UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 20082009
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)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 No.)
 
150 West Civic Center Drive, Suite 400, Sandy, Utah 84070
(Address of principal executive offices, Zip Code)
 
(801) 451-6141
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o      No x 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No x 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitiondefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o  
 
Accelerated filer x
Non-accelerated filer o   
 
Non-accelerated filer o
Smaller reporting company ox   

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

There were 159,231,260211,765,988 shares of the registrant's common stock outstanding as of December 22, 2008.29, 2009. The aggregate market value of common stock held by non-affiliates of the registrant as of December 22, 200829, 2009 was approximately $46,708,276.$28,530,000.

 
 
 
 
REMOTEMDX, INC.
 
FORM 10-K
 
For the Fiscal Year Ended September 30, 20082009
 
INDEX
 
  
Page
  
Part I
  
Item 1Business3
Item 1ARisk Factors10
Item 1BUnresolved Staff Comments1511
Item 2Properties15
Item 3Legal Proceedings1516
Item 4Submission of Matters to a Vote of Security Holders16
  
Part II
  
Part II
��
Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
17
Item 6Selected Financial Data20
Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationOperations
22
Item 7AQuantitative and Qualitative Disclosures About Market Risk3521
Item 8Financial Statements and Supplementary Data3530
Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
35
30
Item 9A9A(T)Controls and Procedures3530
Item 9BOther Information3931
  
Part III
  
Item 10Directors, Executive Officers and Corporate Governance3931
Item 11Executive Compensation4234
Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
48
40
Item 13Certain Relationships and Related Transactions, and Director Independence5041
Item 14Principal Accounting Fees and Services5243
  
Part IV
  
Item 15Consolidated Financial Statements and ExhibitsExhibits, Financial Statement Schedules44
 53
Signatures
  
 
        The statements contained in this Report on Form 10-K that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future, and include, but are not limited to the risks and uncertainties outlined in item 1A Risk Factors, and item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in forward-looking statements within this Report.

 
2
 
 
PART I
 
Item 1.    Business
 
The statements contained in this Report on Form 10-K that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future, and include, but are not limited to the risks and uncertainties outlined in Item 1A “Risk Factors”, and Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations.” Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in forward-looking statements within this Report.
General

Unless the context otherwise requires, all references in this report to "registrant," "we," "us," "our," "RemoteMDx" or the "Company" refer to RemoteMDx, Inc., a Utah corporation and its subsidiary corporations.

RemoteMDx Inc. (“RemoteMDx” or the “Company”) markets and deployssubsidiaries market and deploy offender management programs, combining patented GPS (Global Positioning System) tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and case management services.  Our vision is to be the market leader for delivering offender management solutions that integrate interaction technologies.  We believe that we currently deliver the only offender management technology which integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single device, deployable on offenders worldwide.  Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an accountable opportunity to be “free from prison”,prison,” while providing for greater public safety at a lower cost to incarceration or traditional resource-intensive alternatives.

TrackerPAL I &TrackerPAL™ II and TrackerPAL™ IIe (“enhanced”), now manufactured in the USA – The TrackerPAL™ portfolio of products, e-Arrest beaconsBeacons and monitoring services are designed to create “Jails“Jails without Walls,” customizable by offender types (e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, juvenile offenders, etc.).  Additionally, our proprietary software and device firmware support the dynamic accommodation of agency-established monitoring protocols, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions.  TrackerPALTrackerPAL™ IIe is designed for federal, state and local agencies to provide location tracking of select individuals in the criminal justice system.  The TrackerPALTrackerPAL™ IIe device fastens to the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can only be adjusted or removed without detection by a supervising officer through services provided by the Company’sour SecureAlert Monitoring Center (or other monitoring centers).  The Company’sThis monitoring and intervention center acts as an important link between the offender and the supervising officer as monitoring centerintervention specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols.  An intelligent device with integrated computer circuitry and constructed from case-hardened plastics, the TrackerPALTrackerPAL™ IIe unit promptly notifies the monitoring center if any attempt is made to breach protocols or to remove or otherwise tamper with the device or optical strap housing. 

According to the Bureau of Justice Statistics (2007)annual report March 2009 (available online at http://bjs.ojp.usdoj.gov/), it is currently estimated that over 2.3 million inmates, or one in every 131 U.S. residents, were held in custody in state or federal prisons or in local jails. Nearly 5.1 million adults were under community supervision at year-end 2008—the equivalent of about 1 in every 45 adults in the United States.  Probationers (4,270,917) represented the majority (84%) of the community supervision population in 2008; parolees (828,169) accounted for a smaller share (16%).  Sadly, approximately 7,235,7287.4 million people are now either incarcerated (State or Federal prisons or local jails) or on parole or on probation.  The average cost of incarcerating an inmate ranges from $65 to $175 (plus) per day dependent upon facility type, security level, amenities and jurisdiction.  AndBut this annualized “equivalency” number pales in comparison to actual populations. The Bureau of Justice Statistics also reports that over one-third of all inmates held in custody at midyear 2008 were in local jails.  More than half (52%) were housed in the 180 largest jail facilities, with average daily populations of 1,000 inmates or more.  Overall, an estimated 13.6 million inmates were admitted to local jails during the 12-month period ending June 30, 2008.  Statistics for 2009 have not been published, but we believe this number continues to grow and to push capacity and resource levels.
Due to ever-growing economic pressures, it is widely recognized that these costs are unsustainable with ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas. Thus, electronic monitoring alternatives to incarceration for low and moderate risk offenders (adult and juveniles), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments are now strongly encouraged and seriously considered by legislative and judicial branches of government in many jurisdictions.  For between 10% to 15% of the traditional costs of incarceration or for roughly (1/3) one-third the Company’s TrackerPALvariable costs (inmate daily food, laundry, uniforms, medical, guard overtime, etc.), our TrackerPAL™ monitoring and intervention center and patented TrackerPAL™ IIe devices can monitor offenders continuously, providing real-time location tracking, interactive voice access and intervention-biasedintervention-based contact, thus reducing the potential for subsequent or repeat offenses.offenses (recidivism).

Many
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The ongoing budget crisis and the “Great Recession” have forced many jurisdictions are alsoto embrace or reconsider embracing “offender pay”, “parent pay” and/or “partial pay” programs, and in doing so, shifting the burden of the tracking and monitoring costs in whole or part to the offender directly, defraying the cost to the public.  We estimate that approximately 20%30% of our gross revenues (up from 20% in 2008) come from offender payments directly under court order and threat of re-incarceration for non-payment; the majority of these accounts remain in compliance because of the severe consequences of non-payment.  This aspect of our business is growing significantly and we expect that it will outpace traditional tax-payer obligated payment programs.

Strategically, and in continued support of ever-growing rehabilitation and re-socialization efforts, the Company has adoptedwe embrace a broader services charter, necessary to support and encourage many evolving rehabilitation initiatives.  Our “C.A.R.E.” programs support Corrections and Accountability objectives in concert with Rehabilitation and Empowerment agendas.  Specifically, our technology facilitates a stringent protocol enforcement capability, incorporating restricted movement provisions, coupled with enablement of positive reinforcement communications, all in support of social worker interactions, ongoing ministry options and proactive access by authorized counselors and/or sponsors.  We believe that our programs are uniquely positioned to allow for regular, frequent, and positive interactions and daily affirmations with offenders, as they strive to again become responsible and contributing members of society, while living within the virtual “electronic fence” boundaries established through our proprietary technologies.  As it stands, according to the Bureau of Justice Statistics’ report on recidivism, 65% of offenders recommit a violation within three years of release and re-entry (recidivism), which we believe can be dramatically reduced through the utilization of monitoring services, intervention and interaction technologies.

TheCritically, we must focus on a reduction in recidivism and leveraging our technologies and services to provide frameworks and foundations for stopping repeat and new offenses of those offenders on our programs.  For example, according to the Bureau of Justice Statistics’ report on recidivism, of the 272,111 persons released from prisons in 15 states in 1994, an estimated 67.5% were rearrested for a felony or serious misdemeanor within 3 years, 46.9% were reconvicted, and 25.4% resentenced to prison for a new crime. Incredibly, after 15 years, the 272,111 offenders discharged in 1994 accounted for nearly 4,877,000 arrest charges over their recorded careers.  Society simply cannot sustain these financial costs or the victimization or re-victimization of the public, which is why our programs are strategically and tactically positioned to impact this number measurably.
As identified, the offender marketplace today provides significant opportunity for growth, as local agencies, county governments and state legislators are confronted with ever-growing offender populations, pre-trial overcrowding, resource limitations and economic crises.  Importantly, the company iswe are strategically positioned to capitalize on these public sector challenges, while enhancing reduced resourcechallenges. We offer offender service offerings and tools to provide enhanced effectiveness and coverage through our offender offerings, which act asfor agencies with reduced resources. This results in a force multiplier for impaired agencies.effect that allows smaller or understaffed agencies to grow while reducing the number of offenders using valuable resources. We are also attracting new customers to the industry, who historically have only leveraged now obsolete “home arrest” technologies, and are now seeking GPS tracking and fulltime monitoring alternatives.  Additionally, we are very encouraged by the interest and expansion of many rehabilitation initiatives, which will avail themselves toof our program offerings in a mutual pursuit to reduce recidivism, encourage re-socialization and to facilitate the earlier release of qualified candidates.

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During fiscal year 2008 and2009, in response to these evolving market factors, the Companywe restructured and right-sized our direct sales force throughout the United States, while embracing an expanded and growing distributorship model domestically and internationally.  We believe that this will help to ensure localized market knowledge, relationship leverage and enhanced ability to respond effectively to requests for sole-sourced and/or competitive proposals. This model has also allowed us to better focus on expanded market sectors, judicial branch contacts and legislature interfaces in ongoing efforts to work from both the bottom up at agencies, as well as from the top down in county and state governments, securing multi-level commitments to embed our programs into ongoing probation, parole and policing efforts.

We also completed acquisitionshold a majority interest in two subsidiaries, which we believe will enable us to increase our revenues in target markets.  In addition, we extended the exercise period of our options to acquire the remaining shares of both entities into 2010.  Although acquisitions require the commitment of capital, both to consummate the acquisition as well as to integrate the acquired businesses, we believe that we will be able to integrate these entities and increase our revenues, although thererevenues.  There can be no guarantee that revenues will increase as projected or anticipated.

The assimilation of these acquired entities is subject to uncertainties and risks.  There can be no assurance that we will successfully integrate these companies into our operations without incurring significant unanticipated costs or experiencing unexpected operational problems.  Some of the potential risks include:

 ·Management of expanded inventory base.base
 ·Control of operations that are more geographically diverse than our prior operations.operations
 ·Account collections of added customer accounts.accounts
 ·The need to secure additional operating and working capital.capital
 ·The ability to reduce overhead costs and streamline operations.operations
 ·Potential conflicts arising from the distribution of products or services from providers who are or may beour competitors of the Company.
 ·Availability of trained support personnel.personnel

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In summary, during the fiscal year ended September 30, 2008,2009, we were case managing and/or electronically monitoring approximately 12,70014,000 offenders domestically, while also expanding our sales capabilities and sold 4,000 TrackerPAL devices internationally, with recurring daily revenues expected to begin during the fiscal quarter ending March 31, 2009.initiatives internationally.  We have worked to build our domestic and international direct sales force, while solidifying distributors and to identify new markets and opportunities.local business partners opportunistically.  We have entered into monitoring agreements with approximately 400450 law enforcement, judiciaries and bail bond agencies throughout the United States.  We acquiredcontinue to hold a majority interest in two related businesses to further our efforts to increase our revenues and market development and we now maintain 10 expanding12 expanded distributorships. Although there can be no guarantee that we will be able to continue these efforts or be able to implement our business plan as anticipated, management believes that the Company iswe are in a good position to move forward and to continue the growth of the business and to take advantage of the market opportunities open to it.us.

Our Strategy
 
Our strategy is to empower law enforcement, corrections and rehabilitation professionals with sole-sourced offender management programs, whichsolutions that integrate reliable interaction technologies in support of intervention and re-socialization initiatives.  We will grant offenders accountable opportunity, while providing for greater public safety at a lower cost. cost to incarceration or other service offerings.

We will accomplish our strategy through the “value-driven”, yet profitable deployment of our SecureAlerta portfolio of proprietary and non-proprietary GPS/RF Tracking, Intervention Monitoringand/or alcohol and/or drug tracking, real-time monitoring and Rehabilitation Technologiesintervention products and services to corrections, probation, law enforcement and rehabilitation services agenciespersonnel worldwide, all in support of offender reformation and re-socialization initiatives.

Our exclusive portfolio of products and services balance the need to dynamically track and monitor offenders with the opportunity to positively encourage and transform offenders, thus reducing recidivism rates through our proprietary C.A.R.E.™ (Correction, Accountability, Rehabilitation, Empowerment) programs and client-adapted initiatives.

We will continue to develop and deploy adaptive, cost-effective and interactive technology products and services, which meet the ever-changing needs of our clients, while providing value-driven and enhanced public safety at a lower cost. safety.

Importantly, while there are no ongoing warranties of our business model and no assurances of our capabilities to continue to raise necessary expansion capital, we will endeavor to ensure our ongoing viability through diligent, margin-centric imperatives and operational efficiency gains through prioritized management initiatives.

Background

RemoteMDx was originally formed to manufacture and market medical diagnostic stains, solutions and related equipment.  Through the acquisition of SecureAlert, Inc. (“SecureAlert”) in July 2001, the Companywe expanded itsour product sales and monitoring services related to the Personal Emergency Response Systems (“PERS”).

In 2006, the Companywe developed the GPS tracking technology and monitoring business currently conducted by our subsidiary SecureAlert.  SecureAlert’s business involves manufacturing, distributing, and monitoring mobile emergency and interactive GPS tracking products, worn on the body, that focus on the defendant and offender tracking, monitoring and monitoring market.

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intervention marketplace.

To complement our own offerings and obtainto drive additional means to captureof capturing a growth position in the offender management market, in JanuaryDecember of 2008,2007, we completed the acquisition ofacquired a majority interest in the Court Programs Inc. group of companies (“Court Programs”), headquartered in Gulfport, Mississippi;Mississippi and Midwest Monitoring and Surveillance, Inc. (“Midwest Monitoring”) which is based in Fairmont, Minnesota.  These acquisitions brought the Companyus solid business relationships with ongoing revenue streams, as well as the possibility of expanding SecureAlert’s presence into the existing accounts of the acquired companies.  Furthermore, they brought business processes and practices in the area of case management, offender pay programs and attendant services that could be leveraged and integrated into SecureAlert.SecureAlert, which remains an ongoing initiative.

In order to focus on such integration and leverage potential, during the fiscal year ended September 30, 2008 we divested ourselves of our majority ownership interest of the diagnostic stain business conducted by our former subsidiary Volu-Sol Reagents Corporation (“Volu-Sol”).  We are in the process of completing the divestiture and expect to complete the distribution to RemoteMDx shareholders of our remaining interest (approximately 17% of the common stock) in Volu-Sol during the fiscal quarter ending March 31, 2009.
Marketing

According to the latest figures from the United States Department of Justice, Bureau of Justice Statistics (2007), over 7.2 million people were in prison, in jail, or on probation or parole in the United States.  This represents approximately 3.2% of the U.S. population or about 1 in every 31 adults.  Of these, approximately 5 million adult men and women are on supervised probation or parole and a total of 798,202 adult men and women are on parole or mandatory conditional release following a prison term.  These numbers are expected to continue to grow as state and county budget deficits hinder the development and staffing of new prisons and jails, which are already under significant pressure.  We expect that this pressure will not be relieved any time soon with the deepening economic crisis in the United States.  The tandem issues of reduced budgets and the increasing number of overcrowded jails and prisons should drive governmental agencies to technology solutions, including those offered by the Company.

The Company has worked to strengthen its foundation to meet the increased demand anticipated by the above market drivers.  In addition to the acquisition and integration of Court Programs and Midwest Monitoring and the divesture of Volu-Sol to tighten industry focus, through SecureAlert the Company introduced its second generation TrackerPAL device, TrackerPAL IITM, and the eArrest BeaconTM.  TrackerPAL II expands upon the best features of the predecessor TrackerPAL I.  It maintains a single unit design which integrates GPS, expanded waterproofing, 95-decibal siren, cell-based data transmission, and industry-unique cell-based voice capability.  New features include the capability to interface with the eArrest Beacon to provide indoor tracking, and water-proof as opposed to water-resistant design.

As with TrackerPAL I, TrackerPAL II provides the ability to electronically track a wearer’s location by transmitting the device’s location to the Company’s Monitoring Center as it receives GPS signals and transmits that information through its cellular technology.  However, a device’s ability to receive GPS signals is not always possible if it is in a location that impedes those signals, such as a high-rise apartment building or a concrete-wall workplace.  It is with these situations in mind that the eArrest Beacon was developed.  For these situations, TrackerPAL II can be combined with the eArrest Beacon, to establish a radio frequency tether.  So long as the wearer is within range of an eArrest Beacon when he or she is scheduled to be, the Monitoring Center is able to receive and record that information, and no alarm is created.  However, if the wearer goes out of range, an alarm is created and the Monitoring Center responds according to pre-established protocols.  In addition, the Beacon can be associated with multiple Tracker PAL II devices allowing for utilization in settings such as half-way houses, detention centers and prisons; providing the ability to monitor the presence of multiple individuals simultaneously.

Under our current business model, the majority of customers lease our TrackerPAL devices and eArrest Beacons. The equipment is leased under a contractual arrangement (usually at least one year) which may effectively be cancelled at any time by either party with 30 days notice.  We may also pay a monthly fee to distributors for each monitoring contract originated through that distributor.

In addition to this “agency pay” model, our subsidiaries Court Programs and Midwest Monitoring brought “offender pay” programs to the Company.  This model was integrated into SecureAlert.  A benefit of offender pay is that it calls for payment in advance of service, which improves cash flow.  Also, given the budget constraints discussed, it is anticipated that the demand for offender pay programs will continue to grow and the Company has positioned itself well to address this increased requirement.    

 
5
 

Marketing

The sales momentum which started with the release of TrackerPAL™ and the eArrest Beacon in 2008 continued in 2009.  As anticipated, the number of agencies facing budget constraints, while at the same time being required to take on increased case loads, grew.  These conflicting demands fueled the need of many agencies to look at GPS monitoring as a solution.

A particularly strong sector was juvenile corrections, including juvenile probation departments and juvenile detention centers.  It is widely recognized that incarcerating juveniles can start a life-long pattern of recidivism.  This is created by first time and minor crime offenders’ affiliation with more seasoned offenders who have the means and contacts to encourage and enable repeat crimes.  Those in charge of juvenile law enforcement and corrections recognize that in many cases, keeping youth at home and in school is a better option.  However, with reduced staff and increased case loads, probation officers and other support staff find it harder, if not impossible, to be effective.  Many are recognizing that the visibility that GPS monitoring provides can be a powerful solution.  Moreover, TrackerPAL’s unique two and three way on-device calling feature takes that visibility to the next level by enabling supervisory staff to communicate with the user wearing the device, any place, any time.  For many offenders, this feature is the only phone communication available to them, not being able to afford either land or cell phones and without the TrackerPAL™, officers would have far less contact with their offenders.  Also, the incarceration of juveniles costs considerably more than adult incarceration – exceeding $500 per day in some areas – so putting offenders on GPS monitoring instead of incarceration makes financial sense as well.  During the fiscal year ended September 30, 2009, we acquired several new juvenile corrections clients.
As critical as our Intervention Active Monitoring is for monitoring high risk and other offenders that require intensive monitoring, less intense monitoring levels may be more appropriate to address lower risk offenders and budget constraints.  To address this, we introduced two new service offerings.  These offerings, Passive Monitoring and Standard Active Monitoring, utilize the same TrackerPAL™ devices as the flagship Intervention Active Monitoring.  Intervention Monitoring utilizes our SecureAlert Monitoring Center to communicate with offenders and officers on a real-time basis when an offender has a violation such as entering an exclusion zone (a designated restricted area the offender is prohibited to enter under the terms of his sentence).  Like virtually all other active monitoring offerings, the Standard Active level still provides real-time communications to officers, but only through emails and texts.  No live operators call offenders or officers.  The Passive level captures locations and alarms on a real-time basis, and like other passive offerings, sends a report of them each night.  However, unlike competitors’ passive and basic active monitoring products which only post location traces every few hours, all of our monitoring options utilize the GPS technology in the TrackerPAL™ II device to continuously track offenders’ movements and post them real time for viewing anytime through the TrackerPAL™ II software.  The eArrest Beacon option is also available for all service levels.  In addition, unlike some competitive systems, no docking stations or landlines are required for any of the levels.  Conveniently, officers can transition offenders to different monitoring levels via the TrackerPAL™ software; no equipment change is required.  This is a huge advantage as it dramatically reduces the number of devices an agency has to keep on hand to be proficient.  Several existing as well as new customers have signed up for the new service offerings.
Fiscal year 2009 also saw many enhancements to our production and distribution capabilities.  In January 2009, we moved our final assembly and distribution activities to a 6,152 foot warehouse and distribution center.  The new facility allowed us to bring all device refurbishment activities in-house, saving not only time, but money in processing devices that come back for stock rotation or refurbishment.  The facility also positions us for the growth we have planned over the next several years.
We also moved our manufacturing from Canada to contract manufacturer, Inovar Inc. (“Inovar”), in Logan, Utah.  Inovar is a provider of quality electronic manufacturing services for the electronics, medical, military and aerospace industries.  In addition to facilitating design and testing collaboration with us due to its proximity, Inovar provides other value added services from which we will benefit.  Inovar’s services include materials procurement, printed circuit assembly, test and system build. This complete offering of services will enable us to receive high quality at reduced costs.  Inovar’s location near the campus of Utah State University also provides significant benefits.  Inovar’s relationship with the University provides it with a steady stream of labor, as well as access to one of the most respected engineering schools in the world.  Inovar is ISO 9001:2000 and ISO 13485:2003 certified.  
Research and Development Program
 
General Information
 
GPS technology utilizes highly accurate clocks on 24 satellites orbiting the earth owned and operated by the U.S. Department of Defense.  These satellites are designed to transmit their identity, orbital parameters and the correct time to earthbound GPS receivers at all times.  Supporting the satellites are several radar-ranging stations maintaining exact orbital parameters for each satellite and transmitting that information to the satellites for rebroadcast at frequencies between 1500 and 1600 MHz.
 
A GPS receiver (or engine) scans the frequency range for GPS satellite transmissions. If the receiver can detect three satellite transmissions, algorithms within the engine deduce its location, usually in terms of longitude and latitude, on the surface of the earth as well as the correct time. If the receiver can detect four or more GPS satellite transmissions, it can also deduce its own elevation above sea level.  The effectiveness of GPS technology is limited by obstructions between the device and the satellites and, therefore, service can be interrupted or may not be available at all if the user is located in the lower floors of high-rise buildings or underground.
 
During the fiscal year ended September 30, 2008,2009, we spent $4,811,128$1,777,873 on research and development, compared to research and development expenditures of $4,564,121$4,811,128 in the fiscal year ended September 30, 2007 and $2,087,802 for the year ended September 30, 2006.  During the years ended September 30, 2007 and 2006, the Company disposed2008.  These costs of monitoring equipment with a net book value$1,777,873 were to further develop our TrackerPAL™ portfolio of $1,454,784 and $0, respectively, that was initially used as test units and that had served its useful life. In fiscal year 2008, we disposed of units with a net book value of $570,948.  This expense was classified as cost of revenues.products.

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Monitoring Center
 
As we developed prior product lines, we simultaneously worked to create the SecureAlert monitoring center.Monitoring Center. In contrast withto a typical monitoring center, our monitoring centerMonitoring Center is equipped with hardware and software that pinpoints the location of the incoming caller by utilizing GPS technology.  This capability is referred to as telematic.  The operator’s computer screen can identify the caller as well as locate, in real time, the caller’s precise location on a detailed map.  The Company believesWe believe the monitoring center is the cornerstone of our business.  An operator goes through extensive training to insure professional service is provided to the supervising parole officer and individuals wearing the TrackerPAL™ portfolio of products..
 
In order to prepare for an increase in TrackerPALthe number of TrackerPAL™ devices to be monitored, the Company iswe are continuing to build up the monitoring centerMonitoring Center to effectively manage these devices.  In order toTo increase the efficiencies in the monitoring center, the Company isMonitoring Center, we are developing software to further expand service automation in the processing of alarms and operational events resulting in increased operator efficiency and ability to manage more devices. The automation of alarms includes pre-recorded responses to inform the offender of the alarm and to resolve the issue.  If the issue is not timely resolved, an operator will become involved and take the additional necessary actions according to protocols set up by the customer.  The Company anticipatesWe anticipate one operator will be able to manage over 230 active devices after the software is fully developed.
 
Strategic Relationships
 
We believe one of our strengths is the high quality of our strategic alliances.  Our two primary alliances are described below.
 
Inovar, Inc.

Inovar, located in Logan Utah, is a leading contract electronics manufacturer dedicated to providing flexible solutions to OEMs (original equipment manufacturers) in the fastest growing segments of the electronics, medical, and aerospace industries and the military.  We are ISO 9001-:2000 and ISO 13485:2003 certified to provide the most comprehensive and value-added services to our customers. Inovar currently manufactures our TrackerPAL™ product.

euromicron AG

euromicron AG is an all-round solution provider for communications, data and security networks. Its network infrastructures integrate voice, video and data transport wirelessly, via copper cable and by means of fiber-optic technologies. euromicron builds its leading applications, such as e-health, security, control or surveillance systems, on the basis of these network infrastructures.  Founded on its expertise as a developer and producer of fiber-optic components, euromicron AG is a strongly growing, profitable group that is listed on the XETRA and Frankfurt, Germany (FRA) stock markets and focuses on operational growth, integration and further market penetration, internationalization and expansion.

Puracom, Inc.
 
Puracom, Inc. (“Puracom”) is a Canadian firm that specializes in hardware and software development in the areas of GPS, GSM and GPRS. It is the preferred distributor of GPS chip sets manufactured by Motorola and is recognized for its rapid development cycles and expertise in both the cellular and GPS areas.  Puracom performs research and development for the Companyus on a contract basis.  
Dynamic Source Manufacturing
Dynamic Source Manufacturing (“DSM”) located in Calgary, Alberta, Canada, is an electronics manufacturing company that delivers a full range of services to its clients.  DSM currently manufactures the Company’s TrackerPAL product.
 
Competition in Offender Management Markets
 
In fiscal year 2008,2009, we encountered various levels of GPS, house arrest and case management competition from seventhe following traditional and evolving competitors, as identified below:
competitors:
 ·Pro Tech Monitoring Inc., Odessa, FL – This company has satellite tracking software technology that operates in conjunction with GPS and wireless communication networks.
 
·iSECUREtrac Corp., Omaha, NE – This company supplies electronic monitoring equipment for tracking and monitoring persons on pretrial release, probation, parole, or work release.
 
·Sentinel Security and Communications, Inc., Rochester NY–Offender Services, LLC, Augusta GA – This company supplies monitoring and supervision solutions for the offender population.
 ·Omnilink Systems, Inc., Alpharetta, GA – This company provides a one-piece device combined with GPS and Sprint cellular networks to electronically track an individual.
 ·BI Incorporated, Boulder, CO – This company has been providing intensive community supervision services and technologies for more than 20 years to criminal justice agencies throughout the United States.
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 ·G4S plc – Crawley, Sussex, England – This international company is the world’s leading international security solutions group.  In the United States, they provide electronic monitoring of offenders, prison and detention center management and transitional support services.  Currently, G4S resells Omnilink’s active GPS device.
 
·Satellite Tracking of People, LLC – Houston, TX – This company provides GPS tracking systems and services to government agencies.
 
The CompanyWe also facesface competition from small and regional companies that provide electronic monitoring technology along with localized case management and/or monitoring services.  Some of these entities utilize less well-known technologies or are resellers of the above competitor’scompetitors’ products.  The Company sawWe observed an increase in these types of businesses in 2008.2009.  We do not believe there is reliable publicly available information to indicate theour relative market share or that of the Company.our competitors.

7
 
Dependence on Major Customers
 
In fiscal year 2008, noNo customer accounted forrepresented more than 10% of the Company’s revenues. Duringour total revenues for the fiscal year ended September 30, 2007, we had revenues from QuestGuard2009.  One non-repeat customer represented 16% of $3,229,760 or approximately 49% ofour total revenues and from Seguridad Satelital Vehicular of $928,800 or approximately 14% of total revenues.  We have no arrangements or contracts with these customers that would require them to purchase a specific amount of product or services from us.for the fiscal year ended September 30, 2008.

Dependence on Major Suppliers
 
The Company purchasesWe purchase cellular services from a variety of providers.  The costscost to the Companyus for these services during the fiscal years ended September 30, 20072009 and 2006 were2008 was approximately $2,592,951$2,422,541 and $290,000,$2,939,790, respectively. We reduced cellular costs while increasing revenues from monitoring services we successfully negotiated new and existing contracts.
During the fiscal year ended September 30, 2008, cellular service expense totaled $2,939,790.

The Company has established a relationship with2009, we switched manufacturing of the TrackerPAL™ devices from Dynamic Source Manufacturing (DSM) to manufactureInovar.  The change in manufacturers was made to increase the TrackerPALreliability of the TrackerPAL™ and reduce our cost per device.  All monitoring equipment that has been leased or sold to date by the Company has been manufactured by DSM.  Should the relationship between DSM and the Companywith Inovar cease, the Companywe would need to find another vendor to manufacture the device which could limit the ability to lease additional monitoring equipment.

Product Returns

Our first generation TrackerPAL device experienced significantly high in-field failure rates.  These problems involved:  (1) water ingression; (2) low battery and charger life and functionality; (3) weak GPS signal strength; and (4) scratching and other aesthetic damage whenDuring the device was removed from an offender.  Remediating these problems required that the Company refurbish products that had been delivered and products in inventory.  The process was largely completed during thefiscal year ended September 30, 2008.  Steps taken2009, we replaced the majority of TrackerPAL™ I devices with our next generation TrackerPAL™ II device to addressremedy problems incurred with the first generation product. These problems included the following:included:

 ·Waterproofing the device by applying a chemical-based ‘weld’ around the back panel seamlow battery and augmenting the seal integrity of the rear hatch of the devicecharger life and functionality
 ·Improving electrical connectivity between the battery and the deviceweak GPS signal strength
 ·Replacing the Integrated Circuit (“IC”) chip installed in the battery chargerswater ingression; and
 ·Redesigningscratching and installing a new cellular antenna that improves coverage and enhances GPS tracking
· Enhancing the cosmetic cap design to avoid the early potential to scar outer housing ofother aesthetic damage when the device when beingwas removed from the ankle and using different screws to mitigate the stripping of screws and damaging of the device when it is being removed.an offender.

Subsequent to September 30, 2009, we began manufacturing an improved TrackerPAL™ device dubbed the “TrackerPAL™ IIe” (for “enhanced”) to further improve the performance and functionality of the product.  We achieved significant improvement in GPS signal strength by incorporating the latest available GPS technology into the enhanced device.  Additionally, the battery life has improved, realizing over 30 hours of life on a single two hour daily charge.
The problems encountered and corrected in the first TrackerPAL devices led to significant improvements in the new TrackerPAL II device now being distributed by the Company.

Intellectual Property
 
Trademarks.  We have developed and use registered trademarks in our business, particularly relating to our corporate and product names. We own eight trademarks that are registered with the United States Patent and Trademark Office and one trademark registered in Mexico. Federal registration of a trademark in the United States enables the registered owner of the mark to bar the unauthorized use of the registered mark in connection with a similar product in the same channels of trade by any third-party anywhere in the United States, regardless of whether the registered owner has ever used the trademark in the area where the unauthorized use occurs. We have one application for registration pending approval in the state of California and one application in the United States that has been approved and is awaiting the filing of a statement of use.  We may file additional applications for the registration of our trademarks in foreign jurisdictions as our business expands under current and planned distribution arrangements.  Protection of registered trademarks in some jurisdictions may not be as extensive as the protection in the United States.

 
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The following table summarizes our trademark registrations and applications:
 
 
Mark
Application Number
Registration
Number
Status/Next Action
MOBILE911
MOBILE91175/615,118
2,437,673
Registered
    
MOBILE911 SIREN WITH 2-WAY VOICE
COMMUNICATION & DESIGN
76/013,8862,595,328Registered
    
WHEN EVERY SECOND MATTERS76/319,7592,582,183Registered
    
MOBILEPAL78/514,0313,035,577Registered
    
HOMEPAL78/514,0933,041,055Registered
    
PAL SERVICES78/514,5143,100,192Registered
    
REMOTEMDX78/561,796pendingAllowed-Awaiting Statement of Use
    
TRACKERPALTRACKERPAL™78/843,0353,345,878Registered
    
MOBILE91178/851,3843,212,937Registered
    
TRACKERPALTRACKERPAL™CA 1,315,487pendingPending
    
TRACKERPALTRACKERPAL™MX 805,365960954Registered
 
Patents. We have fourfive patents in the United States and one patent in China andChina.  In addition, we have seven patents pending in the United States and ten pending internationally. The following tables contain information regarding our patents and patent applications; there can be no assurance given that the applications will be granted or that they will, if granted, contain all of the claims currently included. 


Domestic Patents:   
Patent TitleApplication/Patent NumberFiling/Issue DatesStatus
Remote Tracking and Communication Device7,330,1222/12/08Issued
    
Remotely Controllable Thermostat6,260,7657/17/01Issued
    
Interference Structure for Emergency Response System Wristwatch6,366,5384/2/02Issued (Reacquired)
    
Multiple Emergency Response Services Combination Emergency Phone and Personal Audio Device6,285,8679/4/01Issued
Remote Tracking System and Device with Variable Sampling11/486,9916/9/09Issued
    
Alarm and Alarm Management System for Remote Tracking Devices11/489,9927/14/06Pending
    
A Remote Tracking Device and a System and Method for Two-Way Voice Communication Between Device and a Monitoring Center
 
11/486,989
7/14/06Pending
    
A Remote Tracking System with a Dedicated Monitoring Center11/486,9767/14/06Pending
    
Remote Tracking System and Device with Variable Sampling11/486,9917/14/06Pending
Methods for Establishing Emergency Communications Between a Communications Device and a Response Center11/830,3987/30/07Pending
    
Remote Tracking and Communications Device12/028,0882/8/08Pending
    
A System and Method for Monitoring Individuals Using a Beacon and Intelligent Remote Tracking DeviceUS 61/034,7203/7/08Pending
Beacon12/394.1519/2009Pending

 
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International Patents:   
Patent Title
Application/Patent NumberFiling/Issue DatesStatus
Emergency Phone with Single-Button ActivationZL 01807350.610/5/05Issued
    
Remote Tracking and Communication DeviceBrazil PI0614742.98/4/06Pending
    
Remote Tracking and Communication DeviceCanada 26179238/4/06Pending
    
Remote Tracking and Communication DeviceEurope 06836098.18/4/06Pending
    
Remote Tracking and Communication DeviceMexico a/2008/0019328/4/06Pending
    
Emergency Phone with Single-Button ActivationEP 01924386.43/28/01Pending
    
Emergency Phone with Single-Button ActivationJP 2001-5715683/28/01Pending
    
Alarm and Alarm Management System for Remote Tracking DevicesPCT/US2007/0727367/3/07Pending
    
A Remote Tracking Device and a System and Method for Two-Way Communication Between the Device and a Monitoring CenterPCT/US2007/0727407/3/07Pending
    
A Remote Tracking System with a Dedicated Monitoring CenterPCT/US2007/0727437/3/07Pending
    
Remote Tracking System and Device with Variable Sampling and Sending Capabilities Based on Environmental FactorsPCT/US2007/0727467/3/07Pending

During the year ended September 30, 2008, the Companywe reacquired Patent Number 6,366,538 which was previously sold in exchange for Patent Number 7,092,695 and Patent Number 7,251,471.  Patent Number 6,226,510 and Patent Number 6,044,257 were originally sold subject to terminal disclaimers requiring common ownership with patents owned (Patent Number 7,092,695 and Patent Number 7,251,471) by RemoteMDx but not assigned to purchaser.  A terminal disclaimer is used to link two patents filed by the same inventors and claiming the same invention.  In order to get the additional patent rights desired by the purchaser, the two patents are linked using a terminal disclaimer that specifies that they have the same term and must be commonly assigned.

We intend to protect our legal rights concerning intellectual property by all appropriate legal action. Consequently, we may become involved from time to time in litigation to determine the enforceability, scope, and validity of any of the foregoing proprietary rights. Any patent litigation could result in substantial cost and divert the efforts of management and technical personnel.

 Trade Secrets.  We own certain intellectual property, including trade secrets that we seek to protect, in part, through confidentiality agreements with employees and other parties, although some employees who are involved in research and development activities have not entered into these agreements. Even where these agreements exist, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, or that our trade secrets will not otherwise become known to or independently developed by competitors.

Seasonality

Given the continued and steady increase in revenues throughout 2008,2009, no revenueapparent seasonality, if it existed, could be detected.  However, as in previous years, incremental deployment opportunities were found to be slower in the months of July and August. This was due to the unavailability of many judges, probation directors and other key parole officials, who observe a traditional vacation season.

Backlog

With the transformation of our supply chain operations and manufacturing capabilities during July through December 2009, the commercial availability of TrackerPAL IIour newly modified and enhanced TrackerPAL™ IIe devices (now manufactured in August 2008, the Company has realizedUnited States) created an intermittent weekly manufacturingbacklog of units.  Monthly backlogs for organic growth and shipping backlogs, rangingnew account implementation have averaged 150 devices from 75 to 125 units for these devicesJuly through December 1, 2008.  This backlog is primarily related to (1) orders for the replacement of TrackerPAL I units, (2) the addition of incremental units within existing accounts2009 as we have implemented and (3) the fulfillment ofimproved our internal repair and refurbishment capabilities in conjunction with our new orders for new accounts. The Company viewsworld-class manufacturing partner and production capabilities at Inovar.

We view backlogs as undesirable, as they impair deployments, which necessarily reduce available recurring revenue streams. The Company continuesreduces revenue.  We continue to work on mitigating backlogs, in an ongoing effort to maximizemaximizing demand fulfillment, and to capitalizecapitalizing on all available opportunities to secure recurring revenue streams.  In a significant development after September 30, 2009, we authorized the initial manufacture of our first 3,000 TrackerPAL™ IIe units, which we began delivering in mid-December 2009 and expect to continue to deliver over the next few months. We will use these units to replace any remaining TrackerPAL™ I units, as well as to support growth in existing accounts and in support of new domestic and international opportunities.

 
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Environment
 
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations.
 
Employees
 
As of December 1, 2008, the Company11, 2009, we had 160170 full time employees and 3335 part-time employees.  None of the employees are represented by a labor union or subject to a collective bargaining agreement.  The Company hasWe have never experienced a work stoppage and management believes that the relations with employees are good.  After September 30, 2008, the Company downsized its monitoring center and other headquarters staff by approximately 13% (26 persons) as part of a restructuring intended to improve operating margins and reduce overhead.  Additional reductions in force and cost-saving measures will also be considered in the next six months as the Company implements its strategic plan to improve operating results by reducing operating losses.
 
Additional Available Information
 
We maintain our principal executive offices and principal facilities at 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070.  Our telephone number is (801) 451-6141. We maintain a World Wide Web site at www.remotemdx.com.  TheReference to our website is not intended to incorporate information on our web site should not be consideredas part of this Reportreport on Form 10-K.
We make available, free of charge at our corporate web site, copies of our annual reports filed with the Securities and Exchange Commission (“SEC”) on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and all amendments to these reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. This informationWe also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement and Annual Report at no charge to investors upon request.
All reports filed by RemoteMDx with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may also be obtained fromread and copy materials we have filed with the SEC’s on-line database, which isSEC at the SEC's public reference room located at www.sec.gov.450 Fifth St., N.W., Washington, D.C. 20549.  
 
Item 1A.    Risk Factors
 
Risks and uncertaintiesWe have identified the following important factors that could cause actual results to differ materially from those projected in any forward looking statements we may affectmake from time to time. We operate in a continually changing business environment in which new risk factors emerge from time to time. We can neither predict these new risk factors, nor can we assess the impact, if any, of these new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward looking statement. If any of these risks, or combination of risks, actually occurs, our business, financial condition performance, development, and results of operations includecould be seriously and materially harmed, and the following:trading price of our common stock could decline.
 
The financial statements contained in this annual report on Form 10-K for the fiscal year ended September 30, 20082009 have been prepared on the basis that the Companywe will continue as a going concern, notwithstanding the fact that itsour financial performance and condition during the past few years raise substantial doubt as to itsour ability to do so. There is no assurance the Companywe will ever be profitable. In fiscal year 2008, the Company2009, we incurred a net loss of $49,587,050,$23,081,500, negative cash flows from operating activities of $9,672,744,$8,521,326, and as of September 30, 2008 has2009 have an accumulated deficit of $182,683,996.$205,765,496.  These factors raise substantial doubt about the Company’sour ability to continue as a going concern. The financial statements included in this Reportreport do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on increasing the number of TrackerPALTrackerPAL™ devices in the market place from which we will generate monitoring service revenue.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay indebtedness.  Likewise, there can be no assurance that the debt holders will be willing to convert the debt obligations to equity securities or that the Companywe will be successful in raising additional capital from the sale of equity or debt securities.  If the Company iswe are unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of itsour products and will likely cease operations.

The Company hasWe have a history of losses and anticipatesanticipate significant future losses and may be unable to project itsour revenues and expenses accurately. The CompanyWe will incur significant expenses associated with the development and deployment of itsour new products and promoting itsour brand. It intendsWe intend to enter into additional arrangements through current and future strategic alliances that may require itus to pay consideration in various forms and in amounts that may significantly exceed current estimates and expectations.  The CompanyWe may also be required to offer promotional packages of hardware and software to end-users at subsidized prices in order to promote itsour brand, products and services. These guaranteed payments, promotions and other arrangements will result in significant expense. If the Company doeswe do achieve profitability, it cannot be certain that itwe will be able to sustain or increase profitability in the future.  In addition, because of itsour limited operating history in itsour newly targeted markets, the Companywe may be unable to project revenues or expenses with any degree of certainty. Management expects expenses to increase significantly in the future as the Company continueswe continue to incur significant sales and marketing, product development and administrative expenses.  The CompanyWe cannot guarantee that itwe will be able to generate sufficient revenues to offset operating expenses or the costs of the promotional packages or subsidies described above, or that itwe will be able to achieve or maintain profitability. If revenues fall short of projections, our business, financial condition and operating results would be materially adversely affected.

 
1011
 

General economic conditions may affect our revenue and harm our business.  As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession or other changes, may lead our customers to delay or reduce purchases of our products and services, adversely affecting our results of operations and financial condition could be adversely affected thereby.condition. Challenging economic conditions also may impair the ability of our customers or distributors to pay for products or services they have purchased, and as a result, our reserves for doubtful accounts and write-offs of accounts receivable could increase. Our cash flows may be adversely affected by delayed payments or underpayments by our customers. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.

As a result of our increased focus on a new business market, our business is subject to many of the risks of a new or start-up venture. The change in 20082009 of our business goals and strategy subjects us to the risks and uncertainties usually associated with start-ups. Our business plan involves risks, uncertainties and difficulties frequently encountered by companies in their early stages of development.  If the Company iswe are to be successful in this new business direction, it must accomplish the following, among other things:
 
·Develop and introduce functional and attractive product and service offerings;offerings
·Increase awareness of our brand and develop consumer loyalty;loyalty
·Respond to competitive and technological developments;
developments
·Increase gross profit margins;
margins
·Build an operational structure to support our business;business, and
·Attract, retain and motivate qualified personnel.personnel

If the Company failswe fail to achieve these goals, that failure would have a material adverse effect on itsour business, prospects, financial condition and operating results.  Because the market for its newour product and service offerings is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any.  There is no assurance that a market for these products or services will ever develop or that demand for our products and services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
 
Groups own or control a significant number of our outstanding shares.  Certain groups or persons associated with them beneficially own a substantial number of shares of our outstanding common stock.  As a result, these persons have the ability, acting as a group, to effectively control our affairs and business, including the election of our directors and, subject to certain limitations, approval or preclusion of fundamental corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change of control or making other transactions more difficult or impossible without their support.  See Item 10 “Directors, Executive Officers and Corporate Governance,” and Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
 
There is no certainty that the market will accept our new products and services.  Our targeted markets may never accept our products or services.  Governmental organizations may not use our products unless they determine, based on experience, advertising or other factors, that those products are a preferable alternative to currently available methods of tracking.  In addition, decisions to adopt new tracking devices can be influenced by government administrators, regulatory factors, and other factors largely outside our control.  No assurance can be given that key decision-makers will accept our new products, which could have a material adverse effect on our business, financial condition and results of operations.
 
Our relationship with certain of our certain stockholders presents potential conflicts of interest, which may result in decisions that favor them over our other shareholders.  Two of ourOur principal beneficial ownersowner and founders,founder, David Derrick, and James J. Dalton, provideprovides management and/or financial services and assistance to the Company.us.  When theirhis personal investment interests diverge from our interests, theyhe and theirhis affiliates may exercise their influence in their own best interests. Some decisions concerning our operations or finances may present conflicts of interest between us and these stockholders and their affiliated entities.
 
The Company reliesWe rely on significant suppliers for key products and cellular access.  If the Company  doeswe do not renew these agreements when they expire itwe may not continue to have access to these suppliers’ products or services at favorable prices or in volumes as it haswe have in the past, which would reduce revenues and could adversely affect results of operations or financial condition. The Company hasWe have entered into an agreement with a national cellular access company for cellular services. We also rely currently on a single manufacturer for the manufacture of our TrackerPALTrackerPAL™ devices.  If any of these significant suppliers were to cease providing product or services to us, we would be required to seek alternative sources. There is no assurance that alternate sources could be located or that the delay or additional expense associated with locating alternative sources for these products or services would not materially and adversely affect our business and financial condition.

 
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Our business subjects our research, development and ultimate marketing activities to current and possibly to future government regulations. The cost of compliance or the failure to comply with these regulations could adversely affect our business, results of operations and financial condition. Our monitoring device products are not subject to specific approvals from any governmental agency, although our products using cellular and GPS technologies must be manufactured in compliance with applicable rules and regulations of the Federal Communications Commission (“FCC”).  There can also be no assurance that changes in the legal or regulatory framework or other subsequent developments will not result in limitation, suspension or revocation of regulatory approvals granted to us. Any such events, were they to occur, could have a material adverse effect on our business, financial condition and results of operations.  We may be required to comply with FCC regulations for manufacturing practices, which mandate procedures for extensive control and documentation of product design, control and validation of the manufacturing process and overall product quality. Foreign regulatory agencies have similar manufacturing standards. Any third parties manufacturing our products or supplying materials or components for such products may also be subject to these manufacturing practices and mandatory procedures. If we, our management or our third-party manufacturers fail to comply with applicable regulations regarding these manufacturing practices, we could be subject to a number of sanctions, including fines, injunctions, civil penalties, delays, suspensions or withdrawals of market approval, seizures or recalls of product, operating restrictions and, in some cases, criminal prosecutions.  Our products and related manufacturing operations may also be subject to regulation, inspection and licensing by other governmental agencies, including the Occupational Health and Safety Administration.
 
The Company facesWe face intense competition, including competition from entities that are more established and may have greater financial resources than we do, which may make it difficult for us to establish and maintain a viable market presence.  Our current and expected markets are rapidly changing.  Existing products and services and emerging products and services will compete directly with the products we are seeking to develop and market.  Our technology will compete directly with other technology, and, although we believe our technology has or will have advantages over these competing systems, there can be no assurance that our technology will have advantages that are significant enough to cause users to adopt its use.  Competition is expected to increase.  Many of these competitors have products or techniques approved or in development and operate large, well-funded research and development programs in the field.  Moreover, these companies and institutions may be in the process of developing technology that could be developed more quickly or be ultimately more effective than our planned products.  We face competition based on product efficacy, availability of supply, marketing and sales capability, price and patent position.  There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier patent protection or product commercialization.
 
Our business plan is subject to the risks of technological uncertainty, which may result in our products failing to be competitive or readily accepted by our target markets.  We may not realize revenues from the sale of any of our new products or services for several years, if at all.  Some of the products we are currently evaluating likely will require further research and development efforts before they can be commercialized. There can be no assurance that our research and development efforts will be successful or that we will be successful in developing any commercially successful products.  In addition, the technology which we integrate or that we may expect to integrate with our product and service offerings is rapidly changing and developing.  We face risks associated with the possibility that our technology may not function as intended and the possible obsolescence of our technology and the risks of delay in the further development of our own technologies. Cellular coverage is not uniform throughout our current and targeted markets and GPS technology depends upon “line-of-sight” access to satellite signals used to locate the user.  This limits the effectiveness of GPS if the user is in the lower floors of a tall building, underground or otherwise located where the signals have difficulty penetrating.  Other difficulties and uncertainties normally associated with new industries or the application of new technologies in new or existing industries also threaten our business, including the possible lack of consumer acceptance, difficulty in obtaining financing for untested technologies, increasing competition from larger or smaller well-funded competitors, advances in competing or other technologies, and changes in laws and regulations affecting the development, marketing or use of our new products and related services.
 
Our business plan anticipates significant growth through monitoring revenues and acquisitions. To manage the expected growth the Companywe will require capital and there is no assurance it will be successful in obtaining necessary additional funding.  If we are successful in implementing our business plan, we may be required to raise additional capital to manage anticipated growth.  Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities the success of our development efforts, the cost and timing of establishing or expanding our revenues, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing alliances, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to stockholders (including the purchasers of the shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories.  Any inability or failure to raise capital when needed could also have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.  

 
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Our products are subject to the risks and uncertainties associated with the protection of intellectual property and related proprietary rights.  We believe that our success depends in part on our ability to obtain and enforce patents, maintain trade secrets and operate without infringing on the proprietary rights of others in the United States and in other countries.  We have received several patents; we have also applied for several additional patents and those applications are awaiting action by the U.S. Patent Office.  There is no assurance those patents will issue or that when they do issue they will include all of the claims currently included in the applications.  Even if they do issue, those new patents and our existing patents must be protected against possible infringement.  The enforcement of patent rights can be uncertain and involve complex legal and factual questions.  The scope and enforceability of patent claims are not systematically predictable with absolute accuracy.  The strength of our own patent rights depends, in part, upon the breadth and scope of protection provided by the patent and the validity of our patents, if any.  Our inability to obtain or to maintain patents on our key products could adversely affect our business.  We own five patents and have filed and intend to file additional patent applications in the United States and in key foreign jurisdictions relating to our technologies, improvements to those technologies and for specific products we may develop.  There can be no assurance that patents will issue on any of these applications or that, if issued, any patents will not be challenged, invalidated or circumvented.  The prosecution of patent applications and the enforcement of patent rights are expensive, and the expense may adversely affect our profitability and the results of our operations.  In addition, there can be no assurance that the rights afforded by any patents will guarantee proprietary protection or competitive advantage.  Our success will also depend, in part, on our ability to avoid infringing the patent rights of others.  We must also avoid any material breach of technology licenses we may enter into with respect to our new products and services.  Existing patent and license rights may require us to alter the designs of our products or processes, obtain licenses or cease certain activities.  In addition, if patents have been issued to others that contain competitive or conflicting claims and such claims are ultimately determined to be valid and superior to our own, we may be required to obtain licenses to those patents or to develop or obtain alternative technology.  If any licenses are required, there can be no assurance that we will be able to obtain any necessary licenses on commercially favorable terms, if at all.  Any breach of an existing license or failure to obtain a license to any technology that may be necessary in order to commercialize our products may have a material adverse impact on our business, results of operations and financial condition.  Litigation that could result in substantial costs may also be necessary to enforce patents licensed or issued to us or to determine the scope or validity of third-party proprietary rights.  If our competitors prepare and file patent applications in the United States that claim technology also claimed by us, we may have to participate in proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial costs, even if we eventually prevail.  An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require that we cease using such technology.
 
We also rely on trade secrets laws to protect portions of our technology for which patent protection has not yet been pursued or is not believed to be appropriate or obtainable.  These laws may protect us against the unlawful or unpermitted disclosure of any information of a confidential and proprietary nature, including but not limited to our know-how, trade secrets, methods of operation, names and information relating to vendors or suppliers and customer names and addresses.  We intend to protect this unpatentable and unpatented proprietary technology and processes, in addition to other confidential and proprietary information in part, by entering into confidentiality agreements with employees, collaborative partners, consultants and certain contractors.  There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, or that our trade secrets and other confidential and proprietary information will not otherwise become known or be independently discovered or reverse-engineered by competitors.
 
The existence of certain anti-dilution rights applicable to our Series B Preferred Stock might result in increased dilution inasmuch as the Company has offered and sold shares of common stock or securities convertible into shares of common stock at prices below the initial conversion rate of $3.00 per common share, unless those rights are waived.  The investors in our Series B preferred stockWe have the right to an automatic adjustment of the conversion price of the Series B preferred shares held by them in the event we sell shares of common stock or securities convertible into common stock at a price below the original conversion price of $3.00 per share. Certain holders of the Series B preferred stock have waived their right to receive the adjustment but there is no assurance that any holder of Series B preferred stock will waive those rights as to issuances of common stock.  Accordingly, we may be required to issue additional shares of common stock to comply with anti-dilution adjustments to the conversion rights of present or former preferred shareholders.  Any increase in the number of shares of common stock issued upon conversion of Series B preferred shares would compound the risks of dilution to existing stockholders.  As of September 30, 2008, the total outstanding shares of Series B Preferred stock of 10,999 could convert into a maximum of 113,783 shares of common stock.
The obligation to issue shares of common stock upon the exercise of outstanding options and warrants or upon conversion of outstanding shares of preferred stock increases the potential for short sales. Downward pressure on the market price of our common stock that likely would result from issuances of common stock upon conversion of preferred stock or convertible debentures, or upon the exercise of options and warrants, could encourage short sales of common stock by the holders of the preferred stock or others.  A significant amount of short selling could place further downward pressure on the market price of the common stock, reducing the market value of the securities held by our shareholders. 
Payment of dividends in additional shares of Series A preferred stock or in shares of common stock will result in further dilution. Under the terms of the Series A preferred stock, our board of directors may elect to pay dividends by issuing additional shares of Series A preferred stock or common stock.  Dividends accrue from the date of the issuance of the preferred stock, subject to any intervening payments in cash. Each share of Series A preferred stock is convertible into 370 shares of common stock.  The issuance of additional shares of Series A preferred stock or common stock as dividends could result in a substantial increase in the number of shares issued and outstanding and could result in a decrease of the relative voting control of the holders of the common stock issued and outstanding prior to such payment of dividends and interest.  As of September 30, 2008, the total outstanding shares of Series A Preferred stock of 19 could convert into a maximum of 7,178 shares of common stock.

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The Company has had and will continue to have significant capital needs and there is no assurance itwe will be successful in obtaining necessary additional funding. We will be required to raise additional capital to fully implement our business plan.  Our actual capital requirements will depend on many factors, including but not limited to, the costs and timing of our ongoing development activities, the success of our development efforts, the cost and timing of establishing or expanding our sales, marketing and manufacturing activities, the extent to which our products gain market acceptance, our ability to establish and maintain collaborative relationships, competing technological and market developments, the progress of our commercialization efforts and the commercialization efforts of our marketing alliances, the costs involved in preparing, filing, prosecuting, maintaining and enforcing and defending patent claims and other intellectual property rights, developments related to regulatory issues, and other factors, including many that are outside our control. To satisfy our capital requirements, we may seek to raise funds through public or private financings, collaborative relationships or other arrangements. Any arrangement that includes the issuance of equity securities or securities convertible into our equity securities may be dilutive to stockholders (including the purchasers of the shares), and debt financing, if available, may involve significant restrictive covenants that limit our ability to raise capital in other transactions. Collaborative arrangements, if necessary to raise additional funds, may require that we relinquish or encumber our rights to certain of our technologies, products or marketing territories.  Any inability or failure to raise capital when needed could also have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any such financing, if required, will be available on terms satisfactory to us, if at all.

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Penny stock regulations may impose certain restrictions on marketability of the Company’sour securities. The SEC has adopted regulations which generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  As a result, theour common stock is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).  For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the SEC relating to the penny stock market.  The broker-dealer must also disclose the commission payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market.  Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.  Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell the Company’sour securities and may affect the ability of investors to sell the Company’sour securities in the secondary market and the price at which such purchasers can sell any such securities. 
 
Investors should be aware that, according to the SEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:
 
 ·Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;issuer
 ·Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;releases
 ·“Boiler room” practices involving high pressure sales tactics and unrealistic price projections by inexperienced sales persons;persons
 ·Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers;broker-dealers, and
 ·The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.

 The Company’sOur management is aware of the abuses that have occurred historically in the penny stock market.

Our board of directors may authorize the issuance of preferred stock and designate rights and preferences that will dilute the ownership and voting interests of existing stockholders without their approval.  Our Articles of Incorporation authorize us to issue up to 20,000,000 shares of preferred stock, at par value $0.0001. The board of directors is authorized to determine the rights and preferences of any series or class of preferred stock. The board of directors may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting or other rights which are senior to the common stock or which could adversely affect the voting power or other rights of the existing holders of our Series Boutstanding shares of preferred stock or common stock. Additionally, the issuance of preferred stock may have voting rights that are the same aseffect of decreasing the voting rightsmarket price of holders of ourthe common stock which effectively dilutesand may adversely affect the voting power of the holders of common stock and reduce the likelihood that common stock.  Holdersstockholders will receive dividend payments and payments upon liquidation. The issuance of additional shares of Series B preferred stock are entitledmay also adversely affect an acquisition or change in control of the Company.

Subsequent to one vote perthe year ended September 30, 2009, the board of directors designated 50,000 shares of preferred stock as our Series D Preferred stock.  Each share of Series B preferredD Preferred stock on all matters upon which holdersis convertible into 6,000 shares of common stock.  Holders of the commonSeries D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the Company are entitled to vote.  Therefore, without convertingstockholders, including the shareselection of Series B preferred stock,directors and the holders thereof enjoyapproval of certain transactions such as a merger or other business combination of the same voting rights as if they heldCompany.  In addition, on the issues of an equalincrease in the number of shares of common stock as well as the liquidation preference described above.  In addition, withoutCompany is authorized to issue and on the approvalproposal of a reduction in the number of issued and outstanding shares (a reverse split) of the Company’s common stock, holders of the Series D Preferred stock may vote as a majorityclass holding the equivalent of 60 percent of the issued and outstanding shares of Series B preferredthe common stock, voting as a class, we are prohibited from (i) authorizing, creating or issuing anyregardless of the number of shares then outstanding.  As of the date of this report, there were 25,186 shares of any class or series ranking senior toSeries D Preferred stock outstanding.  As a consequence of these voting rights, the Series B preferred stock as to liquidation rights; (ii) amending, altering or repealing our Articles of Incorporation if the powers, preferences or special rightsholders of the Series B preferred stock would be materially adversely affected; or (iii) becoming subject to any restriction on the Series B preferred stock other than restrictions arising solely under the Utah Act or existing under our Articles of Incorporation as in effect on June 1, 2001.  As of September 30, 2008, the total outstanding shares of Series BD Preferred stock may exercise control over these issues regardless of 10,999 could convert into a maximumthe interests of 113,783 shares of common stock.

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the remaining stockholders.
 
Item 1B.    Unresolved Staff Comments
We received no written comments from the Commission staff that remain unresolved regarding periodic or current reports under the Exchange Act in the 180 days prior to September 30, 2008.
Item 2.    Properties

Our headquarters and monitoring facility are housed in 11,4008,106 square feet of space located at 150 West Civic Center Drive, Sandy, Utah.  Monthly lease payments are approximately $17,600 per month. We moved into these facilities during the fourth fiscal quarter of 2005.  During November 2008, the Company renewed 8,106 square feet this$16,200. This lease which will expireexpires on November 30, 2013.  The lease payment will decrease from approximately $17,600 to $15,400 per month.  In addition, the Companywe signed an additional lease to provide 6,152 square feet of warehousing and pallet shipping functions and capabilities.  Thecapabilities in a facility is located at 9716 South 500 West, Sandy, Utah 84070.  Monthly lease payments are approximately $5,200 per month.$5,300.  Management believes that these facilities are sufficient to meet our needs for the foreseeable future.


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Item 3.    Legal Proceedings

Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: A patent infringement suit was filed against the Company and other defendants in the United States District Court for the Eastern District of Texas on March 19, 2008.  Plaintiffs have alleged that the defendants infringe United States Patent No. RE39,909 ('909 Patent), Tracking System for Locational Tracking of Monitored Persons.  On May 14, 2008, the Company answered the complaint, denying PlaintiffsPlaintiffs’ 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 Company intends to vigorously defendUSPTO is now in the process of reexamining the claims of the '909 Patent. Briefs have been submitted on the issue of claim construction, and the case is currently in discovery. The Markman hearing is scheduled for May of 2011, and prosecute its counterclaim. The Company hastrial is set for late 2011. We have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

RemoteMDx, Inc. v. Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company filed a patent infringement suit against STOP in the United States District Court for the Central District of California on May 2, 2008.  The Company has asserted that STOP infringes United States Patent No. 7,330,122 for a remote tracking and communication device and method for processing data from the device ("'122 patent"), in which the Company holds all rights and interests.  STOP moved to dismiss the original complaint and also filed an answer and counterclaim.  The motion to dismiss was granted with leave to amend.  The Company filed an amended complaint on August 5, 2008.  The amended complaint seeks damages for infringement according to proof, treble damages, injunctive relief enjoining the infringement, and costs and attorney's fees.  STOP's counterclaim is for declaratory relief, seeking a declaration that STOP has not infringed the '122 patent and that the '122 patent is invalid. The Company filed an answer to the counterclaim. STOP subsequently filed a motion for summary judgment of non-infringement, which was denied.  STOP’s subsequent motion for reconsideration was also denied.  The parties are currently working on claim construction and discovery issues.  The Markman hearing is currently set for March of 2010.  No trial date has yet been set.  The Company intends to vigorously prosecute its claims and defend against the counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.
Strategic Growth International, Inc., v. RemoteMDx.  In December 2008, the Company verbally agreed to settle a lawsuit with Strategic Growth International, Inc. in consideration of the issuance of 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 will have piggyback registration rights and be protected against any potential reverse stock splits.  The Company has accrued $385,000 to settle this lawsuit.

Frederico and Erica Castellanos, v. Volu-Sol, Inc.  On August 15, 2008, plaintiffs Frederico and Erica Castellanos filed a lawsuit in the Superior Court of the State of California, Los Angeles County.  The complaint names twenty-four defendants and one hundred unnamed Doe defendants.  The complaint asserts claims for negligence, strict liability - failure to warn, strict liability - design defect, fraudulent concealment, breach of implied warranties, and loss of consortium based on Mr. Castellanos' alleged exposure to certain chemicals during the course of his employment.  One of the original named defendants was Logos Scientific, Inc.  On September 4, 2008, Plaintiffs amended their complaint to substitute "Volu-Sol, Inc. as successor in interest to Logos Scientific, Inc." for the previously unnamed Doe 1.  Volu-Sol,“Volu-Sol, Inc.” was the original corporate name of RemoteMDx, Inc.  The Company intendsWe intend to vigorously defend itself against Castellanos’ claims.  The Company hasWe have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

Thomas Natale, et al. 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 for non-payment of certain obligations.  The Plaintiff has alleged that the Defendants owe him certain back amounts of bonuses, interest and note payables. Management has been advised that a similar action has been filed by Edward Boling. The Company has answered the complaint and discovery is ongoing. The Company intends to vigorously defend the case and prosecute its counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

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SecureAlert, v. David Ezell, et al.  The Company hasWe have filed a claim against David Ezell and several related entities for breach of contract, unjust enrichment, conversion, and punitive damages, and seeksseek approximately $290,810 in damages, as well as other amounts to be proven at trial.  The case is in the discovery stage.  After consultation with legal counsel, the Company haswe have not accrued for any potential recovery or any material loss associated with this claim.

Informal Inquiry.  As voluntarily disclosed in our prior reports filed by the Company with the SEC commencing with itsour quarterly report for the fiscal quarter ended March 31, 2008, the Company waswe were advised by letter from the SEC, Salt Lake District Office in March 2008, that the SEC had begun an informal inquiry regarding the Company.us.  The SEC has advised the Companyus in its correspondence that this informal inquiry should not be construed as an indication that any violation of law has occurred, nor should it be considered a reflection upon any person, entity, or security.  There were no material developments in this matter during the most recent fiscal quarteryear ended September 30, 2008.2009.
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
No matters were submitted to a vote of shareholdersour stockholders during the fiscal quarter ended September 30, 2008.  Subsequent to the year-end, as previously reported in a Current Report on Form 8-K, the Company held its annual shareholder meeting on October 28, 2008.  At this meeting, the following matters were considered and voted upon by the shareholders of the Company:2009.
 
·Election of six directors;
·Approval of an amendment to the Articles of Incorporation of the Company, changing the name of the Company to SecureAlert, Inc.;
·Ratification of the selection of Hansen Barnett & Maxwell, P.C. as the Company’s independent registered public accounting firm for the fiscal year ended September 30, 2008.
A total of 87,229,775 shares (approximately 58%) of the issued and outstanding shares of the Company were represented by proxy or in person at the meeting. These shares were voted on the matters described above as follows:
1.              For the directors as follows:
Name
Number of 
Shares For
Number of Shares
Abstaining/Withheld
David Derrick87,016,137213,638
James Dalton87,008,148221,627
Robert Childers87,016,148213,627
David Hanlon87,016,148213,627
Peter McCall86,968,098261,677
Larry Schafran86,976,098253,677
2.For the amendment to the Articles of Incorporation changing the corporate name to SecureAlert, Inc., as follows:

Number of 
Shares For
Number of 
Shares Against
Number of Shares
Abstaining/Withheld
85,677,57677,4461,474,753

The Company intends to file the amendment effecting the change of name to SecureAlert, Inc. as soon as practical.

3.  
For the ratification of the audit committee of the Board’s selection of Hansen Barnett & Maxwell, P.C. as the independent certified public accountants of the Company for fiscal year 2008 as follows:
Number of 
Shares For
Number of 
Shares Against
Number of Shares
Abstaining/Withheld
87,093,49781,94554,333

 
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PART II
 
PART II
Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information

Our common stock is traded on the OTC Bulletin Board of the National Association of Securities Dealers, Inc., under the symbol “RMDX.OB.”  

The following table sets forth the range of high and low bid prices of our common stock as reported on the OTC Bulletin Board of the National Association of Securities Dealers, Inc., for the periods indicated.  The sales information is available online at http://otcbb.com.
 
 High Low  High  Low 
Fiscal Year 2007     
Fiscal Year
Ended September 30, 2008
      
First Quarter $1.63 $1.51  $4.22  $2.72 
Second Quarter $1.54 $1.40  $4.09  $1.00 
Third Quarter $1.69 $1.60  $1.84  $1.47 
Fourth Quarter $2.84 $2.40  $1.52  $1.11 
             
Fiscal Year 2008     
Fiscal Year
Ended September 30, 2009
        
First Quarter $4.22 $2.72  $1.20  $0.18 
Second Quarter $4.09 $1.00  $0.27  $0.10 
Third Quarter $1.84 $1.47  $0.26  $0.14 
Fourth Quarter $1.52 $1.11  $0.20  $0.11 
 
Holders

As of December 1, 2008,23, 2009, there were approximately 3,0003,500 holders of record of theour common stock and 155,881,260211,765,988 shares of common stock outstanding. We also have 19 shares of Series A preferred stock outstanding, held by one stockholder, convertible into a minimum of approximately 7,178 shares of common stock, as well as 10,999 shares of Series B preferred stock outstanding held by six stockholders, that at present are convertible into approximately 113,783 shares of common stock. We also have granted options and warrants for the purchase of approximately 21,725,45125,248,165 shares of common stock.  As discussed elsewhere in this Report,report, we may be required to issue additional shares of common stock or preferred stock to pay accrued dividends, or to comply with anti-dilution adjustments to the conversion rights of present or former preferred stockholders.

Dividends

Since incorporation, we have not declared any cash dividends on our common stock.  We do not anticipate declaring cash dividends on our common stock for the foreseeable future.  The Series A Preferred Stock accrues dividends at the rate of 10% annually, which may be paid in cash or additionalTo date all shares of preferred orstock have converted into shares of common stock at our option.  To dateand all such dividends have been paid by issuance of preferred stock, valued at $200 per share of preferred.  We are not required to pay and do not pay dividends with respect tostock.  During the Series B Preferred Stock.  During thefiscal years ended September 30, 2009 and 2008, we recorded $175 and 2007, the Company recorded $345,356 and $550,603 in stock dividends, paid on Series A and C Preferred Stock, respectively.

Dilution

We have a large number of shares of common stock authorized in comparison to the number of shares issued and outstanding.  The board of directors determines when and under what conditions and at what prices to issue stock.  In addition, a significant number of shares of common stock are reserved for issuance upon exercise of purchase or conversion rights.
 
The issuance of any shares of common stock for any reason will result in dilution of the equity and voting interests of existing stockholders.
 
Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New York, NY 11219.

Authorized Capital to be Increased

As of September 30, 2008, the Company was2009, we were authorized to issue 175,000,000250,000,000 shares of common stock.  SubsequentWe intend to the fiscal year 2008,seek stockholder approval by written consent of the holders of a majority of the issued and outstanding shares of the Company’sour common stock consented in writing to an increase of the authorized shares from 175,000,000250,000,000 to 250,000,000.  The Company intends to600,000,000.  If consent is obtained, we will file Amended Articles of Incorporation for the Company to effect the increase in the number of authorized shares as soon as reasonably practical.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information as of September 30, 2009, our most recently completed fiscal year, with respect to compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance.  No equity securities have been authorized for issuance under plans that were not previously approved by security holders.
Equity Compensation Plan Information
Plan category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance
Equity compensation plans approved by security holders 10,000,000 $1.06 7,487,286
 
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Stock Performance Graph
 
The 2006 RemoteMDx, Inc. Stock Incentive Plan
On July 10, 2006, the board of directors approved the 2006 RemoteMDx, Inc Stock Incentive Plan (“2006 Plan”). The stockholders approved the 2006 Plan on July 10, 2006. Under the 2006 Plan, we may issue stock options, stock appreciation rights, restricted stock awards and other incentives to our employees, officers and directors. The 2006 Plan provides for the award of incentive stock options to our key employees and directors and the award of nonqualified stock options, stock appreciation rights, bonus rights, and other incentive grants to employees and certain non-employees who have important relationships with us or our subsidiaries. A total of 10,000,000 shares are authorized for issuance pursuant to awards granted under the 2006 Plan.  During the fiscal years ended September 30, 2009 and 2008, 1,517,714 and 1,725,000 options were granted under this plan to employees, respectively.

Recent Sales of Unregistered Securities

During the two years ended September 30, 2009, we issued the following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filingsecurities without registration under the Securities Act of 1933, or Securities Exchange Act of 1934, each as amended except to the extent that the Company specifically incorporates it by reference into such filing.(the “Securities Act”).

The RemoteMDx, Inc. Common Stock Performance Graph compares total shareholder returns of the Company since July 10, 2004, to two indices: the NASDAQ Composite Index and the RDG SmallCap Technology Index.  The total return calculations assume the reinvestment of dividends, although dividends have never been declared for the Company’s common stock, and are based on the returns of the component companies weighted according to their capitalizations as of the end of each monthly period. Fiscal Year 2008
The Company’s common stock is traded on the Over-the-counter Bulletin Board. The Company’s stock price on the last trading day of its fiscal year, September 30, 2008, was $1.20.
Recent Sales of Unregistered Securities
During the year ended September 30, 2008, we issued 28,541,175 shares of common stock without registration of the offer and sale of the securities under the Securities Act, as follows:

Shares Issued Pursuant to Acquisitions

·650,000 shares valued at $2,599,500 were issued in December 2007 pursuant to acquisitions.  The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506.  There were no non-accredited investors involved in this issuance.
650,000 shares valued at $2,599,500 were issued in December 2007 pursuant to acquisitions.  The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506.  There were no non-accredited investors involved in this transaction.
 

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Shares Issued in Connection with Line of Credit Agreement

·360,000 shares were issued in March 2008 to certain entities who provided letters of credit in connection with the Company’s360,000 shares were issued in March 2008 to certain entities who provided letters of credit in connection with our line of credit with Citizen National Bank. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
 
Shares Issued to Employees, Consultants and Vendors for Products and Services

·6,710,000 shares valued at $10,552,300 were approved for issuance to certain of our employees and officers of the Company as consideration for services rendered to the Company during fiscal year 2008.  Additionally, 1,000,000 shares of restricted common stock valued at $1,520,000, or $1.52 per share were issued to an officer for deferred compensation.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of these shares were officers or employees of the Company at the time of the issuance and each was an accredited investor.

·400,000 shares valued at $704,000 were issued in May 2008 to an independent consultant for consulting services.  These consulting services consisted of aiding in the settlement of a vendor dispute.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.

1,025,000 shares valued at $3,068,285 were issued during fiscal year 2008 to an independent consultant for consulting services provided to the Company.  These consulting services consisted of aiding in the settlement of a vendor dispute.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
·1,025,000 shares valued at $3,068,285 were issued in April 2007 to seven unaffiliated entities for product design services.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
 
Shares Issued in Settlement

·325,000 shares valued at $572,000 were issued in May 2008 to Onyx Consulting Group (“Onyx”) to settle amounts owed due to a public relations contract. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities.  Onyx is an accredited investor.  No general solicitation or general advertising was made or done in connection with the issuance of the shares.
325,000 shares valued at $572,000 were issued in May 2008 to Onyx Consulting Group (“Onyx”) to settle amounts owed due to a public relations contract. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities.  Onyx is an accredited investor.  No general solicitation or general advertising was made or done in connection with the issuance of the shares.

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Shares Issued Upon the Conversion of Preferred Stock

·15,000 shares of common stock were issued upon conversion of the Company’s Series B Preferred stock in October 2007.  Each share of Series B Preferred stock is convertible at any time into shares of common stock.  The number of shares of common stock into which each share of Series B Preferred stock may be converted is determined by dividing the original purchase price paid per share of Series B Preferred stock, namely $3.00, by the conversion price.  These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of the common shares were accredited investors and were already security holders of the Company.15,000 shares of common stock were issued upon conversion of our Series B Preferred stock in October 2007.  Each share of Series B Preferred stock is convertible at any time into shares of common stock.  The number of shares of common stock into which each share of Series B Preferred stock was converted was determined by dividing the original purchase price paid per share of Series B Preferred stock, namely $3.00, by the conversion price.  These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of the common shares were accredited investors and were already security holders.  The common shares were issued pursuant to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities.  Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the preferred stock.
 
Shares Issued Upon the Conversion of SecureAlert Series A Preferred Stock

·7,434,249 shares of common stock were issued upon redemption of SecureAlert Series A Preferred stock in March 2008. In addition, 825,893 shares of common stock were issued for SecureAlert Series A Preferred stock dividends.  These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The shares of common stock were issued to individuals who were already security holders of the Company and were issued pursuant to the terms of the rights and preferences of the preferred class of securities being converted.  These shares were issued pursuant to a privately negotiated transaction.  There was no public offering of securities, and no general solicitation or general advertising was made or done in connection with the issuances.  No cash consideration was paid in connection with the conversion of the preferred stock.
 
 Shares Issued on Revalue Rights

100,000 shares of common stock were issued as a penalty to Borinquen Container Corp. (“Borinquen”) for our failure to register shares Borinquen purchased in a private placement. These shares of common stock were issued without registration under the Securities Act in reliance on Section 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Borinquen represented that it was an accredited investor; in addition, Borinquen already owned shares of our common stock at the time of this transaction.
Shares Issued in Private Placements

In March and September 2008, 6,077,219 shares were issued to Futuristic, Advance Technology Investors, LLC, and Borinquen for gross proceeds of $5,057,914 in cash in a private placement of common stock. The initial issuance of the shares of common stock and the warrants were effected without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  Each investor signed a purchase agreement in which the investor made representations that included being an accredited investor, and purchasing for the investor’s own account and not with a view to distribute the shares.  There was no public offering of securities.  No general solicitation or general advertising was made or done in connection with the issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates.
Shares Issued Upon Exercise of Warrants

3,618,814 shares were issued upon the exercise of options and warrants between October 2007 and September 2008.  The exercise prices ranged from $0.54 to $1.73 per share.  The warrants had been granted in connection with services rendered.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. 
Fiscal Year 2009
Shares Issued Pursuant to Acquisitions
2,857,286 shares valued at $657,176 were issued in January 2009 pursuant to an acquisition of Bishop Rock Software.  The recipients of these shares represented in the original acquisition agreements that they were accredited investors as defined in Rule 501 under the Securities Act.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D and Rule 506.  There were no non-accredited investors involved in this issuance.

150,000 shares valued at $19,500 were issued in March 2009 pursuant to an agreement to extend an option to purchase the remaining 49% ownership of Midwest Monitoring.

 
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Shares Issued on Revalue Rightsin Connection with Debt
 
·100,000 shares of Common stock were issued as a penalty to Borinquen Container Corp. (“Borinquen”) for the Company’s failure to register shares Borinquen purchased in a private placement.100,000 shares were issued in November 2008 to a related-party for entering into a promissory note with us. These shares of common stock were issued without registration under the Securities Act in reliance on Section 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder. Borinquen represented to the Company that it was an accredited investor and was already a security holder of the Company.
Shares Issued in Private Placements
·In March and September 2008, 6,077,219 shares were issued to Futuristic Medical Devices, LLC, Advance Technology Investors, LLC, and Borinquen investors for $5,057,914 in cash in a private placement of common stock. The initial issuance of the shares of common stock and the warrants were effected without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  Each investor signed a purchase agreement in which the investor made representations to the Company that included being an accredited investor, and purchasing for the investor’s own account and not with a view to distribute the shares.  There was no public offering of securities.  No general solicitation or general advertising was made or done in connection with the issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates.
Shares Issued Upon Exercise of Warrants
·3,618,814 shares were issued upon the exercise of options and warrants between October 2007 and September 2008.  The exercise prices ranged from $0.54 to $1.73 per share.  The warrants had been granted in connection with services rendered to the Company.   These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to privately negotiated transactions with individuals and entities that had provided services to the Company.
In addition to the information provided above, the Company notes that the recipients of the shares in each of the above transactions were accredited investors and/or current stockholders, affiliates, employees, or service providers to the Company.  Each had a pre-existing relationship with the Company, was provided with the information available in the Company’s public filings and, where indicated, represented itself to be an accredited investor.  The transactions described above did not involve any public solicitation or similar activity by the Company and each transaction was a private transaction in which the recipient was advised that the shares issued were restricted shares, not freely transferable, and subject to the restrictions against resale of federal and applicable state securities laws.  The certificates issued representing the shares in each case contained a restrictive legend, advising that the resale of the securities was subject to registration under the Securities Act or an exemption from the registration provisions of such act.  In entering into these transactions the Company relied on exemptions available for offers and sales of securities not involving a public offering, including, without limitation, the exemptions from the registration requirements provided under Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
4,506,750 shares were issued during the fiscal year ended September 30, 2009 to 13 entities in connection with the issuance of Series A 15% debentures for cash proceeds of $4,496,750. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
3,549,630 shares were issued in March 2009 to six entities in connection with the issuance of Senior Secured Convertible notes. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
8,000,000 shares were issued in July 2009 for additional consideration to enter into a promissory note and to resolve prior investments. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
9,796,636 shares were issued in January 2009 for additional consideration to enter into a debenture and to resolve prior investments. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder. The entities and their respective owners, officers and directors were accredited investors. There were no non-accredited investors involved in this issuance of shares.
Shares Issued to Employees, Directors, and Consultants
737,500 shares valued at $169,625 were issued to our employees and officers as consideration for services rendered to us during fiscal year 2009.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
 
Item 6.    Selected Financial Data400,000 shares valued at $120,000 were issued in March and August 2009 to directors from the conversion of fees for services provided to us.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
 
Due to2,875,000 shares valued at $639,250 were throughout the divestiture of our medical stains and solutions business during fiscal year 2008, we now operate as one reportable business segment, offender trackingto four unaffiliated entities for legal and monitoring. Our financial results have been adjusted to reflectconsulting services.  These shares of common stock were issued without registration under the reclassificationSecurities Act in reliance on Section 4(2) of salesthe Securities Act and related expenses in our former stainsthe rules and solutions segment to "discontinued operations" for all periods presented. Further information on this can be found in Note (2) to the Consolidated Financial Statements herein under "Discontinued Operations."regulations promulgated thereunder.
 
The following selected consolidated financial data should be readShares Issued to Settled Lawsuits and Obligations
1,200,000 shares valued at $240,000 were issued in conjunction with "Management's Discussion and AnalysisFebruary 2009 to Strategic Growth International (“SGI”) to settle amounts owed due to a public relations contract. These shares of Financial Condition and Resultscommon stock were issued without registration under the Securities Act in reliance on Section 4(2) of Operation"the Securities Act and the Consolidated Financial Statementsrules and related notes theretoregulations promulgated thereunder.  These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that are includedmay be owed as royalty payments, and there was no public offering of securities.  SGI is an accredited investor.  No general solicitation or general advertising was made or done in this Report.connection with the issuance of the shares.

2,000,000 shares valued at $240,000 were issued in March 2009 to Thomas Natale, Edward Boling, and Boling Enterprises, LP (“Boling”) to settle amounts owed due to an unresolved disputed debt. Natale and Boling were former officers of SecureAlert.  These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities.  Boling is an accredited investor.  No general solicitation or general advertising was made or done in connection with the issuance of the shares.
2,200,000 shares valued at $550,000 were issued in May 2009 to Fulbright and Jaworski, LLP (“Fulbright”) to settle amounts owed for legal services. These shares of common stock were issued without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  These shares were issued pursuant to a privately negotiated transaction in settlement of amounts owed or that may be owed as royalty payments, and there was no public offering of securities.  Fulbright is an accredited investor.  No general solicitation or general advertising was made or done in connection with the issuance of the shares.
 
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Fiscal Year Ended September 30,
 
  
2004
 
2005
 
2006
 
2007
 
2008
 
Consolidated Statements of Operations:                
   Revenues                
   TrackerPAL device sales $- $- $32,751 $2,866,432 $2,300,000 
   Monitoring services  -  -  89,914  3,687,935  10,013,311 
   Home and personal security systems and other  556,338  289,236  268,935  60,842  90,366 
   Total Revenues  556,338  289,236  391,600  6,615,209  12,403,677 
   Cost of revenues  (796,565)  (437,224)  (569,664)  (13,396,163)  (13,108,990) 
        Negative margin (240,227) (147,988) (178,064) (6,780,954) (705,313) 
   Selling, general and administrative  (4,051,350)  (7,080,573)  (15,649,099)  (15,586,852)  (36,466,678) 
   Research and development  (205,341)  (1,766,791)  (2,087,802)  (4,564,121)  (4,811,128) 
   Impairment of inventory  (30,358)  -  -  -  - 
   Impairment of goodwill  (1,321,164)  -  -  -  - 
        Loss from operations (5,848,440) (8,995,352) (17,914,965) (26,931,927) (41,983,119) 
   Other income (expense)  (742,682)  (2,024,792)  (5,814,558)  900,038  (7,189,819) 
        Net loss from continuing operations 
 
(6,591,122)
 
 
(11,020,144)
 
 
(23,729,523)
 
 
(26,031,889)
 
 
(49,172,938
 
) 
   Discontinued operations  184,411  36,455  (68,222)  (338,682)  (414,112) 
        Net loss (6,406,711) (10,983,689) (23,797,745) (26,370,571) (49,587,050) 
   Dividends on Series A Preferred stock  (525,800)  (512,547)  (642,512)  (550,603)  (345,356) 
   Net loss attributable to common stockholders $(6,932,511) $(11,496,236) $(24,440,257) $(26,921,174)  $(49,932,406)
   Net loss per common share, basic and diluted $(0.25) $(0.33) $(0.44) $(0.26)  $   (0.36)
   Weighted average common shares outstanding  28,217,000  34,318,000  55,846,000  102,826,000  140,092,000 
Shares Issued Upon the Conversion of Preferred Stock
 
  
As of September 30,
 
  
2004
 
  
2005
 
  
2006
 
  
2007
 
  
2008
 
 
Consolidated Balance Sheets:               
 Assets   
   Cash $52,342  $289,680  $5,870,040  $4,803,871  $2,782,953 
   Accounts receivable  180,000   8,672   88,289   4,396,093   1,441,853 
   Inventory  40,850   12,811   -   -   - 
   Prepaid expenses  11,821   26,754   2,492,994   290,922   224,842 
   Other current assets  176,361   180,103   15,604   605,174   555,385 
   Other current assets from discontinued operations  129,283   262,832   194,410   933,755   - 
      Total current assets  590,657   780,852   8,661,337   11,029,815   5,005,033 
   Property and equipment, net of depreciation  110,531   377,610   1,321,995   1,380,192   1,581,558 
   Leased equipment, net of depreciation  -   -   2,139,685   3,739,474   1,349,146 
    Other assets  2,701   33,505   46,641   36,632   5,074,960 
    Other assets from discontinued operations  4,915   4,477   22,408   50,576   - 
        Total assets $708,804  $1,196,444  $12,192,066  $16,236,689  $13,010,697 
10,999 shares of common stock were issued upon conversion of our Series B Preferred stock in February 2009.  Each share of Series B Preferred stock was convertible at any time into shares of common stock.  The number of shares of common stock into which each share of Series B Preferred stock was converted was determined by dividing the original purchase price paid per share of Series B Preferred stock, namely $3.00, by the conversion price.  These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of the common shares were accredited investors and were already our security holders.  The common shares were issued pursuant to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities.  Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the preferred stock.
 
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Liabilities and Stockholders’ Equity              
    Line of credit $175,000  $174,898  $3,897,111 $3,858,985  $3,462,285 
    Accounts payable  656,043   1,333,620   1,681,040  3,032,223   2,059,188 
    Accrued liabilities  429,555   642,181   361,753  1,288,513   1,781,267 
    Redeemable common stock payable  196,000   96,000   -  -   - 
    Convertible debentures, current portion  -   1,262,366   -  -   - 
    Embedded derivative liability  -   1,860,626   -  -   - 
    SecureAlert Series A Preferred stock redemption obligation  -   -   -  -   3,244,758 
    Related-party notes and line of credit, current portion  -   255,472   44,549   -   792,804 
    Other current liabilities  539,234   17,539   38,694  1,314,247   21,343 
    Notes payable, current portion  789,176   287,343   169,676  169,676   465,664 
    Current liabilities from discontinued operations  73,490   68,273   58,043  69,186   - 
       Total current liabilities  2,858,498   5,998,318   6,250,866  9,732,830   11,827,309 
    Convertible debentures, long-term portion  1,106,412   421,570   -  -   - 
    Related-party notes and line of credit, long-term portion  222,546   -   -  239,763   - 
    Notes payable, long-term portion  -   -   -  -   1,147,382 
       Total liabilities  4,187,456   6,419,888   6,250,866  9,972,593   12,974,691 
                    
    Minority interest  -   -   -  1,396,228   - 
                    
    SecureAlert Series A Preferred stock  -   2,990,000   3,590,000  3,590,000   - 
                    
    Common stock  3,140   4,513   8,013  12,734   15,588 
    Preferred stock, Series A  2   3   2  1   1 
    Preferred stock, Series B  184   137   5  1   1 
    Preferred stock, Series C  -   -   553  -   - 
    Additional paid in capital  66,329,339   76,113,623   111,718,090  142,238,576   186,203,084 
    Deferred compensation  (331,312)  (3,363,126)  (2,649,088)  (7,468,998)   (3,498,672)
    Subscription receivable  -   (504,900)  -  (407,500)   - 
    Retained earnings  (63,073,294)  (69,480,005)  (82,928,630) (106,726,375)   (133,096,946)
    Current earnings  (6,406,711)  (10,983,689)  (23,797,745) (26,370,571)   (49,587,050)
       Total stockholders’ equity  (3,478,652)  (8,213,444)  2,351,200  1,277,868   36,006 
         Total liabilities and stockholders’ equity $708,804  $1,196,444  $12,192,066 $16,236,689  $13,010,697 
9,306 shares of common stock were issued upon conversion of 19 shares of our Series A Preferred stock in February 2009.  Each share of Series A Preferred stock is convertible at any time into shares of common stock.  One share of Series A Preferred stock may convert into 370 shares of common stock. These shares of common stock were issued without registration under the Securities Act in reliance on Sections 3(a)(9) and 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  The recipients of the common shares were accredited investors and were already our security holders.  The common shares were issued pursuant to the terms of the rights and preferences of the preferred class of securities that were converted, and there was no public offering of securities.  Additionally, no general solicitation or general advertising was made or done in connection with the issuances, and no cash consideration was paid in connection with the conversion of the preferred stock.
 
Shares Issued in Private Placements
In December 2008, March 2009, and May 2009, 17,850,000 shares were issued to Solomon Tennenhaus, Kofler Ventures, and euromicron AG investors for $3,250,000 in cash in a private placement of common stock. The initial issuance of the shares of common stock and the warrants were effected without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.  Each investor signed a purchase agreement in which the investor made representations to us that included being an accredited investor, and purchasing for the investor’s own account and not with a view to distribute the shares.  There was no public offering of securities.  No general solicitation or general advertising was made or done in connection with the issuance, and the shares and warrants were issued in paper certificate form, with appropriate restrictive legends prominently affixed on the certificates.
During the fiscal year ended September 30, 2009, we also cancelled 1,758,379 shares of common stock previously issued in prior years.
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of OperationOperations
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Report.

The following Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations (“MD&A”) is intended to help the reader better understand RemoteMDx, our operations and our present business environment.  This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements for the fiscal years ended September 30, 20082009 and 20072008 and the accompanying notes thereto contained in this Report.report. This introduction summarizes MD&A, which includes the following sections:

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 ·Overview - a general description of our business and the markets in which we operate; our objectives; our areas of focus; and challenges and risks of our business.

 ·Recent Developments – a brief description of business developments occurring after the fiscal year ended September 30, 20082009 and prior to the filing of this Report.

 ·Results of Operations - an analysis of our consolidated results of operations for the last two fiscal years presented in our consolidated financial statements.

 ·Liquidity and Capital Resources - an analysis of cash flows; off-balance sheet arrangements and aggregate contractual obligations; an overview of financial position; and the impact of inflation and changing prices.

 ·Critical Accounting Policies - a discussion of accounting policies that require critical judgments and estimates.

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We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the two segments of our business to provide a better understanding of how those segments and their results affect theour financial condition and results of operations of the Company as a whole.

Overview

The Company marketsRemoteMDx and deploys what it believes to be the most advancedsubsidiaries market and deploy offender management programs, available in the global marketplace today, combining patented GPS (Global Positioning System) tracking technologies, fulltime 24/7/365 intervention-based monitoring capabilities and comprehensive case management services.  Our vision is to be the market leader for delivering offender management solutions that integrate interaction technologies.  We believe that we currently deliver the only offender management technology which effectively integrates GPS, RF (Radio Frequency) and an interactive 3-way voice communication system into a single device, deployable on offenders in any country worldwide.  Through our patented electronic monitoring technologies and services, we empower law enforcement, corrections and rehabilitation professionals alike with offender, defendant, probationer and parolee programs, which grant convicted criminals and pre-trial suspects an accountable opportunitiesopportunity to be “free from prison”prison,” while providing for greater public safety at a lower cost to incarceration or traditional resource-intensive monitoring alternatives.

TrackerPAL I &TrackerPAL™ II and TrackerPAL™ IIe (“enhanced”), now manufactured in the USA – The TrackerPAL™ portfolio of products, e-Arrest beaconsBeacons and monitoring services are uniquely designed to create “Jails“Jails without Walls,” customizable by offender types such as(e.g., domestic abusers, sexual predators, gang members, pre-trial defendants, and juvenile offenders.  Ouroffenders, etc.).  Additionally, our proprietary software and device firmware also support the dynamic accommodation of agency-established monitoring protocols, 95-decibal siren, victim protection imperatives, geographic boundaries, work environments, school attendance, rehabilitation programs and sanctioned home restrictions.  TrackerPALTrackerPAL™ IIe is designed for use by federal, state and local agencies to provide location tracking of select individuals in the criminal justice system.  The TrackerPALTrackerPAL™ IIe device fastens to the offender's ankle with a tamper resistant strap (steel cabling with optic fiber) that can only be adjusted or removed without detection by a supervising officer through services provided by our SecureAlert Monitoring Center (or other monitoring centers).  The Company’sThis monitoring and intervention center acts as an important link between the offender and the supervising officer as monitoring centerintervention specialists persistently track and monitor the offender, initiating contact at the direction of the supervising agency and/or when the offender is in violation of any established restrictions or protocols.  An intelligent device with integrated computer circuitry and constructed from case-hardened plastics, the TrackerPALTrackerPAL™ IIe unit promptly notifies the monitoring center if any attempt is made to breach protocols or to remove or otherwise tamper with the device or optical strap housing. 

According to the latest available Bureau of Justice Statistics (2007), it is estimated that approximately 7,235,728 people were either incarcerated, on parole or on probation. The report also indicates that the average cost of incarcerating an inmate ranges from $65 to $175 per day dependent upon facility type, security level, amenities and jurisdiction.  Moreover, with ever-growing economic pressures, we believe that these costs are unsustainable with ongoing state and federal budget reductions, facility-specific overcrowding concerns, increased rehabilitation imperatives and politicized re-socialization agendas. Thus, electronic monitoring alternatives to incarceration for low to moderate risk offenders (adult and juveniles), early release for good behavior initiatives, work release programs, sentencing diversions and accelerated halfway house deployments are all being strongly encouraged and seriously considered by most legislative and judicial branches of government.  For approximately 10% to 15% of the traditional costs of incarceration, our TrackerPAL monitoring center and patented devices can monitor offenders continuously, while providing real-time location tracking, interactive voice access and intervention-biased contact, thus reducing the potential for subsequent or repeat offenses.  A growing number of jurisdictions are also embracing “offender pay,” “parent pay” and/or “partial pay” programs wherein the burden of the tracking and monitoring costs is shifted in whole or part directly to the offender or a responsible party, and thus permanently defrayed from tax payer obligation.  We estimate that approximately 20% of our gross revenues currently derive from offender payments directly under court order and threat of re-incarceration for non-payment; with the cost of non-compliance being reincarceration, the majority of these accounts remain in compliance. This aspect of our business is growing significantly and we expect that it will continue to outpace traditional tax-payer obligated payment programs.

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Strategically, and in support of ever-growing rehabilitation and re-socialization efforts, the Company has adopted a broader services charter to further support and encourage many evolving rehabilitation initiatives. Our “C.A.R.E.” programs support Corrections and Accountability objectives in concert with Rehabilitation and Empowerment agendas. Specifically, our technology facilitates a stringent protocol enforcement capability, incorporating restricted movement provisions, coupled with enablement of positive reinforcement communications, all in support of social worker interactions, ongoing ministry options and proactive access by authorized counselors and/or sponsors.  We believe that our programs are uniquely positioned to allow for regular, frequent, and positive interactions and daily affirmations with offenders, as they strive to again become responsible and contributing members of society, while living within the virtual “electronic fence” boundaries established through our proprietary technologies.
 
Recent Developments
 
Subsequent to the fiscal year ended September 30, 2008,2009, we entered into several material transactions that are not reflected in the results of operations for fiscal year 2008,2009, as follows:
 
 
·
On November 17, 2008, the Company’s Chief Financial OfficerIn October 2009, we issued 1,400,000 shares of common stock to several former holders of SecureAlert Series A Preferred to settle a dispute and Chief Operating Officer Blake Rigby resigned from his positions with the Company to pursue other interests.  He had served in the position since June 2008. No severance or other obligations were incurred by the Companyan outstanding liability in connection with the departure of Mr. Rigby.

·Effective November 20, 2008, the Board of Directors of the Company appointed John L. Hastings, IIIcontingency payments due to the additional position of Chief Operating Officer, recently vacated by Mr. Rigby.  Mr. Hastings also continues to serve as the Company’s President.  No change was made in the compensation of Mr. Hastings in connection with this expanded role.holders.

·Also effective November 20, 2008, the Board of Directors of the Company appointed Michael G. Acton to the position of Chief Financial Officer.  He previously served as the Company’s Chief Financial Officer from March 2001 until June 2008.  From 1999 until present, Mr. Acton serves as the Company’s Secretary-Treasurer.  He is a Certified Public Accountant in the State of Utah. Mr. Acton also is the Chief Financial Officer of Volu-Sol, a former subsidiary of the Company.  

·The Company’s subsidiary SecureAlert down-sized its workforce by approximately 21% (26 persons) during the first two weeks of November 2008 as part of a restructuring plan which began in October 2008. The Company implemented this restructuring with the goal of increasing operating efficiencies while reducing operating expenses and improving gross margins and cash flows during the fiscal year ending September 30, 2009.

 ·On November 21, 2008, the Company borrowed $1,000,000 from its Chief Executive Officer2, 2009, our board of directors designated 50,000 shares of authorized but previously undesignated and Chairman, David G. Derrick, pursuant tounissued preferred stock as Series D Convertible Preferred stock.  The shares accrue dividends at a Promissory Note (the “Note”). This unsecured loan is intended to bridge the device procurement, accelerated and expanded manufacturing and short-term financial needs of the Company until the completion of a private round of debt financing, which is presently being conducted by the Company.  Terms of the transaction are consistent with the terms offered to third-party financing sources in recent transactions.  The Note bears interest at an annual percentage rate of 15%8% per annum and is due and payable the earlier of the receipt of a minimum of $1,000,000may be paid in new financing,cash or seventy-five (75) days from origination.  Net proceeds to the Company after payment of a 5% initiation fee paid to Mr. Derrick were $950,000.  The Company also agreed to issue 100,000additional shares of commonSeries D Preferred stock. Subsequent to September 30, 2009, we issued 15,986 shares of Series D Convertible Preferred stock to Mr. Derrickupon the conversion of $15,723,204 in debt, accrued liabilities and interest and an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as additional consideration for extending the loan to the Company.  As of the date of this Report, the 100,000resulting in a total of 28,186 shares of common stock had not yet been issued.  The Company may prepay the Note at any time without penalty or further interest obligation.  The transaction was reviewed and approved by the Audit Committee of the Company’s Board of Directors.Series D Preferred stock.

·On November 21, 2008, the Company received AT&T certification allowing the TrackerPAL product to be used on the AT&T network.

·In December 2008, the Company verbally agreed to settle a lawsuit with Strategic Growth International, Inc. 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.

·In December 2008, the Company received written consents from the holders of a majority of the issued and outstanding shares of the Company’s capital stock required to increase the number of authorized shares of the Company from 175,000,000 to 250,000,000.

·The Company issued 350,000 shares of restricted common stock for cash proceeds of $100,000, or approximately $0.29 per share.  Additionally, the Company issued 1,800,000 shares of restricted common stock to settle or satisfy accounts payable balances with two vendors.
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·On December 22, 2008, Mr. Derrick rescinded 1,500,000 shares of common stock which were granted in April 2008 valued at $2,325,000.  Additionally, Mr. Derrick also rescinded 1,000,000 warrants that were vested during the fiscal year ending September 30, 2008 valued at $1,934,162.

·On December 22, 2008, Mr. Hastings rescinded 250,000 shares of common stock which were granted in June 2008 valued at $387,500.  Additionally, Mr. Hastings also rescinded 250,000 warrants that were vested during the fiscal year ending September 30, 2008 valued at $337,113.
Results of Operations
The following table summarizes our consolidated operating results as a percentage of net sales, respectively, for the periods indicated:
Fiscal Year Ended September 30,
    
Consolidated Statements of Operations Data:200620072008
      
Net revenues100%100%100%
Cost of revenues(145)%(203)%(106)%
 Negative margin(45)%(103)%(6)%
    
Operating expenses:   
   Selling, general and administrative expenses(3,997)%(236)%(294)%
   Research and development(533)%(69)%(39)%
 Loss from operations(4,575)%(408)%(339)%
    
Other income (expense):(1,485)%14%(58)%
          Loss from continuing operations(6,060)%(394)%(397)%
Discontinued operations(17)%(5)%(3)%
 Net Loss(6,077)%(399)%(400)%

Fiscal Year 20082009 compared to Fiscal Year 20072008

[Note: during the fiscal year ended September 30, 2008, the Companywe divested itself of itsour subsidiary Volu-Sol Reagents Corporation (“Volu-Sol”).ActiveCare. As a result, the Companywe now operatesoperate in one segment.  Unless otherwise indicated, the results of operations for all periods in this Report have been adjusted to reflect continuing operations only.  See Note (2) – Discontinued Operations in the Company’sour Consolidated Financial Statements included in this Report.]
Revenues
 
During the fiscal year ended September 30, 2008, the Company2009, we had net revenues of $12,403,677$12,625,908 compared to net revenues of $6,615,209$12,403,677 for the fiscal year ended September 30, 2007.  This2008, an increase of approximately 88%$222,231 (2%).  Revenues from monitoring services for the fiscal year ended September 30, 2009 totaled $12,055,159, compared to $9,826,077 for the same period ended 2008, resulting in an increase of $2,229,082 (23%). Revenues from product sales for the fiscal year ended September 30, 2009 were $570,749, compared to $2,577,600 for the same period ended 2008, resulting in a decrease of $2,006,851.  This decrease of $2,006,851 is primarily due primarily to increased revenues from the leasea shift in focus to leasing monitoring equipment instead of our TrackerPAL products and related monitoring services.  device sales.

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During the fiscal year ended September 30, 2008,2009, our SecureAlert subsidiary provided net revenues of $7,333,659$5,322,191 compared to net revenues of $6,615,209 for the year ended September 30, 2007, an increase of approximately 11%.  These fiscal year ended 2008 revenues from SecureAlert of $7,333,659 consisted of $2,300,000 from the sale of offender tracking devices, $4,943,293 from monitoring services, and $90,366 from home and personal security systems and other miscellaneous revenues.  The first units of TrackerPAL I began to be delivered during the second quarter of fiscal year 2006.  Delivery of TrackerPAL II devices were introduced in August 2008.

On December 1, 2007, the Company acquired Midwest Monitoring.  For the year ended September 30, 2008, Midwest Monitoring had revenuesa decrease of $2,799,914.  These revenues consisted of $2,522,314$2,011,468 (27%).  Revenues from monitoring services for the monitoring of offender tracking devices and $277,600 from the sale of equipment.

On December 1, 2007, the Company acquired Court Programs. For the ten months ended September 30, 2008, Court Programs had revenues of $2,270,104 from the monitoring of offender tracking devices and parolee services.

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During thefiscal year ended September 30, 2007,2009 were $5,131,655, compared to $5,033,659 for the Company delivered TrackerPAL devicesprior year, resulting in an increase of $97,996 (2%). Revenues from product sales for the fiscal year ended September 30, 2009 were $190,536, compared to distributors with$2,300,000 for the fiscal year 2008, resulting in a sales valuedecrease of $1,300,000 in transactions that did not meet$2,109,464.  This decrease of $2,109,464 is primarily due to our focus on leasing monitoring equipment instead of device sales.

During the requirementsfiscal year ended September 30, 2009, our Midwest Monitoring subsidiary provided net revenues of EITF 00-21 and SAB 104 for revenue recognition.  This revenue was deferred and recognized$4,213,972 compared to net revenues of $2,799,914 during the fiscal year ended September 30, 2008, when all revenue recognition criteriaan increase of $1,414,058 (51%).  This increase is related to revenues in the amount of $514,744 that Midwest Monitoring recognized during the period from October 1, 2007 through November 30, 2007 that we were met.not required to consolidate.  The remaining increase of $899,314 is related to an increase of $86,288 in device sales and $813,026 of monitoring services.

During the fiscal year ended September 30, 2009, our Court Programs subsidiary provided net revenues of $3,086,335 compared to net revenues of $2,270,104 during the fiscal year ended September 30, 2008, an increase of $816,231 (36%).  This increase is related to revenues in the amount of $540,935 that Court Programs recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate.  The remaining increase is related to an increase of $275,296 in monitoring services.

On January 14, 2009, we purchased Bishop Rock Software.  During the fiscal year ended September 30, 2009, Bishop Rock Software had $3,410 of revenue.

Cost of Revenues
 
During the fiscal year ended September 30, 2008,2009, cost of revenues totaled $13,108,990,$10,138,613, compared to cost of revenues in fiscal 2007 of $13,396,163.  This decrease is due primarily to a royalty expense incurred during the fiscal year 2007 that was terminated in July and August 2007.  SecureAlert’s cost of revenues totaled $10,007,725 or approximately 136% of SecureAlert’s revenues in fiscal year 2008, compared to $13,396,163, or 203%, of SecureAlert’s revenues in 2007.  SecureAlert’s cost of revenues in fiscal year 2008 consisted of communication costs of $2,939,790, monitoring center costs of $2,042,774, device costs of $1,675,212, amortization of $745,894, disposal of units of $570,948, utilization costs of $470,227, commissions of $434,285, tools and accessories of $298,706, device enhancements of $148,515, warranty of $220,758, freight of $222,034, lease of $72,965, battery related issues of $70,638, location of $52,895, other electronic monitoring costs of $29,031,and home security and PERS costs of $13,053.  The disposal of units with a cost of $570,948 relates primarily to the water ingression and strap design problems experienced by the Company.  

The Company expects the cost of revenues as a percentage of revenues to decrease in the foreseeable future due to the following reasons:  (1) The Company has attained AT&T certification which is expected to result in lower communication costs, and (2) Further development of the Company’s proprietary software will enable each operator to monitor more devices resulting in lower monitoring center costs.

Midwest Monitoring’s cost of revenues totaled $1,630,823, or 58%, of Midwest Monitoring’s revenues for the ten months ended September 30, 2008.  Court Program’s cost of revenues totaled $1,470,442, or 65%, of Court Program’s revenues for the ten months ended September 30, 2008.

The Company recognized $952,341 of costs during the year ended September 30, 2008 that related to deferredof $13,108,990, a decrease of $2,970,377 (23%).  The decrease in cost of revenues resulted primarily from reduced communication and direct labor cost initiatives, device cost of goods and software enhancements, offset by a minor increase in equipment amortization.

Communication costs, from deferred device sales.
Amortization of $745,894 recorded during$2,422,541 for the fiscal year ended September 30, 2008 is based on a three-year useful life for TrackerPAL devices.  Devices that are leased or remain in the Company’s possession because they have not been sold are amortized over three years.  The Company believes this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence.  Management periodically assesses the useful life of the devices for appropriateness.
Communication costs of $2,939,7902009, primarily referrefers to the costs associated with Subscriber Identity Modules (“SIM”).  Embedded in each TrackerPALTrackerPAL™ device is a SIM, which enables the device to transfer voice and data information to a monitoring center.  We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue because the SIM cards are ordered and inserted into devices before the devices are sold or leased.

Research and Development Expenses
During the fiscal year ended September 30, 2008, the Company incurred research and development expenses of $4,811,128 compared to similar expenses in fiscal year 2007 totaling $4,564,121. This increase is due primarily to expenses associated with the development of the TrackerPAL II device for the parolee market.  We anticipate research and development expenses to decrease in future periods.
Selling, General and Administrative Expenses
           During the fiscal year ended September 30, 2008, the Company’s selling, general and administrative expenses totaled $36,466,678, compared to $15,586,852Amortization, $1,300,783 for the fiscal year ended September 30, 2007. This increase of $20,879,826 is the result of an increase in advertising and marketing of $54,062, amortization of $45,200, automobile of $103,466, consulting of $17,339,667, depreciation of $164,167, insurance of $108,541, legal of $738,729, office expense of $36,800, payroll and taxes of $1,716,849, postage of $28,992, rent and storage of $125,088, telephone of $143,585 travel of $715,455, and utilities of $45,117 and other selling, general and administrative expenses of $144,514.  These increases in selling, general and administrative expenses were offset, in part, by decreases in the following: bad debt expense of $43,448, contract labor of $105,296, investment relations of $91,514, lease of $116,041, outside services of $173,538, training of $46,262, and other selling, general and administrative expenses of $54,307.  Consulting expense for the year ended September 30, 2008 was $23,608,063 compared to $6,268,396 for the year ended September 30, 2007, an increase in consulting expense of $17,339,667.  Consulting expense for the year ended September 30, 2008 of $23,608,063 consisted of $1,138,628 in cash and $22,469,435 in non-cash compensation.  Non-cash compensation of the $22,469,435 consisted of stock and warrants issued to vendors of $2,155,331, board of directors of $3,468,084, executive officers and employees of $15,185,020, and settlement of lawsuits of $1,661,000.

26
Gain on Sale of Intellectual Property

During the fiscal year ended September 30, 2007, the Company sold three patents for a total of $2,400,000.  These patents were as follows:  Interference Structure for Emergency Response System Wristwatch (No. 6,366,538 issued on April 2, 2002), Emergency Phone for Automatically Summoning (No. 6,226,510 issued on May 1, 2001), and Panic Button Phone (No. 6,044,257 issued on March 28, 2000).  During the fiscal year ended September 30, 2008, the Company sold Patent Number 6,636,732, Emergency Phone with Single Button Activation, to an unrelated party for cash proceeds of $2,400,000.
Other Income and Expense
For the fiscal year ended September 30, 2008, interest expense was $1,566,542, compared to $1,198,573 for fiscal year 2007. This amount includes non-cash interest expense of approximately $865,568 related to amortization of deferred financing costs associated with warrants and shares of common stock issued for prepaid interest.

During the year ended September 30, 2008, the Company redeemed all outstanding shares of SecureAlert Series A in exchange for 7,434,249 shares of RemoteMDx common stock for a value of $8,372,566.

Net Loss
The Company had a net loss for the year ended September 30, 2008 totaling $49,587,050, compared to a net loss of $26,370,571 for fiscal year 2007.  This increase is due primarily to expenses associated with the development of the TrackerPAL device for parolees, and related increases in cost of revenues, and non-cash compensation expense issued to vendors, board of directors, officers and employees, and in connection with the settlement of lawsuits.
Fiscal Year 2007 compared to Fiscal Year 2006
Revenues
During the fiscal year ended September 30, 2007, the Company had net revenues of $6,615,209 compared to net revenues of $391,600 for the fiscal year ended September 30, 2006, an increase of $6,223,609.  This increase is due primarily to increased revenues from the sale or lease of our TrackerPAL products and related monitoring services.  The first units were delivered during the first quarter of fiscal year 2007.  During the year ended September 30, 2007, our SecureAlert subsidiary provided net revenues of $6,615,209 compared to net revenues of $391,600 for the year ended September 30, 2006, an increase of approximately 1,589%.  These revenues consisted of $2,866,432 from the sale of offender tracking devices, $3,687,935 from monitoring services, and $60,842 from home and personal security systems.

During the year ended September 30, 2007, the Company delivered TrackerPAL devices to distributors with a sales value of $1,300,000 in transactions that did not meet the requirements of EITF 00-21 and SAB 104 for revenue recognition.  This revenue was deferred and recognized in future periods.
Cost of Revenues
During the fiscal year ended September 30, 2007, cost of revenues totaled $13,396,163, compared to cost of revenues in fiscal 2006 of $569,664. This increase is due primarily to the increase in revenues from TrackerPAL commencing in the first quarter of fiscal year 2007.  SecureAlert’s cost of revenues totaled $13,396,163, or 203%, of its revenues in 2007, compared to $569,664, or 145%, for fiscal 2006.  SecureAlert’s cost of revenues consisted of device costs of $2,957,787, monitoring center costs of $1,782,490, communication costs of $3,088,283, disposal of units of $472,132, commissions of $262,655, device enhancements of $194,704, home security and PERS costs of $139,162, royalty settlement expense of $2,767,010, amortization of $1,286,401, accessories of $80,904, and location and other costs of $364,635.  The disposal of units with a cost of $472,132 relates primarily to the water ingression and strap design problems experienced by the Company.  

As indicated above, $1,300,000 of device deliveries did not meet the requirements of EITF 00-21 and SAB104 for revenue recognition.  The corresponding cost of revenues is $952,341.  These costs were recognized during fiscal year 2008.
The Company previously had entered into two agreements requiring it to pay royalties on devices in service with customers.  During the year ended September 30, 2007, the Company terminated these agreements and settled past and future royalty obligations under these agreements for a total of 1,788,520 shares of common stock valued at $2,647,010 and $120,000 in cash, for total consideration of $2,767,010.  The terms of each agreement and the termination thereof are discussed below.

Futuristic Medical Devices, LLC (“Futuristic”).  On January 8, 2007, the Company entered into an agreement with Futuristic under which the Company agreed to pay a royalty of $0.057 per day for each device in service with a customer through June 30, 2009.  On July 18, 2007, the Company and Futuristic terminated the agreement and settled all obligations.  In consideration of the termination of the agreement, the Company issued to Futuristic a total of 1,188,520 shares of common stock valued at $1,759,010, or $1.48 per share (based on the quoted market price of the Company’s common stock on that date).  Of the 1,188,520 shares of common stock issued, 88,520 were issued to settle royalty obligations incurred by the Company through July 18, 2007.  The remaining 1,100,000 shares of common stock were issued to settle future royalty obligations that may be owed by the Company.
PFK Development Group, Ltd. (“PFK”).  On February 1, 2006, the Company entered into a consulting agreement with PFK under which the Company agreed to pay a royalty of $0.10 per day for each device in service with a customer that PFK introduced to the Company through January 31, 2009.  On July 18, 2007, the Company and PFK terminated the agreement and settled all obligations thereunder.  The Company issued 600,000 shares of common stock valued at $888,000, or $1.48 per share (based on the quoted market price of the Company’s common stock on that date) and $120,000 in cash.
During the year ended September 30, 2007, we incurred amortization expense of $826,425 and communication expense of $2,266,627 for non-billable units.  A non-billable unit is a TrackerPAL device that did not generate any revenue for the period.  We have recorded these expenses as cost of revenues because the non-billable units do not directly meet the definition of research and development assets, they are not promotional assets, and they are not used by the Company for internal purposes.  Amortization2009, is based on a three-year useful life for TrackerPALTrackerPAL™ devices.  Devices that are leased or remain in the Company’s possession because they have not been soldretained by us for future deployment or sale are amortized over three years.  The Company believesWe believe this three-year life is appropriate due to rapid changes in electronic monitoring technology and the corresponding potential for obsolescence.  Management periodically assesses the useful life of the devices for appropriateness.

We expect the cost of revenues as a percentage of revenues to decrease in the foreseeable future due to (a) further attempts to lower communication costs, and (b) further development of our proprietary software enabling each operator to monitor more devices resulting in lower monitoring center costs.

SecureAlert’s cost of revenues totaled $5,583,841 (105% of SecureAlert net revenue) for the fiscal year ended September 30, 2009 compared to $10,007,725 (136% of SecureAlert net revenue) for the fiscal year ended September 30, 2008, a decrease of $4,423,884 (44%).  This is related to decreases of $1,626,018 in device costs, $521,716 in communication costs, $454,374 in monitoring center costs, and $1,538,129 in other TrackerPAL™ and miscellaneous costs.

Midwest Monitoring’s cost of revenues totaled $2,735,276 (65% of Midwest Monitoring’s revenue) for the fiscal year ended September 30, 2009 compared to $1,630,823 (58% of Midwest Monitoring’s revenue) for the fiscal year ended September 30, 2008, an increase of $1,104,453 (68%).  This increase is related to revenues in the amount of $330,504 that Midwest Monitoring recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate.  The remaining increase of $773,949 is primarily related to the growth in revenues.

Court Program’s cost of revenues totaled $1,819,496 (59% of Court Program’s revenue) for the fiscal year ended September 30, 2009 compared to $1,470,442 (65% of Court Program’s revenue) for the fiscal year ended September 30, 2008, an increase of $349,054 (24%).  This increase is related to revenues in the amount of $311,868 that Court Programs recognized during the period from October 1, 2007 through November 30, 2007 that we were not required to consolidate.  The remaining increase of $37,186 is primarily related to the growth in revenues.

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CommunicationGross Margin

During the fiscal year ended September 30, 2009, gross margin totaled $167,765, compared to negative margin during the fiscal year ended September 30, 2008 of $705,313, an improvement of $873,078.  Included in cost of revenues are costs primarily referattributable to impairment of inventory and monitoring equipment of $2,319,530 and $570,948 for the years ended September 30, 2009 and 2008, respectively.  These impairment costs associated with Subscriber Identity Modules (“SIM”).  Embeddedfrom disposal of obsolete monitoring equipment were expenses not expected in each TrackerPAL device is a SIM, which enablesfuture periods. Excluding impairment costs, adjusted gross margin for the device to transfer voice and data informationfiscal year ended September 30, 2009 was $2,487,295, compared to a negative margin of $134,365 for the same period in 2008, an improvement of $2,621,660 while increasing revenues from monitoring center.  We incur a monthly charge for each SIM, regardless of whether or not the associated device generates revenue because the SIM cards are ordered and inserted into devices before the devices are sold or leased.services.

Research and Development Expenses
 
During the fiscal year ended September 30, 2007, the Company2009, we incurred research and development expenses of $4,564,121$1,777,873 compared to similar expenses in 2006recognized during fiscal year 2008 totaling $2,087,802.$4,811,128. This increasedecrease of $3,033,255 is due primarily to expenses associated with the development of the TrackerPAL device for the parolee market.  In addition, researchmanagement’s decision to bring software enhancements and development expenses for the year ended September 30, 2007 include $1,454,784 in monitoring equipment disposed of that was initially usedproduct design in-house as test units and had served its useful life.  The Company does not expectopposed to dispose of a significant number of test units in the future.using third-party vendors.  We expectanticipate research and development expenses to continue to decrease in the future due to ongoing research and development related to our TrackerPAL device and accessories.periods.
 
Selling, General and Administrative Expenses
 
During the fiscal year ended September 30, 2007, the Company’s2009, our selling, general and administrative expenses totaled $15,586,852,$16,540,645, compared to $15,649,099$36,466,678 for the fiscal year ended September 30, 2006. This decrease2008. The improvement of $62,247$19,926,033 is the result of decreases in the following expenses: consulting ($19,362,378), travel ($1,297,363), advertising and marketing ($132,596), bad debt expense ($68,775), meals and entertainment ($64,677), postage ($43,636), office ($28,895), employee benefits ($25,519), outside services ($23,181), and other selling, general and administrative ($99,090).  These decreases in selling, general and administrative expense were offset by an increase in advertising of $38,858, automobile of $54,677, bad debt expense of $313,949,payroll and taxes ($457,921), legal ($441,611), amortization ($64,955), investment relations ($54,554), contract labor ($40,081), board of directorsdirector fees paid in shares of common stock valued at $110,000,($35,000), depreciation of $351,809,($33,714), insurance of $323,953, equipment lease expense of $154,709, office expense of $70,784, outside services of $62,566, payroll and payroll taxes of $1,278,647, rent of $91,101, supplies of $24,952, telephone of $133,866, training of $70,561, travel of $580,652,($26,625), and other selling, general and administrative expenses of $131,670.  These increases in selling, general and administrative expenses were offset, in part, by decreases in the following: commissions of $56,250, consulting($65,616).  Consulting expense of $3,223,396, investment relations and banking fees of $411,934, legal fees of $114,538, and other selling, general and administrative expenses of $48,883.  Selling, general and administrative expenses of $15,586,852 for the year ended September 30, 2007 included $8,074,126 of non-cash expense primarily related to the issuance of warrants and shares to consultants for services provided to the Company.
Gain on Sale of Intellectual Property
During the fiscal year ended September 30, 2007,2009 was $4,245,685 compared to $23,608,063 for the Company sold three patents forfiscal year ended September 30, 2008, a totaldecrease of $2,400,000.  The patents are as follows:  Interference Structure for Emergency Response System Wristwatch (No. 6,366,538$19,362,378.  This decrease is primarily due to a significant reduction of non-cash compensation totaling $18,603,062 through options and warrants issued on April 2, 2002), Emergency Phone for Automatically Summoning (No. 6,226,510 issued on May 1, 2001),to board of directors, executive officers and Panic Button Phone (No. 6,044,257 issued on March 28, 2000).employees.  Cash compensation also decreased by $759,316 since we settled fewer lawsuits related to consulting and brought a lot of consulting in-house.
 
Other Income and Expense
 
For the fiscal year ended September 30, 2007,2009, interest expense was $1,198,573,$5,012,803, compared to $6,541,074$1,566,542 for the fiscal year 2006. The $1,198,573ended September 30, 2008. This amount includes non-cash interest expense of approximately $396,019$2,595,933 related to amortization of deferred financing costs associated with warrants, debentures and shares of common stock issued for prepaid interest.

During the fiscal year ended September 30, 2008, we redeemed all outstanding shares of SecureAlert Series A in exchange for 7,434,249 shares of RemoteMDx common stock for a value of $8,372,566.
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Net Loss
 
The CompanyWe had a net loss for the fiscal year ended September 30, 2007,2009 totaling $26,370,571,$23,081,500, compared to a net loss of $23,797,745$49,587,050 for the fiscal year 2006.ended September 30, 2008.  This increasedecrease of $26,505,550 is due primarily to expenses associated withreductions in communication and device costs, bringing software enhancements and product design in-house as opposed to using high priced third-party vendors, and the developmentreduced use of the TrackerPAL device for parolees, and related increases in cost of revenues, selling, general and administrative expenses, and interest expense.consulting services by bringing these services in-house.

Quarterly Financial Information (Unaudited)

The following tables set forth unaudited quarterly operating results for each of the last eight fiscal quarters. This information is consistent with the Consolidated Financial Statements herein and includes normally recurring adjustments that management considers to be necessary for a fair presentation of the data. Due to the divestiture of control of Volu-Sol during the year ended September 30, 2008, we now operate as one reportable business segment. Our financial results have been adjusted to reflect the reclassification of revenues and related expenses in our former diagnostic stains business to "discontinued operations" for all periods presented. Further information on this can be found in Note (2) to the Consolidated Financial Statements herein under—"Discontinued Operations." Quarterly results are not necessarily indicative of future results of operations. This information should be read in conjunction with the audited Consolidated Financial Statements and notes thereto that are included elsewhere in this Report.

  Quarter Ended 
                         
  December 31,  March 31,  June 30,  Sept. 30,  December 31,  March 31,  June 30,  Sept. 30, 
  2006  2007  2007  2007  2007  2008  2008  2008 
                         
Consolidated Statements of Operations Data:
                         
Revenues:                        
    TrackerPAL device sales $33,333  $962,733  $1,837,033  $33,333  $1,033,333  $33,333  $1,033,334  $200,000 
    Monitoring services  380,188   533,121   1,136,813   1,637,813   2,416,045   2,434,013   2,425,657   2,737,596 
    Home, personal security systems, other  21,862   13,307   12,241   13,432   19,908   21,101   28,666   20,691 
Total revenues $435,383  $1,509,161  $2,986,087  $1,684,578  $3,469,286  $2,488,447  $3,487,657  $2,958,287 
Cost of revenues  (1,837,181)  (2,056,548)  (3,429,626)  (6,072,808)  (2,742,786)  (3,205,178)  (3,389,497)  (3,771,529)
Gross Profit (Loss)  (1,401,798)  (547,387)  (443,539)  (4,388,230)  726,500   (716,731)  98,160   (813,242)
Operating expenses:                                
    Selling, general, and administrative  (5,070,834)  (3,573,184)  (3,707,225)  (3,235,609)  (4,152,714)  (7,284,214)  (16,597,728)  (8,432,022)
    Research and development  (1,219,659)  (1,932,302)  (731,498)  (680,662)  (865,344)  (2,848,036)  (646,335)  (451,413)
    Loss from operations  (7,692,291)  (6,052,873)  (4,882,262)  (8,304,501)  (4,291,558)  (10,848,981)  (17,145,903)  (9,696,677)
Other income (expense), net  (179,908)  (855,758)  (316,540)  2,252,244   2,048,568   (9,168,053)  (303,245)  232,911 
Loss from continuing operations  (7,872,199)  (6,908,631)  (5,198,802)  (6,052,257)  (2,242,990)  (20,017,034)  (17,449,148)  (9,463,766)
    Discontinued operations  (66,722)  (124,985)  (75,457)  (71,518)  (98,954)  (101,046)  (53,670)  (160,442)
Net loss $(7,938,921) $(7,033,616) $(5,274,259) $(6,123,775) $(2,341,944) $(20,118,080) $(17,502,818) $(9,624,208)
(Loss) per common share*:                                
Basic and diluted                                
    Continuing operations $(0.09) $(0.08) $(0.05) $(0.06) $(0.02) $(0.15) $(0.12) $(0.06)
    Discontinued operations  (0.01)  0.00   0.00   0.00   0.00   0.00   0.00   0.00 
    Net loss $(0.10) $(0.08) $(0.05) $(0.06) $(0.02) $(0.15) $(0.12) $(0.06)
Weighted average shares outstanding:  83,018,000   90,618,000   104,583,000   102,826,000   129,617,000   132,661,000   146,085,000   151,947,000 
 
2924
 

*Earnings per common share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share amounts does not necessarily equal the total for the year.
           We may experience variations in the results of operations from quarter to quarter as a result of factors that include the following:
·New product introductions;
·The acceptance of GPS tracking and monitoring as an alternative to aid case management of offenders
·The integration and operation of new information technology systems;
·Entry into one or more of our markets by competitors;
·General conditions in the criminal justice industry; and
·Customer and public perceptions of our products and services.
As a result of these and other factors, quarterly revenues, expenses, and results of operations could vary significantly in the future, and period-to-period comparisons should not be relied upon as indications of future performance. There can be no assurance that we will be able to increase revenues in future periods or be able to sustain the level of revenue or rate of revenue growth on a quarterly or annual basis that we have sustained in the past. Due to the foregoing factors, future results of operations could be below the expectations of public market analysts and investors. If that occurred, the market price of our common stock would likely decline.
Liquidity and Capital Resources

The Company hasWe have not historically financed operations entirely from cash flows from operating activities.  During the fiscal year ended September 30, 2008, the Company2009, we funded itsour operating and investing activities through the saleby taking on new debt, sales of equity securities and the exercise of options and warrants.  See “Recent Sales of Unregistered Securities,” on page 18the accompanying Notes (8, 9, 12, 15 and 16) to Consolidated Financial Statements of this Report.report.  The cash provided by these transactions was used by the Companyus to (i) pay operating expenses, including the costs associated with itsour monitoring center, (ii) purchase TrackerPALTrackerPAL™ devices, (iii) pay down debt and accounts payable, including amounts owed on a line of credit and bank debt, and (iv) pay general and administrative expenses, including the salaries of our employees, officers, and consultants of the Company and other expenses as described below.
 
AtAs of September 30, 2008, the Company2009, we had unrestricted cash of $2,782,953,$602,321, compared to unrestricted cash of $4,803,871 at$2,782,953 as of September 30, 2007. At2008. As of September 30, 2008, the Company2009, we had a working capital deficit of $16,476,897, compared to a working capital deficit of $6,822,276 compared to working capitalas of $1,296,985 at September 30, 2007.2008.  The decrease in working capital primarily resulted from the increaseincreases in our accounts payable, accrued liabilities and notes payable balances atand decrease in cash balances offset by an increase in our inventory and decrease in our lines of credit during the fiscal year ended September 30, 2008.
 
During fiscal year 2008, the Company’s2009, our operating activities used cash of $9,672,744,$8,521,326, compared to $13,408,266 of cash$9,672,744 used in 2007.during fiscal year 2008.  This decrease in cash used from operating activities of $3,735,522$1,151,418 is primarily the result of an increasedecreases in the net income (loss) of $26,505,550, common stock issued for services and settlement of $12,891,708, common stock issued to settle lawsuits of $10,058,394,$1,014,479, amortization of deferred financing and consulting costs of $3,372,405, derivative liability valuation of $1,867,007, stock options and warrants issued for services of $3,917,629, and debt of $2,244,765, amortization of deferred consulting and financing costs of $5,018,086, redemption of SecureAlert Series A Preferred stock of $8,205,922, deconsolidation of subsidiary of $414,112, accrued liabilities of $371,413,net accounts receivable of $7,528,478, and inventory of $952,341, receivable from sale of intellectual property of $600,000.$3,316,540.  These increases in cash used from operating activitiesdecreases were offset, in part, by decreasesincreases in the following:  net of loss of $23,555,161, depreciation and amortization of $324,627, registration payment arrangement expensedebt discount of $533,000,$2,030,504, impairment of monitoring equipment of $883,836, loss on sale$1,748,582, impairment of assetgoodwill of $228,800, related-party services of $80,091,$2,804,580, deposit held in escrow of $500,000, prepaid$1,000,000 and other assets of $1,487,894, interest receivable of $23,094, accounts payable of $2,724,674, and deferred revenue of $1,316,812$2,119,121.
 
Investing activities forduring the fiscal year ended September 30, 2008,2009, used cash of $526,447,$1,676,467, compared to $4,221,548$526,447 of cash used by investing activities induring the fiscal year ended September 30, 2007.2008.  The decreaseincrease in cash used during fiscal year 20082009 resulted primarily from the decreasean increase in purchasingpurchases of additional monitoring equipment.  The CompanyWe purchased $192,221$1,312,397 and $3,684,216$192,221 of monitoring equipment during the fiscal years ended September 30, 20082009 and 2007, respectively.  In addition, the Company purchased $334,226 and $537,332 of property and equipment during the years ended September 30, 2008, and 2007, respectively.
 
Financing activities forduring the fiscal year ended September 30, 2008,2009, provided $8,178,273$8,017,161 of net cash compared to $16,563,645 of net cash for$8,178,273 during the fiscal year ended September 30, 2007.

30
2008.
 
The CompanyWe made net payments of $315,392$739,063 on a related-party line of credit $336,133and $1,115,237 on notes payable, $2,176,821 related to acquisitions, and $396,700 on a bank line of credit.  Inpayable.  During fiscal year 2008, the Company2009, we had proceeds of $5,058,014$4,496,750 from the issuance of Series A 15% Convertible Debentures, $3,250,000 from the issuance of common stock, $2,772,381$1,055,889 from the exerciseissuance of options and warrants, $2,400,000debt, $680,229 from the saleissuance of warrants and subsidiary stock, $975,578 from related-party notes $163,002and $388,593 from bank lines of cash received upon acquisitions, and $34,344 from notes payable.credit.

During the fiscal year 2008, the Companyended September 30, 2009, we incurred a net loss of $23,081,500 and negative cash flows from operating activities of $8,521,326, compared to a net loss of $49,587,050 and negative cash flows from operating activities of $9,672,744 compared to a net loss of $26,370,571 and negative cash flows from operating activities of $13,408,266 for the fiscal year ended September 30, 2007.2008.  As of September 30, 2008, the Company’s2009, our working capital deficit was $6,822,276$16,476,897 and the Companywe had stockholders’ equitydeficit of $36,006$12,372,821 and an accumulated deficit of $182,683,996.$205,765,496.

Going Concern
 
The factors described above, as well as the risk factors set out elsewhere in this Reportreport raise substantial doubt about the Company’sour ability to continue as a going concern. The financial statements included in this Reportreport do not include any adjustments that might result from the outcome of this uncertainty.  Our plan with respect to this uncertainty is to focus on increasing the leasing of the TrackerPALTrackerPAL™ product.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  Likewise, there can be no assurance that the Company’sour debt holders will be willing to convert the debt obligations to equity securities or that the Companywe will be successful in raising additional capital from the sale of equity or debt securities.  If the Company iswe are unable to increase cash flows from operating activities or obtain additional financing, itwe will be unable to continue the development of itsour products and would likely cease operations.

Contractual ObligationsTo lessen our cash burden and Commercial Contingenciesto raise additional capital, subsequent to September 30, 2009, the Company issued 15,986 shares of Series D Convertible Preferred stock from the conversion of $15,723,204 in debt, accrued liabilities and interest and an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.

The following table summarizes the Company’s contractual obligations as of September 30, 2008:Inflation

 
Years
 Total  SecureAlert  
Midwest
Monitoring
  Court Programs 
             
2009 $533,493  $402,509  $14,128  $116,856 
2010  354,027   262,894   11,124   80,009 
2011  308,825   267,173   3,744   37,908 
2012  279,162   268,362   -   10,800 
2013  267,882   267,882   -   - 
2014  60,537   60,537   -   - 
                 
Total $1,803,926  $1,529,357  $28,996  $245,573 

The total contractual obligations of $1,803,926 consist of the following: $1,554,667 from facilities operating leases and $249,259 from equipment leases.  During the years ended 2006, 2007 and 2008, the Company paid approximately $191,000, $284,000, and $536,000 in lease payment obligations, respectively.
Inflation
We do not believe that inflation has had a material impact on our historical operations or profitability.

 
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Critical Accounting Policies
 
In Note (3) to the audited financial statements for the fiscal year ended September 30, 20082009 included in this Report, the Companyreport, we discusses those accounting policies that are considered to be significant in determining the results of operations and itsour financial position.
 
The preparation of financial statements requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, product liability, revenue, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities.  The actual results may differ from these estimates under different assumptions or conditions.
 
With respect to inventory reserves, revenue recognition, impairment of long-lived assets and allowance for doubtful accounts receivables, the Company applieswe apply the following critical accounting policies in the preparation of itsour financial statements:

31
 
Inventory Reserves
 
The nature of the Company’sour business requires maintenance of sufficient inventory on hand at all times to meet the requirements of itsour customers. The Company recordsWe record finished goods inventory at the lower of standard cost, which approximates actual cost (first-in, first-out method) or market.  Raw materials are stated at the lower of cost (first-in, first-out method), or market.  General inventory reserves are maintained for the possible impairment of the inventory.  Impairment may be a result of slow moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, management analyzes the following, among other things:

 ·Current inventory quantities on hand;
 ·Product acceptance in the marketplace;
 ·Customer demand;
 ·Historical sales;
 ·Forecast sales;
 ·Product obsolescence; and
 ·Technological innovations.
 
Any modifications to these estimates of reserves are reflected in cost of revenues within the statement of operations during the period in which such modifications are determined necessary by management.
 
Revenue Recognition
 
The Company’sOur revenue has historically been from threetwo sources: (i) monitoring services; (ii) monitoring device and other product sales; and (iii) medical diagnostic stains sales.  With the divestiture of Volu-Sol, the Company no longer has revenues from this third source.

Monitoring Services

Monitoring services include two components: (i)(a) lease contracts in which the Company provideswe provide monitoring services and leaseslease devices to distributors or end users and the Company retainswe retain ownership of the leased devices;device; and (ii)(b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and have optedopt to use the Company’sour monitoring services.

The Company leases itsWe typically lease our devices under one-year contracts with customers that opt to use the Company’sour monitoring services.  However, these contracts may be cancelled by either party at anytime with 30 days notice.  Under the Company’sour 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 recognizesus.  We recognize revenue on leased devices at the end of each month that monitoring services have been provided.  In those circumstances in which the Company receiveswe receive payment in advance, the Company recordswe record these payments as deferred revenue.

Monitoring Device Product Sales

Although not the focus of the Company’sour business model, the Company sells itswe sell our monitoring devices in certain situations. In addition, the Company sells to a very small degreewe sell home security and Personal Emergency Response Systems.  The Company recognizesSystems (“PERS”) units.  We recognize product sales revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the devices, prices are fixed or determinable (including sales not being made outside the normal payment terms) and collection is reasonably assured. When purchasing products (such as TrackerPAL devices) from the Company,us, customers may, but are not required to, enter into monitoring service contracts.  The Company recognizescontracts with us.  We recognize revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.

Multiple Element Arrangements
 
The majority of the Company’sour revenue transactions do not have multiple elements. On occasion, the Company haswe have revenue transactions that have multiple elements (such as product sales and monitoring services).  For revenue arrangements that have multiple elements, the Company considerswe consider whether: (i) the delivered devices have stand alonestandalone 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 recognizeswe recognize revenue from the sale of devices separately from the monitoring services to be provided to the customer.  In accordance with EITF 00-21,FASB ASC Subsection 605-25, if the fair value of the undelivered element exists, but the fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteria are met.

 
3226
 
Medical Diagnostic Stain Sales

The Company recognizes medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the products, prices are fixed or determinable and collection is reasonably assured.  As of September 30, 2008, this segment of operations was discontinued.

Other Matters

The Company considersWe consider an arrangement with payment terms longer than the Company’sour 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 itsWe sell our devices and services directly to end users and to distributors.  Distributors do not have general rights of return.  DistributorsAlso, distributors have no price protection or stock protection rights with respect to devices sold to them by the Company.us.  Generally, title and risk of loss pass to the buyer upon delivery of the devices. The collection terms for the diagnostic stains and reagent product sales are net 30 days.  The Company estimates its

We estimate our product returns based on historical experience and maintainsmaintain an allowance for estimated returns, which is recorded as a reduction to accounts receivable and revenue.

Shipping and handling fees are included inas part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.

Impairment of Long-lived Assets
 
The Company reviews itsWe review our long-lived assets, other than goodwill, for impairment when events or changes in circumstances indicate the book value of an asset may not be recoverable.  An evaluation is made at each balance sheet date, to determine whether events and circumstances have occurred which indicate possible impairment. An estimate is made of future undiscounted net cash flows of the related asset or group of assets over itsour estimated remaining life in measuring whether the assets are recoverable. During the fiscal years ended September 30, 2009 and 2008, and 2007, the Companywe disposed of $2,319,530 and $570,948, and $1,454,784, respectively.  The $570,948 was recorded as cost of revenues.
 
Allowance for Doubtful Accounts
 
The CompanyWe must make estimates of the collectability of accounts receivable. In doing so, we analyze accounts receivable and historical bad debts, customer credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts.
 
Recent Accounting Pronouncements 

InEffective for December 2007,2008, new accounting guidance was added relating to business combinations. The objective of this topic is to enhance the FASB issued SFAS No. 141(R), Business Combinations,information that an entity provides in our financial reports about a business combination and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141(R) requires anits effects. The Topic mandates: (i) how the acquirer to measurerecognizes and measures the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair valuesacquiree; (ii) what information to disclose in our financial reports and; (iii) recognition and measurement criteria for goodwill acquired. This Topic is effective for any acquisitions made on or after December 15, 2008. The adoption of this Topic is not expected to have a material impact on our financial statements and disclosures.

In May 2009, the Financial Accounting Standards Board (“FASB”) issued guidance which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Topic sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in our financial statements, (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Topic should be applied to the accounting and disclosure of subsequent events. This Topic does not apply to subsequent events or transactions that are within the scope of other applicable accounting standards that provide different guidance on the acquisitionaccounting treatment for subsequent events or transactions. This Topic was effective for interim and annual periods ending after June 15, 2009, which was September 30, 2009 for us. The adoption of this Topic did not have a material impact on our financial statements and disclosures.

In June 2009, the FASB issued guidance which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Topic, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification will become non-authoritative. This Topic identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with goodwill beingGAAP and arranged these sources of GAAP in a hierarchy for users to apply accordingly. This Topic is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this topic did not have a material impact on our disclosure of the excess value overfinancial statements.

27

In June 2009, the net identifiable assets acquired. SFAS No. 160 clarifiesFASB issued additional guidance which improves the relevance, representational faithfulness, and comparability of the information that a non-controlling interestreporting entity provides in our financial statements about a subsidiarytransfer of financial assets; the effects of a transfer on our financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This additional guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This additional guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This additional guidance must be applied to transfers occurring on or after the effective date. The adoption of this Topic is not expected to have a material impact on our financial statements and disclosures.

In September 2009, the FASB added implementation guidance on accounting for uncertainty in income taxes. For entities that are currently applying the standards for accounting for uncertainty in income taxes, the guidance and disclosure amendments are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Update did not have a material impact on our financial statements and disclosures.

In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future impact of this new accounting update to our financial statements.

In October 2009, the FASB issued accounting guidance which changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue recognition guidance given prior to this new guidance. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance.  This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.  We are currently assessing the future impact of this new accounting update to our financial statements.

In April 2008, the FASB issued an amendment for determination of the useful life of intangible assets. This guidance amends the factors that should be reported as equityconsidered in developing renewal or extension assumptions used to determine the consolidated financial statements, consolidated net income shall be adjusteduseful life of a recognized intangible asset under authoritative accounting guidance for goodwill and other intangible assets. This guidance is intended to includeimprove the net income attributedconsistency between the useful life of an intangible asset determined under the guidance for goodwill and other intangible assets and the period of expected cash flows used to measure the non-controlling interest,fair value of the asset under ASC 805 “Business Combinations” and consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 areother principles under GAAP. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.2008, and interim periods within those fiscal years. Early adoption is prohibited. Management does not currently believe adoptionThis guidance will have a material impact on the Company's financial condition or operating results, if any, uponbe effective for us in fiscal year 2010. The adoption of SFAS No. 141(R) or SFAS No. 160.this guidance is not expected to significantly impact our results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which definesenhanced guidance for using fair value to measure assets and liabilities. This guidance also provides a framework for measuringexpanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and expands the disclosures requiredeffect of fair value measurements on earnings. ASC 820 applies whenever other guidance require or permit assets or liabilities to be measured at fair value. ASC 820 does not expand the use of fair value in any new circumstances. In February 2008, the FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and delays the effective date of ASC 820 by one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. In October 2008, the FASB issued additional guidance for determining the fair value of a financial asset when the market for that asset is not active to clarify the application of the provisions of the guidance for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that requiremeasurements in an inactive market and how an entity would determine fair value measurements; it doesin an inactive market. This additional guidance is effective immediately. We adopted ASC 820 for financial assets and financial liabilities at the beginning of fiscal year 2009. The adoption of this guidance for financial assets and financial liabilities did not require any new fair value measurements. SFAS No. 157impact our results of operations and financial position. The guidance is effective for nonfinancial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2007,2008, which is our fiscal year 2010. The adoption of this guidance for nonfinancial assets and nonfinancial liabilities is requirednot expected to be adopted by the Company beginning in the first quartersignificantly impact our results of fiscal 2009. Although the Company will continue to evaluate the application of SFAS No. 157, management does not currently believe adoption will have a material impact on the Company'soperations and financial condition or operating results.position.

In February 2007,June 2009, the FASB issued SFAS No. 159,accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity.  This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted.  The adoption of this guidance is not expected to significantly impact our results of operations and financial position.

28

In September 2009, the FASB issued guidance updates and provided amendments to its Fair Value Option for Financial AssetsMeasurements and Financial Liabilities-including an amendment of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159 allows companiesDisclosure requirements which permit a reporting entity to choose to elect measuring eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on items for whichmeasure the fair value option hasof certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments, such as the nature of any restriction on the ability to redeem an investment on the measurement date.  This guidance is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been elected be reportedissued.  The adoption of this guidance is not expected to significantly impact our results of operations and financial position.

In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in earnings at each reporting date. SFAS No. 159contemplation of a convertible debt offering or other financing.  This guidance is effective for fiscal years beginning on or after NovemberDecember 15, 20072009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required to be adopted byfor such arrangements. This guidance is effective for arrangements entered into on (not outstanding) or after the Company beginning inof the first quarter of fiscalreporting period that begins on or after June 15, 2009. Although the Company will continue to evaluate theCertain transition disclosures are also required. Early application of SFAS No. 159, management doesis not currently believe adoption will have a material impact on the Company's financial condition or operating results.

33
In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles. ��SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP.  The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process.  The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.permitted.  The adoption of FASB 162this guidance is not expected to have a materialsignificantly impact on the Company’sour results of operations and financial position.
 
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. Under APB No. 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.Compensation
 
For the fiscal years ended September 30, 20082009 and 2007,2008, the Company calculated compensation expense of $214,251$67,406 and $900,664,$214,251, respectively related to the vesting of previously granted stock options and additional options granted.granted in prior years
 
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company granted 1,725,0001,517,714 and 320,0001,725,000 stock options to employees during the fiscal years ended September 30, 2009 and 2008 valued $274,650 and 2007,$359,946, respectively.  In addition, 390,000 stock options issued to employees in prior years vested during the fiscal year ended September 30, 2008.  The weighted average fair value of stock options at the date of grant during the yearsfiscal year ended September 30, 2009 and 2008 was $0.18 and 2007, was $1.34, and $1.43, respectively. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options.

The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2009 and 2008, and 2007, respectively:
 
 September 30, 2008September 30, 2007
   
Risk free interest rate3.12%4.57%
Expected life5 Years5 Years
Cash dividend yield--
Volatility136%142%
  
Fiscal years Ended
September 30,
 
  2009  2008 
Expected cash dividend yield  -   - 
Expected stock price volatility  121%  136%
Risk-free interest rate  1.16%  3.12%
Expected life of options 3.7 years  5 years 

A summary of stock option activity for the fiscal year ended September 30, 2009 and 2008 is presented below:
 
 
Shares
Under
Option
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
  
 
Aggregate
Intrinsic
Value
 
 
 
 
Outstanding as of September 30, 20073,295,000 $0.64      
     Granted1,725,000 $1.54      
     Exercised(1,375,000) $0.63      
     Forfeited(45,000) $0.86      
     Expired-  -      
Outstanding as of  September 30, 20083,600,000 $1.08 3.34 years $1,062,000 
Exercisable as of  September 30, 2008421,667 $1.35 3.30 years $37,000 

  
Shares
Under
Option
  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
Outstanding as of September 30, 2007  3,295,000  $0.64     
     Granted  1,725,000  $1.54     
     Exercised  (1,375,000) $0.63     
     Forfeited  (45,000) $0.86     
     Expired  -   -     
Outstanding as of  September 30, 2008  3,600,000  $1.08 3.34 years $1,062,000 
Exercisable as of  September 30, 2008  421,667  $1.35 3.30 years $37,000 


  
Shares
Under
Option
  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
Outstanding as of September 30, 2008  3,600,000  $1.08     
     Granted  1,517,714  $0.21     
     Exercised  -  $-     
     Forfeited  -  $-     
     Expired  (408,500) $1.45     
Outstanding as of  September 30, 2009  4,709,214  $0.76 2.05  years $12,854 
Exercisable as of  September 30, 2009  1,719,880  $0.32 2.97 years $12,854 
 
3429
 
 
Item 7A.    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 8% and 29% of our total revenues for the fiscal years ended September 30, 2008 and 2007, 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 September 30, 2008, we had $3,462,285 of borrowings outstanding on a line of credit with a weighted-average interest rate of 18%.  In addition, we had $48,500 of borrowings outstanding on a line of credit with two banks with a weighted average interest rate of 10.05%.  The interest rates on these lines of credit are subject to change from time to time based on changes in an independent index which is the Prime Rate as published in The Wall Street Journal.
Item 8.    Financial Statements and Supplementary Data
 
The Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated at Item 15 below.
 
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.9A(T).    Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective.  We and our auditors identified material weaknesses discussed below in the Report of management on internal control over financial reporting.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

35

 (i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 (ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 (iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to the Company'sour annual or interim financial statements will not be prevented or detected.

30

In the course of the management's assessment, it has identified the following material weaknesses in internal control over financial reporting:
 
 ·
Control Environment – We did not maintain an effective control environment for internal control over financial reporting. Specifically, we concluded that we did not have appropriate controls in the following areas:
 
 o
Segregation of Duties – As a result of limited resources and the addition of multiple majority owned subsidiaries, we did not maintain proper segregation of incompatible duties. The effect of the lack of segregation of duties potentially affects multiple processes and procedures.
 
 o
Implementation of Effective Controls – We failed to complete the implementation of effective internal controls over our newly acquired majority owned subsidiaries as of September 30, 20082009 due to limited resources.
·
Application of GAAP – We did not maintain effective internal controls relating to the application of generally accepted accounting principles to include improper revenue recognition, classification of expenses, and accounting for equity transactions.
 
 ·
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 disclose in the financial statementsaccount for and related notes to the financial statementsdisclose the effects of the spin-off of Volu-Sol.issuing derivatives.
 
 ·
Tracking of Leased Equipment – We failed to maintain effective internal controls over the tracking of leased equipment as it relates to the assignment and leasing of monitoring equipment.
 
We restated our September 30, 2007 financial statements as a result of errors that were not detected due to several of the above mentioned material weaknesses, which have not been mitigated as of September 30, 2008. Accordingly, management has determined the Company's internal control over financial reporting as of September 30, 2008 was not effective.  These material weaknesses have been disclosed to our audit committee.
·
Inventory – We failed to maintain effective internal controls over the tracking of inventory and adjusting its’ corresponding cost to reflect lower of cost or market.

We are in the process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort and staffing is needed to fully remedy these deficiencies. Our management, audit committee, and directors will continue to work with our auditors and outside advisors to ensure that our controls and procedures are adequate and effective.


36
 
HANSEN, BARNETT& MAXWELL, P.C.
A Professional CorporationRegistered with the Public Company
CERTIFIED PUBLIC ACCOUNTANTSAccounting Oversight Board
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
 
www.hbmcpas.comA Member of the Forum of Firms

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of RemoteMDx, Inc.
We have audited RemoteMDx Inc.’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RemoteMDx Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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.
A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
·
Control Environment – The Company did not maintain an effective control environment for internal control over financial reporting. Specifically, the Company concluded that they 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, the Company 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 – The Company failed to complete the implementation of effective internal controls over its newly acquired majority owned subsidiaries as of September 30, 2008 due to limited resources.
·
Application of GAAP – The Company did not maintain effective internal controls relating to the application of generally accepted accounting principles to include improper revenue recognition, classification of expenses, and accounting for equity transactions.
·
Financial Reporting Process – The Company did not maintain an effective financial reporting process to prepare financial statements in accordance with generally accepted accounting principles. Specifically, the Company initially failed to appropriately disclose in the financial statements and related notes to the financial statement the effects of the spin-off of Volu-Sol.
·
Tracking of Leased Equipment – The Company failed to maintain effective internal controls over the tracking of leased equipment as it relates to the assignment and leasing of monitoring equipment.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 financial statements, and this report does not affect our report dated December 23, 2008 on those financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, RemoteMDx has not maintained effective internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets and the related statements of income, stockholders’ equity and comprehensive income, and cash flows of RemoteMDx, Inc., and our report dated December 23, 2008 expressed an unqualified opinion.



HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
December 23, 2008



Item 9B.    Other Information
 
None.
 
PART III
 
Item 10.    Directors, Executive Officers and Corporate Governance
 
The following table sets forth certain information concerning our executive officers and directors as of September 30, 2008:2009:
 
Name  Age            Position                                                                                      
   
David G. Derrick5556Chief Executive Officer and Chairman
John L. Hastings, III4546President
Blake T. Rigby*51Chief Financial and Chief Operating Officer
BruceMichael G. DerrickActon5046Chief TechnologyFinancial Officer
Bernadette Suckel5253Managing Director of Sales & Marketing
Bruce G. Derrick51Chief Technology Officer
James J. Dalton6566Director
Peter McCall50Director
Robert E. Childers6364Director
Larry G. Schafran71Director
David P. Hanlon6364Director
Larry G. Schafran70Director
*Mr. Rigby resigned from his positions with the Company on November 17, 2008 to pursue other interests. The Company brought back Michael G. Acton who had previously served as the Chief Financial Officer of the Company from March 2001 until June 2008.  Mr. Acton’s biographical information is included below. The position of Chief Operating Officer was given to Mr. Hastings upon Mr. Rigby’s resignation.

 
David Derrick, CEO and Chairman. Mr. Derrick has been our CEO and Chairman since February 2001.  Prior to joining us, Mr. Derrick occupied directorship and management positions in other companies, including Biomune Systems Inc. (“Biomune”), theour former parent, of the Company, and Purizer Corporation.  From 1979 to 1982, Mr. Derrick was a faculty member at the University of Utah College of Business.  Mr. Derrick graduated from the University of Utah with a Bachelor of Arts degree in Economics and a Masters in Business Administration degree with an emphasis in Finance.
 
John Hastings, President and Chief Operating Officer.  Mr. Hastings became our President of the Company on June 19, 2008 and Chief Operating Officer on November 20, 2008.  Mr. Hastings has worked for Nestle/Stouffer’s, Kraft/General Foods, Nissan Motor Acceptance Corp., NCR/Teradata, Unisys Corp. and VNU/AC Nielsen during his career.  He has also served on the boards of small entrepreneurial companies.  From 1998 through 2006, Mr. Hastings worked with VNU – AC Nielsen in several executive posts, last serving as its Senior Vice President and General Manager of Global Business Intelligence, reporting directly to the company’sour Chief Executive Officer.  Upon acquisition and privatization of VNU in 2006, and until his appointment as President of RemoteMDx, Mr. Hastings served as the interim President and CEO of Klever Marketing, Inc., a Utah-based retail marketing company.  Mr. Hastings received a BA from Cal State University, Fullerton CA (1985) and an MBA from Pepperdine University, Malibu CA (1987).

31

Michael Acton, Secretary, Treasurer and Chief Financial Officer.  Mr. Acton joined us asbecame our Chief Financial Officer on November 20, 2008.  Previously he had served as the Company’s Chief Financial Officer from March 1999 until June 2008. He has served as the Company’sour Secretary/Treasurer since March 1999.  Since June 2008 he has also served as the Chief Financial Officer of Volu-Sol Reagents Corporation, aActiveCare, our former subsidiary of the Company.subsidiary.  He is a Certified Public Accountant in the State of Utah.

Bernadette Suckel, Managing Director of Sales & Marketing.  Ms. Suckel joined us on April 24, 2008.  Prior to coming to RemoteMDx, Ms. Suckel served as the VP/Solution and Client Principal, for The Nielsen Company/ACNielsen from 2000 through April 2008.  From November 2006 through April 2008, she consulted on a part-time basis to Klever Marketing, Inc. to focus on cost reduction strategies.   Ms. Suckel also worked previously for Cogit.com and NCR/AT&T GIS/Teradata.  She received a BS in Business Administration, Marketing Option, from California State University, Fresno.
 
Bruce G. Derrick, Chief Technology Officer.  Mr. Derrick has been our Chief Technology Officer since November 21, 2004.  He has extensive experience in management of custom solutions development and customer management in the wireless telecom marketplace.  From 2001 to 2004 was a senior product development manager for WatchMark Corporation.  WatchMark collects cellular network performance data for quality assurance and capacity planning. Prior to joining WatchMark, Mr. Derrick was responsible for forming and managing the Professional Services team for Marconi’s MSI division.  Mr. Derrick also worked in management positions at Boeing and Western Wireless, built and managed the Corporate Computer and Network Operations department for Avaya’s Mosaix division.  He was a Senior Programmer in applied research at the University of Utah’s Department of Medical Informatics where he developed and implemented medical informatics and physiological monitoring services for ICU care and participated in development of IEEE standards for automated physiological monitoring for NASA’s Space Station program.  Mr. Derrick holds a Bachelor’s Degree in Computer Science from the University of Utah.  Bruce Derrick is the brother of David Derrick, theour Chairman and CEO of the Company.CEO.

39
James Dalton, Director.  Mr. Dalton joined us as a director in 2001.  Since June 2008 he has served as the Chief Executive Officer and Chairman of Volu-Sol Reagents Corporation.ActiveCare.  He was our President of the Company from August 2003 until June 2008.  Prior to joining the Company,us, Mr. Dalton was the owner and President of Dalton Development, a real estate development company.  He served as the President and coordinated the development of The Pinnacle, an 86-unit condominium project located at Deer Valley Resort in Park City, Utah.  Mr. Dalton served as the President and equity owner of Club Rio Mar in Puerto Rico, a 680-acre beach front property that includes 500 condominiums, beach club, numerous restaurants, pools and a Fazio-designed golf course.  He was a founder and owner of the Deer Valley Club, where he oversaw the development of a high-end, world-class ski project.  From 1996 to 2000, Mr. Dalton served as an officer and director of Biomune.  

Peter McCall, Director.  Effective November 2, 2009, Mr. McCall joined ourDalton resigned from the board of directors in July 2001.  Mr. McCall beganto focus on his career in the mortgage finance business in 1982.  As a Vice President of GE Mortgage Securities, he oversaw the first mortgage securities transactions between GE Capital Corporation and Salomon Brothers.  For fifteen years, Mr. McCall structured and sold both mortgage and asset backed security transactions.  In 1997 Mr. McCall founded McCall Partners LLC.  McCall Partners is an investment vehicle for listed and non-listed equity securities.  Mr. McCall is also a member of the Board of Directors of Premium Power Corporation of North Andover, MA. Mr. McCall is a member of the Audit Committee, Compensation Committee and the Nominating Committee of the Company’s Board of Directors.  opportunities at ActiveCare.

Robert Childers, Director.  Mr. Childers joined our board in July 2001.  Since 1977, he has served as the Chief Executive Officer of Structures Resources Inc., a firm which he founded in 1972, and has more than 30 years of business experience in construction and real estate development.  Mr. Childers has served or is currently serving as General Partner in 16 Public Limited Partnerships in the Middle Atlantic States.  Partners include First Union Bank and Fannie Mae.  Structures Resources has successfully completed over 300 projects (offices, hotels, apartments, and shopping centers) from New York to North Carolina.  Recently Mr. Childers has beenfounded a partner for various projectsnew company providing construction services to major companies developing gas wells in Baltimore and Philadelphia.the Marcellus shale. He is a co-founder of Life Science Group, a boutique biotech investment-banking firm. Mr. Childers was the founding President of Associated Building Contractors for the State of West Virginia and served as a director of The Twentieth Street Bank until its merger with City Holding Bank.  He is a former naval officer serving in Atlantic fleet submarines.  Mr. Childers is a member of the Compensation Committee and the Nominating Committee of the Company’s Boardour board of Directors.directors.

Larry G. Schafran, Director.  Director.  Larry G. Schafran, Director.  Mr. Schafran is associated with Providence Capital, Inc. (“PCI”) as a Managing Director.  PCI is a New York City-based investment and advisory firm.  Mr. Schafran is also a director of Tarragon Corporation.  Additionally, Mr. Schafran was Lead Director and Audit Committee Chairman and later a Consultant to the Chairman of WorldSpace, Inc.  In addition, Mr. Schafran is also a Director of the following publicly traded U. S. corporations: ElectroEnergy, Inc., Sulphco, Inc., New Frontier Energy, Inc., DollarDays International, Inc., Subaye Corp. and National Patent Development Corporation.  In recent years, Mr. Schafran served in several capacities, including, as a Director of PubliCard, Inc., and ElectroEnergy, and Trustee, Chairman/Interim-CEO/President and Co-Liquidating Trustee of Special Liquidating Trust of Banyan Strategic Realty Trust; Director and/or Chairman of the Executive Committees of Dart Group Corporation, Crown Books Corporation, TrakAuto Corporation, and Shoppers Food Warehouse, Inc. (Vice-Chairman); Director and Member of the Strategic Planning and Finance Committees of COMSAT Corporation, and Managing General Partner of L. G. Schafran & Partners, LP, a real estate investment and development firm.  Mr. Schafran is Chairman of the Audit and Nominating Committees and a Member the Compensation Committee of the Company’s Boardour board of Directors.directors.

David P. Hanlon, Director.  Mr. Hanlon isresigned as Chief Executive Officer and President of Empire Resorts, Inc., a public company in the gaming industry.industry in May 2009.  Prior to starting his own gaming consulting business in 2000, in which he advised a number of Indian and international gaming ventures, Mr. Hanlon was President and Chief Operating Officer of Rio Suites Hotel & Casino from 1996-1999, a period in which the Rio Suites Hotel & Casino underwent a major expansion. From 1994-1995, Mr. Hanlon served as President and Chief Executive Officer of International Game Technology, the world's leading manufacturer of microprocessor gaming machines. From 1988-1993, Mr. Hanlon served as President and Chief Executive Officer of Merv Griffin's Resorts International, and prior to that, Mr. Hanlon served as President of Harrah's Atlantic City (Harrah's Marina and Trump Plaza). Mr. Hanlon's education includes a B.S. in Hotel Administration from Cornell University, an M.S. in Accounting, an M.B.A. in Finance from the Wharton School, University of Pennsylvania, and he completed the Advanced Management Program at the Harvard Business School. Mr. Hanlon is a member of the Audit Committee of the Company’s Boardour board of Directors.directors.

 
4032
 

Board of Directors

Election and Meetings

Directors hold office until the next annual meeting of the stockholders and until their successors have been elected or appointed and duly qualified.  Executive officers are elected by the board of directors and hold office until their successors are elected or appointed and duly qualified.  Vacancies on the board which are created by the retirement, resignation or removal of a director may be filled by the vote of the remaining members of the board, with such new director serving the remainder of the term or until his successor shall be elected and qualify.
 
The Boardboard of Directorsdirectors is elected by and is accountable to the shareholders of the Company.our shareholders. The Boardboard establishes policy and provides our strategic direction, oversight, and control of the Company.control. The Boardboard met six11 times during fiscal year 2008 and acted on five occasions by written consents.2009. All directors attended at least 75%70% of the meetings of the Boardboard and the Board Committeesboard committees of which they are members.
 
Director Independence
 
We assess director independence on an annual basis. The Boardboard has determined, after careful review that Mr. Childers, Mr. Hanlon, Mr. McCall and Mr. Schafran are independent based on the applicable regulations of the SEC.
 
Shareholder Communications with Directors
 
If the Company receiveswe receive correspondence from itsour shareholders that is addressed to the Boardboard of Directors,directors, we forward it to every director or to the individual director to whom it is addressed. Shareholders who wish to communicate with the directors may do so by sending their correspondence to the directors c/o RemoteMDx, Inc., 150 West Civic Center Drive, Suite 400, Sandy, Utah 84070.
 
Committees of the Board of Directors
 
The Boardboard of Directorsdirectors has a separately-designated standing Audit Committee, Compensation Committee, and Nominating Committee. All members of the Audit Committee, Compensation Committee, and Governance and Nominating Committee meet the definition of "independent," described above.  
 
Audit Committee.  The Audit Committee of the Boardboard of Directorsdirectors (the "Audit Committee") is a standing committee of the Board,board, which has been established as required by the Securities Exchange Act of 1934 (“Exchange Act”). The Audit Committee met four times during fiscal year 2008.2009. Members of the Audit Committee during fiscal year 20082009 and at the date of this Report are Larry Schafran (Chairman), Peter McCall, and David Hanlon. The Boardboard has determined that Mr. Schafran is an "audit committee financial expert," as defined by the applicable regulations promulgated by the SEC under the Exchange Act.  The Boardboard also believes that each member of the Audit Committee meets the NasdaqNASDAQ composition requirements, including the requirements regarding financial literacy and financial sophistication.
 
The primary purpose of the Audit Committee is to oversee the Company'sour financial reporting process on behalf of the Boardboard of Directors.directors.  The Audit Committee meets with our Chief Financial Officer and with our independent registered public accounting firm and evaluates the responses by the Chief Financial Officer both to the facts presented and to the judgments made by our independent registered public accounting firm.
 
In April 8, 2004, our Boardboard adopted a Charter for the Audit Committee.  The Charter establishes the independence of our Audit Committee and sets forth the scope of the Audit Committee's duties.  The purpose of the Audit Committee is to conduct continuing oversight of our financial affairs.  A copy of the Charter of the Audit Committee can be found on the Company’sour website at www.remotemdx.com.  The Audit Committee conducts an ongoing review of our financial reports and other financial information prior to their being filed with the Securities and Exchange Commission, or otherwise provided to the public.  The Audit Committee also reviews our systems, methods and procedures of internal controls in the areas of: financial reporting, audits, treasury operations, corporate finance, managerial, financial and SEC accounting, compliance with law, and ethical conduct.  The Audit Committee is objective, and reviews and assesses the work of our independent registered public accounting firm and our internal audit department.
 
The Audit Committee reviewed and discussed the matters required by SAS 114 and our audited financial statements for the fiscal year ended September 30, 20082009 with management and our independent registered public accounting firm.  The Audit Committee has received the written disclosures and the letter from our independent registered public accounting firm required by Independence Standards Board No. 1, and the Audit Committee has discussed with the independent registered public accounting firm the independent registered public accounting firm's independence.  The Audit Committee recommended to the Boardboard of Directorsdirectors that the Company'sour audited financial statements for the fiscal year September 30, 20082009 be included in this Report.

 
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Compensation Committee.  The Compensation Committee was restructured during the fiscal year ended September 30, 2008,2009, with Robert Childers, a directorone of the Company,our directors, appointed by the Boardboard of Directorsdirectors to serve as the head of the compensation committee.chair. In addition, Peter McCall and Larry Schafran serveserves as membersa member of the Compensation Committee.  The Compensation Committee met twothree times during fiscal year 2008.2009.  The Committee has responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to stockholders. The Committee monitors the results of such policy to assure that the compensation payable to the Company’sour executive officers provides overall competitive pay levels, creates proper incentives to enhance stockholder value, rewards superior performance, and is justified by the returns available to stockholders.
 
Nominating Committee.  During the fiscal year ended September 30, 2008,2009, Larry Schafran, a directorone of the Company,our directors, was appointed as the headchair of the Nominating Committee.  The Committee has the responsibility for identifying and recommending candidates to fill vacant and newly created board positions, setting corporate governance guidelines regarding director qualifications and responsibilities, and planning for CEO and senior management succession.  In addition, Peter McCall and Robert Childers serveserves as membersa member of the Nominating Committee.
 
Code of Ethics.  The Company hasWe have established a Code of Business Ethics that applies to itsour officers, directors and employees. The Code of Business Ethics contains general guidelines for conducting theour business of the Company consistent with the highest standards of business ethics, and is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.   
 
There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONCompensation Committee Interlocks and Insider Participation
 
The Compensation Committee during fiscal 20082009 was composed of Robert Childers Peter McCall and Larry Schafran. All members of the Compensation Committee are independent directors. No member of the Company'sour Compensation Committee is a current or former officer or employee of the CompanyRemoteMDx or any of itsour subsidiaries, and no director or executive officer of the CompanyRemoteMDx is a director or executive officer of any other corporation that has a director or executive officer who is also a director of the Company.RemoteMDx.
 
Item 11.    Executive Compensation
 
Compensation Discussion and Analysis
 
The following is a discussion of the Company’sour program for compensation of itsour named executive officers and directors. The Company’sofficers. Our Compensation Committee had responsibility for developing and maintaining an executive compensation policy that creates a direct relationship between pay levels and corporate performance and returns to stockholders. The Committee monitors the results of such policy to assure that the compensation payable to the Company’sour executive officers provides overall competitive pay levels, creates proper incentives to enhance stockholder value, rewards superior performance, and is justified by the returns available to stockholders.
 
Compensation Program Objectives
 
The Company’sOur compensation program is designed to encompass several factors in determining the compensation of the Company’sour named executive officers.  The following are the main objectives of the compensation program for the Company’sour named executive officers:
 
 ·Retain qualified officers.
 
 ·Provide overall corporate direction for the officers and also to provide direction that is specific to the officer’s respective areas of authority.  The level of compensation amongst the officer group, in relation to one another, is also considered in order to maintain a high level of satisfaction within the leadership group. We consider the relationship that the officers maintain to be one of the most important elements of the leadership group.
 
 ·Provide a performance incentive for the officers.
 
42
The Company’sOur compensation program is designed to reward the officers in the following areas:
 
 ·achievement of specific goals;
 
 ·professional education and development;
 
 ·creativity in the form of innovative ideas and analysis for new programs and projects;
 
 ·new program implementation;
 
 ·attainment of company goals, budgets, and objectives;
 
 ·results oriented determination and organization;
 
 ·positive and supportive direction for company personnel; and
 
 ·community involvement.
 
34
As of the date of this Report,report, there were four principal elements of named executive officer compensation.  The Compensation Committee determines the portion of compensation allocated to each element for each individual named executive officer.  The discussions of compensation practices and policies are of historical practices and policies.  Our Compensation Committee is expected to continue these policies and practices, but will reevaluate the practices and policies as it considers advisable.  The elements of the compensation program include the following:
 
 ·Base salary;
 
 ·Performance bonus and commissions;
 
 ·Stock options and stock awards
 
 ·Employee benefits in the form of:
 
 §health and dental insurance;
 
 §life insurance;
 
 §paid parking and auto reimbursement; and
 
 §Other de minimis benefits.
 
Base salary
 
Base salary is intended to provide competitive compensation for job performance and to attract and retain qualified named executive officers.  The base salary level is determined by considering several factors inherent in the market place such as: the size of the company; the prevailing salary levels for the particular office or position; prevailing salary levels in a given geographic locale; and the qualifications and experience of the named executive officer.
 
Our Chief Executive Officer, Mr. Derrick, is paid a base salary of $240,000 per year.  The amount of the base salary was determined after negotiations between Mr. Derrick and the Company’sour Compensation Committee.  Factors considered in determining the base salary included Mr. Derrick’s status as a founderone of the Company;our founders; his experience and length of service with the Company;us; his experience in the industries in which the Companyhe operates; educational and work background; and reviews of sample salaries at companies of comparable size and industry.  The Compensation Committee also considered the fact that Mr. Derrick has provided and facilitated credit agreements and other financing for the Company.us.  The salary payable to Mr. Derrick is paid by ADP Management out of amounts paid to ADP Management for consulting and other services.  During the fiscal year ended September 30, 2008, the Companywe issued 1,000,000 shares of common stock valued at $1.52 per share to prepay services in connection with his base salary.  Although, these shares have not yet been sold and had a market value of $110,000 as of September 30, 2009, we recorded $240,000 and $60,000 of expense during the fiscal years ended September 30, 2009 and 2008, respectively, in connection with the 1,000,000 shares issued in fiscal year 2008.  As of September 30, 2008,2009, the outstanding prepaid salary of $1,460,000,$1,220,000, reflected as deferred compensation, will be amortized over future periods.
 
Our President and Chief Operating Officer, Mr. Hastings, is paid a base annual salary of $300,000. The amount of the base salary was determined after negotiations between Mr. Hastings and the Company’sour Compensation Committee.  Factors considered in determining Mr. Hastings’ base salary included his background in the industries in which the Company operates; his educational and work background, and reviews of sample salaries at companies of comparable size and industry.
Mr. Acton, our Chief Financial Officer is paid an annual salary of $120,000.  Factors considered in determining Mr. Acton’s salary and additional compensation included his background and experience as a certified public accountant; his experience working in the accounting industry with a national and international accounting firm; his background and experience with the other entities;we operate; his educational and work background, and reviews of sample salaries at companies of comparable size and industry.
 
Performance bonus and commissions
 
Bonuses are in large part based on Companyour performance.  The most important determining factors used to calculate the performance bonus for the Chief Executive Officer, President and Chief Financial Officer are based upon the terms outlined below. Policy decisions to waive or modify performance goals have not been a significant factor to date in that there have not been contractual changes made other than the normal renewal or updating of contracts or compensation as would be expected as part of an annual review.

 
4335
 
 
Recent Developments
 
Effective July 1, 2008,December 4, 2009, the Compensation Committee approved the issuance of 3,000,000 shares of common stock to James Dalton as severance for his service as the President of the Company.  In addition, the Committee approved, in lieu of future cash compensation payable to David Derrick, an immediate grant to Mr. Derrick, effective July 1, 2008 of 1,000,000 shares of common stock.
With regard to John Hastings, the Company’s President and Chief Operating Officer, the Committee approved, effective June 26, 2008, the grant of 1,500,000 shares of common stock and options to purchase 1,500,000 shares of common stock at $1.55 per share based on the following vesting schedule:following:
 
 250,000 common·767 shares of Series D Preferred stock for a value of $644,000 were issued to Mr. Derrick for guaranteeing loans, pledge of certificates of deposit to secure a line of credit, his efforts in connection with the conversion of existing debt into shares of Series D Preferred stock, and 250,000 options vested immediately;the raise of additional capital.
 
 250,000·1,250,000 warrants to purchase common sharesstock held by Mr. Hastings were vested and 250,000 options will vest upon the Company (including its subsidiaries, but excluding new acquisitions) achieving an annualized monitoring revenue run rate of $24,000,000 demonstrated over two fiscal quarters;re-priced from $1.55 to $0.13 per share.  Additionally, $250,000 warrants granted to Mr. Hastings were re-priced from $0.30 to $0.13 per share.
 
 250,000 common shares and 250,000 options will vest upon·4,283,767 vested warrants previously granted to the Company (including all majority-owned subsidiaries) achieving an annualized monitoring revenue run ratemembers of $50,000,000, overthe board of two fiscal quarters;directors were re-priced to $0.13 per share.
 
250,000 common shares and 250,000 options will vest upon the Company (including its subsidiaries) achieving an annualized monitoring revenue run rate of $100,000,000, demonstrated over two fiscal quarters;
250,000 common shares and 250,000 options will vest upon the Company (including its subsidiaries) achieving a break-even EBITDA (earnings before interest, taxes, depreciation and amortization) over two consecutive fiscal quarters.
250,000 common shares and 250,000 options will vest upon the Company achieving an annualized EBITDA of $25,000,000 over two consecutive fiscal quarters.
In the repricing of the warrants described above, the new exercise price is equal to the price at which our common stock was traded on December 4, 2009, the date the repricing was approved by the committee.
 
Stock options and stock awards
 
Stock ownership is provided to enable named executive officers and directors to participate in the success of the Company.our success.  The direct or potential ownership of stock will also provide the incentive to expand the involvement of the named executive officer to include, and therefore be mindful of, the perspective of stockholders of the Company.our stockholders.  Stock options and stock awards were approved by the Boardboard of Directorsdirectors and the Compensation Committee and are based, in part, upon the placement of activated TrackerPALTrackerPAL™ devices in the market place.  As noted above, bonusesBonuses may be issued in the form of stock options.
On August 29, 2007, the Board of Directors approved the issuance of options to each of Mr. Derrick and Mr. Dalton for the purchase of 1,000,000 shares of commonor stock at an exercise price of $2.15 per share for services rendered during the 2008 fiscal year.awards.
 
Employee benefits
 
Several of the employee benefits for the named executive officers are selected to provide security for the named executive officers.  Most notably, insurance coverage for health, life, and liability are intended to provide a level of protection that will enable the named executive officers to function without having the distraction of having to manage undue risk.  The health insurance also provides access to preventative medical care which will help the named executive officers function at a high energy level and manage job related stress, and contribute to the overall well being of the named executive officers, all of which contribute to enhance job performance in the opinion of the Compensation Committee.
 
Other de minimis benefits
 
Other de minimis employee benefits such as cell phones, parking, and auto usage reimbursements are directly related to job functions but contain a personal use element which is considered to be a goodwill gesture that contributes to enhanced job performance.
 
As discussed above, the Boardboard of Directorsdirectors determines the portion of compensation allocated to each element for each individual named executive officer.  As a general rule, salary is competitively based while giving consideration to employee retention, qualifications, performance, and general market conditions.  Typically, stock options are based on the current market value of the option and how that will contribute to the overall compensation of the named executive officer.  Consideration is also given to the fact that the option has the potential for an appreciated future value.  As such, the future value may be the most significant factor of the option, but it is also more difficult to quantify as a benefit to the named executive officer.
 
Accordingly, in determining the compensation program for the Company,us, as well as setting the compensation for each named executive officer, the Boardboard of Directorsdirectors attempts to attract the interest of the named executive officer within in the constraints of a compensation package that is fair and equitable to all parties involved.
 

44
REPORT OF THE COMPENSATION COMMITTEEReport of the Compensation Committee
 
The Compensation Committee of the Boardboard of Directorsdirectors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on this review and discussion, the Compensation Committee recommended to the Boardboard that the Compensation Discussion and Analysis be included in this Proxy Statement.

Respectfully submitted by the members of the Compensation Committee:

 
Robert Childers (Chair)
Peter McCall
Larry Schafran
 
SUMMARY COMPENSATION TABLE
36

Summary Compensation Table

The following table summarizes all compensation paid to our named executive officers in each of the two most recently completed fiscal years.
(a)(b)  (c)   (d)   (e)   (f)   (g)   (h)   (i)   (j) 
Name and Principal PositionYear   
Salary
($) 
   
Bonus
($) 
   
Stock
awards
($) 
   
Option/warrants
awards
($) 
   
Non-equity
incentive plan
compensation
($)
   
Change in
pension
value and
non-qualified
deferred
compensation
earnings
($)(5) 
   
All other
compensation
($)
   
Total
($)
 
                                  
David G. Derrick (1)2008 $240,000  $-  $2,325,000  $1,934,162  $-  $-  $13,020  $4,512,182 
Chairman & CEO
 
2007 $240,000  $-  $-  $441,461  $-  $-  $94,370  $775,831 
John L. Hastings III (2)2008 $200,000  $-  $387,500  $337,113  $-  $-  $3,879  $928,492 
President and Chief Operating Officer
 
2007 $-  $-  $-  $-  $-  $-  $-  $- 
Blake Rigby (3)2008 $40,000  $-  $-  $-  $-  $-  $4,197  $44,197 
Chief Operating Officer & Chief Financial Officer
 
2007 $-  $-  $-  $-  $-  $-  $-  $- 
Michael G. Acton (4)2008 $113,231  $25,000  $477,250  $137,340  $-  $-  $13,074  $765,895 
Chief Financial Officer
2007
 
 $100,000  $25,000  $-  $-  $-  $-  $18,313  $143,313 
James Dalton (5)2008 $180,000  $-  $6,975,000  $1,934,162  $-  $-  $9,183  $9,098,345 
President
2007
 
 $240,000  $-  $-  $441,461  $-  $-  $12,130  $693,591 
Scott Horrocks (6)2008 $197,788  $-  $-  $-  $-  $-  $10,468  $208,256 
President of Volu-Sol2007 $200,000  $-  $-  $-  $-  $-  $14,730  $214,730 
 
 (a)(b)  (c)   (d)   (e)   (f)   (g)   (h)   (i)   (j) 
Name and Principal PositionYear  
Salary
($)
   
Bonus
($)
   
Stock
awards
($)
   
Options/warrants
awards
($)
   
Non-equity
incentive plan
compensation
($)
   
Change in
pension
value and
non-qualified
deferred
compensation
earnings
($)(5)
   
All other
compensation
($)
   
Total
($)
 
                                  
David G. Derrick (1)2009 $240,000  $300,000  $-  $185,571  $-  $-  $5,929  $731,500 
Chairman & CEO2008 $240,000  $-  $-  $-  $-  $-  $13,020  $253,020 
                                  
John L. Hastings III (2)2009 $302,885  $94,330  $-  $46,393  $-  $-  $18,868  $462,476 
President and Chief Operating Officer2008 $200,000  $-  $-  $-  $-  $-  $3,879  $203,879 
                                  
Bernadette Suckel (3)2009 $126,161  $-  $11,500  $104,520  $-  $-  $-  $242,181 
Managing Director of Sales and Marketing2008 $55,846  $-  $-  $-  $-  $-  $-  $55,846 

(1)(1)  Column (i) includes additional compensation for health, dental, life, and vision insurance paid on Mr. Derrick’s behalf by the Company.us.  In addition, country club dues are also included.  Amounts shown do not include consideration and fees paid to ADP Management in connection with a line of credit agreement.  Stock awards of $2,325,000 duringDuring the fiscal year ended September 30, 2008 resulted from 1,500,0002009, we accrued a $300,000 bonus granted by the board of directors that was subsequently converted into 300 shares of restricted commonSeries D Preferred stock valued at $1.55 per share for a total of $2,325,000.subsequent to September 30, 2009. Additionally, option/options/warrant awards of $1,934,162$185,571 resulted from the issuance of 1,000,000 unregistered warrants at an exercise price of $2.15$0.30 per share.  These options/warrants were issued in August 2007, butand vested duringon January 16, 2009 and have not yet been exercised as of the fiscal year ended September 30, 2008.    Subsequent to year ended September 30, 2008, Mr. Derrick returned to the Company 1,500,000 shares of common stock valued at $2,325,000, or $1.55 per share and rescinded 1,000,000 vested warrants previously granted at an exercise price of $2.15 per share valued at $1,934,162.  The net impactdate of this change is that Mr. Derrick effectively received $253,020 in compensation for the year ended September 30, 2008.Report.

During the fiscal year ended September 30, 2008, we issued 1,000,000 shares of restricted common stock valued at $1.52 per share to prepay services in connection with Mr. Derrick’s base salary.  Although, these shares have not yet been sold and had a market value of $110,000 as of September 30, 2009, we recorded $240,000 and $60,000 of expense during the fiscal year ended September 30, 2009 and 2008, respectively, in connection with the 1,000,000 prepaid shares issued in fiscal year 2008.

To summarize, Mr. Derrick was paid $5,929 and $193,020 in cash and $725,571 and $60,000 in equity instruments for the fiscal years ended September 30, 2009 and 2008, respectively.

(2)(2)  Mr. Hastings became our President in June 2008 and Chief Operating Officer in November 2008.  He holds similar positions in SecureAlert, Inc.SecureAlert. Column (i) includes additional compensation for health, dental, and vision insurance paid on his behalf.  Stock awards of $387,500 during the fiscal year ended September 30, 2008 resulted from 250,000 shares of restricted common stock valued at $1.55 per share for a total of $387,500.  Additionally, option/Options/warrant awards of $337,113$46,393 resulted from the issuance and vesting of 250,000 unregistered warrants at an exercise price of $2.15$0.30 per share.  Subsequent to year ended September 30, 2008, Mr. Hastings returned to

(3) Mrs. Suckel has served as Managing Director of Offender Management Solutions since June 2008.  Options/warrants awards of $37,114 resulted from the Company 250,000 sharesissuance of common stock valued200,000 unregistered warrants at $387,500, or $1.55an exercise price of $0.30 per share and rescinded$67,406 resulted from the 250,000 vestedvesting of 100,000 unregistered warrants previously granted atwith an exercise price of $1.55 per share valued at $337,113.  The net impactpreviously issued for a total of this change is that Mr. Hastings effectively received $203,879 in compensation for the year ended September 30, 2008.

45
 (3)  Mr. Rigby served as Chief Operating Officer and Chief Financial Officer from June 19 through November 17, 2008.  Column (i) includes additional compensation for health, dental, and vision insurance paid on his behalf.

(4)  Mr. Acton was Chief Financial Officer from 2001 through June 19, 2008 and from November 20, 2008 to present. Column (i) includes additional compensation for health, dental, life, and vision insurance paid on Mr. Acton’s behalf by the Company.  Stock awards of $477,250 during the fiscal year ended September 30, 2008 resulted from 250,000$104,520. Additionally, we granted 50,000 shares of restricted common stock valued at $1.55 per share for a total of $387,500 and 25,000 shares of restricted common stock valued at $3.59 per share for a total of $89,750.  As of$11,500 upon the date of this Report, these shares have not yet been sold.  As of December 17, 2008 the approximate market value of these shares is $55,000, or $0.20 per share.  Additionally, option/warrant awards of $137,340 resulted from the vesting of 250,000 warrants previously granted during fiscal year 2007 at an exercise price of $0.60 per share.  During the fiscal year ended September 30, 2008, Mr. Acton exercised 600,000 warrants by paying $370,000 to the Company.  During the fiscal year ended September 30, 2007, Mr. Acton exercised 100,000 warrants by paying $54,000 to the Company.grant.


(5)  Mr. Dalton was President until June 19, 2008. Amounts shown do not include consideration and fees paid to ADP Management in connection with the credit line agreement. Column (i) includes amounts paid for health, dental, and vision insurance.  Stock awards of $6,975,000 during the fiscal year ended September 30, 2008 resulted from 1,500,000 shares of restricted common stock valued at $1.55 per share for a total of $2,325,000 and 3,000,000 shares of restricted common stock valued at $1.55 per share for severance given for service as President of the Company for a total of $4,650,000.  As of the date of this Report, these shares have not yet been sold.  As of December 17, 2008 the market value of these shares is approximately $900,000, or $0.20 per share.  Additionally, option/warrant awards of $1,934,162 resulted from the issuance of 1,000,000 unregistered warrants at an exercise price of $2.15 per share.  These warrants were issued in August 2007, but vested during the fiscal year ended September 30, 2008.  During the fiscal year ended September 30, 2008, Mr. Dalton did not exercise any warrants.  During the fiscal year ended September 30, 2007, Mr. Dalton exercised 4,750,000 warrants by paying $3,730,000 to the Company.

(6)  Mr. Horrocks was President of Volu-Sol Reagents Corporation, a former subsidiary of the Company, until September 5, 2008. Column (i) includes amounts paid for health, dental, and vision insurance.
 
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
37
 
  Option awards Stock Awards
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Name 
Number of
securities
underlying
unexercised
options (#)
exercisable
 
Number of
securities
underlying
unexercised
options (#)
unexercisable
 
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
 
Option
exercise
price
($)
 
Option
expiration
date
 
Number of
shares or
units of
stock that
have not
vested
(#)
 
Market
value of
shares or
units of
stock that
have not
vested
($)
 
Equity
incentive
plan awards:
Number of
unearned
shares,
units or
other rights
that have
not vested
(#)
 
Equity
incentive
plan awards:
Market or
payout
value of
unearned
shares,
units or
other rights
that have
not vested
($)
 
David G. Derrick 1,000,000  (1) - -  $2.15 8/28/2012 - $              - - $               -
John L. Hastings, III 250,000  (2) 1,250,000 1,250,000  $1.55 6/25/2013 1,250,000 $1,500,000 1,250,000 $1,500,000
Michael G. Acton - - -  - - - - - -
Blake Rigby* - 100,000 100,000  $1.55 6/08/2013 - - - -
*Mr. Rigby was CFO from June 19, 2008 through November 17, 2008.  Mr. Acton served as CFO from October 1, 2007 through June 19, 2008 and again from November 20, 2008 to the present.

Outstanding Equity Awards at Fiscal Year-End
 
 Option awardsStock Awards
(a)(b)(c)(d) (e) (f)(g)(h)(i)(j)
Name
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Equity
incentive
plan awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
 
Option
exercise
price
($)
 
Option
expiration
date
Number of
shares or
units of
stock that
have not
vested
(#)
Market
value of
shares or
units of
stock that
have not
vested
($)
Equity
incentive
plan awards:
Number of
unearned
shares,
units or
other rights
that have
not vested
(#)
Equity
incentive
plan awards:
Market or
payout
value of
unearned
shares,
units or
other rights
that have
not vested
($)
 
David G. Derrick1,000,000-- $0.30 1/15/2014-$            --$            -
John L. Hastings, III   250,000-- $0.30 1/15/2014-$            --$            -
Bernadette Suckel   200,000-- $0.30 1/15/2014-$            --$            -

Notes:  Market value is based on the fair market value of our common stock on September 30, 20082009 in the amount of $1.20$0.11 per share based on current market price.

(1)Subsequent to year ended September 30, 2008, Mr. Derrick rescinded 1,000,000 vested warrants previously granted at an exercise price of $2.15 per share valued at $1,934,162.
(2)Subsequent to year ended September 30, 2008, Mr. Hastings rescinded 250,000 vested warrants previously granted at an exercise price of $1.55 per share valued at $337,113.

 
46
Option Exercises and Stock Vested
 
OPTION EXERCISES AND STOCK VESTED
   Option awards   Stock awards 
 (a)  (b)   (c)   (d)   (e) 
Name  
Number of shares
acquired on exercise
(#)
   
Value realized
on exercise
($)
   
Number of shares
acquired on vesting
(#)
   
Value realized
on vesting
($)
 
                 
David G. Derrick  -  $-   -  $- 
John L. Hastings, III  -  $-   -  $- 
Bernadette Suckel  -  $-   50,000  $11,500(1)
                 
 
  Option awards Stock awards
(a) (b)(c) (d)  
(e)
  
Name 
Number of shares
acquired on exercise
(#)
Value realized
on exercise
($)
 
Number of shares
acquired on vesting
(#)
  
Value realized
on vesting
($)
  
 
David G. Derrick  -  $-   1,500,000  $2,325,000(1)
John L. Hastings  -  $-   250,000  $387,500(2)
Blake Rigby  -  $-   -  $- 
Michael G. Acton  600,000  $1,069,000   275,000  $477,250(3)
Notes:
 
(1)Stock awards of $2,325,000$11,500 during the fiscal year ended September 30, 20082009 resulted from 1,500,00050,000 shares of restricted common stock valued at $1.55$0.23 per share for a total of $2,325,000.  Subsequent to year ended September 30, 2008, Mr. Derrick returned to the Company 1,500,000 shares of common stock.
(2)Stock awards of $387,500 during the fiscal year ended September 30, 2008 resulted from 250,000 shares of restricted common stock valued at $1.55 per share for a total of $387,500.  Subsequent to year ended September 30, 2008, Mr. Hastings returned to the Company 250,000 shares of common stock.$11,500.

(3)Stock awards of $477,250 during the fiscal year ended September 30, 2008 resulted from 250,000 shares of restricted common stock valued at $1.55 per share for a total of $387,500 and 25,000 shares of restricted common stock valued at $3.59 per share for a total of $89,750.  As of the date of this Report, these shares have not yet been sold and as of December 17, 2008 the value of these shares is $55,000, or $0.20 per share.
Employment Agreements
 
We have no employment agreements with any executive officers at this time.  By agreement, however, the salary of Mr. Derrick is paid by ADP Management from the proceeds of a management fee paid by the Companyus to ADP Management.
 
COMPENSATION OF DIRECTORSCompliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than 10% of our common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of these forms that were furnished to us, and based on representations made by certain persons who were subject to this obligation that such filings were not required to be made, we believe that all reports required to be filed by these individuals and persons under Section 16(a) were filed on time in fiscal year 2009, except the following:
·Mr. Derrick filed one late Form 4;
·ADP Management filed one late Form 4.

38
Compensation of Directors
 
The table below summarizes the compensation paid by the Companyus to non-employee Directorsdirectors for the fiscal year ended September 30, 2008.2009.
 
(a)
(a)(b) (c) (d)(e)(f)(g)(h) (a) (b) (c) (d) (e) (f) (g) (h)
Name
Fees earned or
paid in cash
($)
 
Stock awards
($)
 
Option awards
($)
Non-equity
incentive
plan
compensation
($)
Change in
pension
value and
nonqualified
compensation
earnings
($)
All other
compensation
($)
Total
($)
 
Fees earned or
paid in cash
($)
 
Stock awards
($)
 
Option awards
($)
 
Non-equity
incentive
plan
compensation
($)
 
Change in
pension
value and
nonqualified
compensation
earnings
($)
 
All other
compensation
($)
 
Total
($)
David Hanlon$          60,000 $- $             666,625$                     -$                      -$                   -$   726,625  $        60,000(1) $                  -  $                     - $                  - $                  -  $                -  $  60,000
Robert Childers$          60,000 $- $             919,008$                     -$                      -$                   -$   979,008 $        60,000(2) $                  -  $                     - $                  - $                  -  $                -  $  60,000
Peter McCall$          60,000 $- $             666,625$                     -$                      -$                   -$   726,625 $        20,000(3) $                  -  $                     - $                  - $                  -  $                -  $  20,000
Larry Schafran$          60,000 $193,800(1)$          1,102,617$                     -$                      -$                   -$1,356,417 $        60,000(1) $                  -  $                     - $                  - $                  -  $                -  $  60,000
James Dalton $        60,000(4) $                  -  $                     - $                  - $                  -  $                -  $  60,000

Note:

(1)The Company granted 60,000We accrued $60,000 in fees during the fiscal year ended September 30, 2009. Subsequent to the fiscal year end, Mr. Hanlon and Mr. Schafran converted these fees and all other outstanding fees earned in prior years totaling $225,000 into 225 shares of restrictedSeries D Preferred stock subsequent to September 30, 2009.

(2)Mr. Childers converted $60,000 in fees into 200,000 shares of common stock to Mr. Schafran valued at $193,800, or $3.23$0.30 per share. AsSubsequent to the fiscal year end, Mr. Childers converted $50,000 of December 17, 2008, thesefees accrued in prior years into 50 shares haveof Series D Preferred stock.

(3)Mr. McCall resigned from the board of directors effective February 1, 2009. The $20,000 in fees were earned, but not been soldpaid during the fiscal year ended September 30, 2009.

(4)Mr. Dalton converted $15,000 in fees into 15 shares of Series D Preferred stock and are currently valued at $12,000, or $0.20 per sharewas paid $45,000 in cash subsequent to September 30, 2009.  Also subsequent to the fiscal year end, Mr. Dalton resigned from the board of directors.
 
Compensation of $5,000 per month is accrued each month to non-employee directors.  We also reimburse travel expenses of members for their attendance at board and meetings.
 

47
The table below outlines the option awards thatNo options or warrants were granted to the Boardboard of Directorsdirectors for services rendered during the fiscal year ended September 30, 2008:
NameGrant Date
Expiration
Date
 
Exercise
Price
  
Number
of
Options
  
Total
($)
  
 
David Hanlon           
 8/29/078/28/2012 $2.15   100,000  $193,416(1)
 7/14/087/14/2013 $1.22   459,000  $473,209  
            $666,625  
                
Robert Childers               
 8/29/078/28/2012 $2.15   150,000  $290,124(1)
 7/14/087/14/2013 $1.22   610,000  $628,884  
            $919,008  
                
Peter McCall               
 8/29/078/28/2012 $2.15   100,000  $193,416(1)
 7/14/087/14/2013 $1.22   459,000  $473,209  
            $666,625  
Larry Schafran               
 8/29/078/28/2012 $2.15   150,000  $290,124(1)
 12/5/0712/5/2012 $4.05   50,000  $183,610  
 7/14/087/14/2013 $1.22   610,000  $628,883  
            $1,102,617  
  Note:
2009. Subsequent to the fiscal year end, we re-priced the following warrants shown in the table below to $0.13 per share:
 
(1)NameIn August 2007, the company granted 500,000 warrants to non-employee members
Grant
Date
Expiration
Date
Exercise
Price
Number
of the Board of Directors for services rendered and expensed over the fiscal year September 30, 2008.
Options

As of the date of this Report, these options are all “out-of-money”; and thus, if exercised these options would not have any net value to the holder.
During the year ended September 30, 2007, the independent members of the Board of Directors received an additional 50,000 options at fair market value.
David Hanlon9/8/069/7/11$1.4150,000
 7/14/087/13/13$1.22459,000
 8/29/078/28/12$2.15100,000
     
Robert Childers10/5/0610/4/11$1.7350,867
 8/29/078/28/12$2.15150,000
 7/14/087/13/13$1.22610,000
     
Larry Schafran9/8/069/7/11$1.4153,900
 8/29/078/28/12$2.15150,000
 12/5/0712/4/12$4.0550,000
 7/14/087/13/13$1.22610,000
 
During fiscal year 2008,2009, our two non-independent directors, Messrs. Derrick and DaltonHastings, received no additional compensation for their service as directors.
 
39
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
This section sets forth information known to us with respect to the beneficial ownership of our common stock as of December 22, 2008.29, 2009.  We have determined beneficial ownership in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we include shares of common stock subject to options and warrants held by that person that are currently exercisable or will become exercisable within 60 days after December 1, 2008,29, 2009, while those shares are not included for purposes of computing percentage ownership of any other person.  Unless otherwise indicated, the persons and entities named in the table are believed by the Companyus to have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws where applicable.

48
 
Security Ownership of Certain Beneficial Owners
 
The following table sets forth information for any person (including any “group”) who is known to us to be the beneficial owner of more than 5% of our common stock, other than theour named executive officers or directors of the Company.directors.
 
Title of ClassName and Address of Beneficial OwnerAmount and nature of beneficial ownershipPercent of ClassName and Address of Beneficial Owner
Amount and
nature of beneficial
ownership
Percent of Class
    
Common
Winfried Kill
Parkstrasse 32A
Bergisch-Gladbach 2M, 51427
Germany
31,924,000
 
 
 
20.48%
 
 
 
Winfried Kill
Parkstrasse 32A
Bergisch-Gladbach 2M, 51427
Germany
 
 
31,924,000
 
 
 
15.08%
 
 
Common
VATAS Holdings GmbH(1)
Friedrichstrasse 95
10117 Berlin, Germany
16,774,926
 
 
10.76%
 
 
Kofler Ventures (1)
R.C.S. Luxembourg B-0090554
412F, route d’ Esch, L-2086
Luxembourg, Germany
 
 
17,000,000
 
 
 
8.03%
 
 
Common
Borinquen Container Corporation
P.O. Box 145170
Arecibo, Puerto Rico 00614
 
 
13,005,759
 
 
 
6.14%
 
 
Common
Advance Technology Investors, LLC (2)
154 Rock Hill Road
Spring Valley, NY 10977
 
 
13,005,222
 
 
6.14%
 
 
Common
euromicron AG
Speicherstrasse 1
D-60327 Frankfurt am Main
Germany
 
 
12,500,000
5.90%
Common
Mara Holdings Limited (3)
2/3 B Horse Barrack Lane
Gibraltar
 
 
12,000,000
 
 
 
5.67%
 
 
Common
VATAS Holdings GmbH (4)
Friedrichstrasse 95
10117 Berlin, Germany
 
 
11,500,000
 
 
 
5.43%
 
 
__________

(1)Includes 10,774,9265,000,000 shares of common stock, and 2,000 shares of Series D Preferred stock convertible into 12,000,000 shares of common stock.

(2)Includes 11,135,222 shares of common stock, and 1,670,000 shares issuable upon exercise of warrants. Also includes 100,000 shares of common stock owned of record by Dina Weidman and 100,000 shares of common stock owned of record by U/W Mark Weidman Trust.

(3)Includes 2,000 shares of Series D Preferred stock convertible into 12,000,000 shares of commons stock.

(4)Includes 5,500,000 shares of common stock, and 6,000,000 shares issuable upon exercise of warrants.

 
Security Ownership of Management
40
 
We have two classes of voting equity securities, the common stock and Series B preferred stock.  In addition, we have a class of nonvoting Series A preferred stock that is convertible into commonD Preferred stock.  The following table sets forth information as of December 22, 2008,29, 2009, regarding the voting securities beneficially owned by all directors, each of the named executive officers, and directors and executive officers as a group.
 
Title of Class
 
Name of Beneficial Owner
Amount and nature of
beneficial ownership
Percent of ClassName of Beneficial Owner
Amount and Nature
of Beneficial
Ownership
 
   
CommonDavid G. Derrick (1)6,219,1083.91% David G. Derrick (1)26,249,06312.40%
James Dalton (2)10,637,8316.68% James Dalton (2)9,607,7864.54%
John L. Hastings, III-* John L. Hastings, III1,500,000*
Michael G. Acton (3)927,043* Michael G. Acton (3)1,202,043*
Bernadette Suckel-* Bernadette Suckel325,000*
Peter McCall (4)1,273,400* Robert Childers (4)2,100,657*
Robert Childers (5)1,700,6571.07% Larry Schafran (5)1,630,000*
Larry Schafran (6)970,000* David Hanlon (6)1,410,702*
David Hanlon (7)720,702* Officers and Directors as a Group (9 persons) (7)32,890,42215.41%
Officers and Directors as a Group (8 persons) (9)18,219,34711.44% 
________________
*Less than 1% ownership percentage.
 
(1)Mr. Derrick is theour Chief Executive Officer and Chairman of the Boardboard of Directors.directors.  Includes 1,989,7141,204,000 shares of common stock owned of record by Mr. Derrick, and 4,229,3942,645,063 shares of common stock in the name of ADP Management, an entity controlled by Messrs. Derrick and Dalton, are included.and 2,000,000 vested warrants. Additionally, includes 2,567 shares of Series D Preferred stock convertible into 15,400,000 shares of common stock owned of record by Mr. Derrick and 833 shares of Series D Preferred stock in the name of ADP Management convertible into 5,000,000 shares of common stock.
 
(2)Mr. Dalton is the former President of RemoteMDx and currently servesserved as a director.director until November 2009.  Includes 5,408,4371,872,723 shares of common stock and 1,000,000 warrants that have been vested. In addition, 4,229,3942,645,063 shares of common stock in the name of ADP Management, an entity controlled by Messrs. Derrick and Dalton. Additionally, includes 833 shares of Series D Preferred stock in the name of ADP Management convertible into 5,000,000 shares of common stock and 15 shares of Series D Preferred stock in the name of Mr. Dalton are included.convertible into 90,000 shares of common stock.
 
(3)Mr. Acton is theour Chief Financial OfficerOfficer.  Includes 1,002,043 shares of the Company.common stock owned of record by Mr. Acton and 200,000 shares of common stock issuable upon exercise of stock warrants.
 
(4)Mr. McCall is a director.  Includes 664,400 shares of common stock owned of record by McCall Capital Holdings, LLC and 14,451 shares owned of record by Mr. McCall.  In addition, 594,549 shares issuable upon exercise of warrants held by Mr. McCall.
(5)Mr. Childers is a director.  Includes 343,143443,143 shares of common stock owned of record by the Robert E. Childers Living Trust and 546,647 shares owned of record by Mr. Childers.  Includes 50 shares of Series D Preferred stock in the name of Mr. Childers convertible into 300,000 shares of common stock. In addition, 810,867 shares issuable upon exercise of stock warrants held by Mr. Childers have been included.
 
(6)(5)Mr. Schafran is a director.  Includes 106,100 shares of common stock owned of record by Mr. Schafran.  Includes 110 shares of Series D Preferred stock in the name of Mr. Schafran convertible into 660,000 shares of common stock. In addition, 863,900 shares of common stock issuable upon exercise of stock warrants held by Mr. Schafran have been included.
 
(7)(6)Mr. Hanlon is a director.  Includes 111,702 shares of common stock owned of record by Mr. Hanlon.  Includes 115 shares of Series D Preferred stock in the name of Mr. Hanlon convertible into 690,000 shares of common stock. In addition, 609,000 shares of common stock issuable upon exercise of stock warrants held by Mr. Schafran have been included.
 
(8)(7)Duplicate entries eliminated.
 

49
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of September 30, 2008, our most recently completed fiscal year, with respect to compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance.  No equity securities have been authorized for issuance under plans that were not previously approved by security holders.
Equity Compensation Plan Information
Plan categoryNumber of securities to be issued upon exercise of outstanding options, warrants and rightsWeighted average exercise price of outstanding options, warrants and rightsNumber of securities remaining available for future issuance
Equity compensation plans approved by security holders10,000,000$1.538,130,000
The 2006 RemoteMDx, Inc. Stock Incentive Plan
On July 10, 2006, the Board of Directors approved the 2006 RemoteMDx, Inc Stock Incentive Plan (“2006 Plan”). The stockholders approved the 2006 Plan on July 10, 2006. Under the 2006 Plan, the Company may issue stock options, stock appreciation rights, restricted stock awards and other incentives to our employees, officers and directors. The 2006 Plan provides for the award of incentive stock options to our key employees and directors and the award of nonqualified stock options, stock appreciation rights, bonus rights, and other incentive grants to employees and certain non-employees who have important relationships with us or our subsidiaries. A total of 10,000,000 shares are authorized for issuance pursuant to awards granted under the 2006 Plan.  During the years ended September 30, 2008 and 2007, 1,725,000 and 145,000 options were granted under this plan to employees, respectively.
Item 13.    Certain Relationships and Related Transactions, and Director Independence
 
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors, and persons who beneficially own more than 10% of the Company’s common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors, and greater-than-ten-percent shareholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of these forms that were furnished to the Company, and based on representations made by certain persons who were subject to this obligation that such filings were not required to be made, the Company believes that all reports that are required to be filed by these individuals and persons under Section 16(a) were filed on time in fiscal year 2008, except the following:
·Mr. Derrick filed two late Forms 4;
·Mr. Dalton filed one late Forms 4;
·Mr. McCall filed one late Form 4;
·Mr. Childers filed two late Forms 4;
·Mr. Hanlon filed one late Form 4;
·Mr. Hastings filed one late Form 4;
·Mr. Schafran filed two late Forms 4; and
·ADP Management filed one late Form 4.

Related Transactions

Our Boardboard of Directorsdirectors has adopted a policy that our business affairs will be conducted in all respects by standards applicable to publicly held corporations and that we will not enter into any future transactions and/or loans between us and our officers, directors and 5% stockholders unless the terms are no less favorable than could be obtained from independent, third parties and will be approved by a majority of our independent and disinterested directors. In our view, all of the transactions described below meet this standard.
The following discussion summarizes transactions between the Company and related parties during the fiscal years ended September 30, 2008 and 2007.

 
5041
 

Related-Party Line of Credit
ADP Management, David Derrick and James Dalton

As of September 30, 2008, the Company2009, we owed $542,804$76,022 under a line-of-credit agreement towith ADP Management, an entity owned and controlled by two of the Company’s directors, Mr. Derrick, and Mr. Dalton.  Mr. Derrick is also an executive officer of the Company.  Mr. Dalton served as the Company’s president until June 2008.our Chief Executive Officer.  Outstanding amounts on the line of credit accrue interest at 11% per annum and are due on August 31, 2009.upon demand.  During the fiscal year ended September 30, 2008,2009, the net decrease under this line of credit increased $1,318,433 due to a monthly management feewas $466,782. This decrease consisted of cash repayments of $739,063 offset, in part, by $272,281 of expenses owed to ADP Management, including salaries for Mr. Derrick and Mr. Dalton, expenses incurred by ADP Management that are reimbursable by us.

Related-Party Notes Payable

In November 2008, we borrowed $1,000,000 from Mr. Derrick, our Chief Executive Officer.  The unsecured note payable accrues interest at 15% and was due and payable upon our receiving cash proceeds of $1,000,000 or more from the Companysale of $618,433,common stock or other additional financing activities or February 4, 2009, whichever comes first.  We paid to Mr. Derrick a loan origination fee of $50,000 in cash and $700,000100,000 shares of restricted common stock.  In February 2009, Mr. Derrick loaned us an additional $500,000 resulting in cash. The Company made cash repayments duringa total of $1,500,000 due to Mr. Derrick.  We and Mr. Derrick agreed to extend the yeardue date of $975,641.
the full obligation to February 26, 2010.  As of September 30, 2007, the Company2009, we owed $239,763$1,500,000 plus $12,197 in accrued interest to ADP Management under the line-of-credit agreement.  During the year endedMr. Derrick. Subsequent to September 30, 2007, the line of credit increased by $698,524 due to a monthly management fee, including2009, we and Mr. Derrick and Mr. Dalton’s salary, owedagreed to ADP Management and expenses incurred by ADP Management that are reimbursable byconvert the Company. The Company made cash repayments during the year totaling $503,311. During the year ended September 30, 2007, the Company increased the linenote of credit from $500,000 to $5,000,000, including any guarantees made by ADP Management.  As a result, ADP Management was granted 500,000 restricted$1,500,000 into 1,500 shares of the Company’s common stock and an increase in the annual interest rate from 5% to 11%.Series D Preferred stock.
On March 6, 2007, the Board of Directors granted 1,500,000 options for 120 days to each of Mr. Derrick and Mr. Dalton with an exercise price of $1.30 per share.  These options were granted in connection with their assistance in providing the Company with additional capital.
Unsecured Note Payable to Randy Olshen

In September 2008, the Companywe borrowed $250,000 from Randy Olshen, the former President of the Company’s subsidiary SecureAlert.  The unsecured note payable accruesaccrued interest at 11% and iswas due and payable upon the earlier of demand oron December 31, 2009.2009 or upon demand whichever occurs first.  As of September 30, 2008, the Company owed $250,000 to Randy Olshen.2009, this note was paid in full.

Note Receivable from Gary BengtsonForeclosure Liability

The Company acquired a 51% ownership in Midwest Monitoring effective December 1, 2007.  Prior to the date of acquisition, Midwest Monitoring hadIn July 2009, we entered into a promissory note with an unrelated entity in the amount of $1,000,000 payable on December 31, 2010.  The note bears interest at a rate of 15% per annum paid quarterly.  As additional consideration for the loan arrangementto settle a registration right dispute and to induce the lender to loan the money, we granted the lender 8,000,000 shares of common.  Additionally, a related-party entity, ADP Management, collateralized this note with Gary Bengtson,5,000,000 shares of the Chief Financial OfficerCompany’s common stock. In August 2009, we defaulted on the loan because we failed to register the 8,000,000 shares of Midwest Monitoring.common stock within 30 days of entering into the agreement resulting in the lender foreclosing on the 5,000,000 shares of common stock held as collateral. As of September 30, 2008, Mr. Bengtson owed2009, we accrued $775,000 as a “foreclosure liability” to record our obligation to repay the Company $55,385. The note accrues interest at 12% per annum and is5,000,000 shares of common stock to ADP Management.  Subsequent to September 30, 2009, we agreed to issue 833 shares of Series D Preferred stock to ADP Management as payment this liability.

Related-Party Series A 15% Debenture

On May 1, 2009, we issued a Series A 15% debenture due and payable on March 31, 2009.November 1, 2010 to an entity controlled by an employee of the Company for $250,000 in cash. In addition to the rights and terms of the debenture, the entity received one-year warrants to purchase 2,200,000 shares of our common stock at an exercise price of $0.25 per share valued at $43,926. As of September 30, 2009, the outstanding balance owed on the debenture was $250,000 plus $9,452 in accrued interest. Subsequent to September 30, 2009, we agreed to issue 250 shares of Series D Preferred stock in exchange for the debenture of $250,000.

Consulting Arrangements

We agreed to pay consulting fees to ADP Management for assisting us to develop our new business direction and business plan and to provide introductions to strategic technical and financial partners.  Under the terms of this agreement, ADP Management was paid a consulting fee of $40,000 per month and we agreed to reimburse the expenses incurred by ADP Management (including the salaries of certain of our officers) in the course of performing services under the consulting arrangement. Effective April 1, 2008, ADP Management reduced the consulting fee from $40,000 to $20,000 per month to reflect the resignation of Mr. Dalton as our President.

The ADP Management agreement also requires ADP Management to pay the salary of Mr. Derrick as our Chief Executive Officer and Chairman of the board of directors.  The board of directors, which at the time did not include Mr. Derrick, approved both of these arrangements.

During the fiscal year ended September 30, 2008, we issued 1,000,000 shares of common stock valued at $1.52 per share to prepay consulting fees to ADP Management which will be reflected in future periods.  We recorded $240,000 and $60,000 of expense associated with the issuance of these shares during the fiscal years ended September 30, 2009 and September 30, 2008, respectively.  As of September 30, 2009, the remaining deferred compensation was $1,220,000.

42

Director Independence

As of the date of this Report, the Company’sreport, our common stock is traded on the OTC Bulletin Board (the “Bulletin Board”).  The Bulletin Board does not impose on the Companyus standards relating to director independence or the makeup of committees with independent directors, or provide definitions of independence.  Nevertheless, the Company haswe have undertaken to appoint fourthree individuals to its Boardour board of Directors,directors, Messrs. Schafran, McCall, Childers and Hanlon, who are independent under the NASDAQ Marketplace Rules and those standards applicable to companies trading on NASDAQ.

Specifically, none of Mr. Schafran, Mr. Hanlon, Mr. Childers or Mr. McCall:Childers:

 ·has been at any time during the past three years employed by the Companyus or by any of our parent or subsidiary of the Company;subsidiary;

 ·has accepted or has a family member who accepted any compensation from the Companyus in excess of $60,000 during any period of twelve consecutive months within the three years preceding the determination of independence, other than compensation for board or board committee service;

 ·is a family member of an individual who is, or at any time during the past three years was, employed by the Companyus as an executive officer;

 ·is, or has a Family Memberfamily member who is, a partner in, or a controlling stockholder or an executive officer of, any organization to which the Companywe made, or from which the companywe received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more:more;

 ·is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of theour executive officers of the Company serve on the compensation committee of such other entity; or

 ·is, or has a family member who is, a current partner of the Company'sour outside auditor, or was a partner or employee of the Company'sour outside auditor who worked on the Company'sour audit at any time during any of the past three years.
 

51
Item 14.    Principal Accounting Fees and Services
 
Audit Fees
 
Audit services consist of the audit of the annual consolidated financial statements of the Company,us, and other services related to filings and registration statements filed by the Companyus and itsour subsidiaries and other pertinent matters.  Audit fees paid to Hansen Barnett & Maxwell for fiscal years 20082009 and 20072008 totaled approximately $168,000 and $166,000, and $98,000, respectively.
 
Tax Fees, Audit Related Fees, and All Other Fees
 
Hansen Barnett & Maxwell has not provided any consulting services (including tax consulting and compliance services or any financial information systems design and implementation services to the Companyus in fiscal years 20082009 and 2007.2008.
 
The Audit Committee of the Boardboard of Directorsdirectors considered and authorized all services provided by Hansen Barnett & Maxwell.
 
Auditor Independence

Our Audit Committee considered that the work done for us in fiscal 20082009 by Hansen Barnett & Maxwell was compatible with maintaining Hansen Barnett & Maxwell's independence.
 
REPORT OF THE AUDIT COMMITTEEReport of the Audit Committee
 
The Audit Committee oversees the Company'sour financial reporting process on behalf of the Boardboard of Directors.directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The directors who serve on the Audit Committee are all independent for purposes of applicable SEC Rules.
 
The Audit Committee operates under a written charter that has been adopted by the Boardboard of Directors.directors.
 
We have reviewed and discussed with management the Company'sour audited financial statements as of and for the fiscal year ended September 30, 2008.2009.
 
We have discussed with theour independent registered public accountant, of the Company, Hansen Barnett & Maxwell, P.C., the matters that are required to be discussed by Statement on Auditing Standards No. 114, The Auditors Communication with Those Charged with Governance, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants, which includes a review of the findings of the independent registered public accountant during its examination of the Company'sour financial statements.
 
We have received and reviewed written disclosures and the letter from Hansen Barnett & Maxwell, P.C., which is required by Independence Standard No. 1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and we have discussed with Hansen Barnett & Maxell, P.C. their independence under such standards. We have concluded that the independent registered public accountant is independent from the Companyus and itsour management.
 
Based on our review and discussions referred to above, we have recommended to the Boardboard of Directorsdirectors that theour audited financial statements of the Company be included in the Company'sour Annual Report on Form 10-K for the fiscal year ended September 30, 2008,2009, for filing with the Securities and Exchange Commission.
 
Respectfully submitted by the members of the Audit Committee:
 
 
Larry Schafran, Chair
Peter McCall
David Hanlon


 
5243
 

PART IV
 
Item 15.    Exhibits,Consolidated Financial Statement SchedulesStatements and Exhibits
 
(a) The following documents are filed as part of this Form:

1. Financial Statements
 
ReportsReport of Independent Registered Public Accounting FirmsFirm F-3 50
Consolidated Balance Sheets F-4 51
Consolidated Statements of EarningsOperations F-6 53
Consolidated Statements of Stockholders' Equity (Deficit) and  Comprehensive Income F-7 54
Consolidated Statements of Cash Flows F-1860
Notes to the Consolidated Financial Statements F-2062

2.  Financial Statement Schedules.    [Included in the Consolidated Financial Statements or Notes thereto.]

 
3. Exhibits.
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission: 

Exhibit NumberTitle of Document
3.01
3(i)(1)
Articles of Incorporation (incorporated by reference to the Company'sour Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
3.01(1)3(i)(2)
Amendment to Articles of Incorporation for Change of Name (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2001)
.
3.01(2)3(i)(3)
Amendment to Articles of Incorporation Amending Rights and Preferences of Series A Preferred Stock (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2001)
.
3.01(3)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)
.
3.01(4)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’sour annual report on Form 10-KSB for the fiscal year ended September 30, 2001)
.
3.01(5)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’sour Current Report on Form 8-K, filed with the Commission on March 24, 2006)
.
3.01(6)3(i)(7)
Articles of Amendment to Articles of Incorporation filed July 12, 2006 (previously filed as exhibits to the Company’sour current report on Form 8-K filed July 18, 2006, and incorporated herein by reference).
3.023(i)(8)
Bylaws (incorporated by reference to the Company’s Registration Statement on Form 10-SB, effective December 1, 1997)
3.03
Articles of Amendment to the Fourth Amended and Restated Designation of Right and Preferences of Series A 10% Convertible Non-Voting Preferred Stock of RemoteMDx, Inc. (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007).
3.043(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).
4.01      3(i)(10)Articles of Amendment to the Articles of Incorporation and Certificate of Amendment to the Designation of Rights and Preferences Related to Series D 8% Convertible Preferred Stock of RemoteMDx, Inc.
3(ii)Bylaws (incorporated by reference to our Registration Statement on Form 10-SB, effective December 1, 1997).
44

4.012006 Equity Incentive Award Plan (previously filed in August 2006 the Form 10-QSB for the nine months ended June 30, 2006)
 9.01
Voting Trust Agreement (see Exhibit 10.24) 
.
10.01
Distribution and Separation Agreement (incorporated by reference to the Company'sour 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’sour Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
10.03
1997 Transition Plan (incorporated by reference to the Company’sour Registration Statement and Amendments thereto on Form 10-SB, effective December 1, 1997).
10.04
Securities Purchase Agreement for $1,200,000 of Series A Preferred Stock (incorporated by reference to the Company’sour 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’sour annual report on Form 10-KSB for the fiscal year ended September 30, 2001)
.
53
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’sour 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’sour current report on Form 8-K filed August 7, 2006 and incorporated herein by reference).
10.11
Change in Terms Agreement between Citizen National Bank and the Company (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2006)
.
10.12
Securities Purchase Agreement between the Company and VATAS Holding GmbH, a German limited liability company (previously filed on Form 8-K in November 2006).
10.13
Common Stock Purchase Warrant between the Company and VATAS Holding GmbH dated November 9, 2006 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007).
10.14
Settlement Agreement and Mutual Release between the Company and Michael Sibbett and HGR Enterprises, LLC, dated as of February 1, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007).
10.15
Distributor Sales, Service and License Agreement between the Company and Seguridad Satelital Vehicular S.A. de C.V., dated as of February 5, 2007 (previously filed as Exhibit on Form 10-QSB for the three months ended December 31, 2006, filed in February 2007).
10.16
Distributor Agreement between the Company and QuestGuard, dated as May 31, 2007.  Portions of this exhibit were redacted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (previously filed as Exhibit on Form 10-QSB for the nine months ended June 30, 2007, filed in August 2007).
10.17
Stock Purchase Agreement between the Company and Midwest Monitoring & Surveillance, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008).
10.18
Stock Purchase Agreement between the Company and Court Programs, Inc., Court Programs of Florida Inc., and Court Programs of Northern Florida, Inc., dated effective December 1, 2007 (previously filed as Exhibit on Form 10-KSB for the fiscal year ended September 30, 2007, filed in January 2008).
45

10.19
Sub-Sublease Agreement between the Company and Cadence Design Systems, Inc., a Delaware corporation, dated March 10, 2005 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
10.20
Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
10.21
Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
10.22
Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated September 14, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
10.23
Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated December 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
10.24
Stock Purchase Agreement (sale of Volu-Sol Reagents Corporation shares to Futuristic Medical, LLC), dated January 15, 2008, including voting agreement (previously filed as Exhibit on Form 10-KSB/A for the fiscal year ended September 30, 2007, filed in June 2008).
10.25
Change in TermsDistribution and License Agreement between Citizen National Bankeuromicron AG, a German corporation, and the Company, dated March 14, 2008May 28, 2009 (previously filed as an Exhibit on Form 10-KSB/A10-Q for the yearnine months ended SeptemberJune 30, 2007,2009, filed in June 2008)August 2009).
10.26
Statement of Work from Wireless Endeavors (a/k/a/ neXaira or Puracom), dated January 8, 2005 (previously filed as Exhibit on Form 10-KSB/A for the year ended September 30, 2007, filed in June 2008).
10.27
Terms and Conditions of the agreement between Spectrum Design Solutions, Inc. and the Company, dated April 30, 2007 (previously filed as Exhibit on Form 10-KSB/A for the year ended September 30, 2007, filed in June 2008).
10.28
Contract Agreement between Dyanmic Source Manufacturing and the Company, dated September 18, 2006 (previously filed as Exhibit on Form 10-KSB/A for the year ended September 30, 2007, filed in June 2008).
10.29
Distribution Agreement between Electronic Monitoring Services Corporation and the Company, dated September 20, 2007 (previously filed as Exhibit on Form 10-KSB/A for the year ended September 30, 2007, filed in June 2008).
10.30
Distribution Agreement between Security Investment Holdings, LLC and the Company, dated December 28, 2006 (previously filed as Exhibit on Form 10-KSB/A for the year ended September 30, 2007, filed in June 2008).
54
10.31Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated June 30, 2008. 
10.32Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated June 30, 2008. 
10.33Patent Assignment Agreement between Futuristic Medical Devices, LLC, dated June 30, 2008. 
14
Code of Business Conduct and Ethics (previously filed as Exhibit on Form 10-KSB for the year ended September 30, 2007, filed in January 2008).
23.1
Consent of Independent Registered Public Accounting Firm
Firm.
31.131(i)
Certification of President and Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002
2002.
31.231(ii)
Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002
2002.
32CertificationCertifications under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. SECTIONSection 1350).



 
5546
 
 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 RemoteMDx, Inc.
  
  
 
By:
/s/  David G. Derrick
        David G. Derrick, Chief Executive Officer
        (Principal(Principal Executive Officer)
 
Date: December 23, 2008January 13, 2010
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature 
Title
Date
    
    
/s/ David G. Derrick Director, Chairman, andDecember 23, 2008January 13, 2010
David G. Derrick Chief Executive Officer 
  (Principal Executive Officer) 
    
  DirectorDecember 23, 2008
James Dalton/s/  John L. Hastings, IIIPresident and Chief Operating OfficerJanuary 13, 2010
John L. Hastings, III   
    
    
/s/  Robert E. Childers DirectorDecember 23, 2008January 13, 2010
Robert E. Childers   
 
/s/  Peter McCall
DirectorDecember 23, 2008
Peter McCall   
    
/s/  Larry G. Schafran DirectorDecember 23, 2008January 13, 2010
Larry G. Schafran   
    
    
/s/  David P. Hanlon DirectorDecember 23, 2008January 13, 2010
David P. Hanlon
   
    
/s/  Michael G. Acton Chief Financial OfficerDecember 23, 2008January 13, 2010
Michael G. Acton (principal financial officer) 
    
/s/  Chad D. Olsen Corporate ControllerDecember 23, 2008January 13, 2010
Chad D. Olsen 
(principal accounting officer)
 


 
5647
 
 








RemoteMDx, Inc.
Consolidated Financial Statements
September 30, 2008 and 2007









RemoteMDx, Inc.
Consolidated Financial Statements
September 30, 2009 and 2008








 






 
F - 148
 

 
Index to Consolidated Financial Statements
 



 Page
  
Report of Independent Registered Public Accounting FirmF-350
  
Consolidated Balance Sheets as of September 30, 2009 and 2008F-451
  
Consolidated Statements of Operations for the fiscal years ended September 30, 2009 and 2008F-653
  
Consolidated Statements of Stockholders’ Equity (Deficit) for the fiscal years ended September 30, 2008 and 2009F-754
  
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2009 and 2008F-1860
  
Notes to Consolidated Financial StatementsF-2062








 
F - 249
 


HANSEN, BARNETT& MAXWELL, P.C.
  
A Professional Corporation Registered with the Public Company
CERTIFIED PUBLIC ACCOUNTANTS Accounting Oversight Board
5 Triad Center, Suite 750  
Salt Lake City, UT 84180-1128  
Phone: (801) 532-2200
Fax: (801) 532-7944
 
www.hbmcpas.com A Member of the Forum of Firms

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of RemoteMDx, Inc.

We have audited the accompanying consolidated balance sheets of RemoteMDx, Inc. and subsidiaries (collectively, the Company) as of September 30, 20082009 and 2007,2008, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three-yeartwo-year period ended September 30, 2008.2009.  The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of RemoteMDx, Inc. as of September 30, 20082009 and 2007,2008, and the consolidated results of its operations and its cash flows for each of the years in the three-yeartwo-year period ended September 30, 20082009 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the consolidated financial statements, the Company has incurred losses and has an accumulated deficit.  These conditions raise substantial doubt about its ability to continue as a going concern.  Management’s plans regarding those matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of RemoteMDx, Inc.’s internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 23, 2008 expressed an adverse opinion.


HANSEN, BARNETT & MAXWELL, P.C.
Salt Lake City, Utah
December 23, 2008January 12, 2010




 
F - 350
 

REMOTEMDX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND 2008


      
 September 30,    
Assets 2008  2007  2009  2008 
Current assets:            
Cash $2,782,953  $4,803,871  $602,321  $2,782,953 
Deposit held in escrow  500,000   -   -   500,000 
Accounts receivable, net of allowance for doubtful accounts of $312,000 and $160,000, respectively  1,441,853   4,996,093 
Accounts receivable, net of allowance for doubtful accounts of $266,000 and $312,000, respectively  1,441,648   1,441,853 
Receivables from related-party  55,385   -   -   55,385 
Prepaid expenses and other  224,842   296,096   275,390   224,842 
Current assets from discontinued operations  -   933,755 
Inventory, net of reserves of $83,092 and $0, respectively  603,329   - 
Total current assets  5,005,033   11,029,815   2,922,688   5,005,033 
Property and equipment, net of accumulated depreciation and amortization of $1,937,710 and $671,611, respectively  1,581,558   1,380,192 
Monitoring equipment, net of accumulated depreciation of $3,061,321 and $1,388,515, respectively  1,349,146   3,739,474 
Property and equipment, net of accumulated depreciation of $2,525,180 and $1,937,710, respectively  1,313,306   1,581,558 
Monitoring equipment, net of accumulated depreciation of $2,944,197 and $3,061,321, respectively  1,316,493   1,349,146 
Goodwill  4,811,834   -   2,468,081   4,811,834 
Intangible assets, net of amortization of $16,500 and zero, respectively  216,500   - 
Intangible assets, net of amortization of $126,655 and $16,500, respectively  496,346   216,500 
Other assets  46,626   36,632   76,675   46,626 
Other assets from discontinued operations  -   50,576 
Total assets $13,010,697  $16,236,689  $8,593,589  $13,010,697 
 

 

See accompanying notes to consolidated financial statements.

 
F - 451
 

REMOTEMDX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
AS OF SEPTEMBER 30, 2009 AND 2008
 

 September 30, 
Liabilities and Stockholders’ Equity 2008  2007    
       2009  2008 
Current liabilities:            
Bank line of credit $3,462,285  $3,858,985  $252,600  $3,462,285 
Accounts payable  2,059,188   3,032,223   2,339,786   2,059,188 
Accrued liabilities  1,781,267   1,288,513   3,506,680   1,781,267 
Deferred revenue  21,343   1,314,247   56,858   21,343 
Related-party note payable and line of credit  792,804   -   1,576,022   792,804 
SecureAlert Series A Preferred stock redemption obligation  3,244,758   -   3,148,943   3,244,758 
Derivative liability (Note 11)  1,219,426   - 
Promissory notes payable, net of debt discount of $41,556 and $0, respectively  2,008,444   - 
Senior secured note payable, net of debt discount of $529,109 and $0, respectively  2,890,522   - 
Current portion of Series A 15% debentures, net of debt discount of $1,272,189 and $0, respectively  2,127,811   - 
Current portion of long-term debt  465,664   169,676   272,493   465,664 
Current liabilities from discontinued operations  -   69,186 
Total current liabilities  11,827,309   9,732,830   19,399,585   11,827,309 
Related-party line of credit  -   239,763 
Long-term debt, net of current portion  1,147,382   - 
Series A 15% debentures net of current portion, net of debt discount of $549,531 and $0, respectively  557,219   - 
Long-term debt, net of current portion, net of debt discount of $525,665 and $0, respectively  1,009,606   1,147,382 
Total liabilities  12,974,691   9,972,593   20,966,410   12,974,691 
                
Commitments and Contingencies (Note 16)        
        
Minority interest  -   1,396,228 
        
SecureAlert Series A Preferred stock  -   3,590,000 
        
Stockholders’ equity:        
Stockholders’ equity (deficit):        
Preferred stock:                
Series A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares designated; 19 shares outstanding (aggregate liquidation preference of $875)  1   1 
Series B convertible, $0.0001 par value: 2,000,000 shares designated; 10,999 and 12,999 shares outstanding, respectively (aggregate liquidation preference of $32,997)    1     1 
Series C convertible, $0.0001 par value: 7,357,144 shares designated; no shares outstanding (aggregate liquidation preference of $0)  -   - 
Common stock, $0.0001 par value: 175,000,000 shares authorized; 155,881,260 and 127,340,085 shares outstanding, respectively  15,588   12,734 
Series A 10% dividend, convertible, non-voting, $0.0001 par value: 40,000 shares designated; zero and 19 shares outstanding, respectively (aggregate liquidation preference of $0)  -   1 
Series B convertible, $0.0001 par value: 2,000,000 shares designated; zero and 10,999 shares outstanding, respectively (aggregate liquidation preference of $0)  -   1 
Common stock, $0.0001 par value: 250,000,000 shares authorized; 210,365,988 and 155,881,260 shares outstanding, respectively  21,037   15,588 
Additional paid-in capital  186,203,084   142,238,576   194,659,044   186,203,084 
Deferred compensation  (3,498,672)  (7,468,998)  (1,287,406)  (3,498,672)
Subscription receivable  -   (407,500)
Accumulated deficit  (182,683,996)  (133,096,946)  (205,765,496)  (182,683,996)
Total stockholders’ equity  36,006   1,277,868 
Total stockholders’ equity (deficit)  (12,372,821)  36,006 
Total liabilities and stockholders’ equity $13,010,697  $16,236,689  $8,593,589  $13,010,697 

 

 
See accompanying notes to consolidated financial statements.

 
F - 552
 

REMOTEMDX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008

 Years Ended September 30, 
 2008  2007  2006  2009  2008 
Revenues:               
Products $2,577,600  $1,533,100  $-  $570,749  $2,577,600 
Monitoring services  9,826,077   5,082,109   391,600   12,055,159   9,826,077 
Total revenues  12,403,677   6,615,209   391,600   12,625,908   12,403,677 
Cost of revenues:                    
Products  1,675,212   3,298,783   -   275,688   1,675,212 
Monitoring services  11,433,778   10,097,380   569,664   9,862,925   10,862,830 
Impairment of monitoring equipment and parts (Note 3)  2,319,530   570,948 
Total cost of revenues  13,108,990   13,396,163   569,664   12,458,143   13,108,990 
Negative margin  (705,313)  (6,780,954)  (178,064)
Gross (negative) margin  167,765   (705,313)
Operating expenses:                     
Selling, general and administrative (including $26,324,358, $8,074,126 and $8,453,840, respectively, of compensation expense paid in stock or stock options / warrants)  36,466,678   15,586,852   15,649,099 
Research and development (including $1,045,285, $301,800, and $0, respectively, paid in stock or stock options / warrants)  4,811,128   4,564,121   2,087,802 
Selling, general and administrative (including $3,315,716 and $26,324,358, respectively, of compensation expense paid in stock or stock options / warrants)  16,540,645   36,466,678 
Research and development (including $0 and $1,045,285, respectively, paid in stock or stock options / warrants)  1,777,873   4,811,128 
Impairment of goodwill (Note 4)  2,804,580   - 
Loss from operations  (41,983,119)  (26,931,927)  (17,914,965)  (20,955,333)  (41,983,119)
Other income (expense):                    
Gain on sale of intellectual property  2,400,000   2,400,000   -   -   2,400,000 
Redemption of SecureAlert Series A Preferred  (8,372,566)  -   -   95,816   (8,372,566)
Interest income  35,230   105,972   30,051   18,187   35,230 
Interest expense (including $865,568, $396,019, and $2,787,221, respectively, paid in stock or stock options / warrants)  (1,566,542)  (1,198,573)  (6,541,074)
Derivative valuation gain  -   -   629,308 
Loss on revalued registration rights  -   (663,000)  - 
Loss on sale of asset  -   (228,800)  - 
Interest expense (including $2,695,759 and $865,568, respectively, paid in stock or stock options / warrants)  (5,012,803)  (1,566,542)
Derivative valuation gain (Note 11)  1,867,007   - 
Other income (expense), net  314,059   484,439   67,157   905,626   314,059 
Net loss from continuing operations  (49,172,938)  (26,031,889)  (23,729,523)  (23,081,500)  (49,172,938)
Discontinued operations  (414,112)  (338,682)  (68,222)  -   (414,112)
Net loss  (49,587,050)  (26,370,571)  (23,797,745)  (23,081,500)  (49,587,050)
Dividends on Series A Preferred stock  (345,356)  (550,603)  (642,512)  (175)  (345,356)
Net loss attributable to common stockholders $(49,932,406) $(26,921,174) $(24,440,257) $(23,081,675) $(49,932,406)
Net loss per common share from continuing operations, basic and diluted $(0.35) $(0.25) $(0.43) $(0.13) $(0.35)
Net loss per common share from discontinued operations, basic and diluted $(0.01) $(0.01) $(0.01) $(0.00)  $(0.01)
Net loss per common, basic and diluted $(0.36) $(0.26) $(0.44) $(0.13) $(0.36)
Weighted average common shares outstanding, basic and diluted  140,092,000   102,826,000   55,846,000   182,188,000   140,092,000 
 

See accompanying notes to consolidated financial statements.
53

REMOTEMDX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  Preferred Stock 
  
Series A
Shares
  
Series A
Amount
  
Series B
Shares
  
Series B
Amount
 
             
Balance as of October 1, 2007  19  $1   12,999  $1 
                 
Issuance of common stock for:                
Conversion of Series B Preferred stock  -   -   (2,000)  - 
    Settlement of lawsuit  -   -   -   - 
    Related provisions of debt  -   -   -   - 
Services  -   -   -   - 
    Cash  -   -   -   - 
    Acquisition of subsidiaries  -   -   -   - 
    Exercise of options and warrants  -   -   -   - 
                 
Issuance of warrants for:                
    Related provisions of debt  -   -   -   - 
    Services
  -   -   -   - 
                 
Amortization of deferred consulting  -   -   -   - 
                 
Amortization of financing costs  -   -   -   - 
                 
Issuance of SecureAlert Series A Preferred stock  -   -   -   - 
                 
Issuance of Series A Preferred stock for accrued dividends  -   -   -   - 
                 
Subscription receivable  -   -   -   - 
                 
SecureAlert Series A Preferred stock redemption  -   -   -   - 
                 
Deconsolidation of subsidiary  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance as of September 30, 2008  19  $1   10,999  $1 


See accompanying notes to consolidated financial statements.

 
F - 654
 

REMOTEMDX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
 
RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
     Additional    
  Common Stock  Paid-In  Deferred 
  Shares  Amount  Capital  Compensation 
             
Balance as of October 1, 2007  127,340,085  $12,734  $142,238,576  $(7,468,998)
                 
Issuance of common stock for:                
Conversion of Series B Preferred stock  15,000   2   (2)  - 
    Settlement of lawsuit  325,000   33   571,967   - 
    Debt  360,000   36   403,164   (403,200)
Services  9,135,000   914   15,843,671   (1,520,000)
    Cash  6,177,219   618   5,187,296   - 
    Acquisition of subsidiaries  650,000   65   2,599,435   - 
    Exercise of options and warrants  3,618,814   361   2,509,520   - 
                 
Issuance of warrants for:                
    Debt  -   -   1,872,000   - 
    Services
  -   -   4,398,279   (134,812)
                 
Amortization of deferred consulting  -   -   -   5,162,770 
                 
Amortization of financing costs  -   -   -   865,568 
                 
Issuance of SecureAlert Series A Preferred stock  825,893   82   825,810   - 
                 
Issuance of Series A Preferred stock for accrued dividends  -   -   (345,356)  - 
                 
Subscription receivable  -   -   -   - 
                 
SecureAlert Series A Preferred stock redemption  7,434,249   743   8,548,643   - 
                 
Deconsolidation of subsidiary  -   -   1,550,081   - 
                 
Net loss  -   -   -   - 
                 
Balance as of September 30, 2008  155,881,260  $15,588  $186,203,084  $(3,498,672)

  Preferred Stock 
  
Series A
Shares
  
Series A
Amount
  
Series B
Shares
  
Series B
Amount
 
             
Balance at October 1, 2005  26,007  $3   1,369,157  $137 
                 
Issuance of common stock for:                
 Conversion of Series A Preferred stock  (10,843)  (1)  -   - 
    Conversion of Series B Preferred stock  -   -   (1,315,825)  (132)
 Services  -   -   -   - 
    Cash  -   -   -   - 
    Debt and accrued interest  -   -   -   - 
 Exercise of options and warrants  -   -   -   - 
                 
Issuance of Series C Preferred stock for
    Debt and accrued interest
  -   -   -   - 
                 
Issuance of warrants for services                
    Debt  -   -   -   - 
       Services  -   -   -   - 
                 
Amortization of deferred consulting and financing fees  -   -   -   - 
                 
Issuance of RemoteMDx Series C Preferred stock for cash  -   -   -   - 
                 
Record beneficial conversion feature on notes  -   -   -   - 
                 
Issuance of Series A and C Preferred stock for dividends  2,146   -   -   - 
                 
Preferred stock dividend on SecureAlert Series A Preferred stock  -   -   -   - 
                 
Subscription receivable  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance of September 30, 2006  17,310  $2   53,332  $5 

See accompanying notes to consolidated financial statements.

 
F - 755
 

RemoteMDx, Inc.REMOTEMDX, INC.
Consolidated Statements of Stockholders’ EquityCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  
Subscription
Receivable
  
Accumulated
Deficit
  
Total
 
          
Balance as of October 1, 2007 $(407,500) $(133,096,946) $1,277,868 
             
Issuance of common stock for:            
Conversion of Series B Preferred stock  -   -   - 
    Settlement of lawsuit  -   -   572,000 
    Debt  -   -   - 
Services  -   -   14,324,585 
    Cash  -   -   5,187,914 
    Acquisition of subsidiaries  -   -   2,599,500 
    Exercise of options and warrants  -   -   2,509,881 
             
Issuance of warrants for:            
    Debt  -   -   1,872,000 
    Services
  -   -   4,263,467 
             
Amortization of deferred consulting  -   -   5,162,770 
             
Amortization of financing costs  -   -   865,568 
             
Issuance of SecureAlert Series A Preferred stock  -   -   825,892 
             
Issuance of Series A Preferred stock for accrued dividends  -   -   (345,356)
             
Subscription receivable  407,500   -   407,500 
             
SecureAlert Series A Preferred stock redemption  -   -   8,549,386 
             
Deconsolidation of subsidiary  -   -   1,550,081 
             
Net loss  -   (49,587,050)  (49,587,050)
             
Balance as of September 30, 2008 $-  $(182,683,996) $36,006 


See accompanying notes to consolidated financial statements.
 Years Ended September 30, 2006, 2007 and 2008
56

  Preferred Stock       
  
Series C
Shares
  
Series C
Amount
  
Common
Shares
  
Common
Amount
 
             
Balance at October 1, 2005  -  $-   45,129,042  $4,513 
                 
Issuance of common stock for:                
 Conversion of Series A Preferred stock  -   -   4,014,916   401 
    Conversion of Series B Preferred stock  -   -   7,171,380   717 
 Services  -   -   5,846,428   585 
    Cash  -   -   6,883,334   688 
    Debt and accrued interest  -   -   10,739,753   1,074 
 Exercise of options and warrants  -   -   350,000   35 
                 
Issuance of Series C Preferred stock for                
    Debt and accrued interest  617,352   62         
           -   - 
Issuance of warrants for services                
    Debt  -   -   -   - 
       Services  -   -   -   - 
                 
Amortization of deferred consulting and financing fees  -   -   -   - 
                 
Issuance of RemoteMDx Series C Preferred stock for cash  4,739,788   474   -   - 
                 
Record beneficial conversion feature on notes  -   -   -   - 
                 
Issuance of Series A and C Preferred stock for dividends  175,226   17   -   - 
                 
Preferred stock dividend on SecureAlert Series A Preferred stock  -   -   -   - 
                 
Subscription receivable  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance of September 30, 2006  5,532,366  $553   80,134,853  $8,013 
REMOTEMDX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
  Preferred Stock 
  
Series A
Shares
  
Series A
Amount
  
Series B
Shares
  
Series B
Amount
 
             
Balance as of October 1, 2008  19  $1   10,999  $1 
                 
Issuance of common stock for:                
Conversion of Series A Preferred stock  (19)  (1)  -   - 
Conversion of Series B Preferred stock  -   -   (10,999)  (1)
Settlement of lawsuit  -   -   -   - 
Related issuances of debt  -   -   -   - 
Services  -   -   -   - 
Cash  -   -   -   - 
Acquisition of subsidiaries  -   -   -   - 
Acquisition extension  -   -   -   - 
                 
Issuance of warrants for:                
Related issuances of debt  -   -   -   - 
Services  -   -   -   - 
Acquisition of subsidiary  -   -   -   - 
                 
Amortization of deferred consulting  -   -   -   - 
                 
Amortization of financing costs  -   -   -   - 
                 
Beneficial conversion feature recorded as interest expense on notes  -   -   -   - 
                 
Forgiveness of debt from related party  -   -   -   - 
                 
Issuance of RemoteMDx Series A Preferred stock for accrued dividends  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance as of September 30, 2009  -  $-   -  $- 
 
 
See accompanying notes to consolidated financial statements.

 
F - 857
 

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ EquityREMOTEMDX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009

        Additional  Deferred 
  Common Stock  Paid-In  Financing and 
  Shares  Amount  Capital  Consulting 
             
Balance as of October 1, 2008  155,881,260  $15,588  $186,203,084  $(3,498,672)
                 
Issuance of common stock for:                
Conversion of Series A Preferred stock  9,306   1   -   - 
Conversion of Series B Preferred stock  10,999   1   -   - 
Settlement of lawsuits  5,400,000   540   1,029,460   - 
Related issuances of debt  25,953,016   2,595   1,767,955   (138,000)
Services  2,254,121   226   928,648   (200,000)
Cash  17,850,000   1,785   3,248,215   - 
Acquisition of subsidiaries  2,857,286   286   656,890   - 
Acquisition extension  150,000   15   19,485   - 
                 
Issuance of warrants for:                
Related issuances of debt  -   -   96,844   - 
Services  -   -   392,506   (46,667)
Acquisition of subsidiary  -   -   114,383   - 
                 
Amortization of deferred consulting  -   -   -   1,930,678 
                 
Amortization of financing costs  -   -   -   665,255 
                 
Beneficial conversion feature recorded as interest expense on notes  -   -   122,727   - 
                 
Forgiveness of debt from related party  -   -   79,022   - 
                 
Issuance of RemoteMDx Series A Preferred stock for accrued dividends  -   -   (175)  - 
                 
Net loss  -   -   -   - 
                 
Balance as of September 30, 2009  210,365,988  $21,037  $194,659,044  $(1,287,406)
See accompanying notes to consolidated financial statements.  
Years Ended September 30, 2006, 2007 and 200858

  
 
Additional Paid-In Capital
  
Deferred Financing and Consulting
  Preferred Stock Subscriptions Receivable  
 
Accumulated Deficit
 
             
Balance at October 1, 2005 $76,113,623  $(3,363,126) $(504,900) $(80,463,694)
                 
Issuance of common stock for:                
 Conversion of Series A Preferred stock  (400)  -   -   - 
    Conversion of Series B Preferred stock  (586)  -   -   - 
 Services  3,983,022   (1,935,000)  -   - 
    Cash  7,909,312   -   -   - 
    Debt and accrued interest  6,855,629   (1,434,550)  -   - 
 Exercise of options and warrants  251,965   -   -   - 
                 
Issuance of Series C Preferred stock for                
    Debt and accrued interest  1,037,090   -   -     
                 
Issuance of warrants for services                
    Debt  255,012   -   -   - 
       Services  5,108,869   (2,776,889)  -   - 
                 
Amortization of deferred consulting and financing fees  -   6,860,477   -   - 
                 
Issuance of RemoteMDx Series C Preferred stock for cash  7,439,085   -   (1,712,565)  - 
                 
Record beneficial conversion feature on notes  2,786,364   -   -   (2,464,936)
                 
Issuance of Series A and C Preferred stock for dividends  (18)  -   -   - 
                 
Preferred stock dividend on SecureAlert Series A Preferred stock  (20,877)  -   -   - 
                 
Subscription receivable  -   -   2,217,465   - 
                 
Net loss  -   -   -   (23,797,745)
                 
Balance of September 30, 2006 $111,718,090  $(2,649,088) $-  $(106,726,375)
REMOTEMDX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2008 AND 2009
 

  
Accumulated
Deficit
  
Total
 
       
Balance as of October 1, 2008 $(182,683,996) $36,006 
         
Issuance of common stock for:        
Conversion of Series A Preferred stock  -   - 
Conversion of Series B Preferred stock  -   - 
Settlement of lawsuits  -   1,030,000 
Related issuances of debt  -   1,632,550 
Services  -   728,874 
Cash  -   3,250,000 
Acquisition of subsidiaries  -   657,176 
Acquisition of extension  -   19,500 
         
Issuance of warrants for:        
Related issuances of debt  -   96,844 
Services  -   345,839 
Acquisition of subsidiary  -   114,383 
         
Amortization of deferred consulting  -   1,930,678 
         
Amortization of financing costs  -   665,255 
         
Beneficial conversion feature recorded as interest expense on notes  -   122,727 
         
Forgiveness of debt from related party  -   79,022 
         
Issuance of RemoteMDx Series A Preferred stock for accrued dividends  -   (175)
         
Net loss  (23,081,500)  (23,081,500)
         
Balance as of September 30, 2009 $(205,765,496) $(12,372,821)

See accompanying notes to consolidated financial statements.

 
F - 959
 

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended September 30, 2006, 2007 and 2008

  
Total
 
    
Balance at October 1, 2005 $(8,213,444)
     
Issuance of common stock for:    
 Conversion of Series A Preferred stock  - 
    Conversion of Series B Preferred stock  (1)
 Services  2,048,607 
    Cash  7,910,000 
    Debt and accrued interest  5,422,153 
 Exercise of options and warrants  252,000 
     
Issuance of Series C Preferred stock for    
    Debt and accrued interest  1,037,152 
     
Issuance of warrants for services    
    Debt  255,012 
       Services  2,331,980 
     
Amortization of deferred consulting and financing fees  6,860,477 
     
Issuance of RemoteMDx Series C Preferred stock for cash  5,726,994 
     
Record beneficial conversion feature on notes  321,428 
     
Issuance of Series A and C Preferred stock for dividends  (1)
     
Preferred stock dividend on SecureAlert Series A Preferred stock  (20,877)
     
Subscription receivable  2,217,465 
     
Net loss  (23,797,745)
     
Balance of September 30, 2006 $2,351,200 

 
See accompanying notes to consolidated financial statements.

F - 10

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008

  Preferred Stock 
  
Series A
Shares
  
Series A
Amount
  
Series B
Shares
  
Series B
Amount
 
             
Balance at October 1, 2006  17,310  $2   53,332  $5 
                 
Issuance of common stock for:                
 Conversion of Series A Preferred stock  (18,093)  (1)  -   - 
    Conversion of Series B Preferred stock  -   -   (40,333)  (4)
 Conversion of Series C Preferred stock  -   -   -   - 
    Registration rights penalty  -   -   -   - 
    Extension of related-party line of credit  -   -   -   - 
 Services  -   -   -   - 
    Cash  -   -   -   - 
    Exercise of options and warrants  -   -   -   - 
                 
Issuance of warrants for services  -   -   -   - 
                 
Amortization of deferred consulting and financing fees  -   -   -   - 
                 
Issuance of Series A and C Preferred stock for dividends  802   -   -   - 
                 
Preferred stock dividend on SecureAlert Series A Preferred stock  -   -   -   - 
                 
Subscription receivable  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance of September 30, 2007  19  $1   12,999  $1 

See accompanying notes to consolidated financial statements.

F - 11

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
  Series C       
  Preferred Stock  Common Stock 
  Shares  Amount  Shares  Amount 
             
Balance at October 1, 2006  5,532,366  $553   80,134,853  $8,013 
                 
Issuance of common stock for:                
 Conversion of Series A Preferred stock  -   -   6,694,329   670 
    Conversion of Series B Preferred stock  -   -   351,824   35 
 Conversion of Series C Preferred stock  (5,764,488)  (576)  17,293,463   1,729 
    Registration rights penalty  -   -   750,000   75 
    Extension of related-party line of credit  -   -   500,000   50 
 Services  -   -   3,067,853   307 
    Cash  -   -   3,081,000   308 
    Exercise of options and warrants  -   -   15,466,763   1,547 
                 
Issuance of warrants for services  -   -   -   - 
                 
Amortization of deferred consulting and financing fees  -   -   -   - 
                 
Issuance of Series A and C Preferred stock for dividends  232,122   23   -   - 
                 
Preferred stock dividend on SecureAlert Series A Preferred stock  -   -   -   - 
                 
Subscription receivable  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance of September 30, 2007  -  $-   127,340,085  $12,734 

See accompanying notes to consolidated financial statements.

F - 12

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
  
Additional
Paid-In
Capital
  
Deferred
Financing
and Consulting
  
Subscription
Receivable
 
          
Balance at October 1, 2006 $111,718,090  $(2,649,088) $- 
             
Issuance of common stock for:            
 Conversion of Series A Preferred stock  (668)  -   - 
    Conversion of Series B Preferred stock  (31)  -   - 
 Conversion of Series C Preferred stock  (1,153)  -   - 
    Registration rights penalty  662,925   -   - 
    Extension of related-party line of credit  799,950   (800,000)  - 
 Services  4,837,883   -   - 
    Cash  6,161,692   -   - 
    Exercise of options and warrants  11,377,486   -   (6,081,024)
             
Issuance of warrants for services  6,988,864   (4,970,162)  - 
             
Amortization of deferred consulting and financing fees  -   950,252   - 
             
Issuance of Series A and C Preferred stock for dividends  (220)  -   - 
             
Preferred stock dividend on SecureAlert Series A Preferred stock  (306,242)  -   - 
             
Subscription receivable  -   -   5,673,524 
             
Net loss  -   -   - 
             
Balance of September 30, 2007 $142,238,576  $(7,468,998) $(407,500)

See accompanying notes to consolidated financial statements.

F - 13

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
       
  Accumulated    
  Deficit  Total 
       
Balance at October 1, 2006 $(106,726,375) $2,351,200 
         
Issuance of common stock for:        
 Conversion of Series A Preferred stock  -   1 
    Conversion of Series B Preferred stock  -   - 
 Conversion of Series C Preferred stock  -   - 
    Registration rights penalty  -   663,000 
    Extension of related-party line of credit  -   - 
 Services  -   4,838,190 
    Cash  -   6,162,000 
    Exercise of options and warrants  -   5,298,009 
         
Issuance of warrants for services  -   2,018,702 
         
Amortization of deferred consulting and financing fees  -   950,252 
         
Issuance of Series A and C Preferred stock for dividends  -   (197)
         
Preferred stock dividend on SecureAlert Series A Preferred stock  -   (306,242)
         
Subscription receivable  -   5,673,524 
         
Net loss  (26,370,571)  (26,370,571)
         
Balance of September 30, 2007 $(133,096,946) $1,277,868 

See accompanying notes to consolidated financial statements.

F - 14

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
  Preferred Stock 
  
Series A
Shares
  
Series A
Amount
  
Series B
Shares
  
Series B
Amount
 
             
Balance at October 1, 2007  19  $1   12,999  $1 
                 
Issuance of common stock for:                
 Conversion of Series B Preferred stock  -   -   (2,000)  - 
    Settlement of lawsuit  -   -   -   - 
    Debt  -   -   -   - 
 Services  -   -   -   - 
    Cash  -   -   -   - 
    Acquisition of subsidiaries  -   -   -   - 
    Exercise of options and warrants  -   -   -   - 
                 
Issuance of warrants for:                
    Debt  -   -   -   - 
    Services
  -   -   -   - 
                 
Amortization of deferred consulting  -   -   -   - 
                 
Amortization of financing costs  -   -   -   - 
                 
Issuance of SecureAlert Series A Preferred stock  -   -   -   - 
                 
Issuance of Series A Preferred stock for accrued dividends  -   -   -   - 
                 
Subscription receivable  -   -   -   - 
                 
SecureAlert Series A Preferred stock redemption  -   -   -   - 
                 
Deconsolidation of subsidiary  -   -   -   - 
                 
Net loss  -   -   -   - 
                 
Balance of September 30, 2008  19  $1   10,999  $1 

See accompanying notes to consolidated financial statements.

F - 15

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
     Additional    
  Common Stock  Paid-In  Deferred 
  Shares  Amount  Capital  Compensation 
             
Balance at October 1, 2007  127,340,085  $12,734  $142,238,576  $(7,468,998)
                 
Issuance of common stock for:                
 Conversion of Series B Preferred stock  15,000   2   (2)  - 
    Settlement of lawsuit  325,000   33   571,967   - 
    Debt  360,000   36   403,164   (403,200)
 Services  9,135,000   914   15,843,671   (1,520,000)
    Cash  6,177,219   618   5,187,296   - 
    Acquisition of subsidiaries  650,000   65   2,599,435   - 
    Exercise of options and warrants  3,618,814   361   2,509,520   - 
                 
Issuance of warrants for:                
    Debt  -   -   1,872,000   - 
    Services
  -   -   4,398,279   (134,812)
                 
Amortization of deferred consulting  -   -   -   5,162,770 
                 
Amortization of financing costs  -   -   -   865,568 
                 
Issuance of SecureAlert Series A Preferred stock  825,893   82   825,810   - 
                 
Issuance of Series A Preferred stock for accrued dividends  -   -   (345,356)  - 
                 
Subscription receivable  -   -   -   - 
                 
SecureAlert Series A Preferred stock redemption  7,434,249   743   8,548,643   - 
                 
Deconsolidation of subsidiary  -   -   1,550,081   - 
                 
Net loss  -   -   -   - 
                 
Balance of September 30, 2008  155,881,260  $15,588  $186,203,084  $(3,498,672)
See accompanying notes to consolidated financial statements.

F - 16

RemoteMDx, Inc.
Consolidated Statements of Stockholders’ Equity
 Years Ended September 30, 2006, 2007 and 2008
  
Subscription
Receivable
  
Accumulated
Deficit
  
Total
 
          
Balance at October 1, 2007 $(407,500) $(133,096,946) $1,277,868 
             
Issuance of common stock for:            
 Conversion of Series B Preferred stock  -   -   - 
    Settlement of lawsuit  -   -   572,000 
    Debt  -   -   - 
 Services  -   -   14,324,585 
    Cash  -   -   5,187,914 
    Acquisition of subsidiaries  -   -   2,599,500 
    Exercise of options and warrants  -   -   2,509,881 
             
Issuance of warrants for:            
    Debt  -   -   1,872,000 
    Services
  -   -   4,263,467 
             
Amortization of deferred consulting  -   -   5,162,770 
             
Amortization of financing costs  -   -   865,568 
             
Issuance of SecureAlert Series A Preferred stock  -   -   825,892 
             
Issuance of Series A Preferred stock for accrued dividends  -   -   (345,356)
             
Subscription receivable  407,500   -   407,500 
             
SecureAlert Series A Preferred stock redemption  -   -   8,549,386 
             
Deconsolidation of subsidiary  -   -   1,550,081 
             
Net loss  -   (49,587,050)  (49,587,050)
             
Balance of September 30, 2008 $-  $(182,683,996) $36,006 

See accompanying notes to consolidated financial statements.

F - 17

REMOTEMDX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008
 
For Years Ended September 30,
 
 2008  2007  2006  2009  2008 
Cash flows from operating activities:               
Net loss $(49,587,050) $(26,370,571) $(23,797,745) $(23,081,500) $(49,587,050)
Adjustments to reconcile net loss to net cash used in operating activities:                    
Depreciation and amortization  1,736,492   2,061,119   229,441   2,087,949   1,736,492 
Common stock issued for services  13,620,584   4,641,390   2,048,606   728,876   13,620,584 
Common stock issued for interest  -   -   88,100 
Common stock issued to settle lawsuit  1,276,000   196,800   -   261,521   1,276,000 
Amortization of debt discount  -   -   1,223,092   2,030,504   - 
Amortization of deferred financing and consulting costs  5,968,338   950,252   6,826,077   2,595,933   5,968,338 
Amortization of interest expense related to debt  -   -   1,809,643 
Beneficial conversion feature recorded as interest expense   -   -   321,429 
Derivative liability valuation  -   -   (629,308)  (1,867,007)  - 
Registration payment arrangement expense  130,000   663,000   -   -   130,000 
Stock options and warrants issued during the period for services  4,263,467   -   -   345,838   4,263,467 
Redemption of SecureAlert Series A Preferred stock  8,205,922   -   -   (95,816)  8,205,922 
Impairment of goodwill  2,804,580   - 
Common stock issued for acquisition option extension cost  19,500   - 
Increase in related-party line of credit for services  618,433   698,524   662,007   272,281   618,433 
Common stock options and warrants issued to board of directors  -   235,116   - 
Options and warrants issued to consultants for services  -   900,664   2,366,378 
Options and warrants issued to related party for services  -   882,922   - 
Impairment of monitoring equipment  570,948   1,454,784   - 
Loss on sale of receivables  -   228,800   - 
Interest income on restricted cash  -   -   5,628 
Impairment of monitoring equipment and parts  2,319,530   570,948 
Loss from discontinued operations  414,112   338,682   68,222   -   414,112 
Changes in operating assets and liabilities:                    
Accounts receivable, net  3,293,050   (4,235,428)  (107,578)  (23,490)  3,293,050 
Interest receivable (payable)  (9,068)  14,026   (15,604)  -   (9,068)
Inventories  -   (952,341)  12,811 
Deposit held in escrow  (500,000)  -   -   500,000   (500,000)
Prepaid expenses and other assets  720,591   1,608,485   (2,479,376)  (25,212)  720,591 
Accounts payable  (1,373,491)  1,351,183   345,185   745,630   (1,373,491)
Accrued liabilities  999,310   627,897   (271,518)  1,824,042   999,310 
Deferred revenue  (20,382)  1,296,430   278   35,515   (20,382)
Net cash used in operating activities  (9,672,744)  (13,408,266)  (11,294,232)  (8,521,326)  (9,672,744)
                    
Cash flows from investing activities:                    
Purchase of property and equipment  (334,226)  (537,332)  (1,071,711)  (380,647)  (334,226)
Purchase of monitoring equipment  (192,221)  (3,684,216)  (2,241,800)
Purchase of monitoring equipment and parts  (1,312,397)  (192,221)
Proceeds from sale of equipment  16,577   - 
Net cash used in investing activities  (526,447)  (4,221,548)  (3,313,511)  (1,676,467)  (526,447)
                    
Cash flows from financing activities:                    
Payment of accrued SecureAlert Series A Preferred stock dividends  -   (28,452)  - 
Net payments on related-party line of credit  (315,392)  (503,310)  (635,073)
Payments on related-party line of credit  (739,063)  (315,392)
Net principal proceeds (reductions) in bank line of credit borrowings  (396,700)  (38,126)  3,896,688   388,593   (396,700)
Payments on notes payable  (336,133)  -   (2,043,623)  (1,115,237)  (336,133)
Net borrowings on related-party notes payable  975,578   -   - 
Borrowings on related-party notes payable  680,229   975,578 
Principal payments on notes payable related to acquisitions  (2,176,821)  -   -   -   (2,176,821)
Cash acquired through acquisitions  163,002   -   -   -   163,002 
Decrease in subscriptions receivable  -   -   504,900 
Proceeds from the issuance of Series C Preferred stock  -   -   7,439,558 
Proceeds from issuance of debt  -   -   1,746,153 
Proceeds from the issuance of SecureAlert Series A Preferred stock  -   -   600,000 
Proceeds from the issuance of Series A 15% debentures  4,496,750   - 
Proceeds from sale of common stock  5,058,014   6,162,000   7,910,000   3,250,000   5,058,014 
Proceeds from sale of warrants and subsidiary stock  2,400,000   -   -   -   2,400,000 
Proceeds from issuance of notes payable  34,344   -   517,500   1,055,889   34,344 
Proceeds from exercise of options and warrants  2,772,381   10,971,533   252,000   -   2,772,381 
Net cash provided by financing activities  8,178,273   16,563,645   20,188,103   8,017,161   8,178,273 
Net decrease in cash  (2,020,918)  (1,066,169)  5,580,360   (2,180,632)  (2,020,918)
Cash, beginning of year  4,803,871   5,870,040   289,680   2,782,953   4,803,871 
Cash, end of year $2,782,953  $4,803,871  $5,870,040  $602,321  $2,782,953 

See accompanying notes to consolidated financial statements.
 
F - 1860
 
 
  For Years Ended September 30, 
  2008  2007  2006 
          
Cash paid for interest $700,974  $802,554  $311,592 
             
Supplemental schedule of non-cash investing and financing activities:            
             
     Issuance of zero, 6,694,329 and 4,014,916 common shares, respectively, in exchange for zero, 18,093 and 10,843 shares of Series A Preferred stock, respectively $-  $670  $ 401 
             
     Issuance of  2,000, 351,824 and 7,171,380 common shares, respectively, in exchange for 15,000, 40,333 and 1,315,825 shares of Series B Preferred stock, respectively  2   35     717 
             
     Issuance of zero, 17,293,463 and zero common shares, respectively, in exchange for zero, 5,764,488 and zero shares of Series C Preferred stock, respectively  -   1,729     - 
             
     Issuance of 360,000, 500,000 and 4,057,500 common shares, respectively for deferred consulting services and financing services  403,200   800,000     3,369,550 
             
     Preferred Series A and C stock dividends  423   550,603   642,512 
             
     SecureAlert Series A Preferred stock dividends accrued  480,537   298,667   20,877 
             
     Options exercised for subscription receivable  -   407,500   - 
             
  Notes payable and accrued interest converted into zero, zero and 7,586,299 shares of common stock respectively  -   -   2,671,653 
             
     Notes payable and accrued interest converted into zero, zero and 736,400 shares of Series C Preferred stock, respectively  -   -     1,037,152 
             
  Issuance of zero, zero and 400,000 common shares, respectively, for establishing letters of credit to secure a line of credit  -   -     656,000 
             
  Series B and C debentures converted into zero, zero and 2,030,184 shares of common stock, respectively  -   -   913,583 
             
  Shares issued prepaid services  1,520,000   -   - 
             
  Fair value of assets acquired in purchase of Court Programs through the issuance of common stock  1,316,338   -   - 
             
  Fair value of liabilities assumed in purchase of Court Programs through the issuance of common stock  468,837   -   - 
             
     Issuance of common stock in acquisition of Court Programs, Inc., Court Programs of Florida, Inc., and Court Programs of Northern Florida, Inc.  847,500   -     - 
             
  Settlement of SecureAlert Series A Preferred stock  3,590,000   -   - 
             
  Deconsolidation of Volu-Sol  607,869   -   - 
             
  Fair value of assets acquired in purchase of Midwest Monitoring through the issuance of common stock  2,974,666   -   - 
             
  Fair value of liabilities assumed in purchase of Midwest Monitoring through the issuance of common stock  1,222,666   -   - 
             
    Issuance of common stock in acquisition of Midwest Monitoring & Surveillance, Inc.  1,752,000   -   - 
             

REMOTEMDX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2009 AND 2008

   2009   2008 
         
Cash paid for interest  $        1,963,200  $700,974 
         
Supplemental schedule of non-cash investing and financing activities:        
         
Issuance of 9,306 and  zero common shares, respectively, in exchange for 19 and zero shares of Series A Preferred stock, respectively  $                      1  $- 
         
Issuance of  10,999 and 2,000 common shares, respectively, in exchange for 10,999 and 15,000 shares of Series B Preferred stock, respectively  1   2 
         
Issuance of 2,000,000 and 360,000 common shares, respectively for deferred consulting services and financing services  384,667   403,200 
         
Preferred Series A and C stock dividends  175   423 
         
SecureAlert Series A Preferred stock dividends accrued  -   480,537 
         
Forgiveness of debt from related-party debt  79,022   - 
         
Shares issued prepaid services  -   1,520,000 
         
Fair value of assets acquired in purchase of Court Programs through the issuance of common stock  -   1,316,338 
         
Fair value of liabilities assumed in purchase of Court Programs through the issuance of common stock  -   468,837 
         
Issuance of common stock in acquisition of Court Programs, Inc  -   847,500 
         
Settlement of SecureAlert Series A Preferred stock  -   3,590,000 
         
Deconsolidation of ActiveCare  -   607,869 
         
Fair value of assets acquired in purchase of Midwest Monitoring through the issuance of common stock  -   2,974,666 
         
Fair value of liabilities assumed in purchase of Midwest Monitoring through the issuance of common stock  -   1,222,666 
         
Issuance of common stock in acquisition of Midwest Monitoring  -   1,752,000 
         
Issuance of common stock and stock options  to acquire the assets and liabilities of Bishop Rock Software  856,522   - 
         
Stock issued in connection with debt (as discount)  1,739,393   - 
         
Beneficial conversion feature recorded  122,727   - 
         
Debt issued to settle line of credit  3,549,631   - 
         
Common stock cancelled  175   - 
         
Acquisition of monitoring equipment through issuance of note payable  2,887,987   - 
         
Stock issued to settle related-party note payable and accrued interest  218,479   - 
         
Issuance of common stock to settle accounts payables  550,000   - 
         
Acquisition of property and equipment through issuance of note payable  38,991   - 
         
Reclassification of monitoring equipment to inventory from recovery of parts  1,450,803   - 
 
See accompanying notes to consolidated financial statements.

 
F - 1961
 

REMOTEMDX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)Organization and Nature of Operations
 
General
 
RemoteMDx, Inc. and subsidiaries (collectively, the “Company”) market, monitormarkets, monitors and sell the TrackerPAL device.leases TrackerPAL™ devices.  The TrackerPALTrackerPAL™ is used to monitor convicted offenders that are on probation or parole in the criminal justice system.  The TrackerPALTrackerPAL™ 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 TrackerPALTrackerPAL™ is targeted to meet the needs of this market domestically as well as the international market.internationally.
 
Going Concern
 
The Company has incurred recurring net losses and negative cash flows from operating activities for the fiscal years ended September 30, 2008, 20072009 and 2006.2008.  In addition, the Company has an accumulated deficitdeficits of $205,765,496 and $182,683,996 as of September 30, 2008.2009 and 2008, respectively. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In order for the Company to continue as a going concern, the Companyit 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 exercise of warrants and issuance of a convertible debenturepreferred stock and expanding its market for its trackingTrackerPAL™ portfolio of products.  There can be no assurance that revenues will increase rapidly enough to offset operating losses and repay debts.  If the Company is unable to increase cash flows from operating activities or obtain additional financing, it will be unable to continue the development of its products and may have to cease operations.

To lessen the Company’s cash burden and to raise additional capital, subsequent to September 30, 2009, the Company entered into agreements to issue 15,986 shares of Series D Convertible Preferred stock in exchange for conversion of $15,723,204 in debt, accrued liabilities and interest and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.
 
(2)Discontinued Operations

During the fiscal year ended September 30, 2008, the Company divested its majority ownership interest of the diagnostic stain business conducted by a former subsidiary ActiveCare, Inc., formerly known as Volu-Sol Reagents Corporation (“Volu-Sol”ActiveCare”).  The Company is in the process of completingcompleted the divestiture and expects to complete the distribution ofby distributing its remaining interest (approximately 17% of the common stock) in Volu-SolActiveCare during the fiscal second quarter ending March 31,year ended September 30, 2009.  This transaction was treated as a pro-rata nonreciprocal transfer to owners in according toas required by the nonmonetary transactions topic of the Financial Accounting PrinciplesStandards Board (APB) Opinion No. 29.Accounting Standards Codification (FASB ASC).  This resulted in $1,550,081 recorded as additional paid in capital to the Company.

The Company’s consolidated financial statements have been reclassified to segregate operating results of the discontinued operations for all periods presented.  Prior to reclassification, the discontinued operations were reported in the stain operating segment.  The summary of net sales and operating results from discontinued operations for the fiscal years ended September 30, 20082009 and 2007,2008, respectively, are as follows:

 2008  2007  2006  2009  2008 
Net sales $608,024  $655,331  $678,541  $-  $608,024 
Loss from discontinued operations $(414,112) $(338,682) $(68,222) $-  $(414,112)


 
F - 2062
 

(3)Summary of Significant Accounting Policies

Principles of Consolidation
 
The accompanying consolidated financial statements include the accounts of RemoteMDx, Inc. and its subsidiaries, SecureAlert, Inc., Volu-Sol Reagents Corporation (“Volu-Sol”) Midwest Monitoring & Surveillance, Inc., Bishop Rock Software, Inc., Court Programs, Inc., Court Programs of Florida, Inc., and Court Programs of Northern Florida, Inc. (collectively, the “Company”).  All intercompany balances and transactions have been eliminated in consolidation.  As discussed in Note 2, the Company completely divested its ownership of Volu-SolActiveCare during the year ended September 30, 2008; therefore, Volu-Sol is part of the consolidated financial statements as discontinued operations through September 30, 2007, but no longer consolidated at September 30, 2008.2009.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Fair Value of Financial Statements
 
The carrying amounts reported in the accompanying consolidated financial statements for cash, accounts receivable, accounts payable, accrued liabilities, and other debt obligations approximate fair values because of the immediate or short-term maturities of these financial instruments.  The carrying amounts of the Company’s debt obligations approximate fair value as the interest rates approximate market interest rates.

Concentration of Credit Risk

The Company has cash in bank accounts that, at times, may exceed federally insured limits.  The Company has not experienced any losses in such accounts.

In the normal course of business, the Company provides credit terms to its customers and requires no collateral. Accordingly, the Company performs ongoing credit evaluations of its customers' financial condition.

Based upon the expected collectability of its accounts receivable, the Company maintains an allowance for doubtful accounts receivable.

Listed below is a table reporting entities whichNo customer represented more than 10% of the Company’s total revenues for the fiscal year ended September 30, 2008, 2007 and 2006:2009.  One non-repeat customer represented 16% of the Company’s total revenues for the fiscal year ended September 30, 2008.

  2008  2007  2006 
Company A $-  $3,229,760  $- 
Company B  -   928,800   - 

Listed below is a table reporting entities whichNo customer represented more than 10% of the Company’s total accounts receivable for the fiscal year ended September 30, 2008, 2007 and 2006:
   2008   2007    2006  
Company A $360,257  $2,764,324  $- 
Company B  -   1,000,000   - 

2009.  One customer accounted for $360,257 (25%) of the Company’s total accounts receivable for the fiscal year ended September 30, 2008.

Cash Equivalents

Cash equivalents consist of investments with original maturities to the Company of three months or less.  The Company had $15,670 and $0 of cash deposits in excess of federally insured limits as of September 30, 2009 and 2008, respectively.


F - 21

Accounts Receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  Specific reserves are estimated by management based on certain assumptions and variables, including the customer’s financial condition, age of the customer’s receivables and changes in payment histories.  Trade receivables are written off when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when cash is received.  A trade receivable is considered to be past due if any portion of the receivable balance has not been received by the Company within its normal terms.  Interest income is not recorded on trade receivables that are past due, unless that interest is collected.

63

Inventory

Inventory is valued at the lower of the cost or market.  Cost is determined using the first-in, first-out (“FIFO”) method.  Market is determined based on the estimated net realizable value, which generally is the item selling price.  Inventory is periodically reviewed in order to identify obsolete or damaged items or impaired values.

Inventory consists of products that are available for sale and raw materials used in the manufacturing of TrackerPAL™ devices.  Completed TrackerPAL™ devices are reflected in Monitoring Equipment.  As of September 30, 2009 and 2008, respectively, inventory consisted of the following:

  2009  2008 
Raw materials $686,421  $- 
Reserve for damaged or obsolete inventory  (83,092)  - 
Total inventory, net of reserves $603,329  $- 

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are determined using the straight-line method over the estimated useful lives of the assets, typically three to seven years.  Leasehold improvements are amortized over the shorter of the estimated useful lives of the asset or the term of the lease. Expenditures for maintenance and repairs are expensed while renewals and improvements are capitalized.  When property and equipment are disposed of, any gains or losses are included in the results of operations.

Property and equipment consisted of the following as of September 30, 20082009 and 2007,2008, respectively:

 2008  2007  2009  2008 
Equipment, software and tooling $2,472,076   1,757,878 
Equipment, software, tooling, and other fixed assets $2,742,537  $2,472,076 
Automobiles  287,736   -   305,658   287,736 
Building and land  377,555   -   377,555   377,555 
Leasehold improvements  102,190   96,532   127,912   102,190 
Furniture and fixtures  279,711   197,393   284,824   279,711 
  3,519,268   2,051,803 
Total property and equipment  3,838,486   3,519,268 
Accumulated depreciation  (1,937,710)  (671,611)  (2,525,180)  (1,937,710)
        
Property and equipment, net of accumulated depreciation $1,581,558   1,380,192  $1,313,306  $1,581,558 


Depreciation expense for the fiscal years ended September 30, 2009 and 2008 was $677,016 and 2007 was $638,138, and $479,135, respectively.

Monitoring Equipment

Monitoring equipment atas of September 30, 20082009 and 20072008 is as follows:

 2008  2007  2009  2008 
Monitoring equipment $4,410,467  $5,127,989  $4,260,690  $4,410,467 
Less accumulated depreciation  (3,061,321)  (1,388,515)  (2,944,197)  (3,061,321)
Monitoring Equipment, net $1,349,146  $3,739,474  $1,316,493  $1,349,146 

The Company began leasing monitoring equipment to agencies for offender tracking in April 2006 under operating lease arrangements.  The monitoring equipment is depreciated using the straight-line method over an estimated useful life of 3 years.

Amortization expense for the fiscal years ended September 30, 2009 and 2008 2007was $1,300,783 and 2006 was $1,082,648, $1,581,985 and $102,115, respectively.  These expenses were classified as a cost of revenues.

Assets to be disposed of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell.  During the fiscal years ended September 30, 2009 and 2008, the Company disposed of lease monitoring equipment and parts of $2,319,530 and $570,948, respectively.

 
F - 2264
 

Impairment of Long-Lived Assets and Goodwill

The Company reviews its long-lived assets for impairment when events or changes in circumstances indicate that the book value of an asset may not be recoverable and in the case of goodwill, at least annually,annually. The Company evaluates at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment.impairment as of each balance sheet date. The Company uses an estimate of future undiscounted net cash flowsequity vs. fair market value method 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,fair market value, an impairment charge is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset.  Impairment of long-lived assets is assessed at the lowest levels for which there areis an identifiable cash flowsfair market value that areis independent of other groups of assets.  As of September 30, 2008,2009, the Company did not deem necessary anyimpaired goodwill from Midwest Monitoring & Surveillance, Inc. by $2,343,753 and from Bishop Rock Software by $460,827, Inc. for a total impairment costs associated with goodwill or other intangible assets.  Assets to be disposedexpense of are reported at the lower of the carrying amount or fair value, less the estimated costs to sell.  During the years ended September 30, 2008 and 2007, the Company disposed of lease monitoring equipment of $570,948 and $1,454,784, respectively.$2,804,580.

Revenue Recognition

The Company’s revenue has historically been from threetwo sources: (i) monitoring services; (ii) monitoring device and other product sales; and (iii) medical diagnostic stains sales.

Monitoring Services
Monitoring services include two components: a)(a) lease contracts in which the Company provides monitoring services and leases devices to distributors or end users in whichand the Company retains ownership of the leased devices;device; and b)(b) monitoring services purchased by distributors or end users who have previously purchased monitoring devices and have optedopt 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 to a very small degree sells home security and Personal Emergency Response Systems.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.contracts with the Company.  The Company recognizes revenue on monitoring services for customers that have previously purchased devices at the end of each month that monitoring services have been provided.

Multiple Element Arrangements
The majority of the Company’s revenue transactions do not have multiple elements. On occasion, the Company has revenue transactions that have multiple elements (such as product sales and monitoring services).  For revenue arrangements that have multiple elements, the Company considers whether: (i) the delivered devices have stand alonestandalone 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,FASB ASC subtopic addressing multiple deliverables, if the fair value of the undelivered element exists, but the fair value does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method as applied to these particular transactions, the fair value of the undelivered element (the monitoring services) is deferred and the remaining portion of the arrangement (the sale of the device) is recognized as revenue when the device is delivered and all other revenue recognition criteria are met.


 
F - 2365
 

Medical Diagnostic Stain Sales
The Company recognizes medical diagnostic stains revenue when persuasive evidence of an arrangement with the customer exists, title passes to the customer and the customer cannot return the products, prices are fixed or determinable and collection is reasonably assured.  As of September 30, 2008, this segment of operations was discontinued.

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.  DistributorsAlso, 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 collection terms for the diagnostic stains and reagent product sales are net 30 days.  

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 inas part of net revenues.  The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of revenues.

Research and Development Costs

All expenditures for research and development are charged to expense as incurred. These expenditures in 2008, 20072009 and 2006,2008 were for the development of SecureAlert’s TrackerPALTrackerPAL™ device and associated services. For the fiscal years ended September 30, 2009 and 2008, 2007and 2006, research and development expenses were $4,811,128, $4,564,121,$1,777,873 and $2,087,802$4,811,128, respectively.

Advertising Costs

The Company expenses advertising costs as incurred.  Advertising expense for the fiscal years ended September 30, 2009, and 2008, 2007was $76,793 and 2006, was $209,389, $155,327 and $116,469, respectively.

Stock-Based Compensation

Effective October 1, 2006,For 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. Under APB No. 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. The Company adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation.

For thefiscal years ended September 30, 20082009 and 2007,2008, the Company calculated compensation expense of $214,251$67,406 and $900,664,$214,251, respectively related to the vesting of previously granted stock options and additional options granted.granted in prior years.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company granted 1,725,0001,517,714 and 320,0001,725,000 stock options to employees during the fiscal years ended September 30, 2009 and 2008 valued $274,650 and 2007,$359,946, respectively.  In addition, 390,000 stock options issued to employees in prior years vested during the fiscal year ended September 30, 2008.  The weighted average fair value of stock options at the date of grant during the fiscal year ended September 30, 2009 and 2008 was $0.18 and 2007 was $1.34, and $1.43, respectively. The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents the Company’s anticipated cash dividends over the expected life of the stock options.

F - 24

The following are the weighted-average assumptions used for options granted during the fiscal years ended September 30, 2009 and 2008, and 2007, respectively:

 
Years Ended
September 30,
  
Fiscal years Ended
September 30,
 
 2008  2007  2009  2008 
            
Expected cash dividend yield  -   -   -   - 
Expected stock price volatility  136%  142%  121%  136%
Risk-free interest rate  3.12%  4.57%  1.16%  3.12%
Expected life of options 5 years  5 years  3.7 years  5 years 
 
66

A summary of stock option activity for the yearfiscal years ended September 30, 2008 and 20072009 is presented below:

 
Shares
Under
Option
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
  
Aggregate
Intrinsic
Value
Outstanding as of September 30, 20063,607,500 $0.63     
Granted320,000 $1.58     
Exercised(462,500) $1.06     
Forfeited(100,000) $0.60     
Expired(70,000) $1.46     
Outstanding as of September 30, 20073,295,000 $0.64 3.97 years $7,015,700 
Exercisable as of September 30, 20071,140,000 $0.69 3.98 years $2,365,649 
    
 
Shares
Under
Option
  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
Outstanding as of September 30, 20073,295,000 $0.64       3,295,000  $0.64     
Granted1,725,000 $1.54       1,725,000  $1.54     
Exercised(1,375,000) $0.63       (1,375,000) $0.63     
Forfeited(45,000) $0.86       (45,000) $0.86     
Expired- -       -   -     
Outstanding as of September 30, 20083,600,000 $1.08 3.34 years $1,062,000   3,600,000  $1.08 3.34 years $1,062,000 
Exercisable as of September 30, 2008421,667 $1.35 3.30 years $37,000   421,667  $1.35 3.30 years $37,000 

  
Shares
Under
Option
  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
Outstanding as of September 30, 2008  3,600,000  $1.08     
     Granted  1,517,714  $0.21     
     Exercised  -  $-     
     Forfeited  -  $-     
     Expired  (408,500) $1.45     
Outstanding as of  September 30, 2009  4,709,214  $0.76 2.05  years $12,854 
Exercisable as of  September 30, 2009  1,719,880  $0.32 2.97 years $12,854 
F - 25

Income Taxes

The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized.  Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary.

Net Loss Per Common Share

Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss attributable to common stockholders by the sum of the weighted-average number of common shares outstanding and the weighted-average dilutive common share equivalents outstanding.  The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect.

Common share equivalents consist of shares issuable upon the exercise of common stock options and warrants, and shares issuable upon conversion of preferred stock.  As of September 30, 2008, 20072009 and 2006,2008, there were 21,846,412, 19,029,54675,789,348 and 45,132,45221,846,412 outstanding common share equivalents, respectively, that were not included in the computation of diluted net loss per common share as their effect would be anti-dilutive.

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Recent Accounting Pronouncements

InEffective for December 2007,2008, new accounting guidance was added relating to business combinations. The objective of this Topic is to enhance the FASB issued SFAS No. 141(R), Business Combinations,information that an entity provides in our financial reports about a business combination and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141(R) requires anits effects. The Topic mandates: (i) how the acquirer to measurerecognizes and measures the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their fair valuesacquiree; (ii) what information to disclose in our financial reports and; (iii) recognition and measurement criteria for goodwill acquired. This Topic is effective for any acquisitions made on or after December 15, 2008. The adoption of this Topic is not expected to have a material impact on our financial statements and disclosures.

In May 2009, the FASB issued guidance which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Topic sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in our financial statements, (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Topic should be applied to the accounting and disclosure of subsequent events. This Topic does not apply to subsequent events or transactions that are within the scope of other applicable accounting standards that provide different guidance on the acquisitionaccounting treatment for subsequent events or transactions. This Topic was effective for interim and annual periods ending after June 15, 2009, which was September 30, 2009 for us. The adoption of this Topic did not have a material impact on our financial statements and disclosures.

In June 2009, the FASB issued guidance which became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Topic, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting literature not included in the Codification will become non-authoritative. This Topic identifies the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with goodwill beingGAAP and arranged these sources of GAAP in a hierarchy for users to apply accordingly. This Topic is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Topic did not have a material impact on our disclosure of the excess value overfinancial statements.

In June 2009, the net identifiable assets acquired. SFAS No. 160 clarifiesFASB issued additional guidance which improves the relevance, representational faithfulness, and comparability of the information that a non-controlling interestreporting entity provides in our financial statements about a subsidiarytransfer of financial assets; the effects of a transfer on our financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This additional guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are required to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This additional guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This additional guidance must be applied to transfers occurring on or after the effective date. The adoption of this Topic is not expected to have a material impact on our financial statements and disclosures.

In September 2009, the FASB added implementation guidance on accounting for uncertainty in income taxes. For entities that are currently applying the standards for accounting for uncertainty in income taxes, the guidance and disclosure amendments are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this Update did not have a material impact on our financial statements and disclosures.

In September 2009, the FASB issued guidance that changes the existing multiple-element revenue arrangements guidance currently included under its Revenue Arrangements with Multiple Deliverables codification. The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. This will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. We are currently assessing the future impact of this new accounting update to our financial statements.

68

In October 2009, the FASB issued accounting guidance which changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product's essential functionality are excluded from the software revenue recognition guidance given prior to this new guidance. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance.  This guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted.  We are currently assessing the future impact of this new accounting update to our financial statements.

In April 2008, the FASB issued an amendment for determination of the useful life of intangible assets. This guidance amends the factors that should be reported as equityconsidered in developing renewal or extension assumptions used to determine the consolidated financial statements, consolidated net income shall be adjusteduseful life of a recognized intangible asset under authoritative accounting guidance for goodwill and other intangible assets. This guidance is intended to includeimprove the net income attributedconsistency between the useful life of an intangible asset determined under the guidance for goodwill and other intangible assets and the period of expected cash flows used to measure the non-controlling interest,fair value of the asset under ASC 805 “Business Combinations” and consolidated comprehensive income shall be adjusted to include the comprehensive income attributed to the non-controlling interest. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS No. 141(R) and SFAS No. 160 areother principles under GAAP. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008.2008, and interim periods within those fiscal years. Early adoption is prohibited. Management does not currently believe adoptionThis guidance will have a material impact on the Company's financial condition or operating results, if any, uponbe effective for us in fiscal year 2010. The adoption of SFAS No. 141(R) or SFAS No. 160.this guidance is not expected to significantly impact our results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which definesenhanced guidance for using fair value to measure assets and liabilities. This guidance also provides a framework for measuringexpanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and expands the disclosures requiredeffect of fair value measurements on earnings. ASC 820 applies whenever other guidance requires or permit assets or liabilities to be measured at fair value. ASC 820 does not expand the use of fair value in any new circumstances. In February 2008, the FASB issued additional guidance to exclude ASC 840 “Accounting for Leases” and delays the effective date of ASC 820 by one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. In October 2008, the FASB issued additional guidance for determining the fair value of a financial asset when the market for that asset is not active to clarify the application of the provisions of the guidance for fair value measurements. SFAS No. 157 applies to other accounting pronouncements that requiremeasurements in an inactive market and how an entity would determine fair value measurements; it doesin an inactive market. This additional guidance is effective immediately. We adopted ASC 820 for financial assets and financial liabilities at the beginning of fiscal year 2009. The adoption of this guidance for financial assets and financial liabilities did not require any new fair value measurements. SFAS No. 157impact our results of operations and financial position. The guidance is effective for nonfinancial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2007,2008, which is our fiscal year 2010. The adoption of this guidance for nonfinancial assets and nonfinancial liabilities is requirednot expected to be adopted by the Company beginning in the first quartersignificantly impact our results of fiscal 2009. Although the Company will continue to evaluate the application of SFAS No. 157, management does not currently believe adoption will have a material impact on the Company'soperations and financial condition or operating results.position.

In February 2007,June 2009, the FASB issued SFAS No. 159,accounting guidance on the consolidation of variable interest entities (VIEs). This new guidance revises previous guidance by eliminating the exemption for qualifying special purpose entities, by establishing a new approach for determining who should consolidate a variable-interest entity and by changing when it is necessary to reassess who should consolidate a variable-interest entity.  This guidance will be effective at the beginning of the first fiscal year beginning after November 15, 2009. Early application is not permitted.  The adoption of this guidance is not expected to significantly impact our results of operations and financial position.

In September 2009, the FASB issued guidance updates and provided amendments to its Fair Value Option for Financial AssetsMeasurements and Financial Liabilities-including an amendment of FASB Statement No. 115 ("SFAS No. 159"). SFAS No. 159 allows companiesDisclosure requirements which permit a reporting entity to choose to elect measuring eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on items for whichmeasure the fair value option hasof certain investments on the basis of the net asset value per share of the investment (or its equivalent). This guidance also requires new disclosures, by major category of investments, about the attributes of investments, such as the nature of any restriction on the ability to redeem an investment on the measurement date.  This guidance is effective for interim and annual periods ending after December 15, 2009. Early application is permitted in financial statements for earlier interim and annual periods that have not been elected be reportedissued.  The adoption of this guidance is not expected to significantly impact our results of operations and financial position.

In October 2009, the FASB issued guidance on share-lending arrangements entered into on an entity's own shares in earnings at each reporting date. SFAS No. 159contemplation of a convertible debt offering or other financing.  This guidance is effective for fiscal years beginning on or after NovemberDecember 15, 20072009, and fiscal years within those fiscal years for arrangements outstanding as of the beginning of those years. Retrospective application is required to be adopted byfor such arrangements. This guidance is effective for arrangements entered into on (not outstanding) or after the Company beginning inof the first quarter of fiscalreporting period that begins on or after June 15, 2009. Although the Company will continue to evaluate theCertain transition disclosures are also required. Early application of SFAS No. 159, management doesis not currently believe adoption will have a material impact on the Company's financial condition or operating results.

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

 
F - 2669
 

(4)Goodwill and Other Intangible Assets

As of September 30, 2009, the Company had recorded goodwill and intangible assets related to the acquisition of controlling interest of Midwest, Court Programs, and Bishop Rock Software as follows:

  
Midwest
Monitoring &
Surveillance
  
Court
Programs, Inc.
  
Bishop Rock
Software
  Total 
Goodwill $1,259,995  $1,208,086  $-  $2,468,081 
Other Intangible Assets                
Trade name  120,000   99,000   10,000   229,000 
Software  -   -   380,001   380,001 
Customer relationships  -   6,000   -   6,000 
Non-compete agreements  2,000   6,000   -   8,000 
Total Other Intangible Assets  122,000   111,000   390,001   623,001 
Accumulated other intangible asset amortization  (16,500)  19,800)  (90,355)  (126,655)
Total goodwill and other intangible assets, net of amortization $1,365,495  $1,299,286  $299,646  $2,964,427 
Midwest Monitoring & Surveillance
Effective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, of Midwest Monitoring & Surveillance (“Midwest”) for $1,800,000 in notes payable and up to 438,000 shares of.  Like the Company’s common stock.  The notes payableoperations prior to the acquisition of $1,800,000 were paid off on January 18, 2008.  The RemoteMDx shares issued as part of the consideration for the Midwest shares were placed in escrow and were released by the Company in March 2008.  

interest, Midwest provides electronic monitoring for individuals on parole.  The primary reason for the acquisition of Midwest was the expansion of Company’s technology and name recognition throughout the midwest, central and eastern United States.  The total consideration for the purchase of Midwest was $4,400,427 comprised of notes payable of $1,800,000, shares of common stock valued at $1,752,000 (438,000 shares valued at $4.00 per share), transaction costs of $31,497, and long-term liabilities assumed of $816,930.

The total consideration of $4,400,427 less the tangible assets acquired of $674,679 resulted in an excess over net book value of $3,725,748.  The excess overCompany recorded impairment of $2,343,753 for the fiscal year ended September 30, 2009, resulting in a net book value was allocatedgoodwill of $1,259,995, as follows:noted in the table above.

Goodwill and Other Intangible Assets   
Goodwill $3,603,748 
Trade name  120,000 
Non-compete agreements  2,000 
     Excess over net book value $3,725,748 

AsThe Company recorded $9,000 of September 30, 2008, amortization expense for theMidwest intangible assets was $7,500during the fiscal year ended September 30, 2009 resulting in a total accumulated amortization of $16,500 and net intangible assets of $114,500.$105,500.

During March 2009, the parties extended the option period for the purchase of the remaining 49% ownership of Midwest to April 15, 2010.  The Company agreed to give the following consideration to Midwest minority owners to extend this option:

1)150,000 shares of RemoteMDx common stock valued at $0.13 per share for a total of $19,500.
2)$75,000 in cash upon execution of the agreement.
3)$105,000 in cash paid in ten equal payments of $10,500 beginning April 15, 2009 through January 15, 2010.
The expense totaling $199,500 was reported as an acquisition option extension cost under other income (expense) for the fiscal year ended September 30, 2009.

Court Programs
Effective December 1, 2007, the Company purchased a 51% ownership interest, including a voting interest, of Court Programs, Inc., a Mississippi corporation, Court Programs of Northern Florida, Inc., a Florida corporation, and Court Programs of Florida, Inc., a Florida corporation (collectively, “Court Programs”) for $300,000 in a note payable and up.  Similar to 212,000 shares of the Company’s common stock.  The RemoteMDx shares issued as partoperations prior to the acquisition of the consideration for the purchase of Court Programs were placed in escrow and were released by the Company in August 2008.

interest, Court Programs is a distributor of electronic monitoring devices to courts providing a solution to monitor individuals on parole.  The primary reasons to acquire Court Programs are to expand the Company’s technology and to increase the Company’s name recognition throughout the eastern United States.  The total consideration for the purchase of Court Programs was $1,527,743 delineated as follows: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 follows:noted in the table above.
Goodwill and Other Intangible Assets   
Goodwill $1,208,086 
Trade name  99,000 
Customer relationships  6,000 
Non-compete agreements  6,000 
     Excess over net book value $1,319,086 

F - 2770

AsThe Company recorded $10,800 of amortization expense on intangible assets for Court Programs during the fiscal year ended September 30, 2008,2009 resulting in a total accumulated amortization expense for the intangible assets was $9,000 resulting inof $19,800 and net intangible assets of $102,000.$91,200.

In connection withEffective April, 1, 2009, the acquisitions of MidwestCompany and Court Programs agreed to release Court Programs from an obligation to repay expenses paid on its behalf by the Company in the amount of $147,566 as consideration to extend the option period for the purchase of the remaining 49% ownership of Court Programs to April 15, 2010. The expense of $147,566 was reported as an acquisition option extension cost under other income (expense) for the fiscal year ended September 30, 2009.

Bishop Rock Software
Effective January 14, 2009, the Company purchased a 100% ownership interest, including a voting interest, of Bishop Rock Software, Inc., a California corporation, (“Bishop Rock”) for 2,857,286 shares of the Company’s common stock valued at $0.23 per share valued at $657,176, options to purchase 642,714 shares of the Company’s common stock with an exercise price of $0.09 per share for a value of $114,383 using the Black-Scholes calculation, and $79,268 in debt for a total purchase price of $850,827.  The total consideration of $850,827 less crime-scene correlation software recorded as an asset for $390,001 resulted in goodwill of $460,827.  During the fiscal year ended September 30, 2009, the Company recorded goodwill and other intangible assets.  The table below shows the allocationan impairment expense of the goodwill and identified intangibles for each company:$460,827, resulting in no more remaining goodwill.

Goodwill and other intangible assets, net of amortization 
    
Goodwill   
Midwest $3,603,748 
Court Programs  1,208,086 
Other intangible assets 
     Midwest, net of amortization of $7,500  114,500 
     Court Programs, net of amortization of $9,000  102,000 
Total goodwill and other intangible assets, net of amortization $5,028,334 
The estimatedCompany recorded $90,355 of amortization expense associated with otheron intangible assets for Bishop Rock Software during the five years subsequent tofiscal year ended September 30, 2008 by entity is as follows:

 
Years
 Total  Midwest  Court Programs 
          
2009 $18,600  $9,000  $9,600 
2010  15,267   8,167   7,100 
2011  14,600   8,000   6,600 
2012  14,600   8,000   6,600 
2013  14,600   8,000   6,600 
             
Total $77,667  $41,167  $36,500 
2009 resulting in a total accumulated amortization of $90,355 and net intangible assets of $299,646.

Supplemental Pro Forma Results of Operations
The following tables present the pro forma results of operations for the fiscal years ended September 30, 20082009 and 2007,2008, as though the Midwest, and Court Programs, and Bishop Rock Software acquisitions had been completed as of the beginning of each period presented:
  
Years Ended
September 30,
 
  2008  2007 
Revenues:      
     Products $2,593,925  $1,705,402 
     Monitoring services  11,322,201   10,368,116 
          Total revenues  13,916,126   12,073,518 
         
Cost of revenues:        
     Products  (1,675,212)  (3,298,783)
     Monitoring services  (12,832,087)  (13,602,827)
          Total cost of revenues  (14,507,299)  (16,901,610)
         
     Gross margin (deficit)  (591,173)  (4,828,092)
Operating expenses:        
     Selling, general and administrative  (36,602,040)  (17,873,362)
     Research and development  (4,811,128)  (4,564,121)
           Loss from operations  (42,004,341)  (27,265,575)
Other income (expense):        
     Gain on sale of intellectual property  2,400,000   2,400,000 
     Loss on revalued registration rights  -   (663,000)
     Loss on sale of asset  -   (228,800)
     Redemption of SecureAlert Series A Preferred stock  (8,372,566)  - 
     Other income (loss)  314,059   484,439 
     Interest income  35,230   110,697 
     Interest expense  (1,588,073)  (1,350,441)
Net loss from continuing operations  (49,215,691)  (26,512,680)
Discontinued operations  (414,112)  (338,682)
Net loss  (49,629,803)  (26,851,362)
Dividends on Series A and C Preferred stock  (345,356)  (550,603)
Net loss attributable to common stockholders $(49,975,159) $(27,401,965)
Net loss per common share – basic and diluted $(0.36) $(0.27)
Weighted average common shares outstanding – basic and diluted  140,092,000   102,826,000 

  
Fiscal years Ended
September 30,
 
  2009  2008 
Revenues:      
Products $570,749  $2,593,925 
Monitoring services  12,055,841   11,322,201 
Total revenues  12,626,590   13,916,126 
Cost of revenues:        
Products  (275,688)  (1,675,212)
Monitoring services  (9,862,925)  (12,261,139)
Impairment of monitoring equipment and parts  (2,319,530)  (570,948)
Total cost of revenues  (12,458,143)  (14,507,299)
Gross margin (deficit)  168,447   (591,173)
Operating expenses:        
Selling, general and administrative  (16,701,374)  (36,777,665)
Research and development  (1,777,873)  (4,811,128)
Impairment of goodwill  (2,804,580)  - 
Loss from operations  (21,115,380)  (42,179,966)
Other income (expense):        
Gain on sale of intellectual property  -   2,400,000 
Redemption of SecureAlert Series A Preferred stock  -   (8,372,566)
Interest income  18,187   35,230 
Interest expense  (5,012,803)  (1,588,073)
Derivative valuation gain  1,867,007   - 
Change from estimate to actual on Series A  95,816   - 
Other income (loss)  905,626   314,059 
Net loss from continuing operations  (23,241,547)  (49,391,316)
Discontinued operations  -   (414,112)
Net loss  (23,241,547)  (49,805,428)
Dividends on Series A and C Preferred stock  (175)  (345,356)
Net loss attributable to common stockholders $(23,241,722) $(50,150,784)
Net loss per common share – basic and diluted $(0.13) $(0.36)
Weighted average common shares outstanding – basic and diluted  182,188,000   140,092,000 
 
F - 2871
 

(5)Accrued Expenses

Accrued expenses consisted of the following as of September 30, 2008:

Accrued payroll and payroll taxes $451,485 
Accrued lawsuit liability  385,000 
Accrued warranty and manufacturing costs  291,423 
Accrued board of directors fees  205,000 
Accrued outside services costs  118,665 
Accrued interest  97,383 
Accrued legal and consulting fees  91,720 
Accrued bonuses  83,763 
Accrued commissions and other costs  56,828 
     Total accrued expenses $1,781,267 

(6)Bank Line of Credit

During the fiscal year ended September 30, 2008, the Company paid off a $4,000,000 line of credit and established a new line of credit for $3,600,000 with the same bank.  The interest rate is 7% and the line of credit matures on March 1, 2009.  The line of credit is secured by letters of credit for a total of $3,600,000 and SecureAlert’s assets including TrackerPAL products.  The letters of credit were provided as collateral by four unrelated entities.  The entities received a total of 360,000 restricted shares of the Company’s common stock valued at $403,200 and were reimbursed approximately $33,000 in cash for expenses related to establishing the letters of credit.  In addition, the Company pays 11% annual interest rate, paid monthly, on the line of credit to the entities that provided the letters of credit.  As of September 30, 2008, the outstanding balance of the line of credit was $3,462,285 and was due and payableit matured on March 1, 2009.  The line of credit was secured by letters of credit for a total of $3,600,000 and SecureAlert’s assets, excluding TrackerPAL™ products. The letters of credit were provided as collateral by six unrelated parties.  During the fiscal year ended September 30, 2009, the Company and the six unrelated parties mutually agreed to pay off the line of credit by calling upon the letters of credit and converting into a senior secured convertible note. (See Note 9)

Additionally, the Company established a new line of credit for $1,000,000 with a bank during the fiscal year ended September 30, 2009.  The interest rate is 3.28% and the line of credit matures on September 22, 2010.  The line of credit is secured by certificates of deposit pledged by the Company’s Chief Executive Officer, Mr. David Derrick.  Interest on the line of credit is due monthly. As of September 30, 2009, the Company owed $252,600.  Subsequent to September 30, 2009, the Company borrowed the remaining $747,400 available under the line of credit.

(6)Accrued Expenses

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

Accrued foreclosure liability (see Note 7) $775,000 
Accrued payroll, taxes and employee benefits  561,898 
Accrued officer compensation  492,280 
Accrued consulting  436,054 
Accrued interest  382,424 
Accrued board of directors fees  300,000 
Accrued warranty and manufacturing costs  246,622 
Accrued legal and settlement costs  80,208 
Accrued research and development costs  45,000 
Accrued acquisition extension costs  42,000 
Accrued outside services  38,132 
Accrued indigent fees  34,130 
Accrued cellular costs  27,144 
Accrued commissions and other costs  45,788 
     Total accrued expenses $3,506,680 

Subsequent to September 30, 2009, the Company entered into agreements to exchange approximately 2,099 shares of Series D Preferred stock for the conversion of $1,857,280 of existing accrued expenses shown above.

(7)Related Party Transactions

The Company has entered into certain transactions with related parties. These transactions consist mainly of financing transactions and consulting arrangements.

Related-Party Line of Credit

As of September 30, 2008,2009, the Company owed $542,804 to$76,022 under a line-of-credit agreement with ADP Management, an entity owned and controlled by two ofMr. Derrick, the Company’s officers and directors, Mr. Derrick and Mr. Dalton, under a line-of-credit agreement.Chief Executive Officer.  Outstanding amounts on the line of credit accrue interest at 11% per annum and are due on August 31, 2009.upon demand.  During the fiscal year ended September 30, 2009, the net decrease under this line of credit was $466,782. This decrease consisted of cash repayments of $739,063 offset, in part, by $272,281 of expenses owed to ADP Management that are reimbursable by the Company.

As of September 30, 2008, the Company owed $542,804 to ADP Management under a line-of-credit agreement.  During the year ended September 30, 2008, the line of credit increased $1,318,433 due to a monthly management fee owed to ADP Management, including salaries for Mr. Derrick and Mr. Dalton, expenses incurred by ADP Management that are reimbursable by the Company of $618,433, and $700,000 in cash. The Company made cash repayments during the year of $975,641.

72

Related-Party NoteNotes Payable

In November 2008, the Company borrowed $1,000,000 from Mr. Derrick, the Chief Executive Officer of the Company.  The unsecured note payable accrues interest at 15% and was due and payable upon the Company receiving cash proceeds of $1,000,000 or more from the sale of common stock or other additional financing activities or February 4, 2009, whichever comes first.  The Company paid to Mr. Derrick a loan origination fee of $50,000 in cash and 100,000 shares of restricted common stock.  In February 2009, Mr. Derrick loaned an additional $500,000 to the Company resulting in a total of $1,500,000 due to Mr. Derrick.  The Company and Mr. Derrick agreed to extend the due date of the full obligation to February 26, 2010.  As of September 30, 2009, the Company owed $1,500,000 plus $12,197 in accrued interest to Mr. Derrick. Subsequent to September 30, 2009, the Company and Mr. Derrick agreed to convert the note of $1,500,000 into 1,500 shares of Series D Preferred stock.

In September 2008, the Company borrowed $250,000 from Randy Olshen, the former President of SecureAlert.  The unsecured note payable accruesaccrued interest at 11% and is.  As of September 30, 2009, this note was paid in full.

Foreclosure Liability

In July 2009, the Company entered into a promissory note with an unrelated entity in the amount of $1,000,000 payable on December 31, 2010.  The note bears interest at a rate of 15% per annum paid quarterly.  As additional consideration for the loan to settle a registration rights dispute, the Company granted the lender 8,000,000 shares of common.  Additionally, a related-party entity, ADP Management, collateralized this note with 5,000,000 shares of the Company’s common stock it owns. In August 2009, the Company defaulted on the loan because it failed to register the 8,000,000 shares of common stock within 30 days of entering into the agreement resulting in the lender foreclosing on the 5,000,000 shares of common stock held as collateral. As of September 30, 2009, the Company accrued $775,000 as a “foreclosure liability” to record the Company’s obligation to repay the 5,000,000 shares of common stock to ADP Management.  Subsequent to September 30, 2009, the Company agreed to issue 833 shares of Series D Preferred stock to ADP Management as payment this liability.

Related-Party Series A 15% Debenture

On May 1, 2009, the Company issued a Series A 15% debenture due and payable on December 31, 2009 or upon demand whichever comes first.November 1, 2010 to an entity controlled by an employee of the Company for $250,000 in cash. In addition to the rights and terms of the debenture, the entity received one-year warrants to purchase 2,200,000 shares of the Company common stock at an exercise price of $0.25 per share valued at $43,926. As of September 30, 2008,2009, the outstanding balance owed on the debenture was $250,000 plus $9,452 in accrued interest. Subsequent to September 30, 2009, the Company owed $250,000agreed to Randy Olshen.
Note Receivable from Gary Bengtson
The Company acquired a 51% ownershipissue 250 shares of Series D Preferred stock in Midwest Monitoring & Surveillance, Inc. (“Midwest”) effective December 1, 2007.  Prior toexchange for the datedebenture of acquisition, Midwest had entered into a loan arrangement with Gary Bengtson, the Chief Financial Officer of Midwest.  As of September 30, 2008, Mr. Bengtson owed the Company $55,385. The note receivable accrues interest at 12% and is due and payable on March 31, 2009.

F - 29
$250,000.

Consulting Arrangements

In March 2000, theThe Company agreed to pay consulting fees to ADP Management for assisting the Company to develop its new business direction and business plan and to provide introductions to strategic technical and financial partners.  Under the terms of this agreement, ADP Management was paid a consulting fee of $40,000 per month and the Company agreed to reimburse the expenses incurred by ADP Management (including the salaries of certain of our officers) in the course of performing services under the consulting arrangement. Effective April 1, 2008, ADP Management reduced the consulting fee from $40,000 to $20,000 per month to reflect the resignation of Mr. Dalton as the Company’s President.

The ADP Management agreement also requires ADP Management to pay the salariessalary of Mr. Derrick as Chief Executive Officer and Chairman of the Board of Directors of the Company and Mr. Dalton as president and Vice-Chairman of the Board of Directors of the Company.  The Board of Directors, which at the time did not include either of these individuals,Mr. Derrick, approved both of these arrangements.

Effective April 1, 2008, ADP Management allocatedDuring the $40,000 consulting fee between Volu-Sol and the Company resulting in a monthly charge of $20,000 for each company. Therefore, beginning October 1, 2008, the Company will be charged $20,000 per month and reimbursable expenses as provided under the consulting arrangement.

During thefiscal year ended September 30, 2008, the Company issued 1,000,000 shares of common stock valued at $1.52 per share to prepay servicesconsulting fees to ADP Management which will be reflected in future periods.Management.  The Company recorded $240,000 and $60,000 of expense associated with the issuance of these shares during the fiscal years ended September 30, 2009 and September 30, 2008, respectively.  As of September 30, 2008,2009, the remaining deferred compensation was $1,460,000.$1,220,000.

(8)        
(8)Convertible Promissory Note

On January 15, 2009, the Company entered into an unsecured convertible promissory note for $2,700,000 in order to purchase TrackerPAL™ units.  The note, at the lender’s option, may convert into shares of the Company’s common stock at a conversion price of $0.22 per share.  The note bears interest at 8% per annum and matures on January 15, 2010. Interest is due monthly and the principal is due at maturity. The fair market value of the common stock was $0.23 per share on the date the Company entered into the agreement resulting in a beneficial conversion feature of $122,727.  This was recorded as a debt discount and will be expensed over the life of the note. As of September 30, 2009, the outstanding balance due was $2,050,000 with a remaining debt discount balance of $41,556. Subsequent to September 30, 2009, the holders of the convertible promissory note of $2,050,000 agreed to convert the note and the total outstanding accrued interest of $98,414 into 2,149 shares of Series D Preferred stock.

73

(9)Senior Secured Convertible Notes

During the year ended September 30, 2009, the Company issued senior secured convertible notes of $3,549,631 to unrelated parties. The proceeds were used to pay off the Company’s line of credit. The interest rate is 15% per annum and the notes mature on March 13, 2010.  Interest is due monthly and the principal is due at maturity.  These notes may convert into shares of the Company’s common stock at a conversion price of $0.20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share., or into shares of the SecureAlert’s common stock at the fair market value of the stock at the conversion date.  The Company determined that the embedded conversion features of the notes were subject to derivative accounting treatment (see Note 11). This resulted in a debt discount valued at $853,166. Additionally, with the issuance of these notes, the Company issued 3,549,630 shares of common stock valued at $226,853 recorded as a debt discount. The value of $1,080,019 recorded as a debt discount will be expensed over the life of these notes.  As of September 30, 2009, the outstanding balance of the notes was $3,419,631 with a remaining debt discount balance of $529,109. Subsequent to September 30, 2009, the holders of $2,270,000 of this debt agreed to convert the debt into 2,270 shares of Series D Preferred stock and the remaining debt discount of $529,109 was expensed.

(10)Series A 15% Debentures

During the fiscal year ended September 30, 2009, the Company received $4,400,000 in cash from the issuance of Series A 15% debentures. Additionally, the Company issued debentures to a consultant in the principal amount of $106,750 for services rendered to the Company.  As of September 30, 2009, the total outstanding balance of the debentures was $4,506,750.  The terms of these debentures are as follows: 1) 15% interest per annum.  Interest is due quarterly and principal is due at maturity, 2) 18-month maturity, 3) for every $1 invested into the debenture the holder received 1 share of the Company’s common stock, and 4) at the holder’s option, the debenture may be converted into shares of common stock at a conversion rate of $0.20 per share or into shares at a reduced conversion rate should the Company issue any equity security at a price less than $0.20 per share. The Company determined that the embedded conversion features of the notes were subject to derivative accounting treatment (see Note 11). This resulted in a debt discount valued at $3,130,423.  Additionally, with the issuance of these notes, the Company issued 4,506,750 shares of common stock valued at $265,982 and 2,200,000 warrants valued at $43,926 recorded as a debt discount. This discount will be expensed over the life of the debentures.

In September 2008, the Company sold 4,077,219 shares of common stock at $0.75 per share to an investor.  Shortly following the transaction, the market price of the Company’s common stock fell to approximately $0.20 per share. The Company agreed upon the investor’s investment of an additional $3,000,000 (included in the $4,506,750 discussed in the paragraph above) in the Series A 15% debenture that the Company would issue 9,796,636 additional shares of its common stock to the investor.  Furthermore, the Company agreed to re-price outstanding warrants held by the investor from $1.00 to $0.25 per share and extend the purchase period an additional two years. The issuance of these shares and re-pricing of the warrants attributed an additional $587,248 to the debt discount resulting in a total $3,130,423 in a debt discount to be amortized over the life of the debentures.  During the fiscal year ended September 30, 2009, the Company amortized $1,308,703 of this debt discount and recorded it as interest expense.  As of September 30, 2009, the debt discount balance was $1,821,720.

Subsequent to September 30, 2009, the holders of $4,609,648 of debentures and accrued interest agreed to convert this debt into a total of 4,614 shares of Series D Preferred stock and the remaining debt discount of $1,821,720 was expensed.

(11)Derivative Liability

The Company does not hold or issue derivative instruments for trading purposes.  However, the Company has convertible notes that contain embedded derivative features that require separate valuation from the convertible notes payable.  The Company recognizes these derivatives as liabilities in its balance sheet, measures them at their estimated fair value, and recognizes changes in their estimated fair value in earnings (losses) in the period of change.  As of September 30, 2009, the derivative instruments had a fair value of $1,219,426 resulting in a derivative valuation gain of $1,867,007 for the period. The Company did not have any derivatives during the fiscal year ended September 30, 2008.

74

(12) Debt Obligations

Debt obligations as of September 30, 20082009 and 20072008 consisted of the following:
  September 30, 
  2008  2007 
SecureAlert, Inc.      
Unsecured note payable to a former subsidiary bearing interest at 5%.  The note matures on December 31, 2009. $598,793  $- 
         
Unsecured notes payable to former SecureAlert stockholders, with interest at 5.00%, payable in installments of $80,000 per month until paid in full.  These notes are currently in default, although these notes are subject to an offset provision which has never been provided to the Company.  169,676   169,676 
         
Court Programs        
Note payable due to the Small Business Administration (“SBA”).  Note bears interest at 6.04% and matures on April 6, 2037.  The note is secured by monitoring equipment.  229,100   - 

  September 30, 
  2009  2008 
SecureAlert, Inc.      
Unsecured note payable to a former subsidiary bearing interest at 5%.  This note was paid in full during the fiscal year ended September 30, 2009. $-  $598,793 
         
Unsecured notes payable to former SecureAlert stockholders, with interest at 5%, payable in installments of $80,000 per month paid in full as of September 30, 2009.  -   169,676 
         
Note payable for testing equipment with an interest rate of 8%.  The note is secured by testing equipment. The note matures on June 9, 2011.  12,228   - 
         
Unsecured note payable with an interest rate of 12%. The note matures on February 1, 2010.  8,728   - 
         
RemoteMDx, Inc.        
Unsecured promissory note with an entity bearing an interest rate of 15%.  The note matures on December 31, 2010.  Interest is paid quarterly and the principal due at maturity. Debt discount at year end was $525,665.  474,335   - 
         
Court Programs, Inc.        
Note payable due to the Small Business Administration (“SBA”).  Note bears interest at 6.04% and matures on April 6, 2037.  The note is secured by monitoring equipment.  225,000   229,100 
         
Unsecured revolving lines of credit with two banks, with interest rates between 6.60% and 13.49%.  16,500   48,499 
         
Automobile loan with a financial institution secured by the vehicle purchased.  Interest rate is 7.09% and is due in June 2014.  30,751   - 
         
Unsecured note payable with an interest rate of 8%.  1,492   16,028 
         
Capital leases with an effective interest rate 14.89% that matures in January 2011.  14,898   - 
         
Midwest Monitoring & Surveillance, Inc.        
Unsecured revolving line of credit with a bank, with an interest rate of 6.60%  39,224   - 
         
Notes payable to a financial institution bearing interest at 6.37%.  Notes mature in July 2011 and July 2016.  The notes are secured by property.  185,274   247,675 
         
Notes payable for monitoring equipment.  Interest rates range between 7.8% to 18.5% and mature September 2008 through November 2011.  The notes are secured by monitoring equipment.  57,344   199,747 
Automobile loans with several financial institutions secured by the vehicles.  Interest rates range between 6.9% and 8.5%, due between January 2010 and October 2011.  42,463   43,570 
         
Note payable to a stockholder of Midwest.  The note bears interest at 5%  maturing in February 2013.  47,704   59,958 
         
Capital leases with effective interest rates that range between 12.9% and 14.7%.  Leases mature between June 2014 and September 2014.  126,158   - 
         
Total debt obligations  1,282,099   1,613,046 
Less current portion  (272,493)  (465,664)
Long-term debt, net of current portion $1,009,606  $1,147,382 


F - 3075

  September 30, 
  2008  2007 
       
Unsecured revolving lines of credit with two banks, with interest rates between 6.60 % and 13.49%.  48,499   - 
         
Unsecured notes payable with interest rates between 7% and 8%.  16,028   - 
         
Midwest        
Notes payable to a financial institution bearing interest at 8.41%.  Notes mature in July 2011 and July 2016.  The notes are secured by property.  247,675   - 
         
Notes payable for monitoring equipment.  Interest rates range between 7.8% to 18.5% and mature September 2008 through November 2011.  The notes are secured by monitoring equipment.  199,747   - 
         
Automobile loans with several financial institutions secured by the vehicles.  Interest rates range between 6.9% and 8.5%, due between January 2009 and October 2011.  43,570   - 
         
Note payable to a stockholder of Midwest.  The note bears interest at 5% maturing on February 2013.  59,958   - 
         
Total debt obligations $1,613,046  $169,676 
Less current portion  (465,664)  (169,676)
Long-term debt, net of current portion $1,147,382  $- 
(9)        
13) Preferred Stock

The Company is authorized to issue up to 20,000,000 shares of preferred stock, $0.0001 par value per share. The Company's Board of Directors has the authority to amend the Company's Articles of Incorporation, without further stockholder approval, to designate and determine, in whole or in part, the preferences, limitations and relative rights of the preferred stock before any issuance of the preferred stock and to create one or more series of preferred stock.

Series A 10 % Convertible Non-Voting Preferred Stock
The Company has designated 40,000 shares of preferred stock as Series A 10% Convertible Non-Voting Preferred stock ("Series A Preferred stock"). As ofDuring the year ended September 30, 2008, there were2009, all 19 outstanding shares of Series A Preferred Stock outstanding, which represent 7,178converted into 9,306 shares of the Company’s common stock equivalents at a conversion rate of 370 for 1.stock.  There were no conversions during the year ended September 30, 2008.

Dividends
The remaining holder of the Series A Preferred stock iswas entitled to dividends at the rate of 10% per year on the stated value of the Series A Preferred stock (or $200 per share), payable in cash, additional shares of Series A Preferred stock, or common shares of RemoteMDx at the discretion of the Board of Directors. Dividends arewere fully cumulative and accrueaccrued from the date of original issuance to the holders of record as recorded on the books of the Company at the record date or date of declaration if no record date is set.  During the fiscal years ended September 30, 20082009 and 2007,2008, the Company recorded $423$175 and $160,638$423 in dividends on Series A Preferred stock, respectively.

Convertibility
Series A Preferred Stock is convertible at 370 shares of common stock for each share of Series A Preferred stock.  During the year ended September 30, 2008, no shares of Series A Preferred stock were converted into shares of common stock.  During the year ended September 30, 2007, 18,093 shares of Series A Preferred stock were converted into 6,694,329 shares of common stock.  As of September 30, 2008, there were 19 shares of Series A Preferred stock outstanding, which may convert into 7,178 shares of common stock.

F - 31

Voting Rights and Liquidation Preference
The holders of Series A Preferred stock have no voting rights and are entitled to a liquidation preference of $2.00 per share plus unpaid dividends multiplied by 133%.

Optional Redemption
The Company may, at its option, redeem up to two-thirds of the total number of shares of Series A Preferred stock at any time. As of September 30, 2008, the redemption price was 133% of the conversion price of Series A Preferred stock; however, the Company may designate a different and lower conversion price for all shares of Series A Preferred stock called for redemption by the Company. Through September 30, 2008, the Company has not exercised its option to redeem shares of Series A Preferred stock.

Issuances of Series A Preferred Stock
During the years ended September 30, 2008, 2007 and 2006, the Company had recorded and issued 0, 802 and 2,146 shares, respectively, of Series A Preferred stock for payment of Series A accrued dividends.

Series B Convertible Preferred Stock
On June 7, 2001, the holders of the Company's Series A Preferred stock approved the designation ofThe Company designated 2,000,000 shares of a preferred stock theas Series B Convertible Preferred stock ("Series B Preferred stock") previously approved by the Board of Directors.

Dividends
The Company will not pay dividends on the Series B Preferred stock unless dividends are declared by the Board of Directors, in which case the Series B Preferred stock would be paid dividends prior and in preference to any declaration or payment of any dividends to common stock, and subject to the preferences of the holders of the Series A Preferred stock.

Convertibility
. Each share of Series B Preferred stock iswas convertible at any time into shares of common stock at an initial rate of $3.00 per share of common. Each share of Series B Preferred stock will automatically convert into shares of common stock at the then effective conversion rate on the closing of a firm commitment underwritten public offering with an aggregate public offering price of not less than $20,000,000. The Company has issued shares of common stock or securities convertible into common stock for consideration per share less than $3.00 per share.  The conversion rate will automatically be adjusted to a price equal to the aggregate consideration received by the Company for that issuance divided by the number of shares of common stock issued. During the yearfiscal years ended September 30, 2009 and 2008, 200710,999 and 2006, 2,000 40,333 and 1,315,825 shares converted into 15,000, 351,824 and 7,171,380 shares of common stock. As of September 30, 2008, there were 10,999 shares of Series B Preferred stock outstanding, which may convertconverted into 113,78310,999 and 15,000 shares of common stock, respectively. As of September 30, 2009, there were no shares of Series B Preferred stock outstanding.

Series D Convertible Preferred Stock
In November 2009, the Company designated 50,000 shares of preferred stock as Series D Convertible Preferred stock, $0.0001 par value per share (“Series D Preferred stock”).  Subsequent to the fiscal year ended September 30, 2009, the Company agreed to issue a total of 15,986 shares of Series D Preferred stock in consideration for the conversion of $15,723,204 of debt, accrued liabilities and interest and issued an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, resulting in a total of 28,186 shares of Series D Preferred stock.

Dividends
The Series D Preferred stock is entitled to dividends at the rate equal to eight percent (8%) per annum calculated on the purchase amount actually paid for the shares or amount of debt converted.  The dividend is payable in cash or shares of common stock at the sole discretion of the Board of Directors. If a dividend is paid in shares of common stock of the Company, the number of shares to be issued is based on the average per share market price of the common stock for the 14-day period immediately preceding the applicable accrual date (i.e., March 31, June 30, September 30, or December 31, as the case may be).  Dividends are payable quarterly, no later than thirty days following the end of the accrual period.

Convertibility
Each share of Series D Preferred stock may be converted into 6,000 shares of common stock commencing after ninety days from the date of issue.

76

Voting Rights and Liquidation Preference
HoldersThe holders of the Series D Preferred stock may vote their shares on an as-converted basis on any issue presented for a vote of the stockholders, including the election of directors and the approval of certain transactions such as a merger or other business combination of the Company.  In addition, on the issues of an increase in the number of shares of common stock the Company is authorized to issue and on the proposal of a reduction in the number of issued and outstanding shares (a reverse split) of the Company’s common stock, holders of the Series BD Preferred stock are entitled to onemay vote per shareas a class holding the equivalent of Series B Preferred stock on all matters upon which holders60 percent of the issued and outstanding shares of the common stock, regardless of the Company are entitled to vote. Thenumber of shares then outstanding.  As of the date of this report, there were 25,186 shares of Series D Preferred stock outstanding.  As a consequence of these voting rights, the holders of the Series BD Preferred stock may exercise control over these issues regardless of the interests of the remaining stockholders.  Additionally, the holders are entitled to a liquidation preference of $3.00 per share, plus all accrued and unpaid dividends.  For purposes of this liquidation preference, the Series A Preferred stock ranks on a parity with the Series B Preferred stock.equal to their original investment amount.

Optional Redemption
The Company may redeemIn the Series B Preferred stock at its option at any time. The redemption price will be a minimum of 110%event of the conversion price atliquidation, dissolution or winding up of the dateaffairs of redemption.

Series C Convertible Preferred Stock
The Company has designated 7,357,144 shares of preferred stock as Series C Convertible Preferred stock, $.0001 par value per share.  During the year ended September 30, 2006, the Company issued 5,357,143 shares(including in connection with a permitted sale of Series C Preferred stock for $7,439,558 in cash and $1,037,152 from conversion of debt and accrued interest.

Convertibility
One share of Series C Preferred stock is convertible into three sharesall or substantially all of the Company’s common stock, subject to adjustments. Duringassets), whether voluntary or involuntary, the years ended September 30, 2008, 2007 and 2006, the holders of Series C Preferred stock converted 0, 5,764,488 and 0 shares of Series C Preferred stock into 0, 17,293,463 and 0 shares of common stock.


F - 32

Dividends
The stock has an 8% dividend that may be paid in cash or additional shares of Series C Preferred stock at the option of the Company.  During the years ended September 30, 2008, 2007 and 2006, the Company recorded $0, $389,965 and $294,379 in dividends on Series C Preferred stock, respectively.  For the years ended September 30, 2008, 2007, and 2006 the Company issued 0, 232,122 and 175,226 shares, respectively of Series C Preferred stock for dividends.

Voting Rights and Liquidation Preference
Holders of shares of Series CD Preferred stock areStock then outstanding will be entitled to one vote per share of Series C Preferred stock on all matters upon which holdersreceive, out of the common stockassets of the Company are entitledavailable for distribution to vote. Generally the holders of Series C Preferred stock are entitled to a liquidation preference of $1.68its stockholders, an amount per share plus all accruedequal to original issue price, as adjusted to reflect any stock split, stock dividend, combination, recapitalization and unpaid dividends.  For purposes of this liquidation preference,the like with respect to the Series CD Preferred stock ranks on a parity with the Series B Preferred stock.

Optional Redemption
The Company may redeem the Series C Preferred stock at its option at any time.  The redemption price payable by the Company shall be equal to the greater of (a) $4.00 plus any and all accrued dividends or (b) 110% of the current Conversion Price per share at the time of the redemption, as adjusted for stock dividends, stock splits, stock combinations, other dividends or distributions, reclassifications, exchanges, or substitutions plus any and all accrued dividends.

During the year ended September 30, 2007, the Company sent out a letter to all Series C Preferred stockholders giving them notice to redeem all Series C Preferred stock.  The holders were required to convert their shares of Series C Preferred stock into common stock or redeem them for $4 per share.  During the year ended September 30, 2007, 5,764,488 shares of Series C Preferred shares converted into 17,293,463 shares of common stock.  As of September 30, 2008, there were no shares of Series C Preferred stock outstanding.Stock.

(10)(14)SecureAlert Preferred Stock

SecureAlert, Inc. Series A Preferred Shares
During the fiscal year ended September 30, 2007, and pursuant to Board of Directors approval, the Company amended the articles of incorporation of its subsidiary, SecureAlert, Inc. to establish 3,590,000 shares of preferred stock designated as Series A Convertible Redeemable Non-Voting Preferred stock (“SecureAlert Series A Preferred stock”).

Dividends
The holders of shares of SecureAlert Series A Preferred stock shall bewere entitled to receive quarterly dividends out of any of SecureAlert’s assets legally available therefore, prior and in preference to any declaration or payment of any dividend on the common stock of SecureAlert, at the rate of $1.54 per day times the number of SecureAlert’s parolee contracts calculated in days during the quarter.  For example, if there were an average of 10,000 parolee contracts outstanding during the quarter, the total dividend would be $1,386,000 ($1.54 x 90 days x 10,000 contracts) or $0.386 per share of SecureAlert Series A Preferred stock.  In no case will a dividend be paid if the gross revenue per contract per day to SecureAlert averages less than $4.50.  Dividends will be paid in cash to the holders of record of shares of SecureAlert Series A Preferred stock as they appear on the books and records of SecureAlert on such record dates not less than ten (10) days nor more than sixty (60) days preceding the payment dates thereof, as may be fixed by the Board of Directors of the Company.

During the fiscal years ended September 30, 20082009 and 2007,2008, the Company recorded $344,933$0 and $306,242$344,933 in dividends on SecureAlert Series A Preferred stock.

Convertibility
As a group, all SecureAlert Series A Preferred stock may be converted at the holder’s option at any time into an aggregate of 20% ownership of the common shares of SecureAlert, Inc.

As of September 30, 2007, the total outstanding SecureAlert Series A Preferred shares were 3,590,000.  Because the preferred stock sold was Series A Preferred stock of the Company’s subsidiary, SecureAlert, Inc., the consideration received from the sale has been recorded similar to minority interest as a separate component of the balance sheet outside of permanent equity.

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.  As of September 30, 2008, the Company has estimated and accrued $3,244,758 for future contingency payments.  This can be paid in either cash or common stock at the Company’s option. The Company will make quarterly adjustments as necessary to reflect the difference between the estimated and actual contingency payments to the former SecureAlert Series A stockholders.  During the fiscal year ended September 30, 2008, RemoteMDx issued 825,893 shares of common stock as consideration for dividends due to the former SecureAlert Series A stockholders, and recorded a net expense of $8,372,566 from the initial redemption and subsequent quarterly adjustments.
  As of September 30, 2009, the Company estimated and accrued $3,148,943 for future and past contingency payments due to former SecureAlert Series A stockholders. Subsequent to September 30, 2009, former holders of SecureAlert Series A Preferred stock agreed to convert an aggregate of $2,261,142 of the future and past contingency payments otherwise payable with respect to the redemption of the SecureAlert Series A Preferred stock for 2,263 shares of Series D Preferred stock.

 
F - 3377
 

(11)Minority Interest

In January 2007, Messrs. Derrick and Dalton exercised their previously granted right (which was granted in February 2006) to purchase from the Company 1,250,000 shares of Volu-Sol common stock for cash proceeds of $400,000 or $0.32 per share.  Prior to the sale, the Company owned 100% of Volu-Sol common stock.  The sale decreased the Company’s ownership to 70%.  During the year ended September 30, 2007, the Volu-Sol had a forward stock split at a ratio of 8.333 to 1 per share of common stock.

During the year ended September 30, 2007, the Company issued 1,687,500 shares of common stock, with a three year anti-dilution provision, for net cash proceeds of $1,150,000, or $0.68 per share, to various stockholders.  These transactions decreased the Company’s ownership of Volu-Sol to 50%.

During the year ended September 30, 2008, Volu-Sol issued 2,690,972 shares of its common stock for net cash proceeds of $2,198,333.  In addition, Volu-Sol issued 437,500 shares of its common stock for services valued at $350,000, or $0.80 per share.  As of September 30, 2008, Volu-Sol had a total of 8,982,639 shares outstanding.  As of September 30, 2008, RemoteMDx owned 1,416,667 shares of Volu-Sol’s common stock, or 16% of the outstanding shares.  During the year ended September 30, 2008, the Volu-Sol had a reverse stock split at a ratio of 2 to 1 per share of common stock.

In September 2008, Volu-Sol filed a Form S-1with the Securities and Exchange Commission reporting the Company’s intent to spin-off Volu-Sol by distributing Volu-Sol shares still held by the Company to existing RemoteMDx stockholders. As a result, minority interest for Volu-Sol was $0 at the year ended September 30, 2008.

(12)(15)Common Stock

Authorized Shares

The Company is authorized to issue up to 175,000,000250,000,000 shares of common stock.

Common Stock Issuances

During the fiscal year ended September 30, 2009, the Company issued 54,484,728 shares of common stock.  Of these shares, 9,306 shares were issued upon conversion of 19 shares of Series A Preferred stock; 10,999 shares were issued upon conversion of 10,999 shares of Series B Preferred stock; 5,400,000 shares were issued to settle lawsuits and obligations; 25,953,016 shares were issued in connection with debt; 2,254,121 shares were issued for services rendered to the Company valued at $728,874; 3,007,286 shares were issued to purchase Bishop Rock and to extend an option to purchase the remaining percentage of ownership of Midwest; and 17,850,000 shares were issued for net cash proceeds of $3,250,000.

During the fiscal year ended September 30, 2008, the Company issued 28,541,175 shares of common stock.  Of these shares, 15,000 shares were issued upon conversion of 2,000 shares of Series B Preferred stock; 325,000 shares were issued upon settlement of a lawsuit; 360,000 shares were issued for debt; 9,235,0009,135,000 shares were issued for services in the amount of $15,974,585; 6,077,219$14,324,585; 6,177,219 shares were issued for cash proceeds of $5,057,914;$5,187,914; 650,000 shares were issued in connection with the acquisition of Midwest and Court Programs; 825,893 shares were issued for SecureAlert Series A Preferred stock dividends; 7,434,249 shares were issued to redeem SecureAlert Series A Preferred stock; and 3,618,814 shares were issued from the exercise of options and warrants.

During the year ended September 30, 2007, the Company issued 47,205,232 shares of common stock.  Of these shares, 6,694,329 shares were issued upon conversion of 18,093 shares of Series A Preferred stock; 351,824 shares were issued upon conversion of 40,333 shares of Series B Preferred stock; 17,293,463 shares were issued upon conversion of 5,764,488 shares of Series C Preferred stock; 750,000 shares were issued pursuant to a registration payment arrangement; 500,000 shares were issued to a related party to increase the line of credit; 3,067,853 shares were issued for services in the amount of $4,837,883; 3,081,000 shares were issued for cash proceeds of $6,162,000; and 15,466,763 shares were issued from the exercise of options and warrants.

During the year ended September 30, 2006, the Company issued 35,005,811 shares of common stock.  5,846,428 shares were issued for services in the amount of $3,983,607, 4,014,916 shares were issued upon the conversion of 10,843 shares of Series A Preferred Stock, 7,171,380 shares were issued upon the conversion of 1,315,825 shares of Series B Preferred Stock, 10,739,753 shares were issued for debt and accrued interest of $7,893,782, 350,000 were issued from the exercise of options and warrants, and the remaining 6,883,334 were issued for cash.

As of September 30, 2008,2009, the Company was authorized to issue 175,000,000250,000,000 shares of common stock.  stock and 210,365,988 were outstanding.

Subsequent to the fiscal year 2008,2009, the holders of a majority of the issued and outstanding sharesvoting securities of the Company’s common stockCompany consented in writing to thean increase of the number of authorized shares of common stock from 175,000,000250,000,000 to 250,000,000 shares.600,000,000.  The Company intends to file Amended Articles of Incorporation for the Company to the effect the increase in the number of authorized shares will be filed as soon as reasonably practical.

F - 34

(13)(16)Options and Warrants

Stock Incentive Plan

During the fiscal year ended September 30, 2006, the stockholders approved the 2006 Equity Incentive Award Plan (the “2006 Plan”).  The 2006 Plan provides for the grant of incentive stock options and nonqualified stock options, restricted stock, stock appreciation rights, performance shares, performance stock units, dividend equivalents, stock payments, deferred stock, restricted stock units, other stock-based awards and performance-based awards to employees and certain non-employees who have important relationships with the Company.  A total of 10,000,000 shares are authorized for issuance pursuant to awards granted under the 2006 Plan.  During the fiscal year ended September 30, 2008,2009, the Company granted 6,752,8694,931,214 options under this plan.plan as described below.
 
  
Number of
Options and
Warrants
  
Exercise
Price Per
Share
 
       
Outstanding as of September 30, 200621,597,392$.54 to 3.00
    Granted13,509,0001.23 to 2.15
    Expired or cancelled(751,733).60 to 3.00
    Exercised(15,466,763).50 to 1.85
Outstanding as of September 30, 2007  18,887,896 .54$0.54 to 3.00 
    Granted  6,752,869 .590.59 to 4.05 
    Expired or cancelled  (296,500).600.60 to 3.00 
    Exercised  (3,618,814).540.54 to 1.73 
         
Outstanding as of September 30, 2008  21,725,451 0.56 to 4.05
    Granted4,931,2140.09 to 0.30
    Expired or cancelled(1,408,500)0.60 to 2.15
    Exercised--
Outstanding as of September 30, 200925,248,165 $.560.09 to 4.05 

78

The following table summarizes information about stock options and warrants outstanding as of September 30, 2008:2009:
 
    Options and Warrants   Options and Warrants 
    Outstanding    Exercisable 
        Weighted           
        Average
 
          
       Remaining  Weighted
 
     Weighted 
Range of
       Contractual  Average      Average  
Exercise   Number    Life  Exercise   Number   Exercise  
Prices 
   Outstanding   
(Years)
  Price   Exercisable   Price  
$0.00 - $0.60     4,008,135   3.48  $  0.58     2,299,802  $  0.56 
0.61 – 1.20     2,670,000   2.43      1.00     2,070,000
 
 
    1.00 
1.21 – 4.05   15,047,316   2.84      1.81   13,535,649
 
     1.83 
 Options and Warrants   Options and Warrants
 Outstanding   Exercisable
         Weighted            
         Average            
         Remaining   Weighted      Weighted
 Range of       Contractual   Average      Average
 Exercise   Number   Life   Exercise   Number  Exercise
 Prices   Outstanding   (Years)   Price   Exercisable  Price
$0.00 - $0.60   10,566,849   2.36  $0.37   8,886,849  $0.33
 0.61 – 1.60   5,849,400   3.29   1.28   3,944,400   1.24
 1.61 – 4.05   8,831,916   0.67   2.03   8,827,582   2.03
 
As of September 30, 2008, 17,905,4512009, 21,658,831 of the 21,725,45125,248,165 outstanding options and warrants were vested.

During the fiscal year ended September 30, 2009, the Company issued 4,931,214 options and warrants to purchase common stock as follows:  2,200,000 in connection with the settlement of debt; 1,213,500 granted to consultants for services; 875,000 to employees; and 642,714 in connection with the purchase of Bishop Rock.  All the options and warrants issued during the year vested over the year or immediately. The exercise prices range from $0.09 to $0.30 per share.  The exercise price for the options granted during the fiscal year ended September 30, 2009 were based upon the quoted market price of the Company’s shares on the date of grant. No options or warrants were exercised during the fiscal year ended September 30, 2009.

During the fiscal year ended September 30, 2008, the Company issued 6,752,869 common stock options and warrants as follows: 1,670,000 in connection with the sale of common stock, 1,725,000 to employees (275,000 have vested and 1,450,000 are unvested), 1,169,869 to consultants, and  2,188,000 to the Board of Directors.  The exercise prices range from $0.59 to $4.05 per share.  The exercise price for the options granted during the fiscal year ended September 30, 2008 were based upon the quoted market price of the Company’s shares on the date of grant.

During
(17)Deferred Compensation

As of September 30, 2008, deferred compensation in connection with common stock and warrants issued in prior years reflected $3,498,672 of expenses to be recorded in future periods. Of these expenses of $3,498,672, $2,211,266 was recorded as deferred compensation expense during the fiscal year ended September 30, 2007,2009. Additionally, the Company issued 13,509,000recorded deferred compensation expense of $384,667 related to common stock options and warrants as follows: 7,189,000issued and fully expensed throughout the fiscal year, resulting in connection witha total of $2,595,933 of deferred compensation expense recorded during the sale of common stock, 320,000 to employees, 350,000 to consultants, 650,000 to the Board of Directors, and 5,000,000 to related parties (David Derrick and James Dalton).  The exercise prices range from $1.23 to $2.15 per share.  The exercise price for the options granted during thefiscal year ended September 30, 2007 were based upon2009.

The issuance of common stock and warrants during the quoted market pricefiscal year ended September 30, 2009 valued at $384,667 is outlined as follows:

·1,000,000 shares of common stock issued to an entity for services valued at $200,000 or $0.20 per share.
·900,000 shares of common stock issued to three individuals for paying down the Company’s line of credit valued at $108,000, or $0.12 per share.
·100,000 shares of common stock issued to an officer of the Company in connection with debt (Note 7:  Related-Party Notes Payable) valued at $30,000, or $0.30 per share.
·213,500 unregistered warrants to an individual for rendering services to the Company valued at $46,667.

As of the Company’s shares on the date of grant.September 30, 2009, deferred compensation to be expensed in future periods was $1,287,406.

 
F - 3579
 

(14)(18)Income Taxes

The Company recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply when the differences are expected to be settled or realized.  Deferred income tax assets are reviewed periodically for recoverability and valuation allowances are provided as necessary.  Interest and penalties related to income tax liabilities, when incurred, are classified in interest expense and income tax provision, respectively.

For the fiscal years ended September 30, 2008, 20072009 and 2006,2008, the Company incurred net losses of $49,587,050, $26,370,571$22,761,102 and $23,797,745,$49,339,637, respectively, for income tax purposes.  The amount and ultimate realization of the benefits from the net operating losses is dependent, in part, upon the tax laws in effect, the Company's future earnings, and other future events, the effects of which cannot be determined.  The Company has established a valuation allowance for all deferred income tax assets not offset by deferred income tax liabilities due to the uncertainty of their realization.  Accordingly, there is no benefit for income taxes in the accompanying statements of operations.

At September 30, 2008,2009, the Company had net carryforwards available to offset future taxable income of approximately $136,045,000$158,807,000 which will begin to expire in 2018.2017.  The utilization of the net loss carryforwards is dependent upon the tax laws in effect at the time the net operating loss carryforwards can be utilized.  The Internal Revenue Code contains provisions that likely could reduce or limit the availability and utilization of these net operating loss carryforwards.  For example, limitations are imposed on the utilization of net operating loss carryforwards if certain ownership changes have taken place or will take place.  The Company will perform an analysis to determine whether any such limitations have occurred as the net operating losses are utilized.

Deferred income taxes are determined based on the estimated future effects of differences between the financial statement and income tax reporting bases of assets and liabilities given the provisions of currently enacted tax laws and the tax rates expected to be in place.

The deferred income tax assets (liabilities) were comprised of the following atas or September 30:

  2008  2007  2006 
Net loss carryforwards $42,560,000  $32,524,000  $22,923,000 
Depreciation and reserves  20,000   490,000   7,000 
Accruals and reserves  4,000   54,000   53,000 
Valuation allowance  (42,536,000)  (33,068,000)  (22,863,000)
  $-  $-  $- 
   2009   2008 
         
Net loss carryforwards $53,994,000  $45,367,000 
Accruals and reserves  101,000   (99,000)
Contributions  1,000   3,000 
Valuation allowance  (54,096,000)   (45,271,000)
  $-  $- 

Reconciliations between the benefit for income taxes at the federal statutory income tax rate and the Company's benefit for income taxes for the fiscal years ended September 30, 2008, 20072009 and 20062008 are as follows:

 2009  2008 
 2008  2007  2006       
Federal income tax benefit at statutory rate $7,438,000  $8,966,000  $8,092,000  $7,739,000  $16,755,000 
State income tax benefit, net of federal income tax effect  2,107,000   1,318,000   1,190,000   1,138,000   2,464,000 
Loss on non-deductible expenses  (77,000)  (79,000)  (118,000)
Change in estimated tax rate and gain (loss) on non-deductible expenses  (52,000)  (91,000)
Change in valuation allowance  (9,468,000)  (10,205,000)  (9,164,000)  (8,825,000)  (19,128,000)
            
Benefit for income taxes $-  $-  $-  $-  $- 

F - 36
The deferred income tax assets (liabilities) and the federal and state income tax benefits reflects an adjustment in calculating the valuation allowance using a tax rate of 15% used in fiscal year ended 2008 to 34% in fiscal year ended 2009.

(15)(19)Commitment and Contingencies

Legal Matters

Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC) and Michelle Enterprises, LLC v. Pro Tech Monitoring, Inc., Omnilink Systems, Inc., and SecureAlert: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 Defendantsdefendants infringe United States Patent No. RE39,909 ('909 Patent), Tracking System for Locational Tracking of Monitored Persons.Persons.  On May 14, 2008, the Company answered the complaint, denying PlaintiffsPlaintiffs’ 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 Company intends to vigorously defendUSPTO is now in the process of reexamining the claims of the '909 Patent. Briefs have been submitted on the issue of claim construction, and the case is currently in discovery. The Markman hearing is set for May of 2011, and prosecute its counterclaim. The Company hastrial is set for late 2011. We have not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.


80
RemoteMDx, Inc. v. Satellite Tracking of People, L.L.C. (a/k/a STOP, LLC):  The Company filed a patent infringement suit against STOP in the United States District Court for the Central District of California on May 2, 2008.  The Company has asserted that STOP infringes United States Patent No. 7,330,122 for a remote tracking and communication device and method for processing data from the device ("'122 patent"), in which the Company holds all rights and interests.  STOP moved to dismiss the original complaint and also filed an answer and counterclaim.  The motion to dismiss was granted with leave to amend.  The Company filed an amended complaint on August 5, 2008.  The amended complaint seeks damages for infringement according to proof, treble damages, injunctive relief enjoining the infringement, and costs and attorney's fees.  STOP's counterclaim is for declaratory relief, seeking a declaration that STOP has not infringed the '122 patent and that the '122 patent is invalid. The Company filed an answer to the counterclaim.  STOP subsequently filed a motion for summary judgment of non-infringement, which was denied.  STOP’s subsequent motion for reconsideration was also denied.  The parties are currently working on claim construction and discovery issues.  The Markman hearing is currently set for March of 2010.  No trial date has yet been set. The Company intends to vigorously prosecute its claims and defend against the counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

Strategic Growth International, Inc., v. RemoteMDx:  This action was filed in response to an action previously filed by the Company against Strategic Growth International, Inc. ("SGI") in Utah.  The action arises out of a contract between SGI and the Company for certain investor relations related services to be performed by SGI.  SGI and its principals' original complaint alleged a single claim for Breach.  On October 29, 2007, the Company amended its Answer and Counterclaims to assert an additional claim against SGI for fraudulent inducement, seeking rescission of its contract with SGI and the return of amounts the Company paid SGI under the contract.  On December 31, 2007, the Company filed a motion for summary judgment on its fraudulent inducement claim.  On January 18, 2008, SGI filed a cross-motion for partial summary judgment.  On April 17, 2008, SGI amended its complaint to assert a claim for conversion with respect to the options and shares which are the subject of SGI's breach of contract claim.  On May 2, 2008, the Company filed a motion to dismiss the conversion claim.  On April 23, 2008, SGI sought an order permitting the attachment of the Company's assets in the State of New York.  In December 2008, the Company has verbally agreed to settle 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 has accrued $385,000 to settle this lawsuit.

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 Defendantsdefendants 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 Defendantsdefendants 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.

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Thomas Natale v. RemoteMDx.Informal Inquiry.  This non-payment of certain obligations suit was filed againstIn 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 defendants, including ADP Management Corp., James Daltonitems, relates to the Company’s revenue recognition policy and David Derrickdocuments, relationship with stockholders, and business.  The SEC has advised the Company in the United States District Courtits correspondence that this informal inquiry should not be construed as an indication that any violation of law has occurred, nor should it be considered a reflection upon any person, entity, or security.  The Company voluntarily disclosed this inquiry in its Quarterly Report on Form 10-Q for the Eastern District of Tennessee on August 18,fiscal quarter ended March 31, 2008.  The Plaintiff has alleged thatThere were no material developments in this matter during the Defendants owe him certain back amounts of bonuses, interest and note payables. Management has been advised that a similar action has been filed by Edward Boling. The Company has answered the complaint and discovery is ongoing. The Company intends to vigorously defend the case and prosecute its counterclaim. The Company has not accrued any potential loss as the probability of incurring a material loss is deemed remote by management, after consultation with legal counsel.

SecureAlert, v. David Ezell, et al.  The Company has filed a claim against David Ezell and several related entities for breach of contract, unjust enrichment, conversion, and punitive damages, and seeks approximately $290,810 in damages, as well as other amounts to be proven at trial.  The case is in the discovery stage.  After consultation with legal counsel, the Company has not accrued for any potential recovery or any material loss associated with this claim.fiscal year ended September 30, 2009.

Lease Obligations

The following table summarizes the Company’s contractual obligations as of September 30, 2008:2009:

Years
 Total  SecureAlert  Midwest  Court Programs 
Fiscal Year Total  SecureAlert  
Midwest
Monitoring
  Court Programs 
                        
2009 $533,493  $402,509  $14,128  $116,856 
2010  354,027   262,894   11,124   80,009  $418,151  $266,691  $35,555  $115,905 
2011  308,825   267,173   3,744   37,908   361,588   274,095   27,771   59,722 
2012  279,162   268,362   -   10,800   336,588   278,991   22,473   35,124 
2013  267,882   267,882   -   -   285,749   269,922   8,075   7,752 
2014  60,537   60,537   -   -   61,018   60,564   454   - 
Thereafter  -   -   -   - 
                                
Total $1,803,926  $1,529,357  $28,996  $245,573  $1,463,094  $1,150,263  $94,328  $218,503 

The total contractual obligations of $1,803,926$1,463,094 consist of the following: $1,554,667$1,324,432 from facilities operating leases and $249,259$138,662 from equipment leases.  During the fiscal years ended 2006, 2007September 30, 2009 and 2008, the Company paid approximately $191,000, $284,000,$487,000 and $536,000, in lease payment obligations, respectively.

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Indemnification Agreements
In November 2001, the Company's Board of DirectorsCompany agreed that the Company wouldto indemnify officers and directors of the Company against personal liability incurred by them in the conduct of their duties for the Company. In the event that any of the officers or directors of the Company are sued or claims or actions are brought against them in connection with the performance of their duties and the individual is required to pay an amount, the Company will immediately repay the obligation together with interest thereon at the greater of 10% per year or the interest rate of any funds borrowed by the individual to satisfy their liability.

Cellular Access Agreement
During the fiscal year ended September 30, 2006,2009, the Company entered into several agreements with cellular organizations to provide communication services. The cost to the Company during the fiscal years ended September 30, 2008, 20072009 and 20062008 was approximately $2,422,541 and $2,940,000, $2,593,000 and $290,000, respectively.

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  These amounts are included in cost of sales.

(16)(20)Subsequent Events

Subsequent to September 30, 2008,2009, the following events occurred:


1)On November 17, 2008, the Company’s Chief Financial Officer and Chief Operating Officer Blake Rigby resigned. Mr. Rigby indicated he was stepping down to pursue other interests.  He had served in the position since June 2008. No severance or other obligations were incurred byOctober 30, 2009, the Company in connection with the departure of Mr. Rigby.
Effective November 20, 2008, the Board of Directors of the Company appointed John L. Hastings, III to the additional position of Chief Operating Officer, recently vacated by Mr. Rigby. Mr. Hastings also will continue to serve as the Company’s President.  No change will be made in the compensation of Mr. Hastings in connection with this expanded role in the Company.
Also effective November 20, 2008, the Board of Directors of the Company appointed Michael G. Acton to the position of Chief Financial Officer.  Mr. Acton also is the Chief Financial Officer of Volu-Sol Reagents Corporation, a former subsidiary of the Company.  From 1999 until June 2008, Mr. Acton was Secretary-Treasurer of the Company; he served as the Company’s Chief Financial Officer from March 2001 until June 2008.  He is a Certified Public Accountant in the State of Utah.
2)The Company’s subsidiary SecureAlert down-sized its workforce by approximately 21% (26 persons) during the first two weeks of November 2008 as part of a restructuring plan, which began in October 2008. The Company implemented this restructuring with the goal of increasing operating efficiencies while reducing operating expenses and improving gross margins and cash flows during the fiscal year ending September 30, 2009.
3)
On November 21, 2008, the Company borrowed $1,000,000 from its Chief Executive Officer and Chairman, David G. Derrick, pursuant to a Promissory Note (the “Note”). This unsecured loan is intended to bridge the device procurement, accelerated and expanded manufacturing and short-term financial needs of the Company until the completion of a private round of debt financing, which is presently being conducted by the Company.  Terms of the transaction are consistent with the terms offered to third-party financing sources in recent transactions.  The Note bears interest at an annual percentage rate of 15% and is due and payable the earlier of the receipt of a minimum of $1,000,000 in new financing, or seventy-five (75) days from origination.  Net proceeds to the Company after payment of a 5% initiation fee paid to Mr. Derrick were $950,000.  The Company also agreed to issue 100,000issued 1,400,000 shares of common stock to Mr. Derrick as additional consideration for extending the loanseveral former holders of SecureAlert Series A Preferred to settle a dispute and an outstanding liability in connection with contingency payments due to the Company.  Asholders.

2)
On November 2, 2009, the Company’s Board of Directors designated 50,000 shares Series D Preferred stock.  The shares accrue dividends at a rate of 8% per annum and may be paid in cash or additional shares of Series D Preferred stock. See note 13. Subsequent to September 30, 2009, the Company agreed to issue a total of 15,986 shares of Series D Preferred stock in exchange for conversion of $15,723,204 in debt, accrued liabilities and interest and an additional 12,200 shares from securities purchase agreements totaling $6,100,000 of which $4,600,000 has been received in cash as of the date of this Report, the 100,000resulting in a total of 28,186 shares of common stock have not yet been issued.  The Company may prepay the Note at any time without penalty or further interest obligation.  The transaction was reviewed and approved by the Audit Committee of the Company’s Board of Directors.Series D Preferred stock.
4)
In December 2008, the Company verbally agreed to settle a lawsuit with Strategic Growth International, Inc. 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 will have piggyback registration rights and be protected against any potential reverse stock splits.
5)As of September 30, 2008, the Company was authorized to issue 175,000,000 shares of common stock.  Subsequent to the fiscal year 2008, the holders of a majority of issued and outstanding shares of the Company consented to increase the authorized shares from 175,000,000 to 250,000,000.  Amended Articles of Incorporation for the Company to increase the authorized shares will be filed as soon as reasonably practical.
6)The Company issued 350,000 shares of restricted common stock for cash proceeds of $100,000, or approximately $0.29 per share.  Additionally, the Company issued 1,800,000 shares of restricted common stock to settle payoff accounts payable balances with two vendors in the amount of $440,000.
7)On December 22, 2008, Mr. Derrick rescinded 1,500,000 shares of common stock which were granted in April 2008 valued at $2,325,000.  Additionally, Mr. Derrick also rescinded 1,000,000 warrants that were vested during the fiscal year ending September 30, 2008 valued at $1,934,162.
8)On December 22, 2008, Mr. Hastings rescinded 250,000 shares of common stock which were granted in June 2008 valued at $387,500.  Additionally, Mr. Hastings also rescinded 250,000 warrants that were vested during the fiscal year ending September 30, 2008 valued at $337,113.

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