UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q




(Mark
One)





[X]  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the quarterly period ended December 31, 2009





or





[  ]  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
the transition period from ___________ to ____________





Commission
file number: 0-23153





SecureAlert,
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 Number)





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)





RemoteMDx,
Inc.


(Former
name, former address and former fiscal year, if changed since last
report)





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.     [X]  Yes    [   ]  No





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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files)    [   ]  Yes  [   ]  No





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 the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer [  ]
            Accelerated
      filer [  ]Non-accelerated
      filer [  ]
            Smaller
      reporting company [X]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  [   ]
Yes  [X]  No





The
number of shares outstanding of the registrant’s common stock as of February 5,
2010 was 211,765,988.





SecureAlert,
Inc.





FORM
10-Q





For
the Quarterly Period Ended December 31, 2009





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1
            Financial
      StatementsCondensed
      Consolidated Balance Sheets (Unaudited)
            3Condensed
      Consolidated Statements of Operations (Unaudited)
            5Condensed
      Consolidated Statements of Cash Flows (Unaudited)
            6Notes
      to Condensed Consolidated Financial Statements (Unaudited)
            8Item
      2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            23Item
      3
            Quantitative
      and Qualitative Disclosures About Market Risk
            26Item
      4
            Controls
      and Procedures
            26PART
      II.     OTHER INFORMATIONItem
      1
            Legal
      Proceedings
            28Item
      2
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            28Item
      5
            Other
      Information
            28Item
      6
            Exhibits
            28Signatures
            32





2


PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements











SECUREALERT,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)


December
      31,
              2009
            
            
            September
      30,
              2009AssetsCurrent
      assets:Cash
            
            $
            418,206
            
            
            $
            602,321Accounts
      receivable, net of allowance for doubtful accounts of  $269,000
      and $266,000, respectively
            
            
            1,521,462
            
            
            
            1,441,648Inventory,
      net of reserve of $83,092 and $83,092, respectively
            
            
            602,817
            
            
            
            603,329Prepaid
      expenses and other
            
            
            150,002
            
            
            
            275,390Total
      current assets
            
            
            2,692,487
            
            
            
            2,922,688Property
      and equipment, net of accumulated depreciation of $2,637,428 and
      $2,525,180, respectively
            
            
            1,197,558
            
            
            
            1,313,306Monitoring
      equipment, net of accumulated depreciation of $2,947,198 and $2,944,197,
      respectively
            
            
            1,282,826
            
            
            
            1,316,493Goodwill
            
            
            2,468,081
            
            
            
            2,468,081Intangible
      assets, net of amortization of $162,605 and $126,655,
      respectively
            
            
            460,396
            
            
            
            496,346Other
      assets
            
            
            111,054
            
            
            
            76,675Total
      assets
            
            $
            8,212,402
            
            
            $
            8,593,589







The
accompanying notes are an integral part of these statements.


3


SECUREALERT,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS – Continued


(Unaudited)




December
      31,
              2009
            
            
            September
      30,
              2009Liabilities
      and Stockholders’ DeficitCurrent
      liabilities:Bank
      line of credit
            
            $
            999,437
            
            
            $
            252,600Accounts
      payable
            
            
            2,239,602
            
            
            
            2,339,786Accrued
      liabilities
            
            
            3,746,959
            
            
            
            3,506,680Advances
      to purchase Series D Preferred stock
            
            
            1,000,000
            
            
            
            -Deferred
      revenue
            
            
            46,148
            
            
            
            56,858SMI
      Series A Preferred stock redemption obligation
            
            
            3,007,985
            
            
            
            3,148,943Related-party
      line of credit and notes
            
            
            1,500,000
            
            
            
            1,576,022Promissory
      notes payable, net of debt discount of $5,826 and $41,556,
      respectively
            
            
            2,044,174
            
            
            
            2,008,444Senior
      secured note payable, net of debt discount of $232,292 and $529,109,
      respectively
            
            
            3,187,339
            
            
            
            2,890,522Current
      portion of Series A 15% debentures, net of debt discount of $1,111,742 and
      $1,272,189, respectively
            
            
            2,970,008
            
            
            
            2,127,811Derivative
      liability
            
            
            1,747,453
            
            
            
            1,219,426Current
      portion of long-term debt
            
            
            610,633
            
            
            
            272,493Total
      current liabilities
            
            
            23,099,738
            
            
            
            19,399,585Series
      A 15% debentures, net of debt discount of $156,881 and $549,531,
      respectively, net of current portion
            
            
            243,119
            
            
            
            557,219Long-term
      debt, net of current portion, net of debt discount of $419,842 and
      $525,665, respectively
            
            
            1,912,241
            
            
            
            1,009,606Total
      liabilities
            
            
            25,255,098
            
            
            
            20,966,410Stockholders’
      deficit:Common
      stock,  $0.0001 par value: 250,000,000 shares authorized;
      211,765,988 and 210,365,988 shares outstanding,
    respectively
            
            
            21,177
            
            
            
            21,037Additional
      paid-in capital
            
            
            195,533,344
            
            
            
            194,659,044Deferred
      compensation
            
            
            (1,306,518
            )
            
            
            (1,287,406
            )Accumulated
      deficit
            
            
            (211,290,699
            )
            
            
            (205,765,496
            )Total
      stockholders’ deficit
            
            
            (17,042,696
            )
            
            
            (12,372,821
            )Total
      liabilities and stockholders’ deficit
            
            $
            8,212,402
            
            
            $
            8,593,589







The
accompanying notes are an integral part of these statements.


4


SECUREALERT,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended
              December
      31,2009
            
            
            2008Revenues:Products
            
            $
            50,370
            
            
            $
            352,750Monitoring
      services
            
            
            3,146,253
            
            
            
            2,869,547Total
      revenues
            
            
            3,196,623
            
            
            
            3,222,297Cost
      of revenues:Products
            
            
            14,621
            
            
            
            239,467Monitoring
      services
            
            
            1,951,117
            
            
            
            2,875,990Total
      cost of revenues
            
            
            1,965,738
            
            
            
            3,115,457Gross
      profit
            
            
            1,230,885
            
            
            
            106,840Operating
      expenses:Selling,
      general and administrative (including $696,998 and $865,404, respectively,
      of compensation expense paid in stock or stock options/
      warrants)
            
            
            3,472,775
            
            
            
            4,089,273Settlement
      expense
            
            
            1,150,000
            
            
            
            -Research
      and development
            
            
            287,717
            
            
            
            492,403Loss
      from operations
            
            
            (3,679,607)
            
            
            
            (4,474,836)Other
      income (expense):Currency
      exchange rate loss
            
            
            (5,937)
            
            
            
            -Redemption
      of SMI Series A Preferred
            
            
            35,681
            
            
            
            18,715Interest
      income
            
            
            6,607
            
            
            
            1,682Interest
      expense (including $991,467 and $221,404, respectively, paid in stock or
      stock options / warrants)
            
            
            (1,463,142)
            
            
            
            (479,745)Derivative
      valuation loss
            
            
            (528,027)
            
            
            
            -Other
      income (expense), net
            
            
            109,222
            
            
            
            25Net
      loss
            
            
            (5,525,203)
            
            
            
            (4,934,159)Dividends
      on Series A Preferred stock
            
            
            -
            
            
            
            (113)Net
      loss attributable to common stockholders
            
            $
            (5,525,203)
            
            
            $
            (4,934,272)Net
      loss per common share, basic and diluted
            
            $
            (0.03)
            
            
            $
            (0.03)Weighted
      average common shares outstanding, basic and diluted
            
            
            211,309,000
            
            
            
            156,631,000






The
accompanying notes are an integral part of these statements.


5


SECUREALERT,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)




Three
      Months EndedDecember
      31,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (5,525,203
            )
            
            $
            (4,934,159
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            351,052
            
            
            
            400,614Common
      stock issued for services
            
            
            -
            
            
            
            425,000Amortization
      of deferred financing and consulting costs
            
            
            206,518
            
            
            
            661,808Non-cash
      compensation related to re-pricing of stock options
            
            
            490,340
            
            
            
            -Amortization
      of debt discount
            
            
            991,467
            
            
            
            -Settlement
      expense
            
            
            1,150,000
            
            
            
            -Redemption
      of SecureAlert series A preferred stock
            
            
            (35,681
            )
            
            
            (18,715
            )Increase
      in related-party line of credit for services
            
            
            48,978
            
            
            
            81,764Derivative
      liability valuation loss
            
            
            528,027
            
            
            
            -Changes
      in operating assets and liabilities:Accounts
      receivable, net
            
            
            (79,814
            )
            
            
            (219,152
            )Deposit
      released from escrow
            
            
            -
            
            
            
            500,000Inventories
            
            
            512
            
            
            
            (170,953
            )Prepaid
      expenses and other assets
            
            
            127,009
            
            
            
            (60,777
            )Accounts
      payable
            
            
            (100,184
            )
            
            
            522,552Accrued
      liabilities
            
            
            293,472
            
            
            
            115,859Deferred
      revenue
            
            
            (10,710
            )
            
            
            8,958Net
      cash used in operating activities
            
            
            (1,564,217
            )
            
            
            (2,687,201
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (20,305
            )
            
            
            (120,483
            )Purchase
      of monitoring equipment
            
            
            (146,200
            )
            
            
            (444,733
            )Disposal
      of property and equipment
            
            
            1,195
            
            
            
            -Disposal
      of monitoring equipment
            
            
            14,108
            
            
            
            2,267Net
      cash used in investing activities
            
            
            (151,202
            )
            
            
            (562,949
            )Cash
      flows from financing activities:Principal
      payments on related-party line of credit
            
            
            (125,000
            )
            
            
            (9,428
            )Proceeds
      from issuance of related-party note payable
            
            
            -
            
            
            
            1,000,000Principal
      payments on notes payable
            
            
            (65,943
            )
            
            
            (175,064
            )Net
      borrowings on bank line of credit
            
            
            746,837
            
            
            
            117,009Proceeds
      from notes payable
            
            
            410
            
            
            
            22,366Proceeds
      to purchase Series D Preferred stock
            
            
            1,000,000
            
            
            
            -Proceeds
      from issuance of common stock, net of commissions
            
            
            -
            
            
            
            100,000Proceeds
      from Series A 15% debenture, net of commissions
            
            
            -
            
            
            
            200,000Payment
      on Series A 15% debenture
            
            
            (25,000
            )
            
            
            -Net
      cash provided by financing activities
            
            
            1,531,304
            
            
            
            1,254,883Net
      decrease in cash
            
            
            (184,115
            )
            
            
            (1,995,267
            )Cash,
      beginning of period
            
            
            602,321
            
            
            
            2,782,953Cash,
      end of period
            
            $
            418,206
            
            
            $
            787,686







The
accompanying notes are an integral part of these statements.


6


SECUREALERT,
INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)




Three
      Months Ended
                December
      31,2009
              
              
              2008Cash
      paid for interest
              
              $
              144,804
              
              
              $
              251,189Supplemental
      schedule of non-cash investing and financing activities:Series
      A Preferred stock dividends
              
              $
              -
              
              
              $
              113Issuance
      of 0 and 300,000 shares of common stock for deferred financing costs,
      respectively
              
              
              -
              
              
              
              82,000Note
      payable issued to acquire monitoring equipment
              
              
              30,000
              
              
              
              -Note
      payable issued to acquire property and equipment
              
              
              20,485
              
              
              
              -Issuance
      of 1,400,000, and 0 shares of common stock for payment of SecureAlert
      Monitoring, Inc. Series A Preferred stock dividends
              
              
              158,469
              
              
              
              -Issuance
      of 2,000,000 and 0 stock options, respectively, for deferred
      consulting
              
              
              225,630
              
              
              
              -







The
accompanying notes are an integral part of these statements.


7


SECUREALERT,
INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





(1)
            BASIS
      OF PRESENTATION





The
unaudited interim condensed consolidated financial information of SecureAlert,
Inc. (formerly RemoteMDx, Inc.) and subsidiaries (collectively, the “Company” or
“SecureAlert”) has been prepared in accordance with Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission.  Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to such rules and
regulations.  In the opinion of management, the accompanying interim
consolidated financial information contains all adjustments, consisting only of
normal recurring adjustments necessary to present fairly the Company’s financial
position as of December 31, 2009, and results of its operations for the three
months ended December 31, 2009 and 2008.  These financial statements
should be read in conjunction with the annual consolidated financial statements
and notes thereto that are included in the Company’s Annual Report on Form 10-K
for the year ended September 30, 2009.  The results of operations for
the three months ended December 31, 2009 may not be indicative of the results
for the fiscal year ending September 30, 2010.





(2)
            GOING
      CONCERN





The
Company has incurred recurring net losses, negative cash flows from operating
activities, and an accumulated deficit. 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 achieve successful
operations, the Company 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, during the three
months ended and subsequent to December 31, 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 agreed to issue an additional 12,200 shares under securities purchase
agreements for cash proceeds 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 (see Note 20).





(3)           PRINCIPLES
OF CONSOLIDATION





The
condensed consolidated financial statements include the accounts of SecureAlert
and its subsidiaries. All significant inter-company transactions have been
eliminated in consolidation.





(4)           RECENTLY
ISSUED ACCOUNTING STANDARDS





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 the Company’s financial statements about a transfer
of financial assets; the effects of a transfer on its 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 guidance is not expected to have a material impact on the
Company’s financial statements and disclosures.


8





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. The Company is currently assessing the future impact of this new
accounting update to its 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.  The Company is currently assessing the future impact of
this new accounting update to its 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.  The Company adopted
this guidance as of October 1, 2009 which did not significantly impact its
results of operations and financial position as of December 31,
2009.





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. This new guidance applies whenever other
guidance requires or permits assets or liabilities to be measured at fair value.
This does not expand the use of fair value in any new circumstances. In February
2008, the FASB issued additional guidance to exclude previous guidance
on  “Accounting for Leases” and delays the effective date of the this
new guidance 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. The Company adopted this 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 the Company’s 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 the Company’s results of
operations and financial position.


9





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 was
permitted in financial statements for earlier interim and annual periods that
have not been issued.  The Company adopted this guidance for the three
months ended December 31, 2009 which did not significantly impact the Company’s
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 new 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 and early
application is not permitted.  The adoption of this guidance is not
expected to significantly impact the Company’s results of operations and
financial position.





(5)           IMPAIRMENT
OF LONG-LIVED ASSETS





The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the estimated remaining life in measuring whether the
assets are recoverable. If the carrying amount of an asset exceeds its estimated
future cash flows, 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 are
identifiable cash flows that are independent of other groups of assets. 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 three months
ended December 31, 2009 and 2008, the Company did not find any indicators of
impairment nor did it impair any long-lived assets.





(6)           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.


10





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.





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.





(7)           NET
LOSS PER COMMON SHARE





Basic net
loss per common share ("Basic EPS") is computed by dividing net loss
attributable 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 then
outstanding. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect.





Common
stock equivalents consist of shares issuable upon the exercise of common stock
options and warrants and shares issuable upon conversion of debt. As of December
31, 2009 and 2008, there were 96,072,569 and 20,491,912 outstanding common stock
equivalents, respectively, that were not included in the computation of diluted
net loss per common share as their effect would be anti-dilutive. The common
stock equivalents outstanding as of December 31, 2009, consisted of 51,824,404
shares of common stock from the potential conversion of $10,560,828 of debt and
accrued interest, and 20,248,165 shares underlying options and
warrants.  Of the 20,248,165 shares underlying options and warrants,
16,933,831 shares underlie options and warrants which have vested and 3,314,334
shares underlie options and warrants which have not yet vested.  The
remaining common stock equivalents consist of 4,000 Series D Preferred stock
options that when converted would result in 24,000,000 shares of the Company’s
common stock.





(8)           STOCK-BASED
COMPENSATION





For the
three months ended December 31, 2009 and 2008, the Company calculated
compensation expense of $160,933 and $33,703 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 no stock options to
employees during the three months ended December 31, 2009 and
2008.  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.


11


A summary
of stock option activity for the three months ended December 31, 2009 is
presented below:


Shares
              Under
              Option
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            Aggregate
              Intrinsic
              ValueOutstanding
      as of September 30, 2009
            4,709,214
            
            $
            0.76Granted
            -
            
            $
            -Exercised
            -
            
            $
            -Forfeited
            -
            
            $
            -Expired
      / Cancelled
            -
            
            $
            -Outstanding
      as of December 31, 2009
            4,709,214
            
            $
            0.38
            
            
            2.45
      years
            
            $
            69,313Exercisable
      as of December 31, 2009
            2,969,880
            
            $
            0.24
            
            
            3.04
      years
            
            $
            69,313





(9)           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 December 31, 2009 and
September 30, 2009, respectively, inventory consisted of the
following:





December
      31,
              2009
            
            
            September
      30,
              2009Raw
      materials
            
            $
            685,909
            
            
            $
            686,421Reserve
      for damaged or obsolete inventory
            
            
            (83,092
            )
            
            
            (83,092
            )Total
      inventory, net of reserves
            
            $
            602,817
            
            
            $
            603,329




(10)         PROPERTY
AND EQUIPMENT





Property
and equipment as of December 31, 2009 and September 30, 2009, were as
follows:


December
      31,
              2009
            
            
            September
      30,
              2009Equipment,
      software and tooling
            
            $
            2,747,327
            
            
            $
            2,742,537Automobiles
            
            
            297,368
            
            
            
            305,658Building
      and land
            
            
            377,555
            
            
            
            377,555Leasehold
      improvements
            
            
            127,912
            
            
            
            127,912Furniture
      and fixtures
            
            
            284,824
            
            
            
            284,8243,834,986
            
            
            
            3,838,486Accumulated
      depreciation
            
            
            (2,637,428
            )
            
            
            (2,525,180
            )Property
      and equipment, net of accumulated depreciation
            
            $
            1,197,558
            
            
            $
            1,313,306





Depreciation
expense for the three months ended December 31, 2009 and 2008, was $119,343 and
$175,260, respectively.





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 three months ended
December 31, 2009 and 2008, the Company disposed of property and equipment with
a net book value of $1,195 and $0, respectively.


12





(11)         MONITORING
EQUIPMENT





Monitoring
equipment as of December 31, 2009 and September 30, 2009, was as
follows:


December
      31,
              2009
            
            
            September
      30,
              2009Monitoring
      equipment
            
            $
            4,230,024
            
            
            $
            4,260,690Less:
      accumulated depreciation
            
            
            (2,947,198
            )
            
            
            (2,944,197
            )Total
            
            $
            1,282,826
            
            
            $
            1,316,493





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.





Depreciation
expense for the three months ended December 31, 2009 and 2008 was $195,758 and
$220,405, 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 three months ended
December 31, 2009 and 2008, the Company disposed of monitoring equipment and
parts with a net book value of $14,108 and $2,267, respectively.





(12)         GOODWILL
AND OTHER INTANGIBLE ASSETS





As of
December 31, 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
      amortization
            
            
            (18,542
            )
            
            
            (21,875
            )
            
            
            (122,188
            )
            
            
            (162,605
            )Other
      intangible assets, net of accumulated amortization
            
            
            103,458
            
            
            
            89,125
            
            
            
            267,813
            
            
            
            460,396Total
      goodwill and other intangible assets, net of amortization
            
            $
            1,363,453
            
            
            $
            1,297,211
            
            
            $
            267,813
            
            
            $
            2,928,477





Midwest Monitoring &
Surveillance


Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, in 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.


13





The
Company recorded $2,042 of amortization expense for Midwest intangible assets
during the three months ended December 31, 2009 resulting in a total accumulated
amortization of $18,542 and net intangible assets of $103,458.





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 SecureAlert 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, in 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.





The
Company recorded $2,075 of amortization expense on intangible assets for Court
Programs during the three months ended December 31, 2009 resulting in a total
accumulated amortization of $21,875 and net intangible assets of
$89,125.





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, in 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 $31,833 of amortization expense on intangible assets for Bishop
Rock Software during the three months ended December 31, 2009 resulting in a
total accumulated amortization of $122,188 and net intangible assets of
$267,813.


14





Supplemental Pro Forma
Results of Operations


The
following tables present the pro forma results of operations for the three
months ended December 31, 2009 and 2008, as though the Bishop Rock Software
acquisition had been completed as of the beginning of each period
presented:


Three
      Months Ended
                December
      31,2009
              
              
              2008Revenues:Products
              
              $
              50,370
              
              
              $
              360,250Monitoring
      services
              
              
              3,146,253
              
              
              
              2,869,547Total
      revenues
              
              
              3,196,623
              
              
              
              3,229,797Cost
      of revenues:Products
              
              
              14,621
              
              
              
              239,467Monitoring
      services
              
              
              1,951,117
              
              
              
              2,875,990Total
      cost of revenues
              
              
              1,965,738
              
              
              
              3,115,457Gross
      margin
              
              
              1,230,885
              
              
              
              114,340Operating
      expenses:Selling,
      general and administrative (including $696,998 and $865,404, respectively,
      of compensation expense paid in stock or stock options/
      warrants
              
              
              3,472,775
              
              
              
              4,244,987Settlement
      expense
              
              
              1,150,000
              
              
              
              -Research
      and development
              
              
              287,717
              
              
              
              492,403Loss
      from operations
              
              
              (3,679,607
              )
              
              
              (4,623,050
              )Other
      income (expense):Currency
      exchange rate loss
              
              
              (5,937
              )
              
              
              -Redemption
      of SecureAlert Series A Preferred
              
              
              35,681
              
              
              
              18,715Interest
      income
              
              
              6,607
              
              
              
              1,682Interest
      expense (including $991,467 and $221,404, respectively, of compensation
      expense paid in stock)
              
              
              (1,463,142
              )
              
              
              (479,745
              )Derivative
      valuation gain (loss)
              
              
              (528,027
              )
              
              
              -Other
      income (expense), net
              
              
              109,222
              
              
              
              25Net
      loss
              
              
              (5,525,203
              )
              
              
              (5,082,373
              )Dividends
      on Series A Preferred stock
              
              
              -
              
              
              
              (113
              )Net
      loss attributable to common stockholders
              
              $
              (5,525,203
              )
              
              $
              (5,082,486
              )Net
      loss per common share, basic and diluted
              
              $
              (0.03
              )
              
              $
              (0.03
              )Weighted
      average common shares outstanding, basic and diluted
              
              
              211,309,000
              
              
              
              156,631,000





(13)         ACCRUED
EXPENSES





Accrued
expenses consisted of the following as of December 31, 2009 and September 30,
2009:


15




December
      31,
                2009
              
              
              September
      30,
                2009Accrued
      officer compensation
              
              $
              792,280
              
              
              $
              492,280Accrued
      foreclosure liability
              
              
              775,000
              
              
              
              775,000Accrued
      interest
              
              
              709,295
              
              
              
              382,424Accrued
      payroll, taxes and employee benefits
              
              
              444,475
              
              
              
              561,898Accrued
      board of directors fees
              
              
              360,000
              
              
              
              300,000Accrued
      warranty and manufacturing costs
              
              
              210,622
              
              
              
              246,622Accrued
      consulting
              
              
              115,053
              
              
              
              436,054Accrued
      outside services
              
              
              79,693
              
              
              
              38,132Accrued
      legal and settlement costs
              
              
              66,665
              
              
              
              80,208Accrued
      research and development costs
              
              
              45,000
              
              
              
              45,000Accrued
      indigent fees
              
              
              40,778
              
              
              
              34,130Accrued
      cellular costs
              
              
              29,760
              
              
              
              27,144Accrued
      acquisition extension costs
              
              
              -
              
              
              
              42,000Accrued
      commissions and other costs
              
              
              78,338
              
              
              
              45,788Total
      accrued expenses
              
              $
              3,746,959
              
              
              $
              3,506,680





(14)
            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 December 31,
2009 and September 30, 2009, the outstanding balance due was $2,050,000 with a
remaining debt discount balance of $5,826 and, $41,556 respectively. Subsequent
to December 31, 2009, the holders of the convertible promissory note converted
the note, including the principal and accrued interest of $98,414 into 2,149
shares of Series D Preferred stock.




(15)
            SENIOR
      SECURED CONVERTIBLE NOTES





During
the fiscal 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 of common stock of a subsidiary of the Company 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 17). 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 December 31, 2009 and September 30, 2009, the
outstanding balance of the notes was $3,419,631 with a remaining debt discount
balance of $232,292 and $529,109, respectively. Subsequent to December 31, 2009,
the holders of $2,270,000 of this debt converted the debt into 2,270 shares of
Series D Preferred stock.





(16)
            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 December 31, 2009 and
September 30, 2009, the total outstanding balance of the debentures was
$4,481,750 and $4,506,750, respectively.  The debentures earned
interest at a rate of 15% interest per annum, with interest due quarterly and
principal due at maturity 18 months after issuance.  In addition, for
every $1 invested in the debenture the holder received one share of the
Company’s common stock.  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 debentures were subject to derivative
accounting treatment (see Note 17). 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.


16




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 three months ended
December 31, 2009, the Company amortized $553,097 of this debt discount and
recorded it as interest expense.  As of December 31, 2009 and
September 30, 2009, the debt discount balance was $1,268,623 and $1,821,720,
respectively.





Subsequent
to December 31, 2009, the holders of debentures of $4,609,648 in principal and
accrued interest converted this debt into a total of 4,614 shares of Series D
Preferred stock.





(17)         DERIVATIVES





The
Company does not hold or issue derivative instruments for trading
purposes.  However, the Company has convertible notes and debentures
that contain embedded derivative features that require separate valuation from
the convertible instruments.  The Company recognizes these derivatives
as liabilities on 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 December 31, 2009 and September 30,
2009, the derivative liabilities had a fair value of $1,747,453 and $1,219,426,
respectively, resulting in a derivative valuation loss of $528,027 for the three
months ended December 31, 2009.  The Company did not have any
derivatives during the three months ended December 31, 2008.





(18)         DEBT
OBLIGATIONS





Debt
obligations as of December 31, 2009 and September 30, 2009, consisted of the
following:




December
      31,
              2009
            
            
            September
      30,
              2009SecureAlert
      Monitoring, Inc.Note
      payable for testing equipment with an interest rate of 8%.  The
      note is secured by testing equipment. The note matures on June 9,
      2011.
            
            $
            11,094
            
            
            $
            12,228Unsecured
      note payable with an interest rate of 12%. The note matures on February 1,
      2010.
            
            
            4,401
            
            
            
            8,728Note
      payable for computer equipment with an interest rate of
      10%.  The note is secured by computer equipment.  The
      note matures on December 18, 2012.
            
            
            20,485
            
            
            
            -SecureAlert,
      Inc.Settlement
      fee obligation reflects the net amount payable to Satellite Tracking of
      People, L.L.C. in consideration of the dismissals of the Texas litigation
      and the California litigation (see Note 23).  The Company is
      required to make quarterly payments requiring a final payment on December
      1, 2012.
            
            
            1,150,000
            
            
            
            -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. As of December 31,
      2009, the debt discount was $419,842.
            
            
            580,158
            
            
            
            474,335




17





Court Programs,
      Inc.


Note
      payable due to the Small Business Administration (“SBA”).  Note
      bears interest at 4% and matures on April 6, 2037.  The note is
      secured by monitoring equipment.
            
            
            223,386
            
            
            
            225,000Unsecured
      revolving line of credit with a bank with an interest rate of
      9.24%.
            
            
            15,000
            
            
            
            16,500Automobile
      loan with a financial institution secured by the vehicle
      purchased.  Interest rate is 7.09% and is due in June
      2014.
            
            
            29,243
            
            
            
            30,751Unsecured
      note payable with an interest rate of 8%.
            
            
            942
            
            
            
            1,492Capital
      lease with an effective interest rate 14.89% that matures in January
      2011.
            
            
            12,323
            
            
            
            14,898Capital
      lease with an interest rate of 14.12% that matures on November 15,
      2012.
            
            
            28,985
            
            
            
            -





Midwest


Unsecured
      revolving line of credit with a bank, with an interest rate of
      9.25%.
              
              
              39,534
              
              
              
              39,224Notes
      payable to a financial institution bearing interest at
      6.37%.  Notes mature in July 2011 and July 2016.  The
      notes are secured by property.
              
              
              168,338
              
              
              
              185,274Notes
      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.
              
              
              38,217
              
              
              
              57,344Automobile
      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.
              
              
              36,117
              
              
              
              42,463Note
      payable to a stockholder of Midwest.  The note bears interest at
      5% maturing in February 2013.
              
              
              44,532
              
              
              
              47,704Capital
      leases with effective interest rates that range between 12.9% and
      14.7%.  Leases mature between June 2014 and September
      2014.
              
              
              120,119
              
              
              
              126,158Total
      debt obligations
              
              $
              2,522,874
              
              
              $
              1,282,099Less
      current portion
              
              
              (610,633
              )
              
              
              (272,493
              )Long-term
      debt, net of current portion
              
              $
              1,912,241
              
              
              $
              1,009,606
  (19)
              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
December 31, 2009 and September 30, 2009, the Company owed $0 and $76,022,
respectively, 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 accrued interest
at 11% per annum and were due upon demand.  During the three months
ended December 31, 2009, the Company repaid and ended the remainder of the
line-of-credit which consisted of cash repayments of $125,000 offset, in part,
by $48,978 of expenses owed to ADP Management that are reimbursable by the
Company.


18





Related-Party
Notes Payable





As of
December 31, 2009 and September 30, 2009, the Company owed $1,500,000 in
principal plus $47,158 and $12,197, respectively, in accrued interest to Mr.
Derrick on an unsecured note payable.  Total proceeds from the note
were $1,500,000, which accrues interest at 15% and is due on February 26, 2010.
Subsequent to December 31, 2009, Mr. Derrick converted the note into 1,500
shares of Series D Preferred stock.





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 and to settle a registration rights dispute, the
Company granted the lender 8,000,000 shares of common
stock.  Additionally, 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 owned by ADP
Management and held as collateral. As of December 31, 2009 and 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 December 31, 2009, the Company issued 833
shares of Series D Preferred stock to ADP Management to repay 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 officer 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’s common stock at
an exercise price of $0.25 per share, valued at $43,926. As of December 31, 2009
and September 30, 2009, the outstanding balance owed on the debenture was
$250,000 plus $2,465 and $9,452, respectively, in accrued interest. Subsequent
to December 31, 2009, the Company issued 250 shares of Series D Preferred stock
and the debenture was converted to equity.





Consulting
Arrangements





The
Company has 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 is paid a consulting fee of $20,000
per month and the Company agrees to reimburse the expenses incurred by ADP
Management in the course of performing services under the consulting
arrangement.





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, with Mr. Derrick abstaining,
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 recognized $60,000 of expense associated with
the issuance of these shares during each of the three months ended December 31,
2009 and 2008.  As of December 31, 2009, the remaining deferred
compensation was $1,160,000.





(20)         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.


19





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 fiscal 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. As of December 31,
2009, there were no shares of Series A Preferred stock outstanding.





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
SecureAlert 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 three months ended
December 31, 2008, the Company recorded $113 in dividends on Series A Preferred
stock.





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 year ended
September 30, 2009, 10,999 shares of Series B Preferred stock converted into
10,999 shares of common stock. As of December 31, 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 three months ended December 31, 2009, the
Company issued 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 9,200 shares from securities purchase
agreements for $4,600,000 in cash.  Additionally, the Company received
a subscription to purchase 3,000 shares of Series D Preferred stock, but has not
yet received the $1,500,000 of funds for this purchase.  As of the
date of this report, there were 25,186 Series D Preferred shares
outstanding.




Dividends


The
Series D Preferred stock is entitled to dividends at a 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.





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.


20





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.





Series D Preferred Stock
Options


As of
December 31, 2009, 4,000 Series D Preferred stock options were vested with an
exercise price of $500.00 per share.  The Company issued all of the
outstanding options during the three months ended December 31, 2009 in
connection with a financial advisory service agreement to restructure debt and
raise additional capital.





SecureAlert
Monitoring, Inc. (formerly 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 Monitoring, Inc. (“SMI”) to designate 3,590,000 shares of preferred
stock as Series A Convertible Redeemable Non-Voting Preferred stock (“SMI Series
A Preferred stock”).





On March
24, 2008, SMI redeemed all outstanding shares of SMI Series A Preferred stock in
exchange for 7,434,249 shares of the Company’s common stock for a value of
$8,549,386.  The former SMI 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 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 SMI Series A stockholders.  As of December 31, 2009 and
September 30, 2009, the Company estimated and accrued $3,007,985 and $3,148,943,
respectively, for future and past contingency payments due to former SMI Series
A stockholders. Subsequent to December 31, 2009, former holders of SMI 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 SMI Series A Preferred stock for 2,263 shares of Series D Preferred
stock.





During
the three months ended December 31, 2009 and 2008, the Company recorded $35,681
and $18,715 in other income, respectively, to reflect the change between the
estimated and actual contingency payments.  During the three months
ended December 31, 2009, the Company issued 1,400,000 shares of common stock to
satisfy $158,469 in dividends on SMI Series A Preferred stock.





(21)         COMMON
STOCK





During
the three months ended December 31, 2009, the Company issued 1,400,000 shares of
common stock valued at $158,469 to a former SMI Series A Preferred stockholder
in connection with the settlement of certain obligations in connection with the
redemption of the stockholder’s SMI Series A Preferred stock.





Subsequent
to the three months ended December 31, 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 common 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.





Common
Stock Options and Warrants





As of
December 31, 2009, 16,933,831 of the 20,248,165 outstanding options and warrants
were vested with a weighted average exercise price of $0.37 per
share.





During
the three months ended December 31, 2009, the Company issued 2,000,000 warrants
to purchase common stock in connection with a third party consulting service
agreement.  Of the 2,000,000 warrants issued during the three months
ended December 31, 2009, 1,000,000 vested at an exercise price of $0.15 per
share.  The exercise price for the options granted during the three
months ended December 31, 2009, was based upon the quoted market price of the
Company’s shares on the date of grant.


21





(22)
            SUBSEQUENT
      EVENTS





Subsequent
to December 31, 2009, the following events occurred:





1)
            The
      Company granted to each previously existing non-executive member of the
      board of directors warrants to purchase 250,000 shares of common stock at
      an exercise price of $0.13 per share for past and future services from
      October 1, 2009 to December 31, 2010, totaling 750,000
      warrants.  Additionally, the Company granted to each new
      non-executive member of the board of directors warrants to purchase
      200,000 shares of common stock at an exercise price of $0.13 per share for
      future services from January 1, 2010 to December 31, 2010, totaling
      400,000 warrants.





2)
            The
      Company settled the Texas and California lawsuits with Satellite Tracking
      of People, L.L.C. for $1,150,000 in cash to be paid over three
      years.  As part of the settlement agreement the parties also
      entered into cross-licensing arrangements covering certain patents held by
      each party.





3)
            The
      Company, RemoteMDx, Inc.,  filed an amendment to its Articles of
      Incorporation changing its corporate name to SecureAlert, Inc. 
      Additionally, the Company's subsidiary, SecureAlert, Inc., filed an
      amendment to its Articles of Incorporation changing its corporate name to
      SecureAlert Monitoring, Inc.





Subsequent
events have been evaluated through February 12, 2010, the date these financial
statements were issued.  No events, other than the events described
above, required disclosure.





(23)  
      COMMITMENTS AND CONTINGENCIES





Legal
Matters





Subsequent
to December 31, 2009, the Company settled two lawsuits, 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 RemoteMDx, Inc. and RemoteMDx, Inc. v.Satellite
Tracking of People, L.L.C.(a/k/a STOP, LLC).
Under the terms of the settlement agreement, these cases were dismissed and the
Company agreed to pay STOP over three years $1,150,000, which has been accrued
as of December 31, 2009. The settlement agreement also included cross-licensing
provisions pursuant to which the Company licensed STOP to utilize certain of its
patents and STOP licensed the Company to use certain of its patents that were
the subject matter of these two lawsuits.





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 SecureAlert,
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.





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 under these agreements during the three months ended
December 31, 2009 and 2008, was approximately $423,226 and $787,725,
respectively.  These amounts are included in cost of
sales.


22


Item
2.                      Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Forward-looking
Statements





This
report contains information that constitutes “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995 and Section
21E of the Securities Exchange Act.  Generally, the statements
contained in this report that are not purely historical can be considered to be
“forward-looking statements.”  These statements represent our
expectations, hopes, beliefs, anticipations, commitments, intentions, and
strategies regarding the future.  They may be identified by the use of
words or phrases such as “believes,” “expects,” “intends,” “anticipates,”
“should,” “plans,” “estimates,” “potential,” and “will,” among
others.  Forward-looking statements include, but are not limited to,
statements contained in Management’s Discussion and Analysis of Financial
Condition and Results of Operations regarding our financial performance,
revenue, and expense levels in the future and the sufficiency of our existing
assets to fund future operations and capital spending needs.  We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.  In addition, forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from our historical experience and our present expectations or
projections.  These risks and uncertainties include, but are not
limited to, those described in “Risk Factors” in our most recent Annual Report
on Form 10-K, and those described from time to time in our future reports filed
with the Securities and Exchange Commission.





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and notes thereto that are contained in this report, as
well as Management’s Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended September 30,
2009, and Current Reports on Form 8-K that have been filed with the SEC through
the date of this Report. Except as otherwise indicated, as used in this Report,
the terms “the Company,” “SecureAlert,” “we,” “our,” “us,” refer to SecureAlert,
Inc., a Utah corporation formerly known as RemoteMDx, Inc.





General





SecureAlert
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 with siren capabilities 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 individuals with an
accountable opportunity to be “free from prison,” while providing for greater
public safety at a lower cost in comparison to incarceration or traditional
resource-intensive alternatives.





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.





Critical
Accounting Policies





In Note 3
to the consolidated financial statements for the fiscal year ended September 30,
2009 included in our Form 10-K, we discuss those accounting policies that are
considered to be significant in determining our results of operations and
financial position.


23





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 judgments are subject to an
inherent degree of uncertainty. We assess the reasonableness of 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 as well as available current information on a regular
basis.  Management uses this information to form the basis for making
judgments about the carrying value of assets and liabilities.  Actual
results may differ from these estimates under different assumptions or
conditions.





Recent
Developments





Subsequent
to December 31, 2009, the following events occurred:





1)
            The
      Company granted to each previously existing non-executive member of the
      board of directors warrants to purchase 250,000 shares of common stock at
      an exercise price of $0.13 per share for past and future services from
      October 1, 2009 to December 31, 2010, totaling 750,000
      warrants.  Additionally, the Company granted to each new
      non-executive member of the board of directors warrants to purchase
      200,000 shares of common stock at an exercise price of $0.13 per share for
      future services from January 1, 2010 to December 31, 2010, totaling
      400,000 warrants.





2)
            The
      Company settled the Texas and California lawsuits with Satellite Tracking
      of People, L.L.C. for $1,150,000 in cash to be paid over three
      years.  As part of the settlement agreement the parties also
      entered into cross-licensing arrangements covering certain patents held by
      each party.





3)
            The
      Company, RemoteMDx, Inc.,  filed an amendment to its Articles of
      Incorporation changing its corporate name to SecureAlert, Inc. 
      Additionally, the Company's subsidiary, SecureAlert, Inc., filed an
      amendment to its Articles of Incorporation changing its corporate name to
      SecureAlert Monitoring, Inc.





Results
of Operations





Three
months ended December 31, 2009, compared to three months ended December 31,
2008




Revenues




For the
three months ended December 31, 2009, we had revenues from operations of
$3,196,623, compared to $3,222,297 for the three months ended December 31, 2008,
a decrease of $25,674.  Although total revenues decreased, recurring
revenues from monitoring services increased from $2,869,547 for the three months
ended December 31, 2008 to $3,146,253 for the three months ended December 31,
2009, a 10% ($276,706) increase. We shifted our focus to leasing monitoring
equipment instead of device sales. Product revenues decreased from $352,750 for
the three months ended December 31, 2008 to $50,370 for the three months ended
December 31, 2009. For the three months ended December 31, 2009, revenues from
one piece activated GPS tracking devices supported entirely about a single limb
of the monitored person equated to $1,514,514. The operating results of our
subsidiaries, SMI, Midwest and Court Programs, are described in the following
paragraphs.




SMI had
revenues of $1,332,502 during the three months ended December 31, 2009, compared
to revenues of $1,309,921 for the three months ended December 31, 2008, an
increase of $22,581. Product revenues, increased from $7,750 for three months
ended December 31, 2008 to $41,670 for the three months ended December 31, 2009.
This increase is offset by a decrease of $11,339 (0.8%) in recurring revenues
from monitoring services from $1,302,171 for the three months ended December 31,
2008, to $1,290,832 for the three months ended December 31, 2009. No SMI
customer accounted for 10% or more of its revenues during the three months ended
December 31, 2009 or 2008.




Midwest
had revenues of $1,037,766 during the three months ended December 31, 2009,
compared to revenues of $1,180,810 during the same period in the prior
year.  The decrease of $143,044 resulted primarily from a one-time
sale of $345,000 of merchandise made during the three months ended December 31,
2008 that did not recur during the three months ended December 31, 2009.
Midwest, however, had an increase in recurring monitoring revenues of $191,831
from the three months ended December 31, 2008 to the same period ended 2009.
During the three months ended December 31, 2009 and 2008, a customer accounted
for $194,322 and $144,628, or approximately 19% and 12% of Midwest’s revenues,
respectively.  During the three months ended December 31, 2009 and
2008, we made a one-time sale to a customer that represented approximately 0%
and 29% of Midwest’s revenues, respectively.   No other customer
accounted for 10% or more on Midwest’s revenues.




24




Court
Programs had revenues of $826,355 during the three months ended December 31,
2009, compared to revenues of $731,566 during the same period in the prior
year.  The increase of $94,789 resulted primarily from increased
monitoring of offender tracking devices and probation services. No Court Program
customer accounted for 10% or more of Court Program’s revenues during the three
months ended December 31, 2009 or 2008.





Cost
of Revenues





For the
three months ended December 31, 2009, cost of revenues for operations declined
to $1,965,738 from $3,115,457 during the three months ended December 31, 2008, a
decrease of $1,149,719.  The decrease in cost of revenues resulted
primarily from a reduction in communication cost of $366,426, utilization fees
of $253,952, device costs of $224,846 from units sold, and monitoring center
costs of $172,631.  While focusing on the reductions in cost of
revenues, we have been able to increase gross profit from $106,840, or 3% of
revenues for the three months ended December 31, 2008 to $1,230,885, or 39% of
revenues for the three months ended December 31, 2009. Improving gross profit
has been achieved primarily through reduced communication and direct labor cost
initiatives and software enhancements.





SMI’s
cost of revenues for the three months ended December 31, 2009 and 2008 was
$821,067 and $1,817,131, or 62% and 139% of revenues, respectively, which
resulted in a decrease of $996,064.  This decrease is as a result of a
reduction in communication cost of $366,426, utilization fees of $253,952,
monitoring center costs of $172,631, and other costs of $203,055.





Midwest’s
cost of revenues totaled $663,177, or 64% of revenues for the three months ended
December 31, 2009, compared to $773,830, or 66% of revenues for the same period
during 2008.  Court Program’s cost of revenues totaled $481,494, or
58% of revenues for three months ended December 31, 2009, compared to $524,496,
or 72% of revenues for the three months ended December 31, 2008.





Research
and Development Expenses





During
the three months ended December 31, 2009 and 2008, research and development
expense from operations was $287,717 and $492,403, respectively, and consisted
primarily of expenses associated with the development of the TrackerPAL device
and related services.





Selling,
General and Administrative Expenses





During
the three months ended December 31, 2009, selling, general and administrative
expenses from operations were $3,472,775 compared to $4,089,273 during the three
months ended December 31, 2008.  The improvement of $616,498 is
primarily due to decreases in legal and professional expense of $192,172, travel
expense of $94,466, outside services of $89,497, and insurance expense of
$74,251.





Interest
Expense





During
the three months ended December 31, 2009 and 2008, interest expense related to
operations totaled $1,463,142 and $479,745, respectively. The increase of
$983,397 resulted primarily from a non-cash expense related to amortization of
debt discount from the issuance of stock and warrants in connection with debt
obligations.





Liquidity
and Capital Resources





We are
presently unable to finance our business solely from cash flows from operating
activities. During the three months ended December 31, 2009, we financed our
business primarily from the issuance of debt and the issuance of stock providing
cash proceeds of $1,531,304.





As of
December 31, 2009, we had unrestricted cash of $418,206 and a working capital
deficit of $20,407,251, compared to unrestricted cash of $602,321 and a working
capital deficit of $16,476,897 as of September 30, 2009.  For the
three months ended December 31, 2009, our operating activities used cash of
$1,564,217, compared to $2,687,201 of cash used in operating activities for the
three months ended December 31, 2008.


25





We used
cash of $151,202 for investing activities during the three months ended December
31, 2009, compared to $562,949 of cash used in investing activities in the three
months ended December 31, 2008.





Financing
activities for the three months ended December 31, 2009, provided cash of
$1,531,304 compared to $1,254,883 for the three months ended December 31, 2008.
For the three months ended December 31, 2009, we had net proceeds of $1,000,000
in the form of advances to purchase Series D Preferred stock, $410 from the
issuance of debt instruments and net advances from the line of credit of
$746,837.  Cash decreased by $125,000 in net payments from
related-party line-of-credit, $65,943 due to payments on notes payable, and
$25,000 due to payment for the termination of a portion of a Series A 15%
Debenture.  Cash provided by financing activities was used to fund
operating activities and purchase monitoring equipment.





We
incurred a net loss of $5,525,203 for the three months ended December 31, 2009
and a loss from operations of $3,679,607. In addition, we had an accumulated
deficit of $211,290,699 as of December 31, 2009.  These factors, as
well as the risk factors set out in our annual report on Form 10-K for the year
ended September 30, 2009 raise substantial doubt about our ability to continue
as a going concern. The condensed consolidated financial statements included in
this report do not include any adjustments that may result from the outcome of
this uncertainty.  Our plans with respect to this uncertainty are to
increase leases of the TrackerPALTM product and to increase monitoring services
revenues.  There can be no assurance that revenues will increase
rapidly enough to deliver profitable operating results and pay our debts as they
come due.  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, we will be unable to continue the
development of our business and may have to cease operations.





Item
3.    Quantitative and Qualitative Disclosures About
Market Risk





Our
business is extending to several countries outside the United States, and we
intend to continue to expand our foreign operations.  As a result, our
revenues and results of operations are affected by fluctuations in currency
exchange rates, interest rates, and other uncertainties inherent in doing
business in more than one currency.  In addition, our operations are
exposed to risks that are associated with changes in social, political, and
economic conditions in the foreign countries in which we operate, including
changes in the laws and policies that govern foreign investment, as well as, to
a lesser extent, changes in United States laws and regulations relating to
foreign trade and investment.





Foreign Currency
Risks.  We had no revenues from sources outside the United
States for the three months ended December 31, 2009 and 2008.  Sales
of monitoring equipment during the periods indicated were transacted in U.S.
dollars and, therefore, we did not experience any effect from foreign currency
exchange in connection with these international sales.  Changes in
currency exchange rates affect the relative prices at which we sell our
products.  Given the uncertainty of exchange rate fluctuations, we
cannot estimate the effect of these fluctuations on our future business, product
pricing, results of operations, or financial condition.





We do not
use foreign currency exchange contracts or derivative financial instruments for
trading or speculative purposes.  To the extent foreign sales become a
more significant part of our business in the future, we may seek to implement
strategies which make use of these or other instruments in order to minimize the
effects of foreign currency exchange on our business.





Interest Rate
Risks.  As of December 31, 2009, we had $999,437 of borrowings
outstanding on a line of credit with a bank with an interest rate of
3.28%.  The interest rate on this line of credit is subject to change
from time to time based on changes in an independent index which is the Prime
Rate as published in The Wall Street Journal.





Item
4.    Controls and Procedures





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:


26





(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, including our chief
executive officer and our chief financial officer, 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.





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 majority owned subsidiaries as of
      December 31, 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 instruments
      with embedded derivative features.





·
            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.


27





PART
II.   OTHER INFORMATION





Item
1.    Legal Proceedings





Subsequent
to December 31, 2009, we settled two lawsuits, 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 RemoteMDx, Inc. and RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC). Under the terms of the
settlement agreement, these cases were dismissed and we agreed to pay STOP over
three years $1,150,000.  The settlement agreement also included
cross-licensing provisions pursuant to which we licensed STOP to utilize certain
of our patents and STOP licensed us to use certain of its patents that were the
subject matter of these two lawsuits.





Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds





During
the three months ended December 31, 2009, we did not sell any equity securities
without registration under the Securities Act of 1933.





Item
5.    Other Information





Subsequent
to December 31, 2009, we filed an amendment to our Articles of Incorporation
changing the name of the Company to “SecureAlert, Inc.”  This action
had been approved by the affirmative vote of our shareholders at annual meeting
on October 28, 2008.  The results of the shareholder voting on this
proposal were disclosed previously in the Company’s Annual Report on Form 10-K
for the year ended September 30, 2008, filed by the Company with the SEC on
December 26, 2008.





Item
6.    EXHIBITS





(a)          
Exhibits Required by Item 601 of Regulation S-K





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 (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 (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).




28





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
      (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 (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 (previously filed)3(i)(11)
            
            Articles
      of Amendment to the Articles of Incorporation to Change Name from
      RemoteMDx, Inc. to SecureAlert, Inc., dated February 1, 2010 (filed
      herewith).3(i)(12)
            
            Articles
      of Amendment to the Articles of Incorporation to Change Name from
      SecureAlert, Inc. to SecureAlert Monitoring, Inc., dated February 1, 2010
      (filed herewith).3(ii)
            
            Bylaws
      (incorporated by reference to our Registration Statement on Form 10-SB,
      effective December 1, 1997).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 three months 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).




29





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).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).




30





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).10.26
            
            Settlement
      Agreement between Satellite Tracking of People, L.L.C. and the Company,
      dated January 29, 2010.  Portions of this exhibit were redacted
      pursuant to a request for confidential treatment filed with the Securities
      and Exchange Commission (filed herewith).10.27
            
            Agreement
      between the Company and Sapinda Group, Ltd., dated November 25, 2009
      (filed herewith).31(i)
            
            Certification
      of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002
      (filed herewith).31(ii)
            
            Certification
      of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002
      (filed herewith).32
            
            Certifications
      under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
      1350) (filed herewith).





31


SIGNATURES








Pursuant
to the requirements 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.








SecureAlert,
    INC.Date:
      February 16, 2010
            By:
            /s/ David G.
      DerrickDavid
      G. Derrick,Chief
      Executive Officer(Principal
      Executive Officer)Date:
      February 16, 2010
            By:
            /s/ Chad D.
      OlsenChad
      D. Olsen,Chief
      Financial Officer(Principal
      Accounting Officer)












32