation initiatives, which will avail
themselves of our program offerings in a mutual pursuit to reduce recidivism,
encourage re-socialization and to facilitate the earlier release of qualified
candidates.
 
 During
fiscal year 2009, in response to these evolving market factors, we restructured
and right-sized our direct sales force throughout the United States, while
embracing an expanded and growing distributorship model domestically and
internationally.  We believe that this will help to ensure localized
market knowledge, relationship leverage and enhanced ability to respond
effectively to requests for sole-sourced and/or competitive proposals. This
model has also allowed us to better focus on expanded market sectors, judicial
branch contacts and legislature interfaces in ongoing efforts to work from both
the bottom up at agencies, as well as from the top down in county and state
governments, securing multi-level commitments to embed our programs into ongoing
probation, parole and policing efforts.
 
 We also
hold a majority interest in two subsidiaries, which we believe will enable us to
increase our revenues in target markets.  In addition, we extended the
exercise period of our options to acquire the remaining shares of both entities
into 2010.  Although acquisitions require the commitment of capital,
both to consummate the acquisition as well as to integrate the acquired
businesses, we believe that we will be able to integrate these entities and
increase our revenues.  There can be no guarantee that revenues will
increase as projected or anticipated.
 
 The
assimilation of these acquired entities is subject to uncertainties and
risks.  There can be no assurance that we will successfully integrate
these companies into our operations without incurring significant unanticipated
costs or experiencing unexpected operational problems.  Some of the
potential risks include:
 
 ·
                Management
      of expanded inventory base
 ·
                Control
      of operations that are more geographically diverse than our prior
      operations
 ·
                Account
      collections of added customer
accounts
 ·
                The
      need to secure additional operating and working
  capital
 ·
                The
      ability to reduce overhead costs and streamline
  operations
 ·
                Potential
      conflicts arising from the distribution of products or services from
      providers who are or may our
competitors
 ·
                Availability
      of trained support personnel
  4
 
 In
summary, during the fiscal year ended September 30, 2009, we were case managing
and/or electronically monitoring approximately 14,000 offenders domestically,
while also expanding our sales capabilities and initiatives
internationally.  We have worked to build our domestic and
international direct sales force, while solidifying distributors and local
business partners opportunistically.  We have entered into monitoring
agreements with approximately 450 law enforcement, judiciaries and bail bond
agencies throughout the United States.  We continue to hold a majority
interest in two related businesses to further our efforts to increase our
revenues and market development and we now maintain 12 expanded
distributorships. Although there can be no guarantee that we will be able to
continue these efforts or be able to implement our business plan as anticipated,
management believes that we are in a good position to move forward and to
continue the growth of the business and to take advantage of the market
opportunities open to us.
 
 Our
Strategy
 
 Our strategy is to empower law
enforcement, corrections and rehabilitation professionals with sole-sourced
offender management solutions that integrate reliable interaction technologies
in support of intervention and re-socialization initiatives.  We will
grant offenders accountable opportunity, while providing for greater public
safety at a lower cost to incarceration or other service offerings.
 
 We will
accomplish our strategy through the “value-driven”, yet profitable deployment of
a portfolio of proprietary and non-proprietary GPS/RF and/or alcohol and/or drug
tracking, real-time monitoring and intervention products and services to
corrections, probation, law enforcement and rehabilitation personnel worldwide,
all in support of offender reformation and re-socialization
initiatives.
 
 Our
exclusive portfolio of products and services balance the need to dynamically
track and monitor offenders with the opportunity to positively encourage and
transform offenders, thus reducing recidivism rates through our proprietary
C.A.R.E.TM (Correction, Accountability, Rehabilitation, Empowerment) programs and
client-adapted initiatives.
 
 We will
continue to develop and deploy adaptive, cost-effective and interactive
technology products and services, which meet the ever-changing needs of our
clients, while providing value-driven and enhanced public safety.
 
 Importantly,
while there are no ongoing warranties of our business model and no assurances of
our capabilities to continue to raise necessary expansion capital, we will
endeavor to ensure our ongoing viability through diligent, margin-centric
imperatives and operational efficiency gains through prioritized management
initiatives.
 
 Background
 
 RemoteMDx was originally formed to
manufacture and market medical diagnostic stains, solutions and related
equipment.  Through the acquisition of SecureAlert, Inc.
(“SecureAlert”) in July 2001, we expanded our product sales and monitoring
services related to the Personal Emergency Response Systems
(“PERS”).
 
 In 2006,
we developed the GPS tracking technology and monitoring business currently
conducted by our subsidiary SecureAlert.  SecureAlert’s business involves
manufacturing, distributing, and monitoring mobile emergency and interactive GPS
tracking products, worn on the body, that focus on the defendant and offender
tracking, monitoring and intervention marketplace.
 
 To complement our own offerings and to
drive additional means of capturing a growth position in the offender management
market, in December of 2007, we acquired a majority interest in the Court
Programs Inc. group of companies (“Court Programs”), headquartered in Gulfport,
Mississippi and Midwest Monitoring and Surveillance, Inc. (“Midwest Monitoring”)
which is based in Fairmont, Minnesota.  These acquisitions brought us
solid business relationships with ongoing revenue streams, as well as the
possibility of expanding SecureAlert’s presence into the existing accounts of
the acquired companies.  Furthermore, they brought business processes
and practices in the area of case management, offender pay programs and
attendant services that could be leveraged and integrated into SecureAlert,
which remains an ongoing initiative.
  5
 
 Marketing
 
 The sales momentum which started with
the release of TrackerPALTM and the eArrest Beacon in 2008 continued in
2009.  As anticipated, the number of agencies facing budget
constraints, while at the same time being required to take on increased case
loads, grew.  These conflicting demands fueled the need of many
agencies to look at GPS monitoring as a solution.
 
 A
particularly strong sector was juvenile corrections, including juvenile
probation departments and juvenile detention centers.  It is widely
recognized that incarcerating juveniles can start a life-long pattern of
recidivism.  This is created by first time and minor crime offenders’
affiliation with more seasoned offenders who have the means and contacts to
encourage and enable repeat crimes.  Those in charge of juvenile law
enforcement and corrections recognize that in many cases, keeping youth at home
and in school is a better option.  However, with reduced staff and
increased case loads, probation officers and other support staff find it harder,
if not impossible, to be effective.  Many are recognizing that the
visibility that GPS monitoring provides can be a powerful
solution.  Moreover, TrackerPAL’s unique two and three way on-device
calling feature takes that visibility to the next level by enabling supervisory
staff to communicate with the user wearing the device, any place, any
time.  For many offenders, this feature is the only phone
communication available to them, not being able to afford either land or cell
phones and without the TrackerPALTM, officers would have far less contact with
their offenders.  Also, the incarceration of juveniles costs
considerably more than adult incarceration – exceeding $500 per day in some
areas – so putting offenders on GPS monitoring instead of incarceration makes
financial sense as well.  During the fiscal year ended September 30,
2009, we acquired several new juvenile corrections clients.
  As
critical as our Intervention
Active Monitoring is for monitoring high risk and other offenders that
require intensive monitoring, less intense monitoring levels may be more
appropriate to address lower risk offenders and budget
constraints.  To address this, we introduced two new service
offerings.  These offerings, Passive Monitoring and Standard Active Monitoring,
utilize the same TrackerPALTM devices as the flagship Intervention Active
Monitoring.  Intervention Monitoring utilizes our SecureAlert
Monitoring Center to communicate with offenders and officers on a real-time
basis when an offender has a violation such as entering an exclusion zone (a
designated restricted area the offender is prohibited to enter under the terms
of his sentence).  Like virtually all other active monitoring
offerings, the Standard Active level still provides real-time communications to
officers, but only through emails and texts.  No live operators call
offenders or officers.  The Passive level captures locations and
alarms on a real-time basis, and like other passive offerings, sends a report of
them each night.  However, unlike competitors’ passive and basic
active monitoring products which only post location traces every few hours, all
of our monitoring options utilize the GPS technology in the TrackerPALTM II
device to continuously track offenders’ movements and post them real time for
viewing anytime through the TrackerPALTM II software.  The eArrest
Beacon option is also available for all service levels.  In addition,
unlike some competitive systems, no docking stations or landlines are required
for any of the levels.  Conveniently, officers can transition
offenders to different monitoring levels via the TrackerPALTM software; no
equipment change is required.  This is a huge advantage as it
dramatically reduces the number of devices an agency has to keep on hand to be
proficient.  Several existing as well as new customers have signed up
for the new service offerings.
  Fiscal
year 2009 also saw many enhancements to our production and distribution
capabilities.  In January 2009, we moved our final assembly and
distribution activities to a 6,152 foot warehouse and distribution
center.  The new facility allowed us to bring all device refurbishment
activities in-house, saving not only time, but money in processing devices that
come back for stock rotation or refurbishment.  The facility also
positions us for the growth we have planned over the next several
years.
  We also
moved our manufacturing from Canada to contract manufacturer, Inovar Inc.
(“Inovar”), in Logan, Utah.  Inovar is a provider of quality
electronic manufacturing services for the electronics, medical, military and
aerospace industries.  In addition to facilitating design and testing
collaboration with us due to its proximity, Inovar provides other value added
services from which we will benefit.  Inovar’s services include
materials procurement, printed circuit assembly, test and system build. This
complete offering of services will enable us to receive high quality at reduced
costs.  Inovar’s location near the campus of Utah State University
also provides significant benefits.  Inovar’s relationship with the
University provides it with a steady stream of labor, as well as access to one
of the most respected engineering schools in the world.  Inovar is ISO
9001:2000 and ISO 13485:2003 certified.
  Research
and Development Program
 
 General
Information
 
 GPS technology utilizes highly accurate
clocks on 24 satellites orbiting the earth owned and operated by the U.S.
Department of Defense.  These satellites are designed to transmit
their identity, orbital parameters and the correct time to earthbound GPS
receivers at all times.  Supporting the satellites are several
radar-ranging stations maintaining exact orbital parameters for each satellite
and transmitting that information to the satellites for rebroadcast at
frequencies between 1500 and 1600 MHz.
 
 A GPS receiver (or engine) scans the
frequency range for GPS satellite transmissions. If the receiver can detect
three satellite transmissions, algorithms within the engine deduce its location,
usually in terms of longitude and latitude, on the surface of the earth as well
as the correct time. If the receiver can detect four or more GPS satellite
transmissions, it can also deduce its own elevation above sea
level.  The effectiveness of GPS technology is limited by obstructions
between the device and the satellites and, therefore, service can be interrupted
or may not be available at all if the user is located in the lower floors of
high-rise buildings or underground.
 
 During the fiscal year ended September
30, 2009, we spent $1,777,873 on research and development, compared to research
and development expenditures of $4,811,128 in the fiscal year ended September
30, 2008.  These costs of $1,777,873 were to further develop our
TrackerPALTM portfolio of products.
  6
 
 Monitoring
Center
 
 As we developed prior product lines, we
simultaneously worked to create the SecureAlert Monitoring Center. In contrast
to a typical monitoring center, our Monitoring Center is equipped with hardware
and software that pinpoints the location of the incoming caller by utilizing GPS
technology.  This capability is referred to as
telematic.  The operator’s computer screen can identify the caller as
well as locate, in real time, the caller’s precise location on a detailed
map.  We believe the monitoring center is the cornerstone of our
business.  An operator goes through extensive training to insure
professional service is provided to the supervising parole officer and
individuals wearing the TrackerPALTM.
 
 In order to prepare for an increase in
the number of TrackerPALTM devices to be monitored, we are continuing to build up
the Monitoring Center to effectively manage these devices.  To
increase the efficiencies in the Monitoring Center, we are developing software
to further expand service automation in the processing of alarms and operational
events resulting in increased operator efficiency and ability to manage more
devices. The automation of alarms includes pre-recorded responses to inform
the offender of the alarm and to resolve the issue.  If the issue is
not timely resolved, an operator will become involved and take the additional
necessary actions according to protocols set up by the customer.  We
anticipate one operator will be able to manage over 230 active devices after the
software is fully developed.
 
 Strategic
Relationships
 
 We believe one of our strengths is the
high quality of our strategic alliances.  Our two primary alliances
are described below.
 
 Inovar,
Inc.
 
 Inovar,
located in Logan Utah, is a leading contract electronics manufacturer dedicated
to providing flexible solutions to OEMs (original equipment manufacturers) in
the fastest growing segments of the electronics, medical, and aerospace
industries and the military.  We are ISO 9001-:2000 and ISO 13485:2003
certified to provide the most comprehensive and value-added services to our
customers. Inovar currently manufactures our TrackerPALTM product.
 
 euromicron
AG
 
 euromicron
AGis an all-round
solution provider for communications, data and security networks. Its network
infrastructures integrate voice, video and data transport wirelessly, via copper
cable and by means of fiber-optic technologies. euromicron builds its leading
applications, such as e-health, security, control or surveillance systems, on
the basis of these network infrastructures.  Founded on its expertise
as a developer and producer of fiber-optic components, euromicron AG is a
strongly growing, profitable group that is listed on the XETRA and Frankfurt,
Germany (FRA) stock markets and focuses on operational growth, integration and
further market penetration, internationalization and expansion.
 
 Puracom,
Inc.
 
 Puracom,
Inc. (“Puracom”) is a Canadian firm that specializes in hardware and software
development in the areas of GPS, GSM and GPRS. It is the preferred distributor
of GPS chip sets manufactured by Motorola and is recognized for its rapid
development cycles and expertise in both the cellular and GPS
areas.  Puracom performs research and development for us on a contract
basis.
 
 Competition
 
 In fiscal
year 2009, we encountered various levels of GPS, house arrest and case
management competition from the following traditional and evolving
competitors:
 ·
                Pro
      Tech Monitoring Inc., Odessa, FL – This company has satellite tracking
      software technology that operates in conjunction with GPS and wireless
      communication networks.·
                iSECUREtrac
      Corp., Omaha, NE – This company supplies electronic monitoring equipment
      for tracking and monitoring persons on pretrial release, probation,
      parole, or work release.·
                Sentinel
      Offender Services, LLC, Augusta GA – This company supplies monitoring and
      supervision solutions for the offender population.·
                Omnilink
      Systems, Inc., Alpharetta, GA – This company provides a one-piece device
      combined with GPS and Sprint cellular networks to electronically track an
      individual.·
                BI
      Incorporated, Boulder, CO – This company has been providing intensive
      community supervision services and technologies for more than 20 years to
      criminal justice agencies throughout the United States.·
                G4S
      plc – Crawley, Sussex, England – This international company is the world’s
      leading international security solutions group.  In the United
      States, they provide electronic monitoring of offenders, prison and
      detention center management and transitional support
      services.  Currently, G4S resells Omnilink’s active GPS
      device.·
                Satellite
      Tracking of People, LLC – Houston, TX – This company provides GPS tracking
      systems and services to government
agencies.
  We also
face competition from small and regional companies that provide electronic
monitoring technology along with localized case management and/or monitoring
services.  Some of these entities utilize less well-known technologies
or are resellers of the above competitors’ products.  We observed an
increase in these types of businesses in 2009.  We do not believe
there is reliable publicly available information to indicate our relative market
share or that of our competitors.
  7
 
 Dependence
on Major Customers
 
 No customer represented more than 10%
of our total revenues for the fiscal year ended September 30,
2009.  One non-repeat customer represented 16% of our total revenues
for the fiscal year ended September 30, 2008.
 
 Dependence
on Major Suppliers
 
 We purchase cellular services from a
variety of providers.  The cost to us for these services during the
fiscal years ended September 30, 2009 and 2008 was approximately $2,422,541 and
$2,939,790, respectively. We reduced cellular costs while increasing revenues
from monitoring services we successfully negotiated new and existing
contracts.
  During the fiscal year ended September
30, 2009, we switched manufacturing of the TrackerPALTM devices from Dynamic
Source Manufacturing to Inovar.  The change in manufacturers was made
to increase the reliability of the TrackerPALTM and reduce our cost per
device.  Should the relationship with Inovar cease, we would need to
find another vendor to manufacture the device which could limit the ability to
lease additional monitoring equipment.
 
 Product
Returns
 
 During
the fiscal year ended September 30, 2009, we replaced the majority of
TrackerPALTM I devices with our next generation TrackerPALTM II device to remedy
problems incurred with the first generation product. These problems
included:
 
 ·
                low
      battery and charger life and
functionality
 ·
                weak
      GPS signal strength
 ·
                water
      ingression; and
 ·
                scratching
      and other aesthetic damage when the device was removed from an
      offender.
 
 Subsequent
to September 30, 2009, we began manufacturing an improved TrackerPALTM device
dubbed the “TrackerPALTM IIe” (for “enhanced”) to further improve the performance
and functionality of the product.  We achieved significant improvement
in GPS signal strength by incorporating the latest available GPS technology into
the enhanced device.  Additionally, the battery life has improved,
realizing over 30 hours of life on a single two hour daily charge.
 
 Intellectual
Property
  Trademarks.  We
have developed and use registered trademarks in our business, particularly
relating to our corporate and product names. We own eight trademarks that are
registered with the United States Patent and Trademark Office and one trademark
registered in Mexico. Federal registration of a trademark in the United States
enables the registered owner of the mark to bar the unauthorized use of the
registered mark in connection with a similar product in the same channels of
trade by any third-party anywhere in the United States, regardless of whether
the registered owner has ever used the trademark in the area where the
unauthorized use occurs. We have one application for registration pending
approval in the state of California and one application in the United States
that has been approved and is awaiting the filing of a statement of
use.  We may file additional applications for the registration of our
trademarks in foreign jurisdictions as our business expands under current and
planned distribution arrangements.  Protection of registered
trademarks in some jurisdictions may not be as extensive as the protection in
the United States.
  8
  The following table summarizes our
trademark registrations and applications:
  Mark
                Application
      Number
                Registration
      Number
                Status/Next
      ActionMOBILE911
                75/615,118
                2,437,673
                RegisteredMOBILE911
      SIREN WITH 2-WAY VOICE
                  COMMUNICATION
      & DESIGN
                76/013,886
                2,595,328
                RegisteredWHEN
      EVERY SECOND MATTERS
                76/319,759
                2,582,183
                RegisteredMOBILEPAL
                78/514,031
                3,035,577
                RegisteredHOMEPAL
                78/514,093
                3,041,055
                RegisteredPAL
      SERVICES
                78/514,514
                3,100,192
                RegisteredREMOTEMDX
                78/561,796
                pending
                Allowed-Awaiting
      Statement of UseTRACKERPALTM
                78/843,035
                3,345,878
                RegisteredMOBILE911
                78/851,384
                3,212,937
                RegisteredTRACKERPALTM
                CA
      1,315,487
                pending
                PendingTRACKERPALTM
                MX
      805,365
                960954
                Registered
 
 Patents. We have five
patents in the United States and one patent in China.  In addition, we
have seven patents pending in the United States and ten pending internationally.
The following tables contain information regarding our patents and patent
applications; there can be no assurance given that the applications will be
granted or that they will, if granted, contain all of the claims currently
included.
 
 
 Domestic
      Patents:Patent
      Title
                Application/Patent
      Number
                Filing/Issue
      Dates
                StatusRemote
      Tracking and Communication Device
                7,330,122
                2/12/08
                IssuedRemotely
      Controllable Thermostat
                6,260,765
                7/17/01
                IssuedInterference
      Structure for Emergency Response System Wristwatch
                6,366,538
                4/2/02
                IssuedMultiple
      Emergency Response Services Combination Emergency Phone and Personal Audio
      Device
                6,285,867
                9/4/01
                IssuedRemote
      Tracking System and Device with Variable Sampling
                11/486,991
                6/9/09
                IssuedAlarm
      and Alarm Management System for Remote Tracking Devices
                11/489,992
                7/14/06
                PendingA
      Remote Tracking Device and a System and Method for Two-Way Voice
      Communication Between Device and a Monitoring Center
                11/486,989
                7/14/06
                PendingA
      Remote Tracking System with a Dedicated Monitoring Center
                11/486,976
                7/14/06
                PendingMethods
      for Establishing Emergency Communications Between a Communications Device
      and a Response Center
                11/830,398
                7/30/07
                PendingRemote
      Tracking and Communications Device
                12/028,088
                2/8/08
                PendingA
      System and Method for Monitoring Individuals Using a Beacon and
      Intelligent Remote Tracking Device
                US
      61/034,720
                3/7/08
                PendingBeacon
                12/394.151
                9/2009
                Pending
  9
 
 International
      Patents:Patent
      Title
                Application/Patent
      Number
                Filing/Issue
      Dates
                StatusEmergency
      Phone with Single-Button Activation
                ZL
      01807350.6
                10/5/05
                IssuedRemote
      Tracking and Communication Device
                Brazil
      PI0614742.9
                8/4/06
                PendingRemote
      Tracking and Communication Device
                Canada
      2617923
                8/4/06
                PendingRemote
      Tracking and Communication Device
                Europe
      06836098.1
                8/4/06
                PendingRemote
      Tracking and Communication Device
                Mexico
      a/2008/001932
                8/4/06
                PendingEmergency
      Phone with Single-Button Activation
                EP
      01924386.4
                3/28/01
                PendingEmergency
      Phone with Single-Button Activation
                JP
      2001-571568
                3/28/01
                PendingAlarm
      and Alarm Management System for Remote Tracking Devices
                PCT/US2007/072736
                7/3/07
                PendingA
      Remote Tracking Device and a System and Method for Two-Way Communication
      Between the Device and a Monitoring Center
                PCT/US2007/072740
                7/3/07
                PendingA
      Remote Tracking System with a Dedicated Monitoring Center
                PCT/US2007/072743
                7/3/07
                PendingRemote
      Tracking System and Device with Variable Sampling and Sending Capabilities
      Based on Environmental Factors
                PCT/US2007/072746
                7/3/07
                Pending
 
 During
the year ended September 30, 2008, we reacquired Patent Number 6,366,538 which
was previously sold in exchange for Patent Number 7,092,695 and Patent Number
7,251,471.  Patent Number 6,226,510 and Patent Number 6,044,257 were
originally sold subject to terminal disclaimers requiring common ownership with
patents owned (Patent Number 7,092,695 and Patent Number 7,251,471) by RemoteMDx
but not assigned to purchaser.  A terminal disclaimer is used to link
two patents filed by the same inventors and claiming the same
invention.  In order to get the additional patent rights desired by
the purchaser, the two patents are linked using a terminal disclaimer that
specifies that they have the same term and must be commonly
assigned.
 
 We intend
to protect our legal rights concerning intellectual property by all appropriate
legal action. Consequently, we may become involved from time to time in
litigation to determine the enforceability, scope, and validity of any of the
foregoing proprietary rights. Any patent litigation could result in substantial
cost and divert the efforts of management and technical personnel.
 
 Trade
Secrets.  We own certain intellectual property, including trade
secrets that we seek to protect, in part, through confidentiality agreements
with employees and other parties, although some employees who are involved in
research and development activities have not entered into these agreements. Even
where these agreements exist, there can be no assurance that these agreements
will not be breached, that we would have adequate remedies for any breach, or
that our trade secrets will not otherwise become known to or independently
developed by competitors.
 
 Seasonality
 
 Given the
continued and steady increase in revenues throughout 2009, no apparent
seasonality, if it existed, could be detected.  However, as in
previous years, incremental deployment opportunities were found to be slower in
the months of July and August. This was due to the unavailability of many
judges, probation directors and other key parole officials, who observe a
traditional vacation season.
 
 Backlog
 
 With the
transformation of our supply chain operations and manufacturing capabilities
during July through December 2009, the commercial availability of our newly
modified and enhanced TrackerPALTM IIe devices (now manufactured in the United
States) created an intermittent backlog of units.  Monthly backlogs
for organic growth and new account implementation have averaged 150 devices from
July through December 2009 as we have implemented and improved our internal
repair and refurbishment capabilities in conjunction with our new world-class
manufacturing partner and production capabilities at Inovar.
 
 We view
backlogs as undesirable, as they impair deployments, which necessarily reduces
revenue.  We continue to work on mitigating backlogs, maximizing
demand fulfillment, and capitalizing on all available opportunities to secure
recurring revenue streams.  In a significant development after
September 30, 2009, we authorized the initial manufacture of our first 3,000
TrackerPALTM IIe units, which we began delivering in mid-December 2009 and expect
to continue to deliver over the next few months. We will use these units to
replace any remaining TrackerPALTM I units, as well as to support growth in
existing accounts and in support of new domestic and international
opportunities.
  10
  Environment
  We are
not aware of any instance in which we have contravened federal, state, or local
laws relating to protection of the environment or in which we otherwise may be
subject to liability for environmental conditions that could materially affect
operations.
  Employees
  As of
December 11, 2009, we had 170 full time employees and 35 part-time
employees.  None of the employees are represented by a labor union or
subject to a collective bargaining agreement.  We have never
experienced a work stoppage and management believes that the relations with
employees are good.
  Additional
Available Information
  We
maintain our principal executive offices and facilities at 150 West Civic Center
Drive, Suite 400, Sandy, Utah 84070.  Our telephone number is
(801) 451-6141. We maintain a World Wide Web site at
www.remotemdx.com.  Reference to our website is not intended to
incorporate information on our web site as part of this report on
Form 10-K. We make available, free of charge at our corporate web site,
copies of our annual reports filed with the Securities and Exchange Commission
(“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy statements, and all amendments to these reports, as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act. We also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement
and Annual Report at no charge to investors upon request.
  All
reports filed by RemoteMDx with the SEC are available free of charge via EDGAR
through the SEC website at www.sec.gov. In addition, the public may read and
copy materials we have filed with the SEC at the SEC's public reference room
located at 450 Fifth St., N.W., Washington, D.C.
20549.
  Item 1A.    Risk
Factors
  We have identified the following
important factors that could cause actual results to differ materially from
those projected in any forward looking statements we may make from time to time.
We operate in a continually changing business environment in which new risk
factors emerge from time to time. We can neither predict these new risk factors,
nor can we assess the impact, if any, of these new risk factors on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those projected in any forward looking
statement. If any of these risks, or combination of risks, actually occurs,
our business, financial condition and results of operations could be seriously
and materially harmed, and the trading price of our common stock could
decline.
  The financial
statements contained in this annual report on Form 10-K for the fiscal year
ended September 30, 2009 have been prepared on the basis that we will continue
as a going concern, notwithstanding the fact that our financial performance and
condition during the past few years raise substantial doubt as to our ability to
do so. There is no assurance we will ever be profitable.In fiscal
year 2009, we incurred a net loss of $23,081,500, negative cash flows from
operating activities of $8,521,326, and as of September 30, 2009 have an
accumulated deficit of $205,765,496.  These factors raise substantial
doubt about our ability to continue as a going concern. The financial statements
included in this report do not include any adjustments that might result from
the outcome of this uncertainty.  Our plan with respect to this
uncertainty is to focus on increasing the number of TrackerPALTM devices in the
market place from which we will generate monitoring service
revenue.  There can be no assurance that revenues will increase
rapidly enough to offset operating losses and repay
indebtedness.  Likewise, there can be no assurance that the debt
holders will be willing to convert the debt obligations to equity securities or
that we will be successful in raising additional capital from the sale of equity
or debt securities.  If we are unable to increase cash flows from
operating activities or obtain additional financing, it will be unable to
continue the development of our products and will likely cease
operations.
 
 We have a history
of losses and anticipate significant future losses and may be unable to project
our revenues and expenses accurately.We will incur significant
expenses associated with the development and deployment of our new products and
promoting our brand. We intend to enter into additional arrangements through
current and future strategic alliances that may require us to pay consideration
in various forms and in amounts that may significantly exceed current estimates
and expectations.  We may also be required to offer promotional
packages of hardware and software to end-users at subsidized prices in order to
promote our brand, products and services. These guaranteed payments, promotions
and other arrangements will result in significant expense. If we do achieve
profitability, it cannot be certain that we will be able to sustain or increase
profitability in the future.  In addition, because of our limited
operating history in our newly targeted markets, we may be unable to project
revenues or expenses with any degree of certainty. Management expects expenses
to increase significantly in the future as we continue to incur significant
sales and marketing, product development and administrative
expenses.  We cannot guarantee that we will be able to generate
sufficient revenues to offset operating expenses or the costs of the promotional
packages or subsidies described above, or that we will be able to achieve or
maintain profitability. If revenues fall short of projections, our business,
financial condition and operating results would be materially adversely
affected.
  11
 
 General economic
conditions may affect our revenue and harm our business.  As widely
reported, financial markets in the United States, Europe and Asia have been
experiencing extreme disruption in recent months. Unfavorable changes in
economic conditions, including declining consumer confidence, inflation,
recession or other changes, may lead our customers to delay or reduce purchases
of our products and services, adversely affecting our results of operations and
financial condition. Challenging economic conditions also may impair the ability
of our customers or distributors to pay for products or services they have
purchased, and as a result, our reserves for doubtful accounts and write-offs of
accounts receivable could increase. Our cash flows may be adversely affected by
delayed payments or underpayments by our customers. We are unable to predict the
duration and severity of the current disruption in financial markets and adverse
economic conditions in the U.S. and other countries.
 
 As a result of
our increased focus on a new business market, our business is subject to many of
the risks of a new or start-up venture.The change in 2009 of our
business goals and strategy subjects us to the risks and uncertainties usually
associated with start-ups. Our business plan involves risks, uncertainties and
difficulties frequently encountered by companies in their early stages of
development.  If we are to be successful in this new business
direction, it must accomplish the following, among other things:
 
 ·
                Develop
      and introduce functional and attractive product and service
      offerings·
                Increase
      awareness of our brand and develop consumer loyalty·
                Respond
      to competitive and technological developments·
                Increase
      gross profit margins·
                Build
      an operational structure to support our business, and·
                Attract,
      retain and motivate qualified
personnel
 
 If we
fail to achieve these goals, that failure would have a material adverse effect
on our business, prospects, financial condition and operating
results.  Because the market for our product and service offerings is
new and evolving, it is difficult to predict with any certainty the size of this
market and its growth rate, if any.  There is no assurance that a
market for these products or services will ever develop or that demand for our
products and services will emerge or be sustainable. If the market fails to
develop, develops more slowly than expected or becomes saturated with
competitors, our business, financial condition and operating results would be
materially adversely affected.
 
 Groups own or
control a significant number of our outstanding
shares.Certain groups or persons associated with them
beneficially own a substantial number of shares of our outstanding common
stock.  As a result, these persons have the ability, acting as a
group, to effectively control our affairs and business, including the election
of our directors and, subject to certain limitations, approval or preclusion of
fundamental corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change of control or making other
transactions more difficult or impossible without their support.  See
Item 10 “Directors, Executive Officers and Corporate Governance,” and Item 12
“Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.”
 
 There is no
certainty that the market will accept our products and
services.Our targeted markets may never accept our products
or services.  Governmental organizations may not use our products
unless they determine, based on experience, advertising or other factors, that
those products are a preferable alternative to currently available methods of
tracking.  In addition, decisions to adopt new tracking devices can be
influenced by government administrators, regulatory factors, and other factors
largely outside our control.  No assurance can be given that key
decision-makers will accept our new products, which could have a material
adverse effect on our business, financial condition and results of
operations.
 
 Our relationship
with certain of our stockholders presents potential conflicts of interest, which
may result in decisions that favor them over our other
shareholders.Our principal beneficial owner and founder,
David Derrick, provides management and/or financial services and assistance to
us.  When his personal investment interests diverge from our
interests, he and his affiliates may exercise their influence in their own best
interests. Some decisions concerning our operations or finances may present
conflicts of interest between us and these stockholders and their affiliated
entities.
 
 We rely on
significant suppliers for key products and cellular access.  If
we do not renew these agreements when they expire we may not continue to
have access to these suppliers’ products or services at favorable prices or in
volumes as we have in the past, which would reduce revenues and could adversely
affect results of operations or financial condition. We have
entered into an agreement with a national cellular access company for cellular
services. We also rely currently on a single manufacturer for the manufacture of
our TrackerPALTM devices.  If any of these significant suppliers were
to cease providing product or services to us, we would be required to seek
alternative sources. There is no assurance that alternate sources could be
located or that the delay or additional expense associated with locating
alternative sources for these products or services would not materially and
adversely affect our business and financial condition.
  12
 
 Our business
subjects our research, development and ultimate marketing activities to current
and possibly to future government regulations. The cost of compliance or the
failure to comply with these regulations could adversely affect our business,
results of operations and financial condition.Our monitoring device
products are not subject to specific approvals from any governmental agency,
although our products using cellular and GPS technologies must be manufactured
in compliance with applicable rules and regulations of the Federal
Communications Commission (“FCC”).  There can also be no assurance that
changes in the legal or regulatory framework or other subsequent developments
will not result in limitation, suspension or revocation of regulatory approvals
granted to us. Any such events, were they to occur, could have a material
adverse effect on our business, financial condition and results of
operations.  We may be required to comply with FCC regulations for
manufacturing practices, which mandate procedures for extensive control and
documentation of product design, control and validation of the manufacturing
process and overall product quality. Foreign regulatory agencies have similar
manufacturing standards. Any third parties manufacturing our products or
supplying materials or components for such products may also be subject to these
manufacturing practices and mandatory procedures. If we, our management or our
third-party manufacturers fail to comply with applicable regulations regarding
these manufacturing practices, we could be subject to a number of sanctions,
including fines, injunctions, civil penalties, delays, suspensions or
withdrawals of market approval, seizures or recalls of product, operating
restrictions and, in some cases, criminal prosecutions.  Our products
and related manufacturing operations may also be subject to regulation,
inspection and licensing by other governmental agencies, including the
Occupational Health and Safety Administration.
 
 We face intense
competition, including competition from entities that are more established and
may have greater financial resources than we do, which may make it difficult for
us to establish and maintain a viable market presence.Our
current and expected markets are rapidly changing.  Existing products
and services and emerging products and services will compete directly with the
products we are seeking to develop and market.  Our technology will
compete directly with other technology, and, although we believe our technology
has or will have advantages over these competing systems, there can be no
assurance that our technology will have advantages that are significant enough
to cause users to adopt its use.  Competition is expected to
increase.  Many of these competitors have products or techniques
approved or in development and operate large, well-funded research and
development programs in the field.  Moreover, these companies and
institutions may be in the process of developing technology that could be
developed more quickly or be ultimately more effective than our planned
products.  We face competition based on product efficacy, availability
of supply, marketing and sales capability, price and patent
position.  There can be no assurance that our competitors will not
develop more effective or more affordable products, or achieve earlier patent
protection or product commercialization.
 
 Our business plan
is subject to the risks of technological uncertainty, which may result in our
products failing to be competitive or readily accepted by our target
markets.We may not realize revenues from the sale of any of
our new products or services for several years, if at all.  Some of
the products we are currently evaluating likely will require further research
and development efforts before they can be commercialized. There can be no
assurance that our research and development efforts will be successful or that
we will be successful in developing any commercially successful
products.  In addition, the technology which we integrate or that we
may expect to integrate with our product and service offerings is rapidly
changing and developing.  We face risks associated with the
possibility that our technology may not function as intended and the possible
obsolescence of our technology and the risks of delay in the further development
of our own technologies. Cellular coverage is not uniform throughout our current
and targeted markets and GPS technology depends upon “line-of-sight” access to
satellite signals used to locate the user.  This limits the
effectiveness of GPS if the user is in the lower floors of a tall building,
underground or otherwise located where the signals have difficulty
penetrating.  Other difficulties and uncertainties normally associated
with new industries or the application of new technologies in new or existing
industries also threaten our business, including the possible lack of consumer
acceptance, difficulty in obtaining financing for untested technologies,
increasing competition from larger or smaller well-funded competitors, advances
in competing or other technologies, and changes in laws and regulations
affecting the development, marketing or use of our new products and related
services.
 
 Our business plan
anticipates significant growth through monitoring revenues and acquisitions. To
manage the expected growth we will require capital and there is no assurance it
will be successful in obtaining necessary additional
funding.If we are successful in implementing our business
plan, we may be required to raise additional capital to manage anticipated
growth.  Our actual capital requirements will depend on many factors,
including but not limited to, the costs and timing of our ongoing development
activities the success of our development efforts, the cost and timing of
establishing or expanding our revenues, marketing and manufacturing activities,
the extent to which our products gain market acceptance, our ability to
establish and maintain collaborative relationships, competing technological and
market developments, the progress of our commercialization efforts and the
commercialization efforts of our marketing alliances, the costs involved in
preparing, filing, prosecuting, maintaining and enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory issues, and other factors, including many that are outside our
control. To satisfy our capital requirements, we may seek to raise funds through
public or private financings, collaborative relationships or other arrangements.
Any arrangement that includes the issuance of equity securities or securities
convertible into our equity securities may be dilutive to stockholders
(including the purchasers of the shares), and debt financing, if available, may
involve significant restrictive covenants that limit our ability to raise
capital in other transactions. Collaborative arrangements, if necessary to raise
additional funds, may require that we relinquish or encumber our rights to
certain of our technologies, products or marketing territories.  Any
inability or failure to raise capital when needed could also have a material
adverse effect on our business, financial condition and results of operations.
There can be no assurance that any such financing, if required, will be
available on terms satisfactory to us, if at all.
  13
 
 Our products are
subject to the risks and uncertainties associated with the protection of
intellectual property and related proprietary rights.We
believe that our success depends in part on our ability to obtain and enforce
patents, maintain trade secrets and operate without infringing on the
proprietary rights of others in the United States and in other
countries.  We have received several patents; we have also applied for
several additional patents and those applications are awaiting action by the
U.S. Patent Office.  There is no assurance those patents will issue or
that when they do issue they will include all of the claims currently included
in the applications.  Even if they do issue, those new patents and our
existing patents must be protected against possible infringement.  The
enforcement of patent rights can be uncertain and involve complex legal and
factual questions.  The scope and enforceability of patent claims are
not systematically predictable with absolute accuracy.  The strength
of our own patent rights depends, in part, upon the breadth and scope of
protection provided by the patent and the validity of our patents, if
any.  Our inability to obtain or to maintain patents on our key
products could adversely affect our business.  We own five patents and
have filed and intend to file additional patent applications in the United
States and in key foreign jurisdictions relating to our technologies,
improvements to those technologies and for specific products we may
develop.  There can be no assurance that patents will issue on any of
these applications or that, if issued, any patents will not be challenged,
invalidated or circumvented.  The prosecution of patent applications
and the enforcement of patent rights are expensive, and the expense may
adversely affect our profitability and the results of our
operations.  In addition, there can be no assurance that the rights
afforded by any patents will guarantee proprietary protection or competitive
advantage.  Our success will also depend, in part, on our ability to
avoid infringing the patent rights of others.  We must also avoid any
material breach of technology licenses we may enter into with respect to our new
products and services.  Existing patent and license rights may require
us to alter the designs of our products or processes, obtain licenses or cease
certain activities.  In addition, if patents have been issued to
others that contain competitive or conflicting claims and such claims are
ultimately determined to be valid and superior to our own, we may be required to
obtain licenses to those patents or to develop or obtain alternative
technology.  If any licenses are required, there can be no assurance
that we will be able to obtain any necessary licenses on commercially favorable
terms, if at all.  Any breach of an existing license or failure to
obtain a license to any technology that may be necessary in order to
commercialize our products may have a material adverse impact on our business,
results of operations and financial condition.  Litigation that could
result in substantial costs may also be necessary to enforce patents licensed or
issued to us or to determine the scope or validity of third-party proprietary
rights.  If our competitors prepare and file patent applications in
the United States that claim technology also claimed by us, we may have to
participate in proceedings declared by the U.S. Patent and Trademark Office to
determine priority of invention, which could result in substantial costs, even
if we eventually prevail.  An adverse outcome could subject us to
significant liabilities to third parties, require disputed rights to be licensed
from third parties or require that we cease using such technology.
 
 We also
rely on trade secrets laws to protect portions of our technology for which
patent protection has not yet been pursued or is not believed to be appropriate
or obtainable.  These laws may protect us against the unlawful or
unpermitted disclosure of any information of a confidential and proprietary
nature, including but not limited to our know-how, trade secrets, methods of
operation, names and information relating to vendors or suppliers and customer
names and addresses.  We intend to protect this unpatentable and
unpatented proprietary technology and processes, in addition to other
confidential and proprietary information in part, by entering into
confidentiality agreements with employees, collaborative partners, consultants
and certain contractors.  There can be no assurance that these
agreements will not be breached, that we will have adequate remedies for any
breach, or that our trade secrets and other confidential and proprietary
information will not otherwise become known or be independently discovered or
reverse-engineered by competitors.
 
 We have had and
will continue to have significant capital needs and there is no assurance we
will be successful in obtaining necessary additional funding.Our actual
capital requirements will depend on many factors, including but not limited to,
the costs and timing of our ongoing development activities, the success of our
development efforts, the cost and timing of establishing or expanding our sales,
marketing and manufacturing activities, the extent to which our products gain
market acceptance, our ability to establish and maintain collaborative
relationships, competing technological and market developments, the progress of
our commercialization efforts and the commercialization efforts of our marketing
alliances, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing and defending patent claims and other intellectual property rights,
developments related to regulatory issues, and other factors, including many
that are outside our control. To satisfy our capital requirements, we may seek
to raise funds through public or private financings, collaborative relationships
or other arrangements. Any arrangement that includes the issuance of equity
securities or securities convertible into our equity securities may be dilutive
to stockholders (including the purchasers of the shares), and debt financing, if
available, may involve significant restrictive covenants that limit our ability
to raise capital in other transactions. Collaborative arrangements, if necessary
to raise additional funds, may require that we relinquish or encumber our rights
to certain of our technologies, products or marketing
territories.  Any inability or failure to raise capital when needed
could also have a material adverse effect on our business, financial condition
and results of operations. There can be no assurance that any such financing, if
required, will be available on terms satisfactory to us, if at
all.
  14
 
 Penny stock
regulations may impose certain restrictions on marketability of our
securities.The SEC has adopted
regulations which generally define a “penny stock” to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions.  As
a result, our common stock is subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with their spouse).  For transactions covered by these rules,
the broker-dealer must make a special suitability determination for the purchase
of such securities and have received the purchaser’s written consent to the
transaction prior to the purchase.  Additionally, for any transaction
involving a penny stock, unless exempt, the rules require the delivery, prior to
the transaction, of a risk disclosure document mandated by the SEC relating to
the penny stock market.  The broker-dealer must also disclose the
commission payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer’s
presumed control over the market.  Finally, monthly statements must be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.  Consequently,
the “penny stock” rules may restrict the ability of broker-dealers to sell our
securities and may affect the ability of investors to sell our securities in the
secondary market and the price at which such purchasers can sell any such
securities.
 
 Investors
should be aware that, according to the SEC, the market for penny stocks has
suffered in recent years from patterns of fraud and abuse.  Such
patterns include:
 
 ·
                Control
      of the market for the security by one or a few broker-dealers that are
      often related to the promoter or
issuer
 ·
                Manipulation
      of prices through prearranged matching of purchases and sales and false
      and misleading press releases
 ·
                “Boiler
      room” practices involving high pressure sales tactics and unrealistic
      price projections by inexperienced sales
persons
 ·
                Excessive
      and undisclosed bid-ask differentials and markups by selling
      broker-dealers, and
 ·
                The
      wholesale dumping of the same securities by promoters and broker-dealers
      after prices have been manipulated to a desired level, along with the
      inevitable collapse of those prices with consequent investor
      losses.
 
 Our
management is aware of the abuses that have occurred historically in the penny
stock market.
 
 Our board of
directors may authorize the issuance of preferred stock and designate rights and
preferences that will dilute the ownership and voting interests of existing
stockholders without their approval.  Our Articles of
Incorporation authorize us to issue up to 20,000,000 shares of preferred stock,
at par value $0.0001. The board of directors is authorized to determine the
rights and preferences of any series or class of preferred stock. The board of
directors may, without stockholder approval, issue shares of preferred stock
with dividend, liquidation, conversion, voting or other rights which are senior
to the common stock or which could adversely affect the voting power or other
rights of the existing holders of outstanding shares of preferred stock or
common stock. Additionally, the issuance of preferred stock may have the effect
of decreasing the market price of the common stock and may adversely affect the
voting power of holders of common stock and reduce the likelihood that common
stockholders will receive dividend payments and payments upon liquidation. The
issuance of additional shares of preferred stock may also adversely affect an
acquisition or change in control of the Company.
 
 Subsequent
to the year ended September 30, 2009, the board of directors designated 50,000
shares of preferred stock as our Series D Preferred stock.  Each share
of Series D Preferred stock is convertible into 6,000 shares of common
stock.  Holders of the Series D Preferred stock may vote their shares
on an as-converted basis on any issue presented for a vote of the stockholders,
including the election of directors and the approval of certain transactions
such as a merger or other business combination of the Company.  In
addition, on the issues of an increase in the number of shares of common stock
the Company is authorized to issue and on the proposal of a reduction in the
number of issued and outstanding shares (a reverse split) of the Company’s
common stock, holders of the Series D Preferred stock may vote as a class
holding the equivalent of 60 percent of the issued and outstanding shares of the
common stock, regardless of the number of shares then outstanding.  As
of the date of this report, there were 25,186 shares of Series D Preferred stock
outstanding.  As a consequence of these voting rights, the holders of
the Series D Preferred stock may exercise control over these issues regardless
of the interests of the remaining stockholders.
 
 Item 2.    Properties
 
 Our
headquarters and monitoring facility are housed in 8,106 square feet of space
located at 150 West Civic Center Drive, Sandy, Utah.  Monthly lease
payments are approximately $16,200. This lease expires on November 30,
2013.  In addition, we signed an additional lease to provide 6,152
square feet of warehousing and pallet shipping functions and capabilities in a
facility located at 9716 South 500 West, Sandy, Utah 84070.  Monthly
lease payments are approximately $5,300.  Management believes that
these facilities are sufficient to meet our needs for the foreseeable future.
  15
  Item 3.    Legal
Proceedings
 
 Satellite Tracking of
People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech
Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent
infringement suit was filed against the Company and other defendants in the
United States District Court for the Eastern District of Texas on March 19,
2008.  Plaintiffs have alleged that the defendants infringe United States
Patent No. RE39,909 ('909 Patent), Tracking System for Locational
Tracking of Monitored Persons.  On May 14, 2008, the Company
answered the complaint, denying Plaintiffs’ allegations and asserting various
affirmative defenses. The Company also asserted a counterclaim for declaratory
judgment that the Company has not infringed the '909 Patent and that the patent
is invalid. On February 17, 2009 the United States Patent and Trademark Office
("USPTO") granted a request for reexamination of the '909 Patent.  The
USPTO is now in the process of reexamining the claims of the '909 Patent. Briefs
have been submitted on the issue of claim construction, and the case is
currently in discovery. The Markmanhearing is scheduled
for May of 2011, and trial is set for late 2011. We have not accrued any
potential loss as the probability of incurring a material loss is deemed remote
by management, after consultation with legal counsel.
 
 RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company filed a
patent infringement suit against STOP in the United States District Court for
the Central District of California on May 2, 2008.  The Company has
asserted that STOP infringes United States Patent No. 7,330,122 for a remote
tracking and communication device and method for processing data from the device
("'122 patent"), in which the Company holds all rights and interests.  STOP
moved to dismiss the original complaint and also filed an answer and
counterclaim.  The motion to dismiss was granted with leave to amend. 
The Company filed an amended complaint on August 5, 2008.  The amended
complaint seeks damages for infringement according to proof, treble damages,
injunctive relief enjoining the infringement, and costs and attorney's
fees.  STOP's counterclaim is for declaratory relief, seeking a declaration
that STOP has not infringed the '122 patent and that the '122 patent is invalid.
The Company filed an answer to the counterclaim. STOP subsequently filed a
motion for summary judgment of non-infringement, which was
denied.  STOP’s subsequent motion for reconsideration was also
denied.  The parties are currently working on claim construction and
discovery issues.  The Markmanhearing is currently
set for March of 2010.  No trial date has yet been set.  The
Company intends to vigorously prosecute its claims and defend against the
counterclaim.
 
 Frederico and Erica
Castellanos, v. Volu-Sol, Inc.  On August 15, 2008, plaintiffs
Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the
State of California, Los Angeles County.  The complaint names
twenty-four defendants and one hundred unnamed Doe defendants.  The
complaint asserts claims for negligence, strict liability - failure to warn,
strict liability - design defect, fraudulent concealment, breach of implied
warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to
certain chemicals during the course of his employment.  One of the
original named defendants was Logos Scientific, Inc.  On September 4,
2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as
successor in interest to Logos Scientific, Inc." for the previously unnamed Doe
1.  “Volu-Sol, Inc.” was the original corporate name of RemoteMDx,
Inc.  We intend to vigorously defend against Castellanos’
claims.  We have not accrued any potential loss as the probability of
incurring a material loss is deemed remote by management, after consultation
with legal counsel.
 
 SecureAlert, v. David Ezell,
et al.  We have filed a claim against David Ezell and several
related entities for breach of contract, unjust enrichment, conversion, and
punitive damages, and seek approximately $290,810 in damages, as well as other
amounts to be proven at trial.  The case is in the discovery
stage.  After consultation with legal counsel, we have not accrued for
any potential recovery or any material loss associated with this
claim.
 
 Informal
Inquiry.  As voluntarily disclosed in our prior reports filed
with the SEC commencing with our quarterly report for the fiscal quarter ended
March 31, 2008, we were advised by letter from the SEC, Salt Lake District
Office in March 2008, that the SEC had begun an informal inquiry regarding
us.  The SEC has advised us in its correspondence that this informal
inquiry should not be construed as an indication that any violation of law has
occurred, nor should it be considered a reflection upon any person, entity, or
security.  There were no material developments in this matter during
the fiscal year ended September 30, 2009.
  Item 4.    Submission of Matters to
a Vote of Security Holders
  No
matters were submitted to a vote of our stockholders during the fiscal quarter
ended September 30, 2009.
  16
 
 PART
II
  Item 5.    Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
  Market
Information
 
 Our
common stock is traded on the OTC Bulletin Board under the symbol
“RMDX.OB.”
 
 The
following table sets forth the range of high and low bid prices of our common
stock as reported on the OTC Bulletin Board for the periods
indicated.  The sales information is available online at http://otcbb.com.
 
 High
                
                
                LowFiscal
      Year
                  Ended September 30,
      2008First
      Quarter
                
                $
                4.22
                
                
                $
                2.72Second
      Quarter
                
                $
                4.09
                
                
                $
                1.00Third
      Quarter
                
                $
                1.84
                
                
                $
                1.47Fourth
      Quarter
                
                $
                1.52
                
                
                $
                1.11Fiscal
      Year
                  Ended September 30,
      2009First
      Quarter
                
                $
                1.20
                
                
                $
                0.18Second
      Quarter
                
                $
                0.27
                
                
                $
                0.10Third
      Quarter
                
                $
                0.26
                
                
                $
                0.14Fourth
      Quarter
                
                $
                0.20
                
                
                $
                0.11
 
 Holders
 
 As of
December 23, 2009, there were approximately 3,500 holders of record of our
common stock and 211,765,988 shares of common stock outstanding. We also have
granted options and warrants for the purchase of approximately 25,248,165 shares
of common stock.  As discussed elsewhere in this report, we may be
required to issue additional shares of common stock or preferred stock to pay
accrued dividends, or to comply with anti-dilution adjustments to the conversion
rights of former preferred stockholders.
 
 Dividends
 
 Since
incorporation, we have not declared any cash dividends on our common
stock.  We do not anticipate declaring cash dividends on our common
stock for the foreseeable future.  To date all shares of preferred
stock have converted into shares of common stock and all dividends have been
paid by issuance of preferred stock.  During the fiscal years ended
September 30, 2009 and 2008, we recorded $175 and $345,356 in stock dividends,
respectively.
 
 Dilution
 
 The board
of directors determines when and under what conditions and at what prices to
issue stock.  In addition, a significant number of shares of common
stock are reserved for issuance upon exercise of purchase or conversion
rights.
 
 The
issuance of any shares of common stock for any reason will result in dilution of
the equity and voting interests of existing stockholders.
 
 Transfer
Agent and Registrar
 
 The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, 59 Maiden Lane, Plaza Level, New York, NY
11219.
 
 Authorized
Capital to be Increased
 
 As of
September 30, 2009, we were authorized to issue 250,000,000 shares of common
stock.  We intend to seek stockholder approval by written consent of
the holders of a majority of the issued and outstanding shares of our common
stock to increase the authorized shares from 250,000,000 to
600,000,000.  If consent is obtained, we will file Amended Articles of
Incorporation to effect the increase in the number of authorized shares as soon
as reasonably practical.
 
 Securities
Authorized for Issuance under Equity Compensation Plans
 
 The
following table sets forth information as of September 30, 2009, our most
recently completed fiscal year, with respect to compensation plans (including
individual compensation arrangements) under which equity securities are
authorized for issuance.  No equity securities have been authorized
for issuance under plans that were not previously approved by security
holders.
  Equity
Compensation Plan Information
  Plan
      category
                
                Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                
                Weighted
      average exercise price of outstanding options, warrants and
      rights
                
                Number
      of securities remaining available for future issuanceEquity
      compensation plans approved by security holders
                
                10,000,000
                
                $1.06
                
                7,487,286
  17
  The
2006 RemoteMDx, Inc. Stock Incentive Plan
  On July 10, 2006, the board of
directors approved the 2006 RemoteMDx, Inc Stock Incentive Plan (“2006 Plan”).
The stockholders approved the 2006 Plan on July 10, 2006. Under the 2006 Plan,
we may issue stock options, stock appreciation rights, restricted stock awards
and other incentives to our employees, officers and directors. The 2006 Plan
provides for the award of incentive stock options to our key employees and
directors and the award of nonqualified stock options, stock appreciation
rights, bonus rights, and other incentive grants to employees and certain
non-employees who have important relationships with us or our subsidiaries. A
total of 10,000,000 shares are authorized for issuance pursuant to awards
granted under the 2006 Plan.  During the fiscal years ended September
30, 2009 and 2008, 1,517,714 and 1,725,000 options were granted under this plan
to employees, respectively.
 
 Recent
Sales of Unregistered Securities
 
 During the two years ended September
30, 2009, we issued the following securities without registration under the
Securities Act of 1933, as amended (the “Securities Act”).
 
 Fiscal
Year 2008
 
 Shares Issued Pursuant to
Acquisitions
 
 650,000
shares valued at $2,599,500 were issued in December 2007 pursuant to
acquisitions.  The recipients of these shares represented in the
original acquisition agreements that they were accredited investors as defined
in Rule 501 under the Securities Act.  These shares of common stock
were issued without registration under the Securities Act in reliance on Section
4(2) of the Securities Act and the rules and regulations promulgated thereunder,
including Regulation D and Rule 506.  There were no non-accredited
investors involved in this transaction.
 
 Shares Issued in Connection
with Line of Credit Agreement
 
 360,000
shares were issued in March 2008 to certain entities who provided letters of
credit in connection with our line of credit with Citizen National Bank. These
shares of common stock were issued without registration under the Securities Act
in reliance on Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder.  The entities and their respective owners,
officers and directors were accredited investors. There were no non-accredited
investors involved in this issuance of shares.
 
 Shares Issued to Employees,
Consultants and Vendors for Products and Services
 
 6,710,000
shares valued at $10,552,300 were approved for issuance to certain of our
employees and officers for services rendered during fiscal year
2008.  Additionally, 1,000,000 shares of restricted common stock
valued at $1,520,000, or $1.52 per share were issued to an officer for deferred
compensation.  These shares of common stock were issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder.  The recipients of these shares were officers or employees
at the time of the issuance and each was an accredited investor.
 
 400,000
shares valued at $704,000 were issued in May 2008 to an independent consultant
for consulting services.  These consulting services consisted of
aiding in the settlement of a vendor dispute.  These shares of common
stock were issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and the rules and regulations promulgated
thereunder.
 
 1,025,000
shares valued at $3,068,285 were issued during fiscal year 2008 to seven
unaffiliated entities for product design services.  These shares of
common stock were issued without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder.
 
 Shares Issued in
Settlement
 
 325,000
shares valued at $572,000 were issued in May 2008 to Onyx Consulting Group
(“Onyx”) to settle amounts owed due to a public relations contract. These shares
of common stock were issued without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder.  These shares were issued pursuant to a
privately negotiated transaction in settlement of amounts owed or that may be
owed as royalty payments, and there was no public offering of
securities.  Onyx is an accredited investor.  No general
solicitation or general advertising was made or done in connection with the
issuance of the shares.
  18
 
 Shares Issued Upon the
Conversion of Preferred Stock
 
 15,000
shares of common stock were issued upon conversion of our Series B Preferred
stock in October 2007.  Each share of Series B Preferred stock is
convertible at any time into shares of common stock.  The number of
shares of common stock into which each share of Series B Preferred stock was
converted was determined by dividing the original purchase price paid per share
of Series B Preferred stock, namely $3.00, by the conversion
price.  These shares of common stock were issued without registration
under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder.  The recipients of the common shares were accredited
investors and were already security holders.  The common shares were
issued pursuant to the terms of the rights and preferences of the preferred
class of securities that were converted, and there was no public offering of
securities.  Additionally, no general solicitation or general
advertising was made or done in connection with the issuances, and no cash
consideration was paid in connection with the conversion of the preferred
stock.
 
 Shares Issued Upon the
Conversion of SecureAlert Series A Preferred Stock
 
 7,434,249
shares of common stock were issued upon redemption of SecureAlert Series A
Preferred stock in March 2008. In addition, 825,893 shares of common stock were
issued for SecureAlert Series A Preferred stock dividends.  These
shares of common stock were issued without registration under the Securities Act
in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and
regulations promulgated thereunder.  The shares of common stock were
issued to individuals who were already security holders and were issued pursuant
to the terms of the rights and preferences of the preferred class of securities
being converted.  These shares were issued pursuant to a privately
negotiated transaction.  There was no public offering of securities,
and no general solicitation or general advertising was made or done in
connection with the issuances.  No cash consideration was paid in
connection with the conversion of the preferred stock.
 
 Shares Issued on Revalue
Rights
 
 100,000
shares of common stock were issued as a penalty to Borinquen Container Corp.
(“Borinquen”) for our failure to register shares Borinquen purchased in a
private placement. These shares of common stock were issued without registration
under the Securities Act in reliance on Section 3(a)(9) and 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. Borinquen
represented that it was an accredited investor; in addition, Borinquen already
owned shares of our common stock at the time of this transaction.
 
 Shares Issued in Private
Placements
 
 In March and September 2008, 6,077,219
shares were issued to Futuristic, Advance Technology Investors, LLC, and
Borinquen for gross proceeds of $5,057,914 in cash in a private placement of
common stock. The initial issuance of the shares of common stock and the
warrants were effected without registration under the Securities Act in reliance
on Section 4(2) of the Securities Act and the rules and regulations promulgated
thereunder.  Each investor signed a purchase agreement in which the
investor made representations that included being an accredited investor, and
purchasing for the investor’s own account and not with a view to distribute the
shares.  There was no public offering of securities.  No
general solicitation or general advertising was made or done in connection with
the issuance, and the shares and warrants were issued in paper certificate form,
with appropriate restrictive legends prominently affixed on the
certificates.
 
 Shares Issued Upon Exercise
of Warrants
 
 3,618,814 shares were issued upon the
exercise of options and warrants between October 2007 and September
2008.  The exercise prices ranged from $0.54 to $1.73 per
share.  The warrants had been granted in connection with services
rendered.  These shares of common stock were issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder.
  Fiscal
Year 2009
  Shares Issued Pursuant to
Acquisitions
  2,857,286
shares valued at $657,176 were issued in January 2009 pursuant to an acquisition
of Bishop Rock Software.  The recipients of these shares represented
in the original acquisition agreements that they were accredited investors as
defined in Rule 501 under the Securities Act.  These shares of common
stock were issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and the rules and regulations promulgated
thereunder, including Regulation D and Rule 506.  There were no
non-accredited investors involved in this issuance.
 
 150,000
shares valued at $19,500 were issued in March 2009 pursuant to an agreement to
extend an option to purchase the remaining 49% ownership of Midwest
Monitoring.
  19
  Shares Issued in Connection
with Debt
  100,000
shares were issued in November 2008 to a related-party for entering into a
promissory note with us. These shares of common stock were issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. The
entities and their respective owners, officers and directors were accredited
investors. There were no non-accredited investors involved in this issuance of
shares.
  4,506,750
shares were issued during the fiscal year ended September 30, 2009 to 13
entities in connection with the issuance of Series A 15% debentures for cash
proceeds of $4,496,750. These shares of common stock were issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. The
entities and their respective owners, officers and directors were accredited
investors. There were no non-accredited investors involved in this issuance of
shares.
  3,549,630
shares were issued in March 2009 to six entities in connection with the issuance
of Senior Secured Convertible notes. These shares of common stock were issued
without registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated thereunder. The
entities and their respective owners, officers and directors were accredited
investors. There were no non-accredited investors involved in this issuance of
shares.
  8,000,000
shares were issued in July 2009 for additional consideration to enter into a
promissory note and to resolve prior investments. These shares of common stock
were issued without registration under the Securities Act in reliance on Section
4(2) of the Securities Act and the rules and regulations promulgated thereunder.
The entities and their respective owners, officers and directors were accredited
investors. There were no non-accredited investors involved in this issuance of
shares.
  9,796,636
shares were issued in January 2009 for additional consideration to enter into a
debenture and to resolve prior investments. These shares of common stock were
issued without registration under the Securities Act in reliance on Section 4(2)
of the Securities Act and the rules and regulations promulgated thereunder. The
entities and their respective owners, officers and directors were accredited
investors. There were no non-accredited investors involved in this issuance of
shares.
  Shares Issued to Employees,
Directors, and Consultants
  737,500
shares valued at $169,625 were issued to our employees and officers as
consideration for services rendered to us during fiscal year
2009.  These shares of common stock were issued without registration
under the Securities Act in reliance on Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder.
  400,000
shares valued at $120,000 were issued in March and August 2009 to directors from
the conversion of fees for services provided to us.  These shares of
common stock were issued without registration under the Securities Act in
reliance on Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder.
  2,875,000
shares valued at $639,250 were throughout the fiscal year to four unaffiliated
entities for legal and consulting services.  These shares of common
stock were issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and the rules and regulations promulgated
thereunder.
  Shares Issued to Settled
Lawsuits and Obligations
  1,200,000
shares valued at $240,000 were issued in February 2009 to Strategic Growth
International (“SGI”) to settle amounts owed due to a public relations contract.
These shares of common stock were issued without registration under the
Securities Act in reliance on Section 4(2) of the Securities Act and the rules
and regulations promulgated thereunder.  These shares were issued
pursuant to a privately negotiated transaction in settlement of amounts owed or
that may be owed as royalty payments, and there was no public offering of
securities.  SGI is an accredited investor.  No general
solicitation or general advertising was made or done in connection with the
issuance of the shares.
  2,000,000
shares valued at $240,000 were issued in March 2009 to Thomas Natale, Edward
Boling, and Boling Enterprises, LP (“Boling”) to settle amounts owed due to an
unresolved disputed debt. Natale and Boling were former officers of
SecureAlert.  These shares of common stock were issued without
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder.  These shares were issued pursuant to a privately
negotiated transaction in settlement of amounts owed or that may be owed as
royalty payments, and there was no public offering of
securities.  Boling is an accredited investor.  No general
solicitation or general advertising was made or done in connection with the
issuance of the shares.
  2,200,000
shares valued at $550,000 were issued in May 2009 to Fulbright and Jaworski, LLP
(“Fulbright”) to settle amounts owed for legal services. These shares of common
stock were issued without registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and the rules and regulations promulgated
thereunder.  These shares were issued pursuant to a privately
negotiated transaction in settlement of amounts owed or that may be owed as
royalty payments, and there was no public offering of
securities.  Fulbright is an accredited investor.  No
general solicitation or general advertising was made or done in connection with
the issuance of the shares.
  20
  Shares Issued Upon the
Conversion of Preferred Stock
  10,999
shares of common stock were issued upon conversion of our Series B Preferred
stock in February 2009.  Each share of Series B Preferred stock was
convertible at any time into shares of common stock.  The number of
shares of common stock into which each share of Series B Preferred stock was
converted was determined by dividing the original purchase price paid per share
of Series B Preferred stock, namely $3.00, by the conversion
price.  These shares of common stock were issued without registration
under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the
Securities Act and the rules and regulations promulgated
thereunder.  The recipients of the common shares were accredited
investors and were already our security holders.  The common shares
were issued pursuant to the terms of the rights and preferences of the preferred
class of securities that were converted, and there was no public offering of
securities.  Additionally, no general solicitation or general
advertising was made or done in connection with the issuances, and no cash
consideration was paid in connection with the conversion of the preferred
stock.
  9,306
shares of common stock were issued upon conversion of 19 shares of our Series A
Preferred stock in February 2009.  Each share of Series A Preferred
stock is convertible at any time into shares of common stock.  One
share of Series A Preferred stock may convert into 370 shares of common stock.
These shares of common stock were issued without registration under the
Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act
and the rules and regulations promulgated thereunder.  The recipients
of the common shares were accredited investors and were already our security
holders.  The common shares were issued pursuant to the terms of the
rights and preferences of the preferred class of securities that were converted,
and there was no public offering of securities.  Additionally, no
general solicitation or general advertising was made or done in connection with
the issuances, and no cash consideration was paid in connection with the
conversion of the preferred stock.
  Shares Issued in Private
Placements
  In
December 2008, March 2009, and May 2009, 17,850,000 shares were issued to
Solomon Tennenhaus, Kofler Ventures, and euromicron AG investors for $3,250,000
in cash in a private placement of common stock. The initial issuance of the
shares of common stock and the warrants were effected without registration under
the Securities Act in reliance on Section 4(2) of the Securities Act and the
rules and regulations promulgated thereunder.  Each investor signed a
purchase agreement in which the investor made representations to us that
included being an accredited investor, and purchasing for the investor’s own
account and not with a view to distribute the shares.  There was no
public offering of securities.  No general solicitation or general
advertising was made or done in connection with the issuance, and the shares and
warrants were issued in paper certificate form, with appropriate restrictive
legends prominently affixed on the certificates.
  During
the fiscal year ended September 30, 2009, we also cancelled 1,758,379 shares of
common stock previously issued in prior years.
  Item 7.   Management's Discussion and
Analysis of Financial Condition and Results of Operations
 
 The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader better
understand RemoteMDx, our operations and our present business
environment.  This MD&A is provided as a supplement to, and should
be read in conjunction with, our consolidated financial statements for the
fiscal years ended September 30, 2009 and 2008 and the accompanying notes
thereto contained in this report. This introduction summarizes MD&A, which
includes the following sections:
 
 ·
                Overview
      - a general description of our business and the markets in which we
      operate; our objectives; our areas of focus; and challenges and risks of
      our business.
 
 ·
                Recent
      Developments – a brief description of business developments occurring
      after the fiscal year ended September 30, 2009 and prior to the filing of
      this Report.
 
 ·
                Results
      of Operations - an analysis of our consolidated results of operations for
      the last two fiscal years presented in our consolidated financial
      statements.
 
 ·
                Liquidity
      and Capital Resources - an analysis of cash flows; off-balance sheet
      arrangements and aggregate contractual obligations; an overview of
      financial position; and the impact of inflation and changing
      prices.
 
 ·
                Critical
      Accounting Policies - a discussion of accounting policies that require
      critical judgments and
estimates.
  21
 
 We intend
for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements. The discussion also provides information about the
financial results of the two segments of our business to provide a better
understanding of how those segments and their results affect our financial
condition and results of operations as a whole.
 
 Overview
 
 RemoteMDx
and subsidiaries market and deploy offender management programs, combining
patented GPS (Global
Positioning System) tracking technologies, fulltime 24/7/365
intervention-based monitoring capabilities and case management
services.  Our vision is to be the market leader for delivering
offender management solutions that integrate interaction
technologies.  We believe that we currently deliver the only offender
management technology which integrates GPS, RF (Radio Frequency) and an
interactive 3-way voice communication system into a single device, deployable on
offenders worldwide.  Through our patented electronic monitoring
technologies and services, we empower law enforcement, corrections and
rehabilitation professionals with offender, defendant, probationer and parolee
programs, which grant convicted criminals and pre-trial suspects an accountable
opportunity to be “free from prison,” while providing for greater public safety
at a lower cost to incarceration or traditional resource-intensive
alternatives.
 
 TrackerPALTM
II and TrackerPALTM IIe (“enhanced”), now manufactured in the USA – The
TrackerPALTM portfolio of products, e-Arrest Beacons and monitoring services are
designed to create “Jails without Walls,” customizable by offender types (e.g.,
domestic abusers, sexual predators, gang members, pre-trial defendants, juvenile
offenders, etc.).  Additionally, our proprietary software and device
firmware support the dynamic accommodation of agency-established monitoring
protocols, victim protection imperatives, geographic boundaries, work
environments, school attendance, rehabilitation programs and sanctioned home
restrictions.  TrackerPALTM IIe is designed for federal, state and
local agencies to provide location tracking of select individuals in the
criminal justice system.  The TrackerPALTM IIe device fastens to the
offender's ankle with a tamper resistant strap (steel cabling with optic fiber)
that can only be adjusted or removed without detection by a supervising officer
through services provided by our SecureAlert Monitoring Center (or other
monitoring centers).  This monitoring and intervention center acts as
an important link between the offender and the supervising officer as
intervention specialists persistently track and monitor the offender, initiating
contact at the direction of the supervising agency and/or when the offender is
in violation of any established restrictions or protocols.  An
intelligent device with integrated computer circuitry and constructed from
case-hardened plastics, the TrackerPALTM IIe unit promptly notifies the
monitoring center if any attempt is made to breach protocols or to remove or
otherwise tamper with the device or optical strap housing.
 
 Recent
Developments
 
 Subsequent
to the fiscal year ended September 30, 2009, we entered into several material
transactions that are not reflected in the results of operations for fiscal year
2009, as follows:
 
 ·
                In
      October 2009, we issued 1,400,000 shares of common stock to several former
      holders of SecureAlert Series A Preferred to settle a dispute and an
      outstanding liability in connection with contingency payments due to the
      holders.
 ·
                On
      November 2, 2009, our board of directors designated 50,000 shares of
      authorized but previously undesignated and unissued preferred stock as
      Series D Convertible Preferred stock.  The shares accrue
      dividends at a rate of 8% per annum and may be paid in cash or additional
      shares of Series D Preferred stock. Subsequent to September 30, 2009, we
      issued 15,986 shares of Series D Convertible Preferred stock upon the
      conversion of $15,723,204 in debt, accrued liabilities and interest and an
      additional 12,200 shares from securities purchase agreements totaling
      $6,100,000 of which $4,600,000 has been received in cash as of the date of
      this Report, resulting in a total of 28,186 shares of Series D Preferred
      stock.
 
 Results
of Operations
 
 Fiscal
Year 2009 compared to Fiscal Year 2008
 
 [Note:
during the fiscal year ended September 30, 2008, we divested our subsidiary
ActiveCare. As a result, we now operate in one segment.  Unless
otherwise indicated, the results of operations for all periods in this Report
have been adjusted to reflect continuing operations only.  See Note
(2) – Discontinued Operations in our Consolidated Financial Statements included
in this Report.]
 Revenues
 
 During
the fiscal year ended September 30, 2009, we had net revenues of $12,625,908
compared to net revenues of $12,403,677 for the fiscal year ended September 30,
2008, an increase of $222,231 (2%).  Revenues from monitoring services
for the fiscal year ended September 30, 2009 totaled $12,055,159, compared to
$9,826,077 for the same period ended 2008, resulting in an increase of
$2,229,082 (23%). Revenues from product sales for the fiscal year ended
September 30, 2009 were $570,749, compared to $2,577,600 for the same period
ended 2008, resulting in a decrease of $2,006,851.  This decrease of
$2,006,851 is primarily due to a shift in focus to leasing monitoring equipment
instead of device sales.
  22
 
 During
the fiscal year ended September 30, 2009, our SecureAlert subsidiary provided
net revenues of $5,322,191 compared to net revenues of $7,333,659 during the
fiscal year ended September 30, 2008, a decrease of $2,011,468
(27%).  Revenues from monitoring services for the fiscal year ended
September 30, 2009 were $5,131,655, compared to $5,033,659 for the prior year,
resulting in an increase of $97,996 (2%). Revenues from product sales for the
fiscal year ended September 30, 2009 were $190,536, compared to $2,300,000 for
the fiscal year 2008, resulting in a decrease of $2,109,464.  This
decrease of $2,109,464 is primarily due to our focus on leasing monitoring
equipment instead of device sales.
 
 During
the fiscal year ended September 30, 2009, our Midwest Monitoring subsidiary
provided net revenues of $4,213,972 compared to net revenues of $2,799,914
during the fiscal year ended September 30, 2008, an increase of $1,414,058
(51%).  This increase is related to revenues in the amount of $514,744
that Midwest Monitoring recognized during the period from October 1, 2007
through November 30, 2007 that we were not required to
consolidate.  The remaining increase of $899,314 is related to an
increase of $86,288 in device sales and $813,026 of monitoring
services.
 
 During
the fiscal year ended September 30, 2009, our Court Programs subsidiary provided
net revenues of $3,086,335 compared to net revenues of $2,270,104 during the
fiscal year ended September 30, 2008, an increase of $816,231
(36%).  This increase is related to revenues in the amount of $540,935
that Court Programs recognized during the period from October 1, 2007 through
November 30, 2007 that we were not required to consolidate.  The
remaining increase is related to an increase of $275,296 in monitoring
services.
 
 On
January 14, 2009, we purchased Bishop Rock Software.  During the
fiscal year ended September 30, 2009, Bishop Rock Software had $3,410 of
revenue.
 
 Cost
of Revenues
 
 During
the fiscal year ended September 30, 2009, cost of revenues totaled $10,138,613,
compared to cost of revenues during the fiscal year ended September 30, 2008 of
$13,108,990, a decrease of $2,970,377 (23%).  The decrease in cost of
revenues resulted primarily from reduced communication and direct labor cost
initiatives, device cost of goods and software enhancements, offset by a minor
increase in equipment amortization.
 
 Communication
costs, $2,422,541 for the fiscal year ended September 30, 2009, primarily refers
to the costs associated with Subscriber Identity Modules
(“SIM”).  Embedded in each TrackerPALTM device is a SIM, which enables
the device to transfer voice and data information to a monitoring
center.  We incur a monthly charge for each SIM, regardless of whether
or not the associated device generates revenue because the SIM cards are ordered
and inserted into devices before the devices are sold or leased.
 
 Amortization,
$1,300,783 for the fiscal year ended September 30, 2009, is based on a
three-year useful life for TrackerPALTM devices.  Devices that are
leased or retained by us for future deployment or sale are amortized over three
years.  We believe this three-year life is appropriate due to rapid
changes in electronic monitoring technology and the corresponding potential for
obsolescence.  Management periodically assesses the useful life of the
devices for appropriateness.
 
 We expect
the cost of revenues as a percentage of revenues to decrease in the foreseeable
future due to (a) further attempts to lower communication costs, and (b) further
development of our proprietary software enabling each operator to monitor more
devices resulting in lower monitoring center costs.
 
 SecureAlert’s
cost of revenues totaled $5,583,841 (105% of SecureAlert net revenue) for the
fiscal year ended September 30, 2009 compared to $10,007,725 (136% of
SecureAlert net revenue) for the fiscal year ended September 30, 2008, a
decrease of $4,423,884 (44%).  This is related to decreases of
$1,626,018 in device costs, $521,716 in communication costs, $454,374 in
monitoring center costs, and $1,538,129 in other TrackerPALTM and miscellaneous
costs.
 
 Midwest
Monitoring’s cost of revenues totaled $2,735,276 (65% of Midwest Monitoring’s
revenue) for the fiscal year ended September 30, 2009 compared to $1,630,823
(58% of Midwest Monitoring’s revenue) for the fiscal year ended September 30,
2008, an increase of $1,104,453 (68%).  This increase is related to
revenues in the amount of $330,504 that Midwest Monitoring recognized during the
period from October 1, 2007 through November 30, 2007 that we were not required
to consolidate.  The remaining increase of $773,949 is primarily
related to the growth in revenues.
 
 Court
Program’s cost of revenues totaled $1,819,496 (59% of Court Program’s revenue)
for the fiscal year ended September 30, 2009 compared to $1,470,442 (65% of
Court Program’s revenue) for the fiscal year ended September 30, 2008, an
increase of $349,054 (24%).  This increase is related to revenues in
the amount of $311,868 that Court Programs recognized during the period from
October 1, 2007 through November 30, 2007 that we were not required to
consolidate.  The remaining increase of $37,186 is primarily related
to the growth in revenues.
  23
 
 Gross
Margin
 
 During
the fiscal year ended September 30, 2009, gross margin totaled $167,765,
compared to negative margin during the fiscal year ended September 30, 2008 of
$705,313, an improvement of $873,078.  Included in cost of revenues
are costs attributable to impairment of inventory and monitoring equipment of
$2,319,530 and $570,948 for the years ended September 30, 2009 and 2008,
respectively.  These impairment costs from disposal of obsolete
monitoring equipment were expenses not expected in future periods. Excluding
impairment costs, adjusted gross margin for the fiscal year ended September 30,
2009 was $2,487,295, compared to a negative margin of $134,365 for the same
period in 2008, an improvement of $2,621,660 while increasing revenues from
monitoring services.
 
 Research
and Development Expenses
 
 During
the fiscal year ended September 30, 2009, we incurred research and development
expenses of $1,777,873 compared to similar expenses recognized during fiscal
year 2008 totaling $4,811,128. This decrease of $3,033,255 is due primarily to
management’s decision to bring software enhancements and product design in-house
as opposed to using third-party vendors.  We anticipate research and
development expenses to continue to decrease in future periods.
 
 Selling,
General and Administrative Expenses
 
 During
the fiscal year ended September 30, 2009, our selling, general and
administrative expenses totaled $16,540,645, compared to $36,466,678 for the
fiscal year ended September 30, 2008. The improvement of $19,926,033 is the
result of decreases in the following expenses: consulting ($19,362,378), travel
($1,297,363), advertising and marketing ($132,596), bad debt expense ($68,775),
meals and entertainment ($64,677), postage ($43,636), office ($28,895), employee
benefits ($25,519), outside services ($23,181), and other selling, general and
administrative ($99,090).  These decreases in selling, general and
administrative expense were offset by an increase in payroll and taxes
($457,921), legal ($441,611), amortization ($64,955), investment relations
($54,554), contract labor ($40,081), board of director fees ($35,000),
depreciation ($33,714), insurance ($26,625), and other selling, general and
administrative expenses ($65,616).  Consulting expense for the fiscal
year ended September 30, 2009 was $4,245,685 compared to $23,608,063 for the
fiscal year ended September 30, 2008, a decrease of $19,362,378.  This
decrease is primarily due to a significant reduction of non-cash compensation
totaling $18,603,062 through options and warrants issued to board of directors,
executive officers and employees.  Cash compensation also decreased by
$759,316 since we settled fewer lawsuits related to consulting and brought a lot
of consulting in-house.
 
 Other
Income and Expense
 
 For the
fiscal year ended September 30, 2009, interest expense was $5,012,803, compared
to $1,566,542 for the fiscal year ended September 30, 2008. This amount includes
non-cash interest expense of approximately $2,595,933 related to amortization of
deferred financing costs associated with warrants, debentures and shares of
common stock issued for interest.
 
 During
the fiscal year ended September 30, 2008, we redeemed all outstanding shares of
SecureAlert Series A in exchange for 7,434,249 shares of RemoteMDx common stock
for a value of $8,372,566.
 
 Net
Loss
 
 We had a
net loss for the fiscal year ended September 30, 2009 totaling $23,081,500,
compared to a net loss of $49,587,050 for the fiscal year ended September 30,
2008.  This decrease of $26,505,550 is due primarily to reductions in
communication and device costs, bringing software enhancements and product
design in-house as opposed to using high priced third-party vendors, and the
reduced use of consulting services by bringing these services in-house.
  24
 
 Liquidity
and Capital Resources
 
 We have
not historically financed operations entirely from cash flows from operating
activities.  During the fiscal year ended September 30, 2009, we
funded our operating and investing activities by taking on new debt, sales of
equity securities and the exercise of options and warrants.  See the
accompanying Notes (8, 9, 12, 15 and 16) to Consolidated Financial Statements of
this report.  The cash provided by these transactions was used by us
to (i) pay operating expenses, including the costs associated with our
monitoring center, (ii) purchase TrackerPALTM devices, (iii) pay down debt and
accounts payable, including amounts owed on a line of credit and bank debt, and
(iv) pay general and administrative expenses, including the salaries of our
employees, officers, and consultants and other expenses as described
below.
 
 As of
September 30, 2009, we had unrestricted cash of $602,321, compared to
unrestricted cash of $2,782,953 as of September 30, 2008. As of September 30,
2009, we had a working capital deficit of $16,476,897, compared to a working
capital deficit of $6,822,276 as of September 30, 2008.  The decrease
in working capital primarily resulted from increases in our accrued liabilities
and notes payable balances and decrease in cash balances offset by an increase
in our inventory and decrease in our lines of credit during the fiscal year
ended September 30, 2008.
 
 During
fiscal year 2009, our operating activities used cash of $8,521,326, compared to
$9,672,744 used during fiscal year 2008.  This decrease in cash used
from operating activities of $1,151,418 is primarily the result of decreases in
the net income (loss) of $26,505,550, common stock issued for services of
$12,891,708, common stock issued to settle lawsuits of $1,014,479, amortization
of deferred financing and consulting costs of $3,372,405, derivative liability
valuation of $1,867,007, stock options and warrants issued for services of
$3,917,629, and net accounts receivable of $3,316,540.  These
decreases were offset, in part, by increases in the amortization of debt
discount of $2,030,504, impairment of monitoring equipment of $1,748,582,
impairment of goodwill of $2,804,580, deposit held in escrow of $1,000,000 and
accounts payable of $2,119,121.
 
 Investing
activities during the fiscal year ended September 30, 2009, used cash of
$1,676,467, compared to $526,447 of cash used by investing activities during the
fiscal year ended September 30, 2008.  The increase in cash used
during fiscal year 2009 resulted primarily from an increase in purchases of
additional monitoring equipment.  We purchased $1,312,397 and $192,221
of monitoring equipment during the fiscal years ended September 30, 2009 and
2008, respectively.
 
 Financing
activities during the fiscal year ended September 30, 2009, provided $8,017,161
of net cash compared to $8,178,273 during the fiscal year ended September 30,
2008.
 
 We made
net payments of $739,063 on a related-party line of credit and $1,115,237 on
notes payable.  During fiscal year 2009, we had proceeds of $4,496,750
from the issuance of Series A 15% Convertible Debentures, $3,250,000 from the
issuance of common stock, $1,055,889 from the issuance of debt, $680,229 from
the issuance of related-party notes and $388,593 from bank lines of
credit.
 
 During
the fiscal year ended September 30, 2009, we incurred a net loss of $23,081,500
and negative cash flows from operating activities of $8,521,326, compared to a
net loss of $49,587,050 and negative cash flows from operating activities of
$9,672,744 for the fiscal year ended September 30, 2008.  As of
September 30, 2009, our working capital deficit was $16,476,897 and we had
stockholders’ deficit of $12,372,821 and an accumulated deficit of
$205,765,496.
 
 Going
Concern
 
 The
factors described above, as well as the risk factors set out elsewhere in this
report raise substantial doubt about our ability to continue as a going concern.
The financial statements included in this report do not include any adjustments
that might result from the outcome of this uncertainty.  Our plan with
respect to this uncertainty is to focus on increasing the leasing of the
TrackerPALTM product.  There can be no assurance that revenues will
increase rapidly enough to offset operating losses and repay
debts.  Likewise, there can be no assurance that our debt holders will
be willing to convert the debt obligations to equity securities or that we will
be successful in raising additional capital from the sale of equity or debt
securities.  If we are unable to increase cash flows from operating
activities or obtain additional financing, we will be unable to continue the
development of our products and would likely cease operations.
 
 To lessen
our cash burden and to raise additional capital, subsequent to September 30,
2009, the Company issued 15,986 shares of Series D Convertible Preferred stock
from the conversion of $15,723,204 in debt, accrued liabilities and interest and
an additional 12,200 shares from securities purchase agreements totaling
$6,100,000 of which $4,600,000 has been received in cash as of the date of this
Report, resulting in a total of 28,186 shares of Series D Preferred
stock.
 
 Inflation
 
 We do not
believe that inflation has had a material impact on our historical operations or
profitability.
  25
 
 Critical
Accounting Policies
 
 In Note
(3) to the audited financial statements for the fiscal year ended September 30,
2009 included in this report, we discusses those accounting policies that are
considered to be significant in determining the results of operations and our
financial position.
 
 The
preparation of financial statements requires management to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. On an on-going basis, we evaluate
our estimates, including those related to bad debts, inventories, intangible
assets, warranty obligations, product liability, revenue, and income taxes. We
base our estimates on historical experience and other facts and circumstances
that are believed to be reasonable, and the results form the basis for making
judgments about the carrying value of assets and liabilities.  The
actual results may differ from these estimates under different assumptions or
conditions.
 
 With
respect to inventory reserves, revenue recognition, impairment of long-lived
assets and allowance for doubtful accounts receivables, we apply the following
critical accounting policies in the preparation of our financial
statements:
 
 Inventory
Reserves
 
 The nature of our business requires
maintenance of sufficient inventory on hand at all times to meet the
requirements of our customers. We record finished goods inventory at the lower
of standard cost, which approximates actual cost (first-in, first-out method) or
market.  Raw materials are stated at the lower of cost (first-in,
first-out method), or market.  General inventory reserves are
maintained for the possible impairment of the inventory.  Impairment
may be a result of slow moving or excess inventory, product obsolescence or
changes in the valuation of the inventory. In determining the adequacy of
reserves, management analyzes the following, among other things:
 
 ·
                Current
      inventory quantities on hand;
 ·
                Product
      acceptance in the marketplace;
 ·
                Customer
      demand;
 ·
                Historical
      sales;
 ·
                Forecast
      sales;
 ·
                Product
      obsolescence; and
 ·
                Technological
      innovations.
 
 Any modifications to these estimates of
reserves are reflected in cost of revenues within the statement of operations
during the period in which such modifications are determined necessary by
management.
 
 Revenue
Recognition
 
 Our revenue has historically been from
two sources: (i) monitoring services; (ii) monitoring device and other
product sales.
 
 Monitoring
Services
 
 Monitoring
services include two components: (a) lease contracts in which we provide
monitoring services and lease devices to distributors or end users and we retain
ownership of the leased device; and (b) monitoring services purchased by
distributors or end users who have previously purchased monitoring devices and
opt to use our monitoring services.
 
 We
typically lease our devices under one-year contracts with customers that opt to
use our monitoring services.  However, these contracts may be
cancelled by either party at anytime with 30 days notice.  Under our
standard leasing contract, the leased device becomes billable on the date of
activation or 21 days from the date the device is assigned to the lessee, and
remains billable until the device is returned to us.  We recognize
revenue on leased devices at the end of each month that monitoring services have
been provided.  In those circumstances in which we receive payment in
advance, we record these payments as deferred revenue.
 
 Monitoring Device Product
Sales
 
 Although
not the focus of our business model, we sell our monitoring devices in certain
situations. In addition, we sell home security and Personal Emergency Response
Systems (“PERS”) units.  We recognize product sales revenue when
persuasive evidence of an arrangement with the customer exists, title passes to
the customer and the customer cannot return the devices, prices are fixed or
determinable (including sales not being made outside the normal payment terms)
and collection is reasonably assured. When purchasing products (such as
TrackerPAL devices) from us, customers may, but are not required to, enter into
monitoring service contracts with us.  We recognize revenue on
monitoring services for customers that have previously purchased devices at the
end of each month that monitoring services have been provided.
 
 Multiple Element
Arrangements
  The
majority of our revenue transactions do not have multiple elements. On occasion,
we have revenue transactions that have multiple elements (such as product sales
and monitoring services).  For revenue arrangements that have multiple
elements, we consider whether: (i) the delivered devices have standalone value
to the customer; (ii) there is objective and reliable evidence of the fair value
of the undelivered monitoring services, which is generally determined by
surveying the price of competitors’ comparable monitoring services; and (iii)
the customer does not have a general right of return.  Based on these
criteria, we recognize revenue from the sale of devices separately from the
monitoring services to be provided to the customer.  In accordance
with FASB ASC Subsection 605-25, if the fair value of the undelivered element
exists, but the fair value does not exist for one or more delivered elements,
then revenue is recognized using the residual method. Under the residual method
as applied to these particular transactions, the fair value of the undelivered
element (the monitoring services) is deferred and the remaining portion of the
arrangement (the sale of the device) is recognized as revenue when the device is
delivered and all other revenue recognition criteria are met.
  26
 
 Other
Matters
 
 We
consider an arrangement with payment terms longer than our normal terms not to
be fixed or determinable, and revenue is recognized when the fee becomes
due.  Normal payment terms for the sale of monitoring services are 30
days, and normal payment terms for device sales are between 120 and 180
days.  We sell our devices and services directly to end users and to
distributors.  Distributors do not have general rights of
return.  Also, distributors have no price protection or stock
protection rights with respect to devices sold to them by
us.  Generally, title and risk of loss pass to the buyer upon delivery
of the devices.
 
 We
estimate our product returns based on historical experience and maintain an
allowance for estimated returns, which is recorded as a reduction to accounts
receivable and revenue.
 
 Shipping
and handling fees are included as part of net revenues.  The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of revenues.
 
 Impairment
of Long-lived Assets
 
 We review our long-lived assets, other
than goodwill, for impairment when events or changes in circumstances indicate
the book value of an asset may not be recoverable.  An evaluation is
made at each balance sheet date, to determine whether events and circumstances
have occurred which indicate possible impairment. An estimate is made of future
undiscounted net cash flows of the related asset or group of assets over our
estimated remaining life in measuring whether the assets are recoverable. During
the fiscal years ended September 30, 2009 and 2008, we disposed of $2,319,530
and $570,948, respectively.
 
 Allowance
for Doubtful Accounts
 
 We must make estimates of the
collectability of accounts receivable. In doing so, we analyze accounts
receivable and historical bad debts, customer credit-worthiness, current
economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts.
 
 Recent
Accounting Pronouncements
 
 Effective
for December 2008, new accounting guidance was added relating to business
combinations. The objective of this topic is to enhance the information that an
entity provides in our financial reports about a business combination and its
effects. The Topic mandates: (i) how the acquirer recognizes and measures the
assets acquired, liabilities assumed and any non-controlling interest in the
acquiree; (ii) what information to disclose in our financial reports and; (iii)
recognition and measurement criteria for goodwill acquired. This Topic is
effective for any acquisitions made on or after December 15, 2008. The adoption
of this Topic is not expected to have a material impact on our financial
statements and disclosures.
 
 In May
2009, the Financial Accounting Standards Board (“FASB”) issued guidance which
establishes general standards of accounting and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. In particular, this Topic sets forth: (i) the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements, (ii) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet
date in our financial statements, (iii) the disclosures that an entity should
make about events or transactions that occurred after the balance sheet date.
This Topic should be applied to the accounting and disclosure of subsequent
events. This Topic does not apply to subsequent events or transactions that are
within the scope of other applicable accounting standards that provide different
guidance on the accounting treatment for subsequent events or transactions. This
Topic was effective for interim and annual periods ending after June 15, 2009,
which was September 30, 2009 for us. The adoption of this Topic did not have a
material impact on our financial statements and disclosures.
 
 In June
2009, the FASB issued guidance which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Topic, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-SEC accounting literature not included in
the Codification will become non-authoritative. This Topic identifies the
sources of accounting principles and the framework for selecting the principles
used in preparing the financial statements of nongovernmental entities that are
presented in conformity with GAAP and arranged these sources of GAAP in a
hierarchy for users to apply accordingly. This Topic is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of this topic did not have a material impact on our
disclosure of the financial statements.
  27
 
 In June
2009, the FASB issued additional guidance which improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in our financial statements about a transfer of
financial assets; the effects of a transfer on our financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This additional guidance requires that a
transferor recognize and initially measure at fair value all assets obtained
(including a transferor’s beneficial interest) and liabilities incurred as a
result of a transfer of financial assets accounted for as a sale. Enhanced
disclosures are required to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This additional guidance must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. This additional guidance must be
applied to transfers occurring on or after the effective date. The adoption of
this Topic is not expected to have a material impact on our financial statements
and disclosures.
 
 In
September 2009, the FASB added implementation guidance on accounting for
uncertainty in income taxes. For entities that are currently applying the
standards for accounting for uncertainty in income taxes, the guidance and
disclosure amendments are effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The adoption of this Update
did not have a material impact on our financial statements and
disclosures.
 
 In
September 2009, the FASB issued guidance that changes the existing
multiple-element revenue arrangements guidance currently included under its
Revenue Arrangements with Multiple Deliverables codification. The revised
guidance primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. This will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the future impact of this new accounting
update to our financial statements.
 
 In
October 2009, the FASB issued accounting guidance which changes the accounting
model for revenue arrangements that include both tangible products and software
elements. Under this guidance, tangible products containing software components
and non-software components that function together to deliver the tangible
product's essential functionality are excluded from the software revenue
recognition guidance given prior to this new guidance. In addition, hardware
components of a tangible product containing software components are always
excluded from the software revenue guidance.  This guidance is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted.  We are currently assessing the future impact of this new
accounting update to our financial statements.
 
 In April
2008, the FASB issued an amendment for determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under authoritative accounting guidance for
goodwill and other intangible assets. This guidance is intended to improve the
consistency between the useful life of an intangible asset determined under the
guidance for goodwill and other intangible assets and the period of expected
cash flows used to measure the fair value of the asset under ASC 805 “Business
Combinations” and other principles under GAAP. This guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
This guidance will be effective for us in fiscal year 2010. The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
 
 In
September 2006, the FASB issued enhanced guidance for using fair value to
measure assets and liabilities. This guidance also provides for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. ASC 820 applies whenever other guidance require
or permit assets or liabilities to be measured at fair value. ASC 820 does not
expand the use of fair value in any new circumstances. In February 2008, the
FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and
delays the effective date of ASC 820 by one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. In October 2008, the FASB issued
additional guidance for determining the fair value of a financial asset when the
market for that asset is not active to clarify the application of the provisions
of the guidance for fair value measurements in an inactive market and how an
entity would determine fair value in an inactive market. This additional
guidance is effective immediately. We adopted ASC 820 for financial assets and
financial liabilities at the beginning of fiscal year 2009. The adoption of this
guidance for financial assets and financial liabilities did not impact our
results of operations and financial position. The guidance is effective for
nonfinancial assets and liabilities in financial statements issued for fiscal
years beginning after November 15, 2008, which is our fiscal year 2010. The
adoption of this guidance for nonfinancial assets and nonfinancial liabilities
is not expected to significantly impact our results of operations and financial
position.
 
 In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (VIEs). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purpose entities, by
establishing a new approach for determining who should consolidate a
variable-interest entity and by changing when it is necessary to reassess who
should consolidate a variable-interest entity.  This guidance will be
effective at the beginning of the first fiscal year beginning after November 15,
2009. Early application is not permitted.  The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
  28
 
 In
September 2009, the FASB issued guidance updates and provided amendments to its
Fair Value Measurements and Disclosure requirements which permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This guidance also
requires new disclosures, by major category of investments, about the attributes
of investments, such as the nature of any restriction on the ability to redeem
an investment on the measurement date.  This guidance is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued.  The adoption of this guidance is not expected
to significantly impact our results of operations and financial
position.
 
 In
October 2009, the FASB issued guidance on share-lending arrangements entered
into on an entity's own shares in contemplation of a convertible debt offering
or other financing.  This guidance is effective for fiscal years
beginning on or after December 15, 2009, and fiscal years within those fiscal
years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements. This guidance is
effective for arrangements entered into on (not outstanding) or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Certain transition disclosures are also required. Early application is not
permitted.  The adoption of this guidance is not expected to
significantly impact our results of operations and financial
position.
  Accounting
for Stock-Based Compensation
  For the
fiscal years ended September 30, 2009 and 2008, the Company calculated
compensation expense of $67,406 and $214,251, respectively related to the
vesting of stock options granted in prior years
  The fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The Company granted 1,517,714 and 1,725,000
stock options to employees during the fiscal years ended September 30, 2009 and
2008 valued $274,650 and $359,946, respectively.  In addition, 390,000
stock options issued to employees in prior years vested during the fiscal year
ended September 30, 2008.  The weighted average fair value of stock
options at the date of grant during the fiscal year ended September 30, 2009 and
2008 was $0.18 and $1.34, respectively. The expected life of stock options
represents the period of time that the stock options granted are expected to be
outstanding based on historical exercise trends. The expected volatility is
based on the historical price volatility of common stock. The risk-free interest
rate represents the U.S. Treasury bill rate for the expected life of the related
stock options. The dividend yield represents the Company’s anticipated cash
dividends over the expected life of the stock options.
 
 The
following are the weighted-average assumptions used for options granted during
the fiscal years ended September 30, 2009 and 2008, respectively:
  Fiscal
      years Ended
                  September
      30,2009
                
                
                2008Expected
      cash dividend yield
                
                
                -
                
                
                
                -Expected
      stock price volatility
                
                
                121
                %
                
                
                136
                %Risk-free
      interest rate
                
                
                1.16
                %
                
                
                3.12
                %Expected
      life of options
                
                3.7
      years
                
                
                5
      years
 
  A summary
of stock option activity for the fiscal year ended September 30, 2009 and 2008
is presented below:
  Shares
                    Under
                    Option
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      as of September 30, 2007
                  
                  
                  3,295,000
                  
                  
                  $
                  0.64Granted
                  
                  
                  1,725,000
                  
                  
                  $
                  1.54Exercised
                  
                  
                  (1,375,000
                  )
                  
                  $
                  0.63Forfeited
                  
                  
                  (45,000
                  )
                  
                  $
                  0.86Expired
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      as of  September 30, 2008
                  
                  
                  3,600,000
                  
                  
                  $
                  1.08
                  
                  3.34
      years
                  
                  $
                  1,062,000Exercisable
      as of  September 30, 2008
                  
                  
                  421,667
                  
                  
                  $
                  1.35
                  
                  3.30
      years
                  
                  $
                  37,000
 
 Shares
                    Under
                    Option
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                  
                  Aggregate
                    Intrinsic
                    ValueOutstanding
      as of September 30, 2008
                  
                  
                  3,600,000
                  
                  
                  $
                  1.08Granted
                  
                  
                  1,517,714
                  
                  
                  $
                  0.21Exercised
                  
                  
                  -
                  
                  
                  $
                  -Forfeited
                  
                  
                  -
                  
                  
                  $
                  -Expired
                  
                  
                  (408,500
                  )
                  
                  $
                  1.45Outstanding
      as of  September 30, 2009
                  
                  
                  4,709,214
                  
                  
                  $
                  0.76
                  
                  2.05  years
                  
                  $
                  12,854Exercisable
      as of  September 30, 2009
                  
                  
                  1,719,880
                  
                  
                  $
                  0.32
                  
                  2.97
      years
                  
                  $
                  12,854
  29
  Item 8.    Financial
Statements and Supplementary Data
  The
Financial Statements and Supplementary Data required by this Item are set forth
at the pages indicated at Item 15 below.
  Item 9.    Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
  None.
  Item 9A(T).    Evaluation
of Disclosure Controls and Procedures
 
 Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were not
effective.  We and our auditors identified material weaknesses
discussed below in the Report of management on internal control over financial
reporting.
 
 Report
of Management on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:
 
 (i)
                pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 
 (ii)
                provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that our receipts and expenditures are
      being made only in accordance with authorizations of our management and
      directors; and
 
 (iii)
                provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of assets that could have a
      material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement to our annual or interim
financial statements will not be prevented or detected.
  30
 
 In the
course of the management's assessment, it has identified the following material
weaknesses in internal control over financial reporting:
  ·
                Control
      Environment – We did not maintain an effective control environment
      for internal control over financial reporting. Specifically, we concluded
      that we did not have appropriate controls in the following
      areas:
  o
                Segregation of Duties –
      As a result of limited resources and the addition of multiple majority
      owned subsidiaries, we did not maintain proper segregation of incompatible
      duties. The effect of the lack of segregation of duties potentially
      affects multiple processes and
procedures.
  o
                Implementation of Effective
      Controls – We failed to complete the implementation of effective
      internal controls over our newly acquired majority owned subsidiaries as
      of September 30, 2009 due to limited
resources.
  ·
                Financial
      Reporting Process– We did
      not maintain an effective financial reporting process to prepare financial
      statements in accordance with generally accepted accounting principles.
      Specifically, we initially failed to appropriately account for and
      disclose the effects of issuing
derivatives.
  ·
                Tracking
      of Leased Equipment – We failed to maintain effective internal
      controls over the tracking of leased equipment as it relates to the
      assignment and leasing of monitoring
equipment.
  ·
                Inventory– We failed to
      maintain effective internal controls over the tracking of inventory and
      adjusting its’ corresponding cost to reflect lower of cost or
      market.
  We are in
the process of improving our internal control over financial reporting in an
effort to eliminate these material weaknesses through improved supervision and
training of our staff, but additional effort and staffing is needed to fully
remedy these deficiencies. Our management, audit committee, and directors will
continue to work with our auditors and outside advisors to ensure that our
controls and procedures are adequate and effective.
 
 Item 9B.    Other
Information
  None.
  PART
III
  Item 10.    Directors,
Executive Officers and Corporate Governance
  The
following table sets forth certain information concerning our executive officers
and directors as of September 30, 2009:
  Name
                Age
                PositionDavid
      G. Derrick
                56
                Chief
      Executive Officer and ChairmanJohn
      L. Hastings, III
                46
                President
      and Chief Operating OfficerMichael
      G. Acton
                46
                Chief
      Financial OfficerBernadette
      Suckel
                53
                Managing
      Director of Sales & MarketingBruce
      G. Derrick
                51
                Chief
      Technology OfficerJames
      J. Dalton
                66
                DirectorRobert
      E. Childers
                64
                DirectorLarry
      G. Schafran
                71
                DirectorDavid
      P. Hanlon
                64
                Director
 
  David Derrick,
CEO and Chairman.Mr. Derrick has been our CEO and Chairman since
February 2001.  Prior to joining us, Mr. Derrick occupied directorship
and management positions in other companies, including Biomune Systems Inc.
(“Biomune”), our former parent, and Purizer Corporation.  From 1979 to
1982, Mr. Derrick was a faculty member at the University of Utah College of
Business.  Mr. Derrick graduated from the University of Utah with a
Bachelor of Arts degree in Economics and a Masters in Business Administration
degree with an emphasis in Finance.
  John Hastings,
President and Chief Operating Officer.Mr. Hastings became our
President on June 19, 2008 and Chief Operating Officer on November 20,
2008.  Mr. Hastings has worked for Nestle/Stouffer’s, Kraft/General
Foods, Nissan Motor Acceptance Corp., NCR/Teradata, Unisys Corp. and VNU/AC
Nielsen during his career.  He has also served on the boards of small
entrepreneurial companies.  From 1998 through 2006, Mr. Hastings
worked with VNU – AC Nielsen in several executive posts, last serving as its
Senior Vice President and General Manager of Global Business Intelligence,
reporting directly to our Chief Executive Officer.  Upon acquisition
and privatization of VNU in 2006, and until his appointment as President of
RemoteMDx, Mr. Hastings served as the interim President and CEO of Klever
Marketing, Inc., a Utah-based retail marketing company.  Mr. Hastings
received a BA from Cal State University, Fullerton CA (1985) and an MBA from
Pepperdine University, Malibu CA (1987).
  31
 
 Michael Acton,
Secretary, Treasurer and Chief Financial Officer.Mr. Acton
became our Chief Financial Officer on November 20, 2008.  Previously
he had served as the Company’s Chief Financial Officer from March 1999 until
June 2008. He has served as our Secretary/Treasurer since March
1999.  Since June 2008 he has also served as the Chief Financial
Officer of ActiveCare, our former subsidiary.  He is a Certified
Public Accountant in the State of Utah.
 
 Bernadette
Suckel, Managing Director of Sales & Marketing.Ms. Suckel
joined us on April 24, 2008.  Prior to coming to RemoteMDx, Ms. Suckel
served as the VP/Solution and Client Principal, for The Nielsen
Company/ACNielsen from 2000 through April 2008.  From November 2006
through April 2008, she consulted on a part-time basis to Klever Marketing, Inc.
to focus on cost reduction strategies.   Ms. Suckel also worked
previously for Cogit.com and NCR/AT&T GIS/Teradata.  She received
a BS in Business Administration, Marketing Option, from California State
University, Fresno.
 
 Bruce G. Derrick,
Chief Technology Officer.Mr. Derrick has been our Chief
Technology Officer since November 21, 2004.  He has extensive
experience in management of custom solutions development and customer management
in the wireless telecom marketplace.  From 2001 to 2004 was a senior
product development manager for WatchMark Corporation.  WatchMark
collects cellular network performance data for quality assurance and capacity
planning. Prior to joining WatchMark, Mr. Derrick was responsible for
forming and managing the Professional Services team for Marconi’s MSI
division.  Mr. Derrick also worked in management positions at Boeing
and Western Wireless, built and managed the Corporate Computer and Network
Operations department for Avaya’s Mosaix division.  He was a Senior
Programmer in applied research at the University of Utah’s Department of Medical
Informatics where he developed and implemented medical informatics and
physiological monitoring services for ICU care and participated in development
of IEEE standards for automated physiological monitoring for NASA’s Space
Station program.  Mr. Derrick holds a Bachelor’s Degree in Computer
Science from the University of Utah.  Bruce Derrick is the brother of
David Derrick, our Chairman and CEO.
 
 James Dalton,
Director.Mr. Dalton joined us as
a director in 2001.  Since June 2008 he has served as the Chief
Executive Officer and Chairman of ActiveCare.  He was our President
from August 2003 until June 2008.  Prior to joining us, Mr. Dalton was
the owner and President of Dalton Development, a real estate development
company.  He served as the President and coordinated the development
of The Pinnacle, an 86-unit condominium project located at Deer Valley Resort in
Park City, Utah.  Mr. Dalton served as the President and equity owner
of Club Rio Mar in Puerto Rico, a 680-acre beach front property that includes
500 condominiums, beach club, numerous restaurants, pools and a Fazio-designed
golf course.  He was a founder and owner of the Deer Valley Club,
where he oversaw the development of a high-end, world-class ski
project.  From 1996 to 2000, Mr. Dalton served as an officer and
director of Biomune.  Effective November 2, 2009, Mr. Dalton resigned
from the board of directors to focus on his opportunities at
ActiveCare.
 
 Robert Childers,
Director.Mr. Childers joined our
board in July 2001.  Since 1977, he has served as the Chief Executive
Officer of Structures Resources Inc., a firm which he founded in 1972, and has
more than 30 years of business experience in construction and real estate
development.  Mr. Childers has served or is currently serving as General
Partner in 16 Public Limited Partnerships in the Middle Atlantic States. 
Partners include First Union Bank and Fannie Mae.  Structures Resources has
successfully completed over 300 projects (offices, hotels, apartments, and
shopping centers) from New York to North Carolina.  Recently Mr. Childers
has founded a new company providing construction services to major companies
developing gas wells in the Marcellus shale. He is a co-founder of Life
Science Group, a boutique biotech investment-banking firm. Mr. Childers was the
founding President of Associated Building Contractors for the State of West
Virginia and served as a director of The Twentieth Street Bank until its merger
with City Holding Bank.  He is a former naval officer serving in Atlantic
fleet submarines.  Mr. Childers is a member of the Compensation Committee
and the Nominating Committee of our board of directors.
 
 Larry G.
Schafran, Director.  Larry G. Schafran, Director.  Mr.
Schafran is associated with Providence Capital, Inc. (“PCI”) as a Managing
Director.  PCI is a New York City-based investment and advisory firm. 
Mr. Schafran is also a director of Tarragon Corporation.  Additionally, Mr.
Schafran was Lead Director and Audit Committee Chairman and later a Consultant
to the Chairman of WorldSpace, Inc.  In addition, Mr. Schafran is also a
Director of the following publicly traded U. S. corporations: Sulphco, Inc., New
Frontier Energy, Inc., DollarDays International, Inc., Subaye Corp. and National
Patent Development Corporation.  In recent years, Mr. Schafran served in
several capacities, including, as a Director of PubliCard, Inc. and
ElectroEnergy, and Trustee, Chairman/Interim-CEO/President and Co-Liquidating
Trustee of Special Liquidating Trust of Banyan Strategic Realty Trust; Director
and/or Chairman of the Executive Committees of Dart Group Corporation, Crown
Books Corporation, TrakAuto Corporation, and Shoppers Food Warehouse, Inc.
(Vice-Chairman); Director and Member of the Strategic Planning and Finance
Committees of COMSAT Corporation, and Managing General Partner of L. G. Schafran
& Partners, LP, a real estate investment and development firm.  Mr.
Schafran is Chairman of the Audit and Nominating Committees and a Member the
Compensation Committee of our board of directors.
 
 David
P. Hanlon, Director.Mr. Hanlon resigned as Chief Executive
Officer and President of Empire Resorts, Inc., a public company in the gaming
industry in May 2009.  Prior to starting his own gaming consulting
business in 2000, in which he advised a number of Indian and international
gaming ventures, Mr. Hanlon was President and Chief Operating Officer of Rio
Suites Hotel & Casino from 1996-1999, a period in which the Rio Suites Hotel
& Casino underwent a major expansion. From 1994-1995, Mr. Hanlon served as
President and Chief Executive Officer of International Game Technology, the
world's leading manufacturer of microprocessor gaming machines. From 1988-1993,
Mr. Hanlon served as President and Chief Executive Officer of Merv Griffin's
Resorts International, and prior to that, Mr. Hanlon served as President of
Harrah's Atlantic City (Harrah's Marina and Trump Plaza). Mr. Hanlon's education
includes a B.S. in Hotel Administration from Cornell University, an M.S. in
Accounting, an M.B.A. in Finance from the Wharton School, University of
Pennsylvania, and he completed the Advanced Management Program at the Harvard
Business School.Mr.
Hanlon is a member of the Audit Committee of our board of
directors.
  32
 
 Board
of Directors
 
 Election
and Meetings
 
 Directors
hold office until the next annual meeting of the stockholders and until their
successors have been elected or appointed and duly
qualified.  Executive officers are elected by the board of directors
and hold office until their successors are elected or appointed and duly
qualified.  Vacancies on the board which are created by the
retirement, resignation or removal of a director may be filled by the vote of
the remaining members of the board, with such new director serving the remainder
of the term or until his successor shall be elected and qualify.
 
 The board
of directors is elected by and is accountable to our shareholders. The board
establishes policy and provides our strategic direction, oversight, and control.
The board met 11 times during fiscal year 2009. All directors attended at least
70% of the meetings of the board and the board committees of which they are
members.
  Director
Independence
  We assess director independence on an
annual basis. The board has determined, after careful review that Mr. Childers,
Mr. Hanlon, and Mr. Schafran are independent based on the applicable regulations
of the SEC.
  Shareholder
Communications with Directors
  If we
receive correspondence from our shareholders that is addressed to the board of
directors, we forward it to every director or to the individual director to whom
it is addressed. Shareholders who wish to communicate with the directors may do
so by sending their correspondence to the directors c/o RemoteMDx, Inc., 150
West Civic Center Drive, Suite 400, Sandy, Utah 84070.
  Committees
of the Board of Directors
  The board of directors has a
separately-designated standing Audit Committee, Compensation Committee, and
Nominating Committee. All members of the Audit Committee, Compensation
Committee, and Governance and Nominating Committee meet the definition of
"independent," described above.
  Audit
Committee.  The Audit Committee of the board of directors (the
"Audit Committee") is a standing committee of the board, which has been
established as required by the Securities Exchange Act of 1934 (“Exchange Act”).
The Audit Committee met four times during fiscal year 2009. Members of the Audit
Committee during fiscal year 2009 and at the date of this Report are Larry
Schafran (Chairman) and David Hanlon. The board has determined that
Mr. Schafran is an "audit committee financial expert," as defined by the
applicable regulations promulgated by the SEC under the Exchange
Act.  The board also believes that each member of the Audit Committee
meets the NASDAQ composition requirements, including the requirements regarding
financial literacy and financial sophistication.
  The
primary purpose of the Audit Committee is to oversee our financial reporting
process on behalf of the board of directors.  The Audit Committee
meets with our Chief Financial Officer and with our independent registered
public accounting firm and evaluates the responses by the Chief Financial
Officer both to the facts presented and to the judgments made by our independent
registered public accounting firm.
  In April
8, 2004, our board adopted a Charter for the Audit Committee.  The
Charter establishes the independence of our Audit Committee and sets forth the
scope of the Audit Committee's duties.  The purpose of the Audit
Committee is to conduct continuing oversight of our financial
affairs.  A copy of the Charter of the Audit Committee can be found on
our website at www.remotemdx.com.  The Audit Committee conducts an
ongoing review of our financial reports and other financial information prior to
their being filed with the Securities and Exchange Commission, or otherwise
provided to the public.  The Audit Committee also reviews our systems,
methods and procedures of internal controls in the areas of: financial
reporting, audits, treasury operations, corporate finance, managerial, financial
and SEC accounting, compliance with law, and ethical conduct.  The
Audit Committee is objective, and reviews and assesses the work of our
independent registered public accounting firm and our internal audit
department.
  The Audit
Committee reviewed and discussed the matters required by SAS 114 and our audited
financial statements for the fiscal year ended September 30, 2009 with
management and our independent registered public accounting firm.  The
Audit Committee has received the written disclosures and the letter from our
independent registered public accounting firm required by Independence Standards
Board No. 1, and the Audit Committee has discussed with the independent
registered public accounting firm the independent registered public accounting
firm's independence.  The Audit Committee recommended to the board of
directors that our audited financial statements for the fiscal year September
30, 2009 be included in this Report.
  33
 
 Compensation
Committee.  The Compensation Committee was restructured during
the fiscal year ended September 30, 2009, with Robert Childers, one of our
directors, appointed by the board of directors to serve as the chair. In
addition, Larry Schafran serves as a member of the Compensation
Committee.  The Compensation Committee met three times during fiscal
year 2009.  The Committee has responsibility for developing and
maintaining an executive compensation policy that creates a direct relationship
between pay levels and corporate performance and returns to stockholders. The
Committee monitors the results of such policy to assure that the compensation
payable to our executive officers provides overall competitive pay levels,
creates proper incentives to enhance stockholder value, rewards superior
performance, and is justified by the returns available to
stockholders.
 
 Nominating
Committee.During the fiscal year ended September 30, 2009,
Larry Schafran, one of our directors, was appointed as the chair of the
Nominating Committee.  The Committee has the responsibility for
identifying and recommending candidates to fill vacant and newly created board
positions, setting corporate governance guidelines regarding director
qualifications and responsibilities, and planning for CEO and senior management
succession.  In addition, Robert Childers serves as a member of the
Nominating Committee.
 
 Code of Ethics.We
have established a Code of Business Ethics that applies to our officers,
directors and employees. The Code of Business Ethics contains general guidelines
for conducting our business consistent with the highest standards of business
ethics, and is intended to qualify as a “code of ethics” within the meaning of
Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated
thereunder.
  Compensation
Committee Interlocks and Insider Participation
  The
Compensation Committee during fiscal 2009 was composed of Robert Childers and
Larry Schafran. All members of the Compensation Committee are independent
directors. No member of our Compensation Committee is a current or former
officer or employee of RemoteMDx or any of our subsidiaries, and no director or
executive officer of RemoteMDx is a director or executive officer of any other
corporation that has a director or executive officer who is also a director of
RemoteMDx.
  Item 11.    Executive
Compensation
  Compensation
Discussion and Analysis
  The
following is a discussion of our program for compensation of our named executive
officers. Our Compensation Committee had responsibility for developing and
maintaining an executive compensation policy that creates a direct relationship
between pay levels and corporate performance and returns to stockholders. The
Committee monitors the results of such policy to assure that the compensation
payable to our executive officers provides overall competitive pay levels,
creates proper incentives to enhance stockholder value, rewards superior
performance, and is justified by the returns available to
stockholders.
  Compensation
Program Objectives
  Our
compensation program is designed to encompass several factors in determining the
compensation of our named executive officers.  The following are the
main objectives of the compensation program for our named executive
officers:
  ·
                Retain
      qualified officers.
  ·
                Provide
      overall corporate direction for the officers and also to provide direction
      that is specific to the officer’s respective areas of
      authority.  The level of compensation amongst the officer group,
      in relation to one another, is also considered in order to maintain a high
      level of satisfaction within the leadership group. We consider the
      relationship that the officers maintain to be one of the most important
      elements of the leadership group.
  ·
                Provide
      a performance incentive for the
officers.
  Our
compensation program is designed to reward the officers in the following
areas:
  ·
                achievement
      of specific goals;
  ·
                professional
      education and development;
  ·
                creativity
      in the form of innovative ideas and analysis for new programs and
      projects;
  ·
                new
      program implementation;
  ·
                attainment
      of company goals, budgets, and
objectives;
  ·
                results
      oriented determination and
organization;
  ·
                positive
      and supportive direction for company personnel;
  and
  ·
                community
      involvement.
  34
  As of the
date of this report, there were four principal elements of named executive
officer compensation.  The Compensation Committee determines the
portion of compensation allocated to each element for each individual named
executive officer.  The discussions of compensation practices and
policies are of historical practices and policies.  Our Compensation
Committee is expected to continue these policies and practices, but will
reevaluate the practices and policies as it considers advisable.  The
elements of the compensation program include the following:
  ·
                Base
      salary;
  ·
                Performance
      bonus and commissions;
  ·
                Stock
      options and stock awards
  ·
                Employee
      benefits in the form of:
  §
                health
      and dental insurance;
  §
                life
      insurance;
  §
                paid
      parking and auto reimbursement; and
  §
                Other
      de minimis benefits.
  Base
salary
  Base
salary is intended to provide competitive compensation for job performance and
to attract and retain qualified named executive officers.  The base
salary level is determined by considering several factors inherent in the market
place such as: the size of the company; the prevailing salary levels for the
particular office or position; prevailing salary levels in a given geographic
locale; and the qualifications and experience of the named executive
officer.
  Our Chief
Executive Officer, Mr. Derrick, is paid a base salary of $240,000 per
year.  The amount of the base salary was determined after negotiations
between Mr. Derrick and our Compensation Committee.  Factors
considered in determining the base salary included Mr. Derrick’s status as one
of our founders; his experience and length of service with us; his experience in
the industries in which he operates; educational and work background; and
reviews of sample salaries at companies of comparable size and
industry.  The Compensation Committee also considered the fact that
Mr. Derrick has provided and facilitated credit agreements and other financing
for us.  The salary payable to Mr. Derrick is paid by ADP Management
out of amounts paid to ADP Management for consulting and other
services.  During the fiscal year ended September 30, 2008, we issued
1,000,000 shares of common stock valued at $1.52 per share to prepay services in
connection with his base salary.  Although, these shares have not yet
been sold and had a market value of $110,000 as of September 30, 2009, we
recorded $240,000 and $60,000 of expense during the fiscal years ended September
30, 2009 and 2008, respectively, in connection with the 1,000,000 shares issued
in fiscal year 2008.  As of September 30, 2009, the outstanding
prepaid salary of $1,220,000, reflected as deferred compensation, will be
amortized over future periods.
  Our
President and Chief Operating Officer, Mr. Hastings, is paid a base annual
salary of $300,000. The amount of the base salary was determined after
negotiations between Mr. Hastings and our Compensation
Committee.  Factors considered in determining Mr. Hastings’ base
salary included his background in the industries in which we operate; his
educational and work background, and reviews of sample salaries at companies of
comparable size and industry.
  Performance
bonus and commissions
  Bonuses
are in large part based on our performance.  The most important
determining factors used to calculate the performance bonus for the Chief
Executive Officer, President and Chief Financial Officer are based upon the
terms outlined below. Policy decisions to waive or modify performance goals have
not been a significant factor to date in that there have not been contractual
changes made other than the normal renewal or updating of contracts or
compensation as would be expected as part of an annual review.
  35
  Recent
Developments
  Effective
December 4, 2009, the Compensation Committee approved the
following:
  ·
                767
      shares of Series D Preferred stock for a value of $644,000 were issued to
      Mr. Derrick for guaranteeing loans, pledge of certificates of deposit to
      secure a line of credit, his efforts in connection with the conversion of
      existing debt into shares of Series D Preferred stock, and the raise of
      additional capital.
  ·
                1,250,000
      warrants to purchase common stock held by Mr. Hastings were vested and
      re-priced from $1.55 to $0.13 per share.  Additionally, $250,000
      warrants granted to Mr. Hastings were re-priced from $0.30 to $0.13 per
      share.
  ·
                4,283,767
      vested warrants previously granted to the members of the board of
      directors were re-priced to $0.13 per
share.
  In the
repricing of the warrants described above, the new exercise price is equal to
the price at which our common stock was traded on December 4, 2009, the date the
repricing was approved by the committee.
  Stock
options and stock awards
  Stock
ownership is provided to enable named executive officers and directors to
participate in our success.  The direct or potential ownership of
stock will also provide the incentive to expand the involvement of the named
executive officer to include, and therefore be mindful of, the perspective of
our stockholders.  Stock options and stock awards were approved by the
board of directors and the Compensation Committee and are based, in part, upon
the placement of activated TrackerPALTM devices in the market
place.  Bonuses may be issued in the form of stock options or stock
awards.
  Employee
benefits
  Several
of the employee benefits for the named executive officers are selected to
provide security for the named executive officers.  Most notably,
insurance coverage for health, life, and liability are intended to provide a
level of protection that will enable the named executive officers to function
without having the distraction of having to manage undue risk.  The
health insurance also provides access to preventative medical care which will
help the named executive officers function at a high energy level and manage job
related stress, and contribute to the overall well being of the named executive
officers, all of which contribute to enhance job performance in the opinion of
the Compensation Committee.
  Other
de minimis benefits
  Other de
minimis employee benefits such as cell phones, parking, and auto usage
reimbursements are directly related to job functions but contain a personal use
element which is considered to be a goodwill gesture that contributes to
enhanced job performance.
  As
discussed above, the board of directors determines the portion of compensation
allocated to each element for each individual named executive
officer.  As a general rule, salary is competitively based while
giving consideration to employee retention, qualifications, performance, and
general market conditions.  Typically, stock options are based on the
current market value of the option and how that will contribute to the overall
compensation of the named executive officer.  Consideration is also
given to the fact that the option has the potential for an appreciated future
value.  As such, the future value may be the most significant factor
of the option, but it is also more difficult to quantify as a benefit to the
named executive officer.
  Accordingly,
in determining the compensation program for us, as well as setting the
compensation for each named executive officer, the board of directors attempts
to attract the interest of the named executive officer within in the constraints
of a compensation package that is fair and equitable to all parties
involved.
  Report
of the Compensation Committee
  The
Compensation Committee of the board of directors has reviewed and discussed the
Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management. Based on this review and discussion, the
Compensation Committee recommended to the board that the Compensation Discussion
and Analysis be included in this Proxy Statement.
 
 Respectfully
submitted by the members of the Compensation Committee:
 
 Robert
      Childers (Chair)
                  Larry
      Schafran
  36
 
 Summary
Compensation Table
 
 The
following table summarizes all compensation paid to our named executive officers
in each of the two most recently completed fiscal years.
 (a)
                    (b)
                    
                    
                    (c)
                    
                    
                    
                    (d)
                    
                    
                    
                    (e)
                    
                    
                    
                    (f)
                    
                    
                    
                    (g)
                    
                    
                    
                    (h)
                    
                    
                    
                    (i)
                    
                    
                    
                    (j)Name
      and Principal Position
                    Year
                    
                    
                    Salary
                      ($)
                    
                    
                    
                    Bonus
                      ($)
                    
                    
                    
                    Stock
                      awards
                      ($)
                    
                    
                    
                    Options/warrants
                      awards
                      ($)
                    
                    
                    
                    Non-equity
                      incentive
      plan
                      compensation
                      ($)
                    
                    
                    
                    Change
      in
                      pension
                      value
      and
                      non-qualified
                      deferred
                      compensation
                      earnings
                      ($)(5)
                    
                    
                    
                    All
      other
                      compensation
                      ($)
                    
                    
                    
                    Total
                      ($)David
      G. Derrick (1)
                    2009
                    
                    $
                    240,000
                    
                    
                    $
                    300,000
                    
                    
                    $
                    -
                    
                    
                    $
                    185,571
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    5,929
                    
                    
                    $
                    731,500Chairman &
      CEO
                    2008
                    
                    $
                    240,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    13,020
                    
                    
                    $
                    253,020John
      L. Hastings III (2)
                    2009
                    
                    $
                    302,885
                    
                    
                    $
                    94,330
                    
                    
                    $
                    -
                    
                    
                    $
                    46,393
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    18,868
                    
                    
                    $
                    462,476President
      and Chief Operating Officer
                    2008
                    
                    $
                    200,000
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    3,879
                    
                    
                    $
                    203,879Bernadette
      Suckel (3)
                    2009
                    
                    $
                    126,161
                    
                    
                    $
                    -
                    
                    
                    $
                    11,500
                    
                    
                    $
                    104,520
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    242,181Managing
      Director of Sales and Marketing
                    2008
                    
                    $
                    55,846
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    55,846
 (1)
                Column
      (i) includes additional compensation for health, dental, life, and vision
      insurance paid on Mr. Derrick’s behalf by us.  In addition,
      country club dues are also included.  Amounts shown do not
      include consideration and fees paid to ADP Management in connection with a
      line of credit agreement.  During the fiscal year ended
      September 30, 2009, we accrued a $300,000 bonus granted by the board of
      directors that was subsequently converted into 300 shares of Series D
      Preferred stock subsequent to September 30, 2009. Additionally,
      options/warrant awards of $185,571 resulted from the issuance of 1,000,000
      unregistered warrants at an exercise price of $0.30 per
      share.  These options/warrants were issued and vested on January
      16, 2009 and have not yet been exercised as of the date of this
      Report.
 
 During
the fiscal year ended September 30, 2008, we issued 1,000,000 shares of
restricted common stock valued at $1.52 per share to prepay services in
connection with Mr. Derrick’s base salary.  Although, these shares
have not yet been sold and had a market value of $110,000 as of September 30,
2009, we recorded $240,000 and $60,000 of expense during the fiscal year ended
September 30, 2009 and 2008, respectively, in connection with the 1,000,000
prepaid shares issued in fiscal year 2008.
 
 To
summarize, Mr. Derrick was paid $5,929 and $193,020 in cash and $725,571 and
$60,000 in equity instruments for the fiscal years ended September 30, 2009 and
2008, respectively.
 
 (2)
                Mr.
      Hastings became our President in June 2008 and Chief Operating Officer in
      November 2008.  He holds similar positions in SecureAlert.
      Column (i) includes additional compensation for health, dental, and vision
      insurance paid on his behalf.  Options/warrant awards of $46,393
      resulted from the issuance of 250,000 unregistered warrants at an exercise
      price of $0.30 per share.
 
 (3)
                Mrs.
      Suckel has served as Managing Director of Offender Management Solutions
      since June 2008.  Options/warrants awards of $37,114 resulted
      from the issuance of 200,000 unregistered warrants at an exercise price of
      $0.30 per share and $67,406 resulted from the vesting of 100,000
      unregistered warrants with an exercise price of $1.55 per share previously
      issued for a total of $104,520. Additionally, we granted 50,000 shares of
      restricted common stock valued at $11,500 upon the date of
      grant.
  37
 
 Outstanding
Equity Awards at Fiscal Year-End
 Option
      awards
                Stock
      Awards(a)
                (b)
                (c)
                (d)
                
                (e)
                
                (f)
                (g)
                (h)
                (i)
                (j)Name
                Number
      of
                  securities
                  underlying
                  unexercised
                  options
      (#)
                  exercisable
                Number
      of
                  securities
                  underlying
                  unexercised
                  options
      (#)
                  unexercisable
                Equity
                  incentive
                  plan
      awards:
                  Number
      of
                  securities
                  underlying
                  unexercised
                  unearned
                  options
                  (#)
                
                Option
                  exercise
                  price
                  ($)
                
                Option
                  expiration
                  date
                Number
      of
                  shares
      or
                  units
      of
                  stock
      that
                  have
      not
                  vested
                  (#)
                Market
                  value
      of
                  shares
      or
                  units
      of
                  stock
      that
                  have
      not
                  vested
                  ($)
                Equity
                  incentive
                  plan
      awards:
                  Number
      of
                  unearned
                  shares,
                  units
      or
                  other
      rights
                  that
      have
                  not
      vested
                  (#)
                Equity
                  incentive
                  plan
      awards:
                  Market
      or
                  payout
                  value
      of
                  unearned
                  shares,
                  units
      or
                  other
      rights
                  that
      have
                  not
      vested
                  ($)David
      G. Derrick
                1,000,000
                -
                -
                
                $0.30
                
                1/15/2014
                -
                $            -
                -
                $            -John
      L. Hastings, III
                250,000
                -
                -
                
                $0.30
                
                1/15/2014
                -
                $            -
                -
                $            -Bernadette
      Suckel
                200,000
                -
                -
                
                $0.30
                
                1/15/2014
                -
                $            -
                -
                $            -
  
 Notes:  Market
value is based on the fair market value of our common stock on September 30,
2009 in the amount of $0.11 per share based on current market
price.
  Option
Exercises and Stock Vested
  Option
      awards
                  
                  
                  
                  Stock
      awards(a)
                  
                  
                  (b)
                  
                  
                  
                  (c)
                  
                  
                  
                  (d)
                  
                  
                  
                  (e)Name
                  
                  
                  Number
      of shares
                    acquired
      on exercise
                    (#)
                  
                  
                  
                  Value
      realized
                    on
      exercise
                    ($)
                  
                  
                  
                  Number
      of shares
                    acquired
      on vesting
                    (#)
                  
                  
                  
                  Value
      realized
                    on
      vesting
                    ($)David
      G. Derrick
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -John
      L. Hastings, III
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Bernadette
      Suckel
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  50,000
                  
                  
                  $
                  11,500
                  (1)
 Notes:
  (1)
                Stock
      awards of $11,500 during the fiscal year ended September 30, 2009 resulted
      from 50,000 shares of restricted common stock valued at $0.23 per share
      for a total of $11,500.
 
 Employment
Agreements
  We have
no employment agreements with any executive officers at this time.  By
agreement, however, the salary of Mr. Derrick is paid by ADP Management from the
proceeds of a management fee paid by us to ADP Management.
  Compliance
with Section 16(a) of the Exchange Act
  Section 16(a)
of the Exchange Act requires our officers, directors, and persons who
beneficially own more than 10% of our common stock to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors, and greater-than-ten-percent shareholders are also required by the
SEC to furnish us with copies of all Section 16(a) forms that they
file.
  Based
solely upon a review of these forms that were furnished to us, and based on
representations made by certain persons who were subject to this obligation that
such filings were not required to be made, we believe that all reports required
to be filed by these individuals and persons under Section 16(a) were filed
on time in fiscal year 2009, except the following:
  ·
                Mr.
      Derrick filed one late Form 4;
 ·
                ADP
      Management filed one late Form
4.
  38
  Compensation
of Directors
  The table
below summarizes the compensation paid by us to non-employee directors for the
fiscal year ended September 30, 2009.
  (a)
                
                (b)
                
                (c)
                
                (d)
                
                (e)
                
                (f)
                
                (g)
                
                (h)Name
                
                Fees
      earned or
                  paid
      in cash
                  ($)
                
                Stock
      awards
                  ($)
                
                Option
      awards
                  ($)
                
                Non-equity
                  incentive
                  plan
                  compensation
                  ($)
                
                Change
      in
                  pension
                  value
      and
                  nonqualified
                  compensation
                  earnings
                  ($)
                
                All
      other
                  compensation
                  ($)
                
                Total
                  ($)David
      Hanlon
                
                
                $        60,000
                (1)
                
                $                  -
                
                
                $                     -
                
                $                  -
                
                $                  -
                
                
                $                -
                
                
                $  60,000Robert
      Childers
                
                
                $        60,000
                (2)
                
                $                  -
                
                
                $                     -
                
                $                  -
                
                $                  -
                
                
                $                -
                
                
                $  60,000Peter
      McCall
                
                
                $        20,000
                (3)
                
                $                  -
                
                
                $                     -
                
                $                  -
                
                $                  -
                
                
                $                -
                
                
                $  20,000Larry
      Schafran
                
                
                $        60,000
                (1)
                
                $                  -
                
                
                $                     -
                
                $                  -
                
                $                  -
                
                
                $                -
                
                
                $  60,000James
      Dalton
                
                
                $        60,000
                (4)
                
                $                  -
                
                
                $                     -
                
                $                  -
                
                $                  -
                
                
                $                -
                
                
                $  60,000
 
 Note:
 
 (1)
                We
      accrued $60,000 in fees during the fiscal year ended September 30, 2009.
      Subsequent to the fiscal year end, Mr. Hanlon and Mr. Schafran converted
      these fees and all other outstanding fees earned in prior years totaling
      $225,000 into 225 shares of Series D Preferred stock subsequent to
      September 30, 2009.
 
 (2)
                Mr.
      Childers converted $60,000 in fees into 200,000 shares of common stock or
      $0.30 per share. Subsequent to the fiscal year end, Mr. Childers converted
      $50,000 of fees accrued in prior years into 50 shares of Series D
      Preferred stock.
 
 (3)
                Mr.
      McCall resigned from the board of directors effective February 1, 2009.
      The $20,000 in fees were earned, but not paid during the fiscal year ended
      September 30, 2009.
 
 (4)
                Mr.
      Dalton converted $15,000 in fees into 15 shares of Series D Preferred
      stock and was paid $45,000 in cash subsequent to September 30,
      2009.  Also subsequent to the fiscal year end, Mr. Dalton
      resigned from the board of
directors.
  Compensation
of $5,000 per month is accrued each month to non-employee
directors.  We also reimburse travel expenses of members for their
attendance at board and meetings.
  No
options or warrants were granted to the board of directors for services rendered
during the fiscal year ended September 30, 2009. Subsequent to the fiscal year
end, we re-priced the following warrants shown in the table below to $0.13 per
share:
  Name
                Grant
                  Date
                Expiration
                  Date
                Exercise
                  Price
                Number
                  of
                  Options
 
 David
      Hanlon
                9/8/06
                9/7/11
                $1.41
                50,0007/14/08
                7/13/13
                $1.22
                459,0008/29/07
                8/28/12
                $2.15
                100,000Robert
      Childers
                10/5/06
                10/4/11
                $1.73
                50,8678/29/07
                8/28/12
                $2.15
                150,0007/14/08
                7/13/13
                $1.22
                610,000Larry
      Schafran
                9/8/06
                9/7/11
                $1.41
                53,9008/29/07
                8/28/12
                $2.15
                150,00012/5/07
                12/4/12
                $4.05
                50,0007/14/08
                7/13/13
                $1.22
                610,000
  During
fiscal year 2009, our two non-independent directors, Messrs. Derrick and
Hastings, received no additional compensation for their service as
directors.
  39
  Item 12.    Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  This
section sets forth information known to us with respect to the beneficial
ownership of our common stock as of December 29, 2009.  We have
determined beneficial ownership in accordance with the rules of the Securities
and Exchange Commission. In computing the number of shares beneficially owned by
a person and the percentage ownership of that person, we include shares of
common stock subject to options and warrants held by that person that are
currently exercisable or will become exercisable within 60 days after December
29, 2009, while those shares are not included for purposes of computing
percentage ownership of any other person.  Unless otherwise indicated,
the persons and entities named in the table are believed by us to have sole
voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
  Security
Ownership of Certain Beneficial Owners
  The
following table sets forth information for any person (including any “group”)
who is known to us to be the beneficial owner of more than 5% of our common
stock, other than our named executive officers or directors.
  Title
      of Class
                Name
      and Address of Beneficial Owner
                Amount
      and
                  nature
      of beneficial
                  ownership
                Percent
      of ClassCommon
                Winfried
      Kill
                  Parkstrasse
      32A
                  Bergisch-Gladbach
      2M, 51427
                  Germany
                31,924,000
                15.08%Common
                Kofler
      Ventures (1)
                  R.C.S.
      Luxembourg B-0090554
                  412F,
      route d’ Esch, L-2086
                  Luxembourg,
      Germany
                17,000,000
                8.03%Common
                Borinquen
      Container Corporation
                  P.O.
      Box 145170
                  Arecibo,
      Puerto Rico 00614
                13,005,759
                6.14%Common
                Advance
      Technology Investors, LLC (2)
                  154
      Rock Hill Road
                  Spring
      Valley, NY 10977
                13,005,222
                6.14%Common
                euromicron
      AG
                  Speicherstrasse
      1
                  D-60327
      Frankfurt am Main
                  Germany
                12,500,000
                5.90%Common
                Mara
      Holdings Limited (3)
                  2/3
      B Horse Barrack Lane
                  Gibraltar
                12,000,000
                5.67%Common
                VATAS
      Holdings GmbH (4)
                  Friedrichstrasse
      95
                  10117
      Berlin, Germany
                11,500,000
                5.43%
 __________
 
 (1)
                Includes
      5,000,000 shares of common stock, and 2,000 shares of Series D Preferred
      stock convertible into 12,000,000 shares of common
  stock.
 
 (2)
                Includes
      11,135,222 shares of common stock, and 1,670,000 shares issuable upon
      exercise of warrants. Also includes 100,000 shares of common stock owned
      of record by Dina Weidman and 100,000 shares of common stock owned of
      record by U/W Mark Weidman Trust.
 
 (3)
                Includes
      2,000 shares of Series D Preferred stock convertible into 12,000,000
      shares of commons stock.
 
 (4)
                Includes
      5,500,000 shares of common stock, and 6,000,000 shares issuable upon
      exercise of warrants.
  40
  We have
two classes of voting equity securities, the common stock and Series D Preferred
stock.  The following table sets forth information as of December 29,
2009, regarding the voting securities beneficially owned by all directors, each
of the named executive officers, and directors and executive officers as a
group.
   Title of
      Class
                Name of Beneficial
      Owner
                Amount
      and Nature
                  of
      Beneficial
                  OwnershipCommon
                David
      G. Derrick (1)
                26,249,063
                12.40%James
      Dalton (2)
                9,607,786
                4.54%John
      L. Hastings, III
                1,500,000
                *Michael
      G. Acton (3)
                1,202,043
                *Bernadette
      Suckel
                325,000
                *Robert
      Childers (4)
                2,100,657
                *Larry
      Schafran (5)
                1,630,000
                *David
      Hanlon (6)
                1,410,702
                *Officers
      and Directors as a Group (9 persons) (7)
                32,890,422
                15.41%
 ________________
  *Less
than 1% ownership percentage.
  (1)
                Mr.
      Derrick is our Chief Executive Officer and Chairman of the board of
      directors.  Includes 1,204,000 shares of common stock owned of
      record by Mr. Derrick, 2,645,063 shares of common stock in the name of ADP
      Management, an entity controlled by Messrs. Derrick and Dalton, and
      2,000,000 vested warrants. Additionally, includes 2,567 shares of Series D
      Preferred stock convertible into 15,400,000 shares of common stock owned
      of record by Mr. Derrick and 833 shares of Series D Preferred stock in the
      name of ADP Management convertible into 5,000,000 shares of common
      stock.
  (2)
                Mr.
      Dalton is the former President of RemoteMDx and currently served as a
      director until November 2009.  Includes 1,872,723 shares of
      common stock and 2,645,063 shares of common stock in the name of ADP
      Management, an entity controlled by Messrs. Derrick and Dalton.
      Additionally, includes 833 shares of Series D Preferred stock in the name
      of ADP Management convertible into 5,000,000 shares of common stock and 15
      shares of Series D Preferred stock in the name of Mr. Dalton convertible
      into 90,000 shares of common stock.
  (3)
                Mr.
      Acton is our Chief Financial Officer.  Includes 1,002,043 shares
      of common stock owned of record by Mr. Acton and 200,000 shares of common
      stock issuable upon exercise of stock
warrants.
  (4)
                Mr.
      Childers is a director.  Includes 443,143 shares of common stock
      owned of record by the Robert E. Childers Living Trust and 546,647 shares
      owned of record by Mr. Childers.  Includes 50 shares of Series D
      Preferred stock in the name of Mr. Childers convertible into 300,000
      shares of common stock. In addition, 810,867 shares issuable upon exercise
      of stock warrants held by Mr. Childers have been
  included.
  (5)
                Mr.
      Schafran is a director.  Includes 106,100 shares of common stock
      owned of record by Mr. Schafran.  Includes 110 shares of Series
      D Preferred stock in the name of Mr. Schafran convertible into 660,000
      shares of common stock. In addition, 863,900 shares of common stock
      issuable upon exercise of stock warrants held by Mr. Schafran have been
      included.
  (6)
                Mr.
      Hanlon is a director.  Includes 111,702 shares of common stock
      owned of record by Mr. Hanlon.  Includes 115 shares of Series D
      Preferred stock in the name of Mr. Hanlon convertible into 690,000 shares
      of common stock. In addition, 609,000 shares of common stock issuable upon
      exercise of stock warrants held by Mr. Schafran have been
      included.
  (7)
                Duplicate
      entries eliminated.
  Item 13.    Certain
Relationships and Related Transactions, and Director Independence
  Related
Transactions
 
 Our board
of directors has adopted a policy that our business affairs will be conducted in
all respects by standards applicable to publicly held corporations and that we
will not enter into any future transactions and/or loans between us and our
officers, directors and 5% stockholders unless the terms are no less favorable
than could be obtained from independent, third parties and will be approved by a
majority of our independent and disinterested directors. In our view, all of the
transactions described below meet this standard.
  41
 
 Related-Party
Line of Credit
 
 As of
September 30, 2009, we owed $76,022 under a line-of-credit agreement with ADP
Management, an entity owned and controlled by Mr. Derrick, our Chief Executive
Officer.  Outstanding amounts on the line of credit accrue interest at
11% per annum and are due upon demand.  During the fiscal year ended
September 30, 2009, the net decrease under this line of credit was $466,782.
This decrease consisted of cash repayments of $739,063 offset, in part, by
$272,281 of expenses owed to ADP Management that are reimbursable by
us.
 
 Related-Party
Notes Payable
 
 In
November 2008, we borrowed $1,000,000 from Mr. Derrick, our Chief Executive
Officer.  The unsecured note payable accrues interest at 15% and was
due and payable upon our receiving cash proceeds of $1,000,000 or more from the
sale of common stock or other additional financing activities or February 4,
2009, whichever comes first.  We paid to Mr. Derrick a loan
origination fee of $50,000 in cash and 100,000 shares of restricted common
stock.  In February 2009, Mr. Derrick loaned us an additional $500,000
resulting in a total of $1,500,000 due to Mr. Derrick.  We and Mr.
Derrick agreed to extend the due date of the full obligation to February 26,
2010.  As of September 30, 2009, we owed $1,500,000 plus $12,197 in
accrued interest to Mr. Derrick. Subsequent to September 30, 2009, we and Mr.
Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D
Preferred stock.
 
 In
September 2008, we borrowed $250,000 from Randy Olshen, the former President of
SecureAlert.  The unsecured note payable accrued interest at 11% and
was due and payable on December 31, 2009 or upon demand whichever occurs
first.  As of September 30, 2009, this note was paid in
full.
 
 Foreclosure
Liability
 
 In July
2009, we entered into a promissory note with an unrelated entity in the amount
of $1,000,000 payable on December 31, 2010.  The note bears interest
at a rate of 15% per annum paid quarterly.  As additional
consideration for the loan to settle a registration right dispute and to induce
the lender to loan the money, we granted the lender 8,000,000 shares of
common.  Additionally, a related-party entity, ADP Management,
collateralized this note with 5,000,000 shares of the Company’s common stock. In
August 2009, we defaulted on the loan because we failed to register the
8,000,000 shares of common stock within 30 days of entering into the agreement
resulting in the lender foreclosing on the 5,000,000 shares of common stock held
as collateral. As of September 30, 2009, we accrued $775,000 as a “foreclosure
liability” to record our obligation to repay the 5,000,000 shares of common
stock to ADP Management.  Subsequent to September 30, 2009, we agreed
to issue 833 shares of Series D Preferred stock to ADP Management as payment
this liability.
 
 Related-Party
Series A 15% Debenture
 
 On May 1,
2009, we issued a Series A 15% debenture due and payable on November 1, 2010 to
an entity controlled by an employee of the Company for $250,000 in cash. In
addition to the rights and terms of the debenture, the entity received one-year
warrants to purchase 2,200,000 shares of our common stock at an exercise price
of $0.25 per share valued at $43,926. As of September 30, 2009, the outstanding
balance owed on the debenture was $250,000 plus $9,452 in accrued interest.
Subsequent to September 30, 2009, we agreed to issue 250 shares of Series D
Preferred stock in exchange for the debenture of $250,000.
 
 Consulting
Arrangements
 
 We agreed
to pay consulting fees to ADP Management for assisting us to develop our new
business direction and business plan and to provide introductions to strategic
technical and financial partners.  Under the terms of this agreement,
ADP Management was paid a consulting fee of $40,000 per month and we agreed to
reimburse the expenses incurred by ADP Management (including the salaries of
certain of our officers) in the course of performing services under the
consulting arrangement. Effective April 1, 2008, ADP Management reduced the
consulting fee from $40,000 to $20,000 per month to reflect the resignation of
Mr. Dalton as our President.
 
 The ADP
Management agreement also requires ADP Management to pay the salary of Mr.
Derrick as our Chief Executive Officer and Chairman of the board of
directors.  The board of directors, which at the time did not include
Mr. Derrick, approved both of these arrangements.
 
 During
the fiscal year ended September 30, 2008, we issued 1,000,000 shares of common
stock valued at $1.52 per share to prepay consulting fees to ADP Management
which will be reflected in future periods.  We recorded $240,000 and
$60,000 of expense associated with the issuance of these shares during the
fiscal years ended September 30, 2009 and September 30, 2008,
respectively.  As of September 30, 2009, the remaining deferred
compensation was $1,220,000.
  42
 
 Director
Independence
 
 As of the
date of this report, our common stock is traded on the OTC Bulletin Board (the
“Bulletin Board”).  The Bulletin Board does not impose on us standards
relating to director independence or the makeup of committees with independent
directors, or provide definitions of independence.  Nevertheless, we
have undertaken to appoint three individuals to our board of directors, Messrs.
Schafran, Childers and Hanlon, who are independent under the NASDAQ Marketplace
Rules and those standards applicable to companies trading on
NASDAQ.
 
 Specifically,
none of Mr. Schafran, Mr. Hanlon, or Mr. Childers:
 
 ·
                has
      been at any time during the past three years employed by us or by any of
      our parent or subsidiary;
 
 ·
                has
      accepted or has a family member who accepted any compensation from us in
      excess of $60,000 during any period of twelve consecutive months within
      the three years preceding the determination of independence, other than
      compensation for board or board committee
  service;
 
 ·
                is
      a family member of an individual who is, or at any time during the past
      three years was, employed by us as an executive
  officer;
 
 ·
                is,
      or has a family member who is, a partner in, or a controlling stockholder
      or an executive officer of, any organization to which we made, or from
      which we received, payments for property or services in the current or any
      of the past three fiscal years that exceed 5% of the recipient's
      consolidated gross revenues for that year, or $200,000, whichever is
      more;
 
 ·
                is,
      or has a family member who is, employed as an executive officer of another
      entity where at any time during the past three years any of our executive
      officers serve on the compensation committee of such other entity;
      or
 
 ·
                is,
      or has a family member who is, a current partner of our outside auditor,
      or was a partner or employee of our outside auditor who worked on our
      audit at any time during any of the past three
  years.
  Item 14.    Principal
Accounting Fees and Services
  Audit
Fees
  Audit services consist of the audit of
the annual consolidated financial statements of us, and other services related
to filings and registration statements filed by us and our subsidiaries and
other pertinent matters.  Audit fees paid to Hansen Barnett &
Maxwell for fiscal years 2009 and 2008 totaled approximately $168,000 and
$166,000, respectively.
  Tax
Fees, Audit Related Fees, and All Other Fees
  Hansen Barnett & Maxwell has not
provided any consulting services (including tax consulting and compliance
services or any financial information systems design and implementation services
to us in fiscal years 2009 and 2008.
  The Audit
Committee of the board of directors considered and authorized all services
provided by Hansen Barnett & Maxwell.
  Auditor
Independence
 
 Our Audit
Committee considered that the work done for us in fiscal 2009 by Hansen Barnett
& Maxwell was compatible with maintaining Hansen Barnett & Maxwell's
independence.
  Report
of the Audit Committee
  The Audit
Committee oversees our financial reporting process on behalf of the board of
directors. Management has the primary responsibility for the financial
statements and the reporting process, including the systems of internal
controls. The directors who serve on the Audit Committee are all independent for
purposes of applicable SEC Rules.
  The Audit
Committee operates under a written charter that has been adopted by the board of
directors.
  We have
reviewed and discussed with management our audited financial statements as of
and for the fiscal year ended September 30, 2009.
  We have
discussed with our independent registered public accountant, Hansen Barnett
& Maxwell, P.C., the matters that are required to be discussed by Statement
on Auditing Standards No. 114, The Auditors Communication with Those Charged
with Governance, as amended, by the Auditing Standards Board of the
American Institute of Certified Public Accountants, which includes a review of
the findings of the independent registered public accountant during its
examination of our financial statements.
  We have
received and reviewed written disclosures and the letter from Hansen Barnett
& Maxwell, P.C., which is required by Independence Standard No. 1,
Independence Discussions with
Audit Committees, as amended, by the Independence Standards Board, and we
have discussed with Hansen Barnett & Maxell, P.C. their independence under
such standards. We have concluded that the independent registered public
accountant is independent from us and our management.
  Based on
our review and discussions referred to above, we have recommended to the board
of directors that our audited financial statements be included in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2009, for
filing with the Securities and Exchange Commission.
  Respectfully
submitted by the members of the Audit Committee:
  Larry
      Schafran, Chair
                  David
      Hanlon
  43
 
 PART
IV
  Item 15.    Consolidated
Financial Statements and Exhibits
  (a)The following documents
are filed as part of this Form:
 
 1. Financial
Statements
  Report
      of Independent Registered Public Accounting Firm
                
                50Consolidated
      Balance Sheets
                
                51Consolidated
      Statements of Operations
                
                53Consolidated
      Statements of Stockholders' Equity (Deficit) and  Comprehensive
      Income
                
                54Consolidated
      Statements of Cash Flows
                
                60Notes
      to the Consolidated Financial Statements
                
                62
 
 2.  Financial Statement
Schedules.    [Included in the Consolidated Financial
Statements or Notes thereto.]
 
 3.
      Exhibits.
                The
      following exhibits are filed herewith or are incorporated by reference to
      exhibits previously filed with the
  Commission:
 
 Exhibit
      Number
                Title of
      Document3(i)(1)
                Articles
      of Incorporation (incorporated by reference to our Registration Statement
      and Amendments thereto on Form 10-SB, effective December 1,
      1997).3(i)(2)
                Amendment
      to Articles of Incorporation for Change of Name (previously filed as
      Exhibit on Form 10-KSB for the fiscal year ended September 30,
      2001).3(i)(3)
                Amendment
      to Articles of Incorporation Amending Rights and Preferences of Series A
      Preferred Stock (previously filed as Exhibit on Form 10-KSB for the fiscal
      year ended September 30, 2001).3(i)(4)
                Amendment
      to Articles of Incorporation Adopting Designation of Rights and
      Preferences of Series B Preferred Stock (previously filed as Exhibit on
      Form 10-QSB for the six months ended March 31, 2002).3(i)(5)
                Certificate
      of Amendment to the Designation of Rights and Preferences Related to
      Series A 10% Cumulative Convertible Preferred Stock of RemoteMDx, Inc.
      (incorporated by reference to our annual report on Form 10-KSB for the
      fiscal year ended September 30, 2001).3(i)(6)
                Certificate
      of Amendment to the Designation of Rights and Preferences Related to
      Series C 8% Convertible Preferred Stock of RemoteMDx, Inc. (incorporated
      by reference to our Current Report on Form 8-K, filed with the Commission
      on March 24, 2006).3(i)(7)
                Articles
      of Amendment to Articles of Incorporation filed July 12, 2006 (previously
      filed as exhibits to our current report on Form 8-K filed July 18, 2006,
      and incorporated herein by reference).3(i)(8)
                Articles
      of Amendment to the Fourth Amended and Restated Designation of Right and
      Preferences of Series A 10% Convertible Non-Voting Preferred Stock of
      RemoteMDx, Inc. (previously filed as Exhibit on Form 10-QSB for the nine
      months ended June 30, 2007, filed in August 2007).3(i)(9)
                Articles
      of Amendment to the Designation of Right and Preferences of Series A
      Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc.
      (previously filed as Exhibit on Form 10-QSB for the nine months ended June
      30, 2007, filed in August 2007).3(i)(10)
                Articles
      of Amendment to the Articles of Incorporation and Certificate of Amendment
      to the Designation of Rights and Preferences Related to Series D 8%
      Convertible Preferred Stock of RemoteMDx, Inc.3(ii)
                Bylaws
      (incorporated by reference to our Registration Statement on Form 10-SB,
      effective December 1, 1997).
  44
 
 4.01
                2006
      Equity Incentive Award Plan (previously filed in August 2006 the Form
      10-QSB for the nine months ended June 30, 2006).10.01
                Distribution
      and Separation Agreement (incorporated by reference to our Registration
      Statement and Amendments thereto on Form 10-SB, effective December 1,
      1997).10.02
                1997
      Stock Incentive Plan of the Company, (incorporated by reference to our
      Registration Statement and Amendments thereto on Form 10-SB, effective
      December 1, 1997).10.03
                1997
      Transition Plan (incorporated by reference to our Registration Statement
      and Amendments thereto on Form 10-SB, effective December 1,
      1997).10.04
                Securities
      Purchase Agreement for $1,200,000 of Series A Preferred Stock
      (incorporated by reference to our Registration Statement and Amendments
      thereto on Form 10-SB, effective December 1, 1997).10.05
                Loan
      Agreement (as amended) dated June 2001 between ADP Management and the
      Company (incorporated by reference to our annual report on Form 10-KSB for
      the fiscal year ended September 30, 2001).10.06
                Loan
      Agreement (as amended and extended) dated March 5, 2002 between ADP
      Management and the Company, effective December 31, 2001 (filed as an
      exhibit to our quarterly report on Form 10-QSB for the quarter ended
      December 31, 2001).10.07
                Agreement
      with ADP Management, Derrick and Dalton (April 2003) (previously filed as
      Exhibit on Form 10-QSB for the six months ended March 31,
      2003).10.08
                Security
      Agreement between Citizen National Bank and the Company (previously filed
      on Form 8-K in July 2006).10.09
                Promissory
      Note between Citizen National Bank and the Company (previously filed on
      Form 8-K in July 2006).10.10
                Common
      Stock Purchase Agreement dated as of August 4, 2006 (previously filed as
      an exhibit to our current report on Form 8-K filed August 7, 2006 and
      incorporated herein by reference).10.11
                Change
      in Terms Agreement between Citizen National Bank and the Company
      (previously filed as Exhibit on Form 10-KSB for the fiscal year ended
      September 30, 2006).10.12
                Securities
      Purchase Agreement between the Company and VATAS Holding GmbH, a German
      limited liability company (previously filed on Form 8-K in November
      2006).10.13
                Common
      Stock Purchase Warrant between the Company and VATAS Holding GmbH dated
      November 9, 2006 (previously filed as Exhibit on Form 10-QSB for the three
      months ended December 31, 2006, filed in February
2007).10.14
                Settlement
      Agreement and Mutual Release between the Company and Michael Sibbett and
      HGR Enterprises, LLC, dated as of February 1, 2007 (previously filed as
      Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed
      in February 2007).10.15
                Distributor
      Sales, Service and License Agreement between the Company and Seguridad
      Satelital Vehicular S.A. de C.V., dated as of February 5, 2007 (previously
      filed as Exhibit on Form 10-QSB for the three months ended December 31,
      2006, filed in February 2007).10.16
                Distributor
      Agreement between the Company and QuestGuard, dated as May 31,
      2007.  Portions of this exhibit were redacted pursuant to a
      request for confidential treatment filed with the Securities and Exchange
      Commission (previously filed as Exhibit on Form 10-QSB for the nine months
      ended June 30, 2007, filed in August 2007).10.17
                Stock
      Purchase Agreement between the Company and Midwest Monitoring &
      Surveillance, Inc., dated effective December 1, 2007 (previously filed as
      Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed
      in January 2008).10.18
                Stock
      Purchase Agreement between the Company and Court Programs, Inc., Court
      Programs of Florida Inc., and Court Programs of Northern Florida, Inc.,
      dated effective December 1, 2007 (previously filed as Exhibit on Form
      10-KSB for the fiscal year ended September 30, 2007, filed in January
      2008).
  45
 
 10.19
                Sub-Sublease
      Agreement between the Company and Cadence Design Systems, Inc., a Delaware
      corporation, dated March 10, 2005 (previously filed as Exhibit on Form
      10-KSB/A for the fiscal year ended September 30, 2007, filed in June
      2008).10.20
                Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated
      September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
      fiscal year ended September 30, 2007, filed in June
  2008).10.21
                Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated
      September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
      fiscal year ended September 30, 2007, filed in June
  2008).10.22
                Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated
      September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
      fiscal year ended September 30, 2007, filed in June
  2008).10.23
                Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated
      December 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the
      fiscal year ended September 30, 2007, filed in June
  2008).10.24
                Stock
      Purchase Agreement (sale of Volu-Sol Reagents Corporation shares to
      Futuristic Medical, LLC), dated January 15, 2008, including voting
      agreement (previously filed as Exhibit on Form 10-KSB/A for the fiscal
      year ended September 30, 2007, filed in June 2008).10.25
                Distribution
      and License Agreement between euromicron AG, a German corporation, and the
      Company, dated May 28, 2009 (previously filed as an Exhibit on Form 10-Q
      for the nine months ended June 30, 2009, filed in August
      2009).23.1
                Consent
      of Independent Registered Public Accounting Firm.31(i)
                Certification
      of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of
      2002.31(ii)
                Certification
      of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of
      2002.32
                Certifications
      under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
      1350).
 
 
  46
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
  RemoteMDx,
      Inc.By:
      /s/  David
      G. DerrickDavid
      G. Derrick, Chief Executive Officer(Principal
      Executive Officer)
  Date:
January 13, 2010
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Signature
                
                Title
                Date/s/
      David G. Derrick
                
                Director,
      Chairman, and
                January
      13, 2010David
      G. Derrick
                
                Chief
      Executive Officer(Principal
      Executive Officer)/s/  John
      L. Hastings, III
                
                President
      and Chief Operating Officer
                January
      13, 2010John
      L. Hastings, III/s/  Robert
      E. Childers
                
                Director
                January
      13, 2010Robert
      E. Childers/s/  Larry
      G. Schafran
                
                Director
                January
      13, 2010Larry
      G. Schafran/s/  David
      P. Hanlon
                
                Director
                January
      13, 2010David
      P. Hanlon/s/  Michael
      G. Acton
                
                Chief
      Financial Officer
                January
      13, 2010Michael
      G. Acton
                
                (principal
      financial officer)/s/  Chad
      D. Olsen
                
                Corporate
      Controller
                January
      13, 2010Chad
      D. Olsen
                
                (principal
      accounting officer)
 
  47
      
 
 
 
 
 
 
 
 
 
 
 RemoteMDx,
Inc.
 Consolidated
Financial Statements
 September
30, 2009 and 2008
 
 
 
 
 
 
 
 
  
 
 
 
 
  48
 
 Index
to Consolidated Financial Statements
  
 
 
 PageReport
      of Independent Registered Public Accounting Firm
              50Consolidated
      Balance Sheets as of September 30, 2009 and 2008
              51Consolidated
      Statements of Operations for the fiscal years ended September 30, 2009 and
      2008
              53Consolidated
      Statements of Stockholders’ Equity (Deficit) for the fiscal years ended
      September 30, 2008 and 2009
              54Consolidated
      Statements of Cash Flows for the fiscal years ended September 30, 2009 and
      2008
              60Notes
      to Consolidated Financial Statements
              62
 
 
 
 
 
  49
  
 HANSEN, BARNETT & MAXWELL,
      P.C.A
      Professional Corporation
              
              Registered
      with the Public CompanyCERTIFIED
      PUBLIC ACCOUNTANTS
              
              Accounting
      Oversight Board5
      Triad Center, Suite 750Salt
      Lake City, UT 84180-1128Phone:
      (801) 532-2200
                Fax:
      (801) 532-7944www.hbmcpas.com
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and
 Stockholders
of RemoteMDx, Inc.
 
 We have
audited the accompanying consolidated balance sheets of RemoteMDx, Inc. and
subsidiaries (collectively, the Company) as of September 30, 2009 and2008, and the
related consolidated statements of operations, stockholders’ equity (deficit),
and cash flows for each of the years in the two-year period ended September 30,
2009.  The Company’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of RemoteMDx, Inc. as of
September 30, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the years in the two-year period ended September 30,
2009 in conformity with accounting principles generally accepted in the United
States of America.
 
 The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 1 to the
consolidated financial statements, the Company has incurred losses and has an
accumulated deficit.  These conditions raise substantial doubt about
its ability to continue as a going concern.  Management’s plans
regarding those matters are also described in Note 1.  The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 
 
 HANSEN,
BARNETT & MAXWELL, P.C.
 Salt Lake
City, Utah
 January
12, 2010
 
 
 
  50
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 AS
OF SEPTEMBER 30, 2009 AND 2008
 
 
 Assets
              
              2009
              
              
              2008Current
      assets:Cash
              
              $
              602,321
              
              
              $
              2,782,953Deposit
      held in escrow
              
              
              -
              
              
              
              500,000Accounts
      receivable, net of allowance for doubtful accounts of  $266,000
      and $312,000, respectively
              
              
              1,441,648
              
              
              
              1,441,853Receivables
      from related-party
              
              
              -
              
              
              
              55,385Prepaid
      expenses and other
              
              
              275,390
              
              
              
              224,842Inventory,
      net of reserves of $83,092 and $0, respectively
              
              
              603,329
              
              
              
              -Total
      current assets
              
              
              2,922,688
              
              
              
              5,005,033Property
      and equipment, net of accumulated depreciation of $2,525,180 and
      $1,937,710, respectively
              
              
              1,313,306
              
              
              
              1,581,558Monitoring
      equipment, net of accumulated depreciation of $2,944,197 and $3,061,321,
      respectively
              
              
              1,316,493
              
              
              
              1,349,146Goodwill
              
              
              2,468,081
              
              
              
              4,811,834Intangible
      assets, net of amortization of $126,655 and $16,500,
      respectively
              
              
              496,346
              
              
              
              216,500Other
      assets
              
              
              76,675
              
              
              
              46,626Total
      assets
              
              $
              8,593,589
              
              
              $
              13,010,697
  
  
 See
accompanying notes to consolidated financial statements.
 51
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS (Continued)
 AS
OF SEPTEMBER 30, 2009 AND 2008
  
 Liabilities
      and Stockholders’ Equity2009
              
              
              2008Current
      liabilities:Bank
      line of credit
              
              $
              252,600
              
              
              $
              3,462,285Accounts
      payable
              
              
              2,339,786
              
              
              
              2,059,188Accrued
      liabilities
              
              
              3,506,680
              
              
              
              1,781,267Deferred
      revenue
              
              
              56,858
              
              
              
              21,343Related-party
      note payable and line of credit
              
              
              1,576,022
              
              
              
              792,804SecureAlert
      Series A Preferred stock redemption obligation
              
              
              3,148,943
              
              
              
              3,244,758Derivative
      liability (Note 11)
              
              
              1,219,426
              
              
              
              -Promissory
      notes payable, net of debt discount of $41,556 and $0,
      respectively
              
              
              2,008,444
              
              
              
              -Senior
      secured note payable, net of debt discount of $529,109 and $0,
      respectively
              
              
              2,890,522
              
              
              
              -Current
      portion of Series A 15% debentures, net of debt discount of $1,272,189 and
      $0, respectively
              
              
              2,127,811
              
              
              
              -Current
      portion of long-term debt
              
              
              272,493
              
              
              
              465,664Total
      current liabilities
              
              
              19,399,585
              
              
              
              11,827,309Series
      A 15% debentures net of current portion, net of debt discount of $549,531
      and $0, respectively
              
              
              557,219
              
              
              
              -Long-term
      debt, net of current portion, net of debt discount of $525,665 and $0,
      respectively
              
              
              1,009,606
              
              
              
              1,147,382Total
      liabilities
              
              
              20,966,410
              
              
              
              12,974,691Stockholders’
      equity (deficit):Preferred
      stock:Series
      A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares
      designated; zero and 19 shares outstanding, respectively (aggregate
      liquidation preference of $0)
              
              
              -
              
              
              
              1Series
      B convertible, $0.0001 par value: 2,000,000 shares designated; zero and
      10,999 shares outstanding, respectively (aggregate liquidation preference
      of $0)
              
              
              -
              
              
              
              1Common
      stock,  $0.0001 par value: 250,000,000 shares authorized;
      210,365,988 and 155,881,260 shares outstanding,
    respectively
              
              
              21,037
              
              
              
              15,588Additional
      paid-in capital
              
              
              194,659,044
              
              
              
              186,203,084Deferred
      compensation
              
              
              (1,287,406
              )
              
              
              (3,498,672
              )Accumulated
      deficit
              
              
              (205,765,496
              )
              
              
              (182,683,996
              )Total
      stockholders’ equity (deficit)
              
              
              (12,372,821
              )
              
              
              36,006Total
      liabilities and stockholders’ equity
              
              $
              8,593,589
              
              
              $
              13,010,697
 
  
 See
accompanying notes to consolidated financial statements.
 52
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
 2009
                  
                  
                  2008Revenues:Products
                  
                  $
                  570,749
                  
                  
                  $
                  2,577,600Monitoring
      services
                  
                  
                  12,055,159
                  
                  
                  
                  9,826,077Total
      revenues
                  
                  
                  12,625,908
                  
                  
                  
                  12,403,677Cost
      of revenues:Products
                  
                  
                  275,688
                  
                  
                  
                  1,675,212Monitoring
      services
                  
                  
                  9,862,925
                  
                  
                  
                  10,862,830Impairment
      of monitoring equipment and parts (Note 3)
                  
                  
                  2,319,530
                  
                  
                  
                  570,948Total
      cost of revenues
                  
                  
                  12,458,143
                  
                  
                  
                  13,108,990Gross
      (negative) margin
                  
                  
                  167,765
                  
                  
                  
                  (705,313
                  )Operating
      expenses:Selling,
      general and administrative (including $3,315,716 and $26,324,358,
      respectively, of compensation expense paid in stock or stock options /
      warrants)
                  
                  
                  16,540,645
                  
                  
                  
                  36,466,678Research
      and development (including $0 and $1,045,285, respectively, paid in stock
      or stock options / warrants)
                  
                  
                  1,777,873
                  
                  
                  
                  4,811,128Impairment
      of goodwill (Note 4)
                  
                  
                  2,804,580
                  
                  
                  
                  -Loss
      from operations
                  
                  
                  (20,955,333
                  )
                  
                  
                  (41,983,119
                  )Other
      income (expense):Gain
      on sale of intellectual property
                  
                  
                  -
                  
                  
                  
                  2,400,000Redemption
      of SecureAlert Series A Preferred
                  
                  
                  95,816
                  
                  
                  
                  (8,372,566
                  )Interest
      income
                  
                  
                  18,187
                  
                  
                  
                  35,230Interest
      expense (including $2,695,759 and $865,568, respectively, paid in stock or
      stock options / warrants)
                  
                  
                  (5,012,803
                  )
                  
                  
                  (1,566,542
                  )Derivative
      valuation gain (Note 11)
                  
                  
                  1,867,007
                  
                  
                  
                  -Other
      income (expense), net
                  
                  
                  905,626
                  
                  
                  
                  314,059Net
      loss from continuing operations
                  
                  
                  (23,081,500
                  )
                  
                  
                  (49,172,938
                  )Discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  (414,112
                  )Net
      loss
                  
                  
                  (23,081,500
                  )
                  
                  
                  (49,587,050
                  )Dividends
      on Series A Preferred stock
                  
                  
                  (175
                  )
                  
                  
                  (345,356
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (23,081,675
                  )
                  
                  $
                  (49,932,406
                  )Net
      loss per common share from continuing operations, basic and
      diluted
                  
                  $
                  (0.13
                  )
                  
                  $
                  (0.35
                  )Net
      loss per common share from discontinued operations, basic and
      diluted
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.01
                  )Net
      loss per common, basic and diluted
                  
                  $
                  (0.13
                  )
                  
                  $
                  (0.36
                  )Weighted
      average common shares outstanding, basic and diluted
                  
                  
                  182,188,000
                  
                  
                  
                  140,092,000
 
 See
accompanying notes to consolidated financial statements.
 53
 
 REMOTEMDX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  Preferred
      StockSeries
      A
                Shares
              
              
              Series
      A
                Amount
              
              
              Series
      B
                Shares
              
              
              Series
      B
                AmountBalance
      as of October 1, 2007
              
              
              19
              
              
              $
              1
              
              
              
              12,999
              
              
              $
              1Issuance
      of common stock for:Conversion
      of Series B Preferred stock
              
              
              -
              
              
              
              -
              
              
              
              (2,000
              )
              
              
              -Settlement
      of lawsuit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Related
      provisions of debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cash
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Acquisition
      of subsidiaries
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of options and warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of warrants for:Related
      provisions of debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of deferred consulting
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of financing costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of SecureAlert Series A Preferred stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of Series A Preferred stock for accrued dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Subscription
      receivable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -SecureAlert
      Series A Preferred stock redemption
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Deconsolidation
      of subsidiary
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of September 30, 2008
              
              
              19
              
              
              $
              1
              
              
              
              10,999
              
              
              $
              1
 
 
 See
accompanying notes to consolidated financial statements.
 54
  REMOTEMDX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  AdditionalCommon
      Stock
              
              
              Paid-In
              
              
              DeferredShares
              
              
              Amount
              
              
              Capital
              
              
              CompensationBalance
      as of October 1, 2007
              
              
              127,340,085
              
              
              $
              12,734
              
              
              $
              142,238,576
              
              
              $
              (7,468,998
              )Issuance
      of common stock for:Conversion
      of Series B Preferred stock
              
              
              15,000
              
              
              
              2
              
              
              
              (2
              )
              
              
              -Settlement
      of lawsuit
              
              
              325,000
              
              
              
              33
              
              
              
              571,967
              
              
              
              -Debt
              
              
              360,000
              
              
              
              36
              
              
              
              403,164
              
              
              
              (403,200
              )Services
              
              
              9,135,000
              
              
              
              914
              
              
              
              15,843,671
              
              
              
              (1,520,000
              )Cash
              
              
              6,177,219
              
              
              
              618
              
              
              
              5,187,296
              
              
              
              -Acquisition
      of subsidiaries
              
              
              650,000
              
              
              
              65
              
              
              
              2,599,435
              
              
              
              -Exercise
      of options and warrants
              
              
              3,618,814
              
              
              
              361
              
              
              
              2,509,520
              
              
              
              -Issuance
      of warrants for:Debt
              
              
              -
              
              
              
              -
              
              
              
              1,872,000
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              4,398,279
              
              
              
              (134,812
              )Amortization
      of deferred consulting
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,162,770Amortization
      of financing costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              865,568Issuance
      of SecureAlert Series A Preferred stock
              
              
              825,893
              
              
              
              82
              
              
              
              825,810
              
              
              
              -Issuance
      of Series A Preferred stock for accrued dividends
              
              
              -
              
              
              
              -
              
              
              
              (345,356
              )
              
              
              -Subscription
      receivable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -SecureAlert
      Series A Preferred stock redemption
              
              
              7,434,249
              
              
              
              743
              
              
              
              8,548,643
              
              
              
              -Deconsolidation
      of subsidiary
              
              
              -
              
              
              
              -
              
              
              
              1,550,081
              
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of September 30, 2008
              
              
              155,881,260
              
              
              $
              15,588
              
              
              $
              186,203,084
              
              
              $
              (3,498,672
              )
 
 
 See
accompanying notes to consolidated financial statements.
 55
  REMOTEMDX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  Subscription
                Receivable
              
              
              Accumulated
                Deficit
              
              
              TotalBalance
      as of October 1, 2007
              
              $
              (407,500
              )
              
              $
              (133,096,946
              )
              
              $
              1,277,868Issuance
      of common stock for:Conversion
      of Series B Preferred stock
              
              
              -
              
              
              
              -
              
              
              
              -Settlement
      of lawsuit
              
              
              -
              
              
              
              -
              
              
              
              572,000Debt
              
              
              -
              
              
              
              -
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              14,324,585Cash
              
              
              -
              
              
              
              -
              
              
              
              5,187,914Acquisition
      of subsidiaries
              
              
              -
              
              
              
              -
              
              
              
              2,599,500Exercise
      of options and warrants
              
              
              -
              
              
              
              -
              
              
              
              2,509,881Issuance
      of warrants for:Debt
              
              
              -
              
              
              
              -
              
              
              
              1,872,000Services
              
              
              -
              
              
              
              -
              
              
              
              4,263,467Amortization
      of deferred consulting
              
              
              -
              
              
              
              -
              
              
              
              5,162,770Amortization
      of financing costs
              
              
              -
              
              
              
              -
              
              
              
              865,568Issuance
      of SecureAlert Series A Preferred stock
              
              
              -
              
              
              
              -
              
              
              
              825,892Issuance
      of Series A Preferred stock for accrued dividends
              
              
              -
              
              
              
              -
              
              
              
              (345,356
              )Subscription
      receivable
              
              
              407,500
              
              
              
              -
              
              
              
              407,500SecureAlert
      Series A Preferred stock redemption
              
              
              -
              
              
              
              -
              
              
              
              8,549,386Deconsolidation
      of subsidiary
              
              
              -
              
              
              
              -
              
              
              
              1,550,081Net
      loss
              
              
              -
              
              
              
              (49,587,050
              )
              
              
              (49,587,050
              )Balance
      as of September 30, 2008
              
              $
              -
              
              
              $
              (182,683,996
              )
              
              $
              36,006
 
 
 See
accompanying notes to consolidated financial statements.
 56
 
 REMOTEMDX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
 Preferred
      StockSeries
      A
                Shares
              
              
              Series
      A
                Amount
              
              
              Series
      B
                Shares
              
              
              Series
      B
                AmountBalance
      as of October 1, 2008
              
              
              19
              
              
              $
              1
              
              
              
              10,999
              
              
              $
              1Issuance
      of common stock for:Conversion
      of Series A Preferred stock
              
              
              (19
              )
              
              
              (1
              )
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred stock
              
              
              -
              
              
              
              -
              
              
              
              (10,999
              )
              
              
              (1
              )Settlement
      of lawsuit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Related
      issuances of debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Cash
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Acquisition
      of subsidiaries
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Acquisition
      extension
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of warrants for:Related
      issuances of debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Acquisition
      of subsidiary
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of deferred consulting
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of financing costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Beneficial
      conversion feature recorded as interest expense on notes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forgiveness
      of debt from related party
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of RemoteMDx Series A Preferred stock for accrued
dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of September 30, 2009
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -
    57
 
 REMOTEMDX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
 
 Additional
              
              
              DeferredCommon
      Stock
              
              
              Paid-In
              
              
              Financing
      andShares
              
              
              Amount
              
              
              Capital
              
              
              ConsultingBalance
      as of October 1, 2008
              
              
              155,881,260
              
              
              $
              15,588
              
              
              $
              186,203,084
              
              
              $
              (3,498,672
              )Issuance
      of common stock for:Conversion
      of Series A Preferred stock
              
              
              9,306
              
              
              
              1
              
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred stock
              
              
              10,999
              
              
              
              1
              
              
              
              -
              
              
              
              -Settlement
      of lawsuits
              
              
              5,400,000
              
              
              
              540
              
              
              
              1,029,460
              
              
              
              -Related
      issuances of debt
              
              
              25,953,016
              
              
              
              2,595
              
              
              
              1,767,955
              
              
              
              (138,000
              )Services
              
              
              2,254,121
              
              
              
              226
              
              
              
              928,648
              
              
              
              (200,000
              )Cash
              
              
              17,850,000
              
              
              
              1,785
              
              
              
              3,248,215
              
              
              
              -Acquisition
      of subsidiaries
              
              
              2,857,286
              
              
              
              286
              
              
              
              656,890
              
              
              
              -Acquisition
      extension
              
              
              150,000
              
              
              
              15
              
              
              
              19,485
              
              
              
              -Issuance
      of warrants for:Related
      issuances of debt
              
              
              -
              
              
              
              -
              
              
              
              96,844
              
              
              
              -Services
              
              
              -
              
              
              
              -
              
              
              
              392,506
              
              
              
              (46,667
              )Acquisition
      of subsidiary
              
              
              -
              
              
              
              -
              
              
              
              114,383
              
              
              
              -Amortization
      of deferred consulting
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,930,678Amortization
      of financing costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              665,255Beneficial
      conversion feature recorded as interest expense on notes
              
              
              -
              
              
              
              -
              
              
              
              122,727
              
              
              
              -Forgiveness
      of debt from related party
              
              
              -
              
              
              
              -
              
              
              
              79,022
              
              
              
              -Issuance
      of RemoteMDx Series A Preferred stock for accrued
dividends
              
              
              -
              
              
              
              -
              
              
              
              (175
              )
              
              
              -Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      as of September 30, 2009
              
              
              210,365,988
              
              
              $
              21,037
              
              
              $
              194,659,044
              
              
              $
              (1,287,406
              )
   58
 
 REMOTEMDX,
INC.
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  Accumulated
                Deficit
              
              
              TotalBalance
      as of October 1, 2008
              
              $
              (182,683,996
              )
              
              $
              36,006Issuance
      of common stock for:Conversion
      of Series A Preferred stock
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred stock
              
              
              -
              
              
              
              -Settlement
      of lawsuits
              
              
              -
              
              
              
              1,030,000Related
      issuances of debt
              
              
              -
              
              
              
              1,632,550Services
              
              
              -
              
              
              
              728,874Cash
              
              
              -
              
              
              
              3,250,000Acquisition
      of subsidiaries
              
              
              -
              
              
              
              657,176Acquisition
      of extension
              
              
              -
              
              
              
              19,500Issuance
      of warrants for:Related
      issuances of debt
              
              
              -
              
              
              
              96,844Services
              
              
              -
              
              
              
              345,839Acquisition
      of subsidiary
              
              
              -
              
              
              
              114,383Amortization
      of deferred consulting
              
              
              -
              
              
              
              1,930,678Amortization
      of financing costs
              
              
              -
              
              
              
              665,255Beneficial
      conversion feature recorded as interest expense on notes
              
              
              -
              
              
              
              122,727Forgiveness
      of debt from related party
              
              
              -
              
              
              
              79,022Issuance
      of RemoteMDx Series A Preferred stock for accrued
dividends
              
              
              -
              
              
              
              (175
              )Net
      loss
              
              
              (23,081,500
              )
              
              
              (23,081,500
              )Balance
      as of September 30, 2009
              
              $
              (205,765,496
              )
              
              $
              (12,372,821
              )
 
 59
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
 
 2009
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (23,081,500
              )
              
              $
              (49,587,050
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              2,087,949
              
              
              
              1,736,492Common
      stock issued for services
              
              
              728,876
              
              
              
              13,620,584Common
      stock issued to settle lawsuit
              
              
              261,521
              
              
              
              1,276,000Amortization
      of debt discount
              
              
              2,030,504
              
              
              
              -Amortization
      of deferred financing and consulting costs
              
              
              2,595,933
              
              
              
              5,968,338Derivative
      liability valuation
              
              
              (1,867,007
              )
              
              
              -Registration
      payment arrangement expense
              
              
              -
              
              
              
              130,000Stock
      options and warrants issued during the period for services
              
              
              345,838
              
              
              
              4,263,467Redemption
      of SecureAlert Series A Preferred stock
              
              
              (95,816
              )
              
              
              8,205,922Impairment
      of goodwill
              
              
              2,804,580
              
              
              
              -Common
      stock issued for acquisition option extension cost
              
              
              19,500
              
              
              
              -Increase
      in related-party line of credit for services
              
              
              272,281
              
              
              
              618,433Impairment
      of monitoring equipment and parts
              
              
              2,319,530
              
              
              
              570,948Loss
      from discontinued operations
              
              
              -
              
              
              
              414,112Changes
      in operating assets and liabilities:Accounts
      receivable, net
              
              
              (23,490
              )
              
              
              3,293,050Interest
      receivable (payable)
              
              
              -
              
              
              
              (9,068
              )Deposit
      held in escrow
              
              
              500,000
              
              
              
              (500,000
              )Prepaid
      expenses and other assets
              
              
              (25,212
              )
              
              
              720,591Accounts
      payable
              
              
              745,630
              
              
              
              (1,373,491
              )Accrued
      liabilities
              
              
              1,824,042
              
              
              
              999,310Deferred
      revenue
              
              
              35,515
              
              
              
              (20,382
              )Net
      cash used in operating activities
              
              
              (8,521,326
              )
              
              
              (9,672,744
              )Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (380,647
              )
              
              
              (334,226
              )Purchase
      of monitoring equipment and parts
              
              
              (1,312,397
              )
              
              
              (192,221
              )Proceeds
      from sale of equipment
              
              
              16,577
              
              
              
              -Net
      cash used in investing activities
              
              
              (1,676,467
              )
              
              
              (526,447
              )Cash
      flows from financing activities:Payments
      on related-party line of credit
              
              
              (739,063
              )
              
              
              (315,392
              )Net
      principal proceeds (reductions) in bank line of credit
      borrowings
              
              
              388,593
              
              
              
              (396,700
              )Payments
      on notes payable
              
              
              (1,115,237
              )
              
              
              (336,133
              )Borrowings
      on related-party notes payable
              
              
              680,229
              
              
              
              975,578Principal
      payments on notes payable related to acquisitions
              
              
              -
              
              
              
              (2,176,821
              )Cash
      acquired through acquisitions
              
              
              -
              
              
              
              163,002Proceeds
      from the issuance of Series A 15% debentures
              
              
              4,496,750
              
              
              
              -Proceeds
      from sale of common stock
              
              
              3,250,000
              
              
              
              5,058,014Proceeds
      from sale of warrants and subsidiary stock
              
              
              -
              
              
              
              2,400,000Proceeds
      from issuance of notes payable
              
              
              1,055,889
              
              
              
              34,344Proceeds
      from exercise of options and warrants
              
              
              -
              
              
              
              2,772,381Net
      cash provided by financing activities
              
              
              8,017,161
              
              
              
              8,178,273Net
      decrease in cash
              
              
              (2,180,632
              )
              
              
              (2,020,918
              )Cash,
      beginning of year
              
              
              2,782,953
              
              
              
              4,803,871Cash,
      end of year
              
              $
              602,321
              
              
              $
              2,782,953
 
 See
accompanying notes to consolidated financial statements.
 60
 
 REMOTEMDX,
INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
 FOR
THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
 
 2009
              
              
              
              2008Cash
      paid for interest
              
              
              $        1,963,200
              
              
              $
              700,974Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of 9,306 and  zero common shares, respectively, in exchange for
      19 and zero shares of Series A Preferred stock,
    respectively
              
              
              $                      1
              
              
              $
              -Issuance
      of  10,999 and 2,000 common shares, respectively, in exchange
      for 10,999 and 15,000 shares of Series B Preferred stock,
      respectively
              
              
              1
              
              
              
              2Issuance
      of 2,000,000 and 360,000 common shares, respectively for deferred
      consulting services and financing services
              
              
              384,667
              
              
              
              403,200Preferred
      Series A and C stock dividends
              
              
              175
              
              
              
              423SecureAlert
      Series A Preferred stock dividends accrued
              
              
              -
              
              
              
              480,537Forgiveness
      of debt from related-party debt
              
              
              79,022
              
              
              
              -Shares
      issued prepaid services
              
              
              -
              
              
              
              1,520,000Fair
      value of assets acquired in purchase of Court Programs through the
      issuance of common stock
              
              
              -
              
              
              
              1,316,338Fair
      value of liabilities assumed in purchase of Court Programs through the
      issuance of common stock
              
              
              -
              
              
              
              468,837Issuance
      of common stock in acquisition of Court Programs, Inc
              
              
              -
              
              
              
              847,500Settlement
      of SecureAlert Series A Preferred stock
              
              
              -
              
              
              
              3,590,000Deconsolidation
      of ActiveCare
              
              
              -
              
              
              
              607,869Fair
      value of assets acquired in purchase of Midwest Monitoring through the
      issuance of common stock
              
              
              -
              
              
              
              2,974,666Fair
      value of liabilities assumed in purchase of Midwest Monitoring through the
      issuance of common stock
              
              
              -
              
              
              
              1,222,666Issuance
      of common stock in acquisition of Midwest Monitoring
              
              
              -
              
              
              
              1,752,000Issuance
      of common stock and stock options  to acquire the assets and
      liabilities of Bishop Rock Software
              
              
              856,522
              
              
              
              -Stock
      issued in connection with debt (as discount)
              
              
              1,739,393
              
              
              
              -Beneficial
      conversion feature recorded
              
              
              122,727
              
              
              
              -Debt
      issued to settle line of credit
              
              
              3,549,631
              
              
              
              -Common
      stock cancelled
              
              
              175
              
              
              
              -Acquisition
      of monitoring equipment through issuance of note payable
              
              
              2,887,987
              
              
              
              -Stock
      issued to settle related-party note payable and accrued
      interest
              
              
              218,479
              
              
              
              -Issuance
      of common stock to settle accounts payables
              
              
              550,000
              
              
              
              -Acquisition
      of property and equipment through issuance of note payable
              
              
              38,991
              
              
              
              -Reclassification
      of monitoring equipment to inventory from recovery of
parts
              
              
              1,450,803
              
              
              
              -
 
 See
accompanying notes to consolidated financial statements.
 61
 
 REMOTEMDX,
INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 (1)
              Organization
      and Nature of Operations
  General
  RemoteMDx,
Inc. and subsidiaries (collectively, the “Company”) markets, monitors and leases
TrackerPALTM devices.  The TrackerPALTM is used to monitor convicted
offenders that are on probation or parole in the criminal justice
system.  The TrackerPALTM device utilizes GPS and cellular technologies
in conjunction with a monitoring center that is staffed 365 days a
year.  The Company believes that its technologies and services benefit
law enforcement officials by allowing them to respond immediately to a problem
involving the monitored offender.  The TrackerPALTM is targeted to meet
the needs of this market domestically as well as internationally.
  Going
Concern
 
 The
Company has incurred recurring net losses and negative cash flows from operating
activities for the fiscal years ended September 30, 2009 and 2008.  In
addition, the Company has accumulated deficits of $205,765,496 and $182,683,996
as of September 30, 2009 and 2008, respectively. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 In order
for the Company to continue as a going concern, it must generate positive cash
flows from operating activities and obtain the necessary funding to meet its
projected capital investment requirements.  Management’s plans with
respect to this uncertainty include raising additional capital from the issuance
of preferred stock and expanding its market for its TrackerPALTM portfolio of
products.  There can be no assurance that revenues will increase
rapidly enough to offset operating losses and repay debts.  If the
Company is unable to increase cash flows from operating activities or obtain
additional financing, it will be unable to continue the development of its
products and may have to cease operations.
 
 To lessen
the Company’s cash burden and to raise additional capital, subsequent to
September 30, 2009, the Company entered into agreements to issue 15,986 shares
of Series D Convertible Preferred stock in exchange for conversion of
$15,723,204 in debt, accrued liabilities and interest and issued an additional
12,200 shares from securities purchase agreements totaling $6,100,000 of which
$4,600,000 has been received in cash as of the date of this Report, resulting in
a total of 28,186 shares of Series D Preferred stock.
   (2)
              Discontinued
      Operations
 
 During
the fiscal year ended September 30, 2008, the Company divested its majority
ownership interest of the diagnostic stain business conducted by a former
subsidiary ActiveCare, Inc., formerly known as Volu-Sol Reagents Corporation
(“ActiveCare”).  The Company completed the divestiture by distributing
its remaining interest (approximately 17% of the common stock) in ActiveCare
during the fiscal year ended September 30, 2009.  This transaction was
treated as a pro-rata nonreciprocal transfer to owners as required by the
nonmonetary transactions topic of the Financial Accounting Standards Board
Accounting Standards Codification (FASB ASC).  This resulted in
$1,550,081 recorded as additional paid in capital to the Company.
 
 The
Company’s consolidated financial statements have been reclassified to segregate
operating results of the discontinued operations for all periods
presented.  Prior to reclassification, the discontinued operations
were reported in the stain operating segment.  The summary of net
sales and operating results from discontinued operations for the fiscal years
ended September 30, 2009 and 2008, respectively, are as follows:
 
 2009
              
              
              2008Net
      sales
              
              $
              -
              
              
              $
              608,024Loss
      from discontinued operations
              
              $
              -
              
              
              $
              (414,112
              )
  62
 
 (3)
              Summary
      of Significant Accounting Policies
 
 Principles
of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of
RemoteMDx, Inc. and its subsidiaries, SecureAlert, Inc., Midwest Monitoring
& Surveillance, Inc., Bishop Rock Software, Inc., Court Programs, Inc.,
Court Programs of Florida, Inc., and Court Programs of Northern Florida, Inc.
(collectively, the “Company”).  All intercompany balances and
transactions have been eliminated in consolidation.  As discussed in
Note 2, the Company completely divested its ownership of ActiveCare during the
year ended September 30, 2009.
 
 Use
of Estimates in the Preparation of Financial Statements
 
 The
preparation of financial statements in conformity with U.S. 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 at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
 
 Fair
Value of Financial Statements
 
 The
carrying amounts reported in the accompanying consolidated financial statements
for cash, accounts receivable, accounts payable, accrued liabilities, and other
debt obligations approximate fair values because of the immediate or short-term
maturities of these financial instruments.  The carrying amounts of
the Company’s debt obligations approximate fair value as the interest rates
approximate market interest rates.
 
 Concentration
of Credit Risk
 
 The
Company has cash in bank accounts that, at times, may exceed federally insured
limits.  The Company has not experienced any losses in such
accounts.
 
 In the
normal course of business, the Company provides credit terms to its customers
and requires no collateral. Accordingly, the Company performs ongoing credit
evaluations of its customers' financial condition.
 
 Based
upon the expected collectability of its accounts receivable, the Company
maintains an allowance for doubtful accounts receivable.
 
 No
customer represented more than 10% of the Company’s total revenues for the
fiscal year ended September 30, 2009.  One non-repeat customer
represented 16% of the Company’s total revenues for the fiscal year ended
September 30, 2008.
 
 No
customer represented more than 10% of the Company’s total accounts receivable
for the fiscal year ended September 30, 2009.  One customer accounted
for $360,257 (25%) of the Company’s total accounts receivable for the fiscal
year ended September 30, 2008.
 
 Cash
Equivalents
 
 Cash
equivalents consist of investments with original maturities to the Company of
three months or less.  The Company had $15,670 and $0 of cash deposits
in excess of federally insured limits as of September 30, 2009 and 2008,
respectively.
 
 Accounts
Receivable
 
 Accounts
receivable are carried at original invoice amount less an estimate made for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis.  Specific reserves are estimated by management based on certain
assumptions and variables, including the customer’s financial condition, age of
the customer’s receivables and changes in payment histories.  Trade
receivables are written off when deemed uncollectible.  Recoveries of
trade receivables previously written off are recorded when cash is
received.  A trade receivable is considered to be past due if any
portion of the receivable balance has not been received by the Company within
its normal terms.  Interest income is not recorded on trade
receivables that are past due, unless that interest is
collected.
  63
 
 Inventory
 
 Inventory
is valued at the lower of the cost or market.  Cost is determined
using the first-in, first-out (“FIFO”) method.  Market is determined
based on the estimated net realizable value, which generally is the item selling
price.  Inventory is periodically reviewed in order to identify
obsolete or damaged items or impaired values.
 
 Inventory
consists of products that are available for sale and raw materials used in the
manufacturing of TrackerPALTM devices.  Completed TrackerPALTM devices
are reflected in Monitoring Equipment.  As of September 30, 2009 and
2008, respectively, inventory consisted of the following:
 
 2009
              
              
              2008Raw
      materials
              
              $
              686,421
              
              
              $
              -Reserve
      for damaged or obsolete inventory
              
              
              (83,092
              )
              
              
              -Total
      inventory, net of reserves
              
              $
              603,329
              
              
              $
              -
 
 Property
and Equipment
 
 Property
and equipment are stated at cost, less accumulated depreciation and
amortization.  Depreciation and amortization are determined using the
straight-line method over the estimated useful lives of the assets, typically
three to seven years.  Leasehold improvements are amortized over the
shorter of the estimated useful lives of the asset or the term of the lease.
Expenditures for maintenance and repairs are expensed while renewals and
improvements are capitalized.  When property and equipment are
disposed of, any gains or losses are included in the results of
operations.
 
 Property
and equipment consisted of the following as of September 30, 2009 and 2008,
respectively:
 
 2009
              
              
              2008Equipment,
      software, tooling, and other fixed assets
              
              $
              2,742,537
              
              
              $
              2,472,076Automobiles
              
              
              305,658
              
              
              
              287,736Building
      and land
              
              
              377,555
              
              
              
              377,555Leasehold
      improvements
              
              
              127,912
              
              
              
              102,190Furniture
      and fixtures
              
              
              284,824
              
              
              
              279,711Total
      property and equipment
              
              
              3,838,486
              
              
              
              3,519,268Accumulated
      depreciation
              
              
              (2,525,180
              )
              
              
              (1,937,710
              )Property
      and equipment, net of accumulated depreciation
              
              $
              1,313,306
              
              
              $
              1,581,558
  Depreciation
expense for the fiscal years ended September 30, 2009 and 2008 was $677,016 and
$638,138, respectively.
 
 Monitoring
Equipment
 
 Monitoring
equipment as of September 30, 2009 and 2008 is as follows:
 
 2009
              
              
              2008Monitoring
      equipment
              
              $
              4,260,690
              
              
              $
              4,410,467Less
      accumulated depreciation
              
              
              (2,944,197
              )
              
              
              (3,061,321
              )Monitoring
      Equipment, net
              
              $
              1,316,493
              
              
              $
              1,349,146
 
 The
Company began leasing monitoring equipment to agencies for offender tracking in
April 2006 under operating lease arrangements.  The monitoring
equipment is depreciated using the straight-line method over an estimated useful
life of 3 years.
 
 Amortization
expense for the fiscal years ended September 30, 2009 and 2008 was $1,300,783
and $1,082,648, respectively.  These expenses were classified as a
cost of revenues.
 
 Assets to
be disposed of are reported at the lower of the carrying amount or fair value,
less the estimated costs to sell.  During the fiscal years ended
September 30, 2009 and 2008, the Company disposed of lease monitoring equipment
and parts of $2,319,530 and $570,948, respectively.
  64
 
 Impairment
of Long-Lived Assets and Goodwill
 
 The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the book value of an asset may not be recoverable
and in the case of goodwill, at least annually. The Company evaluates whether
events and circumstances have occurred which indicate possible impairment as of
each balance sheet date. The Company uses an equity vs. fair market value method
of the related asset or group of assets in measuring whether the assets are
recoverable.  If the carrying amount of an asset exceeds its fair
market value, an impairment charge is recognized for the amount by which the
carrying amount exceeds the estimated fair value of the
asset.  Impairment of long-lived assets is assessed at the lowest
levels for which there is an identifiable fair market value that is independent
of other groups of assets.  As of September 30, 2009, the Company
impaired goodwill from Midwest Monitoring & Surveillance, Inc. by $2,343,753
and from Bishop Rock Software by $460,827, Inc. for a total impairment expense
of $2,804,580.
 
 Revenue
Recognition
 
 The
Company’s revenue has historically been from two sources: (i) monitoring
services; (ii) monitoring device and other product sales.
 
 Monitoring
Services
 Monitoring
services include two components: (a) lease contracts in which the Company
provides monitoring services and leases devices to distributors or end users and
the Company retains ownership of the leased device; and (b) monitoring services
purchased by distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring services.
 
 The
Company typically leases its devices under one-year contracts with customers
that opt to use the Company’s monitoring services.  However, these
contracts may be cancelled by either party at anytime with 30 days
notice.  Under the Company’s standard leasing contract, the leased
device becomes billable on the date of activation or 21 days from the date the
device is assigned to the lessee, and remains billable until the device is
returned to the Company.  The Company recognizes revenue on leased
devices at the end of each month that monitoring services have been
provided.  In those circumstances in which the Company receives
payment in advance, the Company records these payments as deferred
revenue.
 
 Monitoring Device Product
Sales
 Although
not the focus of the Company’s business model, the Company sells its monitoring
devices in certain situations. In addition, the Company sells home security and
Personal Emergency Response Systems (“PERS”) units.  The Company
recognizes product sales revenue when persuasive evidence of an arrangement with
the customer exists, title passes to the customer and the customer cannot return
the devices, prices are fixed or determinable (including sales not being made
outside the normal payment terms) and collection is reasonably assured. When
purchasing products (such as TrackerPAL devices) from the Company, customers
may, but are not required to, enter into monitoring service contracts with the
Company.  The Company recognizes revenue on monitoring services for
customers that have previously purchased devices at the end of each month that
monitoring services have been provided.
 
 Multiple Element
Arrangements
 The
majority of the Company’s revenue transactions do not have multiple elements. On
occasion, the Company has revenue transactions that have multiple elements (such
as product sales and monitoring services).  For revenue arrangements
that have multiple elements, the Company considers whether: (i) the delivered
devices have standalone value to the customer; (ii) there is objective and
reliable evidence of the fair value of the undelivered monitoring services,
which is generally determined by surveying the price of competitors’ comparable
monitoring services; and (iii) the customer does not have a general right of
return.  Based on these criteria, the Company recognizes revenue from
the sale of devices separately from the monitoring services to be provided to
the customer.  In accordance with FASB ASC subtopic addressing
multiple deliverables, if the fair value of the undelivered element exists, but
the fair value does not exist for one or more delivered elements, then revenue
is recognized using the residual method. Under the residual method as applied to
these particular transactions, the fair value of the undelivered element (the
monitoring services) is deferred and the remaining portion of the arrangement
(the sale of the device) is recognized as revenue when the device is delivered
and all other revenue recognition criteria are met.
  65
 
 Other
Matters
 The
Company considers an arrangement with payment terms longer than the Company’s
normal terms not to be fixed or determinable, and revenue is recognized when the
fee becomes due.  Normal payment terms for the sale of monitoring
services are 30 days, and normal payment terms for device sales are between 120
and 180 days.  The Company sells its devices and services directly to
end users and to distributors.  Distributors do not have general
rights of return.  Also, distributors have no price protection or
stock protection rights with respect to devices sold to them by the
Company.  Generally, title and risk of loss pass to the buyer upon
delivery of the devices.
 
 The
Company estimates its product returns based on historical experience and
maintains an allowance for estimated returns, which is recorded as a reduction
to accounts receivable and revenue.
 
 Shipping
and handling fees are included as part of net revenues.  The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of revenues.
 
 Research
and Development Costs
 
 All
expenditures for research and development are charged to expense as incurred.
These expenditures in 2009 and 2008 were for the development of SecureAlert’s
TrackerPALTM device and associated services. For the fiscal years ended September
30, 2009 and 2008, research and development expenses were $1,777,873 and
$4,811,128, respectively.
 
 Advertising
Costs
 
 The
Company expenses advertising costs as incurred.  Advertising expense
for the fiscal years ended September 30, 2009, and 2008, was $76,793 and
$209,389, respectively.
 
 Stock-Based
Compensation
 
 For the
fiscal years ended September 30, 2009 and 2008, the Company calculated
compensation expense of $67,406 and $214,251, respectively related to the
vesting of stock options granted in prior years.
 
 The fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The Company granted 1,517,714 and 1,725,000
stock options to employees during the fiscal years ended September 30, 2009 and
2008 valued $274,650 and $359,946, respectively.  In addition, 390,000
stock options issued to employees in prior years vested during the fiscal year
ended September 30, 2008.  The weighted average fair value of stock
options at the date of grant during the fiscal year ended September 30, 2009 and
2008 was $0.18 and $1.34, respectively. The expected life of stock options
represents the period of time that the stock options granted are expected to be
outstanding based on historical exercise trends. The expected volatility is
based on the historical price volatility of common stock. The risk-free interest
rate represents the U.S. Treasury bill rate for the expected life of the related
stock options. The dividend yield represents the Company’s anticipated cash
dividends over the expected life of the stock options.
 
 The
following are the weighted-average assumptions used for options granted during
the fiscal years ended September 30, 2009 and 2008, respectively:
 
 Fiscal
      years Ended
                September
      30,2009
              
              
              2008Expected
      cash dividend yield
              
              
              -
              
              
              
              -Expected
      stock price volatility
              
              
              121
              %
              
              
              136
              %Risk-free
      interest rate
              
              
              1.16
              %
              
              
              3.12
              %Expected
      life of options
              
              3.7
      years
              
              
              5
      years
  66
 
 A summary
of stock option activity for the fiscal years ended September 30, 2008 and 2009
is presented below:
 
 Shares
                Under
                Option
              
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                Contractual
                Life
              
              Aggregate
                Intrinsic
                ValueOutstanding
      as of September 30, 2007
              
              
              3,295,000
              
              
              $
              0.64Granted
              
              
              1,725,000
              
              
              $
              1.54Exercised
              
              
              (1,375,000
              )
              
              $
              0.63Forfeited
              
              
              (45,000
              )
              
              $
              0.86Expired
              
              
              -
              
              
              
              -Outstanding
      as of  September 30, 2008
              
              
              3,600,000
              
              
              $
              1.08
              
              3.34
      years
              
              $
              1,062,000Exercisable
      as of  September 30, 2008
              
              
              421,667
              
              
              $
              1.35
              
              3.30
      years
              
              $
              37,000
 
 Shares
                Under
                Option
              
              
              Weighted
                Average
                Exercise
                Price
              
              Weighted
                Average
                Remaining
                Contractual
                Life
              
              Aggregate
                Intrinsic
                ValueOutstanding
      as of September 30, 2008
              
              
              3,600,000
              
              
              $
              1.08Granted
              
              
              1,517,714
              
              
              $
              0.21Exercised
              
              
              -
              
              
              $
              -Forfeited
              
              
              -
              
              
              $
              -Expired
              
              
              (408,500
              )
              
              $
              1.45Outstanding
      as of  September 30, 2009
              
              
              4,709,214
              
              
              $
              0.76
              
              2.05  years
              
              $
              12,854Exercisable
      as of  September 30, 2009
              
              
              1,719,880
              
              
              $
              0.32
              
              2.97
      years
              
              $
              12,854
 
 Income
Taxes
 
 The
Company recognizes deferred income tax assets or liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or income tax returns. Deferred income tax assets or liabilities are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates expected to apply when
the differences are expected to be settled or realized.  Deferred
income tax assets are reviewed periodically for recoverability and valuation
allowances are provided as necessary.
 
 Net
Loss Per Common Share
 
 Basic net
loss per common share ("Basic EPS") is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding during the period.
 
 Diluted
net loss per common share ("Diluted EPS") is computed by dividing net loss
attributable to common stockholders by the sum of the weighted-average number of
common shares outstanding and the weighted-average dilutive common share
equivalents outstanding.  The computation of Diluted EPS does not
assume exercise or conversion of securities that would have an anti-dilutive
effect.
 
 Common
share equivalents consist of shares issuable upon the exercise of common stock
options and warrants, and shares issuable upon conversion of preferred
stock.  As of September 30, 2009 and 2008, there were 75,789,348 and
21,846,412 outstanding common share equivalents, respectively, that were not
included in the computation of diluted net loss per common share as their effect
would be anti-dilutive.
  67
 
 Recent
Accounting Pronouncements
 
 Effective
for December 2008, new accounting guidance was added relating to business
combinations. The objective of this Topic is to enhance the information that an
entity provides in our financial reports about a business combination and its
effects. The Topic mandates: (i) how the acquirer recognizes and measures the
assets acquired, liabilities assumed and any non-controlling interest in the
acquiree; (ii) what information to disclose in our financial reports and; (iii)
recognition and measurement criteria for goodwill acquired. This Topic is
effective for any acquisitions made on or after December 15, 2008. The adoption
of this Topic is not expected to have a material impact on our financial
statements and disclosures.
 
 In May
2009, the FASB issued guidance which establishes general standards of accounting
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In particular,
this Topic sets forth: (i) the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, (ii)
the circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in our financial statements, (iii) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. This Topic should be applied to the
accounting and disclosure of subsequent events. This Topic does not apply to
subsequent events or transactions that are within the scope of other applicable
accounting standards that provide different guidance on the accounting treatment
for subsequent events or transactions. This Topic was effective for interim and
annual periods ending after June 15, 2009, which was September 30, 2009 for us.
The adoption of this Topic did not have a material impact on our financial
statements and disclosures.
 
 In June
2009, the FASB issued guidance which became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. On the effective date of
this Topic, the Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-SEC accounting literature not included in
the Codification will become non-authoritative. This Topic identifies the
sources of accounting principles and the framework for selecting the principles
used in preparing the financial statements of nongovernmental entities that are
presented in conformity with GAAP and arranged these sources of GAAP in a
hierarchy for users to apply accordingly. This Topic is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption of this Topic did not have a material impact on our
disclosure of the financial statements.
 
 In June
2009, the FASB issued additional guidance which improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in our financial statements about a transfer of
financial assets; the effects of a transfer on our financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This additional guidance requires that a
transferor recognize and initially measure at fair value all assets obtained
(including a transferor’s beneficial interest) and liabilities incurred as a
result of a transfer of financial assets accounted for as a sale. Enhanced
disclosures are required to provide financial statement users with greater
transparency about transfers of financial assets and a transferor’s continuing
involvement with transferred financial assets. This additional guidance must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application is prohibited. This additional guidance must be
applied to transfers occurring on or after the effective date. The adoption of
this Topic is not expected to have a material impact on our financial statements
and disclosures.
 
 In
September 2009, the FASB added implementation guidance on accounting for
uncertainty in income taxes. For entities that are currently applying the
standards for accounting for uncertainty in income taxes, the guidance and
disclosure amendments are effective for financial statements issued for interim
and annual periods ending after September 15, 2009. The adoption of this Update
did not have a material impact on our financial statements and
disclosures.
 
 In
September 2009, the FASB issued guidance that changes the existing
multiple-element revenue arrangements guidance currently included under its
Revenue Arrangements with Multiple Deliverables codification. The revised
guidance primarily provides two significant changes: 1) eliminates the need for
objective and reliable evidence of the fair value for the undelivered element in
order for a delivered item to be treated as a separate unit of accounting, and
2) eliminates the residual method to allocate the arrangement consideration. In
addition, the guidance also expands the disclosure requirements for revenue
recognition. This will be effective for the first annual reporting period
beginning on or after June 15, 2010, with early adoption permitted provided that
the revised guidance is retroactively applied to the beginning of the year of
adoption. We are currently assessing the future impact of this new accounting
update to our financial statements.
  68
 
 In
October 2009, the FASB issued accounting guidance which changes the accounting
model for revenue arrangements that include both tangible products and software
elements. Under this guidance, tangible products containing software components
and non-software components that function together to deliver the tangible
product's essential functionality are excluded from the software revenue
recognition guidance given prior to this new guidance. In addition, hardware
components of a tangible product containing software components are always
excluded from the software revenue guidance.  This guidance is
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted.  We are currently assessing the future impact of this new
accounting update to our financial statements.
 
 In April
2008, the FASB issued an amendment for determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under authoritative accounting guidance for
goodwill and other intangible assets. This guidance is intended to improve the
consistency between the useful life of an intangible asset determined under the
guidance for goodwill and other intangible assets and the period of expected
cash flows used to measure the fair value of the asset under ASC 805 “Business
Combinations” and other principles under GAAP. This guidance is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited.
This guidance will be effective for us in fiscal year 2010. The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
 
 In
September 2006, the FASB issued enhanced guidance for using fair value to
measure assets and liabilities. This guidance also provides for expanded
information about the extent to which companies measure assets and liabilities
at fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. ASC 820 applies whenever other guidance requires
or permit assets or liabilities to be measured at fair value. ASC 820 does not
expand the use of fair value in any new circumstances. In February 2008, the
FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and
delays the effective date of ASC 820 by one year for nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis. In October 2008, the FASB issued
additional guidance for determining the fair value of a financial asset when the
market for that asset is not active to clarify the application of the provisions
of the guidance for fair value measurements in an inactive market and how an
entity would determine fair value in an inactive market. This additional
guidance is effective immediately. We adopted ASC 820 for financial assets and
financial liabilities at the beginning of fiscal year 2009. The adoption of this
guidance for financial assets and financial liabilities did not impact our
results of operations and financial position. The guidance is effective for
nonfinancial assets and liabilities in financial statements issued for fiscal
years beginning after November 15, 2008, which is our fiscal year 2010. The
adoption of this guidance for nonfinancial assets and nonfinancial liabilities
is not expected to significantly impact our results of operations and financial
position.
 
 In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (VIEs). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purpose entities, by
establishing a new approach for determining who should consolidate a
variable-interest entity and by changing when it is necessary to reassess who
should consolidate a variable-interest entity.  This guidance will be
effective at the beginning of the first fiscal year beginning after November 15,
2009. Early application is not permitted.  The adoption of this
guidance is not expected to significantly impact our results of operations and
financial position.
 
 In
September 2009, the FASB issued guidance updates and provided amendments to its
Fair Value Measurements and Disclosure requirements which permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This guidance also
requires new disclosures, by major category of investments, about the attributes
of investments, such as the nature of any restriction on the ability to redeem
an investment on the measurement date.  This guidance is effective for
interim and annual periods ending after December 15, 2009. Early application is
permitted in financial statements for earlier interim and annual periods that
have not been issued.  The adoption of this guidance is not expected
to significantly impact our results of operations and financial
position.
 
 In
October 2009, the FASB issued guidance on share-lending arrangements entered
into on an entity's own shares in contemplation of a convertible debt offering
or other financing.  This guidance is effective for fiscal years
beginning on or after December 15, 2009, and fiscal years within those fiscal
years for arrangements outstanding as of the beginning of those years.
Retrospective application is required for such arrangements. This guidance is
effective for arrangements entered into on (not outstanding) or after the
beginning of the first reporting period that begins on or after June 15, 2009.
Certain transition disclosures are also required. Early application is not
permitted.  The adoption of this guidance is not expected to
significantly impact our results of operations and financial
position.
  69
 
 (4)
              Goodwill
      and Other Intangible Assets
 
 As of
September 30, 2009, the Company had recorded goodwill and intangible assets
related to the acquisition of controlling interest of Midwest, Court Programs,
and Bishop Rock Software as follows:
 
 Midwest
                Monitoring
      &
                Surveillance
              
              
              Court
                Programs,
      Inc.
              
              
              Bishop
      Rock
                Software
              
              
              TotalGoodwill
              
              $
              1,259,995
              
              
              $
              1,208,086
              
              
              $
              -
              
              
              $
              2,468,081Other
      Intangible AssetsTrade
      name
              
              
              120,000
              
              
              
              99,000
              
              
              
              10,000
              
              
              
              229,000Software
              
              
              -
              
              
              
              -
              
              
              
              380,001
              
              
              
              380,001Customer
      relationships
              
              
              -
              
              
              
              6,000
              
              
              
              -
              
              
              
              6,000Non-compete
      agreements
              
              
              2,000
              
              
              
              6,000
              
              
              
              -
              
              
              
              8,000Total
      Other Intangible Assets
              
              
              122,000
              
              
              
              111,000
              
              
              
              390,001
              
              
              
              623,001Accumulated
      other intangible asset amortization
              
              
              (16,500
              )
              
              
              19,800
              )
              
              
              (90,355
              )
              
              
              (126,655
              )Total
      goodwill and other intangible assets, net of amortization
              
              $
              1,365,495
              
              
              $
              1,299,286
              
              
              $
              299,646
              
              
              $
              2,964,427
 
 Midwest Monitoring &
Surveillance
 Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Midwest Monitoring & Surveillance
(“Midwest”).  Like the Company’s operations prior to the acquisition
of interest, Midwest provides electronic monitoring for individuals on
parole.  The total consideration for the purchase of Midwest was
$4,400,427 comprised of notes payable of $1,800,000, shares of common stock
valued at $1,752,000 (438,000 shares valued at $4.00 per share), transaction
costs of $31,497, and long-term liabilities assumed of $816,930.
 
 The total
consideration of $4,400,427 less the tangible assets acquired of $674,679
resulted in an excess over net book value of $3,725,748.  The Company
recorded impairment of $2,343,753 for the fiscal year ended September 30, 2009,
resulting in a net goodwill of $1,259,995, as noted in the table
above.
 
 The
Company recorded $9,000 of amortization expense for Midwest intangible assets
during the fiscal year ended September 30, 2009 resulting in a total accumulated
amortization of $16,500 and net intangible assets of $105,500.
 
 During
March 2009, the parties extended the option period for the purchase of the
remaining 49% ownership of Midwest to April 15, 2010.  The Company
agreed to give the following consideration to Midwest minority owners to extend
this option:
 
 1)
              150,000
      shares of RemoteMDx common stock valued at $0.13 per share for a total of
      $19,500.
 2)
              $75,000
      in cash upon execution of the
agreement.
 3)
              $105,000
      in cash paid in ten equal payments of $10,500 beginning April 15, 2009
      through January 15, 2010.
  The
expense totaling $199,500 was reported as an acquisition option extension cost
under other income (expense) for the fiscal year ended September 30,
2009.
 
 Court
Programs
 Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Court Programs, Inc., a Mississippi corporation, Court
Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of
Florida, Inc., a Florida corporation (collectively, “Court
Programs”).  Similar to the Company’s operations prior to the
acquisition of interest, Court Programs is a distributor of electronic
monitoring devices to courts providing a solution to monitor individuals on
parole.  The total consideration for the purchase of Court Programs
was $1,527,743 comprised of a note payable of $300,000, shares of common stock
valued at $847,500 (212,000 shares valued at approximately $4.00 per share),
transaction costs of $45,324, and long-term liabilities assumed of
$334,919.  The total consideration of $1,527,743 less the tangible
assets acquired of $208,658 resulted in an excess over net book value of
$1,319,086.  The excess over net book value was allocated as noted in
the table above.
  70
 
 The
Company recorded $10,800 of amortization expense on intangible assets for Court
Programs during the fiscal year ended September 30, 2009 resulting in a total
accumulated amortization of $19,800 and net intangible assets of
$91,200.
 
 Effective
April, 1, 2009, the Company and Court Programs agreed to release Court Programs
from an obligation to repay expenses paid on its behalf by the Company in the
amount of $147,566 as consideration to extend the option period for the purchase
of the remaining 49% ownership of Court Programs to April 15, 2010. The expense
of $147,566 was reported as an acquisition option extension cost under other
income (expense) for the fiscal year ended September 30, 2009.
 
 Bishop Rock
Software
 Effective
January 14, 2009, the Company purchased a 100% ownership interest, including a
voting interest, of Bishop Rock Software, Inc., a California corporation,
(“Bishop Rock”) for 2,857,286 shares of the Company’s common stock valued at
$0.23 per share valued at $657,176, options to purchase 642,714 shares of the
Company’s common stock with an exercise price of $0.09 per share for a value of
$114,383 using the Black-Scholes calculation, and $79,268 in debt for a total
purchase price of $850,827.  The total consideration of $850,827 less
crime-scene correlation software recorded as an asset for $390,001 resulted in
goodwill of $460,827.  During the fiscal year ended September 30,
2009, the Company recorded an impairment expense of $460,827, resulting in no
more remaining goodwill.
 
 The
Company recorded $90,355 of amortization expense on intangible assets for Bishop
Rock Software during the fiscal year ended September 30, 2009 resulting in a
total accumulated amortization of $90,355 and net intangible assets of
$299,646.
 
 Supplemental
Pro Forma Results of Operations
 The
following tables present the pro forma results of operations for the fiscal
years ended September 30, 2009 and 2008, as though the Midwest, Court Programs,
and Bishop Rock Software acquisitions had been completed as of the beginning of
each period presented:
  Fiscal
      years Ended
                September
      30,2009
              
              
              2008Revenues:Products
              
              $
              570,749
              
              
              $
              2,593,925Monitoring
      services
              
              
              12,055,841
              
              
              
              11,322,201Total
      revenues
              
              
              12,626,590
              
              
              
              13,916,126Cost
      of revenues:Products
              
              
              (275,688
              )
              
              
              (1,675,212
              )Monitoring
      services
              
              
              (9,862,925
              )
              
              
              (12,261,139
              )Impairment
      of monitoring equipment and parts
              
              
              (2,319,530
              )
              
              
              (570,948
              )Total
      cost of revenues
              
              
              (12,458,143
              )
              
              
              (14,507,299
              )Gross
      margin (deficit)
              
              
              168,447
              
              
              
              (591,173
              )Operating
      expenses:Selling,
      general and administrative
              
              
              (16,701,374
              )
              
              
              (36,777,665
              )Research
      and development
              
              
              (1,777,873
              )
              
              
              (4,811,128
              )Impairment
      of goodwill
              
              
              (2,804,580
              )
              
              
              -Loss
      from operations
              
              
              (21,115,380
              )
              
              
              (42,179,966
              )Other
      income (expense):Gain
      on sale of intellectual property
              
              
              -
              
              
              
              2,400,000Redemption
      of SecureAlert Series A Preferred stock
              
              
              -
              
              
              
              (8,372,566
              )Interest
      income
              
              
              18,187
              
              
              
              35,230Interest
      expense
              
              
              (5,012,803
              )
              
              
              (1,588,073
              )Derivative
      valuation gain
              
              
              1,867,007
              
              
              
              -Change
      from estimate to actual on Series A
              
              
              95,816
              
              
              
              -Other
      income (loss)
              
              
              905,626
              
              
              
              314,059Net
      loss from continuing operations
              
              
              (23,241,547
              )
              
              
              (49,391,316
              )Discontinued
      operations
              
              
              -
              
              
              
              (414,112
              )Net
      loss
              
              
              (23,241,547
              )
              
              
              (49,805,428
              )Dividends
      on Series A and C Preferred stock
              
              
              (175
              )
              
              
              (345,356
              )Net
      loss attributable to common stockholders
              
              $
              (23,241,722
              )
              
              $
              (50,150,784
              )Net
      loss per common share – basic and diluted
              
              $
              (0.13
              )
              
              $
              (0.36
              )Weighted
      average common shares outstanding – basic and diluted
              
              
              182,188,000
              
              
              
              140,092,000
  71
 
 (5)
              Bank
      Line of Credit
 
 During
the fiscal year ended September 30, 2008, the Company paid off a $4,000,000 line
of credit and established a line of credit for $3,600,000 with the same
bank.  As of September 30, 2008, the outstanding balance of the line
of credit was $3,462,285 and it matured on March 1, 2009.  The line of
credit was secured by letters of credit for a total of $3,600,000 and
SecureAlert’s assets, excluding TrackerPALTM products. The letters of credit were
provided as collateral by six unrelated parties.  During the fiscal
year ended September 30, 2009, the Company and the six unrelated parties
mutually agreed to pay off the line of credit by calling upon the letters of
credit and converting into a senior secured convertible note. (See Note
9)
 
 Additionally,
the Company established a new line of credit for $1,000,000 with a bank during
the fiscal year ended September 30, 2009.  The interest rate is 3.28%
and the line of credit matures on September 22, 2010.  The line of
credit is secured by certificates of deposit pledged by the Company’s Chief
Executive Officer, Mr. David Derrick.  Interest on the line of credit
is due monthly. As of September 30, 2009, the Company owed
$252,600.  Subsequent to September 30, 2009, the Company borrowed the
remaining $747,400 available under the line of credit.
 
 (6)
              Accrued
      Expenses
 
 Accrued
expenses consisted of the following as of September 30, 2009:
 
 Accrued
      foreclosure liability (see Note 7)
              
              $
              775,000Accrued
      payroll, taxes and employee benefits
              
              
              561,898Accrued
      officer compensation
              
              
              492,280Accrued
      consulting
              
              
              436,054Accrued
      interest
              
              
              382,424Accrued
      board of directors fees
              
              
              300,000Accrued
      warranty and manufacturing costs
              
              
              246,622Accrued
      legal and settlement costs
              
              
              80,208Accrued
      research and development costs
              
              
              45,000Accrued
      acquisition extension costs
              
              
              42,000Accrued
      outside services
              
              
              38,132Accrued
      indigent fees
              
              
              34,130Accrued
      cellular costs
              
              
              27,144Accrued
      commissions and other costs
              
              
              45,788Total
      accrued expenses
              
              $
              3,506,680
 
 Subsequent
to September 30, 2009, the Company entered into agreements to exchange
approximately 2,099 shares of Series D Preferred stock for the conversion of
$1,857,280 of existing accrued expenses shown above.
 
 (7)
              Related
      Party Transactions
 
 The
Company has entered into certain transactions with related parties. These
transactions consist mainly of financing transactions and consulting
arrangements.
 
 Related-Party
Line of Credit
 
 As of
September 30, 2009, the Company owed $76,022 under a line-of-credit agreement
with ADP Management, an entity owned and controlled by Mr. Derrick, the
Company’s Chief Executive Officer.  Outstanding amounts on the line of
credit accrue interest at 11% per annum and are due upon
demand.  During the fiscal year ended September 30, 2009, the net
decrease under this line of credit was $466,782. This decrease consisted of cash
repayments of $739,063 offset, in part, by $272,281 of expenses owed to ADP
Management that are reimbursable by the Company.
 
 As of
September 30, 2008, the Company owed $542,804 to ADP Management under a
line-of-credit agreement.  During the year ended September 30, 2008,
the line of credit increased $1,318,433 due to a monthly management fee owed to
ADP Management, including salaries for Mr. Derrick and Mr. Dalton, expenses
incurred by ADP Management that are reimbursable by the Company of $618,433, and
$700,000 in cash. The Company made cash repayments during the year of
$975,641.
  72
 
 Related-Party
Notes Payable
 
 In
November 2008, the Company borrowed $1,000,000 from Mr. Derrick, the Chief
Executive Officer of the Company.  The unsecured note payable accrues
interest at 15% and was due and payable upon the Company receiving cash proceeds
of $1,000,000 or more from the sale of common stock or other additional
financing activities or February 4, 2009, whichever comes first.  The
Company paid to Mr. Derrick a loan origination fee of $50,000 in cash and
100,000 shares of restricted common stock.  In February 2009, Mr.
Derrick loaned an additional $500,000 to the Company resulting in a total of
$1,500,000 due to Mr. Derrick.  The Company and Mr. Derrick agreed to
extend the due date of the full obligation to February 26, 2010.  As
of September 30, 2009, the Company owed $1,500,000 plus $12,197 in accrued
interest to Mr. Derrick. Subsequent to September 30, 2009, the Company and Mr.
Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D
Preferred stock.
 
 In
September 2008, the Company borrowed $250,000 from Randy Olshen, the former
President of SecureAlert.  The unsecured note payable accrued interest
at 11%.  As of September 30, 2009, this note was paid in
full.
 
 Foreclosure
Liability
 
 In July
2009, the Company entered into a promissory note with an unrelated entity in the
amount of $1,000,000 payable on December 31, 2010.  The note bears
interest at a rate of 15% per annum paid quarterly.  As additional
consideration for the loan to settle a registration rights dispute, the Company
granted the lender 8,000,000 shares of common.  Additionally, a
related-party entity, ADP Management, collateralized this note with 5,000,000
shares of the Company’s common stock it owns. In August 2009, the Company
defaulted on the loan because it failed to register the 8,000,000 shares of
common stock within 30 days of entering into the agreement resulting in the
lender foreclosing on the 5,000,000 shares of common stock held as collateral.
As of September 30, 2009, the Company accrued $775,000 as a “foreclosure
liability” to record the Company’s obligation to repay the 5,000,000 shares of
common stock to ADP Management.  Subsequent to September 30, 2009, the
Company agreed to issue 833 shares of Series D Preferred stock to ADP Management
as payment this liability.
 
 Related-Party
Series A 15% Debenture
 
 On May 1,
2009, the Company issued a Series A 15% debenture due and payable on November 1,
2010 to an entity controlled by an employee of the Company for $250,000 in cash.
In addition to the rights and terms of the debenture, the entity received
one-year warrants to purchase 2,200,000 shares of the Company common stock at an
exercise price of $0.25 per share valued at $43,926. As of September 30, 2009,
the outstanding balance owed on the debenture was $250,000 plus $9,452 in
accrued interest. Subsequent to September 30, 2009, the Company agreed to issue
250 shares of Series D Preferred stock in exchange for the debenture of
$250,000.
 
 Consulting
Arrangements
 
 The
Company agreed to pay consulting fees to ADP Management for assisting the
Company to develop its new business direction and business plan and to provide
introductions to strategic technical and financial partners.  Under
the terms of this agreement, ADP Management was paid a consulting fee of $40,000
per month and the Company agreed to reimburse the expenses incurred by ADP
Management (including the salaries of certain of our officers) in the course of
performing services under the consulting arrangement. Effective April 1, 2008,
ADP Management reduced the consulting fee from $40,000 to $20,000 per month to
reflect the resignation of Mr. Dalton as the Company’s President.
 
 The ADP
Management agreement also requires ADP Management to pay the salary of Mr.
Derrick as Chief Executive Officer and Chairman of the Board of Directors of the
Company.  The Board of Directors, which at the time did not include
Mr. Derrick, approved both of these arrangements.
 
 During
the fiscal year ended September 30, 2008, the Company issued 1,000,000 shares of
common stock valued at $1.52 per share to prepay consulting fees to ADP
Management.  The Company recorded $240,000 and $60,000 of expense
associated with the issuance of these shares during the fiscal years ended
September 30, 2009 and September 30, 2008, respectively.  As of
September 30, 2009, the remaining deferred compensation was
$1,220,000.
 
 (8)
              Convertible
      Promissory Note
 
 On
January 15, 2009, the Company entered into an unsecured convertible promissory
note for $2,700,000 in order to purchase TrackerPALTM units.  The note,
at the lender’s option, may convert into shares of the Company’s common stock at
a conversion price of $0.22 per share.  The note bears interest at 8%
per annum and matures on January 15, 2010. Interest is due monthly and the
principal is due at maturity. The fair market value of the common stock was
$0.23 per share on the date the Company entered into the agreement resulting in
a beneficial conversion feature of $122,727.  This was recorded as a
debt discount and will be expensed over the life of the note. As of September
30, 2009, the outstanding balance due was $2,050,000 with a remaining debt
discount balance of $41,556. Subsequent to September 30, 2009, the holders of
the convertible promissory note of $2,050,000 agreed to convert the note and the
total outstanding accrued interest of $98,414 into 2,149 shares of Series D
Preferred stock.
  73
 
 (9)
              Senior
      Secured Convertible Notes
 
 During
the year ended September 30, 2009, the Company issued senior secured convertible
notes of $3,549,631 to unrelated parties. The proceeds were used to pay off the
Company’s line of credit. The interest rate is 15% per annum and the notes
mature on March 13, 2010.  Interest is due monthly and the principal
is due at maturity.  These notes may convert into shares of the
Company’s common stock at a conversion price of $0.20 per share or into shares
at a reduced conversion rate should the Company issue any equity security at a
price less than $0.20 per share., or into shares of the SecureAlert’s common
stock at the fair market value of the stock at the conversion
date.  The Company determined that the embedded conversion features of
the notes were subject to derivative accounting treatment (see Note 11). This
resulted in a debt discount valued at $853,166. Additionally, with the issuance
of these notes, the Company issued 3,549,630 shares of common stock valued at
$226,853 recorded as a debt discount. The value of $1,080,019 recorded as a debt
discount will be expensed over the life of these notes.  As of
September 30, 2009, the outstanding balance of the notes was $3,419,631 with a
remaining debt discount balance of $529,109. Subsequent to September 30, 2009,
the holders of $2,270,000 of this debt agreed to convert the debt into 2,270
shares of Series D Preferred stock and the remaining debt discount of $529,109
was expensed.
 
 (10)
              Series
      A 15% Debentures
 
 During
the fiscal year ended September 30, 2009, the Company received $4,400,000 in
cash from the issuance of Series A 15% debentures. Additionally, the Company
issued debentures to a consultant in the principal amount of $106,750 for
services rendered to the Company.  As of September 30, 2009, the total
outstanding balance of the debentures was $4,506,750.  The terms of
these debentures are as follows: 1) 15% interest per annum.  Interest
is due quarterly and principal is due at maturity, 2) 18-month maturity, 3) for
every $1 invested into the debenture the holder received 1 share of the
Company’s common stock, and 4) at the holder’s option, the debenture may be
converted into shares of common stock at a conversion rate of $0.20 per share or
into shares at a reduced conversion rate should the Company issue any equity
security at a price less than $0.20 per share. The Company determined that the
embedded conversion features of the notes were subject to derivative accounting
treatment (see Note 11). This resulted in a debt discount valued at
$3,130,423.  Additionally, with the issuance of these notes, the
Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000
warrants valued at $43,926 recorded as a debt discount. This discount will be
expensed over the life of the debentures.
 
 In
September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per
share to an investor.  Shortly following the transaction, the market
price of the Company’s common stock fell to approximately $0.20 per share. The
Company agreed upon the investor’s investment of an additional $3,000,000
(included in the $4,506,750 discussed in the paragraph above) in the Series A
15% debenture that the Company would issue 9,796,636 additional shares of its
common stock to the investor.  Furthermore, the Company agreed to
re-price outstanding warrants held by the investor from $1.00 to $0.25 per share
and extend the purchase period an additional two years. The issuance of these
shares and re-pricing of the warrants attributed an additional $587,248 to the
debt discount resulting in a total $3,130,423 in a debt discount to be amortized
over the life of the debentures.  During the fiscal year ended
September 30, 2009, the Company amortized $1,308,703 of this debt discount and
recorded it as interest expense.  As of September 30, 2009, the debt
discount balance was $1,821,720.
 
 Subsequent
to September 30, 2009, the holders of $4,609,648 of debentures and accrued
interest agreed to convert this debt into a total of 4,614 shares of Series D
Preferred stock and the remaining debt discount of $1,821,720 was
expensed.
 
 (11)
              Derivative
      Liability
 
 The
Company does not hold or issue derivative instruments for trading
purposes.  However, the Company has convertible notes that contain
embedded derivative features that require separate valuation from the
convertible notes payable.  The Company recognizes these derivatives
as liabilities in its balance sheet, measures them at their estimated fair
value, and recognizes changes in their estimated fair value in earnings (losses)
in the period of change.  As of September 30, 2009, the derivative
instruments had a fair value of $1,219,426 resulting in a derivative valuation
gain of $1,867,007 for the period. The Company did not have any derivatives
during the fiscal year ended September 30, 2008.
  74
 
 (12)
              Debt
      Obligations
 
 Debt
obligations as of September 30, 2009 and 2008 consisted of the
following:
 
 September
      30,2009
                
                
                2008SecureAlert,
      Inc.Unsecured
      note payable to a former subsidiary bearing interest at
      5%.  This note was paid in full during the fiscal year ended
      September 30, 2009.
                
                $
                -
                
                
                $
                598,793Unsecured
      notes payable to former SecureAlert stockholders, with interest at 5%,
      payable in installments of $80,000 per month paid in full as of September
      30, 2009.
                
                
                -
                
                
                
                169,676Note
      payable for testing equipment with an interest rate of 8%.  The
      note is secured by testing equipment. The note matures on June 9,
      2011.
                
                
                12,228
                
                
                
                -Unsecured
      note payable with an interest rate of 12%. The note matures on February 1,
      2010.
                
                
                8,728
                
                
                
                -RemoteMDx,
      Inc.Unsecured
      promissory note with an entity bearing an interest rate of
      15%.  The note matures on December 31, 2010.  Interest
      is paid quarterly and the principal due at maturity. Debt discount at year
      end was $525,665.
                
                
                474,335
                
                
                
                -Court Programs,
      Inc.Note
      payable due to the Small Business Administration (“SBA”).  Note
      bears interest at 6.04% and matures on April 6, 2037.  The note
      is secured by monitoring equipment.
                
                
                225,000
                
                
                
                229,100Unsecured
      revolving lines of credit with two banks, with interest rates between
      6.60% and 13.49%.
                
                
                16,500
                
                
                
                48,499Automobile
      loan with a financial institution secured by the vehicle
      purchased.  Interest rate is 7.09% and is due in June
      2014.
                
                
                30,751
                
                
                
                -Unsecured
      note payable with an interest rate of 8%.
                
                
                1,492
                
                
                
                16,028Capital
      leases with an effective interest rate 14.89% that matures in January
      2011.
                
                
                14,898
                
                
                
                -Midwest Monitoring
      & Surveillance, Inc.Unsecured
      revolving line of credit with a bank, with an interest rate of
      6.60%
                
                
                39,224
                
                
                
                -Notes
      payable to a financial institution bearing interest at
      6.37%.  Notes mature in July 2011 and July 2016.  The
      notes are secured by property.
                
                
                185,274
                
                
                
                247,675Notes
      payable for monitoring equipment.  Interest rates range between
      7.8% to 18.5% and mature September 2008 through November
      2011.  The notes are secured by monitoring
      equipment.
                
                
                57,344
                
                
                
                199,747
 Automobile
      loans with several financial institutions secured by the
      vehicles.  Interest rates range between 6.9% and 8.5%, due
      between January 2010 and October 2011.
              
              
              42,463
              
              
              
              43,570Note
      payable to a stockholder of Midwest.  The note bears interest at
      5%  maturing in February 2013.
              
              
              47,704
              
              
              
              59,958Capital
      leases with effective interest rates that range between 12.9% and
      14.7%.  Leases mature between June 2014 and September
      2014.
              
              
              126,158
              
              
              
              -Total
      debt obligations
              
              
              1,282,099
              
              
              
              1,613,046Less
      current portion
              
              
              (272,493
              )
              
              
              (465,664
              )Long-term
      debt, net of current portion
              
              $
              1,009,606
              
              
              $
              1,147,382
 
  75
 
 13)
              Preferred
      Stock
 
 The
Company is authorized to issue up to 20,000,000 shares of preferred stock,
$0.0001 par value per share. The Company's Board of Directors has the authority
to amend the Company's Articles of Incorporation, without further stockholder
approval, to designate and determine, in whole or in part, the preferences,
limitations and relative rights of the preferred stock before any issuance of
the preferred stock and to create one or more series of preferred
stock.
 
 Series
A 10 % Convertible Non-Voting Preferred Stock
 The
Company designated 40,000 shares of preferred stock as Series A 10% Convertible
Non-Voting Preferred stock ("Series A Preferred stock"). During the year ended
September 30, 2009, all 19 outstanding shares of Series A Preferred Stock
converted into 9,306 shares of the Company’s common stock.  There were
no conversions during the year ended September 30, 2008.
 
 Dividends
 The
Series A Preferred stock was entitled to dividends at the rate of 10% per year
on the stated value of the Series A Preferred stock (or $200 per share), payable
in cash, additional shares of Series A Preferred stock, or common shares of
RemoteMDx at the discretion of the Board of Directors. Dividends were fully
cumulative and accrued from the date of original issuance to the holders of
record as recorded on the books of the Company at the record date or date of
declaration if no record date is set.  During the fiscal years ended
September 30, 2009 and 2008, the Company recorded $175 and $423 in dividends on
Series A Preferred stock, respectively.
 
 Series
B Convertible Preferred Stock
 The
Company designated 2,000,000 shares of preferred stock as Series B Convertible
Preferred stock ("Series B Preferred stock"). Each share of Series B Preferred
stock was convertible into shares of common stock at an initial rate of $3.00
per share of common. The Company has issued shares of common stock or securities
convertible into common stock for consideration per share less than $3.00 per
share.  The conversion rate automatically adjusted to a price equal to
the aggregate consideration received by the Company for that issuance divided by
the number of shares of common stock issued. During the fiscal years ended
September 30, 2009 and 2008, 10,999 and 2,000 shares of Series B Preferred stock
converted into 10,999 and 15,000 shares of common stock, respectively. As of
September 30, 2009, there were no shares of Series B Preferred stock
outstanding.
 
 Series
D Convertible Preferred Stock
 In
November 2009, the Company designated 50,000 shares of preferred stock as Series
D Convertible Preferred stock, $0.0001 par value per share (“Series D Preferred
stock”).  Subsequent to the fiscal year ended September 30, 2009, the
Company agreed to issue a total of 15,986 shares of Series D Preferred stock in
consideration for the conversion of $15,723,204 of debt, accrued liabilities and
interest and issued an additional 12,200 shares from securities purchase
agreements totaling $6,100,000 of which $4,600,000 has been received in cash as
of the date of this Report, resulting in a total of 28,186 shares of Series D
Preferred stock.
 
 Dividends
 The
Series D Preferred stock is entitled to dividends at the rate equal to eight
percent (8%) per annum calculated on the purchase amount actually paid for the
shares or amount of debt converted.  The dividend is payable in cash
or shares of common stock at the sole discretion of the Board of Directors. If a
dividend is paid in shares of common stock of the Company, the number of shares
to be issued is based on the average per share market price of the common stock
for the 14-day period immediately preceding the applicable accrual date (i.e.,
March 31, June 30, September 30, or December 31, as the case may
be).  Dividends are payable quarterly, no later than thirty days
following the end of the accrual period.
 
 Convertibility
 Each
share of Series D Preferred stock may be converted into 6,000 shares of common
stock commencing after ninety days from the date of issue.
  76
 
 Voting Rights and
Liquidation Preference
 The
holders of the Series D Preferred stock may vote their shares on an as-converted
basis on any issue presented for a vote of the stockholders, including the
election of directors and the approval of certain transactions such as a merger
or other business combination of the Company.  In addition, on the
issues of an increase in the number of shares of common stock the Company is
authorized to issue and on the proposal of a reduction in the number of issued
and outstanding shares (a reverse split) of the Company’s common stock, holders
of the Series D Preferred stock may vote as a class holding the equivalent of 60
percent of the issued and outstanding shares of the common stock, regardless of
the number of shares then outstanding.  As of the date of this report,
there were 25,186 shares of Series D Preferred stock outstanding.  As
a consequence of these voting rights, the holders of the Series D Preferred
stock may exercise control over these issues regardless of the interests of the
remaining stockholders.  Additionally, the holders are entitled to a
liquidation preference equal to their original investment amount.
 
 In the
event of the liquidation, dissolution or winding up of the affairs of the
Company (including in connection with a permitted sale of all or substantially
all of the Company’s assets), whether voluntary or involuntary, the holders of
shares of Series D Preferred Stock then outstanding will be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
an amount per share equal to original issue price, as adjusted to reflect any
stock split, stock dividend, combination, recapitalization and the like with
respect to the Series D Preferred Stock.
 
 (14)
              SecureAlert
      Preferred Stock
 
 SecureAlert,
Inc. Series A Preferred Shares
 During
the fiscal year ended September 30, 2007, and pursuant to Board of Directors
approval, the Company amended the articles of incorporation of its subsidiary,
SecureAlert, Inc. to establish 3,590,000 shares of preferred stock designated as
Series A Convertible Redeemable Non-Voting Preferred stock (“SecureAlert Series
A Preferred stock”).
 
 Dividends
 The
holders of shares of SecureAlert Series A Preferred stock were entitled to
receive quarterly dividends out of any of SecureAlert’s assets legally available
therefore, prior and in preference to any declaration or payment of any dividend
on the common stock of SecureAlert, at the rate of $1.54 per day times the
number of SecureAlert’s parolee contracts calculated in days during the
quarter.  For example, if there were an average of 10,000 parolee
contracts outstanding during the quarter, the total dividend would be $1,386,000
($1.54 x 90 days x 10,000 contracts) or $0.386 per share of SecureAlert Series A
Preferred stock.  In no case will a dividend be paid if the gross
revenue per contract per day to SecureAlert averages less than
$4.50.  Dividends will be paid in cash to the holders of record of
shares of SecureAlert Series A Preferred stock as they appear on the books and
records of SecureAlert on such record dates not less than ten days nor more than
sixty days preceding the payment dates thereof, as may be fixed by the Board of
Directors of the Company.
 
 During
the fiscal years ended September 30, 2009 and 2008, the Company recorded $0 and
$344,933 in dividends on SecureAlert Series A Preferred stock.
 
 Convertibility
 As a
group, all SecureAlert Series A Preferred stock may be converted at the holder’s
option at any time into an aggregate of 20% ownership of the common shares of
SecureAlert, Inc.
 
 On March
24, 2008, SecureAlert redeemed all outstanding shares of SecureAlert Series A in
exchange for 7,434,249 shares of RemoteMDx common stock for a value of
$8,549,386.  The former SecureAlert Series A stockholders are entitled
to receive quarterly contingency payments through March 23, 2011 based on a rate
of $1.54 per day times the number of SecureAlert’s parolee contracts calculated
in days during the quarter.  This can be paid in either cash or common
stock at the Company’s option. The Company will make quarterly adjustments as
necessary to reflect the difference between the estimated and actual contingency
payments to the former SecureAlert Series A stockholders.  During the
fiscal year ended September 30, 2008, RemoteMDx issued 825,893 shares of common
stock as consideration for dividends due to the former SecureAlert Series A
stockholders, and recorded a net expense of $8,372,566 from the initial
redemption and subsequent quarterly adjustments.  As of September 30,
2009, the Company estimated and accrued $3,148,943 for future and past
contingency payments due to former SecureAlert Series A stockholders. Subsequent
to September 30, 2009, former holders of SecureAlert Series A Preferred stock
agreed to convert an aggregate of $2,261,142 of the future and past contingency
payments otherwise payable with respect to the redemption of the SecureAlert
Series A Preferred stock for 2,263 shares of Series D Preferred
stock.
  77
 
 (15)
              Common
      Stock
 
 Authorized
Shares
 
 The
Company is authorized to issue up to 250,000,000 shares of common
stock.
 
 Common
Stock Issuances
 
 During
the fiscal year ended September 30, 2009, the Company issued 54,484,728 shares
of common stock.  Of these shares, 9,306 shares were issued upon
conversion of 19 shares of Series A Preferred stock; 10,999 shares were issued
upon conversion of 10,999 shares of Series B Preferred stock; 5,400,000 shares
were issued to settle lawsuits and obligations; 25,953,016 shares were issued in
connection with debt; 2,254,121 shares were issued for services rendered to the
Company valued at $728,874; 3,007,286 shares were issued to purchase Bishop Rock
and to extend an option to purchase the remaining percentage of ownership of
Midwest; and 17,850,000 shares were issued for net cash proceeds of
$3,250,000.
 
 During
the fiscal year ended September 30, 2008, the Company issued 28,541,175 shares
of common stock.  Of these shares, 15,000 shares were issued upon
conversion of 2,000 shares of Series B Preferred stock; 325,000 shares were
issued upon settlement of a lawsuit; 360,000 shares were issued for debt;
9,135,000 shares were issued for services in the amount of $14,324,585;
6,177,219 shares were issued for cash proceeds of $5,187,914; 650,000 shares
were issued in connection with the acquisition of Midwest and Court Programs;
825,893 shares were issued for SecureAlert Series A Preferred stock dividends;
7,434,249 shares were issued to redeem SecureAlert Series A Preferred stock; and
3,618,814 shares were issued from the exercise of options and
warrants.
 
 As of
September 30, 2009, the Company was authorized to issue 250,000,000 shares of
common stock and 210,365,988 were outstanding.
 
 Subsequent
to the fiscal year 2009, the holders of a majority of the issued and outstanding
voting securities of the Company consented in writing to an increase of the
authorized shares from 250,000,000 to 600,000,000.  The Company
intends to file Amended Articles of Incorporation for the Company to the effect
the increase in the number of authorized shares as soon as reasonably
practical.
 
 (16)
              Options
      and Warrants
 
 Stock
Incentive Plan
 
 During
the fiscal year ended September 30, 2006, the stockholders approved the 2006
Equity Incentive Award Plan (the “2006 Plan”).  The 2006 Plan provides
for the grant of incentive stock options and nonqualified stock options,
restricted stock, stock appreciation rights, performance shares, performance
stock units, dividend equivalents, stock payments, deferred stock, restricted
stock units, other stock-based awards and performance-based awards to employees
and certain non-employees who have important relationships with the
Company.  A total of 10,000,000 shares are authorized for issuance
pursuant to awards granted under the 2006 Plan.  During the fiscal
year ended September 30, 2009, the Company granted 4,931,214 options under this
plan as described below.
 Number
      of
                  Options
      and
                  Warrants
                
                
                Exercise
                  Price
      Per
                  ShareOutstanding
      as of September 30, 2007
                
                
                18,887,896
                
                
                $
                0.54
      to 3.00Granted
                
                
                6,752,869
                
                0.59
      to 4.05Expired
      or cancelled
                
                
                (296,500
                )
                0.60
      to 3.00Exercised
                
                
                (3,618,814
                )
                0.54
      to 1.73Outstanding
      as of September 30, 2008
                
                
                21,725,451
                
                0.56
      to 4.05Granted
                
                
                4,931,214
                
                0.09
      to 0.30Expired
      or cancelled
                
                
                (1,408,500
                )
                0.60
      to 2.15Exercised
                
                
                -
                
                
                
                -Outstanding
      as of September 30, 2009
                
                
                25,248,165
                
                
                $
                0.09
      to 4.05
  78
 
 The
following table summarizes information about stock options and warrants
outstanding as of September 30, 2009:
 Options
      and Warrants
                
                
                
                Options
      and WarrantsOutstanding
                
                
                
                ExercisableWeightedAverageRemaining
                
                
                
                Weighted
                
                
                
                
                
                
                WeightedRange
      of
                
                
                
                
                
                
                
                Contractual
                
                
                
                Average
                
                
                
                
                
                
                AverageExercise
                
                
                
                Number
                
                
                
                Life
                
                
                
                Exercise
                
                
                
                Number
                
                
                ExercisePrices
                
                
                
                Outstanding
                
                
                
                (Years)
                
                
                
                Price
                
                
                
                Exercisable
                
                
                Price$
                0.00
      - $0.60
                
                
                
                10,566,849
                
                
                
                2.36
                
                
                $
                0.37
                
                
                
                8,886,849
                
                
                $
                0.330.61
      – 1.60
                
                
                
                5,849,400
                
                
                
                3.29
                
                
                
                1.28
                
                
                
                3,944,400
                
                
                
                1.241.61
      – 4.05
                
                
                
                8,831,916
                
                
                
                0.67
                
                
                
                2.03
                
                
                
                8,827,582
                
                
                
                2.03
  As of
September 30, 2009, 21,658,831 of the 25,248,165 outstanding options and
warrants were vested.
 
 During
the fiscal year ended September 30, 2009, the Company issued 4,931,214 options
and warrants to purchase common stock as follows:  2,200,000 in
connection with the settlement of debt; 1,213,500 granted to consultants for
services; 875,000 to employees; and 642,714 in connection with the purchase of
Bishop Rock.  All the options and warrants issued during the year
vested over the year or immediately. The exercise prices range from $0.09 to
$0.30 per share.  The exercise price for the options granted during
the fiscal year ended September 30, 2009 were based upon the quoted market price
of the Company’s shares on the date of grant. No options or warrants were
exercised during the fiscal year ended September 30, 2009.
 
 During
the fiscal year ended September 30, 2008, the Company issued 6,752,869 common
stock options and warrants as follows: 1,670,000 in connection with the sale of
common stock, 1,725,000 to employees (275,000 have vested and 1,450,000 are
unvested), 1,169,869 to consultants, and  2,188,000 to the Board of
Directors.  The exercise prices range from $0.59 to $4.05 per
share.  The exercise price for the options granted during the fiscal
year ended September 30, 2008 were based upon the quoted market price of the
Company’s shares on the date of grant.
 
 (17)
              Deferred
      Compensation
 
 As of
September 30, 2008, deferred compensation in connection with common stock and
warrants issued in prior years reflected $3,498,672 of expenses to be recorded
in future periods. Of these expenses of $3,498,672, $2,211,266 was recorded as
deferred compensation expense during the fiscal year ended September 30, 2009.
Additionally, the Company recorded deferred compensation expense of $384,667
related to common stock and warrants issued and fully expensed throughout the
fiscal year, resulting in a total of $2,595,933 of deferred compensation expense
recorded during the fiscal year ended September 30, 2009.
 
 The
issuance of common stock and warrants during the fiscal year ended September 30,
2009 valued at $384,667 is outlined as follows:
 
 ·
              1,000,000
      shares of common stock issued to an entity for services valued at $200,000
      or $0.20 per share.
 ·
              900,000
      shares of common stock issued to three individuals for paying down the
      Company’s line of credit valued at $108,000, or $0.12 per
      share.
 ·
              100,000
      shares of common stock issued to an officer of the Company in connection
      with debt (Note 7:  Related-Party Notes Payable) valued at
      $30,000, or $0.30 per share.
 ·
              213,500
      unregistered warrants to an individual for rendering services to the
      Company valued at $46,667.
 
 As of
September 30, 2009, deferred compensation to be expensed in future periods was
$1,287,406.
  79
 
 (18)
              Income
      Taxes
 
 The
Company recognizes deferred income tax assets or liabilities for the expected
future tax consequences of events that have been recognized in the financial
statements or income tax returns. Deferred income tax assets or liabilities are
determined based upon the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates expected to apply when
the differences are expected to be settled or realized.  Deferred
income tax assets are reviewed periodically for recoverability and valuation
allowances are provided as necessary.  Interest and penalties related
to income tax liabilities, when incurred, are classified in interest expense and
income tax provision, respectively.
 
 For the
fiscal years ended September 30, 2009 and 2008, the Company incurred net losses
of $22,761,102 and $49,339,637, respectively, for income tax
purposes.  The amount and ultimate realization of the benefits from
the net operating losses is dependent, in part, upon the tax laws in effect, the
Company's future earnings, and other future events, the effects of which cannot
be determined.  The Company has established a valuation allowance for
all deferred income tax assets not offset by deferred income tax liabilities due
to the uncertainty of their realization.  Accordingly, there is no
benefit for income taxes in the accompanying statements of
operations.
 
 At
September 30, 2009, the Company had net carryforwards available to offset future
taxable income of approximately $158,807,000 which will begin to expire in
2017.  The utilization of the net loss carryforwards is dependent upon
the tax laws in effect at the time the net operating loss carryforwards can be
utilized.  The Internal Revenue Code contains provisions that likely
could reduce or limit the availability and utilization of these net operating
loss carryforwards.  For example, limitations are imposed on the
utilization of net operating loss carryforwards if certain ownership changes
have taken place or will take place.  The Company will perform an
analysis to determine whether any such limitations have occurred as the net
operating losses are utilized.
 
 Deferred
income taxes are determined based on the estimated future effects of differences
between the financial statement and income tax reporting bases of assets and
liabilities given the provisions of currently enacted tax laws and the tax rates
expected to be in place.
 
 The
deferred income tax assets (liabilities) were comprised of the following as or
September 30:
  2009
                
                
                
                2008Net
      loss carryforwards
                
                $
                53,994,000
                
                
                $
                45,367,000Accruals
      and reserves
                
                
                101,000
                
                
                
                (99,000
                )Contributions
                
                
                1,000
                
                
                
                3,000Valuation
      allowance
                
                
                (54,096,000
                )
                
                
                (45,271,000
                )$
                -
                
                
                $
                -
 
 Reconciliations
between the benefit for income taxes at the federal statutory income tax rate
and the Company's benefit for income taxes for the fiscal years ended September
30, 2009 and 2008 are as follows:
 
 2009
              
              
              2008Federal
      income tax benefit at statutory rate
              
              $
              7,739,000
              
              
              $
              16,755,000State
      income tax benefit, net of federal income tax effect
              
              
              1,138,000
              
              
              
              2,464,000Change
      in estimated tax rate and gain (loss) on non-deductible
      expenses
              
              
              (52,000
              )
              
              
              (91,000
              )Change
      in valuation allowance
              
              
              (8,825,000
              )
              
              
              (19,128,000
              )Benefit
      for income taxes
              
              $
              -
              
              
              $
              -
 
 The
deferred income tax assets (liabilities) and the federal and state income tax
benefits reflects an adjustment in calculating the valuation allowance using a
tax rate of 15% used in fiscal year ended 2008 to 34% in fiscal year ended
2009.
 
 (19)
              Commitment
      and Contingencies
 
 Legal
Matters
 
 Satellite Tracking of
People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech
Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent
infringement suit was filed against the Company and other defendants in the
United States District Court for the Eastern District of Texas on March 19,
2008.  Plaintiffs have alleged that the defendants infringe United States
Patent No. RE39,909 ('909 Patent), Tracking System for Locational Tracking of
Monitored Persons.  On May 14, 2008, the Company answered the complaint,
denying Plaintiffs’ allegations and asserting various affirmative defenses. The
Company also asserted a counterclaim for declaratory judgment that the Company
has not infringed the '909 Patent and that the patent is invalid. On February
17, 2009 the United States Patent and Trademark Office ("USPTO") granted a
request for reexamination of the '909 Patent.  The USPTO is now in the
process of reexamining the claims of the '909 Patent. Briefs have been submitted
on the issue of claim construction, and the case is currently in discovery. The
Markman hearing is set for May of 2011, and trial is set for late 2011. We have
not accrued any potential loss as the probability of incurring a material loss
is deemed remote by management, after consultation with legal
counsel.
  80
  RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company filed a
patent infringement suit against STOP in the United States District Court for
the Central District of California on May 2, 2008.  The Company has
asserted that STOP infringes United States Patent No. 7,330,122 for a remote
tracking and communication device and method for processing data from the device
("'122 patent"), in which the Company holds all rights and interests.  STOP
moved to dismiss the original complaint and also filed an answer and
counterclaim.  The motion to dismiss was granted with leave to amend. 
The Company filed an amended complaint on August 5, 2008.  The amended
complaint seeks damages for infringement according to proof, treble damages,
injunctive relief enjoining the infringement, and costs and attorney's
fees.  STOP's counterclaim is for declaratory relief, seeking a declaration
that STOP has not infringed the '122 patent and that the '122 patent is invalid.
The Company filed an answer to the counterclaim.  STOP subsequently filed a
motion for summary judgment of non-infringement, which was
denied.  STOP’s subsequent motion for reconsideration was also
denied.  The parties are currently working on claim construction and
discovery issues.  The Markman hearing is currently set for March of
2010.  No trial date has yet been set. The Company intends to
vigorously prosecute its claims and defend against the
counterclaim.
 
 Frederico and Erica
Castellanos, v. Volu-Sol, Inc.  On August 15, 2008, plaintiffs
Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the
State of California, Los Angeles County.  The complaint names
twenty-four defendants and one hundred unnamed Doe Defendants.  The
complaint asserts claims for negligence, strict liability - failure to warn,
strict liability - design defect, fraudulent concealment, breach of implied
warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to
certain chemicals during the course of his employment.  One of the
original named defendants was identified as Logos Scientific, Inc.  On
September 4, 2008, Plaintiffs amended their complaint to substitute "Volu-Sol,
Inc. as successor in interest to Logos Scientific, Inc." for the previously
unnamed Doe 1.  Volu-Sol, Inc. was the original name of RemoteMDx,
Inc.  The Company intends to vigorously defend itself against
Castellanos’ claims.  The Company has not accrued any potential loss
as the probability of incurring a material loss is deemed remote by management,
after consultation with legal counsel.
 
 Informal
Inquiry.  In March 2008, the Company was advised by letter from
the U.S. Securities and Exchange Commission (“SEC”), Salt Lake District Office,
that it has begun an informal inquiry regarding the Company.  The
inquiry, among other items, relates to the Company’s revenue recognition policy
and documents, relationship with stockholders, and business.  The SEC
has advised the Company in its correspondence that this informal inquiry should
not be construed as an indication that any violation of law has occurred, nor
should it be considered a reflection upon any person, entity, or
security.  The Company voluntarily disclosed this inquiry in its
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2008.  There were no material developments in this matter during the
fiscal year ended September 30, 2009.
 
 Lease
Obligations
 
 The
following table summarizes the Company’s contractual obligations as of September
30, 2009:
 
 Fiscal
      Year
              
              Total
              
              
              SecureAlert
              
              
              Midwest
                Monitoring
              
              
              Court
      Programs2010
              
              $
              418,151
              
              
              $
              266,691
              
              
              $
              35,555
              
              
              $
              115,9052011
              
              
              361,588
              
              
              
              274,095
              
              
              
              27,771
              
              
              
              59,7222012
              
              
              336,588
              
              
              
              278,991
              
              
              
              22,473
              
              
              
              35,1242013
              
              
              285,749
              
              
              
              269,922
              
              
              
              8,075
              
              
              
              7,7522014
              
              
              61,018
              
              
              
              60,564
              
              
              
              454
              
              
              
              -Thereafter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              1,463,094
              
              
              $
              1,150,263
              
              
              $
              94,328
              
              
              $
              218,503
 
 The total
contractual obligations of $1,463,094 consist of the following: $1,324,432 from
facilities operating leases and $138,662 from equipment
leases.  During the fiscal years ended September 30, 2009 and 2008,
the Company paid approximately $487,000 and $536,000, in lease payment
obligations, respectively.
  81
 
 Indemnification
Agreements
 In
November 2001, the Company agreed to indemnify officers and directors of the
Company against personal liability incurred by them in the conduct of their
duties for the Company. In the event that any of the officers or directors of
the Company are sued or claims or actions are brought against them in connection
with the performance of their duties and the individual is required to pay an
amount, the Company will immediately repay the obligation together with interest
thereon at the greater of 10% per year or the interest rate of any funds
borrowed by the individual to satisfy their liability.
 
 Cellular
Access Agreement
 During
the fiscal year ended September 30, 2009, the Company entered into several
agreements with cellular organizations to provide communication services. The
cost to the Company during the fiscal years ended September 30, 2009 and 2008
was approximately $2,422,541 and $2,940,000, respectively.  These
amounts are included in cost of sales.
 
 (20)
              Subsequent
      Events
 
 Subsequent
to September 30, 2009, the following events occurred:
 
 
 1)
              On
      October 30, 2009, the Company issued 1,400,000 shares of common stock to
      several former holders of SecureAlert Series A Preferred to settle a
      dispute and an outstanding liability in connection with contingency
      payments due to the holders.
 
 2)
              On
      November 2, 2009, the Company’s Board of Directors designated 50,000
      shares Series D Preferred stock.  The shares accrue dividends at
      a rate of 8% per annum and may be paid in cash or additional shares of
      Series D Preferred stock. See note 13. Subsequent to September 30, 2009,
      the Company agreed to issue a total of 15,986 shares of Series D Preferred
      stock in exchange for conversion of $15,723,204 in debt, accrued
      liabilities and interest and an additional 12,200 shares from securities
      purchase agreements totaling $6,100,000 of which $4,600,000 has been
      received in cash as of the date of this Report, resulting in a total of
      28,186 shares of Series D Preferred
stock.
 
 Subsequent
events have been evaluated through January 12, 2010, the date these financial
statements were issued. No events, other than the events described above,
required disclosure.
   82