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, 2008
 
 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
 ______________________
 
 REMOTEMDX,
INC.
 (Exact
name of registrant as specified in its charter)
 
 
 Utah
                87-0543981(State
      or other jurisdiction
                (I.R.S.
      Employerof
      incorporation or organization)
                Identification
      No.)
 ______________________
 
 150
West Civic Center Drive, Suite 400, Sandy, Utah 84070
 (Address
of principal executive offices, Zip Code)
 ______________________
 
 (801)
451-6141
 (Registrant’s
telephone number, including area code)
 
 Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
[X]  No [  ]
 
 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 [X]Non-accelerated
      filer [  ]
                Smaller
      reporting company [  ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes
[  ]  No [X]
 
 The
number of shares outstanding of the registrant’s common stock as of February 5,
2009 was 162,438,546.
 1
 REMOTEMDX, INC.
 
 FORM
10-Q
 
 For
the Quarterly Period Ended December 31, 2008
 
 INDEX
 
 PagePART
      I.   FINANCIAL INFORMATIONItem
      1
                      Financial
      Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of December 31, 2008 and September 30,
      2008
                      3Condensed
      Consolidated Statements of Operations for the three months ended December
      31, 2008 and 2007
                      5Condensed
      Consolidated Statements of Cash Flows for the three months ended December
      31, 2008 and 2007
                      6Notes
      to Condensed Consolidated Financial Statements
                      8Item
      2
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      22Item
      3
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      27Item
      4
                      Controls
      and Procedures
                      28PART
      II.   OTHER INFORMATIONItem
      1
                      Legal
      Proceedings
                      29Item
      1A
                      Risk
      Factors
                      30Item
      2
                      Unregistered
      Sales of Equity Securities and Use of
Proceeds  .
                      30Item
      4
                      Submission
      of Matters to a Vote of Security Holders
                      32Item
      6
                      Exhibits.
                      33Signatures
                      36
 
  2
  PART I.  FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
 
 REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
  December
      31,
                    2008
                  
                  
                  September
      30,
                    2008AssetsCurrent
      assets:Cash
                  
                  $
                  787,686
                  
                  
                  $
                  2,782,953Deposit
      held in escrow
                  
                  
                  -
                  
                  
                  
                  500,000Accounts
      receivable, net of allowance for doubtful accounts of  $205,596
      and $312,000, respectively
                  
                  
                  1,661,005
                  
                  
                  
                  1,441,853Inventory
                  
                  
                  170,953
                  
                  
                  
                  -Receivable
      from related-party
                  
                  
                  57,063
                  
                  
                  
                  55,385Prepaid
      expenses and other
                  
                  
                  252,019
                  
                  
                  
                  224,842Total
      current assets
                  
                  
                  2,928,726
                  
                  
                  
                  5,005,033Property
      and equipment, net of accumulated depreciation and amortization of
      $2,112,970 and $1,937,710, respectively
                  
                  
                  1,526,781
                  
                  
                  
                  1,581,558Monitoring
      equipment, net of accumulated depreciation of $3,276,777 and $3,061,321,
      respectively
                  
                  
                  1,571,208
                  
                  
                  
                  1,349,146Goodwill
                  
                  
                  4,811,834
                  
                  
                  
                  4,811,834Intangible
      assets, net of amortization of $21,450 and $16,500,
      respectively
                  
                  
                  211,550
                  
                  
                  
                  216,500Other
      assets
                  
                  
                  78,548
                  
                  
                  
                  46,626Total
      assets
                  
                  $
                  11,128,647
                  
                  
                  $
                  13,010,697
  See
accompanying notes to condensed consolidated financial
statements.
  Return to Table of Contents
 3
 
 REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS - Continued
 (Unaudited)
 
 December
      31,
                                                          2008
                                                        
                                                        
                                                        September
      30,
                                                          2008Liabilities
      and Stockholders’ Equity (Deficit)Current
      liabilities:Bank
      line of credit
                                                        
                                                        $
                                                        3,579,294
                                                        
                                                        
                                                        $
                                                        3,462,285Accounts
      payable
                                                        
                                                        
                                                        2,581,740
                                                        
                                                        
                                                        
                                                        2,059,188Accrued
      liabilities
                                                        
                                                        
                                                        1,897,238
                                                        
                                                        
                                                        
                                                        1,781,267Deferred
      revenue
                                                        
                                                        
                                                        30,301
                                                        
                                                        
                                                        
                                                        21,343SecureAlert
      Series A Preferred stock redemption obligation
                                                        
                                                        
                                                        3,226,043
                                                        
                                                        
                                                        
                                                        3,244,758Related
      Party Line of Credit and Notes
                                                        
                                                        
                                                        1,865,140
                                                        
                                                        
                                                        
                                                        792,804Current
      portion of long-term debt
                                                        
                                                        
                                                        425,809
                                                        
                                                        
                                                        
                                                        465,664Total
      current liabilities
                                                        
                                                        
                                                        13,605,565
                                                        
                                                        
                                                        
                                                        11,827,309Long-term
      debt, net of current portion
                                                        
                                                        
                                                        1,234,539
                                                        
                                                        
                                                        
                                                        1,147,382Total
      liabilities
                                                        
                                                        
                                                        14,840,104
                                                        
                                                        
                                                        
                                                        12,974,691Commitments
      and ContingenciesStockholders’
      equity (deficit):Preferred
      stock:Series
      A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares
      designated; 19 and 19 shares outstanding, respectively (aggregate
      liquidation preference of $1,024)
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        1Series
      B convertible, $0.0001 par value: 2,000,000 shares designated; 10,999 and
      10,999 shares outstanding, respectively (aggregate liquidation preference
      of $32,997)
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        1Series
      C convertible, $0.0001 par value: 7,357,144 shares designated; no shares
      outstanding (aggregate liquidation preference of $0)
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Common
      stock,  $0.0001 par value: 175,000,000 shares authorized;
      156,581,260 and 155,881,260 shares outstanding,
    respectively
                                                        
                                                        
                                                        15,658
                                                        
                                                        
                                                        
                                                        15,588Additional
      paid-in capital
                                                        
                                                        
                                                        186,809,902
                                                        
                                                        
                                                        
                                                        186,203,084Deferred
      compensation
                                                        
                                                        
                                                        (2,918,864
                                                        )
                                                        
                                                        
                                                        (3,498,672
                                                        )Accumulated
      deficit
                                                        
                                                        
                                                        (187,618,155
                                                        )
                                                        
                                                        
                                                        (182,683,996
                                                        )Total
      stockholders’ equity (deficit)
                                                        
                                                        
                                                        (3,711,457
                                                        )
                                                        
                                                        
                                                        36,006Total
      liabilities and stockholders’ equity (deficit)
                                                        
                                                        $
                                                        11,128,647
                                                        
                                                        
                                                        $
                                                        13,010,697
  See
accompanying notes to condensed consolidated financial
statements.
  Return to Table of Contents
 4
  REMOTEMDX, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three
      Months Ended
                                                                                                                              December
      31,2008
                                                                                                                            
                                                                                                                            
                                                                                                                            2007Revenues:Products
                                                                                                                            
                                                                                                                            $
                                                                                                                            352,750
                                                                                                                            
                                                                                                                            
                                                                                                                            $
                                                                                                                            1,069,379Monitoring
      services
                                                                                                                            
                                                                                                                            
                                                                                                                            2,869,547
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,399,907Total
      revenues
                                                                                                                            
                                                                                                                            
                                                                                                                            3,222,297
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            3,469,286Cost
      of revenues:Products
                                                                                                                            
                                                                                                                            
                                                                                                                            239,467
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            578,822Monitoring
      services
                                                                                                                            
                                                                                                                            
                                                                                                                            2,875,990
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,163,964Total
      cost of revenues
                                                                                                                            
                                                                                                                            
                                                                                                                            3,115,457
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,742,786Gross
      margin
                                                                                                                            
                                                                                                                            
                                                                                                                            106,840
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            726,500Operating
      expenses:Selling,
      general and administrative (including $865,404 and $2,019,945,
      respectively, of compensation expense paid in stock or stock options /
      warrants)
                                                                                                                            
                                                                                                                            
                                                                                                                            4,089,273
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            4,152,715Research
      and development
                                                                                                                            
                                                                                                                            
                                                                                                                            492,403
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            865,344Loss
      from operations
                                                                                                                            
                                                                                                                            
                                                                                                                            (4,474,836
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (4,291,559
                                                                                                                            )Other
      income (expense):Gain
      on sale of intellectual property
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            2,400,000Redemption
      of SecureAlert Series A Preferred
                                                                                                                            
                                                                                                                            
                                                                                                                            18,715
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            -Interest
      income
                                                                                                                            
                                                                                                                            
                                                                                                                            1,682
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            30,517Interest
      expense (including $221,404 and $178,406, respectively, of compensation
      expense paid in stock)
                                                                                                                            
                                                                                                                            
                                                                                                                            (479,745
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (375,510
                                                                                                                            )Other
      income (expense), net
                                                                                                                            
                                                                                                                            
                                                                                                                            25
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            9,260Net
      loss from continuing operations
                                                                                                                            
                                                                                                                            
                                                                                                                            (4,934,159
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (2,227,292
                                                                                                                            )Discontinued
      operations
                                                                                                                            
                                                                                                                            
                                                                                                                            -
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            (114,652
                                                                                                                            )Net
      loss
                                                                                                                            
                                                                                                                            
                                                                                                                            (4,934,159
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (2,341,944
                                                                                                                            )Dividends
      on Series A Preferred stock
                                                                                                                            
                                                                                                                            
                                                                                                                            (113
                                                                                                                            )
                                                                                                                            
                                                                                                                            
                                                                                                                            (167,137
                                                                                                                            )Net
      loss attributable to common stockholders
                                                                                                                            
                                                                                                                            $
                                                                                                                            (4,934,272
                                                                                                                            )
                                                                                                                            
                                                                                                                            $
                                                                                                                            (2,509,081
                                                                                                                            )Net
      loss per common share from continuing operations, basic and
      diluted
                                                                                                                            
                                                                                                                            $
                                                                                                                            (0.03
                                                                                                                            )
                                                                                                                            
                                                                                                                            $
                                                                                                                            (0.02
                                                                                                                            )Net
      loss per common share from discontinued operations, basic and
      diluted
                                                                                                                            
                                                                                                                            $
                                                                                                                            (0.00
                                                                                                                            )
                                                                                                                            
                                                                                                                            $
                                                                                                                            (0.00
                                                                                                                            )Net
      loss per common share, basic and diluted
                                                                                                                            
                                                                                                                            $
                                                                                                                            (0.03
                                                                                                                            )
                                                                                                                            
                                                                                                                            $
                                                                                                                            (0.02
                                                                                                                            )Weighted
      average common shares outstanding, basic and diluted
                                                                                                                            
                                                                                                                            
                                                                                                                            156,631,000
                                                                                                                            
                                                                                                                            
                                                                                                                            
                                                                                                                            129,617,000
 
 See
accompanying notes to condensed consolidated financial
statements.
  Return to Table of Contents
 5
  REMOTEMDX, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three
      Months EndedDecember
      31,2008
                                              
                                              
                                              2007Cash
      flows from operating activities:Net
      loss
                                              
                                              $
                                              (4,934,159
                                              )
                                              
                                              $
                                              (2,341,944
                                              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                              
                                              
                                              400,614
                                              
                                              
                                              
                                              440,445Common
      stock issued for services
                                              
                                              
                                              425,000
                                              
                                              
                                              
                                              621,085Amortization
      of deferred financing and consulting costs
                                              
                                              
                                              661,808
                                              
                                              
                                              
                                              1,393,656Stock
      options and warrants issued during the period for services
                                              
                                              
                                              -
                                              
                                              
                                              
                                              183,610Redemption
      of SecureAlert Series A Preferred stock
                                              
                                              
                                              (18,715
                                              )
                                              
                                              
                                              -Increase
      in related-party line of credit for services
                                              
                                              
                                              81,764
                                              
                                              
                                              
                                              204,509Loss
      from discontinued operations
                                              
                                              
                                              -
                                              
                                              
                                              
                                              114,652Changes
      in operating assets and liabilities:Accounts
      receivable, net
                                              
                                              
                                              (219,152
                                              )
                                              
                                              
                                              (617,938
                                              )Deposit
      released from escrow
                                              
                                              
                                              500,000
                                              
                                              
                                              
                                              -Interest
      receivable (payable)
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (9,068
                                              )Inventories
                                              
                                              
                                              (170,953
                                              )
                                              
                                              
                                              -Prepaid
      expenses and other assets
                                              
                                              
                                              (60,777
                                              )
                                              
                                              
                                              (92,920
                                              )Accounts
      payable
                                              
                                              
                                              522,552
                                              
                                              
                                              
                                              (821,783
                                              )Accrued
      liabilities
                                              
                                              
                                              115,859
                                              
                                              
                                              
                                              (252,140
                                              )Deferred
      revenue
                                              
                                              
                                              8,958
                                              
                                              
                                              
                                              (42,199
                                              )Net
      cash used in operating activities
                                              
                                              
                                              (2,687,201
                                              )
                                              
                                              
                                              (1,220,035
                                              )Cash
      flows from investing activities:Purchase
      of property and equipment
                                              
                                              
                                              (120,483
                                              )
                                              
                                              
                                              (43,313
                                              )Purchase
      of monitoring equipment
                                              
                                              
                                              (444,733
                                              )
                                              
                                              
                                              -Disposal
      of monitoring equipment
                                              
                                              
                                              2,267
                                              
                                              
                                              
                                              -Net
      cash used in investing activities
                                              
                                              
                                              (562,949
                                              )
                                              
                                              
                                              (43,313
                                              )Cash
      flows from financing activities:Principal
      payments on related-party line of credit
                                              
                                              
                                              (9,428
                                              )
                                              
                                              
                                              (436,219
                                              )Principal
      payments on notes payable
                                              
                                              
                                              (175,064
                                              )
                                              
                                              
                                              (78,644
                                              )Cash
      acquired through acquisitions
                                              
                                              
                                              -
                                              
                                              
                                              
                                              160,898Net
      proceeds (payments) in bank line of credit borrowings
                                              
                                              
                                              117,009
                                              
                                              
                                              
                                              (188,534
                                              )Proceeds
      from notes payable
                                              
                                              
                                              22,366
                                              
                                              
                                              
                                              -Proceeds
      from issuance of related-party note payable
                                              
                                              
                                              1,000,000
                                              
                                              
                                              
                                              -Proceeds
      from sale of common stock
                                              
                                              
                                              100,000
                                              
                                              
                                              
                                              -Proceeds
      from issuance of Series A 15% debentures
                                              
                                              
                                              200,000
                                              
                                              
                                              
                                              -Proceeds
      from exercise of options and warrants
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,452,380Net
      cash provided by financing activities
                                              
                                              
                                              1,254,883
                                              
                                              
                                              
                                              1,909,881Net
      increase (decrease) in cash
                                              
                                              
                                              (1,995,267
                                              )
                                              
                                              
                                              646,533Cash,
      beginning of period
                                              
                                              
                                              2,782,953
                                              
                                              
                                              
                                              4,803,871Cash,
      end of period
                                              
                                              $
                                              787,686
                                              
                                              
                                              $
                                              5,450,404
  See
accompanying notes to condensed consolidated financial
statements.
  Return to Table of Contents
 6
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 (Unaudited)
 
 Three
      Months Ended
                                        December
      31,2008
                                      
                                      
                                      
                                      2007Cash
      paid for interest
                                      
                                      $
                                      251,189
                                      
                                      
                                      $
                                      197,104Supplemental
      schedule of non-cash investing and financing activities:Notes
      payable issued in acquisition of Midwest Monitoring & Surveillance,
      Inc.
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,800,000Note
      payable issued in acquisition of Court Programs, Inc., Court Programs of
      Florida, Inc., and Court Programs of Northern Florida,
Inc.
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,147,500Issuance
      of shares of common stock in exchange for shares of Series B
      Preferredstock
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1SecureAlert
      Series A Preferred stock dividends
                                      
                                      
                                      -
                                      
                                      
                                      
                                      167,035Series
      A Preferred stock dividends
                                      
                                      
                                      113
                                      
                                      
                                      
                                      102Issuance
      of 300,000 and 0 shares of common stock for deferred financing costs,
      respectively
                                      
                                      
                                      82,000
                                      
                                      
                                      
                                      -
 
 
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  Return to Table of Contents
 7
  REMOTEMDX, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
 (1) Basis
of Presentation
 
 The
unaudited interim consolidated financial information of RemoteMDx, Inc. and
subsidiaries (collectively, the “Company” or “RemoteMDx”) 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, 2008, and results of its operations for the three months ended
December 31, 2008 and 2007.  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, 2008.  The results of operations for the
three months ended December 31, 2008 may not be indicative of the results for
the fiscal year ending September 30, 2009.
 
 Going
Concern
  The
Company has 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 Series A 15% debentures, expanding its market for its tracking
products, and increasing monitoring service revenues.  There can be no
assurance that revenues will increase rapidly enough to deliver profitable
operating results and pay the Company’s debts as they come
due.  Likewise, there can be no assurance that the Company will be
successful in raising additional capital from the sale of equity or debt
securities.  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 business and may have to cease
operations.
  Principles
of Consolidation
  The
condensed consolidated financial statements include the accounts of RemoteMDx
and its subsidiaries. All significant inter-company transactions have been
eliminated in consolidation.
 
 Recently
Issued Accounting Standards
 
 On June
27, 2007, the FASB ratified EITF 07-3, Accounting for Nonrefundable Advance
Payments for Goods or Services to Be Used in Future Research and Development
Activities, which calls for nonrefundable advance payments for goods or
services to be used in future research and development activities to be deferred
and capitalized until such time as the related goods are delivered or related
services are performed, at which point the amounts are to be recognized as an
expense.  EITF 07-3 is effective for fiscal periods beginning after
December 15, 2007.  The Company has evaluated its research and development
contracts in regard to this new pronouncement and has determined that the effect
of this consensus will not have a material impact on its consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, and
SFAS No. 160. Non-controlling
Interests in Consolidated Financial Statements,
an amendment of Accounting Research Bulletin No. 51.  SFAS No.
141R will change how business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in subsequent
periods.  SFAS No. 160 will change the accounting and reporting for
minority interest, which will be recharacterized as non-controlling interests
and classified as a component of equity.  SFAS No. 141R and SFAS No.
160 are effective for fiscal years, and interim periods within those fiscal
years beginning on or after December 15, 2008.  Early adoption is not
permitted.  The Company has not yet evaluated these new pronouncements
to determine if they will have a material impact on its consolidated financial
statements.
  Return to Table of Contents
 8
 
 In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard Number 157, Fair Value Measurements,
(SFAS 157) which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 related to
financial assets and financial liabilities were effective during
2008.  With respect to certain nonfinancial assets and nonfinancial
liabilities, SFAS No. 157 is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years.  The Company does not expect that the adoption of SFAS
No. 157 with respect to nonfinancial assets and nonfinancial liabilities
will have a material impact on its consolidated financial
statements.
  In
December 2007, the FASB ratified Emerging Issues Task Force (EITF)
Issue No. 07-1, Accounting for Collaborative
Arrangements(EITF 07-1). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years
beginning after December 15, 2008. The Company does not expect that the
adoption of EITF 07-1 will have a material impact on its consolidated
financial statements.
 
 In
February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions (FSP FAS 140-3).
FSP FAS 140-3 requires an initial transfer of a financial asset and a repurchase
financing that was entered into contemporaneously or in contemplation of the
initial transfer to be evaluated as a linked transaction under SFAS No. 140
unless certain criteria are met, including that the transferred asset must be
readily obtainable in the marketplace. FSP FAS 140-3 is effective for fiscal
years beginning after November 15, 2008, and will be applied to new transactions
entered into after the date of adoption. Early adoption is prohibited. The
Company does not expect that the adoption of SFAS No. 141(R) will have a
material impact on its consolidated financial statements.
 
 In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets(FSB FAS 142-3). FSP FAS 142-3 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 SFAS
No. 142, Goodwill and Other
Intangible Assets. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under FAS FAS 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R) and other generally accepted accounting principles. FSP
FAS 142-3 is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2008. The Company has not yet determined the
effect on its consolidated financial statements, if any, that will occur upon
adoption of FSP FAS 142-3.
 
 In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles.  SFAS No. 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with GAAP.  The current GAAP hierarchy has been criticized
because it is directed to the auditor rather than the entity, it is complex, and
it ranks FASB Statements of Financial Accounting Concepts, which are subject to
the same level of due process as FASB Statements of Financial Accounting
Standards, below industry practices that are widely recognized as generally
accepted but that are not subject to due process.  The Board believes
the GAAP hierarchy should be directed to entities because it is the entity (not
its auditors) that is responsible for selecting accounting principles for
financial statements that are presented in conformity with GAAP.  The
adoption of FASB 162 is not expected to have a material impact on the Company’s
financial statements.
  Return to Table of Contents
 9
 
 In May
20008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).  FSB APB 14-1 clarifies that convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants,and specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. The
Company has not yet determined the effect on its consolidated financial
statements, if any, that will occur upon adoption of FSP APB 14-1.
 
 In June
2008, the FASB ratified EITF Issue No. 07-5, Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock (EITF 07-5).
EITF 07-5 provides that an entity should use a two step approach to evaluate
whether an equity-linked financial instrument (or embedded feature) is indexed
to its own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The Company has not yet determined the effect on its
consolidated financial statements, if any, that will occur upon adoption of EITF
07-5.
 
 In
September 2008, the FASB ratified EITF Issue No. 08-5, Issuer’s Accounting for Liabilities
Measured at Fair Value With a Third-Party Credit Enhancement (EITF 08-5).
EITF 08-5 provides guidance for measuring liabilities issued with an attached
third-party credit enhancement (such as a guarantee). It clarifies that the
issuer of a liability with a third-party credit enhancement (such as a
guarantee) should not include the effect of the credit enhancement in the fair
value measurement of the liability. EITF 08-5 is effective for the first
reporting period beginning after December 15, 2008. The Company has not yet
determined the effect on its consolidated financial statements, if any, that
will occur upon adoption of EITF 08-5.
 
 In
November 2008, the FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible
Assets. EITF 08-7 clarifies the accounting for certain separately
identifiable intangible assets which an acquirer does not intend to actively use
but intends to hold to prevent its competitors from obtaining access to them.
EITF 08-7 requires an acquirer in a business combination to account for a
defensive intangible asset as a separate unit of accounting which should be
amortized to expense over the period the asset diminishes in value. EITF 08-7 is
effective for fiscal years beginning after December 15, 2008, with early
adoption prohibited. We are currently evaluating the impact of the pending
adoption of EITF 08-7 on our consolidated financial statements.
 
 In
December 2008, the FASB issued FASB Staff Position FAS 140-4 and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and
FIN 46(R)-8 amends SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities and FIN
46(R), FASB Interpretation No.
46 (R), Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51, to require public entities to
provide additional disclosures about transfers of financial assets and their
involvement with variable interest entities. FSP FAS 140-4 and FIN 46(R)-8 is
effective for the first interim or annual reporting period ending after December
15, 2008. The Company has not yet determined the effect on its consolidated
financial statements, if any, that will occur upon adoption of FSP FAS 140 and
FIN 46(R)-8.
 
 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, 2008 and 2007, the Company performed an assessment of
potential impairment and did not impair any long-lived assets.
  Return to Table of Contents
 10
 
 Revenue
Recognition
 
 The
Company’s revenue has historically been from three 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
PERS units.  The Company recognizes product sales revenue when
persuasive evidence of an arrangement with the customer exists, title passes to
the customer and the customer cannot return the devices, prices are fixed or
determinable (including sales not being made outside the normal payment terms)
and collection is reasonably assured.
  When
purchasing products (such as TrackerPAL devices) from the Company, customers
may, but are not required to, enter into monitoring service contracts with the
Company.  The Company recognizes revenue on monitoring services for
customers that have previously purchased devices at the end of each month that
monitoring services have been provided.
  Multiple Element
Arrangements
 The
majority of the Company’s revenue transactions do not have multiple elements. On
occasion, the Company has revenue transactions that have multiple elements (such
as product sales and monitoring services).  For revenue arrangements
that have multiple elements, the Company considers whether: (i) the delivered
devices have standalone value to the customer; (ii) there is objective and
reliable evidence of the fair value of the undelivered monitoring services,
which is generally determined by surveying the price of competitors’ comparable
monitoring services; and (iii) the customer does not have a general right of
return.  Based on these criteria, the Company recognizes revenue from
the sale of devices separately from the monitoring services to be provided to
the customer.  In accordance with EITF 00-21, 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.
  Return to Table of Contents
 11
  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 preferred
stock.  As of December 31, 2008 and 2007, there were 20,491,912 and
16,184,404 outstanding common stock equivalents, respectively, that were not
included in the computation of diluted net loss per common stock as their effect
would be anti-dilutive. The common stock equivalents outstanding as of December
31, 2008, consisted of 7,178 shares of common stock into which 19 shares of
Series A Preferred stock are convertible, 113,783  shares of common
stock into which 10,999 shares of Series B Preferred Stock are convertible, and
20,370,951 shares underlying options and warrants. Of the 20,370,951 shares
underlying options and warrants, 16,720,618 shares underlie options and warrants
which have vested and 3,650,333 shares underlie options and warrants which have
not yet vested.
 
 As of
December 31, 2008, the Company was authorized to issue 175,000,000 shares of
common stock.  Subsequently, the Company mailed a proxy card in
connection with a Consent Solicitation Statement to the stockholders proposing
to amend the Company’s Articles of Incorporation increasing the authorized
common stock of the Company to 250,000,000.  By March 4, 2009, the
shareholders may vote whether or not to increase the authorized shares, but as
of the date of this Report the number of authorized shares has not
changed.
 
 Equity-based
Compensation
 
 Effective
October 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, using the modified prospective method. SFAS No. 123R requires
the recognition of the cost of employee services received in exchange for an
award of equity instruments in the financial statements and is measured based on
the grant date fair value of the award. SFAS No. 123R also requires the stock
option compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (the vesting
period). Prior to adopting SFAS No. 123R, the Company accounted for its
stock-based compensation plans under Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock
Issued to Employees ("APB 25"). Under APB 25, generally no compensation
expense is recorded when the terms of the award are fixed and the exercise price
of the employee stock option equals or exceeds the fair value of the underlying
stock on the date of grant. The Company adopted the disclosure-only provisions
of SFAS No. 123, Accounting
for Stock-Based Compensation.
 
 For
options granted subsequent to October 1, 2006, the fair value of each stock
option grant will be estimated on the date of grant using the Black-Scholes
option pricing model.  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. No stock options were
granted to employees during the three months ended December 31, 2008 and
2007.
  Return to Table of Contents
 12
  A summary
of stock option activity for the three months ended December 31, 2008, is
presented below:
  Shares
                                                    Under
                                                    Option
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise
                                                    Price
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Remaining
                                                    Contractual
                                                    Life
                                                  
                                                  
                                                  Aggregate
                                                    Intrinsic
                                                    ValueOutstanding
      as of September 30, 2008
                                                  
                                                  
                                                  3,600,000
                                                  
                                                  $
                                                  1.08Granted
                                                  
                                                  
                                                  -
                                                  
                                                  $
                                                  -Exercised
                                                  
                                                  
                                                  -
                                                  
                                                  $
                                                  -Forfeited
                                                  
                                                  
                                                  -
                                                  
                                                  $
                                                  -Expired
      / Cancelled
                                                  
                                                  
                                                  (354,500)
                                                  
                                                  $
                                                  1.55Outstanding
      as of  December 31, 2008
                                                  
                                                  
                                                  3,245,500
                                                  
                                                  $
                                                  1.02
                                                  
                                                  3.28
      years
                                                  
                                                  $
                                                  -Exercisable
      as of  December 31, 2008
                                                  
                                                  
                                                  195,167
                                                  
                                                  $
                                                  1.12
                                                  
                                                  3.08
      years
                                                  
                                                  $
                                                  -
  
 (2)           INVENTORY
  Inventory
is recorded at the lower of cost or market, cost being determined on a first-in
(“FIFO”) method.  Substantially all items included in inventory
consisted of parts related to the manufacturing of the Company’s TrackerPAL
devices.  Inventory was $170,953 and $0 as of December 31, 2008 and
2007, respectively.
  (3)           PROPERTY
AND EQUIPMENT
 
 Property
and equipment as of December 31, 2008 and September 30, 2008, were as
follows:
 December
      31,
                          2008
                        
                        
                        September
      30,
                          2008Equipment,
      software and tooling
                        
                        $
                        2,562,050
                        
                        
                        $
                        2,472,076Automobiles
                        
                        
                        318,244
                        
                        
                        
                        287,736Building
      and land
                        
                        
                        377,555
                        
                        
                        
                        377,555Leasehold
      improvements
                        
                        
                        102,190
                        
                        
                        
                        102,190Furniture
      and fixtures
                        
                        
                        279,712
                        
                        
                        
                        279,7113,639,751
                        
                        
                        
                        3,519,268Accumulated
      depreciation
                        
                        
                        (2,112,970
                        )
                        
                        
                        (1,937,710
                        )Property
      and equipment, net of accumulated depreciation
                        
                        $
                        1,526,781
                        
                        
                        $
                        1,581,558
  Depreciation
expense for the three months ended December 31, 2008 and 2007 was $175,260 and
$142,116, respectively.
 
 (4)           MONITORING
EQUIPMENT
 
 Monitoring
equipment as of December 31, 2008 and September 30, 2008, was as
follows:
 
 December
      31,
                                                    2008
                                                  
                                                  
                                                  
                                                  September
      30,
                                                    2008Monitoring
      equipment
                                                  
                                                  $
                                                  4,847,985
                                                  
                                                  
                                                  $
                                                  4,410,467Less:
      accumulated depreciation
                                                  
                                                  
                                                  (3,276,777
                                                  )
                                                  
                                                  
                                                  (3,061,321
                                                  )Total
                                                  
                                                  $
                                                  1,571,208
                                                  
                                                  
                                                  $
                                                  1,349,146
 
 The
Company began leasing monitoring equipment to agencies for offender tracking in
April 2006 under operating lease arrangements.  The monitoring
equipment is depreciated using the straight-line method over an estimated useful
life of 3 years.
 
 Depreciation
expense for the three months ended December 31, 2008 and 2007 was $220,405 and
$290,897, respectively.  These expenses were classified as a cost of
revenues.
  Return to Table of Contents
 13
  (5)           GOODWILL
AND OTHER INTANGIBLE ASSETS
  Midwest Monitoring &
Surveillance
 Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Midwest Monitoring & Surveillance (“Midwest”) for
$1,800,000 in notes payable and up to 438,000 shares of the Company’s common
stock.  The notes payable of $1,800,000 were paid off on January 18,
2008.  The RemoteMDx shares issued as part of the consideration for
the Midwest shares were placed in escrow and were released by the Company in
March 2008.
 
 Midwest
provides electronic monitoring for individuals on parole.  The primary
reason for the acquisition of Midwest was the expansion of Company’s technology
and name recognition throughout the midwestern, central and eastern United
States.  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 excess
over net book value was allocated as follows:
 
 Goodwill
      and Other Intangible AssetsGoodwill
                      
                      $
                      3,603,748Trade
      name
                      
                      
                      120,000Non-compete
      agreements
                      
                      
                      2,000Excess
      over net book value
                      
                      $
                      3,725,748
 
 The
Company recorded $2,250 of amortization expense for Midwest intangible assets
during the three months ended December 31, 2008 resulting in net intangible
assets of $112,250.
 
 Court
Programs
 Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Court Programs, Inc., a Mississippi corporation, Court
Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of
Florida, Inc., a Florida corporation (collectively, “Court Programs”) for
$300,000 in a note payable and up to 212,000 shares of the Company’s common
stock.  The RemoteMDx shares issued as part of the consideration for
the purchase of Court Programs were placed in escrow and were released by the
Company in August 2008.
 
 Court
Programs is a distributor of electronic monitoring devices to courts providing a
solution to monitor individuals on parole.  The primary reasons to
acquire Court Programs are to expand the Company’s technology and to increase
the Company’s name recognition throughout the eastern United
States.  The total consideration for the purchase of Court Programs
was $1,527,743 delineated as follows: 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 follows:
 
 Goodwill
      and Other Intangible AssetsGoodwill
                      
                      $
                      1,208,086Trade
      name
                      
                      
                      99,000Customer
      relationships
                      
                      
                      6,000Non-compete
      agreements
                      
                      
                      6,000Excess
      over net book value
                      
                      $
                      1,319,086
  Return to Table of Contents
 14
 
 The
Company recorded $2,700 of amortization expense on intangible assets for Court
Programs during the three months ended December 31, 2008 resulting in net
intangible assets of $99,300.
 
 In
connection with the acquisitions of Midwest and Court Programs, the Company
recorded goodwill and other intangible assets.  The table below shows
the allocation of the goodwill and identified intangibles for each
company:
 
 Goodwill
      and other intangible assets, net of amortizationGoodwillMidwest
                    
                    $
                    3,603,748Court
      Programs
                    
                    
                    1,208,086Other
      intangible assetsMidwest,
      net of amortization of $9,750
                    
                    
                    112,250Court
      Programs, net of amortization of $11,700
                    
                    
                    99,300Total
      goodwill and other intangible assets, net of amortization
                    
                    $
                    5,023,384
  Supplemental
Pro Forma Results of Operations
 The
following tables present the pro forma results of operations for the three
months ended December 31, 2008 and 2007, as though the Midwest and Court
Programs acquisitions had been completed as of the beginning of each period
presented:
 Three Months
      EndedDecember
      31,2008
                                    
                                    
                                    2007Revenues:Products
                                    
                                    $
                                    352,750
                                    
                                    
                                    $
                                    1,069,379Monitoring
      services
                                    
                                    
                                    2,869,547
                                    
                                    
                                    
                                    3,317,846Total
      revenues
                                    
                                    
                                    3,222,297
                                    
                                    
                                    
                                    4,387,225Cost
      of revenues:Products
                                    
                                    
                                    (239,467
                                    )
                                    
                                    
                                    (578,822
                                    )Monitoring
      services
                                    
                                    
                                    (2,875,990
                                    )
                                    
                                    
                                    (2,654,527
                                    )Total
      cost of revenues
                                    
                                    
                                    (3,115,457
                                    )
                                    
                                    
                                    (3,233,349
                                    )Gross
      margin
                                    
                                    
                                    106,840
                                    
                                    
                                    
                                    1,153,876Operating
      expenses:Selling,
      general and administrative
                                    
                                    
                                    (4,089,273
                                    )
                                    
                                    
                                    (4,604,614
                                    )Research
      and development
                                    
                                    
                                    (492,403
                                    )
                                    
                                    
                                    (865,344
                                    )Loss
      from operations
                                    
                                    
                                    (4,474,836
                                    )
                                    
                                    
                                    (4,316,082
                                    )Other
      income (expense):Gain
      on sale of intellectual property
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,400,000Loss
      on sale of asset
                                    
                                    
                                    18,715Other
      income (loss)
                                    
                                    
                                    25
                                    
                                    
                                    
                                    9,260Interest
      income
                                    
                                    
                                    1,682
                                    
                                    
                                    
                                    30,517Interest
      expense
                                    
                                    
                                    (479,745
                                    )
                                    
                                    
                                    (391,665
                                    )Net
      loss from continuing operations
                                    
                                    
                                    (4,934,159
                                    )
                                    
                                    
                                    (2,267,970
                                    )Discontinued
      operations
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (114,652
                                    )Net
      loss
                                    
                                    
                                    (4,934,159
                                    )
                                    
                                    
                                    (2,382,622
                                    )Dividends
      on Series A Preferred stock
                                    
                                    
                                    (113
                                    )
                                    
                                    
                                    (167,137
                                    )Net
      loss attributable to common stockholders
                                    
                                    $
                                    (4,934,272
                                    )
                                    
                                    $
                                    (2,549,759
                                    )Net
      loss per common share from continuing operations, basic and
      diluted
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    (0.02
                                    )Net
      loss per common share from discontinued operations, basic and
      diluted
                                    
                                    $
                                    (0.00
                                    )
                                    
                                    $
                                    (0.00
                                    )Net
      loss per common share – basic and diluted
                                    
                                    $
                                    (0.03
                                    )
                                    
                                    $
                                    (0.02
                                    )Weighted
      average common shares outstanding – basic and diluted
                                    
                                    
                                    156,631,000
                                    
                                    
                                    
                                    130,267,000
  Return to Table of Contents
 15
  (6)           BANK
LINE OF CREDIT
  As of
December 31, 2008, the Company’s outstanding balance under a line of credit with
a bank was $3,579,294. The interest rate is 7% and the line of credit matures on
March 1, 2009. The line of credit of $3,600,000 is secured by letters of credit
for a total of $3,600,000 and SecureAlert’s assets, excluding TrackerPAL
products. The cash available to draw on the line of credit as of December 31,
2008 was $20,706. The letters of credit were provided as collateral by four
unrelated entities.  In addition, the Company will make monthly
interest payments, at a rate of 11% annually, on the line of credit to the
entities that provided and arranged for the letters of credit.
  (7) ACCRUED
LIABILITIES
 
 Accrued
liabilities consisted of the following as of December 31, 2008 and September 30,
2008:
 
 December
      31,
                              2008
                            
                            
                            September
      30,
                              2008Accrued
      lawsuit liability
                            
                            $
                            385,000
                            
                            
                            $
                            385,000Accrued
      payroll and employee benefits
                            
                            
                            319,685
                            
                            
                            
                            451,485Accrued
      board of directors fees
                            
                            
                            265,000
                            
                            
                            
                            205,000Accrued
      warranty and manufacturing costs
                            
                            
                            250,000
                            
                            
                            
                            291,423Accrued
      outside services
                            
                            
                            200,744
                            
                            
                            
                            118,665Accrued
      legal and consulting fees
                            
                            
                            125,000
                            
                            
                            
                            91,720Accrued
      cellular costs
                            
                            
                            122,683
                            
                            
                            
                            -Accrued
      interest
                            
                            
                            122,265
                            
                            
                            
                            97,383Accrued
      bonuses
                            
                            
                            73,671
                            
                            
                            
                            83,763Commissions
                            
                            
                            -
                            
                            
                            
                            56,828Other
      accrued expenses
                            
                            
                            33,190
                            
                            
                            
                            -Total
                            
                            $
                            1,897,238
                            
                            
                            $
                            1,781,267
 
 Return to Table of Contents
 16
  (8)          DEBT
OBLIGATIONS
 
 Debt
obligations as of December 31, 2008 and September 30, 2008 consisted of the
following:
  December
      31,
                            2008
                          
                          
                          September
      30,
                            2008SecureAlert,
      Inc.Unsecured
      note payable to a former subsidiary bearing interest at 5%.  The
      note matures on December 31, 2009.
                          
                          $
                          519,791
                          
                          
                          $
                          598,793Unsecured
      notes payable to former SecureAlert stockholders, with interest at 5.00%,
      payable in installments of $80,000 per month until paid in
      full.  These notes are currently in default, although these
      notes are subject to an offset provision which has never been provided to
      the Company.
                          
                          
                          169,676
                          
                          
                          
                          169,676Series
      A 15% debenture bearing interest at a rate of 15% per annum. The debenture
      matures on May 31, 2010.
                          
                          
                          200,000
                          
                          
                          
                          -Court
      ProgramsNote
      payable due to the Small Business Administration (“SBA”).  Note
      bears interest at 6.04% and matures on April 6, 2037.  The note
      is secured by monitoring equipment.
                          
                          
                          228,588
                          
                          
                          
                          229,100Unsecured
      revolving lines of credit with two banks, with interest rates between 6.60
      % and 13.49%.
                          
                          
                          31,800
                          
                          
                          
                          48,499Unsecured
      notes payable with interest rates between 7% and 8%.
                          
                          
                          13,531
                          
                          
                          
                          16,028MidwestNotes
      payable to a financial institution bearing interest at
      8.41%.  Notes mature in July 2011 and July 2016.  The
      notes are secured by property.
                          
                          
                          233,438
                          
                          
                          
                          247,675Notes
      payable for monitoring equipment.  Interest rates range between
      7.8% to 18.5% and mature September 2008 through November
      2011.  The notes are secured by monitoring
      equipment.
                          
                          
                          146,468
                          
                          
                          
                          199,747Automobile
      loans with several financial institutions secured by the
      vehicles.  Interest rates range between 6.9% and 8.5%, due
      between January 2009 and October 2011.
                          
                          
                          60,105
                          
                          
                          
                          43,570Note
      payable to a stockholder of Midwest.  The note bears interest at
      5% maturing on February 2013.
                          
                          
                          56,951
                          
                          
                          
                          59,958Total
      debt obligations
                          
                          $
                          1,660,348
                          
                          
                          $
                          1,613,046Less
      current portion
                          
                          
                          (425,809
                          )
                          
                          
                          (465,664
                          )Long-term
      debt, net of current portion
                          
                          $
                          1,234,539
                          
                          
                          $
                          1,147,382
 Return to Table of Contents
 17
 (9)         
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, 2008, the Company owed $615,140 to ADP Management, an entity owned
and controlled by two of the Company’s officers and directors, Mr. Derrick and
Mr. Dalton, under a line-of-credit agreement.  Outstanding amounts on
the line of credit accrue interest at 11% per annum and are due on August 31,
2009.  During the three months ended December 31, 2008, the net
increase in borrowings under this line of credit was $72,336. The increase of
$72,336 consisted of cash repayments of $9,428 offset, in part, by $81,764 of
expenses owed to ADP Management that are reimbursable by the
Company.
 
 Related-Party
Note Payable
  In
November 2008, the Company borrowed $1,000,000 from Mr. Derrick, the Chief
Executive Officer of the Company.  The unsecured note payable accrues
interest at 15% and is due and payable upon the Company receiving cash proceeds
of $1,000,000 or more from the sale of common stock or other additional
financing activities or February 4, 2009, whichever comes first.  The
Company and Mr. Derrick verbally agreed to convert this note payable into a
future financing instrument.  The Company paid to Mr. Derrick a loan
origination fee of $50,000 in cash and 100,000 shares of restricted common
stock.  As of December 31, 2008, the Company owed $1,000,000 plus
$16,245 in accrued interest to Mr. Derrick.
  Related-Party
Note Payable
  In
September 2008, the Company borrowed $250,000 from Randy Olshen, the former
President of SecureAlert.  The unsecured note payable accrues interest
at 11% and is due and payable on December 31, 2009 or upon demand whichever
comes first.  As of December 31, 2008, the Company owed $250,000 plus
$6,938 in accrued interest to Mr. Olshen. Subsequent to December 31, 2008, the
Company paid off this note and accrued interest in the amount of
$259,106.
  Note
Receivable from Gary Bengtson
  The
Company acquired a 51% ownership in Midwest Monitoring & Surveillance, Inc.
(“Midwest”) effective December 1, 2007.  Prior to the date of
acquisition, Midwest had entered into a loan arrangement with Gary Bengtson, the
Chief Financial Officer of Midwest.  As of December 31, 2008, Mr.
Bengtson owed the Company $57,063. The note receivable accrues interest at 12%
and is due and payable on March 31, 2009.
 
 (10)         PREFERRED
STOCK
 
 Series
A 10% Convertible Non-Voting Preferred Stock
  Each
share of Series A Preferred stock is convertible into 370 shares of common
stock. During the three months ended December 31, 2008, no shares of Series A
Preferred stock were converted into common stock.  As of December 31,
2008, there were 19 shares of Series A Preferred stock outstanding, which
represent 7,178 common stock equivalents at a conversion rate of 370 for
1.
  The
holders of the Series A Preferred stock are entitled to dividends at the rate of
10 percent per year on the stated value of the Series A Preferred stock (or $200
per share), payable in cash or in additional shares of Series A Preferred stock
at the discretion of the board of directors. Dividends are fully cumulative and
accrue from the date of original issuance. During the three months ended
December 31, 2008 and 2007, the Company recorded $113 and $102, respectively, in
dividends for Series A Preferred stock.
  The
Company may, at its option, redeem up to two-thirds of the total number of
shares of Series A Preferred stock at a redemption price of 133 percent of the
stated value of Series A Preferred stock.  However, the Company may
designate a different and lower redemption price for all shares of Series A
Preferred stock called for redemption by the Company. Through December 31, 2008,
the Company had not exercised its option to redeem shares of Series A Preferred
stock.
  Series
B Convertible Preferred Stock
  During
the three months ended December 31, 2008 and 2007, 0 and 2,000 shares of Series
B Convertible Preferred stock were converted into 0 and 15,000 shares of common
stock, respectively.  As of December 31, 2008, there were 10,999
shares of Series B Preferred stock outstanding, convertible into approximately
113,783 common shares.
  Return to Table of Contents
 18
  SecureAlert,
Inc. Preferred Stock
  As of
December 31, 2007, there were 3,590,000 shares of SecureAlert Series A Preferred
stock outstanding.  The holders of shares of Series A Preferred stock
were entitled to receive quarterly dividends out of any of SecureAlert’s assets
legally available therefore, prior and in preference to any declaration or
payment of any dividend on the Common Stock of SecureAlert, at the rate of $1.54
per day times the number of SecureAlert’s parolee contracts calculated in days
during the quarter. For example, if there were an average of 10,000 parolee
contracts outstanding during the quarter, the total dividend would be $1,386,000
($1.54 X 90 days X 10,000 contracts) or $.386 per share of Series A Preferred
stock. In no case would a dividend be paid if the gross revenue per contract per
day to SecureAlert averages less than $4.50. Dividends would be paid in cash to
the holders of record of shares of Series A Preferred stock as they appear on
the books and records of SecureAlert on such record dates not less than ten days
nor more than sixty days preceding the payment dates thereof, as may be fixed by
the Board of Directors of SecureAlert. As a group, all SecureAlert Series A
Preferred stock were convertible at the holders’ option at any time into an
aggregate of 20 percent ownership of the common shares of SecureAlert,
Inc.
 
 On March
24, 2008, SecureAlert redeemed all outstanding shares of SecureAlert Series A in
exchange for 7,434,249 shares of RemoteMDx common stock for a value of
$8,549,386.  The former SecureAlert Series A stockholders are entitled
to receive quarterly contingency payments through March 23, 2011 based on a rate
of $1.54 per day times the number of SecureAlert’s parolee contracts calculated
in days during the quarter.  The Company estimated and accrued
$3,226,043 for future contingency payments.  The Company will make
quarterly adjustments as necessary to reflect the difference between the
estimated and actual contingency payments to the former SecureAlert Series A
stockholders.  During the three months ended December 31, 2008,
RemoteMDx recorded $18,715 in other income to reflect the change between the
estimated and actual contingency payments.
  (11)        
COMMON
STOCK
 During
the three months ended December 31, 2008, the Company issued a net 700,000
shares of RemoteMDx common stock as follows:
  ·
              1,800,000
      shares were issued for services performed for a value of
      $425,000.
  ·
              1,750,000
      shares were cancelled that were previously issued for
      services.
  ·
              350,000
      shares were issued for $100,000 in
cash.
  ·
              300,000
      shares were issued in connection with
debt.
  Common
Stock Options and Warrants
  As of
December 31, 2008, 16,720,618 of the 20,370,951 outstanding options and warrants
were vested with a weighted average exercise price of $1.45 per share. No stock
options and warrants were exercised during the three months ended December 31,
2008. Of the 20,370,951 shares underlying options and warrants, 16,720,618
shares underlie options and warrants which have vested, and 3,650,333 shares
underlie options and warrants which have not vested.
  (12) SUBSEQUENT
EVENTS
  Subsequent
to December 31, 2008, the Company entered into the following
transactions:
 
 1)
              The
      Company received $3,000,000 in cash from the sale of Series A 15%
      Debentures.  The debentures accrue interest at a rate of 15% per
      annum, with interest paid quarterly in cash.  The debentures are
      due on May 31, 2010.  Additionally, the Company issued 3,000,000
      shares of common stock in connection with the sale of the
      debentures.  The debenture holder may convert into common stock
      of the Company at a price of $0.20 per share as long as it owns less than
      5% of the outstanding common stock.  Should at anytime over the
      next twelve (12) months, the Company issues any equity security at a price
      less than $0.20 per share, the debenture holder can convert at that lesser
      price.
 
 2)
              In
      connection with a Consent Solicitation Statement, a proxy card was sent to
      the Company’s stockholders proposing to amend the Company’s Articles of
      Incorporation increasing the authorized common stock of the Company to
      250,000,000.  By March 4, 2009, the shareholders may vote
      whether or not to increase the authorized shares, but as of the date of
      this Report the number of authorized shares has not
    changed.
  Return to Table of Contents
 19
 
 3)
              The
      Company entered into a note payable with an entity for $2,700,000 to
      purchase TrackerPAL devices.  The note bears interest at a rate
      of 8% per annum and matures on January 15, 2010. The note requires
      quarterly interest payment and principal due at the end of
      maturity.  At the Lender’s option, the note may be convertible
      into shares of the Company’s common stock at $0.22 per share. The Company
      anticipates leasing these TrackerPAL devices to domestic and international
      customers.
 
 4)
              On
      January 14, 2009, the Company entered into an Asset Purchase Agreement
      with Bishop Rock Software, Inc., a California corporation (“BRS”), Peter
      C. Sarna, II, Sol Lizarbram, Steven Florek, Clydesdale Partners I, LLC and
      Clydesdale Partners II, LLC, to provide additional software capabilities
      regarding crime scene correlation in connection with the TrackerPAL
      devices. The Company purchased BRS for 2,857,286 shares of the Company’s
      common stock.
 
 (13)         COMMITMENTS
AND CONTINGENCIES
 
 Satellite Tracking of
People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech
Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent
infringement suit was filed against the Company and other defendants in the
United States District Court for the Eastern District of Texas on March 19,
2008.  Plaintiffs have alleged that the Defendants infringe United States
Patent No. RE39,909 ('909 Patent), Tracking System for Locational
Tracking of Monitored Persons.  On May 14, 2008, the Company
answered the complaint, denying Plaintiffs allegations and asserting various
affirmative defenses. The Company also asserted a counterclaim for declaratory
judgment that the Company has not infringed the '909 Patent and that the patent
is invalid. The Company intends to vigorously defend the case and prosecute its
counterclaim. 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.
 
 RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company
filed a patent infringement suit against STOP in the United States District
Court for the Central District of California on May 2, 2008.  The
Company has asserted that STOP infringes United States Patent No. 7,330,122 for
a remote tracking and communication device and method for processing data from
the device ("'122 patent"), in which the Company holds all rights and
interests.  STOP moved to dismiss the original complaint and also
filed an answer and counterclaim.  The motion to dismiss was granted
with leave to amend.  The Company filed an amended complaint on August
5, 2008.  The amended complaint seeks damages for infringement
according to proof, treble damages, injunctive relief enjoining the
infringement, and costs and attorney's fees.  STOP's counterclaim is
for declaratory relief, seeking a declaration that STOP has not infringed the
'122 patent and that the '122 patent is invalid. The Company filed an answer to
the counterclaim.  The Company intends to vigorously prosecute its
claims and defend against the counterclaim. 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.
 
 Strategic Growth
International, Inc., v. RemoteMDx:  This action was filed in
response to an action previously filed by the Company against Strategic Growth
International, Inc. ("SGI") in Utah.  The action arises out of a
contract between SGI and the Company for certain investor relations related
services to be performed by SGI.  SGI and its principals' original
complaint alleged a single claim for Breach.  On October 29, 2007, the
Company amended its Answer and Counterclaims to assert an additional claim
against SGI for fraudulent inducement, seeking rescission of its contract with
SGI and the return of amounts the Company paid SGI under the
contract.  On December 31, 2007, the Company filed a motion for
summary judgment on its fraudulent inducement claim.  On January 18,
2008, SGI filed a cross-motion for partial summary judgment.  On April
17, 2008, SGI amended its complaint to assert a claim for conversion with
respect to the options and shares which are the subject of SGI's breach of
contract claim.  On May 2, 2008, the Company filed a motion to dismiss
the conversion claim.  On April 23, 2008, SGI sought an order
permitting the attachment of the Company's assets in the State of New
York.  The Company verbally agreed with SGI to settle the lawsuit for
1,200,000 restricted shares of the Company’s common stock valued at $360,000, or
$0.30 per share and $25,000 in cash.  The shares would have piggyback
registration rights and are protected against any potential reverse stock
splits.  The Company anticipates executing the settlement agreement
with SGI in February 2009.
  Return to Table of Contents
 20
 
 Frederico and Erica
Castellanos, v. Volu-Sol, Inc.  On August 15, 2008, plaintiffs
Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the
State of California, Los Angeles County.  The complaint names
twenty-four Defendants and one hundred unnamed Doe Defendants.  The
complaint asserts claims for negligence, strict liability - failure to warn,
strict liability - design defect, fraudulent concealment, breach of implied
warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to
certain chemicals during the course of his employment.  One of the
original named Defendants was Logos Scientific, Inc.  On September 4,
2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as
successor in interest to Logos Scientific, Inc." for the previously unnamed Doe
1.  Volu-Sol, Inc. was the original name of RemoteMDx,
Inc.  The Company intends to vigorously defend itself against
Castellanos’ claims.  The Company has not accrued any potential loss
as the probability of incurring a material loss is deemed remote by management,
after consultation with legal counsel.
 
 Thomas Natale v.
RemoteMDx.  This non-payment of certain obligations suit was
filed against the Company and other defendants, including ADP Management Corp.,
James Dalton and David Derrick in the United States District Court for the
Eastern District of Tennessee on August 18, 2008.  The Plaintiff has
alleged that the Defendants owe him certain back amounts of bonuses, interest
and notes payable. Management has been advised that a similar action has been
filed by Edward Boling. The Company has answered the complaint and discovery is
ongoing. The Company intends to vigorously defend the case and prosecute its
counterclaim. 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.
 
 SecureAlert, v. David Ezell,
et al.  The Company has filed a claim against David Ezell and
several related entities for breach of contract, unjust enrichment, conversion,
and punitive damages, and seeks approximately $290,810 in damages, as well as
other amounts to be proven at trial.  The case is in the discovery
stage.  After consultation with legal counsel, the Company has not
accrued for any potential recovery or any material loss associated with this
claim.
 
 Informal
Inquiry.  In March 2008, the Company was advised by letter from
the U.S. Securities and Exchange Commission (“SEC”), Salt Lake District Office,
that it has begun an informal inquiry regarding the Company.  The
inquiry, among other items, relates to the Company’s revenue recognition policy
and documents, relationship with stockholders, and business.  The SEC
has advised the Company in its correspondence that this informal inquiry should
not be construed as an indication that any violation of law has occurred, nor
should it be considered a reflection upon any person, entity, or
security.  We voluntarily disclosed this inquiry in our Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31,
2008.  There were no material developments in this matter during the
fiscal quarter ended December 31, 2008.
 
 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 Company’s 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 Company’s 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 elsewhere in this Report, and those described
from time to time in our future reports filed with the Securities and Exchange
Commission.
  Return to Table of Contents
 21
 
 Item 2.     MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 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 and Plan of Operation in our Annual
Report on Form 10-K for the year ended September 30, 2008, and Current Reports
on Form 8-K that have been filed with the SEC through the date of this
Report.
  General
  RemoteMDx
and subsidiaries (collectively, the “Company”) market, monitor and sell the
TrackerPAL device.  The TrackerPAL is used to monitor convicted
offenders that are on probation or parole in the criminal justice
system.  The TrackerPAL device utilizes GPS and cellular technologies
in conjunction with a monitoring center that is staffed 365 days a
year.  The Company believes that its technologies and services benefit
law enforcement officials by allowing them to respond immediately to a problem
involving the monitored offender.  The parole and probation population
consists of approximately 4.9 million adults in the United States of America
criminal justice system at any given time. The TrackerPAL is targeted to meet
the needs of this market as well as the international market.
  Strategy
  Our
strategy is to empower law enforcement, corrections and rehabilitation
professionals with sole-sourced offender management programs, which grant
offenders accountable opportunity, while providing for greater public safety at
a lower cost. We will accomplish our strategy through the deployment of our
SecureAlert GPS/RF Tracking, Intervention Monitoring and Rehabilitation
Technologies to corrections, probation, law enforcement and rehabilitation
services agencies worldwide, all in support of offender reformation and
re-socialization initiatives. Our exclusive portfolio of products and services
balance the need to dynamically track and monitor offenders with the opportunity
to positively encourage and transform offenders, thus reducing recidivism
through our proprietary C.A.R.E.TM (Correction, Accountability, Rehabilitation,
Empowerment) programs and client-adapted initiatives. We will continue to
develop and deploy adaptive, cost-effective products and services, which meet
the ever-changing needs of our clients, while providing enhanced public safety
at a lower cost. Importantly, while there are no ongoing warranties of our
business model and no assurances of our capabilities to continue to raise
necessary expansion capital, we will endeavor to ensure our ongoing viability
through diligent, margin-centric imperatives and operational efficiency gains
through prioritized management initiatives.
  Critical
Accounting Policies
  In Note 2
to the consolidated financial statements for the fiscal year ended September 30,
2008 included in the Company’s Form 10-K, the Company discusses those accounting
policies that are considered to be significant in determining its results of
operations and its financial position.
  The
preparation of financial statements requires management to make significant
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses. By their nature, these 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.
  With
respect to revenue recognition, impairment of long-lived assets, and accounting
for stock-based compensation, the Company applies the following critical
accounting policies in the preparation of its financial statements:
  Return to Table of Contents
 22
 Revenue
Recognition
  The
Company’s revenue has historically been from three 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
PERS units.  The Company recognizes product sales revenue when
persuasive evidence of an arrangement with the customer exists, title passes to
the customer and the customer cannot return the devices, prices are fixed or
determinable (including sales not being made outside the normal payment terms)
and collection is reasonably assured.
 
 When
purchasing products (such as TrackerPAL devices) from the Company, customers
may, but are not required to, enter into monitoring service contracts with the
Company.  The Company recognizes revenue on monitoring services for
customers that have previously purchased devices at the end of each month that
monitoring services have been provided.
  Multiple Element
Arrangements
 
 The
majority of the Company’s revenue transactions do not have multiple elements. On
occasion, the Company has revenue transactions that have multiple elements (such
as product sales and monitoring services).  For revenue arrangements
that have multiple elements, the Company considers whether: (i) the delivered
devices have standalone value to the customer; (ii) there is objective and
reliable evidence of the fair value of the undelivered monitoring services,
which is generally determined by surveying the price of competitors’ comparable
monitoring services; and (iii) the customer does not have a general right of
return.  Based on these criteria, the Company recognizes revenue from
the sale of devices separately from the monitoring services to be provided to
the customer.  In accordance with EITF 00-21, 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.
  Return to Table of Contents
 23
  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, 2008 and 2007, the Company performed an assessment of
potential impairment and did not impair any long-lived assets.
 
 Equity-based
Compensation
 
 Effective
October 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, using the modified prospective method. SFAS No. 123R requires
the recognition of the cost of employee services received in exchange for an
award of equity instruments in the financial statements and is measured based on
the grant date fair value of the award. SFAS No. 123R also requires the stock
option compensation expense to be recognized over the period during which an
employee is required to provide service in exchange for the award (the vesting
period). Prior to adopting SFAS No. 123R, the Company accounted for its
stock-based compensation plans under Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock
Issued to Employees ("APB 25"). Under APB 25, generally no compensation
expense is recorded when the terms of the award are fixed and the exercise price
of the employee stock option equals or exceeds the fair value of the underlying
stock on the date of grant. The Company adopted the disclosure-only provisions
of SFAS No. 123, Accounting
for Stock-Based Compensation.
 
 For
options granted subsequent to October 1, 2006, the fair value of each stock
option grant will be estimated on the date of grant using the Black-Scholes
option pricing model.  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. No stock options were
granted to employees during the three months ended December 31, 2008 and
2007.
 
 A summary
of stock option activity for the three months ended December 31, 2008, is
presented below:
 Shares
                                                    Under
                                                    Option
                                                  
                                                  
                                                  Weighted
                                                    Average
                                                    Exercise
                                                    Price
                                                  
                                                  Weighted
                                                    Average
                                                    Remaining
                                                    Contractual
                                                    Life
                                                  
                                                  
                                                  Aggregate
                                                    Intrinsic
                                                    ValueOutstanding
      as of September 30, 2008
                                                  3,600,000
                                                  
                                                  $
                                                  1.08Granted
                                                  -
                                                  
                                                  $
                                                  -Exercised
                                                  -
                                                  
                                                  $
                                                  -Forfeited
                                                  -
                                                  
                                                  $
                                                  -Expired
      / Cancelled
                                                  (354,500)
                                                  
                                                  $
                                                  1.55Outstanding
      as of  December 31, 2008
                                                  3,245,500
                                                  
                                                  $
                                                  1.02
                                                  
                                                  3.28
      years
                                                  
                                                  $
                                                  -Exercisable
      as of  December 31, 2008
                                                  195,167
                                                  
                                                  $
                                                  1.12
                                                  
                                                  3.08
      years
                                                  
                                                  $
                                                  -
  Return to Table of Contents
 24
  Results
of Operations
 
 Summary
of Financial Results and Recent Developments
 
 Subsequent
to December 31, 2008, the Company entered into the following
transactions:
 
 ·
              The
      Company received $3,000,000 in cash from the sale of Series A 15%
      Debentures.  The debentures accrue interest at a rate of 15% per
      annum, with interest paid quarterly in cash.  The debentures are
      due on May 31, 2010.  Additionally, the Company issued 3,000,000
      shares of common stock in connection with the sale of the
      debentures.  The debenture holder may convert into common stock
      of the Company at a price of $0.20 per share as long as it owns less than
      5% of the outstanding common stock.  Should at anytime over the
      next twelve (12) months, the Company issues any equity security at a price
      less than $0.20 per share, the debenture holder can convert at that lesser
      price.
 
 ·
              In
      connection with a Consent Solicitation Statement, a proxy card was sent to
      the Company’s stockholders proposing to amend the Company’s Articles of
      Incorporation increasing the authorized common stock of the Company to
      250,000,000.  By March 4, 2009, the shareholders may vote
      whether or not to increase the authorized shares, but as of the date of
      this Report the number of authorized shares has not
    changed.
 
 ·
              The
      Company entered into a note payable with an entity for $2,700,000 to
      purchase TrackerPAL devices.  The note bears interest at a rate
      of 8% per annum and matures on January 15, 2010. The note requires
      quarterly interest payment and principal due at the end of
      maturity.  At the Lender’s option, the note may be convertible
      into shares of the Company’s common stock at $0.22 per
      share.  The Company anticipates leasing these TrackerPAL devices
      to domestic and international
customers.
 
 ·
              On
      January 14, 2009, the Company entered into an Asset Purchase Agreement
      with Bishop Rock Software, Inc., a California corporation (“BRS”), Peter
      C. Sarna, II, Sol Lizarbram, Steven Florek, Clydesdale Partners I, LLC and
      Clydesdale Partners II, LLC, to provide additional software capabilities
      regarding crime scene correlation in connection with the TrackerPAL
      devices. The Company purchased BRS for 2,857,286 shares of the Company’s
      common stock.
 
 Three
months ended December 31, 2008, compared to three months ended December 31,
2007
 
 Revenues
  For the
three months ended December 31, 2008, the Company had revenues of $3,222,297
compared to $3,469,286 for the three months ended December 31, 2007, a decrease
of $246,989. The decrease in revenues resulted primarily from product
sales.  During the three months ended December 31, 2007, the Company
reported product sales of $1,069,379 which consisted of offender tracking
devices and equipment sales compared to $352,750 for the three months ended
December 31, 2008.  Revenues from monitoring services for the three
months ended December 31, 2008 were $2,869,547 compared to $2,399,907 for the
three months ended December 31, 2007, an increase of $469,640, or
20%.
  SecureAlert
had revenues of $1,309,921 during the three months ended December 31, 2008,
compared to revenues of $2,908,390 for the three months ended December 31, 2007.
These revenues in the three months ended December 31, 2008 consisted of $7,750
from the sale of offender tracking devices, $1,293,508 from the monitoring of
offender tracking devices, and $8,663 from home and personal security
systems.  SecureAlert revenues for the three months ended December 31,
2007 consisted of $1,033,333 from the sale of offender tracking devices,
$1,855,149 from the monitoring of offender tracking devices and $19,908 from
home and personal security systems.
  SecureAlert
revenues from device sales decreased during the three months ended December 31,
2008 compared to the same period ending in 2007 because the Company made a
conscious effort in not selling, but leasing its TrackerPAL
devices.
  Although
SecureAlert revenues from monitoring of offender tracking devices decreased
during the three months ended December 31, 2008 compared to the same period
ending in 2007, no customers accounted for more than 10% of SecureAlert’s
monitoring revenues during the three months ended December 31, 2008 compared to
a former customer accounting for 64% of SecureAlert’s monitoring revenues during
the three months ended December 31, 2007.
  Return to Table of Contents
 25
  SecureAlert
revenues from home and personal security systems in not the Company’s core
business; thus, resulting in a decrease in sales for the three months ended
December 31, 2008 compared to the same period ending 2007.
  On
December 1, 2007, the Company acquired Midwest. For the month ended December 31,
2007, Midwest had revenues of $351,583.  These revenues consisted of
$311,631 from the monitoring of offender tracking devices, $36,046 from the sale
of equipment, and $3,906 from other miscellaneous sales.  For the
three months ended December 31, 2008, Midwest had revenues of
$1,180,810.  These revenues consisted of $835,810 from monitoring of
offender tracking devices and $345,000 from the sale of equipment.
  On
December 1, 2007, the Company acquired Court Programs. For the month ended
December 31, 2007, Court Programs had revenues of $209,313 from the monitoring
of offender tracking devices and parolee services. For the three months ended
December 31, 2008, Court Programs had revenues of $731,566 from the monitoring
of offender tracking devices and parolee services.
  Cost
of Revenues
  For the
three months ended December 31, 2008, cost of revenues was $3,115,457 compared
to $2,742,786 during the three months ended December 31, 2007, an increase of
$372,671.  Cost of revenues increased due to an increase in revenues
from monitoring services for the same period.  SecureAlert's cost of
revenues totaled $1,817,131, or 139%, of SecureAlert's revenues during the three
months ended December 31, 2008, compared to $2,431,258, or 84%, of SecureAlert’s
revenues during the three months ended December 31,
2007.  SecureAlert’s cost of revenues for the quarter ended December
31, 2008 of $1,817,131 was comprised of the following:  amortization
of $140,433, device costs of $2,267, commissions of $97,420, communication costs
of $787,725, location costs of $15,347, monitoring center costs of $399,312,
personal emergency response costs of $2,550, shipping costs of $84,303,
utilization rental fees of $253,952, and other TrackerPAL costs of
$33,822.  SecureAlert’s cost of revenues for the quarter ended
December 31, 2007 of $2,431,258 was comprised of the
following:  device costs of $693,043, commissions of $120,176,
communication costs of $702,132, location costs of $11,441, monitoring center
costs of $456,318, amortization of $270,979, personal emergency response costs
of $3,626, and other TrackerPAL costs of $173,543.
  Midwest’s
cost of revenues totaled $773,830 for the three months ended December 31,
2008.  On December 1, 2007, the Company acquired Midwest. For the
month ended December 31, 2007, Midwest had cost of revenues of $173,915 from the
monitoring of offender tracking devices and parolee services.
  Court
Programs’ cost of revenues totaled $524,496 for the three months ended December
31, 2008. On December 1, 2007, the Company acquired Court Programs. For the
month ended December 31, 2007, Court Programs had cost of revenues of $137,613
from the monitoring of offender tracking devices and parolee
services.
  Research
and Development Expenses
 
 During
the three months ended December 31, 2008 and 2007, research and development
expense was $492,403 and  $865,344, respectively, and consisted
primarily of expenses associated with the development of SecureAlert’s
TrackerPAL device and related services.
 
 Selling,
General and Administrative Expenses
 
 During
the three months ended December 31, 2008, selling, general and administrative
expenses were $4,089,273 compared to $4,152,715 during the three months ended
December 31, 2007.  The decrease of $63,442 relates primarily to a
decrease in the following expenses:  consulting of $734,983 and travel
of $357,194.  Furthermore, the decrease of $63,442 in selling, general
and administrative expenses was offset, in part, by increases primarily from
legal and professional fees of $378,479 and payroll of $318,852.  The
decrease in consulting of $734,983 relates primarily a decrease in expense from
the issuance of stock and options for services rendered for the three months
ended December 31, 2008 compared to the three months ended December 31,
2007.  Travel expenses decreased $357,194 due to scrutinizing the
Company’s travel arrangements. Legal and professional fees increased $378,479
due to expenses incurred to defend the Company against outstanding lawsuits
during the year. Payroll expense increased $318,852 due to the personnel added
through the acquisitions of Midwest and Court Programs.
 
 Interest
Income and Expense
 
 During
the three months ended December 31, 2008, interest expense totaled $479,745
compared to $375,510 paid in the three months ended December 31, 2007. This
amount of $479,745 consists of non-cash interest expense of $221,404 related to
unamortized financing costs associated with shares of common stock issued for
prepaid interest.
  Return to Table of Contents
 26
  Liquidity
and Capital Resources
  The
Company is presently unable to finance its business solely from cash flows from
operating activities. During the three months ended December 31, 2008, the
Company financed its business primarily from the issuance debt and sale of
common stock for net proceeds of $1,254,883.
  As of
December 31, 2008, the Company had unrestricted cash of $787,686 and working
capital deficit of $10,676,839, compared to unrestricted cash of $2,782,953 and
working capital deficit of $6,822,276 as of September 30, 2008.
  During
the three months ended December 31, 2008, the Company's operating activities
used cash of $2,687,201, compared to $1,220,035 of cash used during the three
months ended December 31, 2007.
  The
Company used cash of $562,949 for investing activities during the three months
ended December 31, 2008 compared to $43,313 of cash used during the three months
ended December 31, 2007.  The increase of $519,636 resulted primarily
from monitoring equipment purchases of $444,733.
  The
Company's financing activities during the three months ended December 31, 2008,
provided cash of $1,254,883 compared to $1,909,881 during the three months ended
December 31, 2007. During the three months ended December 31, 2008, the Company
had net proceeds of $1,139,375 from the issuance of debt, $200,000 from the
issuance of Series A 15% debentures, and $100,000 of cash from the sale of
common stock.  Cash decreased due to $9,428 in net payments on the
related-party line of credit, and $175,064 in payments on notes
payable.  Cash provided by financing activities was used to fund
operating activities and purchase monitoring equipment.
 
 The
Company incurred a net loss of $4,934,159 for the three months ended December
31, 2008. As of December 31, 2008, the Company had stockholders' deficit of
$3,711,457 and an accumulated deficit of $187,618,155.  These factors,
as well as the risk factors set out in the Company's annual report on Form 10-K
for the year ended September 30, 2008, as amended, raise substantial doubt about
the Company's ability to continue as a going concern. The unaudited condensed
consolidated financial statements included in this report do not include any
adjustments that might result from the outcome of this
uncertainty.  The Company’s plans with respect to this uncertainty
include raising additional capital from the issuance of Series A 15% debentures,
expanding its market for its tracking products, and increasing monitoring
service revenues.  There can be no assurance that revenues will
increase rapidly enough to deliver profitable operating results and pay the
Company’s 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 the Company will be successful in raising additional capital
from the sale of equity or debt securities.  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 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 in the three months ended December 31, 2008, compared to 27% of our total
revenues for the three months ended December 31, 2007.  Sales of
monitoring equipment during the periods indicated were transacted in U.S.
dollars and, therefore, the Company 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.
  Return to Table of Contents
 27
 
 Interest Rate
Risks.  As of December 31, 2008, we had $3,579,294 of
borrowings outstanding on a line of credit with a weighted-average interest rate
of 18% per annum.  In addition, we had $31,800 of borrowings
outstanding on a line of credit with two banks with a weighted average interest
rate of 10.05%.  The interest rates on these lines of credit are
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
 
 Disclosure
Controls and Procedures
  Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of
1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were not
effective.  We and our auditors identified material weaknesses
discussed below in the Report of management on internal control over financial
reporting.
 
 Report
of Management on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) under the
Exchange Act. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting.
Our internal control over financial reporting includes those policies and
procedures that:
 
 (i)
              pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 
 (ii)
              provide
      reasonable assurance that our receipts and expenditures are being made
      only in accordance with authorizations of our management and directors;
      and
 
 (iii)
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of assets that could have a
      material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement to the Company's 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 newly acquired majority owned subsidiaries as
      of December 31, 2008 due to limited
resources.
  ·
                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.
  Return to Table of Contents
 28
  We
restated our December 31, 2007 financial statements as a result of errors that
were not detected due to several of the above mentioned material weaknesses,
which have been resolved as of December 31, 2008.
 
 Accordingly,
management has determined the Company's internal control over financial
reporting as of December 31, 2008 was not effective.  These material
weaknesses have been disclosed to our audit committee.
 
 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 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.
 
 PART
II.   OTHER INFORMATION
 
 Item 1.    LEGAL PROCEEDINGS
 
 Satellite Tracking of
People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech
Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent
infringement suit was filed against the Company and other defendants in the
United States District Court for the Eastern District of Texas on March 19,
2008.  Plaintiffs have alleged that the Defendants infringe United States
Patent No. RE39,909 ('909 Patent), Tracking System for Locational
Tracking of Monitored Persons.  On May 14, 2008, the Company
answered the complaint, denying Plaintiffs allegations and asserting various
affirmative defenses. The Company also asserted a counterclaim for declaratory
judgment that the Company has not infringed the '909 Patent and that the patent
is invalid. The Company intends to vigorously defend the case and prosecute its
counterclaim. 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.
 
 RemoteMDx, Inc. v. Satellite
Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company
filed a patent infringement suit against STOP in the United States District
Court for the Central District of California on May 2, 2008.  The
Company has asserted that STOP infringes United States Patent No. 7,330,122 for
a remote tracking and communication device and method for processing data from
the device ("'122 patent"), in which the Company holds all rights and
interests.  STOP moved to dismiss the original complaint and also
filed an answer and counterclaim.  The motion to dismiss was granted
with leave to amend.  The Company filed an amended complaint on August
5, 2008.  The amended complaint seeks damages for infringement
according to proof, treble damages, injunctive relief enjoining the
infringement, and costs and attorney's fees.  STOP's counterclaim is
for declaratory relief, seeking a declaration that STOP has not infringed the
'122 patent and that the '122 patent is invalid. The Company filed an answer to
the counterclaim.  The Company intends to vigorously prosecute its
claims and defend against the counterclaim. 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.
 
 Strategic Growth
International, Inc., v. RemoteMDx:  This action was filed in
response to an action previously filed by the Company against Strategic Growth
International, Inc. ("SGI") in Utah.  The action arises out of a
contract between SGI and the Company for certain investor relations related
services to be performed by SGI.  SGI and its principals' original
complaint alleged a single claim for Breach.  On October 29, 2007, the
Company amended its Answer and Counterclaims to assert an additional claim
against SGI for fraudulent inducement, seeking rescission of its contract with
SGI and the return of amounts the Company paid SGI under the
contract.  On December 31, 2007, the Company filed a motion for
summary judgment on its fraudulent inducement claim.  On January 18,
2008, SGI filed a cross-motion for partial summary judgment.  On April
17, 2008, SGI amended its complaint to assert a claim for conversion with
respect to the options and shares which are the subject of SGI's breach of
contract claim.  On May 2, 2008, the Company filed a motion to dismiss
the conversion claim.  On April 23, 2008, SGI sought an order
permitting the attachment of the Company's assets in the State of New
York.  The Company verbally agreed with SGI to settle the lawsuit for
1,200,000 restricted shares of the Company’s common stock valued at $360,000, or
$0.30 per share and $25,000 in cash.  The shares would have piggyback
registration rights and are protected against any potential reverse stock
splits.  The Company anticipates executing the settlement agreement
with SGI in February 2009.
  Return to Table of Contents
 29
  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.  There were no material
developments in this action during the period covered by this
report.
 
 Thomas Natale v.
RemoteMDx.  This non-payment of certain obligations suit was
filed against the Company and other defendants, including ADP Management Corp.,
James Dalton and David Derrick in the United States District Court for the
Eastern District of Tennessee on August 18, 2008.  The Plaintiff has
alleged that the Defendants owe him certain back amounts of bonuses, interest
and note payables. Management has been advised that a similar action has been
filed by Edward Boling. The Company has answered the complaint and discovery is
ongoing. The Company intends to vigorously defend the case and prosecute its
counterclaim. 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.
 
 SecureAlert, v. David Ezell,
et al.  The Company has filed a claim against David Ezell and
several related entities for breach of contract, unjust enrichment, conversion,
and punitive damages, and seeks approximately $290,810 in damages, as well as
other amounts to be proven at trial.  The case is in the discovery
stage.  After consultation with legal counsel, the Company has not
accrued for any potential recovery or any material loss associated with this
claim.
 
 Informal
Inquiry.  The Company previously disclosed an informal inquiry
by the Securities and Exchange Commission that commenced in March
2008.  The SEC has advised the Company in its correspondence that this
informal inquiry should not be construed as an indication that any violation of
law has occurred, nor should it be considered a reflection upon any person,
entity, or security.  There were no material developments in this
matter during the fiscal quarter ended December 31, 2008.
 
 Item 1A. RISK FACTORS
 
 We
attempt to identify, manage and mitigate the risks and uncertainties that are
associated with our business to the extent practical.  However, some
level of risk and uncertainty will always be present.  Our Annual
Report on Form 10-K for the fiscal year ended September 30, 2008, describes some
of the risks and uncertainties that are associated with our
business.  These risks and uncertainties have the potential to
materially affect our business, financial condition, results of operations, cash
flows, projected results and future prospects.  In addition, we note
the following:
 
 Our
business plan anticipates significant growth through sales and acquisitions. To
manage the expected growth the Company will require capital and there is no
assurance it will be successful in obtaining necessary additional
funding.
 
 Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
 
 During
the three months ended December 31, 2008, the Company issued a net 700,000
shares of common stock as follows:
  ·
              1,800,000
      shares were issued for services performed for a value of
      $425,000.  These shares were issued without registration under
      the Securities Act of 1933, as amended (“Securities Act”), in reliance on
      Section 4(2) of the Securities Act and the rules and regulations
      promulgated thereunder.  In each case, the shares were issued
      pursuant to privately negotiated transactions with individuals or entities
      who had provided service to the Company; there was no public offering of
      the securities, no general solicitation or advertising was made or done in
      connection with the issuances, and the shares were issued in paper
      certificate form with appropriate restrictive legends prominently affixed
      on the certificates.  In addition, 1,750,000 shares of common
      stock previously issued to two officers of the Company for services were
      cancelled during the three months ended December 31,
  2008.
  ·
              100,000
      shares were issued to an officer and director of the Company as
      consideration for a loan to the Company of $1,000,000.  These
      shares of common stock were issued without registration under the
      Securities Act in reliance on Section 4(2) of the Securities Act and the
      rules and regulations promulgated thereunder.  The officer is
      also an accredited investor.
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 30
  ·
              200,000
      shares were issued as additional consideration to an accredited investor
      in connection with the entity’s purchase of a debenture issued by the
      Company. These shares of common stock were issued without registration
      under the Securities Act in reliance on Section 4(2) of the Securities Act
      and the rules and regulations promulgated thereunder. No public
      solicitation or offering was made in connection with the offer and sale of
      these securities. The certificates evidencing such securities were marked
      with restrictive legends.
  ·
              350,000
      shares were issued to an accredited investor for cash proceeds of
      $100,000.  These shares of common stock were issued without
      registration under the Securities Act in reliance on Section 4(2) of the
      Securities Act and the rules and regulations promulgated thereunder. No
      public solicitation or offering was made in connection with the offer and
      sale of these securities. The certificates evidencing such securities were
      marked with restrictive legends.
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 31
  Item 4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
 
 At our
Annual Meeting of Shareholders on October 28, 2008, the following actions were
submitted and approved by vote of the shareholders:
  (1)
                Election of six directors;(2)
                The
      change of the corporate name of the Company to “SecureAlert, Inc.”,
      and(3)
                Ratification
      of the Board’s selection of Hansen, Barnett & Maxwell as our
      independent registered public accounting firm for fiscal year
      2008.
  A total
of 87,229,775 shares (approximately 58%) of the issued and outstanding shares of
RemoteMDx, Inc. were represented by proxy or in person at the meeting. 
These shares were voted on the matters described above as follows:
  1.For the directors as
follows:
  Name
                  
                  Number of Shares
                    For
                  
                  Number of Shares
                    Abstaining/WithheldRobert
      Childers
                  
                  87,016,148
                  
                  213,627James
      Dalton
                  
                  87,008,148
                  
                  221,627David
      Derrick
                  
                  87,016,137
                  
                  213,638David
      Hanlon
                  
                  87,016,148
                  
                  213,627Peter
      McCall
                  
                  86,968,098
                  
                  261,677Larry
      Schafran
                  
                  86,976,098
                  
                  253,677
  2.For the change of corporate name to SecureAlert, Inc., as
      follows:
  Number of Shares
                    For
                  
                  Number of Shares
                    Against
                  
                  Number of Shares
                    Abstaining/Withheld85,677,576
                  
                  77,446
                  
                  1,474,753
  3.
                For
      the ratification of Hansen, Barnett & Maxwell, P.C. as the Company’s
      independent registered public accounting firm, as
  follows:
  Number of Shares
                    For
                  
                  Number of Shares
                    Against
                  
                  Number of Shares
                    Abstaining/Withheld87,093,497
                  
                  81,945
                  
                  54,333
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 32
  Item 6.   EXHIBITS
 
 (a)
              Exhibits
      Required by Item 601 of Regulation
S-K
 
 Exhibit
                        Number
                      Title
      of Document3.01
                      Articles
      of Incorporation (incorporated by reference to the Company's Registration
      Statement and Amendments thereto on Form 10-SB, effective December 1,
      1997).3.01(1)
                      Amendment
      to Articles of Incorporation for Change of Name (previously filed as
      Exhibit on Form 10-KSB for the year ended September 30, 2001)3.01(2)
                      Amendment
      to Articles of Incorporation Amending Rights and Preferences of Series A
      Preferred Stock (previously filed as Exhibit on Form 10-KSB for the year
      ended September 30, 2001)3.01(3)
                      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)3.01(4)
                      Certificate
      of Amendment to the Designation of Rights and Preferences Related to
      Series A 10% Cumulative Convertible Preferred Stock of RemoteMDx, Inc.
      (incorporated by reference to the Company’s annual report on Form 10-KSB
      for the year ended September 30, 2001)3.01(5)
                      Certificate
      of Amendment to the Designation of Rights and Preferences Related to
      Series C 8% Convertible Preferred Stock of RemoteMDx, Inc. (incorporated
      by reference to the Company’s Current Report on Form 8-K, filed with the
      Commission on March 24, 2006)3.01(6)
                      Articles
      of Amendment to Articles of Incorporation filed July 12, 2006 (previously
      filed as exhibits to the Company’s current report on Form 8-K filed July
      18, 2006, and incorporated herein by reference).3.02
                      Bylaws
      (incorporated by reference to the Company’s Registration Statement on Form
      10-SB, effective December 1, 1997)3.03
                      Articles
      of Amendment to the Fourth Amended and Restated Designation of Right and
      Preferences of Series A 10% Convertible Non-Voting Preferred Stock of
      RemoteMDx, Inc. (previously filed as Exhibit on Form 10-QSB for the nine
      months ended June 30, 2007, filed in August 2007).3.04
                      Articles
      of Amendment to the Designation of Right and Preferences of Series A
      Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc.
      (previously filed as Exhibit on Form 10-QSB for the nine months ended June
      30, 2007, filed in August 2007).4.01
                      2006
      Equity Incentive Award Plan (previously filed in August 2006 the Form
      10-QSB for the nine months ended June 30, 2006)9.01
                      Voting
      Trust Agreement (see Exhibit 10.24)10.01
                      Distribution
      and Separation Agreement (incorporated by reference to the Company's
      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 the
      Company’s Registration Statement and Amendments thereto on Form 10-SB,
      effective December 1, 1997).10.03
                      1997
      Transition Plan (incorporated by reference to the Company’s 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 the Company’s 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 the Company’s annual report on Form
      10-KSB for the 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 the Company’s quarterly report on Form 10-QSB for the quarter
      ended December 31, 2001)  10.07
                        Agreement
      with ADP Management, Derrick and Dalton (April 2003) (previously filed as
      Exhibit on Form 10-QSB for the six months ended March 31,
      2003)10.08
                        Security
      Agreement between Citizen National Bank and the Company (previously filed
      on Form 8-K in July 2006).10.09
                        Promissory
      Note between Citizen National Bank and the Company (previously filed on
      Form 8-K in July 2006).10.10
                        Common
      Stock Purchase Agreement dated as of August 4, 2006 (previously filed as
      an exhibit to the Company’s current report on Form 8-K filed August 7,
      2006 and incorporated herein by reference).
  Return to Table of Contents
 33
 
 10.11
                    Change
      in Terms Agreement between Citizen National Bank and the Company
      (previously filed as Exhibit on Form 10-KSB for the 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 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 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 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
      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
      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
      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
      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 year ended
      September 30, 2007, filed in June 2008).10.25
                    Change
      in Terms Agreement between Citizen National Bank and the Company, dated
      March 14, 2008 (previously filed as Exhibit on Form 10-KSB/A for the year
      ended September 30, 2007, filed in June 2008).10.26
                    Statement
      of Work from Wireless Endeavors (a/k/a/ neXaira or Puracom), dated January
      8, 2005 (previously filed as Exhibit on Form 10-KSB/A for the year ended
      September 30, 2007, filed in June 2008).10.27
                    Terms
      and Conditions of the agreement between Spectrum Design Solutions, Inc.
      and the Company, dated April 30, 2007 (previously filed as Exhibit on Form
      10-KSB/A for the year ended September 30, 2007, filed in June
      2008).10.28
                    Contract
      Agreement between Dyanmic Source Manufacturing and the Company, dated
      September 18, 2006 (previously filed as Exhibit on Form 10-KSB/A for the
      year ended September 30, 2007, filed in June 2008).10.29
                    Distribution
      Agreement between Electronic Monitoring Services Corporation and the
      Company, dated September 20, 2007 (previously filed as Exhibit on Form
      10-KSB/A for the year ended September 30, 2007, filed in June
      2008).10.30
                    Distribution
      Agreement between Security Investment Holdings, LLC and the Company, dated
      December 28, 2006 (previously filed as Exhibit on Form 10-KSB/A for the
      year ended September 30, 2007, filed in June 2008).10.31
                    Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated June
      30, 2008 (previously filed as Exhibit on Form 10-K for the year ended
      September 30, 2007, filed in December 2008).10.32
                    Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated June
      30, 2008 (previously filed as Exhibit on Form 10-K for the year ended
      September 30, 2007, filed in December 2008).10.33
                    Patent
      Assignment Agreement between Futuristic Medical Devices, LLC, dated June
      30, 2008 (previously filed as Exhibit on Form 10-K for the year ended
      September 30, 2007, filed in December
  2008).
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 34
  10.34
                  Asset
      Purchase Agreement between Bishop Rock Software, Inc., Peter C. Sarna, II,
      Sol Lizarbram, Steven Florek, Clydesdale Partners I, LLC and Clydesdale
      Partners II, LLC and the Company, dated January 14,
  2008.14
                  Code
      of Business Conduct and Ethics (previously filed as Exhibit on Form 10-KSB
      for the year ended September 30, 2007, filed in January
2008).31 (i)
                  Certification
      of President and Chief Executive Officer under Section 302 of
      Sarbanes-Oxley Act of 200231 (ii)
                  Certification
      of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of
      200232
                  Certification
      under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. SECTION
      1350)
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 35
 SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
 
 
 
 REMOTEMDX,
      INC.Date:
      February 9, 2009
                        By:
                        /s/
      David G. DerrickDavid
      G. Derrick,Chief
      Executive Officer(Principal
      Executive Officer)Date:
      February 9, 2009
                        By:
                        /s/
      Michael G. ActonMichael
      G. Acton,Chief
      Financial Officer(Principal
      Financial Officer)Date:
      February 9, 2009
                        By:
                        /s/
      Chad D. OlsenChad
      D. Olsen,Principal
      Accounting Officer
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 36