A system and method for monitoring a security state of a portable electronic device (PED), such as a personal digital assistant (PDA), are provided. A security state may be determined by physical or electronic characteristics of the PED. The relative position of PED pieces, the position of a latch, and/or the status of a software application may determine a security state. Furthermore, a PED may have open, closed, and partially open security states. Information about a current security state of a PED may be transmitted to a point-of-sale device (POS), system processor, and/or financial institution. The PED or any of these other devices may use this information to determine whether to allow or restrict a financial transaction involving the PED. Additionally, a software program on the PED may be allowed or restricted from running depending on the information about the current security state.