rtd
 
 
 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 June 30, 2009
 
 or
 
 [  ]  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For
the transition period from ___________ to ____________
 
 Commission
file number: 0-23153
 ______________________
 
 REMOTEMDX,
INC.
 (Exact
name of registrant as specified in its charter)
 
 
 Utah
                87-0543981(State
      or other jurisdiction of incorporation or organization )
                (I.R.S.
      Employer Identification
Number)
 ______________________
 
 150 West Civic Center Drive,
Suite 400, Sandy, Utah 84070
 (Address
of principal executive
offices                       Zip
Code)
 ______________________
 
 (801)
451-6141
 (Registrant’s
telephone number, including area code)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.     [X]  Yes    [   ]  No
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files)    [   ]  Yes  [   ]  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  [X]  No
 
 The
number of shares outstanding of the registrant’s common stock as of August 6,
2009 was 209,774,367.
 
  
  REMOTEMDX,
INC.
 
 FORM
10-Q
 
 For
the Quarterly Period Ended June 30, 2009
 
 INDEX
 
 PagePART
      I. FINANCIAL INFORMATIONItem
      1
                            Financial
      Statements (unaudited)Condensed
      Consolidated Balance Sheets
                            3Condensed
      Consolidated Statements of Operations
                            5Condensed
      Consolidated Statements of Cash Flows
                            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
                            27PART
      II.     OTHER INFORMATIONItem
      1
                            Legal
      Proceedings
                            29Item
      2
                            Unregistered
      Sales of Equity Securities and Use of Proceeds .
                            29Item
      4
                            Submission
      of Matters to a Vote of Security Holders
                            30Item
      6
                            Exhibits .
                            30Signatures
                            33
 
 
 
 
  2
  PART
I.  FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
 
 
 REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June
      30,
                  2009
                
                
                September
      30,
                  2008AssetsCurrent
      assets:Cash
                
                $
                1,592,167
                
                
                $
                2,782,953Deposit
      held in escrow
                
                
                -
                
                
                
                500,000Securities
      held for sale
                
                
                200,000
                
                
                
                -Accounts
      receivable, net of allowance for doubtful accounts of  $278,900
      and $312,000, respectively
                
                
                1,172,465
                
                
                
                1,441,853Receivable
      from related party
                
                
                -
                
                
                
                55,385Inventory
                
                
                177,253
                
                
                
                -Prepaid
      expenses and other
                
                
                331,524
                
                
                
                224,842Total
      current assets
                
                
                3,473,409
                
                
                
                5,005,033Property
      and equipment, net of accumulated depreciation and amortization of
      $2,423,378 and $1,937,710, respectively
                
                
                1,339,313
                
                
                
                1,581,558Monitoring
      equipment, net of accumulated depreciation of $4,147,765 and $3,061,321,
      respectively
                
                
                3,998,895
                
                
                
                1,349,146Goodwill
                
                
                5,662,661
                
                
                
                4,811,834Intangible
      assets, net of amortization of $31,350 and $16,500,
      respectively
                
                
                201,650
                
                
                
                216,500Other
      assets
                
                
                79,127
                
                
                
                46,626Total
      assets
                
                $
                14,755,055
                
                
                $
                13,010,697
  
 See
accompanying notes to condensed consolidated financial
statements.
  3
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS – Continued
 (Unaudited)
 
 
 June
      30,
                                    2009
                                  
                                  
                                  September
      30,
                                    2008Liabilities
      and Stockholders’ Equity (Deficit)Current
      liabilities:Bank
      line of credit
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  3,462,285Accounts
      payable
                                  
                                  
                                  1,609,080
                                  
                                  
                                  
                                  2,059,188Accrued
      liabilities
                                  
                                  
                                  1,723,527
                                  
                                  
                                  
                                  1,781,267Deferred
      revenue
                                  
                                  
                                  39,915
                                  
                                  
                                  
                                  21,343SecureAlert
      Series A Preferred stock redemption obligation
                                  
                                  
                                  3,224,310
                                  
                                  
                                  
                                  3,244,758Related-party
      line of credit and notes
                                  
                                  
                                  1,547,620
                                  
                                  
                                  
                                  792,804Convertible
      promissory note, net of debt discount of $77,287
                                  
                                  
                                  2,522,713
                                  
                                  
                                  
                                  -Senior
      secured convertible notes, net of debt discount of
$831,956
                                  
                                  
                                  2,617,675
                                  
                                  
                                  
                                  -Series
      A 15% debentures, net of debt discount of $1,631,453
                                  
                                  
                                  1,568,547
                                  
                                  
                                  
                                  -Derivative
      liability
                                  
                                  
                                  3,917,537
                                  
                                  
                                  
                                  -Current
      portion of long-term debt
                                  
                                  
                                  531,387
                                  
                                  
                                  
                                  465,664Total
      current liabilities
                                  
                                  
                                  19,302,311
                                  
                                  
                                  
                                  11,827,309Series
      A 15% debentures, net of debt discount of $506,318 , net of current
      portion
                                  
                                  
                                  400,432
                                  
                                  
                                  
                                  -Long-term
      debt, net of current portion
                                  
                                  
                                  519,671
                                  
                                  
                                  
                                  1,147,382Total
      liabilities
                                  
                                  
                                  20,222,414
                                  
                                  
                                  
                                  12,974,691Commitments
      and contingencies
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Stockholders’
      equity (deficit):Preferred
      stock:Series
      A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares
      designated; 0 and 19 shares outstanding, respectively (aggregate
      liquidation preference of $0)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1Series
      B convertible, $0.0001 par value: 2,000,000 shares designated; 0 and
      10,999 shares outstanding, respectively (aggregate liquidation preference
      of $0)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1Common
      stock,  $0.0001 par value: 250,000,000 shares authorized;
      201,774,367 and 155,881,260 shares outstanding,
    respectively
                                  
                                  
                                  20,177
                                  
                                  
                                  
                                  15,588Additional
      paid-in capital
                                  
                                  
                                  193,869,321
                                  
                                  
                                  
                                  186,203,084Deferred
      compensation
                                  
                                  
                                  (2,385,404
                                  )
                                  
                                  
                                  (3,498,672
                                  )Subscription
      receivable
                                  
                                  
                                  (250,000
                                  )
                                  
                                  
                                  -Accumulated
      deficit
                                  
                                  
                                  (196,721,453
                                  )
                                  
                                  
                                  (182,683,996
                                  )Total
      stockholders’ equity (deficit)
                                  
                                  
                                  (5,467,359
                                  )
                                  
                                  
                                  36,006Total
      liabilities and stockholders’ equity (deficit)
                                  
                                  $
                                  14,755,055
                                  
                                  
                                  $
                                  13,010,697
  
 See
accompanying notes to condensed consolidated financial
statements.
  4
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months
      ended
                                                June 30,
                                              
                                              
                                              Ninemonths ended
                                                June 30,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2008Revenues:Products
                                              
                                              $
                                              75,451
                                              
                                              
                                              $
                                              1,064,756
                                              
                                              
                                              $
                                              493,595
                                              
                                              
                                              $
                                              2,173,384Monitoring
      services
                                              
                                              
                                              3,133,518
                                              
                                              
                                              
                                              2,422,901
                                              
                                              
                                              
                                              8,985,386
                                              
                                              
                                              
                                              7,272,006Total
    revenues
                                              
                                              
                                              3,208,969
                                              
                                              
                                              
                                              3,487,657
                                              
                                              
                                              
                                              9,478,981
                                              
                                              
                                              
                                              9,445,390Cost of
      revenues:Products
                                              
                                              
                                              28,891
                                              
                                              
                                              
                                              851,214
                                              
                                              
                                              
                                              246,310
                                              
                                              
                                              
                                              1,502,900Monitoring
      services
                                              
                                              
                                              2,391,935
                                              
                                              
                                              
                                              2,538,283
                                              
                                              
                                              
                                              8,049,230
                                              
                                              
                                              
                                              7,834,560Total cost of
      revenues
                                              
                                              
                                              2,420,826
                                              
                                              
                                              
                                              3,389,497
                                              
                                              
                                              
                                              8,295,540
                                              
                                              
                                              
                                              9,337,460Gross
margin
                                              
                                              
                                              788,143
                                              
                                              
                                              
                                              98,160
                                              
                                              
                                              
                                              1,183,441
                                              
                                              
                                              
                                              107,930Operating
      expenses:Selling, general and
      administrative(includingnon-cash expenses
      of$281,604, $11,923,678, $2,355,600and
      $19,720,720,
      respectively)
                                              
                                              
                                              3,178,333
                                              
                                              
                                              
                                              16,597,727
                                              
                                              
                                              
                                              11,078,059
                                              
                                              
                                              
                                              28,034,657Research and
      development
                                              
                                              
                                              431,201
                                              
                                              
                                              
                                              646,335
                                              
                                              
                                              
                                              1,277,102
                                              
                                              
                                              
                                              4,359,715Loss from
      operations
                                              
                                              
                                              (2,821,391)
                                              
                                              
                                              
                                              (17,145,902)
                                              
                                              
                                              
                                              (11,171,720)
                                              
                                              
                                              
                                              (32,286,442)Other income
      (expense):Gain on sale of  intellectual
      property
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,400,000Redemption of SecureAlert Series A
      Preferred
                                              
                                              
                                              24,060
                                              
                                              
                                              
                                              48,648
                                              
                                              
                                              
                                              20,449
                                              
                                              
                                              
                                              (8,428,520)Minority interest
      allocation
                                              
                                              
                                              -
                                              
                                              
                                              
                                              306,797
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              692,389Interest
    income
                                              
                                              
                                              8,215
                                              
                                              
                                              
                                              920
                                              
                                              
                                              
                                              11,658
                                              
                                              
                                              
                                              35,184Interest expense(includingnon-cash expense
      of $1,099,707, $285,844,$1,929,306, $665,332,
      respectively)
                                              
                                              
                                              (1,255,103)
                                              
                                              
                                              
                                              (389,838)
                                              
                                              
                                              
                                              (2,790,006)
                                              
                                              
                                              
                                              (1,163,586)Acquisition option extension
      cost
                                              
                                              
                                              (147,566)
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (347,066)
                                              
                                              
                                              
                                              -Derivative valuation loss(non-cash
      expense)
                                              
                                              
                                              (1,014,045)
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,014,045)
                                              
                                              
                                              
                                              -Settlement
      expense
                                              
                                              
                                              (23,046)
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (23,046)
                                              
                                              
                                              
                                              -Other income (expense),
      net
                                              
                                              
                                              196,568
                                              
                                              
                                              
                                              16,905
                                              
                                              
                                              
                                              1,276,319
                                              
                                              
                                              
                                              49,486Net loss from continuing
      operations
                                              
                                              
                                              (5,032,308)
                                              
                                              
                                              
                                              (17,162,470)
                                              
                                              
                                              
                                              (14,037,457)
                                              
                                              
                                              
                                              (38,701,489)Discontinued
      operations
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (340,348)
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (1,261,353)Net
      loss
                                              
                                              
                                              (5,032,308)
                                              
                                              
                                              
                                              (17,502,818)
                                              
                                              
                                              
                                              (14,037,457)
                                              
                                              
                                              
                                              (39,962,842)Dividends on Series A Preferred
      stock
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (107)
                                              
                                              
                                              
                                              (175)
                                              
                                              
                                              
                                              (345,246)Net loss attributable to common
      stockholders
                                              
                                              $
                                              (5,032,308)
                                              
                                              
                                              $
                                              (17,502,925)
                                              
                                              
                                              $
                                              (14,037,632)
                                              
                                              
                                              $
                                              (40,308,088)Net loss per common
      sharefrom continuing
      operations, basic and
      diluted
                                              
                                              $
                                              (0.03)
                                              
                                              
                                              $
                                              (0.12)
                                              
                                              
                                              $
                                              (0.08)
                                              
                                              
                                              $
                                              (0.28)Net loss per common
      sharefrom
      discontinued operations,basic and
      diluted
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              (0.01)Net loss per common share, basic
      and diluted
                                              
                                              $
                                              (0.03)
                                              
                                              
                                              $
                                              (0.12)
                                              
                                              
                                              $
                                              (0.08)
                                              
                                              
                                              $
                                              (0.29)Weighted average common shares
      outstanding, basic and diluted
                                              
                                              
                                              191,962,000
                                              
                                              
                                              
                                              146,085,000
                                              
                                              
                                              
                                              173,137,000
                                              
                                              
                                              
                                              136,097,000
 
 See
accompanying notes to condensed consolidated financial
statements.
  5
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine
      Months Ended June 30,2009
                                                  
                                                  
                                                  2008Cash
      flows from operating activities:Net
      loss
                                                  
                                                  $
                                                  (14,037,457
                                                  )
                                                  
                                                  $
                                                  (39,962,842
                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                  
                                                  
                                                  1,676,541
                                                  
                                                  
                                                  
                                                  1,617,309Common
      stock issued for services
                                                  
                                                  
                                                  668,874
                                                  
                                                  
                                                  
                                                  13,833,585Amortization
      of deferred financing and consulting costs
                                                  
                                                  
                                                  1,497,936
                                                  
                                                  
                                                  
                                                  4,472,262Stock
      options and warrants issued during the period for services
                                                  
                                                  
                                                  345,838
                                                  
                                                  
                                                  
                                                  804,205Common stock issued for acquisition
      option extension cost
                                                  
                                                  
                                                  19,500
                                                  
                                                  
                                                  
                                                  -Amortization
      of debt discount
                                                  
                                                  
                                                  1,067,037
                                                  
                                                  
                                                  
                                                  -Common
      stock issued to settle lawsuit
                                                  
                                                  
                                                  292,207
                                                  
                                                  
                                                  
                                                  1,276,000Redemption
      of SecureAlert series A preferred stock
                                                  
                                                  
                                                  (20,448
                                                  )
                                                  
                                                  
                                                  8,477,168Loss
      on discontinued operations
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,261,353Increase
      in related-party line of credit for services
                                                  
                                                  
                                                  218,684
                                                  
                                                  
                                                  
                                                  497,443Impairment
      of monitoring equipment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  570,948Minority
      interest expense, net
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (692,389
                                                  )Derivative
      liability valuation
                                                  
                                                  
                                                  1,014,045
                                                  
                                                  
                                                  
                                                  -Changes
      in operating assets and liabilities:Accounts
      receivable, net
                                                  
                                                  
                                                  269,388
                                                  
                                                  
                                                  
                                                  2,394,276Deposit
      released from escrow
                                                  
                                                  
                                                  500,000
                                                  
                                                  
                                                  
                                                  -Interest
      receivable (payable)
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (9,068
                                                  )Inventories
                                                  
                                                  
                                                  (177,253
                                                  )
                                                  
                                                  
                                                  -Prepaid
      expenses and other assets
                                                  
                                                  
                                                  (139,184
                                                  )
                                                  
                                                  
                                                  789,736Receivables
                                                  
                                                  
                                                  55,385
                                                  
                                                  
                                                  
                                                  -Accounts
      payable
                                                  
                                                  
                                                  14,929
                                                  
                                                  
                                                  
                                                  (754,721
                                                  )Accrued
      liabilities
                                                  
                                                  
                                                  10,202
                                                  
                                                  
                                                  
                                                  876,822Deferred
      revenue
                                                  
                                                  
                                                  18,572
                                                  
                                                  
                                                  
                                                  (378,309
                                                  )Net
      cash used in operating activities
                                                  
                                                  
                                                  (6,705,204
                                                  )
                                                  
                                                  
                                                  (4,926,222
                                                  )Cash
      flows from investing activities:Net
      purchase of property and equipment
                                                  
                                                  
                                                  (240,984
                                                  )
                                                  
                                                  
                                                  (275,728
                                                  )Purchase
      of monitoring equipment
                                                  
                                                  
                                                  (1,047,043
                                                  )
                                                  
                                                  
                                                  (404,123
                                                  )Purchase
      of securities
                                                  
                                                  
                                                  (200,000
                                                  )
                                                  
                                                  
                                                  -Disposal
      of monitoring equipment
                                                  
                                                  
                                                  33,519
                                                  
                                                  
                                                  
                                                  -Net
      cash used in investing activities
                                                  
                                                  
                                                  (1,454,508
                                                  )
                                                  
                                                  
                                                  (679,851
                                                  )Cash
      flows from financing activities:Principal
      payments on related-party line of credit
                                                  
                                                  
                                                  (713,868
                                                  )
                                                  
                                                  
                                                  (715,625
                                                  )Principal
      payments on notes payable
                                                  
                                                  
                                                  (453,766
                                                  )
                                                  
                                                  
                                                  (257,510
                                                  )Cash
      acquired through acquisitions
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  160,898Net
      borrowings (reductions) on bank line of credit
                                                  
                                                  
                                                  87,346
                                                  
                                                  
                                                  
                                                  (2,367,633
                                                  )Proceeds
      from notes payable
                                                  
                                                  
                                                  55,744
                                                  
                                                  
                                                  
                                                  889,263Principal
      payments on notes payable related to acquisitions
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (2,100,000
                                                  )Proceeds
      from issuance of subsidiary stock
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,049,999Proceeds
      from related-party notes payable
                                                  
                                                  
                                                  1,500,000
                                                  
                                                  
                                                  
                                                  -Proceeds
      from issuance of common stock, net of commissions
                                                  
                                                  
                                                  3,250,000
                                                  
                                                  
                                                  
                                                  2,000,000Payment
      on related-party notes payable
                                                  
                                                  
                                                  (603,280
                                                  )
                                                  
                                                  
                                                  -Proceeds
      from exercise of options and warrants
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,658,380Proceeds
      from Series A 15% debenture, net of commissions
                                                  
                                                  
                                                  3,846,750
                                                  
                                                  
                                                  
                                                  -Net
      cash provided by financing activities
                                                  
                                                  
                                                  6,968,926
                                                  
                                                  
                                                  
                                                  2,317,772Net
      decrease in cash
                                                  
                                                  
                                                  (1,190,786
                                                  )
                                                  
                                                  
                                                  (3,288,301
                                                  )Cash,
      beginning of period
                                                  
                                                  
                                                  2,782,953
                                                  
                                                  
                                                  
                                                  4,803,871Cash,
      end of period
                                                  
                                                  $
                                                  1,592,167
                                                  
                                                  
                                                  $
                                                  1,515,570
   See
accompanying notes to condensed consolidated financial
statements.
  6
  REMOTEMDX,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
 (Unaudited)
 Nine
      Months Ended
                                                                June 30,2009
                                                              
                                                              
                                                              
                                                              2008Cash
      paid for interest
                                                              
                                                              $
                                                              1,121,715
                                                              
                                                              
                                                              $
                                                              498,254Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of shares of common stock in exchange for shares of Series B
      Preferredstock
                                                              
                                                              
                                                              2
                                                              
                                                              
                                                              
                                                              2Issuance
      of shares of common stock and warrants in exchange for deferred consulting
      services and financing costs
                                                              
                                                              
                                                              384,667
                                                              
                                                              
                                                              
                                                              672,824Accrual
      of Series A Preferred stock dividends
                                                              
                                                              
                                                              175
                                                              
                                                              
                                                              
                                                              345,246Issuance
      of common stock for payment of SecureAlert Series A Preferred
      dividends
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              643,601Issuance
      of common stock in acquisition of Midwest Monitoring & Surveillance,
      Inc.
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              1,668,780Issuance
      of common stock in acquisition of Court Programs, Inc. Court Programs of
      Florida, Inc. and Court Programs of Northern Florida, Inc.
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              847,500Issuance
      of shares of common stock for subscription receivable
                                                              
                                                              
                                                              250,000
                                                              
                                                              
                                                              
                                                              -Issuance
      of shares of common stock for accounts payable
                                                              
                                                              
                                                              550,000
                                                              
                                                              
                                                              
                                                              -Discount
      from issuance of convertible debt
                                                              
                                                              
                                                              4,114,052
                                                              
                                                              
                                                              
                                                              -Cancellation
      of common stock issued
                                                              
                                                              
                                                              175
                                                              
                                                              
                                                              
                                                              -Acquisition
      of monitoring equipment through issuance of debt
                                                              
                                                              
                                                              2,770,000
                                                              
                                                              
                                                              
                                                              -Stock
      and options issued in connection with acquisition of Bishop Rock Software,
      Inc.
                                                              
                                                              
                                                              856,522
                                                              
                                                              
                                                              
                                                              -Issuance
      of common stock to settle notes payable and accrued
    interest
                                                              
                                                              
                                                              187,793
                                                              
                                                              
                                                              
                                                              -Line
      of credit paid through the issuance of Senior convertible
      notes
                                                              
                                                              
                                                              3,549,630
                                                              
                                                              
                                                              
                                                              -Acquisition
      of property and equipment through issuance of debt
                                                              
                                                              
                                                              38,991
                                                              
                                                              
                                                              
                                                              -
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  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
June 30, 2009, and results of its operations for the three and nine months ended
June 30, 2009 and 2008.  These financial statements should be read in
conjunction with the annual consolidated financial statements and notes thereto
that are included in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2008.  The results of operations for the three and nine
months ended June 30, 2009 may not be indicative of the results for the fiscal
year ending September 30, 2009.
 
 (2) 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, sale of common stock, 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.
  (3)           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.
 
 (4)           RECENTLY
ISSUED ACCOUNTING STANDARDS
 
 In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets(FSP 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 SFAS 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 FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).  FSP 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 ofAPB 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, will
occur upon adoption of FSP APB 14-1.
  8
  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
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. The adoption of EITF Issue No. 08-7 has not had a material
impact on the Company’s financial position.
 
 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, will occur upon adoption of FSP FAS 140 and FIN
46(R)-8.
 
 In
November 2008, the FASB ratified EITF No. 08-8, “Accounting for an
Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on
the Stock of an Entity’s Consolidated Subsidiary,” (EITF08-8).EITF08-8 clarifies whether a
financial instrument for which the payoff to the counterparty is based, in whole
or in part, on the stock of an entity’s consolidated subsidiary is indexed to
the reporting entity’s own stock and therefore should not be precluded from
qualifying for the first part of the scope exception in paragraph 11
(a) of SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities” or from being within the scope of EITF No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and, Potentially
Settled in, a Company’s Own Stock.”EITF08-8 is effective for fiscal years beginning on or 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 EITF 08-5.
 
 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 the2ndquarterreporting periodending March 31, 2009.The adoption of EITF Issue
No. 08-5 has not had a material impact on the Company’s financial
position.
 
 In May
2009, the FASB issued SFAS No. 165, "Subsequent Events," which establishes
general accounting standards and disclosure for events that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued.  It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date.  SFAS 165 is effective for interim and annual financial periods
ending after June 15, 2009 and requires prospective application.  The
Company adopted SFAS 165 during the third fiscal quarter ended June
30, 2009, and its application had no impact on the Company’s consolidated
financial statements.  The Company evaluated subsequent events through
the date the accompanying financial statements were issued, which was August 6,
2009.
  9
 
 In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162.”  SFAS 168 replaces SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB
Accounting Standards CodificationTM” (Codification) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with generally accepted accounting principles
(GAAP).  Rules and interpretive releases of the Securities and
Exchange Commission (SEC) are also sources of authoritative GAAP for SEC
registrants.  SFAS 168 is effective for interim and annual
financial periods ending after September 15, 2009.  On this
effective date, the Codification will supersede all then-existing Non-SEC
accounting and reporting standards.  All other non-grandfathered
Non-SEC accounting literature not included in the Codification will become
non-authoritative.  Once the Codification is in effect, all of its
content will carry the same level of authority, effectively superseding SFAS
162.  The Company will adopt SFAS 168 during its annual period
ending September 30, 2009 and does not anticipate that the adoption of this
standard will have a material impact on its consolidated financial
statements.
 
 (5)           IMPAIRMENT
OF LONG-LIVED ASSETS
  The
Company reviews its long-lived assets for impairment when events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows of the related asset or
group of assets over the estimated remaining life in measuring whether the
assets are recoverable. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized for the amount by which
the carrying amount exceeds the estimated fair value of the asset. Impairment of
long-lived assets is assessed at the lowest levels for which there are
identifiable cash flows that are independent of other groups of assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value, less the estimated costs to sell.  During the nine months ended
June 30, 2009 and 2008, the Company disposed of $33,519 and $570,948,
respectively, in monitoring equipment that no longer had value.  This
expense was classified as cost of revenues.
 
 (6)           REVENUE
RECOGNITION
 
 The
Company’s revenue has historically been from two sources: (i) monitoring
services; (ii) monitoring device and other product sales.
 
 Monitoring
Services
 Monitoring
services include two components: (a) lease contracts in which the Company
provides monitoring services and leases devices to distributors or end users and
the Company retains ownership of the leased device; and (b) monitoring services
purchased by distributors or end users who have previously purchased monitoring
devices and opt to use the Company’s monitoring services.
 
 The
Company typically leases its devices under one-year contracts with customers
that opt to use the Company’s monitoring services.  However, these
contracts may be cancelled by either party at anytime with 30 days
notice.  Under the Company’s standard leasing contract, the leased
device becomes billable on the date of activation or 21 days from the date the
device is assigned to the lessee, and remains billable until the device is
returned to the Company.  The Company recognizes revenue on leased
devices at the end of each month that monitoring services have been
provided.  In those circumstances in which the Company receives
payment in advance, the Company records these payments as deferred
revenue.
 
 Monitoring Device Product
Sales
 Although
not the focus of the Company’s business model, the Company sells its monitoring
devices in certain situations. In addition, the Company sells home security and
Personal Emergency Response Systems (“PERS”) units.  The Company
recognizes product sales revenue when persuasive evidence of an arrangement with
the customer exists, title passes to the customer and the customer cannot return
the devices, prices are fixed or determinable (including sales not being made
outside the normal payment terms) and collection is reasonably assured. When
purchasing products (such as TrackerPAL devices) from the Company, customers
may, but are not required to, enter into monitoring service contracts with the
Company.  The Company recognizes revenue on monitoring services for
customers that have previously purchased devices at the end of each month that
monitoring services have been provided.
  10
 
 Multiple Element
Arrangements
 The
majority of the Company’s revenue transactions do not have multiple elements. On
occasion, the Company has revenue transactions that have multiple elements (such
as product sales and monitoring services).  For revenue arrangements
that have multiple elements, the Company considers whether: (i) the delivered
devices have standalone value to the customer; (ii) there is objective and
reliable evidence of the fair value of the undelivered monitoring services,
which is generally determined by surveying the price of competitors’ comparable
monitoring services; and (iii) the customer does not have a general right of
return.  Based on these criteria, the Company recognizes revenue from
the sale of devices separately from the monitoring services to be provided to
the customer.  In accordance with 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.
 
 (7)           NET
LOSS PER COMMON SHARE
 
 Basic net
loss per common share ("Basic EPS") is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per common share
("Diluted EPS") is computed by dividing net loss attributable to common
stockholders by the sum of the weighted average number of common shares
outstanding and the weighted average dilutive common share equivalents then
outstanding. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect.
 
 Common
stock equivalents consist of shares issuable upon the exercise of common stock
options and warrants and shares issuable upon conversion of debt. As of June 30,
2009 and 2008, there were 76,128,791 and 19,123,412 outstanding common stock
equivalents, respectively, that were not included in the computation of diluted
net loss per common share as their effect would be anti-dilutive. The common
stock equivalents outstanding as of June 30, 2009, consisted of 50,880,626
shares of common stock from the potential conversion of $10,418,311 of debt and
accrued interest, and 25,248,165 shares underlying options and
warrants.  Of the 25,248,165 shares underlying options and warrants,
21,633,831 shares underlie options and warrants which have vested and 3,614,334
shares underlie options and warrants which have not yet vested.
 
 (8)           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.
  11
 
 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. The Company granted
1,517,714 and 1,725,000 stock options to employees during the nine months ended
June 30, 2009 and 2008, respectively.
 
 A summary
of stock option activity for the nine months ended June 30, 2009, 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
                                                                          1,517,714
                                                                          
                                                                          
                                                                          $
                                                                          0.21Exercised
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          -Forfeited
                                                                          -
                                                                          
                                                                          
                                                                          $
                                                                          -Expired
      / Cancelled
                                                                          (408,500)
                                                                          
                                                                          
                                                                          $
                                                                          1.45Outstanding
      as of  June 30, 2009
                                                                          4,709,214
                                                                          
                                                                          
                                                                          $
                                                                          0.76
                                                                          
                                                                          
                                                                          2.95
      years
                                                                          
                                                                          
                                                                          $
                                                                          72,699Exercisable
      as of June 30, 2009
                                                                          1,694,880
                                                                          
                                                                          
                                                                          $
                                                                          0.31
                                                                          
                                                                          
                                                                          3.21
      years
                                                                          
                                                                          
                                                                          $
                                                                          72,699
  (9)           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 $177,253 as of June 30, 2009 and $0 as of
September 30, 2008.
 
 (10)         SECURITIES
HELD FOR RESALE
  On May
29, 2009, the Company purchased 160,000 restricted shares of common stock of
ActiveCare, Inc. for $200,000, or $1.25 per share. ActiveCare, Inc., is a
publicly-held company located in West Valley City, Utah, a former subsidiary of
the Company previously known as Volu-Sol Reagents Corporation
(“ActiveCare”).
  (11)         PROPERTY
AND EQUIPMENT
 
 Property
and equipment as of June 30, 2009 and September 30, 2008, were as
follows:
 June
      30,
                              2009
                            
                            
                            September
      30,
                              2008Equipment,
      software and tooling
                            
                            $
                            2,652,207
                            
                            
                            $
                            2,472,076Automobiles
                            
                            
                            305,658
                            
                            
                            
                            287,736Building
      and land
                            
                            
                            377,555
                            
                            
                            
                            377,555Leasehold
      improvements
                            
                            
                            127,408
                            
                            
                            
                            102,190Furniture
      and fixtures
                            
                            
                            299,865
                            
                            
                            
                            279,7113,762,693
                            
                            
                            
                            3,519,268Accumulated
      depreciation
                            
                            
                            (2,423,380
                            )
                            
                            
                            (1,937,710
                            )Property
      and equipment, net of accumulated depreciation
                            
                            $
                            1,339,313
                            
                            
                            $
                            1,581,558
 
 Depreciation
expense for the nine months ended June 30, 2009 and 2008 was $527,917 and
$472,557, respectively.
  12
 
 (12)         MONITORING
EQUIPMENT
 
 Monitoring
equipment as of June 30, 2009 and September 30, 2008, was as
follows:
 
 June
      30,
                                  2009
                                
                                
                                September
      30,
                                  2008Monitoring
      equipment
                                
                                $
                                8,146,660
                                
                                
                                $
                                4,410,467Less:
      accumulated depreciation
                                
                                
                                (4,147,765
                                )
                                
                                
                                (3,061,321
                                )Total
                                
                                $
                                3,998,895
                                
                                
                                $
                                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 nine months ended June 30, 2009 and 2008 was $1,106,380 and
$861,387, respectively.  These expenses were classified as a cost of
revenues.
 
 (13)         GOODWILL
AND OTHER INTANGIBLE ASSETS
 
 As of
June 30, 2009, the Company had recorded goodwill and intangible assets related
to the acquisition of controlling interest of Midwest, Court Programs, and
Bishop Rock Software as follows:
 
 
 Midwest
                              Monitoring
      &
                              Surveillance
                            
                            
                            Court
                              Programs,
      Inc.
                            
                            
                            Bishop
      Rock
                              Software
                            
                            
                            TotalGoodwill
                            
                            $
                            3,603,748
                            
                            
                            $
                            1,208,086
                            
                            
                            $
                            850,827
                            
                            
                            $
                            5,662,661Other
      Intangible AssetsTrade
      name
                            
                            
                            120,000
                            
                            
                            
                            99,000
                            
                            
                            
                            -
                            
                            
                            
                            219,000Customer
      relationships
                            
                            
                            -
                            
                            
                            
                            6,000
                            
                            
                            
                            -
                            
                            
                            
                            6,000Non-compete
      agreements
                            
                            
                            2,000
                            
                            
                            
                            6,000
                            
                            
                            
                            -
                            
                            
                            
                            8,000Total
      Other Intangible Assets
                            
                            
                            122,000
                            
                            
                            
                            111,000
                            
                            
                            
                            -
                            
                            
                            
                            233,000Accumulated
      amortization
                            
                            
                            (14,250
                            )
                            
                            
                            (17,100
                            )
                            
                            
                            -
                            
                            
                            
                            (31,350
                            )Total
      goodwill and other intangible assets, net of amortization
                            
                            $
                            3,711,498
                            
                            
                            $
                            1,301,986
                            
                            
                            $
                            850,827
                            
                            
                            $
                            5,864,311
 
 Midwest Monitoring &
Surveillance
 Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Midwest Monitoring & Surveillance
(“Midwest”).  Like the Company’s operations prior to the acquisition
of interest, Midwest provides electronic monitoring for individuals on
parole.  The total consideration for the purchase of Midwest was
$4,400,427 comprised of notes payable of $1,800,000, shares of common stock
valued at $1,752,000 (438,000 shares valued at $4.00 per share), transaction
costs of $31,497, and long-term liabilities assumed of $816,930.
 
 The total
consideration of $4,400,427 less the tangible assets acquired of $674,679
resulted in an excess over net book value of $3,725,748.  The excess
over net book value was allocated as noted in the table above.
 
 The
Company recorded $6,750 of amortization expense for Midwest intangible assets
during the nine months ended June 30, 2009 resulting in a total accumulated
amortization of $14,250 and net intangible assets of $107,750.
 
 During
March 2009, the Company extended the option period for the purchase of the
remaining 49% ownership of Midwest to April 15, 2010.  The Company
agreed to give the following consideration to Midwest owners to extend this
option:
  13
 
 1)
              150,000
      shares of common stock valued at $0.13 per share for a total of
      $19,500.
 2)
              $75,000
      in cash upon execution of the
agreement.
 3)
              $105,000
      in cash paid in ten equal payments of $10,500 beginning April 15, 2009
      through January 15, 2010.
 
 The
expense totaling $199,500 was reported as an acquisition option extension cost
under other income (expense) for the nine months ended June 30,
2009.
 
 Court
Programs
 Effective
December 1, 2007, the Company purchased a 51% ownership interest, including a
voting interest, of Court Programs, Inc., a Mississippi corporation, Court
Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of
Florida, Inc., a Florida corporation (collectively, “Court
Programs”).  Similar to the Company’s operations prior to the
acquisition of interest, Court Programs is a distributor of electronic
monitoring devices to courts providing a solution to monitor individuals on
parole.  The total consideration for the purchase of Court Programs
was $1,527,743 comprised of a note payable of $300,000, shares of common stock
valued at $847,500 (212,000 shares valued at approximately $4.00 per share),
transaction costs of $45,324, and long-term liabilities assumed of
$334,919.
 
 The total
consideration of $1,527,743 less the tangible assets acquired of $208,658
resulted in an excess over net book value of $1,319,086.  The excess
over net book value was allocated as noted in the table above.
 
 The
Company recorded $8,100 of amortization expense on intangible assets for Court
Programs during the nine months ended June 30, 2009 resulting in a total
accumulated amortization of $17,100  and net intangible assets of
$93,900.
 
 Effective
April, 1, 2009, the Company and Court Programs agreed to release Court Programs
from an obligation to repay expenses paid on its behalf by the Company in the
amount of $147,566 as consideration to extend the option period for the purchase
of the remaining 49% ownership of Court Programs to April 15, 2010. The expense
of $147,566 was reported as an acquisition option extension cost under other
income (expense) for the three months ended June 30, 2009.
 
 Bishop Rock
Software
 Effective
January 14, 2009, the Company purchased a 100% ownership interest, including a
voting interest, of Bishop Rock Software, Inc., a California corporation,
(“Bishop Rock”) for 2,857,286 shares of the Company’s common stock valued at
$0.23 per share for a total of $657,176, 642,714 options to the Company’s common
stock with an exercise price of $0.09 per share for a value of $114,383 using
the Black-Scholes calculation, and $79,268 in debt for a total purchase price of
$850,827.  Bishop Rock has developed crime-scene correlation software
to be used with the TrackerPAL monitoring device. As of the date of this Report,
the goodwill and intangible assets have not yet been valued; and therefore, the
value of $850,827 has all been reflected as goodwill until the valuation is
completed.  It is anticipated that the valuation of Bishop Rock’s
goodwill and intangible assets will be completed by September 30,
2009.
 14
  Supplemental
Pro Forma Results of Operations
 The following tables present the pro
forma results of operations for the three andninemonths endedJune30, 2009 and 2008, as though theMidwest, Court Programs, and Bishop Rock
acquisitions had been completed as of the beginning of each period
presented:
 Three Months
      EndedJune30,2009
                                                
                                                
                                                2008Revenues:Products
                                                
                                                $
                                                75,451
                                                
                                                
                                                $
                                                1,064,756Monitoring
      services
                                                
                                                
                                                3,133,518
                                                
                                                
                                                
                                                2,422,901Total
      revenues
                                                
                                                
                                                3,208,969
                                                
                                                
                                                
                                                3,487,657Cost of
      revenues:Products
                                                
                                                
                                                (28,891
                                                )
                                                
                                                
                                                (851,214)Monitoring
      services
                                                
                                                
                                                (2,391,935
                                                )
                                                
                                                
                                                (2,538,283)Total
      cost of revenues
                                                
                                                
                                                (2,420,826
                                                )
                                                
                                                
                                                (3,389,497)Gross
      margin
                                                
                                                
                                                788,143
                                                
                                                
                                                
                                                98,160Operating
      expenses:Selling,
      general and administrative
                                                
                                                
                                                (3,178,333
                                                )
                                                
                                                
                                                (16,602,727)Research
      and development
                                                
                                                
                                                (431,201
                                                )
                                                
                                                
                                                (646,335)Loss
      from operations
                                                
                                                
                                                (2,821,391
                                                )
                                                
                                                
                                                (17,150,902)Other income
      (expense):RedemptionSecureAlert Series A Preferred
      stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                48,648Minority
      interest allocation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                306,797Change from estimate to
      actual
                                                
                                                
                                                24,060
                                                
                                                
                                                
                                                -Settlement income
      (expense)
                                                
                                                
                                                (23,046)
                                                
                                                
                                                
                                                -Acquisition option extension
    cost
                                                
                                                
                                                (147,566)
                                                
                                                
                                                
                                                -Derivative valuation
      loss
                                                
                                                
                                                (1,014,045)
                                                
                                                
                                                
                                                -Other
      income (loss)
                                                
                                                
                                                196,568
                                                
                                                
                                                
                                                16,905Interest
      income
                                                
                                                
                                                8,215
                                                
                                                
                                                
                                                920Interest
      expense
                                                
                                                
                                                (1,255,103
                                                )
                                                
                                                
                                                (389,838)Net lossfrom continuing
      operations
                                                
                                                
                                                (5,032,308
                                                )
                                                
                                                
                                                (17,167,470)Discontinued
      operations
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (340,348)Net loss
                                                
                                                $
                                                (5,032,308
                                                )
                                                
                                                $
                                                (17,507,818)Dividends on Series A Preferred
      stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (107)Net loss attributable to common
      stockholders
                                                
                                                $
                                                (5,032,308
                                                )
                                                
                                                $
                                                (17,507,925)Net loss per common sharefrom continuing
      operations,basic and
      diluted
                                                
                                                $
                                                (0.03
                                                )
                                                
                                                $
                                                (0.12)Net loss per common sharefrom discontinued
      operations,basic and
      diluted
                                                
                                                $
                                                (0.00
                                                )
                                                
                                                $
                                                (0.00)Net loss per common share – basic
      and diluted
                                                
                                                $
                                                (0.03
                                                )
                                                
                                                $
                                                (0.12)Weighted average common shares
      outstanding – basic and diluted
                                                
                                                
                                                191,962,000
                                                
                                                
                                                
                                                146,085,000
 
  15
 
 NineMonths Ended
                                                  June30,2009
                                                
                                                
                                                2008Revenues:Products
                                                
                                                $
                                                493,595
                                                
                                                
                                                $
                                                2,173,384Monitoring
      services
                                                
                                                
                                                8,986,068
                                                
                                                
                                                
                                                7,272,006Total
      revenues
                                                
                                                
                                                9,479,663
                                                
                                                
                                                
                                                9,445,390Cost of
      revenues:Products
                                                
                                                
                                                (246,310)
                                                
                                                
                                                
                                                (1,502,900)Monitoring
      services
                                                
                                                
                                                (8,049,230)
                                                
                                                
                                                
                                                (7,834,560)Total
      cost of revenues
                                                
                                                
                                                (8,295,540)
                                                
                                                
                                                
                                                (9,337,460)Gross
      margin
                                                
                                                
                                                1,184,123
                                                
                                                
                                                
                                                107,930Operating
      expenses:Selling,
      general and administrative
                                                
                                                
                                                (11,238,788)
                                                
                                                
                                                
                                                (28,039,657)Research
      and development
                                                
                                                
                                                (1,277,102)
                                                
                                                
                                                
                                                (4,359,715)Loss
      from operations
                                                
                                                
                                                (11,331,767)
                                                
                                                
                                                
                                                (32,291,442)Other income
      (expense):Gain
      on sale of intellectual property
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2,400,000RedemptionSecureAlert Series A Preferred
      stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (8,428,520)Minority
      interest allocation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                692,389Change
      from estimate to actual
                                                
                                                
                                                20,449
                                                
                                                
                                                
                                                -Settlement
      expense
                                                
                                                
                                                (23,046)
                                                
                                                
                                                
                                                -Acquisition option extension
    cost
                                                
                                                
                                                (347,066)
                                                
                                                
                                                
                                                -Derivative valuation
      loss
                                                
                                                
                                                (1,014,045)
                                                
                                                
                                                
                                                -Other
      income (loss)
                                                
                                                
                                                1,276,319
                                                
                                                
                                                
                                                49,486Interest
      income
                                                
                                                
                                                11,658
                                                
                                                
                                                
                                                35,184Interest
      expense
                                                
                                                
                                                (2,790.006)
                                                
                                                
                                                
                                                (1,163,586)Net lossfrom continuing
      operations
                                                
                                                
                                                (14,197,504)
                                                
                                                
                                                
                                                (38,706,489)Discontinued
      operations
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,261,353)Net loss
                                                
                                                $
                                                (14,197,504)
                                                
                                                
                                                $
                                                (39,967,842)Dividends on Series A Preferred stock
                                                
                                                
                                                (175)
                                                
                                                
                                                
                                                (345,246)Net loss attributable to common
      stockholders
                                                
                                                $
                                                (14,197,679)
                                                
                                                
                                                $
                                                (40,313,088)Net loss per common sharefrom continuing
      operations,basic and
      diluted
                                                
                                                $
                                                (0.08)
                                                
                                                
                                                $
                                                (0.29)Net loss per common sharefrom discontinued
      operations,basic and
      diluted
                                                
                                                $
                                                (0.00)
                                                
                                                
                                                $
                                                (0.01)Net loss per common share – basic
      and diluted
                                                
                                                $
                                                (0.08)
                                                
                                                
                                                $
                                                (0.30)Weighted average common shares
      outstanding – basic and diluted
                                                
                                                
                                                173,137,000
                                                
                                                
                                                
                                                136,097,000
   (14)        
ACCRUED LIABILITIES
 Accrued
liabilities consisted of the following as of June 30, 2009 and September 30,
2008:
 June
      30,
                              2009
                            
                            
                            September
      30,
                              2008Accrued
      payroll and employee benefits
                            
                            $
                            532,944
                            
                            
                            $
                            451,485Accrued
      interest
                            
                            
                            345,291
                            
                            
                            
                            97,383Accrued
      board of directors fees
                            
                            
                            300,000
                            
                            
                            
                            205,000Accrued
      warranty and manufacturing costs
                            
                            
                            246,622
                            
                            
                            
                            291,423Accrued
      outside services and other expenses
                            
                            
                            123,543
                            
                            
                            
                            118,665Accrued
      legal and consulting fees
                            
                            
                            101,627
                            
                            
                            
                            91,720Accrued
      extension payments
                            
                            
                            73,500
                            
                            
                            
                            -Accrued
      lawsuit liability
                            
                            
                            -
                            
                            
                            
                            385,000Accrued
      bonuses
                            
                            
                            -
                            
                            
                            
                            83,763Commissions
                            
                            
                            -
                            
                            
                            
                            56,828Total
                            
                            $
                            1,723,527
                            
                            
                            $
                            1,781,267
 
 16
 
 (15)
              CONVERTIBLE
      PROMISSORY NOTE
 
 On
January 15, 2009, the Company entered into an unsecured convertible promissory
note for $2,700,000 in order to purchase TrackerPAL units from a third party
vendor.  The note may convert into shares of the Company’s common
stock at a conversion price of $0.22 per share.  The note bears
interest at 8% per annum and matures on January 15, 2010. Interest is due
monthly and the principal is due at maturity. The fair market value of the
common stock was $0.23 per share on the date the Company entered into the
agreement resulting in a beneficial conversion feature of
$122,727.  This was recorded as a debt discount and will be expensed
over the life of the note. As of June 30, 2009, the outstanding balance due was
$2,600,000 with a remaining debt discount balance of $77,287.
  (16)
              SENIOR
      SECURED CONVERTIBLE NOTES
 
 On March
1, 2009, the Company entered into senior secured convertible notes of $2,649,631
with three unrelated parties to pay down the Company’s line of credit from
$3,600,000 to $900,000.  The Company also issued an additional
$900,000 on June 29, 2009 with three additional unrelated parties to pay off the
Company’s line of credit. The interest rate is 15% per annum and the notes
mature on March 13, 2010.  Interest is due monthly and the principal
is due at maturity.  These notes may convert into shares of the
Company’s common stock at a conversion price of $0.20 per share, or into shares
of the SecureAlert’s common stock at the FMV of the stock at the conversion
date.  The Company determined that certain conversion features of the
notes were subject to derivative accounting treatment (see Note 18). This
resulted in a debt discount valued at $853,166. Additionally, with the issuance
of these notes, the Company issued 3,549,630 shares of common stock valued at
$226,853 recorded as a debt discount. The value of $1,080,019 recorded as a debt
discount and will be expensed over the life of these notes.  As of
June 30, 2009, the outstanding balance was $3,449,631with a remaining debt
discount balance of $831,956.
 
 (17)
              SERIES
      A 15% DEBENTURES
 
 During
the nine months ended June 30, 2009, the Company received $3,750,000 in
cash from the issuance of Series A 15% debentures and issued cash receivables
for $250,000 of Series A 15% debentures.  Additionally, the Company
issued to a vendor debentures in the principal amount of $106,750 for services
rendered to the Company.  As of June 30, 2009, the total outstanding
balance of the debentures was $4,106,750.  The terms of these
debentures are as follows: 1) 15% interest per annum.  Interest is due
quarterly and principal is due at maturity, 2) 18-month maturity, 3) for every
$1 invested into the debenture the holder received 1 share of the Company’s
common stock, and 4) at the holder’s option, the debenture may be converted into
shares of common stock at a conversion rate of $0.20 per share or into shares at
a reduced conversion rate should the Company issue any equity security at a
price less than $0.20 per share. The Company determined that certain conversion
features of the notes were subject to derivative accounting treatment (see Note
18). This resulted in a debt discount valued at
$2,050,326.  Additionally, with the issuance of these notes, the
Company issued 4,106,750 shares of common stock valued at $229,806 and 2,200,000
warrants valued at $43,926 recorded as a debt discount. This discount will be
expensed over the life of the debentures.
 
 In
September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per
share to an investor.  Shortly following the transaction, the
Company’s common stock price fell to approximately $0.20 per share. The Company
and the other party agreed upon the investor’s investment of an additional
$3,000,000 (included in the $4,106,750 discussed in the paragraph above) in the
Series A 15% debenture that the Company would issue 9,796,636 additional
shares.  Furthermore, the Company agreed to reprice outstanding
warrants from $1.00 to $0.25 per share and extend the purchase period an
additional two years. The issuance of these shares and repricing of the warrants
attributed an additional $587,248 to the debt discount resulting in a total
$2,911,306 in a debt discount to be amortized over the life of the
debentures.  During the nine months ended June 30, 2009, the Company
amortized $773,535 of this debt discount and recorded it as interest
expense.  As of June 30, 2009, the debt discount balance was
$2,137,771.
 
 (18)         DERIVATIVES
 
 The
Company does not hold or issue derivative instruments for trading
purposes.  However, the Company has convertible notes that contain
embedded derivatives that require separate valuation from the convertible notes
payable.  The Company recognizes these derivatives as liabilities in
its balance sheet, measures them at their estimated fair value, and recognizes
changes in their estimated fair value in earnings (losses) in the period of
change.  The Company has estimated the fair value of these embedded
derivatives using the Black-Scholes model based on the historical volatility of
its common stock over the past 18 months.  The fair values of the
derivative instruments are re-measured each quarter.
 
 During
the nine months ended June 30, 2009, the Company issued Senior Secured
Convertible Notes and Series A 15% debentures containing embedded derivative
features.  The Company recorded an initial value of $2,903,492 for the
derivatives.  As of June 30, 2009, the derivative instruments had a
fair value of $3,917,537 resulting in a derivative valuation loss of $1,014,045
for the period.
  17
 
 (19)         DEBT
OBLIGATIONS
 
 Debt
obligations as of June 30, 2009 and September 30, 2008 consisted of the
following:
 
 June
      30,
                      2009
                    
                    
                    September
      30,
                      2008SecureAlert,
      Inc.Unsecured
      note payable to a former subsidiary bearing interest at 5%.  The
      note matures on December 31, 2009.
                    
                    $
                    295,513
                    
                    
                    $
                    598,793Unsecured
      notes payable to former SecureAlert stockholders, with interest at 5.00%,
      payable in installments of $80,000 per month. These notes were paid off
      during the six months ended March 31, 2009 in connection with the
      settlement of the Natale and Boling lawsuit.
                    
                    
                    -
                    
                    
                    
                    169,676Unsecured
      note payable with interest rate of 12%.  Note matures on
      February 1, 2010.
                    
                    
                    15,075
                    
                    
                    
                    -Unsecured
      note payable with interest rate of 8%.  Note matures on June 6,
      2011.
                    
                    
                    13,774
                    
                    
                    
                    -
 
 Court
      ProgramsNote
      payable due to the Small Business Administration (“SBA”).  Note
      bears interest at 4% and matures on April 6, 2037.  The note is
      secured by monitoring equipment.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          225,137
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          229,100Unsecured
      revolving lines of credit with two banks, with interest rates between 4.85
      % and 9.24%
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          20,110
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          48,499Unsecured
      note payable with interest rate of 8%. The note matures on May 31,
      2010.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          2,031
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          16,028Automobile
      loan secured by the vehicle.  Loan bears interest at 7.09%, and
      matures on June 21, 2014.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          31,827
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          -MidwestNotes
      payable to a financial institution bearing interest at
      6.37%.  Notes mature in July 2011 and July 2016.  The
      notes are secured by property.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          201,256
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          247,675Notes
      payable for monitoring equipment.  Interest rates range between
      7.8% to 18.5% and mature January 2009 through November
      2011.  The notes are secured by monitoring
      equipment.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          148,189
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          199,747Automobile
      loans with several financial institutions secured by the
      vehicles.  Interest rates range between 6.9% and 8.5%, due
      between January 2010 and October 2011.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          47,324
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          43,570Note
      payable to a stockholder of Midwest.  The note bears interest at
      4.9% maturing on February 22, 2013.
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          50,823
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          59,958Total
      debt obligations
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          1,051,059
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          1,613,046Less
      current portion
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (531,388
                                                                                                                                          )
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          (465,664
                                                                                                                                          )Long-term
      debt, net of current portion
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          519,671
                                                                                                                                          
                                                                                                                                          
                                                                                                                                          $
                                                                                                                                          1,147,382
   18
  (20)       
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
June 30, 2009, the Company owed $47,620 under a line-of-credit agreement with
ADP Management, an entity owned and controlled by two of the Company’s
directors, Mr. Derrick and Mr. Dalton.  Mr. Derrick is also the
Company’s Chief Executive Officer. Outstanding amounts on the line of credit
accrue interest at 11% per annum and are due on August 31,
2009.  During the nine months ended June 30, 2009, the net decrease
under this line of credit was $495,184. This decrease consisted of cash
repayments of $713,868 offset, in part, by $218,684 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 paid to Mr. Derrick a loan origination fee of $50,000 in cash and
100,000 shares of restricted common stock.  In February, Mr. Derrick
loaned an additional $500,000 to the Company resulting in a total of $1,500,000
due to Mr. Derrick.  The Company and Mr. Derrick agreed to extend the
due date of the full obligation to February 26, 2010.  As of June 30,
2009, the Company owed $1,500,000 plus $56,096 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 June 30, 2009, this note was paid in
full.
 
 Related-Party
Note Receivable
 
 The
Company acquired a 51% ownership in Midwest Monitoring & Surveillance, Inc.
(“Midwest”) effective December 1, 2007.  Prior to the sale to the
Company, Midwest had entered into a loan arrangement with Gary Bengtson, the
Chief Financial Officer of Midwest.  On June 29, 2009, Mr. Bengtson
resigned as CFO of Midwest and entered into a separation and release agreement
which settled an outstanding receivable from Mr. Bengtson in the amount of
$60,546 for $37,500 which resulted in a settlement loss of $23,046. The
agreement also reduced a payable balance to Mr. Bengtson from $42,000 to $4,500.
As of June 30, 2009, the Company owed Mr. Bengtson $4,500. Subsequent to June
30, 2009, the Company paid $4,500 to Mr. Bengtson.
 
 Related-Party
Series A 15% Debenture
 
 On May 1,
2009, the Company borrowed $250,000 from an entity controlled by an employee of
the Company and issued a Series A 15% debenture due and payable on November 1,
2010. In addition to the rights and terms of the debenture, the entity received
2,200,000 one-year warrants with an exercise price of $0.25 per share valued at
$43,926 for providing capital to the Company to be used to help settle an
outstanding liability to a vendor in the amount of $814,697 for $227,000 in cash
and 2,200,000 shares of common stock valued at $550,000.
  19
 
 (21)         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 nine months ended June 30, 2009, 19 shares of Series A
Preferred stock were converted into 9,306 shares of common stock.  As
of June 30, 2009, there were no shares of Series A Preferred stock outstanding.
During the nine months ended June 30, 2009 and 2008, the Company recorded $175
and $313, respectively, in dividends for Series A Preferred stock.
 
 Series
B Convertible Preferred Stock
 
 During
the nine months ended June 30, 2009, 10,999 shares of Series B Convertible
Preferred stock were converted into 10,999 shares of common stock. Additionally,
during the year ended September 30, 2008, 2,000 shares of Series B Convertible
Preferred stock were converted into 15,000 shares of common stock.  As
of June 30, 2009, there were no shares of Series B Preferred stock
outstanding.
 
 SecureAlert,
Inc. Preferred Stock
 
 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
$3,224,310 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 nine months ended June 30, 2009, RemoteMDx
recorded $20,449 in other income to reflect the change between the estimated and
actual contingency payments.
 
 (22)
              COMMON
      STOCK
  During
the nine months ended June 30, 2009, the Company issued 45,893,107 shares of
RemoteMDx common stock as follows:
  ·
              3,812,500
      shares were issued for services performed for a value of
      $868,875.
  ·
              150,000
      shares were issued to extend the purchase agreement between Midwest and
      the Company valued at $19,500.
  ·
              5,400,000
      shares were issued to settle lawsuits valued at
  $1,030,000.
  ·
              17,850,000
      shares were issued for net cash proceeds of
  $3,250,000.
  ·
              17,553,016
      shares were issued in connection with debt valued at
      $1,118,989.
  ·
              9,306
      shares were issued from the conversion of 19 shares of Series A Preferred
      stock.
  ·
              10,999
      shares were issued from the conversion of 10,999 shares of Series B
      Preferred stock.
  ·
              2,857,286
      shares were issued in connection with the purchase of Bishop Rock Software
      valued at $657,176.
  In
addition, during the nine months ended June 30, 2009, 1,750,000 shares were
cancelled that had been previously issued for services valued at
$2,712,500.
   Upon
shareholder approval, the Company amended the Articles of Incorporation of
RemoteMDx, Inc. and filed the amendment with the State of Utah Department of
Commerce Division of Corporation and Commercial Code on March 5, 2009 to
increase the authorized shares of common stock from 175,000,000 to
250,000,000.
 
 Common
Stock Options and Warrants
  As of
June 30, 2009, 21,633,831 of the 25,248,165 outstanding options and warrants
were vested with a weighted average exercise price of $1.16 per share. No stock
options and warrants were exercised during the nine months ended June 30,
2009.
  20
  The
Company currently has issued and outstanding options, warrants, convertible
notes and other instruments for the acquisition of the Company’s common stock in
excess of the available authorized but unissued shares of common stock provided
for under the Company’s Articles of Incorporation, as amended.  As a
consequence, in the event that the holders of such instruments requiring the
issuance, in the aggregate, of a number of shares of common stock that would,
when combined with the previously issued and outstanding common stock of the
Company exceed the authorized capital of the Company, seek to exercise their
rights to acquire shares under those instruments, the Company will be required
to increase the number of authorized shares or effect a reverse split of the
outstanding shares in order to provide sufficient shares for issuance under
those instruments.
 
 (23)
              SUBSEQUENT
      EVENTS
  Subsequent
to June 30, 2009, the Company entered into the following
transactions:
 
 1)
              The
      Company received $100,000 in cash from an entity in connection with the
      issuance of the Series A 15%
debentures.
 
 2)
              The
      Company entered into a promissory note in the amount of $1,000,000 payable
      on December 31, 2010.  The note bears interest at a rate of 15%
      per annum paid quarterly.  As additional consideration for the
      loan and as a settlement to resolve a registration-rights dispute between
      the investor and the Company, the Company granted 8,000,000 shares of
      common stock.
 
 (24)           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. On February 17, 2009 the United States Patent and Trademark Office
("USPTO") granted a request for reexamination of the '909 Patent.  The
USPTO is now in the process of reexamining the claims of the '909 Patent. 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.
 
 Frederico and Erica
Castellanos, v. Volu-Sol, Inc.  On August 15, 2008, plaintiffs
Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the
State of California, Los Angeles County.  The complaint names
twenty-four defendants and one hundred unnamed Doe Defendants.  The
complaint asserts claims for negligence, strict liability - failure to warn,
strict liability - design defect, fraudulent concealment, breach of implied
warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to
certain chemicals during the course of his employment.  One of the
original named defendants was identified as Logos Scientific, Inc.  On
September 4, 2008, Plaintiffs amended their complaint to substitute "Volu-Sol,
Inc. as successor in interest to Logos Scientific, Inc." for the previously
unnamed Doe 1.  Volu-Sol, Inc. was the original name of RemoteMDx,
Inc.  The Company intends to vigorously defend itself against
Castellanos’ claims.  The Company has not accrued any potential loss
as the probability of incurring a material loss is deemed remote by management,
after consultation with legal counsel.
  21
 
 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 June 30, 2009.
 
 Item
2.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations
 
 Forward-looking
Statements
 
 This
report contains information that constitutes “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995 and Section
21E of the Securities Exchange Act.  Generally, the statements
contained in this report that are not purely historical can be considered to be
“forward-looking statements.”  These statements represent our
expectations, hopes, beliefs, anticipations, commitments, intentions, and
strategies regarding the future.  They may be identified by the use of
words or phrases such as “believes,” “expects,” “intends,” “anticipates,”
“should,” “plans,” “estimates,” “potential,” and “will,” among
others.  Forward-looking statements include, but are not limited to,
statements contained in Management’s Discussion and Analysis of Financial
Condition and Results of Operations regarding our 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 those described from time to time in our future
reports filed with the Securities and Exchange Commission.
 
 The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the condensed consolidated
financial statements and notes thereto that are contained in this Report, as
well as Management’s Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended September 30,
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.
  22
 
 Critical
Accounting Policies
 
 In Notes
1 through 3 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.
 
 Recent
Developments
 
 Subsequent
to June 30, 2009, the Company entered into the following
transactions:
 
 1)
              The
      Company received $100,000 in cash from an entity in connection with the
      issuance of the Series A 15%
debentures.
 
 2)
              The
      Company entered into a promissory note in the amount of $1,000,000 payable
      on December 31, 2010.  The note bears interest at a rate of 15%
      per annum paid quarterly.  As additional consideration for the
      loan and as a settlement to resolve a registration-rights dispute between
      the investor and the Company, the Company granted 8,000,000 shares of
      common stock.
  Discontinued
Operations
 
 During
the nine months ended June 30, 2009, the Company divested its ownership interest
of the diagnostic stain business conducted by ActiveCare.  The Company
completed the divestiture of approximately 17% of the common stock in ActiveCare
during the fiscal second quarter ending March 31, 2009.  The Company’s
consolidated financial statements have been prepared to segregate operating
results of the discontinued operations for all periods presented. The summary of
net revenues and operating results from discontinued operations for the three
and nine months ended June 30, 2008, respectively are as follows:
  Three
      Months Ended June 30,
                        2008
                      
                      
                      Nine
      Months Ended June 30,
                        2008Net
      revenues
                      
                      $
                      122,721
                      
                      
                      $
                      467,148Net
      loss
                      
                      $
                      (340,348
                      )
                      
                      $
                      (1,261,353
                      )
 
 Results
of Continuing Operations
  Three months ended June 30, 2009,
compared to three months ended June 30, 2008
  Revenues
  For the
three months ended June 30, 2009, the Company had revenues from continuing
operations of $3,208,969 compared to $3,487,657 for the three months ended June
30, 2008, a decrease of $278,688.  Although total revenues decreased,
recurring revenues from monitoring services increased from $2,422,901 for the
three months ended June 30, 2008 to $3,133,518 for the three months ended June
30, 2009, a 29% increase. The Company’s efforts are directed to increase
recurring revenues from monitoring services and product sales are not the
primary focus of the Company’s business model. Product revenues decreased from
$1,064,756 for the three months ended June 30, 2008 to $75,451 for the three
months ended June 30, 2009. The operating results of our subsidiaries,
SecureAlert, Midwest and Court Programs, are described in the following
paragraphs.
  SecureAlert
had revenues of $1,564,638 during the three months ended June 30, 2009, compared
to revenues of $2,259,661 for the three months ended June 30, 2008, a decrease
of $695,023. Although total revenues decreased, recurring revenues from
monitoring services increased 24% from $1,216,968 for the three months ended
June 30, 2008 to $1,509,230 for the three months ended June 30, 2009. Product
revenues decreased from $1,042,693 for the three months ended June 30, 2008 to
$55,408 for the three months ended June 30, 2009. No SecureAlert customer
accounted for 10% or more of SecureAlert’s revenues during the three months
ended June 30, 2009; Electronic Monitoring Services accounted for $1,000,000
(44%) of SecureAlert revenues during the same period ending June 30,
2008.
  23
  Midwest
had revenues of $1,011,974 during the three months ended June 30, 2009, compared
to revenues of $708,919 during the same period in the prior year.  The
increase of $303,055 resulted primarily from increased monitoring of offender
tracking devices and probation services. During the three months ended June 30,
2009, the Rock County Sheriff accounted for $170,102, or approximately 17% of
Midwest’s revenues.  No other customer accounted for 10% or more on
Midwest’s revenues.
  Court
Programs had revenues of $632,357 during the three months ended June 30, 2009,
compared to revenues of $519,077 during the same period in the prior
year.  The increase of $113,280 resulted primarily from increased
monitoring of offender tracking devices and probation services. No Court Program
customer accounted for 10% or more of Court Program’s revenues during the three
months ended June 30, 2009 or 2008.
  On
January 14, 2009, the Company purchased Bishop Rock Software.  During
the three months ended June 30, 2009, Bishop Rock Software had no
revenue.
 
 Cost
of Revenues
 
 For the
three months ended June 30, 2009, cost of revenues for continuing operations
declined to $2,420,826 from $3,389,497 during the three months ended June 30,
2008, a decrease of $968,671.  The decrease in cost of revenues
resulted primarily from a reduction of device costs of $746,156 from units
sold.  Additionally, communication cost and monitoring center costs
decreased $204,387 and $131,460, respectively.  While focusing on cost
of revenues, the Company has been able to increase gross profit from $98,160, or
3% of revenues for the three months ended June 30, 2008 to $788,143, or 25% of
revenues for the three months ended June 30, 2009. Improving gross profit has
been achieved primarily through reduced communication and direct labor cost
initiatives and software enhancements.
 
 SecureAlert’s
cost of revenues for the three months ended June 30, 2009 was $1,484,591, or 95%
of revenues.  The largest components of these costs were communication
costs of $543,293, monitoring center costs of $352,443, amortization of
$383,722, freight of $70,401, and commissions of $66,498. During the three
months ended June 30, 2008, cost of revenues was $2,683,100 or 119% of revenues
and the principal components included device costs of $775,047, communication
costs of $747,680, monitoring center costs of $483,903, amortization of
$141,765, commissions of $134,250, warranty expense of $105,742, and other
TrackerPAL costs of $111,599.
 
 Midwest’s
cost of revenues totaled $654,690, or 65% of revenues for the three months ended
June 30, 2009, compared to $354,796 for the same period during
2008.  Court Program’s cost of revenues totaled $281,545, or 45% of
revenues for the three months ended June 30, 2009, compared to $351,601 for the
three months ended June 30, 2008.
 
 Research
and Development Expenses
 
 During
the three months ended June 30, 2009 and 2008, research and development expense
from continuing operations was $431,201 and $646,335, 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 June 30, 2009, selling, general and administrative
expenses from continuing operations were $3,178,333 compared to $16,597,727
during the three months ended June 30, 2008.  The improvement of
$13,419,394 is primarily the result of decreases in the following expenses:
consulting expense of $12,036,507 related to stock and warrant issuances for
services rendered to the Company, travel of $149,422, and payroll and related
taxes of $143,372.
  24
 
 Interest
Expense
 
 During
the three months ended June 30, 2009 and 2008, interest expense related to
continuing operations totaled $1,255,103 and $389,838, respectively. The
increase of $865,265 resulted primarily from non-cash expense of $1,065,373 from
the accretion on debt instruments and the issuance of stock and warrants in
connection with debt obligations.
 
 Nine
months ended June 30, 2009, compared to nine months ended June 30,
2008
 
 Revenues
 
 For the
nine months ended June 30, 2009, the Company had revenues from continuing
operations of $9,478,981 compared to $9,445,390 for the nine months ended June
30, 2008, an increase of $33,591. Although revenues increased slightly,
recurring revenues from monitoring services in the nine months ended June 30,
2009 increased 24% to $8,985,386 compared to $7,272,006 for the nine months
ended June 30, 2008.  The Company’s efforts are directed to increase
recurring revenues from monitoring services and product sales are not the
primary focus of the Company’s business model. Product revenues decreased from
$2,173,384 for the nine months ended June 30, 2008 to $493,595 for the nine
months ended June 30, 2009.  The operating results of our
subsidiaries, SecureAlert, Midwest and Court Programs, are described in the
following paragraphs.
 
 SecureAlert
had revenues of $4,513,449 during the nine months ended June 30, 2009, compared
to revenues of $6,287,762 for the nine months ended June 30, 2008, a decrease of
$1,774,313. Although total revenues decreased, recurring revenues from
monitoring services increased 5% to $4,377,292 in the nine months ended June 30,
2009 compared to $4,158,729 for the nine months ended June 30, 2008. Product
revenues decreased from $2,129,033 for the nine months ended June 30, 2008 to
$136,157 for the nine months ended June 30, 2009.  No SecureAlert
customer accounted for 10% or more of SecureAlert’s revenues during the nine
months ended June 30, 2009; Electronic Monitoring Services accounted for
$2,000,000 (32%) and QuestGuard accounted for $826,160 (13%) of SecureAlert
revenues during the same period ending June 30, 2008.
 
 Midwest’s
revenues for the nine months ended June 30, 2009 were $3,157,967.  The
primary components of Midwest’s revenues were monitoring and probation services
of $2,800,529 and prison equipment sales of $357,438.  On December 1,
2007, the Company acquired Midwest. For the seven months ended June 30, 2008,
Midwest had revenues of $1,866,147, including $1,821,796 from the monitoring of
offender tracking devices and $44,351 from the sale of
devices.  During the nine months ended June 30, 2009, Rock County
Sheriff accounted for $490,292, or 16% and St. Peter Regional Treatment Center
accounted for $333,000, or 11%, and of Midwest’s revenues.  No other
customer accounted for 10% or more on Midwest’s revenues.
 
 Court
Program’s revenues for the nine months ended June 30, 2009 were $1,804,155,
derived from monitoring and probation services. On December 1, 2007, the Company
acquired Court Programs. For the seven months ended June 30, 2008, Court
Programs had revenues of $1,291,481. No Court Program customer accounted for 10%
or more of Court Program’s revenues during the nine months ended June 30, 2009
or 2008.
 
 On
January 14, 2009, the Company purchased Bishop Rock Software.  During
the period following the acquisition through June 30, 2009, revenues from Bishop
Rock Software were $3,410.
 
 Cost
of Revenues
 
 For the
nine months ended June 30, 2009, cost of revenues from continuing operations was
$8,295,540 compared to $9,337,460 during the nine months ended June 30, 2008, a
decrease of $1,041,920.  The decrease in cost of revenues resulted
primarily from a reduction of device costs of $1,465,984 from units
sold.  Additionally, communication cost and monitoring center costs
decreased $177,342 and $214,653, respectively.  While focusing on cost
of revenues, the Company has been able to increase gross profit from $107,930,
or 1% of revenues for the nine months ended June 30, 2008, to $1,183,441, or 12%
of revenues for the nine months ended June 30, 2009. Improving gross profit has
been achieved primarily through reduced communication and direct labor cost
initiatives and software enhancements.
  25
 
 SecureAlert's
cost of revenues totaled $5,196,592, or 115%, of SecureAlert's revenues during
the nine months ended June 30, 2009, compared to $7,585,683, or 121%, of
SecureAlert’s revenues during the nine months ended June 30,
2008.  The primary components of these costs incurred during the nine
months ended June 30, 2009 were communication costs of $1,935,524, monitoring
center costs of $1,251,336, amortization of $905,084, utilization rental fees of
$336,562, shipping of $244,644 and commissions of $240,096, device costs of
$36,916, as well as other TrackerPAL costs of $246,430.  The primary
components of these costs incurred during the nine months ended June 30, 2008
included communication costs of $2,112,866, device costs of $1,502,900,
monitoring center costs of $1,465,989, amortization of $628,547, commissions of
$357,399, impairment of TrackerPAL devices of $570,948, freight of $242,688,
warranty reserve expense of $105,742, lease equipment of $54,724, location costs
of $38,298, and other TrackerPAL costs of $505,582.
 
 Midwest’s
cost of revenues totaled $2,051,951 for the nine months ended June 30, 2009,
with the principal components being monitoring and probation services of
$1,842,557 and prison equipment sales of $209,394. On December 1, 2007, the
Company acquired Midwest, resulting in cost of revenues of $1,074,264 for the
seven months ended June 30, 2008.
 
 Court
Programs’ cost of revenues totaled $1,046,997 for the nine months ended June 30,
2009 resulting from monitoring and probation services.  On December 1,
2007, the Company acquired Court Programs, resulting in cost of revenues of
$677,513 for the seven months ended June 30, 2008.
 
 Research
and Development Expenses
 
 During
the nine months ended June 30, 2009 and 2008, research and development expense
from continuing operations was $1,277,102 and  $4,359,715,
respectively, and consisted primarily of expenses associated with the
development of SecureAlert’s TrackerPAL device and related services. During the
nine months ended June 30, 2008, the primary component of research and
development expense was $2,555,285 for the issuance of 815,000 shares of common
stock (valued at an average of $3.14 per share) for software and engineering
associated with the development of the TrackerPAL device.
 
 Selling,
General and Administrative Expenses
 
 During
the nine months ended June 30, 2009, selling, general and administrative
expenses related to continuing operations were $11,078,059 compared to
$28,034,657 during the nine months ended June 30, 2008.  The decrease
in selling, general and administrative expense of $16,956,598 was the result
primarily of reductions in consulting expense of $15,870,448 and travel expense
of $1,215,266, offset by increases in lease expense of $153,526.
 
 Interest
Expense
 
 During
the nine months ended June 30, 2009, interest expense related to continuing
operations totaled $2,790,006 compared to $1,163,586 during the nine months
ended June 30, 2008. The increase of $1,626,420 resulted primarily from the
accretion on debt instruments and the issuance of stock and warrants in
connection with debt obligations.
 
 Liquidity
and Capital Resources
 
 The
Company is presently unable to finance its business solely from cash flows from
operating activities. During the nine months ended June 30, 2009, the Company
financed its business primarily from the issuance of debt and the issuance of
stock providing cash proceeds of $8,739,840.
 
 As of
June 30, 2009, the Company had unrestricted cash of $1,592,167 and working
capital deficit of $15,828,902, compared to unrestricted cash of $2,782,953 and
working capital deficit of $6,822,276 as of September 30, 2008.  For
the nine months ended June 30, 2009, the Company's operating activities used
cash of $6,705,204, compared to $4,926,222 of cash used in operating activities
for the nine months ended June 30, 2008.
 
 The
Company used cash of $1,454,508 for investing activities during the nine months
ended June 30, 2009, compared to $679,851 of cash used in investing activities
in the nine months ended June 30, 2008.
  26
 
 The
Company's financing activities for the nine months ended June 30, 2009, provided
cash of $6,968,926 compared to $2,317,772 for the nine months ended June 30,
2008. For the nine months ended June 30, 2009, the Company had net proceeds of
$3,902,494 from the issuance of debt instruments, $3,250,000 from the sale of
common stock, $1,500,000 from proceeds on related-party notes, and net advances
from the line of credit of $87,346.  Cash decreased by $453,766 due to
payments on notes payable and $1,317,148 in net payments on the related-party
line of credit and note.  Cash provided by financing activities was
used to fund operating activities and upgrade monitoring equipment.
 
 The
Company incurred a net loss of $14,037,457 for the nine months ended June 30,
2009 and a loss from operations of $11,171,720. In addition, the Company has an
accumulated deficit of $196,721,453 as of June 30, 2009.  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 raise substantial doubt about
the Company's ability to continue as a going concern. The condensed consolidated
financial statements included in this Report do not include any adjustments that
may result from the outcome of this uncertainty.  The Company’s plans
with respect to this uncertainty are to increase leases of the TrackerPAL
product and to increase monitoring services revenues.  There can be no
assurance that revenues will increase rapidly enough to deliver profitable
operating results and pay 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.  Revenues from sources outside the United States
represented 0% and 10% of our total revenues for the nine months ended June 30,
2009 and 2008, respectively.  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.
 
 Interest Rate
Risks.  As of June 30, 2009, we had $20,110 of borrowings
outstanding on lines of credit with two banks with a weighted average interest
rate of 9.24%.  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.
  27
 
 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.
 
 ·
              Financial
      Reporting Process – We did not maintain an effective financial
      reporting process to prepare financial statements in accordance with
      generally accepted accounting principles. Specifically, we initially
      failed to appropriately account for and disclose the effects of issuing
      derivatives.
 
 Accordingly,
management has determined the Company's internal control over financial
reporting as of June 30, 2009 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.
  28
  
 PART
II.   OTHER INFORMATION
 
 Item
1.    Legal Proceedings
 
 Lawsuits
Settled
 
 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 Company settled this 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 have piggyback
registration rights and are protected against any potential reverse stock
splits.  The Company executed the settlement agreement with SGI in
February 2009.
 
 Thomas Natale v.
RemoteMDx.  This 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.  In March 2009, the Company settled this lawsuit for $50,000 in
cash and 2,000,000 shares of RemoteMDx common stock.
 
 Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds
 
 During
the nine months ended June 30, 2009, the Company sold the following shares of
RemoteMDx common stock without registration under the Securities Act of 1933
(the “Securities Act”)
 
 ·
              12,500,000
      shares were sold in May 2009 for net cash proceeds of $2,250,000. The
      shares were issued to the licensee in connection with a distribution and
      licensing agreement entered into with a European corporation in a
      transaction exempt from registration under Section 4(2) of the Securities
      Act.
 
 ·
              5,000,000
      shares were sold in March 2009 for net cash proceeds of $900,000. The
      shares were issued to an accredited investor in a transaction exempt from
      registration under Section 4(2) of the Securities
  Act.
 
 ·
              350,000
      shares were sold in December 2008 for net cash proceeds of $100,000. The
      shares were issued to an accredited investor in a transaction exempt from
      registration under Section 4(2) of the Securities
  Act.
 
 ·
              17,553,016
      shares were issued in connection with debt financings in transactions
      exempt from registration under Section 4(2) of the Securities Act and
      rules promulgated thereunder as
follows:
 
 o
              4,000,000
      shares were sold on various dates between December 2008 and June 2009 to
      eight purchasers of the Company’s Series A 15% Debentures in a private
      placement of the Debentures and shares.  The offer and sale of
      the Debentures and shares were not registered under the Securities Act in
      reliance upon the exemption from registration provided by Section 4(2) of
      the Securities Act. The purchasers of these securities were accredited
      investors.
 
 o
              100,000
      shares were issued to Mr. Derrick in connection with a loan made to the
      Company by Mr. Derrick in November 2008. Mr. Derrick is an executive
      officer and director of the
Company.
 
 o
              106,750
      shares were issued to a consultant on June 4, 2009 in partial satisfaction
      of consulting fees owed to him.
 
 o
              3,549,630
      shares were issued between May and July 2009 to five accredited investors
      pursuant to senior secured convertible notes to payoff bank line of
      credit.
 
 o
              9,796,636
      shares were issued in February to an accredited investor to compensate for
      a decline in the Company’s share price following the investor’s initial
      investment in September 2008.
  29
  Item
4.    Submission of Matters to a Vote of Security
Holders
 
 The
Company amended its Articles of Incorporation and filed the amendment with the
State of Utah Department of Commerce Division of Corporation and Commercial Code
on March 5, 2009 to increase the number of authorized shares of common stock
from 175,000,000 to 250,000,000.  The amendment was approved by the
consent of the shareholders of the Company.  Shareholders holding a
total of 92,775,909 shares (approximately 58% of the total issued and
outstanding shares of the Company entitled to vote on the matter) submitted
written consents approving the amendment. The consents were obtained without a
meeting pursuant to a proxy solicitation distributed by the
Company.
 
 Item
6.    EXHIBITS
 
 (a)           Exhibits
Required by Item 601 of Regulation S-K
 
 Exhibit
      Number
                    Title of
      Document3(i)(1)
                    Articles
      of Incorporation (incorporated by reference to the Company's Registration
      Statement and Amendments thereto on Form 10-SB, effective December 1,
      1997).3(i)(2)
                    Amendment
      to Articles of Incorporation for Change of Name (previously filed as
      Exhibit on Form 10-KSB for the year ended September 30,
    2001)3(i)(3)
                    Amendment
      to Articles of Incorporation Amending Rights and Preferences of Series A
      Preferred Stock (previously filed as Exhibit on Form 10-KSB for the year
      ended September 30, 2001)3(i)(4)
                    Amendment
      to Articles of Incorporation Adopting Designation of Rights and
      Preferences of Series B Preferred Stock (previously filed as Exhibit on
      Form 10-QSB for the six months ended March 31, 2002)3(i)(5)
                    Certificate
      of Amendment to the Designation of Rights and Preferences Related to
      Series A 10% Cumulative Convertible Preferred Stock of RemoteMDx, Inc.
      (incorporated by reference to the Company’s annual report on Form 10-KSB
      for the year ended September 30, 2001)3(i)(6)
                    Certificate
      of Amendment to the Designation of Rights and Preferences Related to
      Series C 8% Convertible Preferred Stock of RemoteMDx, Inc. (incorporated
      by reference to the Company’s Current Report on Form 8-K, filed with the
      Commission on March 24, 2006)3(i)(7)
                    Articles
      of Amendment to Articles of Incorporation filed July 12, 2006 (previously
      filed as exhibits to the Company’s current report on Form 8-K filed July
      18, 2006, and incorporated herein by reference).3(i)(8)
                    Articles
      of Amendment to the Fourth Amended and Restated Designation of Right and
      Preferences of Series A 10% Convertible Non-Voting Preferred Stock of
      RemoteMDx, Inc. (previously filed as Exhibit on Form 10-QSB for the nine
      months ended June 30, 2007, filed in August 2007).3(i)(9)
                    Articles
      of Amendment to the Designation of Right and Preferences of Series A
      Convertible Redeemable Non-Voting Preferred Stock of SecureAlert, Inc.
      (previously filed as Exhibit on Form 10-QSB for the nine months ended June
      30, 2007, filed in August 2007).3(ii)
                    Bylaws
      (incorporated by reference to the Company’s Registration Statement on Form
      10-SB, effective December 1, 1997)4.01
                    2006
      Equity Incentive Award Plan (previously filed in August 2006 the Form
      10-QSB for the nine months ended June 30, 2006)10.01
                    Distribution
      and Separation Agreement (incorporated by reference to 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).
  30
 
 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).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).
  31
 
 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
                                Distribution
      and License Agreement between euromicron AG, a German corporation, and the
      Company, dated May 28, 200931(i)
                                Certification of 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
                                Certifications
      under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
      1350)
 
  32
  SIGNATURES
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 REMOTEMDX,
      INC.Date:
      August 17, 2009
                By:
                /s/
      David G. DerrickDavid
      G. Derrick,Chief
      Executive Officer(Principal
      Executive Officer)Date:
      August 17, 2009
                By:
                /s/
      Michael G. ActonMichael
      G. Acton,Chief
      Financial Officer(Principal
      Financial Officer)Date:
      August 17, 2009
                By:
                /s/
      Chad D. OlsenChad
      D. Olsen,Principal
      Accounting Officer
 
 
 
 
 33